REGISTRATION NO. 333-_____
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
|_| PRE-EFFECTIVE AMENDMENT NO. __ |_| POST-EFFECTIVE AMENDMENT NO. __
(CHECK APPROPRIATE BOX OR BOXES)
THE INFINITY MUTUAL FUNDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
(614) 470-8000
(AREA CODE AND TELEPHONE NUMBER)
3435 STELZER ROAD, COLUMBUS, OHIO 43219
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES: NUMBER,
STREET, CITY, STATE, ZIP CODE)
(NAME AND ADDRESS OF AGENT FOR SERVICE)
ROBERT L. TUCH, ESQ.
3435 STELZER ROAD
COLUMBUS, OHIO 43219
COPY TO:
STUART H. COLEMAN, ESQ.
STROOCK & STROOCK & LAVAN LLP
180 MAIDEN LANE
NEW YORK, NEW YORK 10038-4982
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after this
Registration Statement is declared effective.
TITLE OF SECURITIES BEING REGISTERED: Registrant is registering shares of common
stock, par value $.001 per share. No filing fee is required because Registrant
previously registered an indefinite number of shares on Form N-1A (Registration
Nos. 33-34080, 811-06076) pursuant to Section 24(f) of the Investment Company
Act of 1940.
It is proposed that this filing will become effective on October 19, 1998
pursuant to Rule 488.
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
Form N-14
Cross Reference Sheet
Pursuant to Rule 481(a) Under the Securities Act of 1933
FORM N-14 ITEM NO. PROSPECTUS/PROXY
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PART A
Item 1. Beginning of Registration Statement Cover Page
and Outside Front Cover Page of
Prospectus
Item 2. Beginning and Outside Back Cover Cover Page
Page of Prospectus
Item 3. Synopsis Information and Risk Summary
Factors
Item 4. Information About the Transaction Letter to Stockholders;
Summary; Reasons for the
Exchange; Information About
the Exchange
Item 5. Information About the Registrant Letter to Stockholders;
Information About Each Fund
Item 6. Information About the Company Letter to Stockholders;
Being Acquired Information About Each Fund
Item 7. Voting Information Letter to Stockholders; Voting
Information
Item 8. Interest of Certain Persons and Additional Information About
Experts the DG Funds and ISG Funds;
Financial Statements and
Experts
Item 9. Additional Information Required Not Applicable
for Reoffering by Persons Deemed
to be Underwriters
Statement of Additional
INFORMATION CAPTION
PART B ------------------------
- ------
Item 10. Cover Page Statement of Additional
Information Cover Page
Item 11. Table of Contents Not Applicable
Item 12. Additional Information about the Statements of Additional
Information Registrant of the
ISG Funds1
Item 13. Additional Information about the Statement of Additional
Company being Acquired Information of the DG Funds2
Item 14. Financial Statements Statement of Additional
Information
PART C
Item 15. Indemnification
Item 16. Exhibits
Item 17. Undertakings
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1 Incorporated herein by reference to the Registration Statement of the
Registrant on Form N-1A (File No. 33-34080).
2 Incorporated herein by reference to the Registration Statement of the DG
Funds on Form N-1A (File No. 33-46431).
<PAGE>
DG INVESTOR SERIES
5800 Corporate Drive
Pittsburgh, PA 15237-7010
Dear Shareholder:
As a shareholder of one or more of the DG Investor Series listed below
(collectively, the "DG Funds"), you are entitled to vote on the proposals
described below and in the enclosed materials.
As you may know, Deposit Guaranty Corp. completed a merger with and
into First American Corporation on May 1, 1998. As a result, the new
organization has since taken steps to consolidate the mutual fund investment
advisory activities of both bank holding companies. Currently, ParkSouth
Corporation provides investment advisory services to the DG Funds. First
American National Bank, a wholly-owned subsidiary of First American Corporation,
currently provides investment advisory services to the AmeriStar Portfolios of
The Infinity Mutual Funds, Inc., which are to be renamed the ISG Funds (the "ISG
Funds").
As the next step in the consolidation process, we are asking you to
consider and approve a proposed Agreement and Plan of Reorganization for your DG
Fund. The Plan of Reorganization provides that each DG Fund listed below will
transfer all of its assets and liabilities to the corresponding ISG Fund
identified opposite its name in exchange for shares of such ISG Fund:
DG FUNDS ISG FUNDS
DG Equity Fund ISG Large Cap Equity Portfolio
DG Government Income Fund ISG Government Income Portfolio
DG International Equity Fund ISG International Equity
Portfolio
DG Limited Term Government ISG Limited Duration U.S.
Income Fund Government Portfolio
DG Municipal Income Fund ISG Municipal Income Portfolio
DG Opportunity Fund ISG Small Cap Opportunity Portfolio
DG Prime Money Market Fund ISG Prime Money Market Portfolio
DG Treasury Money Market Fund ISG U.S. Treasury Money Market
Portfolio
Each DG Fund then will distribute all the ISG Fund shares received in
the exchange to its shareholders. Each shareholder will receive for his or her
DG Fund shares a number of corresponding ISG Fund shares equal to the value of
such DG Fund shares as of the date of the exchange.
DG Fund shareholders may benefit from the reorganization because the
expense ratio of each ISG Fund will be lower than or equal to that of its
corresponding DG Fund, while the investment objective, management policies,
investment advisory personnel and shareholder services of each ISG Fund will
remain substantially similar to those of its corresponding DG Fund. The
reorganization will be tax free and will not involve any sales loads,
commissions or transaction charges.
We are also asking you to approve your DG Fund's current investment
advisory agreement with ParkSouth Corporation and, if you are a shareholder of
DG International Equity Fund or DG Opportunity Fund, the current sub-investment
advisory agreement between ParkSouth Corporation and the respective sub-adviser
to those DG Funds. These agreements became effective as of the date Deposit
Guaranty Corp. merged with First American Corporation--May 1, 1998--and will
remain in effect, if approved by shareholders, until the relevant DG Fund's
reorganization.
Further information about the proposals is contained in the enclosed
materials. Please take the time to review carefully the enclosed materials and
then vote by completing, dating, signing and returning EACH enclosed proxy card.
A self-addressed, postage-paid envelope has been enclosed for your convenience.
THE BOARD MEMBERS OF THE DG INVESTOR SERIES HAVE APPROVED THE PROPOSED
REORGANIZATION AND ADVISORY AGREEMENTS AND RECOMMEND THAT SHAREHOLDERS VOTE IN
FAVOR OF THE PROPOSALS AS WELL. IT IS VERY IMPORTANT THAT YOUR VOTING
INSTRUCTIONS BE RECEIVED BEFORE DECEMBER 11, 1998.
If you have any questions after considering the enclosed materials,
please call toll-free 1-800-________.
Sincerely,
Edward C. Gonzales
President, DG Investor Series
October 16, 1998
<PAGE>
Preliminary Copy
DG INVESTOR SERIES
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 11, 1998
To the Shareholders:
A Special Meeting of Shareholders of each series (collectively, the
"DG Funds") of DG Investor Series (the "Trust") will be held at the Trust's
principal place of business located at 5800 Corporate Drive, Pittsburgh,
Pennsylvania, on Friday, December 11, 1998 at 10:00 a.m. (Eastern time), for the
following purposes:
EACH DG FUND WILL VOTE SEPARATELY ON PROPOSAL ONE
1. To approve or disapprove an Agreement and Plan of Reorganization
pursuant to which each DG Fund listed below will transfer all of its assets and
liabilities solely in exchange (the "Exchange") for Class A Shares and Trust
Shares of the corresponding ISG Fund identified opposite its name:
DG FUNDS SG FUNDS
DG Equity Fund ISG Large Cap Equity Portfolio
DG Government Income Fund ISG Government Income Portfolio
DG International Equity Fund ISG International Equity
Portfolio
DG Limited Term Government ISG Limited Duration U.S.
Income Fund Government Portfolio
DG Municipal Income Fund ISG Municipal Income Portfolio
DG Opportunity Fund ISG Small Cap Opportunity Portfolio
DG Prime Money Market Fund ISG Prime Money Market Portfolio
DG Treasury Money Market Fund ISG U.S. Treasury Money Market
Portfolio
Each DG Fund will distribute the Class A Shares or Trust Shares, as applicable,
of the corresponding ISG Fund received in the Exchange to its shareholders in an
amount equal in net asset value to the shares of the DG Fund held by such
shareholders as of the date of the Exchange, after which the DG Fund will be
terminated as a series of the Trust.
EACH DG FUND WILL VOTE SEPARATELY ON PROPOSAL TWO
2. To approve or disapprove a new Investment Advisory Contract between
the Trust, on behalf of each DG Fund, and ParkSouth Corporation ("ParkSouth"),
the terms of which are identical in all material respects to the prior
investment advisory agreement for the DG Funds. The new Investment Advisory
Contract was approved by the Board of Trustees, effective as of the date of the
merger (the "Merger") of Deposit Guaranty Corp., the former ultimate corporate
parent of the DG Funds' investment adviser, ParkSouth, with and into First
American Corporation.
DG OPPORTUNITY FUND AND DG INTERNATIONAL EQUITY
FUND ONLY WILL EACH VOTE SEPARATELY ON PROPOSAL THREE
3 (A). To approve or disapprove a new Sub-Investment Advisory
Agreement between Womack Asset Management, Inc., the present sub-adviser to the
DG Opportunity Fund, and ParkSouth, on behalf of the DG Opportunity Fund, the
terms of which are identical in all material respects to the prior sub-advisory
agreement for DG Opportunity Fund; and
(B). To approve or disapprove a new Sub-Investment Advisory Agreement
between Lazard Asset Management, the present sub-adviser to the DG International
Equity Fund, and ParkSouth, on behalf of the DG International Equity Fund, the
terms of which are identical in all material respects to the prior sub-advisory
agreement for DG International Equity Fund.
The new Sub-Investment Advisory Agreements were approved by the Board
of Trustees, effective as of the date of the Merger.
4. To transact such other business as may properly come before the
meeting, or any adjournment or adjournments thereof.
Shareholders of record at the close of business on October 15, 1998
will be entitled to receive notice of and to vote at the meeting.
By Order of the Board of Trustees
John W. McGonigle,
Executive Vice President and
Secretary
October 19, 1998
<PAGE>
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WE NEED YOUR PROXY VOTE IMMEDIATELY
A SHAREHOLDER MAY THINK HIS OR HER VOTE IS NOT IMPORTANT, BUT IT IS VITAL. BY
LAW, THE MEETING OF SHAREHOLDERS OF A DG FUND WILL HAVE TO BE ADJOURNED WITHOUT
CONDUCTING ANY BUSINESS IF LESS THAN A QUORUM OF THE SHARES ELIGIBLE TO VOTE ARE
REPRESENTED. CLEARLY, YOUR VOTE COULD BE CRITICAL TO ENABLE YOUR DG FUND TO HOLD
THE MEETING AS SCHEDULED, SO PLEASE RETURN EACH ENCLOSED PROXY CARD IMMEDIATELY.
YOU AND ALL OTHER SHAREHOLDERS WILL BENEFIT FROM YOUR COOPERATION.
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<PAGE>
Preliminary Copy October 19, 1998
PROSPECTUS/PROXY STATEMENT
TRANSFER OF THE ASSETS OF EACH
DG FUND
TO AND IN EXCHANGE FOR SHARES OF A CORRESPONDING
ISG FUND
AND RATIFICATION AND APPROVAL OF CERTAIN ADVISORY AGREEMENTS
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Board of DG Investor Series (the "Trust") on
behalf of each of its series (each, a "DG Fund" and, collectively, the "DG
Funds") to be used at the Special Meeting of Shareholders (the "Meeting") of
each DG Fund to be held on Friday, December 11, 1998 at 10:00 a.m., (Eastern
time), at the Trust's principal place of business located at 5800 Corporate
Drive, Pittsburgh, Pennsylvania, for the purposes set forth in the accompanying
Notice of Special Meeting of Shareholders. Shareholders of record at the close
of business on October 15, 1998 (each, a "Shareholder" and, collectively, the
"Shareholders") are entitled to receive notice of and to vote at the Meeting.
It is proposed that each DG Fund transfer all of its assets, subject
to liabilities, to a corresponding ISG Fund (each, an "ISG Fund" and,
collectively, the "ISG Funds"), as follows:
DG FUNDS ISG FUNDS
DG Equity Fund ISG Large Cap Equity Portfolio
DG Government Income Fund ISG Government Income Portfolio
DG International Equity Fund ISG International Equity
Portfolio
DG Limited Term Government ISG Limited Duration U.S.
Income Fund Government Portfolio
DG Municipal Income Fund ISG Municipal Income Portfolio
DG Opportunity Fund ISG Small Cap Opportunity Portfolio
DG Prime Money Market Fund ISG Prime Money Market Portfolio
DG Treasury Money Market Fund ISG U.S. Treasury Money Market
Portfolio
Such transfer will be in exchange (the "Exchange") for Class A Shares and Trust
Shares (collectively, the "ISG Shares") of the corresponding ISG Fund, all as
more fully described herein. Upon completion of the Exchange, the ISG Shares
received by a DG Fund will be distributed to its Shareholders, with each
Shareholder receiving a pro rata distribution of ISG Shares (or fractions
thereof) for DG Fund shares held prior to the Exchange. Thus, it is contemplated
that each holder of DG Fund shares will receive a number of ISG Shares of the
corresponding ISG Fund (or fractions thereof) equal in value to the aggregate
net asset value of such DG Fund shares as of the date of the Exchange.
The Meeting also is being called to permit Shareholders of each DG
Fund to approve or disapprove a new Investment Advisory Contract (the "New
Advisory Contract") between the Trust, on behalf of each DG Fund, and ParkSouth
Corporation ("ParkSouth"). In addition, shareholders of the DG Opportunity Fund
will be asked to approve or disapprove a new Sub-Investment Advisory Agreement
between ParkSouth and Womack Asset Management, Inc. ("Womack Management"); and
shareholders of the DG International Equity Fund will be asked to approve or
disapprove a new Sub-Investment Advisory Agreement between ParkSouth and Lazard
Asset Management ("Lazard"). The new Sub-Investment Advisory Agreements are
collectively referred to as the "New Sub- Advisory Agreements," and each may
individually be referred to as a "New Sub-Advisory Agreement." Consideration of
the New Advisory Contract and the New Sub-Advisory Agreements has been made
necessary by the merger (the "Merger") of Deposit Guaranty Corp., the ultimate
corporate parent of ParkSouth prior to the Merger, with and into First American
Corporation. The New Advisory Contract and the New Sub-Advisory Agreements took
effect on the date that the Merger was consummated---May 1, 1998--and will
continue, if approved by Shareholders, until the relevant DG Fund's
reorganization, referred to above.
If a Proposal is approved by one or more DG Funds, and disapproved by
the other DG Funds, the Proposal will be implemented only for each DG Fund that
approved the Proposal.
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This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely information about the ISG Funds that
Shareholders should know before voting on the proposal to reorganize their DG
Fund or receiving ISG Shares.
A Statement of Additional Information dated October __, 1998, relating
to this Prospectus/Proxy Statement, has been filed with the Securities and
Exchange Commission (the "Commission") and is incorporated herein by reference
in its entirety. The Commission maintains a Web site (http://www.sec.gov) that
contains the Statement of Additional Information, material incorporated by
reference, and other information regarding the ISG Funds and the DG Funds. For a
free copy of the Statement of Additional Information, write to the relevant ISG
Fund at its principal executive offices located at 3435 Stelzer Road, Columbus,
Ohio 43219-3035, or call 1-800-852-0045.
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MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. MUTUAL FUND SHARES
INVOLVE CERTAIN INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
SHARE PRICE AND INVESTMENT RETURN FLUCTUATE AND ARE NOT GUARANTEED.
AN INVESTMENT IN A MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE MONEY MARKET FUNDS WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
- -------------------------------------------------------------------------------
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/PROXY STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
The DG Funds are separate series of the Trust, an open-end management
investment company. The ISG Funds are separate series of The Infinity Mutual
Funds, Inc. (the "Company"), an open-end management investment company. Each ISG
Fund, except ISG Limited Duration U.S. Government Portfolio, ISG Prime Money
Market Portfolio and ISG U.S. Treasury Money Market Portfolio (collectively, the
"Pre-Existing ISG Funds"), is a newly organized series of the Company
(collectively, the "New ISG Funds"). The investment objective, management
policies and investment restrictions of each ISG Fund are substantially similar
to those of its corresponding DG Fund. A description of each DG Fund and its
corresponding ISG Fund and certain other information about the Exchange is set
forth in Appendix A to this Prospectus/Proxy Statement.
Accompanying this Prospectus/Proxy Statement are:
o The Prospectus of the ISG Funds, dated October __, 1998.
o The Annual Report and Semi-Annual Report of the Pre-Existing ISG
Funds for the year ended December 31, 1997 and the six month
period ended June 30, 1998, respectively.
Each New ISG Fund recently has been organized for the purpose of continuing the
investment operations of the corresponding DG Fund, and has no assets or prior
history of investment operations. FOR FREE COPIES OF THE CURRENT PROSPECTUS OF
THE RELEVANT DG FUND AND THE CURRENT ANNUAL REPORT OF THE RELEVANT DG FUND,
WRITE TO THE TRUST AT ITS PRINCIPAL EXECUTIVE OFFICES, LOCATED AT 5800 CORPORATE
DRIVE, PITTSBURGH, PENNSYLVANIA 15237- 7010, OR CALL 1-800-530-7377.
Shareholders are entitled to one vote for each DG Fund share held and
fractional votes for each fractional DG Fund share held. DG Fund shares
represented by executed and unrevoked proxies will be voted in accordance with
the specifications made thereon. If the enclosed form of proxy is executed and
returned, it nevertheless may be revoked by giving another proxy or by letter or
telegram directed to the Trust, which must indicate the Shareholder's name and
account number. To be effective, such revocation must be received before the
Meeting. Also, any Shareholder who attends the Meeting in person may vote by
ballot at the Meeting, thereby canceling any proxy previously given.
Proxy materials will be mailed to Shareholders of record on or about
October 19, 1998.
<PAGE>
TABLE OF CONTENTS
PAGE
PROPOSAL ONE
Summary.................................................................
Comparison of DG Funds and ISG Funds....................................
Reasons for the Exchange................................................
Information about the Exchange..........................................
Required Vote and Board's Recommendation................................
Additional Information about the DG Funds
and ISG Funds.........................................................
Financial Statements and Experts........................................
PROPOSALS TWO AND THREE
Introduction............................................................
Proposal 2 -- Ratification and Approval or Disapproval
of a New Advisory Contract............................................
Proposal 3(A) -- Ratification and Approval or Disapproval
of a New Sub-Advisory Agreement (DG Opportunity
Fund Only)............................................................
Proposal 3(B) -- Ratification and Approval or Disapproval
of a New Sub-Advisory Agreement (DG International
Equity Fund Only).....................................................
ADDITIONAL VOTING INFORMATION...........................................
OTHER MATTERS...........................................................
NOTICE TO BANKS, BROKER/DEALERS AND
VOTING TRUSTEES AND THEIR NOMINEES....................................
Appendix A: Descriptions of the
DG Funds and ISG Funds................................................ A-1
Appendix B: Directors of the ISG Funds................................. B-1
Appendix C: Form of Agreement and
Plan of Reorganization................................................ C-1
Appendix D: New Advisory Contract...................................... D-1
Appendix E: New Sub-Advisory Agreement
(DG Opportunity Fund)................................................. E-1
Appendix F: New Sub-Advisory Agreement
(DG International Equity Fund)........................................ F-1
Appendix G: Executive Officer and Directors of
First American National Bank.......................................... G-1
<PAGE>
PROPOSAL ONE
APPROVAL OR DISAPPROVAL OF AN AGREEMENT AND PLAN OF REORGANIZATION
PROVIDING FOR THE TRANSFER OF ALL OF THE ASSETS AND LIABILITIES OF
EACH DG FUND IN EXCHANGE FOR SHARES OF A CORRESPONDING ISG FUND
SUMMARY
This Summary is qualified by reference to the more complete
information contained elsewhere in this Prospectus/Proxy Statement, the relevant
DG Fund Prospectus, the ISG Fund Prospectus, the description of each DG Fund and
its corresponding ISG Fund attached to this Prospectus/Proxy Statement as
Appendix A and the form of Agreement and Plan of Reorganization attached to this
Prospectus/Proxy Statement as Appendix C.
PROPOSED TRANSACTION. The Trust's and Company's Boards, including
their respective Board members who are not "interested persons" (as defined in
the Investment Company Act of 1940, as amended (the "1940 Act"))("Independent
Board Members"), have unanimously approved for each Fund an Agreement and Plan
of Reorganization (the "Plan"). The Plan provides that each DG Fund, subject to
the requisite approval of its Shareholders, transfer to the corresponding ISG
Fund all of its assets (subject to liabilities) in exchange for ISG Shares
having an aggregate net asset value equal to the aggregate net asset value of
the DG Fund shares. Each DG Fund will distribute all ISG Shares received by it
to its Shareholders. Trust Shares of the applicable ISG Fund will be distributed
to Shareholders who held DG Fund shares through qualified trust, custody or
agency accounts at Deposit Guaranty National Bank ("DG Bank") or affiliated and
correspondent banks of DG Bank or certain other affiliated and non-affiliated
institutions. All other Shareholders will receive Class A Shares of the
corresponding ISG Fund. Thereafter, each DG Fund will be terminated as a series
of the Trust.
The primary differences between Trust Shares and Class A Shares are
applicable sales loads and the existence of a plan adopted under Rule 12b-1
providing for the payment of up to .25% of Class A Shares' average daily net
assets (except for the ISG Prime Money Market Portfolio and ISG U.S. Treasury
Money Market Portfolio) for the purpose of financing distribution of Class A
Shares. The DG Funds have adopted a similar plan under Rule 12b- 1, but (except
for the DG Prime Money Market Fund) have made no payments thereunder. It is no
expected that any other DG Funds would make such payments until creation of a
separate class of shares for institutional investors. The Trust Shares of the
ISG Funds have features similar to such a class.
As a result of the Exchange, each Shareholder will cease to be a
shareholder of the relevant DG Fund and will become a shareholder of the
corresponding ISG Fund as of the close of business on the closing date of the
Exchange.
REASONS FOR THE EXCHANGE. The primary reason for the Exchange is the
recently completed Merger of Deposit Guaranty Corp., the ultimate parent of
ParkSouth prior to the Merger, each DG Fund's investment adviser, with and into
First American Corporation, the parent of First American National Bank ("First
American"), each ISG Fund's investment adviser. The proposed transaction will
combine the separate DG Fund and ISG Fund families into a single, larger
consolidated group. ParkSouth and First American have recommended that each DG
Fund be reorganized as described herein. DG Fund shareholders may benefit from
the Exchange because the expense ratio of each ISG Fund will be lower than or
equal to that of its corresponding DG Fund, while the investment objective,
management policies, investment advisory personnel and shareholder services of
each ISG Fund will remain substantially similar to those of its corresponding DG
Fund. No sales charge will be imposed on the ISG Shares received by Shareholders
in the Exchange.
The Trust's Board has concluded unanimously that the Exchange would be
in the best interests of Shareholders of each DG Fund and the interests of
existing Shareholders of each DG Fund would not be diluted as a result of the
transactions contemplated thereby. See "Reasons for the Exchange."
TAX CONSEQUENCES. The Exchange is designed to qualify for Federal
income tax purposes as a tax-free reorganization. As a condition to the closing
of the Exchange, the Trust and the Company will receive an opinion of counsel to
the effect that, for Federal income tax purposes, (a) no gain or loss will be
recognized by DG Fund Shareholders for Federal income tax purposes as a result
of the Exchange, (b) the holding period and aggregate tax basis of ISG Shares
received by a DG Fund Shareholder will be the same as the holding period and
aggregate tax basis of the Shareholder's DG Fund shares, and (c) the holding
period and tax basis of the DG Fund's assets transferred to the ISG Fund as a
result of the Exchange will be the same as the holding period and tax basis of
such assets held by the DG Fund immediately prior to the Exchange. See
"Information about the Exchange--Tax Consequences."
COMPARISON OF THE DG FUNDS AND ISG FUNDS
The following discussion summarizes certain aspects of the DG Funds
and the ISG Funds as a whole. A description of each DG Fund and its
corresponding ISG Fund is set forth in Appendix A to this Prospectus/Proxy
Statement. All such information is qualified by the more complete information
set forth in the DG Funds' Prospectuses and Statements of Additional Information
and the ISG Funds' Prospectus and Statements of Additional Information, which
are incorporated herein by reference.
INVESTMENT ADVISERS. ParkSouth, P.O. Box 1200, Jackson, Mississippi
39215, currently provides investment advisory services to each DG Fund. In
addition to managing the DG Funds, ParkSouth manages approximately $2 billion in
trust assets as of June 30, 1998. ParkSouth (which succeeded to the investment
advisory business of its parent corporation DG Bank in 1997) or DG Bank has
served as the adviser to the Trust since May 5, 1992. Lazard, located at 30
Rockefeller Plaza, New York, New York 10020, serves as the sub-investment
adviser to DG International Equity Fund, and Womack Management, located at 2120
DG Plaza, Jackson, Mississippi 39201, serves as the sub-investment adviser to DG
Opportunity Fund. 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. Womack Management
provides investment management services to client discretionary accounts with
assets totaling approximately $300 million as of June 30, 1998.
First American, located at First American Center, 315 Deaderick
Street, Nashville, Tennessee 37237, serves as the investment adviser to each ISG
Fund. First American provides personal trust, estate, employee benefit trust,
corporate trust and custody services to over 3,000 individual and business
clients and investment advisory services. First American and its affiliates, as
of June 30, 1998, had approximately $7 billion under trust and approximately $6
billion under management. Lazard also serves as the sub-investment adviser to
ISG International Equity Portfolio and Womack Management also serves as the
sub-investment adviser to ISG Small Cap Opportunity Portfolio, respectively.
The primary portfolio manager(s) of each DG Fund will continue as the
primary portfolio manager(s) or as a member of a team of portfolio managers of
its corresponding ISG Fund, except in the case of the Pre-Existing ISG Funds,
where the primary portfolio managers of those ISG Funds also will continue in
such capacity. For a description of the primary portfolio manager(s) of the
relevant ISG Fund, see Appendix A.
Under the terms of the respective investment advisory
agreement, each DG Fund and ISG Fund has agreed to pay ParkSouth or First
American, as the case may be, a monthly fee at the annual rate set forth below
as a percentage of the relevant Fund's average daily net assets:
<TABLE>
<CAPTION>
Investment Investment
Advisory Fee Advisory Fee
DG FUNDS Payable ISG Funds Payable
<S> <C> <C> <C>
DG Equity Fund .75% ISG Large Cap Equity .75%
Portfolio
DG Government Income Fund .60% ISG Government Income .60%
Portfolio
DG International Equity Fund 1.00% ISG International Equity 1.00%
DG Limited Term Government .60% ISG Limited Duration U.S. .50%
Income Fund Government Portfolio
DG Municipal Income Fund .60% ISG Municipal Income .60%
Portfolio
DG Opportunity Fund .95% ISG Small Cap Opportunity .95%
Portfolio
DG Prime Money Market Fund .50% ISG Prime Money Market .25%
Portfolio
DG Treasury Money Market .50% ISG U.S. Treasury Money .25%
Fund Market Portfolio
</TABLE>
Under the terms of the respective sub-investment advisory agreement
with Lazard, ParkSouth and First American have agreed to pay Lazard a monthly
fee at the annual rate of .50% of the value of the average daily net assets of
DG International Equity Fund and ISG International Equity Portfolio,
respectively. Under the terms of the respective sub-investment advisory
agreement with Womack Management, ParkSouth has agreed to pay Womack Management,
with respect to DG Opportunity Fund, a monthly fee at the annual rate of the sum
of .32% of the value of the Fund's average daily net assets up to $50 million,
.075% of the value of such assets from $50 million to $70 million and .25% of
the value of such assets in excess of $70 million, and First American has agreed
to pay Womack Management, with respect to ISG Small Cap Opportunity Portfolio, a
monthly fee at the annual rate of .35% of the value of the ISG Small Cap
Opportunity Portfolio's average daily net assets.
From time to time, ParkSouth and First American may waive receipt of
their fees and/or voluntarily assume certain expenses of a Fund. For a
description of any waiver arrangements with respect to advisory fees payable by
the relevant Fund, see Appendix A.
CAPITALIZATION. Each DG Fund has one class of shares. Each ISG Fund
(except ISG U.S. Treasury Money Market Portfolio) has three classes of
shares--Class A Shares, Class B Shares and Trust Shares--which are identical,
except as to services offered to and expenses borne by each class. ISG U.S.
Treasury Money Market Portfolio has two classes of shares--Class A Shares and
Trust Shares. ISG Class B Shares are not being offered in the Exchanges and,
accordingly, no information is presented for such class. For a comparison of the
capitalization of each DG Fund and the Class A Shares and Trust Shares of the
corresponding ISG Funds, see Appendix A.
INITIAL SALES CHARGE. Shares of each DG Fund (except DG International
Equity Fund, DG Prime Money Market Fund and DG Treasury Money Market Fund) are
subject to an initial sales charge. Class A Shares of each ISG Fund (except ISG
Prime Money Market Portfolio and ISG U.S. Treasury Money Market Portfolio) are
subject to an initial sales charge. A contingent deferred sales charge of 1% may
be assessed on certain redemptions of Class A Shares of the ISG Funds (other
than the ISG Money Market Funds) purchased without an initial sales charge as
part of an initial purchase of $1 million or more. Trust Shares of each ISG Fund
are not subject to an initial sales charge or contingent deferred sales charge.
The initial sales charge for DG Fund shares and Class A Shares of the ISG Funds
may be reduced or waived for certain purchases as described in the relevant
Prospectus. ISG Class A Shares received in an Exchange will NOT be subject to an
initial sales charge. In addition, until May 1, 2000, each Shareholder who
participates in the Exchange will be able to purchase additional Class A Shares
of the relevant ISG Fund subject to the lower initial sales charge, if any,
applicable to the ISG Class A Shares or the corresponding DG Fund shares
exchanged by the Shareholder. For a comparison of the schedules of the initial
sales charge imposed on shares of the applicable DG Funds and their
corresponding ISG Funds, See Appendix A.
FEES AND EXPENSES. The annual Total Fund Operating Expenses of each
ISG Fund after the Exchange will be less than or equal to the annual Total Fund
Operating Expenses of its corresponding DG Fund. For a comparison of the fees
and expenses of each ISG Fund and its corresponding DG Fund, see Appendix A.
DISTRIBUTORS. Federated Securities Corp. ("Federated"), located at
Federated Investors Tower, Pittsburgh, Pennsylvania 15222, is the principal
distributor for shares of the DG Funds. It is a Pennsylvania corporation
organized on November 14, 1969, and is the principal distributor for a number of
investment companies. Federated is a subsidiary of Federated Investors, Inc.
BISYS Fund Services Limited Partnership ("BISYS"), located at 3435
Seltzer Road, Columbus, Ohio 43219, serves as each ISG Fund's distributor. BISYS
currently distributes the shares of other investment companies with over $200
billion in assets. BISYS is a wholly-owned subsidiary of The BISYS Group, Inc.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICES PLANS. Under a
Distribution Plan adopted pursuant to Rule 12b-1 under the 1940 Act, each DG
Fund may pay Federated to finance any activity which is principally intended to
result in the sale of shares subject to the Plan. The Trust has disclosed that
fees under the Distribution Plan will not be paid or accrued (except with
respect to DG Prime Money Market Fund) until a separate class of shares has been
created for certain institutional investors. Class A Shares of each ISG Fund,
except ISG Prime Money Market Portfolio and ISG U.S. Treasury Money Market
Portfolio, also are subject to a Distribution Plan adopted pursuant to Rule
12b-1 under the 1940 Act. Under this Plan, each such ISG Fund pays BISYS for
advertising, marketing and distributing its Class A Shares. ISG Trust Shares are
not subject to a Distribution Plan. Pursuant to the relevant Plan, Federated and
BISYS may make payments to certain financial institutions, securities dealers
and other industry professionals (collectively, "Service Organizations") in
respect of distribution-related services for their clients owning Fund shares.
Each DG Fund has adopted a Shareholder Services Plan, pursuant to
which the Fund may pay Service Organizations to provide administrative support
services to their customers who own DG Fund shares. These administrative support
services may include, but are not limited to, the provision of personal services
and maintenance of shareholder accounts. Currently, fees payable under the
Shareholder Services Plan with respect to DG Prime Money Market Fund are being
waived in their entirety. Each ISG Fund also adopted a Shareholder Services Plan
with respect to Class A Shares and Trust Shares. Pursuant to this Plan, each ISG
Fund may pay BISYS for providing shareholder services including personal
services relating to shareholder accounts, such as answering shareholder
inquiries regarding the Fund and providing reports and other information, and
services relating to the maintenance of such shareholder accounts. Under the
Plan, BISYS may make payments to certain Service Organizations in respect of
these services for their clients who own Fund shares.
Under the terms of their respective Distribution Plans and Shareholder
Services Plans, the DG Funds and ISG Funds (Trust Shares are not subject to a
Distribution Plan) are subject to the fees, if any, at the annual rate set forth
below as a percentage of the indicated Fund's average daily net assets.
<TABLE>
<CAPTION>
Shareholder
Distribution Services Plan
Shareholder Plan Fees Fees (Class A
Distribution Services (Class A Shares and
DG FUNDS PLAN FEES PLAN FEES ISG FUNDS SHARES ONLY) TRUST SHARES)
- ----------- ------------ --------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
DG Equity Fund .35% .15% ISG Large Cap .25% .15%
Equity Portfolio
DG Government .35% .15% ISG Government .25% .15%
Income Fund Income Portfolio
DG International .25% .15% ISG International .25% .15%
Equity Fund Equity Portfolio
DG Limited Term .35% .15% ISG Limited .25% .15%
Government Income Duration U.S.
Fund Government
Portfolio
DG Municipal Income .35% .15% ISG Municipal .25% .15%
Fund Income Portfolio
DG Opportunity Fund .35% .15% ISG Small Cap .25% .15%
Opportunity
Portfolio
DG Prime Money .25% .15% ISG Prime Money None .25% (Class
Market Fund Market Portfolio A Shares)/
.15% (Trust
Shares)
DG Treasury Money .25% .15% ISG U.S. Treasury None .25% (Class
Market Fund Money Market A Shares)/
Portfolio .15% (Trust
Shares)
</TABLE>
From time to time, Federated or BISYS may defer or waive receipt of
fees under the relevant Plan while retaining the ability to be paid under the
Plan thereafter. The fees payable to Federated and BISYS under the respective
Plan are payable without regard to actual expenses incurred. As indicated above,
no fees currently are being paid or accrued under the Trust's Distribution Plan.
ADMINISTRATIVE SERVICES. Federated Administrative Services ("FAS"), an
affiliate of Federated, provides the DG Funds with the administrative personnel
and services, such as certain legal and accounting services. FAS provides these
services at the annual rate set forth below as a percentage of the average
aggregate daily net assets of the Trust:
AVERAGE AGGREGATE DAILY
NET ASSETS OF THE TRUST MAXIMUM ADMINISTRATIVE FEE*
on the first $250 million .15%
on the next $250 million .125%
on the next $250 million .10%
on assets in excess of $750
million .075%
- ---------------
* Subject to a minimum annual fee of $100,000 per DG Fund.
BISYS serves as each ISG Fund's administrator, generally assisting in
all aspects of the ISG Funds' operations, other than providing investment
advice. As administrator, BISYS provides the ISG Funds with office facilities,
personnel, and certain clerical and bookkeeping services. BISYS provides these
services at an annual rate of .10% of the value of the average daily net assets
of the ISG Prime Money Market Portfolio and ISG U.S. Treasury Money Market
Portfolio and .15% of the value of each other ISG Fund's average daily net
assets.
From time to time, FAS or BISYS may waive voluntarily all or a portion
of its respective administration fees.
CUSTODIAN AND TRANSFER AGENT. State Street Bank and Trust Company is
the Custodian for the DG Funds and The Bank of New York is the Custodian for the
ISG Funds.
Federated Shareholder Services Company, a subsidiary of Federated,
located at Federated Investors Tower, Pittsburgh, Pennsylvania 15222, is the DG
Funds' Transfer and Dividend Disbursing Agent. BISYS Fund Services Ohio, Inc.,
an affiliate of BISYS, located at 3435 Stelzer Road, Columbus, Ohio 43219, is
the ISG Funds' Transfer and Dividend Disbursing Agent.
INDEPENDENT AUDITORS. KPMG Peat Marwick LLP are the independent
auditors for the DG Funds and ISG Funds.
BOARD MEMBERS. The business affairs of the DG Funds and ISG Funds are
managed under the general supervision of their respective Boards. The Trust and
the Company have different Board members. Until May 1, 2001 (three years after
the Merger of Deposit Guaranty Corp. into First American Corporation), at least
75% of the members of the Trust's Board and Company's Board must be Board
members who are not "interested persons" (as defined under the 1940 Act) of
ParkSouth or First American. For a description of the Company's Board members,
see Appendix B. For a description of the Trust's Board members, see the Trust's
Statement of Additional Information under the caption "DG Investor Series
Management."
PURCHASE PROCEDURES. The purchase procedures of each DG Fund and its
corresponding ISG Fund are substantially similar. See "Investing in the Funds"
in the relevant DG Funds Prospectus and "How To Buy Shares" in the ISG Funds
Prospectus for a discussion of purchase procedures.
REDEMPTION PROCEDURES. The redemption procedures of each DG Fund and
its corresponding ISG Fund are substantially similar. See "Redeeming Shares" in
the relevant DG Funds Prospectus and "How To Redeem Shares" in the ISG Funds
Prospectus for a discussion of redemption procedures.
DISTRIBUTIONS. The dividend and distributions policies of each DG Fund
and its corresponding ISG Portfolio (except for DG Limited Term Government
Income Fund and ISG Limited Duration U.S. Government Portfolio) are
substantially similar. With respect to DG Limited Term Government Income Fund,
dividends are declared and paid monthly; with respect to ISG Limited Duration
U.S. Government Portfolio, dividends are declared daily and paid monthly. See
"Investing in the Funds--Dividends and Distributions" in the relevant DG Funds
Prospectus and "Dividends, Distributions and Taxes" in the ISG Funds Prospectus
for a discussion of such policies.
SHAREHOLDER SERVICES. The shareholder services offered by each DG Fund
and its corresponding ISG Fund are substantially similar, except that each ISG
Fund offers a Directed Distribution Plan, pursuant to which you may invest
automatically dividends and capital gain distributions, if any, paid by the ISG
Fund in Class A Shares of another ISG Fund of which you are a shareholder. In
addition, the ISG Money Market Funds provide check writing privileges. The DG
Funds do not offer a directed distribution plan or check writing privileges. See
"Investing in the Funds" and "Redeeming Shares" in the relevant DG Funds
Prospectus and "Shareholder Privileges" in the ISG Funds Prospectus for a
description of shareholder services.
CERTAIN ORGANIZATIONAL DIFFERENCES BETWEEN THE TRUST AND THE COMPANY.
Each DG Fund is a series of the Trust, which is a Massachusetts business trust,
and the rights of DG Fund shareholders are governed by the Trust's Declaration
of Trust (the "Trust Agreement"), Bylaws and applicable Massachusetts law. Each
ISG Fund is a series of the Company, which is Maryland corporation, and the
rights of ISG Fund shareholders are governed by the Company's Articles of
Incorporation, as amended (the "Charter"), Bylaws and the Maryland General
Corporation Law (the "Maryland Code"). Certain relevant differences between the
two forms of organization are summarized below.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. Generally, neither the DG
Funds nor the ISG Funds are required to hold annual meetings of shareholders.
The Boards of the Company and Trust are each required to call a special meeting
of shareholders for the purpose of removing a Board member when requested in
writing to do so by the holders of at least 10% of its outstanding shares, and
for any other purpose when requested in writing by the holders of at least 10%,
in the case of the Trust, and at least a majority, in the case of the Company,
of its outstanding shares entitled to vote. Moreover, each Board will call a
meeting of shareholders for the purpose of electing Board members, if at any
time, less than a majority of the Board members then holding office have been
elected by shareholders.
Shares of the DG Funds and ISG Funds are entitled to one vote for each
full share held and a proportionate fractional vote for each fractional share
held. On any matter submitted to a vote of shareholders, all shares of the DG
Funds or ISG Funds then entitled to vote will be voted in the aggregate as a
single class without regard to series or classes of shares, except (i) when
required by the 1940 Act or when the respective Board members shall have
determined that the matter affects one or more series or classes differently,
shares will be voted by individual series or class, and (ii) when the respective
Board members have determined that the matter affects only the interests of one
or more series or classes, then only shareholders of such series or classes will
be entitled to vote thereon.
The Trust's Trust Agreement provides that more than 50% of the shares
entitled to vote shall constitute a quorum for the transaction of business at a
shareholders' meeting. The Company's Charter provides that one-third of the
shares entitled to vote shall constitute a quorum for the transaction of
business at a stockholders meeting. Matters requiring a larger vote by law or
under the organizational documents for the Trust or Company are not affected by
such quorum requirements.
SHAREHOLDER LIABILITY. Under Maryland law, stockholders of a Maryland
corporation have no personal liability as such for the corporation's acts or
obligations.
Under Massachusetts law, shareholders of a Massachusetts business
trust, under certain circumstances, could be held personally liable for the
obligations of the business trust. However, the Trust Agreement disclaims
shareholder liability for acts or obligations of a DG Fund or the Trust and
requires that notice of such disclaimer be given in every note, bond, contract
or other undertaking issued or entered into by or on behalf of the DG Fund, the
Trust or the Trust's Trustees. The Trust Agreement provides for indemnification
out of the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust solely by reason of his being
or having been a DG Fund shareholder and not because of his acts or omissions or
some other reason. Thus, the Trust considers the risk of a DG Fund shareholder
incurring financial loss on account of shareholder liability to be remote since
it is limited to circumstances in which a disclaimer is inoperative or the DG
Fund itself would be unable to meet its obligations. The Trust Agreement also
provides that the Trust, upon request, shall assume the defense of any claim
made against any shareholder for any act or obligation of the DG Fund or the
Trust and satisfy any judgment thereon.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND TRUSTEES. Under the
Company's Charter and Maryland law, subject to the 1940 Act, a Director or
officer of the Company is not liable to an ISG Fund or its stockholders for
monetary damages except to the extent he or she receives an improper personal
benefit or his or her action or failure to act was the result of active and
deliberate dishonesty and was material to the cause of action adjudicated. A
Director of the Company is entitled to indemnification against judgments,
penalties, fines, settlements and reasonable expenses unless his or her act or
omission was material to the cause of action and was committed in bad faith or
was the result of active and deliberate dishonesty or the individual received an
improper personal benefit (or, in a criminal case, had reasonable cause to
believe that his act or omission was unlawful). Indemnification may be made
against amounts recoverable by settlement of suits brought by or in the right of
the Company except where the individual is adjudged liable to the Company. A
Director or officer is entitled to advances of expenses in the course of
litigation if (i) such Director or officer undertakes to repay such sums if
indemnification is ultimately denied and provides acceptable security, (ii) the
Company is insured against losses arising from the advances, or (iii) the
disinterested non-party directors or independent legal counsel determine there
is a reason to believe the Director or officer ultimately will be found to be
entitled to indemnification. Officers, employees and agents may be indemnified
to the same extent as Directors and to such further extent as is consistent with
law.
If these provisions of Maryland law are amended, the Directors and
officers will be entitled to limited liability and to indemnification to the
fullest extent of Maryland law as amended. No amendment or repeal of the
provisions of the Charter relating to limited liability and indemnification will
apply to any event, omission or proceeding which precedes the amendment or
repeal.
Under the Trust's Trust Agreement and Bylaws, a Trustee is entitled to
indemnification against all liability and expenses reasonably incurred by him in
connection with the defense or disposition of any threatened or actual
proceeding by reason of his being or having been a Trustee, unless such Trustee
shall have been adjudicated to have acted with bad faith, willful misfeasance,
gross negligence or in reckless disregard of his duties. Officers, employees and
agents of the Trust may be indemnified to the same extent as Trustees.
Under the 1940 Act, a director or trustee may not be protected against
liability to a fund and its security holders to which he would otherwise be
subject as a result of his willful misfeasance, bad faith or gross negligence in
the performance of his duties, or by reason of reckless disregard of his
obligations and duties.
RIGHT OF INSPECTION. Under Maryland law, persons who have been
stockholders of record for six months or more and who own at least 5% of the
shares of an ISG Fund may inspect the books of account and stock ledger of the
ISG Fund. DG Fund shareholders have the right to inspect the records, accounts
and books of the DG Fund for any legitimate business purpose.
* * *
The foregoing is only a summary of certain differences between the ISG
Funds, the Company's Charter, Bylaws and Maryland law, and the DG Funds, the
Trust's Trust Agreement, Bylaws or Massachusetts law. It is not a complete list
of differences, but only of material differences. Shareholders desiring copies
of the Company's Charter and Bylaws or the Trust's Trust Agreement and Bylaws
should write to the Company at 3435 Stelzer Road, Columbus, Ohio 43219-3035, or
the Trust at Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779.
REASONS FOR THE EXCHANGE
The primary reason for the Exchange is the recently completed Merger
of Deposit Guaranty Corp., the parent company of ParkSouth prior to the Merger,
with and into First American Corporation, the parent company of First American.
The Exchange described herein presents the opportunity to combine the separate
DG Funds and ISG Funds into a single, larger consolidated group. ParkSouth and
First American have recommended that each of the DG Funds be reorganized into
the corresponding ISG Fund as described in this Prospectus/Proxy Statement.
In determining whether to recommend approval of the Exchange, each
Board considered the following factors, among others: (1) the compatibility of
each DG Fund's and its corresponding ISG Fund's investment objective, management
policies and investment restrictions, as well as the shareholder services each
offers; (2) the terms and conditions of each Exchange and their conclusion that
the Exchange would not result in dilution of shareholder interests; (3) expense
ratios and published information regarding the fees and expenses of each DG Fund
and its corresponding ISG Fund, as well as the expense ratios of similar funds
and the estimated expense ratio of the combined funds; and (4) the tax-free
nature of each Exchange.
INFORMATION ABOUT THE EXCHANGE
PLAN OF EXCHANGE. The following summary of the Plan is qualified in
its entirety by reference to the form of Plan attached hereto as Appendix C. The
Plan provides that the relevant ISG Fund will acquire all of the assets of its
corresponding DG Fund in exchange for ISG Class A Shares and Trust Shares and
the assumption by the ISG Fund of the DG Fund's stated liabilities on December
11, 1998 or such later date with respect to one or more DG Funds as may be
agreed upon by the parties (the "Closing Date"). The number of ISG Shares to be
issued to the DG Fund will be determined on the basis of the relative net asset
values per share and aggregate net assets of the DG Fund shares and ISG Shares,
generally computed as of the close of trading on the floor of the New York Stock
Exchange (currently at 4:00 p.m., New York time) on the Closing Date (the
"Valuation Time"). Portfolio securities of the DG Fund and ISG Fund will be
valued in accordance with the valuation practices of the ISG Fund, which are
described under the caption "How to Buy Shares" in the ISG Funds Prospectus and
under the caption "Determination of Net Asset Value" in the ISG Funds' Statement
of Additional Information.
Before the Closing Date, each DG Fund will declare and pay a dividend
or other distribution which, together with all previous dividends and other
distributions, will have the effect of distributing to DG Fund Shareholders all
of the DG Fund's previously undistributed investment company taxable income
(computed without regard to any deduction for dividends paid), its net exempt
interest income, and its net capital gain realized (after reduction for any
capital loss carryforward), if any, for all taxable years ending on or before,
and for its current taxable year through, the Closing Date.
As conveniently as practicable after the Closing Date, each DG Fund
will distribute pro rata to its shareholders of record as of the Valuation Time,
in liquidation of the DG Fund, the ISG Shares received by it in the Exchange.
Such distribution will be accomplished by establishing an account on the share
records of the relevant ISG Fund in the name of its corresponding DG Fund
Shareholders, each account representing the respective pro rata number of ISG
Shares due to each DG Fund Shareholder. After such distribution and the winding
up of its affairs, the DG Fund will be terminated as a series of the Trust.
After the Closing Date, any outstanding certificates representing DG Fund shares
will represent the ISG Shares distributed to the record holders of the DG Fund.
Upon presentation to the transfer agent of the ISG Fund, DG Fund share
certificates will be exchanged for ISG Share certificates, at the applicable
exchange rate. Certificates for ISG Shares will be issued only upon the
investor's written request.
The Plan may be amended at any time before the Exchange. The Trust
will provide DG Fund Shareholders with information describing any material
amendment to the relevant Plan prior to DG Fund Shareholder consideration. The
obligations of the DG Fund and its corresponding ISG Fund under the Plan are
subject to various conditions, including approval by the holders of the
requisite number of DG Fund shares and the continuing accuracy of various
representations and warranties being confirmed by the respective parties. In
addition, consummation of the Exchange with respect to DG Limited Term
Government Income Fund and DG Treasury Money Market Fund and ISG Limited
Duration U.S. Government Portfolio and ISG U.S. Treasury Money Market Portfolio,
respectively, is subject to the condition that each of these Funds receive
exemptive relief from the Securities and Exchange Commission with respect to
certain restrictions under the 1940 Act that would otherwise prohibit the
Exchange with respect to such Funds.
The total expenses of the Exchange are expected to be approximately
$______, and will be borne entirely by First American.
If the Exchange is not approved by Shareholders of a DG Fund, the
Trust's Board will consider other appropriate courses of action, including other
possible reorganizations.
FEDERAL INCOME TAX CONSEQUENCES. The exchange of each DG Fund's assets
for ISG Shares is intended to qualify for Federal income tax purposes as a
tax-free reorganization under Section 368(a) of the Code. As a condition to the
closing of the Exchange, the DG Funds and the ISG Funds will receive the opinion
of Stroock & Stroock & Lavan LLP, counsel to the ISG Funds, to the effect that,
on the basis of the existing provisions of the Code, Treasury regulations issued
thereunder, current administrative regulations and pronouncements and court
decisions, and certain facts, assumptions and representations, for Federal
income tax purposes: (1) the transfer of all of the DG Fund's assets in exchange
solely for ISG Shares and the assumption by the ISG Fund of the DG Fund's
liabilities, followed by the DG Fund's distribution of those shares to the DG
Fund Shareholders constructively in exchange for their DG Fund shares, will
constitute a "reorganization" within the meaning of Section 368(a)(1) of the
Code; (2) no gain or loss will be recognized by the DG Fund upon the transfer of
its assets to the ISG Fund solely in exchange for ISG Shares and the assumption
by the ISG Fund of the DG Fund's liabilities or upon the subsequent distribution
(whether actual or constructive) of ISG Shares to the DG Fund Shareholders in
constructive exchange for their DG Fund shares; (3) no gain or loss will be
recognized by the ISG Fund upon its receipt of the DG Fund's assets in exchange
solely for ISG Shares and the assumption by the ISG Fund of the DG Fund's
liabilities; (4) no gain or loss will be recognized by the DG Fund Shareholders
upon the exchange of their DG Fund shares for ISG Shares pursuant to the Plan;
(5) the aggregate tax basis for ISG Shares received by each DG Fund Shareholder
pursuant to the Exchange will be the same as the aggregate tax basis for DG Fund
shares held by such Shareholder immediately prior to the Exchange, and the
Shareholder's holding period for those ISG Shares will include the period the DG
Fund shares surrendered in exchange therefor were held by such Shareholder
(provided the DG Fund shares were held as capital assets on the date of the
Exchange); and (6) the tax basis of the DG Fund's assets transferred to the ISG
Fund will be the same as the tax basis of such assets to the DG Fund immediately
prior to the Exchange, and the holding period of the DG Fund's assets in the
hands of the ISG Fund will include the period during which those assets were
held by the DG Fund.
NONE OF THE DG FUNDS OR ISG FUNDS HAS SOUGHT A TAX RULING FROM THE
INTERNAL REVENUE SERVICE ("IRS"). THE OPINION OF COUNSEL IS NOT BINDING ON THE
IRS NOR DOES IT PRECLUDE THE IRS FROM ADOPTING A CONTRARY POSITION. DG Fund
Shareholders should consult their tax advisers regarding the effect, if any, of
the proposed Exchange in light of their individual circumstances. Since the
foregoing discussion relates only to the Federal income tax consequences of the
Exchange, DG Fund Shareholders also should consult their tax advisers as to
state and local tax consequences, if any, of the Exchange.
REQUIRED VOTE AND BOARD'S RECOMMENDATION
As to each DG Fund, the Trust's Board, including a majority of the
Independent Board Members, has approved the Plan and the Exchange and has
determined that (i) participation in the Exchange is in the DG Fund's best
interests and (ii) the interests of its Shareholders will not be diluted as a
result of the Exchange. Pursuant to the Trust's Trust Agreement, with respect to
each DG Fund, approval of the Plan and Exchange requires the affirmative vote of
(a) 67% of the DG Fund's voting securities present at this Meeting, if the
holders of more than 50% of the DG Fund's outstanding voting securities are
present or represented by proxy, or (b) more than 50% of the DG Fund's
outstanding voting securities, whichever is less.
THE TRUST'S BOARD, INCLUDING THE INDEPENDENT BOARD MEMBERS, RECOMMENDS THAT
SHAREHOLDERS OF EACH DG FUND VOTE "FOR" APPROVAL OF THE PLAN AND THE EXCHANGE.
ADDITIONAL INFORMATION ABOUT THE DG FUNDS AND ISG FUNDS
Information about the ISG Funds is incorporated by reference into this
Prospectus/Proxy Statement from the ISG Funds Prospectus and Statement of
Additional Information, forming a part of the Company's Registration Statement
on Form N-1A (File No. 33-34080).
Information about the DG Funds is incorporated by reference into this
Prospectus/Proxy Statement from the relevant DG Funds Prospectuses and
Statements of Additional Information, forming a part of the Trust's Registration
Statement on Form N-1A (File No. 33-46431).
The DG Funds and ISG Funds are subject to the requirements of the 1940
Act, and file reports, proxy statements and other information with the
Commission. Reports, proxy statements and other information filed by the DG
Funds and ISG Funds may be inspected and copied at the Public Reference
Facilities of the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549 and at the Northeast regional office of the Commission at 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material also
can be obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C.
20549, at prescribed rates.
FINANCIAL STATEMENTS AND EXPERTS
The audited financial statements of each DG Fund contained in the
February 28, 1998 Annual Report to Shareholders for the fiscal year ended
February 28, 1998, and the audited financial statements of each AmeriStar Fund
(to be renamed the ISG Funds) contained in the December 31, 1997 Annual Report
to Shareholders for the fiscal year ended December 31, 1997, have been
incorporated herein by reference in reliance upon the authority of the reports
given by KPMG Peat Marwick LLP, the DG Funds' and ISG Funds' independent
auditors, as experts in accounting and auditing.
* * *
PROPOSALS TWO AND THREE
APPROVAL OR DISAPPROVAL OF
CERTAIN ADVISORY AGREEMENTS
INTRODUCTION
At the Meeting, Shareholders of each DG Fund also will be asked to
approve or disapprove the New Advisory Contract, which is being submitted in
connection with the Merger of Deposit Guaranty Corp., the former ultimate parent
corporation of ParkSouth, with and into First American Corporation on May 1,
1998, and the payment of advisory fees to ParkSouth during the interim period
from the date of the Merger through the earlier of the date of Shareholder
approval or December 31, 1998. In addition, in connection with the Merger,
Shareholders of DG Opportunity Fund and DG International Equity Fund will be
asked to ratify and approve or disapprove the New Sub-Advisory Agreements
between ParkSouth and Womack Management and Lazard, respectively. As a result of
the Merger, the investment advisory agreement between the Trust and ParkSouth
then in effect (the "Former Advisory Contract") automatically terminated in
accordance with its terms and as required by the 1940 Act. Similarly, the
sub-investment advisory agreement between ParkSouth and Womack Management then
in effect (the "Former Womack Sub-Advisory Agreement") and the sub-investment
advisory agreement between ParkSouth and Lazard then in effect (the "Former
Lazard Sub-Advisory Agreement") each automatically terminated as a result of the
Merger. To assure the continued supervision of the investments of the DG Funds
after the Merger, at meetings held on February 26, 1998 and May 11, 1998, the
Trust's Board of Trustees, including a majority of the Independent Board
Members, approved, subject to Shareholder approval, the New Advisory Contract
and the New Sub-Advisory Agreements. Since the date of the Merger, ParkSouth has
provided advisory services to the DG Funds under the New Advisory Contract dated
May 1, 1998, which provides for the same services at the same advisory fee rate
for the relevant DG Fund as the Former Advisory Contract. Womack Management and
Lazard also have provided sub-advisory services since the date of the Merger to
DG Opportunity Fund and DG International Equity Fund, respectively, under the
relevant New Sub-Advisory Agreement dated May 1, 1998, which each provides for
the same services at the same sub- advisory fee rate as the relevant Former
Sub-Advisory Agreement.
Under Section 15(a) of the 1940 Act, investment advisory agreements
such as the New Advisory Contract and New Sub-Advisory Agreements must be
approved by shareholders. The Trust, ParkSouth, Womack Management and Lazard
have received from the Securities and Exchange Commission orders of exemption
(the "Order") from the provisions of Section 15(a) of the 1940 Act. The Order
permits the implementation, without shareholder approval, of the New Advisory
Contract and New Sub-Advisory Agreements during the interim period commencing on
the date of the Merger until such time as the relevant DG Fund's shareholders
vote on the approval of the New Advisory Contract and New Sub- Advisory
Agreements, but in no event later than December 31, 1998 (the "Interim Period").
As a condition to receiving the Order, the fees payable to ParkSouth, Womack
Management and Lazard under the respective new agreements during the Interim
Period are paid into an interest-bearing escrow account maintained by an
independent escrow agent. The escrow agent will release the amounts held in the
escrow account (including any interest earned) to ParkSouth and Womack
Management and Lazard, as the case may be, only upon approval of the relevant
new agreement by the shareholders of the relevant DG Fund. If the requisite
shareholder approval is not received for a DG Fund or new agreement prior to the
end of the Interim Period, the relevant amounts held in the escrow account will
be released to the appropriate DG Fund.
The terms of the New Advisory Contract and the New Sub- Advisory
Agreements with Womack Management and Lazard are identical in all material
respects to the Former Advisory Contract and Former Womack Sub-Advisory
Agreement and Former Lazard Sub-Advisory Agreement, respectively, except for the
effective dates and escrow provisions. In each case, the effective date is the
date of the Merger--May 1, 1998.
Shareholders should consider the following factors in determining
whether to ratify and approve the New Advisory Contract (and, in the case of
shareholders of the DG Opportunity Fund and the DG International Equity Fund,
whether to ratify and approve the respective New Sub-Advisory Agreement):
o the Board of Trustees of the Trust has unanimously approved the
New Advisory Contract for all of the DG Funds, and the New
Sub-Advisory Agreements for the affected DG Funds;
o no change in any DG Fund's investment objective or investment
policies and restrictions will take place;
o there will be no change in the fees payable by a DG Fund to
ParkSouth for advisory services, and there will be no change in
the fees payable by ParkSouth to any sub-adviser;
o investment personnel presently employed by ParkSouth, who are
experienced in managing the DG Funds, are expected to manage the
DG Funds' investment programs under the New Advisory Contract;
and
o there is not expected to be any change in the personnel at the
sub-advisers who manage the assets of the DG Opportunity Fund and
the DG International Equity Fund.
If the holders of a majority (as defined in the 1940 Act) of the
outstanding shares of a DG Fund do not approve the New Advisory Contract or a
New Sub-Advisory Agreement (if applicable), the Board of Trustees will consider
what action to take in the best interests of the shareholders of that DG Fund.
PROPOSAL 2: APPROVAL OR DISAPPROVAL OF THE NEW
ADVISORY CONTRACT
Under the New Advisory Contract, ParkSouth continues to be responsible
for providing advisory services to the DG Funds. A copy of the New Advisory
Contract is attached as Appendix D to this Prospectus/Proxy Statement. As more
fully described below, the terms and conditions of the New Advisory Contract are
identical in all material respects to the Former Advisory Contract. The sole
differences between the Former Advisory Contract and the New Advisory Contract
are the effective date which, in the case of the New Advisory Contract, is the
Merger Date, and the escrow provisions. THE NEW ADVISORY CONTRACT PROVIDES FOR
NO INCREASE IN THE ADVISORY FEES PAYABLE BY ANY DG FUND, AND IS NOT EXPECTED TO
CHANGE THE TYPE OR EXTENT OF SERVICES PROVIDED TO THE DG FUNDS.
INFORMATION ABOUT THE FORMER ADVISORY CONTRACT
The Former Advisory Contract was most recently approved by the Board
of Trustees of the Trust, including a majority of the Independent Board Members,
with respect to each DG Fund, on February 27, 1997. FAS, as the initial
shareholder of each DG Fund, initially approved the Former Advisory Contract on
the following dates:
DG Equity Fund July 17, 1992
DG Opportunity Fund July 22, 1994
DG International Equity Fund March 31, 1997
DG Limited Term Government Income Fund July 17, 1992
DG Government Income Fund July 17, 1992
DG Municipal Income Fund December 11, 1992
DG Prime Money Market Fund January 30, 1997
DG Treasury Money Market Fund May 4, 1992
The Former Advisory Contract provided that ParkSouth provide
investment management services to the DG Funds, subject to the supervision of
the Board of Trustees of the Trust. Under the Former Advisory Contract,
ParkSouth was entitled to receive advisory fees from the DG Funds, computed
daily and paid daily, at the annual rates of: 0.50% of the average daily net
assets of each of the DG Prime Money Market Fund and the DG Treasury Money
Market Fund; 0.60% of the average daily net assets of each of the DG Limited
Term Government Income Fund, the DG Government Income Fund and the DG Municipal
Income Fund; 0.75% of the average daily net assets of the DG Equity Fund; 0.95%
of the average daily net assets of the DG Opportunity Fund; and 1.00% of the
average daily net assets of the DG International Equity Fund.
The table below sets forth: (i) the net assets for each DG Fund as of
February 28, 1998; (ii) the rates of advisory fees, computed daily and payable
daily, to which ParkSouth was entitled for the services provided and expenses
assessed pursuant to the Former Advisory Contract; (iii) advisory fees (net of
waivers) paid by each DG Fund for the fiscal year ended February 28, 1998; and
(iv) the effective rates of each of the advisory fees (net of waivers) expressed
as a percentage of average net assets for the fiscal year ended February 28,
1998:
ASSETS OF DG INVESTOR SERIES AND ADVISORY FEES PAID TO PARKSOUTH CORPORATION
<TABLE>
<CAPTION>
Net Assets as Annual Advisory Actual Advisory
of Fee Rate (Based Fee Rate Effective
February 28, on Average Net (Net of Waivers) Advisory
1998 ASSETS) PAID FEES*
<S> <C> <C> <C> <C>
DG Equity Fund $715,630,667 0.75% 0.75% $4,445,559
DG Opportunity Fund $122,871,510 0.95% 0.84% $854,639
DG International Equity $26,533,211 1.00% 0.50% $47,506
Fund
DG Limited Term $59,136,926 0.60% 0.44% $351,261
Government Income Fund
DG Government Income Fund $270,403,564 0.60% 0.54% $1,416,816
DG Municipal Income Fund $48,578,607 0.60% 0.29% $138,849
DG Prime Money Market $195,040,934 0.50% 0.30% $486,121
Fund
DG Treasury Money Market $349,050,709 0.50% 0.30% $844,729
Fund
TOTAL DG Investor $1,787,246,128
Series
</TABLE>
- ------------------
* Each current fee waiver represents a percentage of daily net assets of
each DG Fund calculated at an annualized rate. As under the Former
Advisory Contract, the voluntary fee waivers and reimbursements may be
modified or terminated by ParkSouth at any time at its sole discretion
under the New Advisory Contract.
For the fiscal year ended February 28, 1998, the DG Equity Fund, DG
Opportunity Fund and DG International Equity Fund paid $74,672, $498,832 and
$67,394, respectively, in total dollar amounts of brokerage commissions. None of
the other DG Funds paid any brokerage commissions or entered into any brokerage
transactions during the fiscal year ended February 28, 1998. The DG Funds,
however, engaged in transactions with dealers acting as principal and the costs
of such transactions involve dealer spreads rather than brokerage commissions.
INFORMATION ABOUT THE NEW ADVISORY CONTRACT
Under the New Advisory Contract, ParkSouth manages the DG Funds'
investments. Subject to the direction of the Board of Trustees of the Trust,
ParkSouth provides investment research and supervision of the investments of
each DG Fund, and conducts a continuous program of investment evaluation and of
appropriate sale or other disposition and reinvestment of each DG Fund's assets.
The New Advisory Contract provides that ParkSouth shall determine from time to
time what securities or other instruments will be purchased, retained or sold by
the Trust with respect to each DG Fund. ParkSouth, in its supervision of the
assets of each DG Fund, is guided by each DG Fund's investment objective and
policies, and the provisions and restrictions contained in the Declaration of
Trust and the By-Laws of the Trust and as set forth in the DG Funds'
prospectuses and statements of additional information that are on file with the
Securities and Exchange Commission.
The New Advisory Contract states that each DG Fund shall pay (or cause
to be paid) all of its own expenses and its allocable share of Trust expenses,
including, without limitation, the expenses of organizing the Trust and
continuing its existence; fees and expenses of the Trustees and officers of the
Trust; fees for investment advisory services and administrative personnel and
services; expenses incurred in the distribution of shares, including expenses of
administrative support services; fees and expenses of preparing and printing the
Trust's Registration Statements under the Securities Act of 1933 and the 1940
Act, and any amendments thereto; expenses of registering and qualifying the
Trust, the DG Funds, and shares of the DG Funds under Federal and state laws and
regulations; expenses of preparing, printing, and distributing prospectuses (and
any amendments thereto) to shareholders; interest expense, taxes, fees, and
commissions of every kind; expenses of issue (including cost of share
certificates), purchase, repurchase, and redemption of shares, including
expenses attributable to a program of periodic issue; charges and expenses of
custodians, transfer agents, dividend disbursing agents, shareholder servicing
agents, and registrars; printing and mailing costs, auditing, accounting, and
legal expenses; reports to shareholders and governmental officers and
commissions; expenses of meetings of Trustees and shareholders and proxy
solicitations therefor; insurance expenses; association membership dues and such
nonrecurring items as may arise, including all losses and liabilities incurred
in administering the Trust and the DG Funds. Each DG Fund will also pay its
allocable share of such extraordinary expenses as may arise, including expenses
incurred in connection with litigation, proceedings, and claims and the legal
obligations of the Trust to indemnify its officers and Trustees and agents with
respect thereto.
THE NEW ADVISORY CONTRACT PROVIDES THAT THE ADVISORY FEES PAYABLE TO
PARKSOUTH BY THE DG FUNDS WILL BE IDENTICAL TO THOSE PAYABLE TO PARKSOUTH UNDER
THE FORMER ADVISORY CONTRACT. The advisory fees payable under the New Advisory
Contract by the DG Funds are equal to a fixed percentage of the daily net assets
of each DG Fund calculated at an annualized rate, payable on a daily basis, and
are listed above. From time to time, ParkSouth may waive its fee or reimburse a
DG Fund for certain of its expenses in order to reduce the DG Fund's expense
ratio. As a result, the DG Fund's return and yield would be higher than it would
be if the fees and such expenses had been paid by the DG Fund.
As in the Former Advisory Contract, the New Advisory Contract provides
that in the absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the obligations or duties of ParkSouth under the New
Advisory Contract, ParkSouth and its affiliates shall not be liable to the Trust
or to any shareholder for any act or omission in the course of, or connected in
any way with, rendering services or for any losses that may be sustained in the
purchase, holding, or sale of any security.
If approved by shareholders of the DG Funds at the Meeting, the New
Advisory Contract will continue for a period of two years from its date of
execution, unless terminated, and may be continued from year to year thereafter
by the Board of Trustees. The continuation of the New Advisory Contract must be
approved by a majority vote of the Trustees, including a majority of the
Independent Board Members, cast in person at a meeting called for that purpose.
Under the New Advisory Contract, ParkSouth has the right, in any year, to notify
the Trust in writing at least 60 days before the New Advisory Contract's
anniversary date that it does not desire a renewal of the New Advisory Contract.
The Trustees, or a majority of the outstanding voting shares of the Trust, may
terminate the New Advisory Contract at any time without penalty by giving
ParkSouth 60 days' written notice. The New Advisory Contract may not be assigned
by ParkSouth and will terminate automatically in the event of its assignment.
The New Advisory Contract provides that it may be amended by a vote of both a
majority of the Trustees, including a majority of the "non-interested" Trustees,
and on behalf of a DG Fund by the holders of a majority of the outstanding
voting shares of such DG Fund.
If the New Advisory Contract is approved by shareholders of one or
more DG Funds, the New Advisory Contract will become effective with respect to
such DG Funds as of May 1, 1998. If the New Advisory Contract is not approved by
the shareholders of a DG Fund, the Board of Trustees will consider what actions
should be taken, including but not limited to, requesting that ParkSouth or
First American perform investment advisory services for that DG Fund at cost
until a new investment advisory contract is approved by the shareholders of that
DG Fund.
INFORMATION ABOUT PARKSOUTH
ParkSouth has served as the investment adviser to the Trust since
March 1, 1997. Prior to that date, DG Bank had served as the investment adviser
to the Trust since May 5, 1992, the date of the Trust's establishment. ParkSouth
is an investment adviser registered under the Investment Advisers Act of 1940,
as amended (the "Advisers Act"), providing investment management services to
individuals and institutional clients. ParkSouth's address is P.O. Box 1200,
Jackson, Mississippi 39215- 1200. ParkSouth is a subsidiary of DG Bank, which is
a national banking association. DG Bank is a subsidiary of First American
Corporation. ParkSouth managed, in addition to the DG Funds, $100 million in
assets, as of December 31, 1997. First American Corporation is a registered bank
holding company and a financial services company headquartered in Nashville,
Tennessee. Through its related banking subsidiaries, including First American,
First American Corporation provides banking and banking-related services
throughout the mid-south region of the United States. On December 31, 1997,
First American Corporation and its affiliates had total assets of approximately
$5.9 billion under trust and approximately $9 billion under management. The
principal executive officer and directors of First American are listed in
Appendix G.
TRUSTEES' CONSIDERATIONS
The New Advisory Contract was unanimously approved on behalf of each
DG Fund by the Board of Trustees of the Trust, including the Independent Board
Members, at meetings held on February 26, 1998 and May 11, 1998. The Trustees
considered information relating to ParkSouth, First American Corporation, First
American and the consolidated entity that would result from the consummation of
the Merger, including information provided by First American concerning its
capabilities and expertise in serving as investment adviser to the ISG Funds.
The Trustees reviewed the terms of the New Advisory Contract and noted that the
New Advisory Contract is identical to the Former Advisory Contract, except for
its date and the escrow provisions.
Specifically, in connection with approval of the New Advisory Contract
on behalf of each DG Fund, the Board considered that the terms of the Merger did
not require or result in any changes in the DG Funds' investment objectives or
policies, the investment management or operation of the DG Funds, the investment
personnel managing the DG Funds, or the shareholder services or other business
activities of the DG Funds.
In approving the New Advisory Contract, the Board noted ParkSouth's
(and its predecessor, DG Bank's) record of service to the DG Funds and the
expectation that the Merger should not have any material adverse effect on the
DG Funds' ongoing operations or on the extent or quality of services provided to
the DG Funds, or increase the cost to the DG Funds of such services.
Section 15(f) of the 1940 Act provides that in connection with the
sale of any interest in any investment adviser which results in the "assignment"
of an investment advisory agreement, an investment adviser of a registered
investment company, such as the Trust, or an affiliated person of such
investment adviser, may receive any amount or benefit if (i) for a period of
three years after the sale, at least 75% of the members of the board of the
investment company are not interested persons of the investment adviser or the
predecessor adviser, and (ii) there is no "unfair burden" imposed on the
investment company as a result of such sale or any express or implied terms,
conditions or understanding applicable thereto. For this purpose, "unfair
burden" is defined to include any arrangement during the two-year period after
the transaction, whereby the investment adviser or its predecessor or successor
investment advisers, or any interested persons of any such adviser, receives or
is entitled to receive any compensation directly or indirectly (i) from any
person in connection with the purchase or sale of securities or other property
to, from or on behalf of the investment company other than bona fide ordinary
compensation as principal underwriter for such company, or (ii) from the
investment company or its security holders for other than bona fide investment
advisory or other services. This provision of the 1940 Act was enacted by
Congress in 1975 to make it clear that an investment adviser (or an affiliated
person of the adviser) can realize a profit on the sale of the adviser's
business subject to the two safeguards described above. The Board has requested
and received a written representation from ParkSouth and assurances from First
American Corporation that no "unfair burden" will be imposed on the Trust as a
result of the Merger and the proposed transactions.
Based upon the considerations set forth above, the Trustees have
determined that the New Advisory Contract is in the best interest of each DG
Fund and its shareholders. In addition, management expects that there will be no
diminution in the scope and quality of services provided to the Trust as a
result of these transactions. In fact, as described above, the New Advisory
Contract is identical in all material respects, except as to its date and the
escrow provisions, as the Former Advisory Contract which was approved previously
by the shareholders of each DG Fund. The Board believes that the DG Funds will
receive investment management services under the New Advisory Contract
equivalent to those that they received under the Former Advisory Contract, and
at the same fee and expense levels.
REQUIRED VOTE AND TRUSTEES' RECOMMENDATION
With respect to each DG Fund, approval of this proposal requires the
affirmative vote of (a) 67% of the DG Fund's voting securities present at this
Meeting, if the holders of more than 50% of the DG Fund's outstanding voting
securities are present or represented by proxy, or (b) more than 50% of the DG
Fund's outstanding voting securities, whichever is less.
THE BOARD OF TRUSTEES, INCLUDING THE INDEPENDENT BOARD MEMBERS, RECOMMENDS
THAT THE SHAREHOLDERS VOTE "FOR" APPROVAL OF THE NEW ADVISORY CONTRACT.
PROPOSAL 3: APPROVAL OR DISAPPROVAL OF THE NEW SUB-ADVISORY
AGREEMENT
A. NEW SUB-ADVISORY AGREEMENT BETWEEN PARKSOUTH AND WOMACK MANAGEMENT
(APPLIES ONLY TO DG OPPORTUNITY FUND)
As indicated above, consummation of the Merger caused a change in
ownership of ParkSouth which, in turn, automatically terminated the Former
Womack Sub-Advisory Agreement. Thus, although the Merger had no effect on Womack
Management, the change in ownership of ParkSouth requires approval by the
Shareholders of DG Opportunity Fund of a new Sub-Advisory Agreement (the "New
Womack Sub-Advisory Agreement) between ParkSouth, on behalf of the DG
Opportunity Fund, and Womack Management. A copy of the New Womack Sub-Advisory
Agreement is attached as Appendix E to this Prospectus/Proxy Statement.
The terms of the New Womack Sub-Advisory Agreement are identical in
all material respects to the Former Womack Sub- Advisory Agreement, except for
the effective date, which, in the case of the New Womack Sub-Advisory agreement,
is the Merger date, and the escrow provisions.
On May 14, 1997, the Former Womack Sub-Advisory Agreement was approved
by the Board of Trustees, including a majority of the Independent Board Members,
and was recommended by the Trustees for shareholder approval. At a shareholder
meeting held on July 21, 1997, a majority of the shareholders of the DG
Opportunity Fund approved the Former Womack Sub-Advisory Agreement.
Pursuant to the terms of the Former Womack Sub-Advisory Agreement and
the New Womack Sub-Advisory Agreement, subject to the direction of the Board of
Trustees and ParkSouth, Womack Management acts as the sub-adviser for all assets
of the DG Opportunity Fund other than cash and cash-equivalents. Under the terms
of the Former Womack Sub-Advisory Agreement and the New Womack Sub-Advisory
Agreement, Womack Management makes all determinations with respect to the
investment of non-cash assets of the DG Opportunity Fund, and takes such steps
as may be necessary to implement the same, including the placement of purchase
and sale orders on behalf of the DG Opportunity Fund.
The Former Womack Sub-Advisory Agreement and the New Womack
Sub-Advisory Agreement provide that Womack Management shall pay the expenses
incurred by it and its staff in connection with the performance of its services
under each Womack Sub- Advisory Agreement, including the payment of salaries of
all officers and employees who are employed by Womack Management. Under the
Former Womack Sub-Advisory Agreement and the New Womack Sub-Advisory Agreement,
ParkSouth will pay Womack Management a monthly fee based on the average daily
net assets of Opportunity Fund under management by the sub-adviser during the
preceding month. The sub-advisory fee shall be the sum of: 0.32% of the average
daily net assets up to $50 million; 0.075% of the average daily net assets in
excess of $50 million and up to $70 million; and 0.25% of the average daily net
assets in excess of $70 million. Applying the foregoing formula to the DG
Opportunity Fund's level of net assets on _________, 1998, Womack Management
would be entitled to a sub-advisory fee equal to [0.25%] of the DG Opportunity
Fund's average daily net assets, payable by ParkSouth from ParkSouth's
investment advisory fee of 0.95% of the DG Opportunity Fund's average daily net
assets. THE FEE ARRANGEMENT BETWEEN PARKSOUTH AND WOMACK MANAGEMENT IS IDENTICAL
IN THE FORMER WOMACK SUB-ADVISORY AGREEMENT AND THE NEW WOMACK SUB-ADVISORY
AGREEMENT.
The New Womack Sub-Advisory Agreement provides, with respect to the DG
Opportunity Fund that, if approved by shareholders of the DG Fund, it will
remain in effect for an initial period of two years from the date of its
execution and shall continue in effect for successive one-year periods, provided
such continuance is specifically approved at least annually by vote of a
majority of Trustees, including a majority of the Independent Board Members,
cast in person at a meeting called for the purpose of voting on such approval.
Womack Management has the right, in any year, to notify ParkSouth in writing, at
least 60 days before the New Womack Sub-Advisory Agreement's anniversary date,
that it does not desire a renewal of the New Womack Sub-Advisory Agreement. The
New Womack Sub- Advisory Agreement may be terminated by the Trustees at any time
without penalty, or by a vote of a majority of the outstanding shares of the DG
Opportunity Fund on 60 days' written notice. The New Womack Sub-Advisory
Agreement will immediately terminate in the event of its assignment (as such
term is defined in the 1940 Act) or in the event of the termination of the
Trust's then- effective advisory agreement with ParkSouth. The New Womack Sub-
Advisory Agreement provides that it may be amended by a vote of both a majority
of the Trustees, including a majority of the Independent Board Members, and by
the holders of a majority of the outstanding shares of the DG Opportunity Fund,
and when required by the 1940 Act.
If the New Womack Sub-Advisory Agreement and the New Advisory Contract
are approved by shareholders of the DG Opportunity Fund, the New Womack
Sub-Advisory Agreement will become effective as of May 1, 1998. If the New
Advisory Contract IS approved but the New Womack Sub-Advisory Agreement is NOT
approved by the shareholders of the DG Opportunity Fund, ParkSouth would be
fully responsible for the Fund's investment activities. If neither the New
Advisory Contract nor the New Womack Sub-Advisory Agreement is approved by the
shareholders of the DG Opportunity Fund, the Board of Trustees will consider
what actions should be taken, including but not limited to, requesting that
ParkSouth, First American or Womack Management perform investment advisory
services at cost until a new investment advisory contract is approved by the
shareholders.
TRUSTEES' CONSIDERATIONS
The New Womack Sub-Advisory Agreement was unanimously approved on
behalf of the DG Opportunity Fund by the Board of Trustees of the Trust,
including the Independent Board Members, at meetings held on February 26, 1998
and May 11, 1998. The Trustees considered information relating to Womack
Management, ParkSouth, First American Corporation, First American and the
consolidated entity that would result from the completion of the Merger. The
Board considered Womack Management's capabilities and expertise in serving as
sub-adviser to the DG Opportunity Fund. The Trustees reviewed the terms of the
New Womack Sub-Advisory Agreement, including the fact that the sub-advisory
services would continue to be performed at the same costs and by the same
personnel at Womack Management as they were under the Former Womack Sub-Advisory
Agreement. It was also noted that Womack Management has served as the
sub-adviser to the Fund since March 1997, and that Mr. Womack has acted as the
Fund's portfolio manager since its inception.
The section entitled "Trustees' Considerations" under Proposal 2
discusses additional factors considered by the Trustees, as well as matters such
as "assignment" of an investment advisory contract and "unfair burden" with
respect to the realization of a profit by ParkSouth or its parent as a result of
the Merger. These statements are also applicable to shareholders of the DG
Opportunity Fund with respect to the ratification and approval or disapproval of
the New Womack Sub-Advisory Agreement. Shareholders should therefore review this
information prior to determining whether to ratify and approve the New Womack
Sub-Advisory Agreement.
REQUIRED VOTE AND TRUSTEES' RECOMMENDATION
With respect to DG Opportunity Fund, approval of this proposal
requires the affirmative vote of (a) 67% of the DG Opportunity Fund's voting
securities present at this meeting, if the holders of more than 50% of the DG
Opportunity Fund's outstanding voting securities are present or represented by
proxy, or (b) more than 50% of the DG Opportunity Fund's outstanding voting
securities, whichever is less.
THE BOARD OF TRUSTEES, INCLUDING THE INDEPENDENT BOARD MEMBERS, RECOMMENDS THAT
THE SHAREHOLDERS VOTE "FOR" APPROVAL OF THE NEW WOMACK SUB-ADVISORY AGREEMENT.
B. NEW SUB-ADVISORY AGREEMENT BETWEEN PARKSOUTH AND LAZARD (APPLIES ONLY
TO DG INTERNATIONAL EQUITY FUND)
As indicated above, consummation of the Merger caused a change in
ownership of ParkSouth which, in turn, automatically terminated the Former
Lazard Sub-Advisory Agreement. Thus, although the Merger had no effect on
Lazard, the change in ownership of ParkSouth requires approval by the
Shareholders of DG International Equity Fund of a new Sub-Investment Advisory
Agreement (the "New Lazard Sub-Advisory Agreement") between ParkSouth, on behalf
of the DG International Equity Fund, and Lazard. A copy of the New Lazard
Sub-Advisory Agreement is attached as Appendix F to this Prospectus/Proxy
Statement.
The terms of the New Lazard Sub-Advisory Agreement are identical in
all material respects to the Former Lazard Sub-Advisory Agreement, except for
the effective date, which, in the case of the New Lazard Sub-Advisory Agreement,
is the Merger date, and the escrow provisions.
On February 27, 1997, the Former Lazard Sub-Advisory Agreement was
approved by the Board of Trustees, including a majority of the Independent Board
Members, and was recommended by the Trustees for shareholder approval. FAS, as
the sole initial shareholder of the DG International Equity Fund, approved the
Former Lazard Sub-Advisory Agreement on March 31, 1997.
Under the terms of the Former Lazard Sub-Advisory Agreement and the
New Lazard Sub-Advisory Agreement, subject to the direction of ParkSouth, Lazard
acts as sub-adviser to the DG International Equity Fund. Under the terms of the
Former Lazard Sub-Advisory Agreement and the New Lazard Sub-Advisory Agreement,
Lazard formulates and implements a continuing program for the management of the
assets of the DG International Equity Fund, and periodically amends and updates
such programs from time to time as financial and other economic conditions
warrant. Lazard makes all determinations with respect to the investment of the
assets of the DG International Equity Fund and takes all steps as may be
necessary to implement its investment decisions, including the placement of
purchase and sale orders on behalf of the DG International Equity Fund.
The Former Lazard Sub-Advisory Agreement and the New Lazard
Sub-Advisory Agreement provide that ParkSouth will pay Lazard an annual
sub-advisory fee equal to 0.50% of the average daily net assets of the DG
International Equity Fund. The sub- advisory fee is calculated by ParkSouth, is
accrued daily, and paid monthly, to Lazard. THE FEE ARRANGEMENT BETWEEN
PARKSOUTH AND LAZARD IS IDENTICAL IN THE FORMER LAZARD SUB-ADVISORY AGREEMENT
AND THE NEW LAZARD SUB-ADVISORY AGREEMENT.
If approved by shareholders of the DG International Equity Fund at the
Meeting, the New Lazard Sub-Advisory Agreement will remain in effect for an
initial period of two years from its date of execution, unless terminated, and
may be continued from year to year thereafter by the Board of Trustees. The
continuation of the New Lazard Sub-Advisory Agreement must be approved by a
majority vote of the Trustees, including a majority of the Independent Board
Members, cast in person at a meeting called for that purpose. Lazard has the
right, in any year, to notify ParkSouth in writing at least 60 days before the
New Lazard Sub-Advisory Agreement's anniversary date, that it does not desire a
renewal of the New Lazard Sub-Advisory Agreement. The Trustees, or a majority of
the outstanding voting shares of the DG International Equity Fund, may terminate
the New Lazard Sub-Advisory Agreement at any time without penalty by giving
Lazard 60 days' written notice. The New Lazard Sub-Advisory Agreement may not be
assigned and shall terminate automatically in the event of any assignment as
defined in the 1940 Act. The New Lazard Sub-Advisory Agreement provides that it
may be amended by a vote of both a majority of the Trustees, including a
majority of the Independent Board Members, and by the holders of a majority of
the outstanding voting shares of the DG International Equity Fund.
If the New Lazard Sub-Advisory Agreement and the New Advisory Contract
are approved by shareholders of the DG International Equity Fund, the New Lazard
Sub-Advisory Agreement will become effective as of May 1, 1998. If the New
Advisory Contract IS approved but the New Lazard Sub-Advisory Agreement is NOT
approved by the shareholders of the DG International Equity Fund, ParkSouth
would be fully responsible for the DG International Equity Fund's investment
activities. If neither the New Advisory Contract nor the New Lazard Sub-Advisory
Agreement is approved by the shareholders of the DG International Equity Fund,
the Board of Trustees will consider what actions should be taken, including but
not limited to requesting that ParkSouth, First American or Lazard perform
investment advisory services at cost until a new investment advisory contract is
approved by the shareholders.
TRUSTEES' CONSIDERATIONS
The Lazard New Sub-Advisory Agreement was unanimously approved on
behalf of the DG International Equity Fund by the Board of Trustees of the
Trust, including the Independent Board Members, at meetings held on February 26,
1998 and May 11, 1998. The Trustees considered information relating to Lazard,
ParkSouth, First American Corporation, First American and the consolidated
entity that would result from the completion of the Merger. The Board considered
Lazard's capabilities and expertise in serving as sub-adviser to the DG
International Equity Fund. The Trustees reviewed the terms of the New Lazard
Sub-Advisory Agreement, including the fact that the sub-advisory services would
continue to be performed at the same costs and by the same personnel at Lazard
as they were under the Former Lazard Sub- Advisory Agreement. It was noted that
Lazard has served as the sub-adviser to the DG International Equity Fund since
its inception.
The section entitled "Trustees' Considerations" under Proposal 2
discusses additional factors considered by the Trustees, as well as matters such
as "assignment" of an investment advisory contract and "unfair burden" with
respect to the realization of profit by ParkSouth or its parent as a result of
the Merger. These statements are also applicable to shareholders of the DG
International Equity Fund with respect to the ratification and approval or
disapproval of the New Lazard Sub-Advisory Agreement. Shareholders should
therefore review this information prior to determining whether to ratify and
approve the New Lazard Sub-Advisory Agreement.
REQUIRED VOTE AND TRUSTEES' RECOMMENDATION
With respect to DG International Equity Fund, approval of this
proposal requires the affirmative vote of (a) 67% of the DG International Equity
Fund's voting securities present at this meeting, if the holders of more than
50% of the DG International Equity Fund's outstanding voting securities are
present or represented by proxy, or (b) more than 50% of the DG International
Equity Fund's outstanding voting securities, whichever is less.
THE BOARD OF TRUSTEES, INCLUDING THE INDEPENDENT BOARD MEMBERS, RECOMMENDS THAT
THE SHAREHOLDERS VOTE "FOR" APPROVAL OF THE NEW LAZARD SUB-ADVISORY AGREEMENT
ADDITIONAL VOTING INFORMATION
In addition to the use of the mails, proxies may be solicited by
telephone, telegraph, facsimile or personal interview. Authorizations to execute
proxies may be obtained by telephonic or electronically transmitted instructions
in accordance with procedures designed to authenticate the Shareholder's
identity. In all cases where a telephonic authorization is solicited, the
Shareholder will be asked to provide his or her address, social security number
(in the case of an individual) or taxpayer identification number (in the case of
a non-individual) and the number of shares owned and to confirm that the
Shareholder has received the Prospectus/Proxy Statement and proxy card in the
mail. Within 72 hours of receiving a Shareholder's telephonic or electronically
transmitted voting instructions, a confirmation will be sent to the Shareholder
to ensure that the vote has been taken in accordance with the Shareholder's
instructions and to provide a telephone number to call immediately if the
Shareholder's instructions are not correctly reflected in the confirmation.
Shareholders requiring further information with respect to telephonic or
electronically transmitted voting instructions or the proxy generally should
call toll free ___________________. Any Shareholder giving a proxy may revoke it
at any time before it is exercised by submitting to the DG Funds a written
notice of revocation or a subsequently executed proxy or by attending the
Meeting and voting in person.
First American Corporation has advised the DG Funds and ISG Funds that
shares of the DG Funds over which First American Corporation or its affiliates
have voting power will be voted, whenever possible, in accordance with
instructions received from beneficial owners or fiduciaries of such accounts who
are not related to First American Corporation or its affiliates. As to employee
benefit plans, First American Corporation or its affiliates may vote such shares
in accordance with the recommendation of an independent fiduciary. Where First
American Corporation is required or permitted to vote DG Fund shares, it will
vote them in favor of the proposals.
If a proxy is properly executed and returned accompanied by
instructions to withhold authority to vote, represents a broker "non-vote" (that
is, a proxy from a broker or nominee indicating that such person has not
received instructions from the beneficial owner or other person entitled to vote
DG Fund shares on a particular matter with respect to which the broker or
nominee does not have discretionary power) or is marked with an abstention
(collectively, "abstentions"), the DG Fund shares represented thereby will be
considered to be present at a Meeting for purposes of determining the existence
of a quorum for the transaction of business. Abstentions will not constitute a
vote "for" or "against" a matter and will be disregarded in determining the
"votes cast" on an issue. Signed but unmarked proxies will be voted "for" the
proposals.
If a quorum is not present at the Meeting, or if a quorum is present
but sufficient votes to approve a proposal with respect to a DG Fund are not
received, the persons named as proxies may propose one or more adjournments of
the Meeting to permit further solicitation of proxies for that DG Fund. Any
adjournment will require the affirmative vote of a majority of those shares
affected by the adjournment that are represented at the Meeting in person or by
proxy. If a quorum is present, the persons named as proxies will vote those
proxies which they are entitled to vote "for" the proposal in favor of such
adjournment, and will vote those proxies required to be voted "against" the
proposal against any adjournment. A quorum is constituted with respect to a DG
Fund by the presence in person or by proxy of the holders of more than 50% of
the outstanding DG Fund shares entitled to vote at the Meeting.
The votes of ISG Fund shareholders are not being solicited since their
approval or consent is not necessary for the Exchange or other proposals
described herein.
OTHER MATTERS
The Trustees are not aware of any other matters which may come before
the Meeting. However, should any such matters properly come before the Meeting,
it is the intention of the persons named in the accompanying form of proxy to
vote the proxy in accordance with their judgment on such matters.
<PAGE>
NOTICE TO BANKS, BROKER/DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES
Please advise the Trust, in care of _________________________________
_______________________________________________________________________________
______________________________________________, whether other persons are the
beneficial owners of DG Fund shares for which proxies are being solicited from
you, and, if so, the number of copies of the Prospectus/Proxy Statement and
other soliciting material you wish to receive in order to supply copies to the
beneficial owners of such shares.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE,
SHAREHOLDERS OF A DG FUND WHO DO NOT EXPECT TO ATTEND THE MEETING IN PERSON ARE
URGED TO COMPLETE, DATE, SIGN AND RETURN EACH ENCLOSED PROXY CARD IN THE
ENCLOSED STAMPED ENVELOPE.
<PAGE>
APPENDIX A
DESCRIPTIONS OF THE DG FUNDS AND ISG FUNDS
NAME OF FUND PAGE
DG Equity Fund/ISG Large Cap Equity Portfolio
DG Government Income Fund/ISG Government Income Portfolio
DG International Equity Fund/ISG International Equity
Portfolio
DG Limited Term Government Income Fund/ISG Limited
Duration U.S. Government Portfolio
DG Municipal Income Fund/ISG Municipal Income Portfolio
DG Opportunity Fund/ISG Small Cap Opportunity Portfolio
DG Prime Money Market Fund/ISG Prime Money Market
Portfolio
DG Treasury Money Market Fund/ISG U.S. Treasury Money
Market Portfolio
DG EQUITY FUND
COMPARISON OF DG EQUITY FUND AND ISG LARGE CAP EQUITY PORTFOLIO
o Investment Objectives are identical: Long-term capital appreciation.
Current income is a secondary objective.
o Management Policies are substantially identical:
-- Each Fund invests at least 70% of its assets in equity securities.
-- Each Fund invests primarily in equity securities of large
capitalization (in excess of $1 billion) domestic companies which, in
the opinion of the Fund's adviser, have potential to provide capital
appreciation and current income.
-- Each Fund may invest in common stocks, preferred stocks, warrants,
convertible securities, foreign securities and American Depositary
Receipts.
-- Each Fund also may invest in investment grade fixed-income
securities, zero coupon securities, money market instruments and
repurchase agreements.
-- Each Fund also may engage in options and futures transactions and
lending portfolio securities.
-- DG Equity Fund may borrow money only for temporary or emergency
purposes. ISG Large Cap Equity Portfolio may borrow money for
investment purposes, but currently intends to borrow money only for
temporary or emergency purposes.
o Investment Restrictions are substantially similar:
Unless otherwise noted, each investment restriction listed below is a
fundamental policy, which cannot be changed without approval by the holders
of a majority (as defined in the 1940 Act) of the DG Equity Fund's or ISG
Large Cap Equity Portfolio's outstanding voting shares. Neither DG Equity
Fund nor ISG Large Cap Equity Portfolio may:
(1) 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.
(2) hold more than 10% of the outstanding voting securities of any
single issuer. With respect to ISG Large Cap Equity Portfolio, this
investment restriction applies only with respect to 75% of its total
assets.
(3) invest more than 25% of the value of its total assets in
securities of issuers in any single industry. This restriction does
not apply to the purchase of U.S. Government securities.
(4) borrow money, except the Fund may borrow up to 33-1/3% of the
value of its total assets (DG Equity Fund may borrow only for
temporary or emergency purposes).
(5) sell securities short or purchase securities on margin, except as
is necessary for purchases and sales of portfolio securities. The ISG
Large Cap Equity Portfolio has no investment restriction on selling
securities short.
(6) issue senior securities, except to the extent certain options and
futures activities may be deemed to give rise to a senior security.
(7) invest in commodities, except for the purchase and sale of options
and futures contracts.
(8) purchase or sell real estate, but the Fund may purchase or sell
securities secured by real estate. ISG Large Cap Equity Portfolio also
may invest in real estate investment trusts.
(9) make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. DG Equity Fund
may lend portfolio securities up to 5% of the value of its total
assets, while ISG Large Cap Equity Portfolio may lend portfolio
securities up to 33-1/3% of the value of its total assets.
(10) act as an underwriter of securities of other issuers, except to
the extent the Fund may be deemed an underwriter by virtue of
disposing of portfolio securities.
(11) invest in the securities of a company for the purpose of
exercising management or control. This investment restriction is a
non-fundamental policy of ISG Large Cap Equity Portfolio and may be
changed by vote of a majority of the Company's Board members at any
time.
(12) pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings (limited to the lesser of the
dollar amount borrowed or 15% of its total assets with respect to DG
Equity Fund) and to the extent related to the purchase of securities
on a when- issued basis and the deposit of assets in escrow in
connection with put and call options and collateral and margin
arrangements with respect to options and futures contracts. This
investment restriction is a non-fundamental policy of ISG Large Cap
Equity Portfolio and may be changed by vote of a majority of the
Company's Board members at any time.
(13) invest more than 15% of its net assets in illiquid securities.
This investment restriction is a non- fundamental policy of both DG
Equity Fund and ISG Large Cap Equity Portfolio.
(14) purchase securities of other investment companies, except to the
extent permitted by, or pursuant to an exemption from, the 1940 Act.
This investment restriction is a non-fundamental policy of both DG
Equity Fund and ISG Large Cap Equity Portfolio.
In addition, as a non-fundamental policy, DG Equity Fund may not enter
into transactions for the purpose of engaging in arbitrage. ISG Large
Cap Equity Portfolio has no such investment restriction, but currently
has no intention of engaging in arbitrage transactions.
o Fees and Expenses:
The following information concerning fees and expenses is derived from
information set forth under the captions "Summary of Fund Expenses" and
"Investing in the Funds--What Shares Cost" in the DG Equity Fund Prospectus and
"Fee Table" and "How to Buy Shares --Purchase Price" in the ISG Fund Prospectus.
The expense information set forth below does not reflect any fee waivers or
expense reimbursement arrangements that may be or may have been in effect.
SCHEDULE OF INITIAL SALES CHARGE:
Until May 1, 2000, DG Equity Fund shareholders who participate in the
Exchange and receive Class A Shares of ISG Large Cap Equity Portfolio will be
permitted to purchase Class A Shares of ISG Large Cap Equity Portfolio subject
to the lower initial sales charge, if any, applicable to the amount of
transaction set forth below for DG Equity Fund or ISG Large Cap Equity
Portfolio.
DG EQUITY FUND
- ------------------------------------------------------------------------------
TOTAL SALES LOAD
As a % of As a % of
Amount of Transaction Offering Price Net Asset Value
Less than $100,000........................ 3.50% 3.63%
$100,000 to less than $250,000............ 3.00% 3.09%
$250,000 to less than $500,000............ 2.50% 2.56%
$500,000 to less than $750,000............ 2.00% 2.04%
$750,000 to less than $1,000,000.......... 1.50% 1.52%
$1,000,000 but less than $2,000,000....... 0.50% 0.50%
$2,000,000 or more........................ 0.25% 0.25%
- ------------------------------------------------------------------------------
ISG LARGE CAP EQUITY PORTFOLIO
CLASS A
- ------------------------------------------------------------------------------
TOTAL SALES LOAD
As a % of As a % of
Amount of Transaction Offering Price Net Asset Value
Less than $50,000.......................... 4.75% 4.99%
$50,000 to less than $100,000.............. 4.00% 4.17%
$100,000 to less than $250,000............. 3.25% 3.36%
$250,000 to less than $500,000............. 2.50% 2.56%
$500,000 to less than $1,000,000........... 1.75% 1.78%
$1,000,000 or more*........................ -0- -0-
- ------------------------------------------------------------------------------
- -------------------
* A contingent deferred sales charge 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.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
ISG Large Cap Equity DG Equity Pro Forma
Portfolio* Fund After Exchange
-----------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C>
Management Fees .75% .75% .75% .75% .75%
12b-1 Fees .25% None .35%** .25% None
Other Expenses .29% .29% .29% .29% .29%
Total Fund
Operating Expenses 1.29% 1.04% 1.39%** 1.29% 1.04%
-----------------------------------------------------------------------------------------------
</TABLE>
- ----------------
* ISG Large Cap Equity Portfolio has not yet commenced operations. It is a
newly-created fund that will continue the operations of DG Equity Fund upon
consummation of the Exchange. Other expenses are based on estimated
amounts.
** Rule 12b-1 fees are not being paid or accrued by the DG Fund, and the Trust
has disclosed that such fees would not be paid until a separate class of
shares is created for certain institutional investors.
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:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
ISG Large Cap Equity DG Equity Pro Forma
Portfolio* Fund After Exchange
-----------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
----------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $ 48 $ 11 $ 49 $ 48 $ 11
3 Years $ 74 $ 33 $ 77 $ 74 $ 33
5 Years $103 $ 57 $108 $103 $ 57
10 Years $185 $127 $196 $185 $127
-----------------------------------------------------------------------------------------------
</TABLE>
THE AMOUNTS LISTED IN THE EXAMPLE REFLECT THE DEDUCTION OF THE MAXIMUM INITIAL
SALES CHARGE, IF ANY, IMPOSED ON A DG FUND SHAREHOLDER. SHARES RECEIVED IN THE
EXCHANGE WILL NOT BE SUBJECT TO AN INITIAL SALES CHARGE. THE AMOUNTS LISTED IN
THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE INDICATED.
MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, EACH FUND'S ACTUAL
PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN GREATER OR LESS THAN
5%.
o Expense Reimbursement and Fee Waiver Arrangements:
As of May 1, 1998, DG Equity Fund's 12b-1 Fees were not being paid or accrued
resulting in Total Fund Operating Expenses of 1.04%. ISG Large Cap Equity
Portfolio's Total Fund Operating Expenses for Class A Shares and Trust Shares
will be capped at
1.04% until May 1, 2000.
o Primary Portfolio Manager(s):
Ronald E. Lindquist has been the primary portfolio manager of DG Equity Fund
since its inception in August 1992. He will be the primary portfolio manager of
ISG Large Cap Equity Portfolio.
o Capitalization:
The following table sets forth as of June 30, 1998, (1) the capitalization of DG
Equity Fund, (2) the capitalization of Class A Shares and Trust Shares of ISG
Large Cap Equity Portfolio and (3) the pro forma capitalization of Class A
Shares and Trust Shares of ISG Large Cap Equity Portfolio as adjusted showing
the effect of the Exchange had it occurred on such date.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
ISG Large Cap Equity DG Equity Pro Forma
Portfolio Fund After Exchange
-----------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
----------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C>
Total Net Assets $0 $0 $ 769,535,072 $46,172,104 $723,362,968
Net Asset Value per
share $0 $0 $ 24.45 $24.45 $24.45
Shares Outstanding 0 0 31,478,719 1,888,723 29,589,996
------------------------------------------------------------------------------------------------
</TABLE>
o Investment Considerations and Risks are substantially identical:
The principal risk of investing in DG Equity Fund or ISG Large Cap Equity
Portfolio is that the market value of its securities (and hence, its share
price) may decline, sometimes rapidly and unpredictably. Such market risk may
affect a single issuer, industry, sector of the economy or the market as a
whole. Investments in foreign securities may involve liquidity and/or currency
risks. Under certain market conditions, options and futures can increase the
volatility of the Fund's net asset value, decrease the liquidity of the Fund's
portfolio and make more difficult the accurate pricing of the Fund's portfolio.
For a more complete discussion of investment considerations and risks, see
"Objective and Policies of Each Fund" in the DG Equity Fund Prospectus and
"Description of the Portfolios--Investment Considerations and Risk Factors" in
the ISG Fund Prospectus.
PERTAINING TO SHARE OWNERSHIP
(AS OF SEPTEMBER 14, 1998)
o DG Equity Fund Shares Outstanding: 30,855,207.620
o Entities known by DG Equity Fund to own of record or beneficially 5% or
more of its outstanding shares:
Percentage
of Class
Name and Number of Owned After
Address Shares Percentage Exchange
Houvis & Co. 14,984,797 48.56% 48.56%
First American National Bank
Attn.: Income Processing
800 First American Center
Nashville, TN 37237-0001
Houvis & Co. 12,423,397 40.26% 40.26%
First American National Bank
First American Center
300 Union Street
Nashville, TN 37237-0001
o Entities known by ISG Large Cap Equity Portfolio to own of record or
beneficially 5% or more of its outstanding Class A Shares or Trust Shares:
None
o The Company's Directors and officers, as a group, owned less than 1% of the
Class A Shares and Trust Shares of ISG Large Cap Equity Portfolio.
o The Trust's Trustees and officers, as a group, owned less than 1% of the
shares of DG Equity Fund.
<PAGE>
DG GOVERNMENT INCOME FUND
COMPARISON OF DG GOVERNMENT INCOME FUND AND ISG GOVERNMENT INCOME PORTFOLIO
o Investment Objective is identical: Current income
o Management Policies are substantially identical:
-- Each Fund invests primarily in securities which are guaranteed as to
payment of principal and interest by the U.S. Government, its agencies
or instrumentalities and will invest, under normal circumstances, at
least 65% of its total assets in U.S. Government securities.
-- Each Fund also may invest in corporate fixed income securities,
mortgage-backed securities, asset-back securities, when-issued
securities, securities of other investment companies, bank obligations,
money market instruments and repurchase agreements.
-- Each Fund may engage in options and futures transactions and lending
portfolio securities.
-- DG Government Income Fund may borrow money only for temporary or
emergency purposes. ISG Government Income Portfolio may borrow money for
investment purposes, but currently intends to borrow money only for
temporary or emergency purposes.
o Investment Restrictions are substantially similar:
Unless otherwise noted, each investment restriction listed below is a
fundamental policy, which cannot be changed without approval by the holders
of a majority (as defined in the 1940 Act) of the DG Government Income
Fund's or ISG Government Income Portfolio's outstanding voting shares.
Neither DG Government Income Fund nor ISG Government Income Portfolio may:
(1) 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.
(2) hold more than 10% of the outstanding voting securities of any
single issuer. With respect to ISG Government Income Portfolio, this
investment restriction applies only with respect to 75% of its total
assets.
(3) borrow money, except the Fund may borrow up to 33-1/3% of the value
of its total assets (DG Government Income Fund may borrow only for
temporary or emergency purposes).
(4) sell securities short or purchase securities on margin, except as is
necessary for purchases and sales of portfolio securities. The ISG
Government Income Portfolio has no investment restriction on selling
securities short.
(5) issue senior securities, except to the extent certain options and
futures activities may be deemed to give rise to a senior security.
(6) invest in commodities, except for the purchase of options and
futures contracts.
(7) purchase or sell real estate, but the Fund may purchase or sell
securities secured by real estate. ISG Government Income Portfolio also
may invest in real estate investment trusts.
(8) make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. DG Government
Income Fund may lend portfolio securities up to 5% of the value of its
total assets, while ISG Government Income Portfolio may lend portfolio
securities up to 33-1/3% of the value of its total assets.
(9) act as an underwriter of securities of other issuers, except to the
extent the Fund may be deemed an underwriter by virtue of disposing of
portfolio securities.
(10) pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings (limited to the lesser of the
dollar amount borrowed or 15% of its total assets with respect to DG
Government Income Fund) and to the extent related to the purchase of
securities on a when-issued basis and the deposit of assets in escrow in
connection with put and call options and collateral and margin
arrangements with respect to options and futures contracts. This
investment restriction is a non-fundamental policy of ISG Government
Income Portfolio and may be changed by vote of a majority of the
Company's Board members at any time.
(11) invest more than 15% of its net assets in illiquid securities. This
investment restriction is a non- fundamental policy of both DG
Government Income Fund and ISG Government Income Portfolio.
(12) purchase securities of other investment companies, except to the
extent permitted by, or pursuant to an exemption from, the 1940 Act.
This investment restriction is a non-fundamental policy of both DG
Government Income Fund and ISG Government Income Portfolio.
o Fees and Expenses:
The following information concerning fees and expenses is derived from
information set forth under the captions "Summary of Fund Expenses" and
"Investing in the Funds--What Shares Cost" in the DG Government Income Fund
Prospectus and "Fee Table" and "How to Buy Shares--Purchase Price" in the ISG
Fund Prospectus. The expense information set forth below does not reflect any
fee waivers or expense reimbursement arrangements that may be or may have been
in effect.
SCHEDULE OF INITIAL SALES CHARGE:
Until May 1, 2000, DG Government Income Fund shareholders who participate
in the Exchange and receive Class A Shares of ISG Government Income Portfolio
will be permitted to purchase Class A Shares of ISG Government Income Portfolio
subject to the lower initial sales charge, if any, applicable to the amount of
transaction set forth below for DG Government Income Fund or ISG Government
Income Portfolio.
DG GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------
TOTAL SALES LOAD
As a % of As a % of
Amount of Transaction Offering Price Net Asset Value
Less than $100,000.......................... 2.00% 2.04%
$100,000 to less than $250,000.............. 1.75% 1.78%
$250,000 to less than $500,000.............. 1.50% 1.52%
$500,000 to less than $750,000.............. 1.25% 1.27%
$750,000 to less than $1,000,000............ 1.00% 1.01%
$1,000,000 but less than $2,000,000 0.50% 0.50%
$2,000,000 or more.......................... 0.25% 0.25%
- ------------------------------------------------------------------------------
ISG GOVERNMENT INCOME PORTFOLIO
CLASS A
- ------------------------------------------------------------------------------
TOTAL SALES LOAD
As a % of As a % of
Amount of Transaction Offering Price Net Asset Value
Less than $50,000......................... 3.00% 3.09%
$50,000 to less than $100,000............. 2.50% 2.56%
$100,000 to less than $250,000............ 2.00% 2.04%
$250,000 to less than $500,000............ 1.50% 1.52%
$500,000 to less than $1,000,000.......... 1.00% 1.01%
$1,000,000 or more*....................... -0- -0-
- ------------------------------------------------------------------------------
- ----------------------------
* A contingent deferred sales charge 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.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
ISG Government DG Government Pro Forma
Income Portfolio* Income Fund After Exchange
-----------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
Management Fees .60% .60% .60% .60% .60%
12b-1 Fees .25% None .35%** .25% None
Other Expenses .31% .31% .31% .31% .31%
Total Fund
Operating Expenses 1.16% .91% 1.26%** 1.16% .91%
----------------------------------------------------------------------------------------------------
- -----------------
* ISG Government Income Portfolio has not yet commenced operations. It is a
newly-created fund that will continue the operations of DG Government
Income Fund upon consummation of the Exchange. Other Expenses are based on
estimated amounts.
** Rule 12b-1 fees are not being paid or accrued by the DG Fund, and the Trust
has disclosed that such fees would not be paid until a separate class of
shares is created for certain institutional investors.
</TABLE>
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:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
ISG Government DG Government Pro Forma
Income Portfolio Income Fund After Exchange
-------------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $ 32 $ 9 $ 33 $ 32 $ 9
3 Years $ 56 $ 29 $ 59 $ 56 $ 29
5 Years $ 83 $ 50 $ 88 $ 83 $ 50
10 Years $158 $112 $169 $158 $112
------------------------------------------------------------------------------------------------------
</TABLE>
THE AMOUNTS LISTED IN THE EXAMPLE REFLECT THE DEDUCTION OF THE MAXIMUM INITIAL
SALES CHARGE, IF ANY, IMPOSED ON A DG FUND SHAREHOLDER. SHARES RECEIVED IN THE
EXCHANGE WILL NOT BE SUBJECT TO AN INITIAL SALES CHARGE. THE AMOUNTS LISTED IN
THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE INDICATED.
MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, EACH FUND'S ACTUAL
PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN GREATER OR LESS THAN
5%.
o Expense Reimbursement and Fee Waiver Arrangements:
As of May 1, 1998, DG Government Income Fund's 12b-1 Fees were not being paid
or accrued resulting in Total Fund Operating Expenses of .91%. ISG Government
Income Portfolio's Total Fund Operating Expenses for Class A Shares and Trust
Shares will be capped at .91% until May 1, 2000.
o Primary Portfolio Manager(s):
John Mark McKenzie has been the primary portfolio manager of DG Government
Income Fund since August 1992. He will be the primary portfolio manager of ISG
Government Income Portfolio. He is a Senior Vice President of ParkSouth and has
been employed by DG Bank since 1984.
o Capitalization:
The following table sets forth as of June 30, 1998, (1) the capitalization of DG
Government Income Fund, (2) the capitalization of Class A Shares and Trust
Shares of ISG Government Income Portfolio and (3) the pro forma capitalization
of Class A Shares and Trust Shares of ISG Government Income Portfolio as
adjusted showing the effect of the Exchange had it occurred on such date.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
ISG Government DG Government Pro Forma
Income Portfolio Income Fund After Exchange
-------------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
------------------------------------ ----------------------------------
<S> <C> <C> <C> <C> <C>
Total Net Assets $0 $0 $261,765,940 $52,353 $261,713,587
Net Asset Value
per share $0 $0 $10.14 $10.14 $10.14
Shares Outstanding 0 0 769,535,072 153,907 769,381,165
------------------------------------------------------------------------------------------------------
</TABLE>
o Investment Considerations and Risks are substantially identical:
The principal risk of investing in DG Government Income Fund or ISG Government
Income Portfolio is that the market value of its securities (and hence, its
share price) may decline in response to an increase in interest rates. This
could cause a portfolio security to be worth less than the price originally paid
for it, or less than it was worth at an earlier time. The value of portfolio
securities also could decline if one or more rating agencies lowered its rating
of the issuing entities or if the financial condition of these entities
worsened. Mortgage-backed and asset-backed securities are subject to both credit
and prepayment risk, and may be more volatile and less liquid than more
traditional debt securities. Under certain market conditions, options and
futures can increase the volatility of the Fund's net asset value, decrease the
liquidity of the Fund's portfolio and make more difficult the accurate pricing
of the Fund's portfolio. For a more complete discussion of investment
considerations and risks, see "Objective and Policies of Each Fund" in the DG
Government Income Fund Prospectus and "Description of the Portfolios--Investment
Considerations and Risk Factors" in the ISG Government Income Portfolio
Prospectus.
PERTAINING TO SHARE OWNERSHIP
(AS OF SEPTEMBER 14, 1998)
o DG Government Income Fund Shares Outstanding: 25,994,249.723
o Entities known by DG Government Income Fund to own of record or
beneficially 5% or more of its outstanding shares:
Percentage
of Class
Name and Number of Owned After
Address Shares Percentage Exchange
Houvis & Co. 16,365,286 62.96% 62.96%
First American National Bank
First American Center
300 Union Street
Nashville, TN 37237-0001
Houvis & Co. 8,305,558 31.95% 31.95%
First American National Bank
Attn.: Income Processing
800 First American Center
Nashville, TN 37237-0001
o Entities known by ISG Government Income Portfolio to own of record or
beneficially 5% or more of its outstanding Class A Shares or Trust Shares:
None
o The Company's Directors and officers, as a group, owned less than 1% of the
Class A Shares and Trust Shares of ISG Government Income Portfolio.
o The Trust's Trustees and officers, as a group, owned less than 1% of the
shares of DG Government Income Fund.
<PAGE>
DG INTERNATIONAL EQUITY FUND
COMPARISON OF DG INTERNATIONAL EQUITY FUND AND ISG INTERNATIONAL EQUITY
PORTFOLIO
o Investment Objective is identical: Capital appreciation
o Management Policies are substantially identical:
-- Each Fund invests at least 65% of its total assets in equity securities
denominated in foreign currencies.
-- Each Fund invests in issuers located in at least three countries outside
of the United States.
-- Each Fund invests in equity securities of established companies
primarily in economically developed countries, however, up to 40% of DG
International Equity Fund's and up to 25% of ISG International Equity
Portfolio's assets may be invested in issuers in emerging markets.
-- In selecting investments for each Fund, LAM attempts to identify
inexpensive markets worldwide through traditional measures of value, and
focuses on individual stock selection (a "bottom-up" approach) rather
than on forecasting stock market trends.
-- Each Fund may invest in American Depositary Receipts, Global Depositary
Receipts and European Depositary Receipts.
-- Each Fund also may invest in fixed-income securities denominated in
foreign currencies, money market instruments and repurchase agreements.
-- Each Fund may engage in options and future transactions, foreign
currency transactions and lending portfolio securities.
-- DG International Equity Fund may borrow money only for temporary or
emergency purposes. ISG International Equity Portfolio may borrow money
for investment purposes, but currently intends to borrow money only for
temporary or emergency purposes.
o Investment Restrictions are substantially similar:
Unless otherwise noted, each investment restriction listed below is a
fundamental policy, which cannot be changed without approval by the holders
of a majority (as defined in the 1940 Act) of the DG International Equity
Fund's or ISG International Equity Portfolio's outstanding voting shares.
Neither DG International Equity Fund nor ISG International Equity Portfolio
may:
(1) purchase securities on margin, except as is necessary for purchases
and sales of portfolio securities.
(2) issue senior securities, except to the extent certain options and
futures activities may be deemed to give rise to a senior security.
(3) borrow money, except the Fund may borrow up to 33-1/3% of value of
its total assets. (DG International Equity Fund may borrow only for
temporary or emergency purposes.)
(4) invest more than 25% of the value of its total assets in securities
of issuers having their principal business activities in the same
industry. This investment restriction does not apply to the purchase of
U.S. Government securities.
(5) invest in commodities, except for the purchase and sale of options,
forward contracts and futures contracts.
(6) purchase or sell real estate, but the Fund may purchase or sell
securities secured by real estate or issued by companies that invest in
real estate, including real estate investment trusts.
(7) make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. In addition, the
Fund may lend portfolio securities up to 33-1/3% of the value of its
total assets.
(8) act as an underwriter of securities of other issuers, except to the
extent the Fund may be deemed an underwriter by virtue of disposing of
portfolio securities.
(9) acquire more than 10% of the outstanding voting securities of any
one issuer. The ISG International Equity Portfolio has no such
restriction.
(10) pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings (limited to 15% of its total
assets with respect to DG International Equity Fund) and to the extent
related to the purchase of securities on a when-issued basis and the
deposit of assets in escrow in connection with put and call options and
collateral and margin arrangements with respect to options and futures
contracts. This investment restriction is a non-fundamental policy of
ISG International Equity Portfolio and may be changed by vote of a
majority of the Company's Board members at any time.
(11) invest more than 15% of its net assets in illiquid securities. This
investment restriction is a non- fundamental policy of both DG
International Equity Fund and ISG International Equity Portfolio.
(12) purchase securities of other investment companies, except to the
extent permitted by, or pursuant to an exemption from, the 1940 Act.
This investment restriction is a non-fundamental policy of both DG
International Equity Fund and ISG International Equity Portfolio.
(13) invest in securities of issuers for the purpose of exercising
management or control. This investment restriction is a non-fundamental
policy of both DG International Equity Fund and ISG International Equity
Portfolio.
Further, as a fundamental policy, DG International Equity Fund will not
permit margin deposits for financial futures contracts held by the Fund,
plus premiums paid by it for open options on financial futures contracts
to exceed 5% of the fair market value of the Fund's total assets after
taking into account the unrealized profits and losses on those
contracts. ISG International Equity Portfolio has not adopted such a
restriction as a fundamental policy. In addition, as a non-fundamental
policy, DG International Equity Fund may not invest in interests in oil,
gas or other mineral exploration, other than debentures or equity
interests therein. ISG International Equity Portfolio has no such
investment restriction, but currently has no intention of investing in
such interests.
o Fees and Expenses:
The following information concerning fees and expenses is derived from
information set forth under the captions "Summary of Fund Expenses" in the DG
International Equity Fund Prospectus and "Fee Table" and "How to Buy
Shares--Purchase Price" in the ISG Fund Prospectus. The expense information set
forth below does not reflect any fee waivers or expense reimbursement
arrangements that may be or may have been in effect.
SCHEDULE OF INITIAL SALES CHARGE:
DG International Equity Fund does not impose an initial sales charge.
Until May 1, 2000, DG International Equity Fund shareholders who participate in
the Exchange and receive Class A Shares of ISG International Equity Portfolio
will be permitted to purchase Class A Shares of ISG International Equity
Portfolio at net asset value without an initial sales charge.
ISG INTERNATIONAL EQUITY PORTFOLIO
CLASS A
- ------------------------------------------------------------------------------
TOTAL SALES LOAD
As a % of As a % of
Amount of Transaction Offering Price Net Asset Value
Less than $50,000.......................... 4.75% 4.99%
$50,000 to less than $100,000.............. 4.00% 4.17%
$100,000 to less than $250,000............. 3.25% 3.36%
$250,000 to less than $500,000............. 2.50% 2.56%
$500,000 to less than $1,000,000........... 1.75% 1.78%
$1,000,000 or more*........................ -0- -0-
- ------------------------------------------------------------------------------
- --------------------
* A contingent deferred sales charge 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.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
ISG International DG
Equity Portfolio* International Pro Forma
Equity Fund After Exchange
-----------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
Management Fees 1.00% 1.00% 1.00% 1.00% 1.00%
12b-1 Fees .25% None .25%** .25% None
Other Expenses 1.27% 1.27% 1.27% 1.27% 1.27%
Total Fund
Operating Expenses 2.52% 2.27% 2.52%** 2.52% 2.27%
-----------------------------------------------------------------------------------------------
- -----------------
* ISG International Equity Portfolio has not commenced operations. It is a
newly-created fund that will continue the operations of DG International
Equity Fund upon consummation of the Exchange. Other Expenses are based on
estimated amounts.
** Rule 12b-1 fees are not being paid or accrued by the DG Fund, and the Trust
has disclosed that such fees would not be paid until a separate class of
shares is created for certain institutional investors.
</TABLE>
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:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
ISG International DG Pro Forma
Equity Portfolio International After Exchange
Equity Fund
-------------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
--------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $ 26 $ 23 $ 26 $ 26 $ 23
3 Years $ 78 $ 71 $ 78 $ 78 $ 71
5 Years $134 $122 $134 $134 $122
10 Years $286 $261 $286 $286 $261
-------------------------------------------------------------------------------------------------
</TABLE>
THE AMOUNTS LISTED IN THE EXAMPLE REFLECT THE DEDUCTION OF THE MAXIMUM INITIAL
SALES CHARGE, IF ANY, IMPOSED ON DG FUND SHAREHOLDERS. SHARES RECEIVED IN THE
EXCHANGE WILL NOT BE SUBJECT TO AN INITIAL SALES CHARGE. THE AMOUNTS LISTED IN
THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE INDICATED.
MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, EACH FUND'S ACTUAL
PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN GREATER OR LESS THAN
5%.
o Expense Reimbursement and Fee Waiver Arrangements:
As of May 1, 1998, DG International Equity Fund's 12b-1 Fees were not being paid
or accrued and a portion of its Management Fees were waived voluntarily
resulting in Total Fund Operating Expenses of 1.77%. ISG International Equity
Portfolio's Total Fund Operating Expenses for Class A Shares and Trust Shares
will be capped at 1.77% until May 1, 2000.
o Primary Portfolio Manager(s):
Herbert W. Gullquist and John R. Reinsberg have been the primary portfolio
managers of DG International Equity Fund since its inception in March 1997. They
will be the primary portfolio managers of ISG International Equity Portfolio.
Mr. Gullquist is a Managing Director of LAM and has been with LAM since 1982,
during which time he has managed various client discretionary accounts. Mr.
Reinsberg is a Managing Director of LAM and has been with LAM since 1992, during
which time he has managed various client discretionary accounts.
o Capitalization:
The following table sets forth as of June 30, 1998, (1) the capitalization of DG
International Equity Fund, (2) the capitalization of Class A Shares and Trust
Shares of ISG International Equity Portfolio and (3) the pro forma
capitalization of Class A Shares and Trust Shares of ISG International Equity
Portfolio as adjusted showing the effect of the Exchange had it occurred on such
date.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
ISG International DG
Equity Portfolio International Pro Forma
Equity Fund After Exchange
-------------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
-------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
Total Net Assets $0 $0 $29,720,407 $2,972 $29,717,435
Net Asset Value
per share $0 $0 $11.07 $11.07 $11.07
Shares Outstanding 0 0 2,684,856 268 2,684,587
-------------------------------------------------------------------------------------------------
</TABLE>
o Investment Considerations and Risks are substantially identical:
The principal risk of investing in DG International Equity Fund or ISG
International Equity Portfolio is that the market value of its securities (and
hence, its share price) may decline, sometimes rapidly and unpredictably. Such
market risk may affect a single issuer, industry, sector of the economy or the
market as a whole. Investments in foreign securities may involve liquidity
and/or currency risks. Because evidence of ownership of foreign securities
usually are held outside the United States, each Fund will be subject to
possible adverse political and economic developments, seizure or nationalization
of foreign deposits and adoption of governmental restrictions which might
adversely affect or restrict the payment of principal and interest on foreign
securities to investors located outside the country of the issuer. 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. Under certain market conditions, options and futures can increase the
volatility of the Fund's net asset value, decrease the liquidity of the Fund's
portfolio and make more difficult the accurate pricing of the Fund's portfolio.
For a more complete discussion of investment considerations and risks, see
"Objective and Policies of Each Fund" in the DG International Equity Fund
Prospectus and "Description of the Portfolios--Investment Considerations and
Risk Factors" in the ISG Fund Prospectus.
PERTAINING TO SHARE OWNERSHIP
(AS OF SEPTEMBER 14, 1998)
o DG International Equity Fund Shares Outstanding: 2,771,695.684
Entities known by DG International Equity Fund to own of record or beneficially
5% or more of its outstanding shares:
Percentage of
Class
Name and Number of Owned After
ADDRESS SHARES PERCENTAGE EXCHANGE
Houvis & Co. 1,832,321 66.11% 66.11%
First American National Bank
Attn.: Income Processing
800 First American Center
Nashville, TN 37237-0001
Houvis & Co. 890,458 32.13% 32.13%
First American National Bank
First American Center
300 Union Street
Nashville, TN 37237-0001
o Entities known by ISG International Equity Portfolio to own of record or
beneficially 5% or more of its outstanding Class A Shares or Trust Shares:
None
o The Company's Directors and officers, as a group, owned less than 1% of the
Class A Shares and Trust Shares of ISG International Equity Portfolio.
o The Trust's Trustees and officers, as a group, owned less than 1% of the
shares of DG International Equity Fund.
<PAGE>
DG LIMITED TERM GOVERNMENT INCOME FUND
COMPARISON OF DG LIMITED TERM GOVERNMENT INCOME FUND AND ISG LIMITED DURATION
U.S. GOVERNMENT PORTFOLIO
o Investment Objective is substantially similar: DG Limited Term Government
Income Fund seeks to provide investors with current income. ISG Limited
Duration U.S. Government Portfolio seeks to provide investors with high
current income without assuming undue risk.
o Management Policies are substantially similar:
-- Each Fund invests in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities and repurchase
agreements in respect of such securities. Under normal market
conditions, DG Limited Term Government Income Fund will invest at least
65% of the value of its total assets in U.S. Government securities. ISG
Limited Duration U.S. Government Portfolio has no such management
policy, but currently intends to invest at least 65% of the value of its
total assets in U.S. Government securities.
-- The weighted average duration of DG Limited Term Government Income
Fund's portfolio securities will at all times be limited to between one
and three years. ISG Limited Duration U.S. Government Portfolio will
seek to maintain a duration ranging between one year and four years
depending on market conditions. Under normal market conditions, the
effective duration of ISG Limited Duration U.S. Government Portfolio's
portfolio securities will approximate that of the Merrill Lynch
Government 1 to 5 Year Bond Index. 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.
-- DG Limited Term Government Income Fund may invest in corporate bonds,
asset-backed securities and bank obligations, and may engage in options
and futures transactions. ISG Limited Duration U.S. Government Portfolio
may not invest in these securities or engage in these transactions.
-- DG Limited Term Government Income Fund may borrow money only for
temporary or emergency purposes. ISG Limited Duration U.S. Government
Portfolio may borrow money for investment purposes, but currently
intends to borrow money only for temporary or emergency purposes.
o Investment Restrictions are substantially similar:
Unless otherwise noted, each investment restriction listed below is a
fundamental policy, which cannot be changed without approval by the holders
of a majority (as defined in the 1940 Act) of the DG Limited Term
Government Income Fund's or ISG Limited Duration U.S. Government
Portfolio's outstanding voting shares. Neither DG Limited Term Government
Income Fund nor ISG Limited Duration U.S. Government Portfolio may:
(1) borrow money, except the Fund may borrow up to 33-1/3% of the value
of its total assets (DG Limited Term Government Income Fund may borrow
only for temporary or emergency purposes).
(2) sell securities short or purchase securities on margin, except as is
necessary for purchases and sales of portfolio securities. The ISG
Limited Duration U.S. Government Portfolio may sell securities short
"against the box" up to 15% of the value of its net assets.
(3) issue senior securities, except to the extent certain options and
futures activities may be deemed to give rise to a senior security.
(4) invest in commodities, except for the purchase of options and
futures contracts.
(5) purchase or sell real estate, but the Fund may purchase or sell
securities secured by real estate.
(6) make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. DG Limited Term
Government Income Fund may lend portfolio securities up to 5% of the
value of its total assets, while ISG Limited Duration U.S. Government
Portfolio may lend portfolio securities up to 33-1/3% of the value of
its total assets.
(7) act as an underwriter of securities of other issuers, except to the
extent the Fund may be deemed an underwriter by virtue of disposing of
portfolio securities.
(8) pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings (limited to the lesser of the
dollar amount borrowed or 15% of its total assets with respect to DG
Limited Term Government Income Fund) and to the extent related to the
purchase of securities on a when-issued basis and the deposit of assets
in escrow in connection with put and call options and collateral and
margin arrangements with respect to options and futures contracts. This
investment restriction is a non-fundamental policy of ISG Limited
Duration U.S. Government Portfolio and may be changed by vote of a
majority of the Company's Board members at any time.
(9) invest more than 15% (10% in the case of ISG Limited Duration U.S.
Government Portfolio) of its net assets in illiquid securities. This
investment restriction is a non- fundamental policy of both DG Limited
Term Government Income Fund and ISG Limited Duration U.S. Government
Portfolio.
(10) purchase securities of other investment companies, except to the
extent permitted by, or pursuant to an exemption from, the 1940 Act.
This investment restriction is a non-fundamental policy of both DG
Limited Term Government Income Fund and ISG Limited Duration U.S.
Government Portfolio.
In addition, as a fundamental policy, DG Limited Term Government Income
Fund may not, with respect to 75% of its total assets, invest more than
5% of its assets in the obligations of any single issuer or hold more
than 10% of the outstanding voting securities of any single issuer. This
investment restriction does not apply to the purchase of U.S. Government
securities. ISG Limited Duration U.S. Government Portfolio is a
non-diversified fund and is not subject to this investment restriction.
As non-fundamental policies, ISG Limited Duration U.S. Government
Portfolio may not (a) invest in the securities of a company for the
purpose of exercising management or control, (b) purchase or sell puts,
calls or combinations thereof, or (c) invest more than 5% of its total
assets in securities of any company having less than three years'
continuous operations. DG Limited Term Government Income Portfolio has
no such investment restrictions, but currently intends not to (x) invest
in companies to exercise management or control or (y) purchase
securities of any company having less than three years' continuous
operations. DG Limited Term Government Income Portfolio, however, may
purchase and sell put and call options on portfolio securities.
o Fees and Expenses:
The following information concerning fees and expenses is derived from
information set forth under the captions "Summary of Fund Expenses" and
"Investing in the Funds--What Shares Cost" in the DG Limited Term Government
Income Fund Prospectus and "Fee Table" and "How to Buy Shares--Purchase Price"
in the ISG Fund Prospectus. The expense information set forth below does not
reflect any fee waivers or expense reimbursement arrangements that may be or
may have been in effect.
SCHEDULE OF INITIAL SALES CHARGE:
Until May 1, 2000, DG Limited Term Government Income Fund shareholders
who participate in the Exchange and receive Class A Shares of ISG Limited
Duration U.S. Government Portfolio will be permitted to purchase Class A Shares
of ISG Limited Duration U.S. Government Portfolio subject to the lower initial
sales charge, if any, applicable to the amount of transaction set forth below
for DG Limited Term Government Income Fund or ISG Limited Duration U.S.
Government Portfolio.
DG LIMITED TERM GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------
TOTAL SALES LOAD
As a % of As a % of
Amount of Transaction Offering Price Net Asset Value
Less than $100,000......................... 2.00% 2.04%
$100,000 to less than $250,000............. 1.75% 1.78%
$250,000 to less than $500,000............. 1.50% 1.52%
$500,000 to less than $750,000............. 1.25% 1.27%
$750,000 to less than $1,000,000........... 1.00% 1.01%
$1,000,000 but less than $2,000,000 0.50% 0.50%
$2,000,000 or more......................... 0.25% 0.25%
- ------------------------------------------------------------------------------
ISG LIMITED DURATION U.S. GOVERNMENT PORTFOLIO
CLASS A
- ------------------------------------------------------------------------------
TOTAL SALES LOAD
As a % of As a % of
Amount of Transaction Offering Price Net Asset Value
Less than $50,000........................... 3.00% 3.09%
$50,000 to less than $100,000............... 2.50% 2.56%
$100,000 to less than $250,000.............. 2.00% 2.04%
$250,000 to less than $500,000.............. 1.50% 1.52%
$500,000 to less than $1,000,000............ 1.00% 1.01%
$1,000,000 or more*......................... -0- -0-
- ------------------------------------------------------------------------------
- -----------------
* A contingent deferred sales charge 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.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
ISG Limited Duration DG Limited Term
U.S. Government Government Pro Forma
Portfolio Income Fund After Exchange
-----------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
---------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
Management Fees .50% .50% .60% .50% .50%
12b-1 Fees .25% None .35%* .25% None
Other Expenses .41% .41% .77% .41% .41%
Total Fund
Operating Expenses 1.16% .91% 1.72%* 1.16% .91%
-----------------------------------------------------------------------------------------------
- ------------
* Rule 12b-1 fees are not being paid or accrued by the DG Fund, and the Trust
has disclosed that such fees would not be paid until a separate class of
shares is created for certain institutional investors.
</TABLE>
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:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
ISG Limited Duration DG Limited Term
U.S. Government Government Pro Forma
Portfolio Income Fund After Exchange
-------------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $ 32 $ 9 $ 37 $ 32 $ 9
3 Years $ 56 $ 29 $ 73 $ 56 $ 29
5 Years $ 83 $ 50 $111 $ 83 $ 50
10 Years $158 $112 $219 $158 $112
-------------------------------------------------------------------------------------------------
</TABLE>
THE AMOUNTS LISTED IN THE EXAMPLE REFLECT THE DEDUCTION OF THE MAXIMUM INITIAL
SALES CHARGE, IF ANY, IMPOSED ON A DG FUND SHAREHOLDER. SHARES RECEIVED IN THE
EXCHANGE WILL NOT BE SUBJECT TO AN INITIAL SALES CHARGE. THE AMOUNTS LISTED IN
THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE INDICATED.
MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, EACH FUND'S ACTUAL
PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN GREATER OR LESS THAN
5%.
o Expense Reimbursement and Fee Waiver Arrangements:
As of May 1, 1998, DG Limited Term Government Income Fund's 12b-1 Fees were not
being paid or accrued and a portion of its Management Fees were waived
voluntarily resulting in Total Fund Operating Expenses of 1.22%. ISG Limited
Duration U.S. Government Portfolio's Total Fund Operating Expenses for Class A
Shares and Trust Shares will be capped at 1.22% until May 1, 2000.
o Primary Portfolio Manager(s):
John Mark McKenzie and Donald F. Turk are the primary portfolio managers of DG
Limited Term Government Income Fund and ISG Limited Duration U.S. Government
Portfolio, respectively . Mr. McKenzie has been the primary portfolio manager of
DG Limited Term Government Income Fund since August 1992. Mr. Turk has been the
primary portfolio manager of the ISG Limited Duration U.S. Government Portfolio
since February 1997. Messrs. McKenzie and Turk will continue as the primary
portfolio managers of ISG Limited Duration U.S. Government Portfolio after the
Exchange.
o Capitalization:
The following table sets forth as of June 30, 1998, (1) the capitalization of DG
Limited Term Government Income Fund, (2) the capitalization of Class A Shares
and Trust Shares of ISG Limited Duration U.S. Government Portfolio and (3) the
pro forma capitalization of Class A Shares and Trust Shares of ISG Limited
Duration U.S. Government Portfolio as adjusted showing the effect of the
Exchange had it occurred on such date.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
DG Limited
ISG Limited Term
Duration U.S. Government Pro Forma
Government Portfolio Income Fund After Exchange
-----------------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST
SHARES
--------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
Total Net Assets $20,049,523 $0 $30,382,585 $1,983,351 $48,448,757
Net Asset Value
per share $10.13 $0 $9.77 $10.13 $10.13
Shares Outstanding 1,978,620 0 3,109,043 195,790 4,782,700
-----------------------------------------------------------------------------------------------------
</TABLE>
o Investment Considerations and Risks are substantially similar:
The principal risk of investing in DG Limited Term Government Income Fund or ISG
Limited Duration U.S. Government Portfolio is that the market value of its
securities (and hence, its share price) may decline in response to an increase
in interest rates. This could cause a portfolio security to be worth less than
the price originally paid for it, or less than it was worth at an earlier time.
Asset-backed securities that DG Limited Term Government Income Fund may invest
in are subject to both credit and prepayment risk, and may be more volatile and
less liquid than more traditional debt securities. DG Limited Term Government
Income Fund may engage in options transactions. Under certain market conditions,
options can increase the volatility of DG Limited Term Government Income Fund's
net asset value, decrease the liquidity of its portfolio and make more difficult
the accurate pricing of its portfolio. DG Limited Term Government Income Fund is
a diversified fund, while ISG Limited Duration U.S. Government Portfolio is a
non-diversified fund. To the extent ISG Limited Duration U.S. Government
Portfolio were to invest its assets in other than U.S. Government securities, a
relatively high percentage of such assets may be invested in the securities of a
limited number of issuers, some of which may be in the same industry, and ISG
Limited Duration U.S. Government Portfolio's securities could be more sensitive
to changes in the market value of a single issuer or industry. For a more
complete discussion of investment considerations and risks, see "Objective and
Policies of Each Fund" in the DG Limited Term Government Income Fund Prospectus
and "Description of the Portfolios-- Investment Considerations and Risks" in the
ISG Fund Prospectus.
PERTAINING TO SHARE OWNERSHIP
(AS OF SEPTEMBER 14, 1998)
o DG Limited Term Government Income Fund Shares Outstanding: 2,997,997.651
o Entities known by DG Limited Term Government Income Fund to own of record
or beneficially 5% or more of its outstanding shares:
Percentage of
Class
Name and Number of Owned After
Address Shares Percentage Exchange
Houvis & Co. 1,476,430 49.25% 29.32%
First American National Bank
Attn.: Income Processing
800 First American Center
Nashville, TN 37237-0001
Houvis & Co. 1,192,200 39.77% 23.67%
First American National Bank
First American Center
300 Union Street
Nashville, TN 37237-0001
o Entities known by ISG Limited Duration U.S. Government Portfolio to own of
record or beneficially 5% or more of its outstanding Class A Shares or
Trust Shares:
Percentage of
Class
Name and Number of Percentage Owned After
Address Shares of Class Exchange
First American National Bank
Attn: AmeriStar Investment
Management & Trust 1,955,036 99.28% 40.27%
800 First American Center Class A Shares
Nashville, TN 37237
o The Company's Directors and officers, as a group, owned less than 1% of the
Class A Shares and Trust Shares of ISG Limited Duration U.S. Government
Portfolio.
o The Trust's Trustees and officers, as a group, owned less than 1% of the
shares of DG Limited Term Government Income Fund.
<PAGE>
DG MUNICIPAL INCOME FUND
COMPARISON OF DG MUNICIPAL INCOME FUND AND ISG MUNICIPAL INCOME PORTFOLIO
o Investment Objective is identical: To provide current income that is exempt
from federal regular income tax.
o Management Policies are substantially similar:
-- Each Fund invests at least 80% of its net assets in obligations the
interest from which is exempt from federal regular income tax or so that at
least 80% of the income from its investments will be exempt from federal
regular income tax.
-- Each Fund invests in investment grade municipal securities.
-- Each Fund also may invest in participation interests, variable rate
municipal securities, municipal leases, bank obligations, money market
instruments and repurchase agreements.
-- Each Fund may lend its portfolio securities.
-- DG Municipal Income Fund may borrow money only for temporary or
emergency purposes. ISG Municipal Income Portfolio may borrow money for
leveraging purposes, but currently intends to borrow money only for
temporary or emergency purposes.
o Investment Restrictions are substantially similar:
Unless otherwise noted, each investment restriction listed below is a
fundamental policy, which cannot be changed without approval by the holders
of a majority (as defined in the 1940 Act) of the DG Municipal Income
Fund's or ISG Municipal Income Portfolio's outstanding voting shares.
Neither DG Municipal Income Fund nor ISG Municipal Income Portfolio may:
(1) 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.
(2) hold more than 10% of the outstanding voting securities of any
single issuer. With respect to ISG Municipal Income Portfolio, this
investment restriction applies only with respect to 75% of its total
assets.
(3) invest more than 25% of the value of its total assets in securities
of issuers in any single industry. This restriction does not apply to
the purchase of U.S. Government securities. DG Municipal Income Fund
will not purchase securities if, as a result of such purchase, 25% or
more of its total assets would be invested in any one industry or in
industrial development bonds or other securities, the interest upon
which is paid from revenues of similar type projects. DG Municipal
Income Fund does not intend to purchase securities that would increase
the percentage of its total assets invested in the securities of
governmental subdivisions located in any one state, territory, or U.S.
possession to 25% or more. However, it may invest 25% or more of its
assets in tax-exempt project notes guaranteed by the U.S. government,
regardless of the location of the issuing municipality.
(4) borrow money, except the Fund may borrow up to 33-1/3% of the value
of its total assets (DG Municipal Income Fund may borrow only for
temporary or emergency purposes).
(5) sell securities short or purchase securities on margin, except as is
necessary for purchases and sales of portfolio securities. The ISG
Municipal Income Portfolio has no investment restriction on selling
securities short.
(6) issue senior securities, except to the extent certain options and
futures activities may be deemed to give rise to a senior security.
(7) purchase or sell commodities or commodities futures contracts. ISG
Municipal Income Portfolio, however, may purchase options and futures
contracts.
(8) purchase or sell real estate, but the Fund may purchase or sell
securities secured by real estate. ISG Municipal Income Portfolio also
may invest in real estate investment trusts.
(9) make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, each of
DG Municipal Income Fund and ISG Municipal Income Portfolio may lend its
portfolio securities up to 33- 1/3% of the value of its total assets.
(10) act as an underwriter of securities of other issuers, except to the
extent the Fund may be deemed an underwriter by virtue of disposing of
portfolio securities, and except that ISG Municipal Income Portfolio 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.
(11) pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings (limited to the lesser of the
dollar amount borrowed or 15% of its total assets with respect to DG
Municipal Income Fund) and to the extent related to the purchase of
securities on a when-issued basis and the deposit of assets in escrow in
connection with put and call options and collateral and margin
arrangements with respect to options and futures contracts. This
investment restriction is a non-fundamental policy of ISG Municipal
Income Portfolio and may be changed by the Company's Board members at
any time.
(12) invest more than 15% of its net assets in illiquid securities. This
investment restriction is a non- fundamental policy of both DG Municipal
Income Fund and ISG Municipal Income Portfolio.
(13) purchase securities of other investment companies, except to the
extent permitted by, or pursuant to an exemption from, the 1940 Act.
This investment restriction is a non-fundamental policy of both DG
Municipal Income Fund and ISG Municipal Income Portfolio.
In addition, as a non-fundamental policy, DG Municipal Income Fund may not
enter into transactions for the purpose of engaging in arbitrage. ISG
Municipal Income Portfolio has no such investment restriction.
o Fees and Expenses:
The following information concerning fees and expenses is derived from
information set forth under the captions "Summary of Fund Expenses" and
"Investing in the Funds--What Shares Cost" in the DG Municipal Income Fund
Prospectus and "Fee Table" and "How to Buy Shares--Purchase Price" in the ISG
Fund Prospectus. The expense information set forth below does not reflect any
fee waivers or expense reimbursement arrangements that may be or may have been
in effect.
SCHEDULE OF INITIAL SALES CHARGE:
Until May 1, 2000, DG Municipal Income shareholders who participate in
the Exchange and receive Class A Shares of ISG Municipal Income Portfolio will
be permitted to purchase Class A Shares of ISG Municipal Income Portfolio
subject to the lower initial sales charge, if any, applicable to the amount of
transaction set forth below for DG Municipal Income Fund or ISG Municipal Income
Fund.
DG MUNICIPAL INCOME FUND
- ------------------------------------------------------------------------------
TOTAL SALES LOAD
As a % of As a % of
Amount of Transaction Offering Price Net Asset Value
Less than $100,000...................... 2.00% 2.04%
$100,000 to less than $250,000.......... 1.75% 1.78%
$250,000 to less than $500,000.......... 1.50% 1.52%
$500,000 to less than $750,000.......... 1.25% 1.27%
$750,000 to less than $1,000,000........ 1.00% 1.01%
$1,000,000 but less than $2,000,000 0.50% 0.50%
$2,000,000 or more...................... 0.25% 0.25%
- ------------------------------------------------------------------------------
ISG MUNICIPAL INCOME PORTFOLIO
CLASS A
- ------------------------------------------------------------------------------
TOTAL SALES LOAD
As a % of As a % of
Amount of Transaction Offering Price Net Asset Value
Less than $50,000....................... 3.00% 3.09%
$50,000 to less than $100,000........... 2.50% 2.56%
$100,000 to less than $250,000.......... 2.00% 2.04%
$250,000 to less than $500,000.......... 1.50% 1.52%
$500,000 to less than $1,000,000........ 1.00% 1.01%
$1,000,000 or more*..................... -0- -0-
- ------------------------------------------------------------------------------
- ----------------
* A contingent deferred sales charge 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.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
ISG Municipal DG Municipal Pro Forma
Income Portfolio* Income Fund After Exchange
-----------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
--------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
Management Fees .60% .60% .60% .60% .60%
12b-1 Fees .25% None .35%** .25% None
Other Expenses .60% .60% .60% .60% .60%
Total Fund
Operating Expenses 1.45% 1.20% 1.55%** 1.45% 1.20%
-----------------------------------------------------------------------------------------------
- ----------------
* ISG Municipal Income Portfolio has not yet commenced operations. It is a
newly-created fund that will continue the operations of DG Municipal Income
Fund upon consummation of the Exchange. Other Expenses are based on
estimated amounts.
** Rule 12b-1 fees are not being paid or accrued by the DG Fund, and the
Trust has disclosed that such fees would not be paid until a separate
class of shares is created for certain institutional investors.
</TABLE>
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:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
ISG Municipal DG Municipal Pro Forma
Income Portfolio Income Fund After Exchange
-------------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
--------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $ 34 $ 12 $ 35 $ 34 $ 12
3 Years $ 65 $ 38 $ 68 $ 65 $ 38
5 Years $ 98 $ 66 $103 $ 98 $ 66
10 Years $190 $145 $201 $190 $145
-------------------------------------------------------------------------------------------------
</TABLE>
THE AMOUNTS LISTED IN THE EXAMPLE REFLECT THE DEDUCTION OF THE MAXIMUM INITIAL
SALES CHARGE, IF ANY, IMPOSED ON A DG FUND SHAREHOLDER. SHARES RECEIVED IN THE
EXCHANGE WILL NOT BE SUBJECT TO AN INITIAL SALES CHARGE. THE AMOUNTS LISTED IN
THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE INDICATED.
MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, EACH FUND'S ACTUAL
PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN GREATER OR LESS THAN
5%.
o Expense Reimbursement and Fee Waiver Arrangements:
As of May 1, 1998, DG Municipal Income Fund's 12b-1 Fees were not being paid or
accrued and a portion of its Management Fees were waived voluntarily resulting
in Total Fund Operating Expenses of .90%. ISG Municipal Income Portfolio's Total
Fund Operating Expenses for Class A Shares and Trust Shares will be capped at
.90% until May 1, 2000.
o Primary Portfolio Manager(s):
John Mark McKenzie has been the primary portfolio manager of DG Municipal Income
Fund since February 1997. He and Sharon S. Brown will be the primary portfolio
managers of ISG Municipal Income Portfolio. Mr. McKenzie is a Senior Vice
President of ParkSouth and has been employed by DG Bank since 1984. Ms. Brown
has been a Trust Officer of First American since 1988.
o Capitalization:
The following table sets forth as of June 30, 1998, (1) the capitalization of DG
Municipal Income Fund, (2) the capitalization of Class A Shares and Trust Shares
of ISG Municipal Income Portfolio and (3) the pro forma capitalization of Class
A Shares and Trust Shares of ISG Municipal Income Portfolio as adjusted showing
the effect of the Exchange had it occurred on such date.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
ISG Municipal DG Municipal Pro Forma
Income Portfolio Income Fund After Exchange
----------------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
--------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
Total Net Assets $0 $0 $53,888,170 $1,724,421 $52,163,748
Net Asset Value
per share $0 $0 $10.87 $10.87 $10.87
Shares Outstanding 0 0 4,956,051 158,594 4,797,457
----------------------------------------------------------------------------------------------------
</TABLE>
o Investment Considerations and Risks are substantially identical:
The principal risk of investing in DG Municipal Income Fund or ISG Municipal
Income Portfolio is that the market value of its securities (and hence, its
share price) may decline in response to an increase in interest rates. This
could cause a portfolio security to be worth less than the price originally paid
for it, or less than it was worth at an earlier time. The value of portfolio
securities also could decline if one or more rating agencies lowered its rating
of the issuing entities or if the financial condition of these entities
worsened. For a more complete discussion of investment considerations and risks,
see "Objective and Policies of Each Fund" in the DG Municipal Income Fund
Prospectus and "Description of the Portfolios--Investment Considerations and
Risk Factors" in the ISG Fund Prospectus.
PERTAINING TO SHARE OWNERSHIP
(AS OF SEPTEMBER 14, 1998)
o DG Municipal Income Fund Shares Outstanding: 5,034,499.918
o Entities known by DG Municipal Income Fund to own of record or beneficially
5% or more of its outstanding shares:
Percentage of
Class
Name and Number of Owned After
Address Shares Percentage Exchange
Houvis & Co. 4,860,027 96.53% 96.53%
First American National Bank
First American Center
300 Union Street
Nashville, TN 37237-0001
o Entities known by ISG Municipal Income Portfolio to own of record or
beneficially 5% or more of its outstanding Class A Shares or Trust Shares:
None
o The Company's Directors and officers, as a group, owned less than 1% of the
Class A Shares and Trust Shares of ISG Municipal Income Portfolio.
o The Trust's Trustees and officers, as a group, owned less than 1% of the
shares of DG Municipal Income Fund.
<PAGE>
DG OPPORTUNITY FUND
COMPARISON OF DG OPPORTUNITY FUND AND ISG SMALL CAP OPPORTUNITY PORTFOLIO
o Investment Objective is identical: Capital appreciation
o Management Policies are substantially identical:
-- Each Fund invests at least 65% of its total assets in equity
securities of companies with a market capitalization of less than $1
billion.
-- Womack Management employs a fundamental growth-oriented approach to
selecting portfolio securities for each Fund.
-- Each Fund may invest in common stocks, fixed-income securities,
foreign securities, American Depositary Receipts, bank obligations,
money market instruments and repurchase agreements.
-- Each Fund may engage in options and futures transactions and lending
portfolio securities.
-- DG Opportunity Fund may borrow money only for temporary or emergency
purposes. ISG Small Cap Opportunity Portfolio may borrow money for
investment purposes, but currently intends to borrow money only for
temporary or emergency purposes.
o Investment Restrictions are substantially similar:
Unless otherwise noted, each investment restriction listed below is a
fundamental policy, which cannot be changed without approval by the holders
of a majority (as defined in the 1940 Act) of the DG Opportunity Fund's or
ISG Small Cap Opportunity Portfolio's outstanding voting shares. Neither DG
Opportunity Fund nor ISG Small Cap Opportunity Portfolio may:
(1) 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.
(2) hold more than 10% of the outstanding voting securities of any
single issuer. With respect to ISG Small Cap Opportunity Portfolio, this
investment restriction applies only with respect to 75% of its total
assets.
(3) invest more than 25% of the value of its total assets in securities
of issuers in any single industry. This restriction does not apply to
the purchase of U.S. Government securities.
(4) sell securities short or purchase securities on margin, except as is
necessary for purchases and sales of portfolio securities. The ISG Small
Cap Opportunity Portfolio has no investment restriction on selling
securities short.
(5) issue senior securities, except to the extent certain options and
futures activities may be deemed to give rise to a senior security.
(6) borrow money, except the Fund may borrow up to 33-1/3% of value of
its total assets (DG Opportunity Fund may borrow only for temporary or
emergency purposes).
(7) invest in commodities, except for the purchase of options and
futures contracts.
(8) purchase or sell real estate, but the Fund may purchase or sell
securities secured by real estate. ISG Small Cap Opportunity Portfolio
also may invest in real estate investment trusts.
(9) make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, each Fund
may lend portfolio securities up to 33-1/3% of the value of its total
assets.
(10) act as an underwriter of securities of other issuers, except to the
extent the Fund may be deemed an underwriter by virtue of disposing of
portfolio securities.
(11) pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings (limited to the lesser of the
dollar amount borrowed or 15% of its total assets with respect to DG
Opportunity Fund) and to the extent related to the purchase of
securities on a when- issued basis and the deposit of assets in escrow
in connection with put and call options and collateral and margin
arrangements with respect to options and futures contracts. This
investment restriction is a non-fundamental policy of ISG Small Cap
Opportunity Portfolio and may be changed by the Company's Board members
at any time.
(12) invest more than 15% of its net assets in illiquid securities. This
investment restriction is a non- fundamental policy of both DG
Opportunity Fund and ISG Small Cap Opportunity Portfolio.
(13) purchase securities of other investment companies, except to the
extent permitted by, or pursuant to an exemption from, the 1940 Act.
This restriction is a non- fundamental policy of both DG Opportunity
Fund and ISG Small Cap Opportunity Portfolio.
In addition, as a non-fundamental policy, DG Opportunity Fund may not enter
into transactions for the purpose of engaging in arbitrage. ISG Small Cap
Opportunity Portfolio has no such restriction.
o Fees and Expenses:
The following information concerning fees and expenses is derived from
information set forth under the captions "Summary of Fund Expenses" and
"Investing in the Funds--What Shares Cost" in the DG Opportunity Fund Prospectus
and "Fee Table" and "How to Buy Shares--Purchase Price" in the ISG Fund
Prospectus. The expense information set forth below does not reflect any fee
waivers or expense reimbursement arrangements that may be or may have been in
effect.
SCHEDULE OF INITIAL SALES CHARGE:
Until May 1, 2000, DG Opportunity Fund shareholders who participate in
the Exchange and receive Class A Shares of ISG Small Cap Opportunity Portfolio
will be permitted to purchase Class A Shares of ISG Small Cap Opportunity
Portfolio subject to the lower initial sales charge, if any, applicable to the
amount of transaction set forth below for DG Opportunity Fund or ISG Small Cap
Opportunity Portfolio.
DG OPPORTUNITY FUND
- ------------------------------------------------------------------------------
TOTAL SALES LOAD
As a % of As a % of
Amount of Transaction Offering Price Net Asset Value
Less than $100,000..................... 3.50% 3.63%
$100,000 to less than $250,000......... 3.00% 3.09%
$250,000 to less than $500,000......... 2.50% 2.56%
$500,000 to less than $750,000......... 2.00% 2.04%
$750,000 to less than $1,000,000....... 1.50% 1.52%
$1,000,000 but less than $2,000,000 0.50% 0.50%
$2,000,000 or more..................... 0.25% 0.25%
- ------------------------------------------------------------------------------
ISG SMALL CAP OPPORTUNITY PORTFOLIO
CLASS A
- ------------------------------------------------------------------------------
TOTAL SALES LOAD
As a % of As a % of
Amount of Transaction Offering Price Net Asset Value
Less than $50,000................... 4.75% 4.99%
$50,000 to less than $100,000....... 4.00% 4.17%
$100,000 to less than $250,000...... 3.25% 3.36%
$250,000 to less than $500,000...... 2.50% 2.56%
$500,000 to less than $1,000,000.... 1.75% 1.78%
$1,000,000 or more*................. -0- -0-
- ------------------------------------------------------------------------------
- ----------------
* A contingent deferred sales charge 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.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
ISG Small Cap DG Opportunity Pro Forma
Opportunity Fund After Exchange
Portfolio*
-----------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
--------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
Management Fees .95% .95% .95% .95% .95%
12b-1 Fees .25% None .35%** .25% None
Other Expenses .38% .38% .38% .38% .38%
Total Fund
Operating Expenses 1.58% 1.33% 1.68%** 1.58% 1.33%
-----------------------------------------------------------------------------------------------
- ----------------
* ISG Small Cap Opportunity Portfolio has not yet commenced operations. It is
a newly-created fund that will continue the operations of DG Opportunity
Fund upon consummation of the Exchange. Other Expenses are based on
estimated amounts.
** Rule 12b-1 fees are not being paid or accrued by the DG Fund, and the Trust
has disclosed that such fees would not be paid until a separate class of
shares is created for certain institutional investors.
</TABLE>
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:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
ISG Small Cap DG Opportunity Pro Forma
Opportunity Fund After Exchange
Portfolio
-------------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
--------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $ 51 $ 14 $ 51 $ 51 $ 14
3 Years $ 83 $ 42 $ 86 $ 83 $ 42
5 Years $118 $ 73 $123 $118 $ 73
10 Years $216 $160 $227 $216 $160
-------------------------------------------------------------------------------------------------
</TABLE>
THE AMOUNTS LISTED IN THE EXAMPLE REFLECT THE DEDUCTION OF THE MAXIMUM INITIAL
SALES CHARGE, IF ANY, IMPOSED ON A DG FUND SHAREHOLDER. SHARES RECEIVED IN THE
EXCHANGE WILL NOT BE SUBJECT TO AN INITIAL SALES CHARGE. THE AMOUNTS LISTED IN
THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE INDICATED.
MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, EACH FUND'S ACTUAL
PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN GREATER OR LESS THAN
5%.
o Expense Reimbursement and Fee Waiver Arrangements:
As of May 1, 1998, DG Opportunity Fund's 12b-1 Fees were not being paid or
accrued resulting in Total Fund Operating Expenses of 1.33%. ISG Small Cap
Opportunity Portfolio's Total Fund Operating Expenses for Class A Shares and
Trust Shares will be capped at 1.33% until May 1, 2000.
o Primary Portfolio Manager(s):
William A. Womack has been the primary portfolio manager of DG Opportunity Fund
since February 1997. He will be the primary portfolio manager of ISG Small Cap
Opportunity Portfolio. Mr. Womack formed Womack Management in February 1997. For
more than five years prior thereto, he was a Senior Vice President and Trust
Officer of DG Bank.
o Capitalization:
The following table sets forth as of June 30, 1998, (1) the capitalization of DG
Opportunity Fund, (2) the capitalization of Class A Shares and Trust Shares of
ISG Small Cap Opportunity Portfolio and (3) the pro forma capitalization of
Class A Shares and Trust Shares of ISG Small Cap Opportunity Portfolio as
adjusted showing the effect of the Exchange had it occurred on such date.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
ISG Small Cap DG Opportunity Pro Forma
Opportunity Fund After Exchange
Portfolio
-----------------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
--------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
Total Net Assets $0 $0 $114,719,651 $11,471,965 $103,247,686
Net Asset Value
per share $0 $0 $13.99 $13.99 $13.99
Shares Outstanding 0 0 8,198,325 819,832 7,378,492
-----------------------------------------------------------------------------------------------------
</TABLE>
o Investment Considerations and Risks are substantially identical:
The principal risk of investing in DG Opportunity Fund or ISG Small Cap
Opportunity Portfolio is that the market value of its securities (and hence, its
share price) may decline, sometimes rapidly and unpredictably. Such market risk
may affect a single issuer, industry, sector of the economy or the market as a
whole. Each Fund may purchase the securities of smaller companies the prices of
which may be subject to more abrupt or erratic market movements than larger,
more established companies. Investments in foreign securities may involve
liquidity and/or currency risks. Under certain market conditions, options and
futures can increase the volatility of the Fund's net asset value, decrease the
liquidity of the Fund's portfolio and make more difficult the accurate pricing
of the Fund's portfolio. For a more complete discussion of investment
considerations and risks, see "Objective and Policies of Each Fund" in the DG
Opportunity Fund Prospectus and "Description of the Portfolios--Investment
Considerations and Risk Factors" in the ISG Fund Prospectus.
PERTAINING TO SHARE OWNERSHIP
(AS OF SEPTEMBER 14, 1998)
o DG Opportunity Fund Shares Outstanding: 8,490,267.360
o Entities known by DG Opportunity Fund to own of record or beneficially 5%
or more of its outstanding shares:
Percentage of
Class
Name and Number of Owned After
Address Shares Percentage Exchange
Houvis & Co. 4,222,445 49.37% 49.37%
First American National Bank
Attn.: Income Processing
800 First American Center
Nashville, TN 37237-0001
Houvis & Co. 2,876,820 33.88% 33.88%
First American National Bank
First American Center
300 Union Street
Nashville, TN 37237-0001
o Entities known by ISG Small Cap Opportunity Portfolio to own
of record or beneficially 5% or more of its outstanding Class
A Shares or Trust Shares: None
o The Company's Directors and officers, as a group, owned less than 1% of the
Class A Shares and Trust Shares of ISG Small Cap Opportunity Portfolio.
o The Trust's Trustees and officers, as a group, owned less than 1% of the
shares of DG Opportunity Fund.
<PAGE>
DG PRIME MONEY MARKET FUND
COMPARISON OF DG PRIME MONEY MARKET FUND AND ISG PRIME MONEY MARKET PORTFOLIO
o Investment Objective is substantially identical: DG Prime Money Market Fund
seeks to provide investors with current income consistent with stability of
principal. ISG 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.
o Management Policies are substantially similar:
-- Each Fund seeks to maintain a net asset value of $1.00 per share for
purchases and redemptions. To do so, each Fund 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.
There can be no assurance that either Fund will be able to maintain a
stable net asset value of $1.00 per share.
-- Each Fund invests in U.S. dollar denominated high quality 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 and
foreign banks) which are either rated in the highest short term rating
category or are of comparable quality.
-- DG Prime Money Market Fund may invest 25% or more of its total assets in
commercial paper issued by finance companies and may invest 25% or more of
its total assets in instruments issued by a U.S. branch of a domestic bank
or savings association meeting certain requirements. ISG Prime Money Market
Portfolio invests 25% or more of its total assets in securities issued by
banks.
-- Each Fund may invest in loan participation agreements, asset-backed
securities, high quality domestic and foreign commercial paper, other high
quality short term corporate obligations, such as floating or variable rate
demand notes and bonds, and repurchase agreements. ISG Prime Money Market
Portfolio also may invest in guaranteed investment contracts issued by
highly rated U.S. insurance companies.
-- Each Fund may engage in lending portfolio securities.
-- DG Prime Money Market Fund may borrow money only for temporary or
emergency purposes. ISG Prime Money Market Portfolio may borrow money for
investment purposes, but currently intends to borrow money only for
temporary or emergency purposes.
o Investment Restrictions are substantially similar:
Unless otherwise noted, each investment restriction listed below is a
fundamental policy, which cannot be changed without approval by the holders
of a majority (as defined in the 1940 Act) of the DG Prime Money Market
Fund's or ISG Prime Money Market Portfolio's outstanding voting shares.
Neither DG Prime Money Market Fund nor ISG Prime Money Market Portfolio
may:
(1) 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.
(2) with respect to 75% of its total assets, hold more than 10% of the
outstanding voting securities of any single issuer.
(3) invest more than 25% of its total assets in the securities of
issuers in any one industry, except that DG Prime Money Market Fund may
invest 25% or more of its total assets in commercial paper issued by
finance companies and may invest 25% or more of its total assets in
instruments issued by a U.S. branch of a domestic bank or savings
association meeting certain requirements, and ISG Prime Money Market
Portfolio will invest 25% or more of its total assets in securities
issued by banks. This investment restriction does not apply to the
purchase of U.S. Government securities.
(4) sell securities short or purchase securities on margin, but may
obtain such short-term credits as are necessary for the clearance of
transactions.
(5) issue senior securities.
(6) borrow money, except the Fund may borrow up to 33-1/3% of the value
of its total assets (DG Prime Money Market Fund may borrow only for
temporary or emergency purposes).
(7) pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings. This investment restriction is
a non-fundamental policy of ISG Prime Money Market Portfolio and may be
changed by vote of a majority of the Company's Board members at any
time.
(8) make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. Each Fund may lend
portfolio securities up to 33-1/3% of the value of its total assets.
(9) invest in commodities.
(10) act as an underwriter of securities of other issuers, except to the
extent the Fund may be deemed an underwriter by virtue of disposing of
portfolio securities.
(11) invest more than 10% of its net assets in illiquid securities. This
investment restriction is a non- fundamental policy of both DG Prime
Money Market Fund and ISG Prime Money Market Portfolio.
(12) purchase securities of other investment companies, except to the
extent permitted by, or pursuant to an exemption from, the 1940 Act.
This investment restriction is a non-fundamental policy of both DG Prime
Money Market Fund and ISG Prime Money Market Portfolio.
(13) invest in the securities of a company for the purpose of exercising
management or control. This investment restriction is a non-fundamental
policy of both DG Prime Money Market Fund and ISG Prime Money Market
Portfolio.
(14) invest in puts, calls or combinations thereof. This investment
restriction is a non-fundamental policy of both DG Prime Money Market
Fund and ISG Prime Money Market Portfolio.
In addition, as a fundamental policy, ISG Prime Money Market Portfolio may
not purchase, hold or deal in real estate, or oil, gas or other mineral
leases or exploration or development programs. DG Prime Money Market Fund
has no such investment restriction, but currently has no intention of
investing in real estate or oil and gas.
o Fees and Expenses:
The following information concerning fees and expenses is derived from
information set forth under the captions "Summary of Fund Expenses" in the DG
Prime Money Market Fund Prospectus and "Annual Operating Expenses" in the ISG
Fund Prospectus. The expense information set forth below does not reflect any
fee waivers or expense reimbursement arrangements that may be or may
have been in effect.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
ISG Prime Money Market DG Prime Money Pro Forma
Portfolio Market Fund After Exchange
-----------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
--------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
Management Fees .25% .25% .50% .25% .25%
12b-1 Fees none none .25% none none
Other Expenses .62% .37% .26%* .62% .37%
Total Fund
Operating Expenses .87% .62% 1.01%* .87% .62%
-----------------------------------------------------------------------------------------------
- ---------
* The DG Fund currently is not paying or accruing fees under its Shareholder
Services Plan.
</TABLE>
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:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
ISG Prime
Money Market DG Prime Money Pro Forma
Portfolio Market Fund After Exchange
-------------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
--------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $ 9 $ 6 $ 10 $ 9 $ 6
3 Years $ 28 $ 20 $ 32 $ 28 $ 20
5 Years $ 48 $ 35 $ 56 $ 48 $ 35
10 Years $107 $ 77 $124 $107 $ 77
-------------------------------------------------------------------------------------------------
</TABLE>
THE AMOUNTS LISTED IN THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF
PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
INDICATED. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, EACH FUND'S
ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN GREATER OR LESS
THAN 5%.
o Expense Reimbursement and Fee Waiver Arrangements:
As of May 1, 1998, a portion of DG Prime Money Market Fund's Management Fees and
Other Expenses (including Shareholder Services Plan fees of .15%) were waived
voluntarily resulting in Total Fund Operating Expenses of .66%. ISG Prime Money
Market Portfolio's Total Fund Operating Expenses for Class A Shares and Trust
Shares will be capped at .66% until May 1, 2000.
o Capitalization:
The following table sets forth as of June 30, 1998, (1) the capitalization of DG
Prime Money Market Fund, (2) the capitalization of the Class A Shares and Trust
Shares of ISG Prime Money Market Portfolio and (3) the pro forma capitalization
of the Class A Shares and Trust Shares of ISG Prime Money Market Portfolio as
adjusted showing the effect of the Exchange had it occurred on such date.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
ISG Prime DG Prime Pro Forma
Money Market Portfolio Money Market After Exchange
Fund
-----------------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
-------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
Total Net Assets $107,989,421 $55,716,106 $216,007,435 $110,149,495 $269,563,467
Net Asset Value
per share $1.00 $1.00 $1.00 $1.00 $1.00
Shares Outstanding 107,991,769 55,717,185 216,007,435 110,151,843 269,564,546
----------------------------------------------------------------------------------------------------
</TABLE>
o Investment Considerations and Risks are substantially identical:
The principal risk of investing in DG Prime Money Market Fund or ISG Prime Money
Market Portfolio is that the market value of its securities may decline in
response to an increase in interest rates. This could cause a portfolio security
to be worth less than the price originally paid for it, or less than it was
worth at an earlier time. However, if the security is held to maturity, no loss
would be realized. In addition, to the extent the Fund's investments are
concentrated in the banking industry or, in the case of DG Prime Money Market
Fund, finance companies, the Fund will have correspondingly greater exposure to
the risk factors affecting such investments. Sustained increases in interest
rates can adversely affect the availability or liquidity and cost of capital
funds for finance companies' and banks' lending activities, and a deterioration
in general economic conditions could increase the exposure to credit losses. For
a more complete discussion of investment considerations and risks, see
"Objective and Policies of Each Fund" in the DG Prime Money Market Fund
Prospectus and "Description of the Portfolios-- Investment Considerations and
Risk Factors" in the ISG Fund Prospectus.
PERTAINING TO SHARE OWNERSHIP
(AS OF SEPTEMBER 14, 1998)
o DG Prime Money Market Fund Shares Outstanding: 217,953,930.22
o Entities known by DG Prime Money Market Fund to own of record or
beneficially 5% or more of its outstanding shares:
Percentage of
Class
Name and Number of Owned After
Address Shares Percentage Exchange
National Financial 216,388,747 99.37% 78.47%
(for the exclusive benefit
of our customers)
P.O. Box 3752
Church Street Station
New York, NY 10008-3750
o Entities known by ISG Prime Money Market Portfolio to own of record or
beneficially 5% or more of its outstanding Class A Shares or Trust Shares:
Percentage of
Class
Name and Number of Owned After
Address Shares Percentage Exchange
First American National Bank
Attn: AmeriStar Investment
Management & Trust 69,476,952 Trust 99.99% 95.51%
800 First American Center Shares
Nashville, TN 37237
o The Company's Directors and officers, as a group, owned less than 1% of the
Class A Shares and Trust Shares of ISG Prime Money Market Portfolio.
o The Trust's Trustees and officers, as a group, owned less than 1% of the
shares of DG Prime Money Market Fund.
<PAGE>
DG TREASURY MONEY MARKET FUND
COMPARISON OF DG TREASURY MONEY MARKET FUND AND ISG U.S. TREASURY MONEY MARKET
PORTFOLIO
o Investment Objective is substantially identical: DG Treasury Money Market
Fund seeks to provide investors with current income consistent with
stability of principal and liquidity. ISG 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.
o Management Policies are substantially similar:
-- Each Fund seeks to maintain a net asset value of $1.00 per share for
purchases and redemptions. To do so, each Fund uses the amortized cost
method of valuing its securities pursuant to Rule 2a-7 under the 1940
Act, which includes various maturity and diversification requirements.
There can be no assurance that either Fund will be able to maintain a
stable net asset value of $1.00 per share.
-- Each Fund invests primarily in U.S. Treasury securities and
repurchase agreements in respect thereof.
-- Each Fund may engage in lending portfolio securities.
-- DG Treasury Money Market Fund may borrow money only for temporary or
emergency purposes. ISG U.S. Treasury Money Market Portfolio may borrow
money for investment purposes, but currently intends to borrow money
only for temporary or emergency purposes.
o Investment Restrictions are substantially similar:
Unless otherwise noted, each investment restriction listed below is a
fundamental policy, which cannot be changed without approval by the holders
of a majority (as defined in the 1940 Act) of the DG Treasury Money Market
Fund's or ISG U.S. Treasury Money Market Portfolio's outstanding voting
shares. Neither DG Treasury Money Market Fund nor ISG U.S. Treasury Money
Market Portfolio may:
(1) sell securities short or purchase securities on margin, but may
obtain such short-term credits as are necessary for the clearance of
transactions.
(2) issue senior securities.
(3) borrow money, except the Fund may borrow up to 33-1/3% of the value
of its total assets (DG Treasury Money Market Fund may borrow only for
temporary or emergency purposes).
(4) pledge, mortgage or hypothecate its assets, except, with respect to
ISG U.S. Treasury Money Market Portfolio, to the extent necessary to
secure permitted borrowings or, with respect to DG Treasury Money Market
Fund, in an amount up to 15% of its total assets. This investment
restriction is a non-fundamental policy of ISG U.S. Treasury Money
Market Portfolio and may be changed by vote of a majority of the
Company's Board members at any time.
(5) make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. Each Fund may lend
portfolio securities up to 33-1/3% of the value of its total assets.
(6) invest in commodities.
(7) purchase or sell real estate, including, with respect to DG Treasury
Money Market Fund, limited partnership interests in real estate,
although the Fund may invest in securities secured by real estate or
interests in real estate.
(8) act as an underwriter of securities of other issuers, except to the
extent the Fund may be deemed an underwriter by virtue of disposing of
portfolio securities.
(9) invest more than 10% of its net assets in illiquid securities. This
investment restriction is a non- fundamental policy of both DG Treasury
Money Market Fund and ISG U.S. Treasury Money Market Portfolio.
(10) purchase securities of other investment companies, except to the
extent permitted by, or pursuant to an exemption from, the 1940 Act.
This investment restriction is a non-fundamental policy of both DG
Treasury Money Market Fund and ISG U.S. Treasury Money Market Portfolio.
(11) invest in puts, calls or combinations thereof. This investment
restriction is a non-fundamental policy of both DG Treasury Money Market
Fund and ISG U.S. Treasury Money Market Portfolio.
In addition, as a fundamental policy, ISG U.S. Treasury Money Market
Portfolio may not invest more than 25% of its total assets in the
securities of issuers in any one industry. This investment restriction does
not apply to the purchase of U.S. government securities. As a
non-fundamental policy, ISG U.S. Treasury Money Market Portfolio may not
invest in securities of a company for the purpose of exercising management
or control. DG Treasury Money Market Fund has neither of these investment
restrictions, but currently has no intention of investing more than 25% of
its total assets in any one industry or investing for the purpose of
exercising management or control.
o Fees and Expenses:
The following information concerning fees and expenses is derived from
information set forth under the captions "Summary of Fund Expenses" in the DG
Treasury Money Market Fund Prospectus and "Annual Operating Expenses" in the ISG
Fund Prospectus. The expense information set forth below does not reflect any
fee waivers or expense reimbursement arrangements that may be or may have been
in effect.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
ISG U.S. Treasury DG Treasury
Money Market Portfolio Money Market Pro Forma
Fund After Exchange
-----------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
--------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
Management Fees .25% .25% .50% .25% .25%
12b-1 Fees none none .25%* none none
Other Expenses .50% .25% .30% .50% .25%
Total Fund
Operating Expenses .75% .50% 1.05%* .75% .50%
-----------------------------------------------------------------------------------------------
- --------------
* Rule 12b-1 fees are not being paid or accrued by the DG Fund, and the Trust
has disclosed that such fees would not be paid until a separate class of
shares is created for certain institutional investors.
</TABLE>
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:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
ISG U.S. Treasury DG Treasury
Money Market Portfolio Money Market Pro Forma
Fund After Exchange
-------------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
--------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
1 Year $ 8 $ 5 $ 11 $ 8 $ 5
3 Years $ 24 $ 16 $ 33 $ 24 $ 16
5 Years $ 42 $ 28 $ 58 $ 42 $ 28
10 Years $ 93 $ 63 $128 $ 93 $ 63
-------------------------------------------------------------------------------------------------
</TABLE>
THE AMOUNTS LISTED IN THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF
PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
INDICATED. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, EACH FUND'S
ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN GREATER OR LESS
THAN 5%.
o Expense Reimbursement and Fee Waiver Arrangements:
As of May 1, 1998, DG Treasury Money Market Fund's 12b-1 Fees were not being
paid or accrued and a portion of its Management Fees were waived voluntarily
resulting in Total Fund Operating Expenses of .60%. ISG U.S. Treasury Money
Market Portfolio's Total Fund Operating Expenses for Class A Shares and Trust
Shares will be capped at .60% until May 1, 2000.
o Capitalization:
The following table sets forth as of June 30, 1998 (1) the capitalization of DG
Treasury Money Market Fund, (2) the capitalization of the Class A Shares and
Trust Shares of ISG U.S. Treasury Money Market Portfolio and (3) the pro forma
capitalization of the Class A Shares and Trust Shares of ISG U.S. Treasury Money
Market Portfolio as adjusted showing the effect of the Exchange had it occurred
on such date.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
ISG U.S. TREASURY MONEY DG TREASURY
MARKET PORTFOLIO MONEY MARKET PRO FORMA
FUND AFTER EXCHANGE
----------------------------------------------------------------------------------------------------
CLASS A TRUST SHARES CLASS A TRUST SHARES
------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
Total Net Assets $82,829,141 $85,625,007 $313,449,480 $89,098,131 $392,805,497
Net Asset Value
per share $1.00 $1.00 $1.00 $1.00 $1.00
Shares Outstanding 82,829,141 85,625,007 313,449,480 89,098,131 392,805,497
----------------------------------------------------------------------------------------------------
</TABLE>
o Investment Considerations and Risks are substantially identical:
The principal risk of investing in DG Treasury Money Market Fund or ISG U.S.
Treasury Money Market Portfolio is that the market value of its securities may
decline in response to an increase in interest rates. This could cause a
portfolio security to be worth less than the price originally paid for it, or
less than it was worth at an earlier time. However, if the security is held to
maturity, no loss would be realized. The value of U.S. Treasury securities also
will be affected by the supply and demand, as well as the perceived supply and
demand, for such securities. For a more complete discussion of investment
considerations and risks, see "Objective and Policies of Each Fund" in the DG
Treasury Money Market Fund Prospectus and "Description of the Portfolios" in the
ISG Fund Prospectus.
PERTAINING TO SHARE OWNERSHIP
(AS OF SEPTEMBER 14, 1998)
o DG Treasury Money Market Fund Shares Outstanding: 314,014,084.86
1 Entities known by DG Treasury Money Market Fund to own of record or
beneficially 5% or more of its outstanding shares:
Percentage of
Class
Name and Number of Owned After
Address Shares Percentage Exchange
Houvis & Co. 219,562,039 69.92% 55.61%
First American National Bank
First American Center
300 Union Street
Nashville, TN 37237-0001
The Bank of New York 78,046,765 24.85% 19.77%
Attn.: Peter Chan
2nd Floor
One Wall Street
New York, NY 10005-2500
o Entities known by ISG U.S. Treasury Money Market Portfolio to own of record
or beneficially 5% or more of its outstanding Class A Shares or Trust
Shares:
Percentage of
Class
Name and Number of Owned After
Address Shares Percentage Exchange
First American National Bank
Attn: AmeriStar Investment
Management & Trust 63,194,388 62.99% 58.08%
800 First American Center Class A Shares
Nashville, TN 37237
Hare & Co.
c/o Bank of New York
Attn: Stif/Master Note 30,629,533 30.53% 28.15%
2nd Floor Class A Shares
One Wall Street
New York, NY 10286
First American National Bank
Attn: AmeriStar Investment
Management & Trust 89,306,319 Trust 99.99% 22.61%
800 First American Center Shares
Nashville, TN 37237
o The Company's Directors and officers, as a group, owned less than 1% of the
Class A Shares and Trust Shares of ISG U.S. Treasury Money Market
Portfolio.
o The Trust's Trustees and officers, as a group, owned less than 1% of the
shares of DG Treasury Money Market Fund.
APPENDIX B
DIRECTORS OF THE ISG FUNDS
Directors of the Company, 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 Company, as defined in
the 1940 Act, is indicated by an asterisk.
*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.
<PAGE>
APPENDIX C
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION dated as of ___________, 1998
(the "Agreement"), between DG INVESTOR SERIES, a Massachusetts business trust
(the "Trust"), on behalf of its ____1____ (the "Acquired Fund"), and THE
INFINITY MUTUAL FUNDS, INC., a Maryland corporation (the "Company"), on behalf
of its ____2____ (the "Acquiring Fund"). All agreements, representations,
actions and obligations described herein that are made or to be taken or
undertaken by the Acquired Fund are made and shall be taken or undertaken by the
Trust on behalf of the Acquired Fund. All agreements, representations, actions
and obligations described herein that are made or to be taken or undertaken by
the Acquiring Fund are made and shall be taken or undertaken by the Company on
behalf of the Acquiring Fund.
WHEREAS, the Trust and the Company wish to effect a reorganization,
which will consist of the transfer of all of the assets of the Acquired Fund to
the Acquiring Fund in exchange solely for Class A Shares and Trust Shares of
common stock, par value $.001 per share, of the Acquiring Fund (the "Acquiring
Fund Shares") and the assumption by the Acquiring Fund of certain liabilities of
the Acquired Fund and the distribution of the Acquiring Fund Shares to the
shareholders of the Acquired Fund in liquidation of the Acquired Fund as
provided herein (the "Reorganization"), all upon the terms and conditions
hereinafter set forth in this Agreement;
WHEREAS, the Trust and the Company intend this Agreement to be a plan
of reorganization and liquidation within the meaning of Section 368(a)(1)
____(3)____ of the United States Internal Revenue Code of 1986, as amended (the
"Code");
- --------
1 Insert DG Equity Fund, DG Government Income Fund, DG International
Equity Fund, DG Limited Term Government Income Fund, DG Municipal
Income Fund, DG Opportunity Fund, DG Prime Money Market Fund or DG
Treasury Money Market Fund, as appropriate.
2 Insert ISG Large Cap Equity Portfolio, ISG Government Income
Portfolio, ISG International Equity Portfolio, ISG Limited Duration
U.S. Government Portfolio, ISG Municipal Income Portfolio, ISG Small
Cap Opportunity Portfolio, ISG Prime Money Market Portfolio or ISG
U.S. Treasury Money Market Portfolio, as appropriate.
3 Insert D with respect to Pre-Existing ISG Funds, or F with respect to
each other ISG Fund.
WHEREAS, the Acquired Fund and the Acquiring Fund are registered,
open-end management investment companies, and the Acquired Fund owns securities
which are assets of the character in which the Acquiring Fund is permitted to
invest;
WHEREAS, the Acquiring Fund and the Acquired Fund are authorized to
issue their respective shares of common stock and beneficial interest,
respectively;
WHEREAS, Acquired Fund shareholders who hold Acquired Fund shares
through a qualified trust, custody or agency accounts at Deposit Guaranty
National Bank or affiliated and correspondent banks of Deposit Guaranty National
Bank or certain other affiliated and non-affiliated institutions will receive
Trust Shares of the Acquiring Fund and all other Acquired Fund shareholders will
receive Class A Shares of the Acquiring Fund;
WHEREAS, First American National Bank has agreed to bear the costs
incurred in connection with the Reorganization;
WHEREAS, the Board of the Company has determined that the exchange of
all of the assets of the Acquired Fund for Acquiring Fund Shares, and the
assumption of the Acquired Fund's liabilities by the Acquiring Fund is in the
best interests of the Acquiring Fund and its shareholders and that the interests
of the Acquiring Fund's existing shareholders would not be diluted as a result
of this transaction; and
WHEREAS, the Board of the Trust has determined that the exchange of
all of the assets of the Acquired Fund for Acquiring Fund Shares, and the
assumption of the Acquired Fund's liabilities by the Acquiring Fund is in the
best interests of the Acquired Fund and its shareholders and that the interests
of the Acquired Fund's existing shareholders would not be diluted as a result of
this transaction:
NOW THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR THE ACQUIRING
FUND SHARES AND ASSUMPTION OF ACQUIRED FUND LIABILITIES AND
LIQUIDATION OF THE ACQUIRED FUND.
1.1. Subject to the requisite approval of the shareholders of the
Acquired Fund and to the other terms and conditions contained herein:
(a) The Acquired Fund agrees to assign, transfer and convey to
the Acquiring Fund at the Closing (as defined and provided for in paragraph 3.1)
all of the Assets of the Acquired Fund (as defined in paragraph 1.2).
(b) The Acquiring Fund agrees in exchange therefor at the Closing
(i) to issue and deliver to the Acquired Fund the number of Acquiring Fund
Shares, including fractional Acquiring Fund Shares, determined as set forth in
paragraph 2.3; and (ii) to assume certain liabilities of the Acquired Fund, as
set forth in paragraph 1.3. In lieu of delivering certificates for the Acquiring
Fund Shares, the Acquiring Fund shall credit the Acquiring Fund Shares to the
Acquired Fund's account on the books of the Acquiring Fund and shall deliver a
confirmation thereof to the Acquired Fund.
1.2. (a) The assets of the Acquired Fund to be acquired by the
Acquiring Fund (the "Assets") shall consist of all property, including, without
limitation, all securities, cash, cash equivalents, commodities and futures
interest, dividend and interest receivables, claims and rights of action that
are owned by the Acquired Fund, any deferred or pre-paid expenses shown as
assets on the books of the Acquired Fund, on the Closing Date (as defined in
paragraph 3.1), and all books and records of the Acquired Fund. The Assets shall
be invested at all times through the Closing in a manner that insures compliance
with paragraph 4.1(j).
(b) The Acquired Fund has provided the Acquiring Fund with a list
of all of its property, including all of the Assets, as of the date of the
execution of this Agreement. The Acquired Fund reserves the right to sell any of
these assets prior to the Closing Date. The Acquiring Fund will, within a
reasonable time prior to the Closing Date, furnish the Acquired Fund with a list
of any assets on such list that do not conform to the Acquiring Fund's
investment objective, policies and restrictions or that the Acquiring Fund
otherwise does not desire to hold. The Acquired Fund will dispose of such assets
prior to the Closing Date to the extent practicable and to the extent the
Acquired Fund would not be affected adversely by such a disposition. In
addition, if it is determined that the portfolios of the Acquired Fund and the
Acquiring Fund, when aggregated, would contain investments exceeding certain
percentage limitations imposed upon the Acquiring Fund with respect to such
investments, the Acquired Fund, if requested to do so by the Acquiring Fund,
will dispose of and/or reinvest a sufficient amount of such investments as may
be necessary to avoid violating such limitations as of the Closing Date.
1.3. The Acquired Fund will endeavor to discharge all of its known
liabilities and obligations prior to the Closing Date. At the Closing, the
Acquiring Fund shall assume all known liabilities, debts, obligations, expenses,
costs, charges and reserves reflected in the calculation of the Acquired Fund's
net asset value and set forth on an unaudited statement of assets and
liabilities of the Acquired Fund prepared by the Acquired Fund's administrator,
as of the Valuation Time (as defined in paragraph 2.1), in accordance with
generally accepted accounting principles consistently applied from the prior
audited period (the "Liabilities"). The Acquiring Fund shall assume only those
liabilities of the Acquired Fund reflected in that unaudited statement of assets
and liabilities and shall not assume any other liabilities, whether absolute or
contingent.
1.4. The Acquired Fund shall deliver the Assets at the Closing to The
Bank of New York, 90 Washington Street, New York, New York 10286, the Acquiring
Fund's custodian (the "Custodian"), for the account of the Acquiring Fund, with
all securities not in bearer or book-entry form duly endorsed, or accompanied by
duly executed separate assignments or stock powers, in proper form for transfer,
with signatures guaranteed, and with all necessary stock transfer stamps,
sufficient to transfer good and marketable title thereto (including all accrued
interest and dividends and rights pertaining thereto) to the Custodian for the
account of the Acquiring Fund free and clear of (other than the Liabilities) all
liens, encumbrances, rights, restrictions and claims. All cash delivered shall
be in the form of immediately available funds payable to the order of the
Custodian for the account of the Acquiring Fund.
1.5. The Acquired Fund will pay or transfer or cause to be paid or
transferred to the Acquiring Fund any dividends, interest, distributions, rights
or other assets received by the Acquired Fund on or after the Closing Date as
distributions on or with respect to any of the Assets. Any such dividends,
interest, distributions, rights, or other assets so paid or transferred, or
received directly by the Acquired Fund, shall be allocated by the Acquired Fund
to the account of the Acquiring Fund, and shall be deemed included in the Assets
transferred to the Acquiring Fund on the Closing Date and shall not be
separately valued.
1.6. As soon after the Closing Date as is conveniently practicable
(the "Liquidation Date"), the Acquired Fund will liquidate and distribute pro
rata to the Acquired Fund's shareholders of record, determined as of the
Valuation Time (the "Acquired Fund Shareholders"), the Acquiring Fund Shares
received by the Acquired Fund pursuant to paragraph 1.1. Such liquidation and
distribution will be accomplished by transferring the applicable Acquiring Fund
Shares then credited to the account of the Acquired Fund on the books of the
Acquiring Fund to open accounts on the share records of the Acquiring Fund in
the names of the Acquired Fund Shareholders and representing the respective pro
rata number of the applicable full and fractional Acquiring Fund Shares due such
shareholders. All issued and outstanding shares of the Acquired Fund
simultaneously will be canceled on the books of the Acquired Fund.
1.7. Ownership of Acquiring Fund Shares will be shown on the books of
the Acquiring Fund's transfer agent. Shares of the Acquiring Fund will be issued
in the manner described in the Acquiring Fund's current prospectus and statement
of additional information, which are and shall be consistent with the policies
currently in effect for the Acquired Fund.
1.8. Any transfer taxes payable upon issuance of the Acquiring Fund
Shares in a name other than the registered holder of the Acquired Fund shares on
the books of the Acquired Fund as of that time shall, as a condition of such
issuance and transfer, be paid by the person to whom such Acquiring Fund Shares
are to be issued and transferred.
1.9. Any reporting responsibility of the Acquired Fund is and shall
remain the responsibility of the Acquired Fund up to and including the Closing
Date and such later date on which the Acquired Fund's existence is terminated.
2. VALUATION.
2.1. The value of the Assets and the amount of the Liabilities to be
acquired by the Acquiring Fund hereunder shall each be computed as of the close
of trading on the floor of the New York Stock Exchange (currently, 4:00 p.m.,
New York time), except that any options and futures contracts will be valued 15
minutes after the close of trading on the floor of the New York Stock Exchange,
on the Closing Date (such time and date being hereinafter called the "Valuation
Time"), using the valuation procedures set forth in the Company's Articles of
Incorporation, as the same may have been amended (the "Company's Charter"), and
the Acquiring Fund's then-current prospectus or statement of additional
information, which are and shall be consistent with the policies currently in
effect for the Acquired Fund.
2.2. The net asset value of an Acquiring Fund Share shall be the net
asset value per share computed as of the Valuation Time, using the valuation
procedures set forth in the Company's Charter and the Acquiring Fund's
then-current prospectus or statement of additional information, which are and
shall be consistent with the policies currently in effect for the Acquired Fund.
[APPLICABLE ONLY WITH RESPECT TO THE MONEY MARKET FUNDS] The value of
the Acquired Fund's assets and the value of the Acquiring Fund Shares for
purposes of sales and redemptions shall be based on the amortized cost valuation
procedures that have been adopted by the Board of the Trust and the Company,
respectively. Any provision in this Agreement to the contrary notwithstanding,
if the difference between the per share net asset values of the Acquired Fund
and the Acquiring Fund equals or exceeds $.0025 at the Valuation Time, as
computed by using such market values in accordance with the policies and
procedures established by the Company (or as otherwise mutually determined by
the Board of the Trust and the Company), either the Board of the Trust or of the
Company shall have the right to postpone the Valuation Time until such time as
the per share difference is less than $.0025.
2.3. The number of Acquiring Fund Shares to be issued (including
fractional shares, if any) in exchange for the Assets shall be determined by
dividing the value of the Assets minus the Liabilities determined using the same
valuation procedures referred to in paragraph 2.1 by the net asset value of one
Acquiring Fund Share determined in accordance with paragraph 2.2.
2.4. All computations and calculations of value shall be made in
accordance with the regular practices of the Acquiring Fund.
3. CLOSING AND CLOSING DATE.
3.1. The exchange of the Assets and Liabilities of the Acquired Fund
for Acquiring Fund Shares according to the terms of this Agreement (the
"Closing") shall occur ____________, 1998 or at such later date as the parties
may mutually agree (the "Closing Date"). All acts taking place at the Closing
shall be deemed to take place simultaneously as of the close of business on the
Closing Date unless otherwise provided. The Closing shall be held at _:__ p.m.,
Eastern time, at the offices of ________________________, or such other time
and/or place as the parties may mutually agree.
3.2. The Custodian shall deliver at the Closing a certificate of an
authorized officer stating that the Acquired Fund's portfolio securities, cash
and any other assets have been presented for examination to the Acquiring Fund
prior to the Closing Date and have been delivered in proper form to the
Acquiring Fund.
3.3. If at the Valuation Time (a) the New York Stock Exchange or
another primary trading market for portfolio securities of either party shall be
closed to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of either party is
impracticable, the Closing Date shall be postponed until the first business day
after the day when trading shall have been fully resumed and reporting shall
have been restored.
3.4. The transfer agent for the Acquired Fund shall deliver at the
Closing a certificate of an authorized officer stating that its records contain
the names and addresses of the Acquired Fund Shareholders and the number and
percentage ownership of outstanding shares of the Acquired Fund owned by each
such Shareholder immediately prior to the Closing. The Acquiring Fund shall
issue and deliver a confirmation evidencing the Acquiring Fund Shares to be
credited on the Closing Date to the Secretary of the Acquired Fund, or provide
evidence satisfactory to the Acquired Fund that such Acquiring Fund Shares have
been credited to the Acquired Fund's account on the books of the Acquiring Fund.
At the Closing, each party shall deliver to the other such bills of sale,
checks, assignments, receipts or other documents as such other party or its
counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES.
4.1. The Trust, on behalf of the Acquired Fund, represents and
warrants to the Company, on behalf of the Acquiring Fund, as follows:
(a) The Acquired Fund is a series of the Trust, a business trust
duly organized and validly existing and in good standing under the laws of The
Commonwealth of Massachusetts, and has power to own all of its properties and
assets and to carry out this Agreement.
(b) The Trust is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment company,
of which the Acquired Fund is a separate ____4____ portfolio, and such
registration has not been revoked or rescinded and is in full force and effect.
- --------
4 Insert diversified for all DG Funds, except DG International Equity
Fund. Insert non-diversified for DG International Equity Fund.
(c) The current prospectus and statement of additional
information of the Acquired Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1993
Act"), and the 1940 Act and the rules and regulations of the Securities and
Exchange Commission (the "SEC") thereunder and do not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) The Acquired Fund is not, and the execution, delivery and
performance of this Agreement will not result, in any material violation of the
Trust's Declaration of Trust, as the same may have been amended (the "Trust's
Trust Agreement"), or its Bylaws or of any agreement, indenture, instrument,
contract, lease or other undertaking with respect to the Acquired Fund to which
the Trust is a party or by which it is bound.
(e) The Acquired Fund has no material contracts or other
commitments outstanding (other than this Agreement) which will be terminated
with liability to it on or prior to the Closing Date.
(f) Except as otherwise disclosed in writing to and accepted by
the Acquiring Fund, no litigation or administrative proceeding or investigation
of or before any court or governmental body is currently pending or to the
Trust's knowledge threatened against the Trust with respect to the Acquired Fund
or any of its properties or assets which, if adversely determined, would
adversely affect the Acquired Fund's financial condition or the conduct of its
business. The Trust knows of no facts which might form the basis for the
institution of such litigation, proceeding or investigation, and is not a party
to or subject to the provisions of any order, decree or judgment of any court or
governmental body which adversely affects the Acquired Fund's business or its
ability to consummate the transactions herein contemplated.
(g) The Statements of Assets and Liabilities of the Acquired Fund
from its commencement of operations through its fiscal year ended February 28,
1998 have been audited by KPMG Peat Marwick LLP, independent auditors, and are
in accordance with generally accepted accounting principles, consistently
applied, and such statements (copies of which have been furnished to the
Company) fairly reflect the financial condition of the Acquired Fund as of such
dates, and there are no known contingent liabilities of the Acquired Fund as of
such dates not disclosed therein.
(h) Since February 28, 1998, there has not been any material
adverse change in the Acquired Fund's financial condition, assets, liabilities
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquired Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as disclosed on the
statement of assets and liabilities referred to in Section 1.3 hereof.
(i) At the Closing Date, all Federal and other tax returns and
reports of the Acquired Fund required by law to have been filed by such date
shall have been filed, and all Federal and other taxes shall have been paid so
far as due, or provision shall have been made for the payment thereof, and to
the best of the Trust's knowledge no such return is currently under audit and no
assessment has been asserted with respect to such returns.
(j) The Acquired Fund is a "fund" as defined in Section 851(g)(2)
of the Code; for each fiscal year of its operation ended prior to the Closing
Date, the Acquired Fund has met the requirements of Subchapter M of the Code for
qualification and treatment as a regulated investment company; based on the
Acquired Fund's activities and operations through the Closing Date, the Acquired
Fund will continue to meet all such requirements for its taxable year (or
portion thereof) that ends on or includes the Closing Date; and the Acquired
Fund will monitor its activities and operations through the Closing Date to
assure compliance with the requirements of Subchapter M of the Code for
qualification and treatment as a regulated investment company. The Acquired Fund
has no earnings and profits accumulated in any taxable year to which the
provisions of Subchapter M did not apply.
(k) The Liabilities were incurred by the Acquired Fund in the
ordinary course of its business.
(l) The Acquired Fund is not under the jurisdiction of a court in
a proceeding under Title 11 of the United States Code or similar case within the
meaning of Section 368(a)(3)(A) of the Code.
(m) The Acquired Fund will distribute the Acquiring Fund Shares
it receives in the Reorganization to the Acquired Fund Shareholders.
(n) The Acquired Fund will be terminated as soon as reasonably
practicable after the Reorganization.
(o) All issued and outstanding shares of the Acquired Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Acquired Fund. All of the issued and outstanding
shares of the Acquired Fund will, at the time of Closing, be held by the persons
and in the amounts set forth in the records of the transfer agent as provided in
paragraph 3.4. The Acquired Fund does not have outstanding any options, warrants
or other rights to subscribe for or purchase any of the Acquired Fund shares,
nor is there outstanding any security convertible into any of the Acquired Fund
shares.
(p) On the Closing Date, the Acquired Fund will have full right,
power and authority to sell, assign, transfer and deliver the Assets to be
transferred by it hereunder.
(q) The execution, delivery and performance of this Agreement
will have been duly authorized prior to the Closing Date by all necessary action
on the part of the Trust's Board and, subject to the approval of the Acquired
Fund Shareholders and assuming due authorization, execution and delivery hereof
by the Company, on behalf of the Acquiring Fund, this Agreement will constitute
the valid and legally binding obligation of the Trust, on behalf of the Acquired
Fund, enforceable in accordance with its terms, subject to the effect of
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and
other similar laws relating to or affecting creditors' rights generally and
court decisions with respect thereto, and to general principles of equity and
the discretion of the court (regardless of whether the enforceability is
considered in a proceeding in equity or at law).
(r) With respect to facts relating to the Acquired Fund, the
prospectus/proxy statement and statement of additional information (the "Proxy
Statement") included in the Registration Statement (referred to in paragraph
5.5) and the information incorporated by reference into the Registration
Statement (other than information therein that has been furnished by the
Company) will, on the effective date of the Registration Statement and on the
Closing Date, not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such statements
were made, not misleading.
4.2. The Company, on behalf of the Acquiring Fund, represents and
warrants to the Trust, on behalf of the Acquired Fund, as follows:
(a) The Acquiring Fund is a series of the Company, a corporation
duly organized, validly existing and in good standing under the laws of the
State of Maryland, and has power to carry on its business as it is now being
conducted and to carry out this Agreement.
(b) The Company is registered under the 1940 Act as an open-end,
management investment company, of which the Acquiring Fund is a separate
____5____ portfolio, and such registration has not been revoked or rescinded and
is in full force and effect.
- --------
5 Insert diversified for all ISG Portfolios, except ISG International
Equity Portfolio and ISG Limited Duration U.S. Government Portfolio.
Insert non-diversified for ISG International Equity Portfolio and ISG
Limited Duration U.S.
Government Portfolio.
(c) The current prospectus and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the SEC thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in any material violation of the
Company's Charter or its Bylaws or of any agreement, indenture, instrument,
contract, lease or other undertaking to which the Acquiring Fund is a party or
by which it is bound.
(e) The Acquiring Fund has no material contracts or other
commitments outstanding (other than this Agreement) which will be terminated
with liability to it on or prior to the Closing Date.
(f) Except as otherwise disclosed in writing to and accepted by
the Acquired Fund, no litigation or administrative proceeding or investigation
of or before any court or governmental body is currently pending or to the
Company's knowledge threatened against the Company with respect to the Acquiring
Fund or any of its properties or assets which, if adversely determined, would
adversely affect the Acquiring Fund's financial condition or the conduct of its
business. The Company knows of no facts which might form the basis for the
institution of such litigation, proceeding or investigation, and is not a party
to or subject to the provisions of any order, decree or judgment of any court or
governmental body which adversely affects the Acquiring Fund's business or its
ability to consummate the transactions contemplated herein.
(g) [APPLICABLE ONLY WITH RESPECT TO ISG LIMITED DURATION U.S.
GOVERNMENT PORTFOLIO, ISG PRIME MONEY MARKET PORTFOLIO AND ISG U.S. TREASURY
MONEY MARKET PORTFOLIO] The Statements of Assets and Liabilities of the
Acquiring Fund from its commencement of operations through its fiscal year ended
December 31, 1997 have been audited by KPMG Peat Marwick LLP, independent
auditors, and are in accordance with generally accepted accounting principles,
consistently applied, and such statements (copies of which have been furnished
to the Trust) fairly reflect the financial condition of the Acquiring Fund as of
such dates, and there are no known contingent liabilities of the Acquiring Fund
as of such dates not disclosed therein; the unaudited statement of assets and
liabilities of the Acquiring Fund for the six month period ended June 30, 1998,
are in accordance with generally accepted accounting principles, consistently
applied, and such statement (copies of which have been furnished to the Trust)
fairly reflect the financial condition of the Acquiring Fund as of such date,
and there are no known contingent liabilities of the Acquiring Fund as of such
date not disclosed therein.
(h) [APPLICABLE ONLY WITH RESPECT TO ISG LIMITED DURATION U.S.
GOVERNMENT PORTFOLIO, ISG PRIME MONEY MARKET PORTFOLIO AND ISG U.S. TREASURY
MONEY MARKET PORTFOLIO] Since June 30, 1998, there has not been any material
adverse change in the Acquiring Fund's financial condition, assets, liabilities
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as disclosed on the
statement of assets and liabilities as of June 30, 1998 referred to in Section
4.2(g) hereof.
(i) [APPLICABLE ONLY WITH RESPECT TO ISG LIMITED DURATION U.S.
GOVERNMENT PORTFOLIO, ISG PRIME MONEY MARKET PORTFOLIO AND ISG U.S. TREASURY
MONEY MARKET PORTFOLIO] At the Closing Date, all Federal and other tax returns
and reports of the Acquiring Fund required by law to have been filed by such
date shall have been filed, and all Federal and other taxes shall have been paid
so far as due, or provision shall have been made for the payment thereof, and to
the best of the Company's knowledge no such return is currently under audit and
no assessment has been asserted with respect to such returns.
(j) [APPLICABLE ONLY WITH RESPECT TO ISG LIMITED DURATION U.S.
GOVERNMENT PORTFOLIO, ISG PRIME MONEY MARKET PORTFOLIO AND ISG U.S. TREASURY
MONEY MARKET PORTFOLIO] The Acquiring Fund is a "fund" as defined in Section
851(g)(2) of the Code; for each fiscal year of its operation ended prior to the
Closing Date, the Acquiring Fund has met the requirements of Subchapter M of the
Code for qualification and treatment as a regulated investment company; it will
continue to meet all such requirements for its taxable year that includes the
Closing Date; and it has no earnings and profits accumulated in any taxable year
to which the provisions of Subchapter M did not apply.
(k) No consideration other than the Acquiring Fund Shares (and
the Acquiring Fund's assumption of the Liabilities) will be issued in exchange
for the Assets in the Reorganization.
(l) The Acquiring Fund is not under the jurisdiction of a court
in a proceeding under Title 11 of the United States Code or similar case within
the meaning of Section 368(a)(3)(A) of the Code.
(m) The Acquiring Fund has no plan or intention to issue
additional Acquiring Fund Shares following the Reorganization except for shares
issued in the ordinary course of its business as a series of an open-end
investment company; nor does the Acquiring Fund have any plan or intention to
redeem or otherwise reacquire any Acquiring Fund Shares issued to the Acquired
Fund Shareholders pursuant to the Reorganization, other than through redemptions
arising in the ordinary course of that business.
(n) [APPLICABLE ONLY WITH RESPECT TO ISG LIMITED DURATION U.S.
GOVERNMENT PORTFOLIO, ISG PRIME MONEY MARKET PORTFOLIO AND ISG U.S. TREASURY
MONEY MARKET PORTFOLIO] The Acquiring Fund (i) will, after the Reorganization,
continue the historic business that the Acquired Fund conducted before the
Reorganization, (ii) has no plan or intention to sell or otherwise dispose of
more than 10% of the Assets by value, except for dispositions made in the
ordinary course of that business (i.e., dispositions resulting from investment
decisions made after the Reorganization on the basis of investment
considerations independent of the Reorganization) and dispositions necessary to
maintain its status as a regulated investment company, and (iii) expects to use
a significant portion of the Acquired Fund's historic business assets in that
business.
[APPLICABLE ONLY WITH RESPECT TO ISG LARGE CAP EQUITY PORTFOLIO,
ISG GOVERNMENT INCOME PORTFOLIO, ISG INTERNATIONAL EQUITY PORTFOLIO, ISG
MUNICIPAL INCOME PORTFOLIO AND ISG SMALL CAP OPPORTUNITY PORTFOLIO] The
Acquiring Fund (i) will, after the Reorganization, continue the historic
business that the Acquired Fund conducted before the Reorganization in a
substantially unchanged manner, and (ii) has no plan or intention to sell or
otherwise dispose of any of the Assets, except for dispositions made in the
ordinary course of that business (i.e., dispositions resulting from investment
decisions made after the Reorganization on the basis of investment
considerations independent of the Reorganization) and dispositions necessary to
maintain its status as a regulated investment company.
(o) There is no plan or intention for the Acquiring Fund to be
dissolved or merged into another corporation or business trust or any "fund"
thereof (within the meaning of Section 851(g)(2) of the Code) following the
Reorganization.
(p) [APPLICABLE ONLY WITH RESPECT TO ISG LIMITED DURATION U.S.
GOVERNMENT PORTFOLIO, ISG PRIME MONEY MARKET PORTFOLIO AND ISG U.S. TREASURY
MONEY MARKET PORTFOLIO] The Acquiring Fund does not own, directly or indirectly,
nor on the Closing Date will it own, directly or indirectly, nor has it owned,
directly or indirectly, at any time during the past five years, any shares of
the Acquired Fund.
(q) All issued and outstanding shares of the Acquiring Fund are,
and (including the shares of the Acquiring Fund that are issued in the
Reorganization) at the Closing Date will be, duly and validly issued and
outstanding, fully paid and non-assessable. The Acquiring Fund does not have
outstanding any options, warrants or other rights to subscribe for or purchase
any of the Acquiring Fund Shares, nor is there outstanding any security
convertible into any Acquiring Fund Shares.
(r) The execution, delivery and performance of this Agreement
will have been duly authorized prior to the Closing Date by all necessary
action, if any, on the part of the Company's Board, and, subject to the approval
of the Acquired Fund Shareholders and assuming due authorization, execution and
delivery hereof by the Trust, on behalf of the Acquired Fund, this Agreement
will constitute the valid and legally binding obligation of the Company, on
behalf of the Acquiring Fund, enforceable in accordance with its terms, subject
to the effect of bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other similar laws relating to or affecting creditors' rights
generally and court decisions with respect thereto, and to general principles of
equity and the discretion of the court (regardless of whether the enforceability
is considered in a proceeding in equity or at law).
(s) With respect to facts relating to the Acquiring Fund, the
Proxy Statement included in the Registration Statement (referred to in paragraph
5.5) and the information incorporated by reference into the Registration
Statement (other than information therein that has been furnished by the Trust)
will, on the effective date of the Registration Statement and on the Closing
Date, not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which such statements were made,
not misleading.
(t) [APPLICABLE ONLY WITH RESPECT TO ISG LIMITED DURATION U.S.
GOVERNMENT PORTFOLIO, ISG PRIME MONEY MARKET PORTFOLIO AND ISG U.S. TREASURY
MONEY MARKET PORTFOLIO] Immediately after the Reorganization, the Acquired Fund
Shareholders will be in "control" of the Acquiring Fund within the meaning of
Section 304(c) of the Code.
[APPLICABLE ONLY WITH RESPECT TO ISG LARGE CAP EQUITY PORTFOLIO,
ISG GOVERNMENT INCOME PORTFOLIO, ISG INTERNATIONAL EQUITY PORTFOLIO, ISG
MUNICIPAL INCOME PORTFOLIO, AND ISG SMALL CAP OPPORTUNITY PORTFOLIO] Immediately
after the Reorganization, the Acquired Fund Shareholders will own all of the
outstanding shares of the Acquiring Fund and will own such shares solely by
reason of their ownership of Acquired Fund shares immediately before the
Reorganization.
(u) [APPLICABLE ONLY WITH RESPECT TO ISG LARGE CAP EQUITY
PORTFOLIO, ISG GOVERNMENT INCOME PORTFOLIO, ISG INTERNATIONAL EQUITY PORTFOLIO,
ISG MUNICIPAL INCOME PORTFOLIO, AND ISG SMALL CAP OPPORTUNITY PORTFOLIO]
Immediately after the Reorganization, the Acquiring Fund will possess the same
assets and liabilities, except for any assets used to pay expenses incurred in
connection with the Reorganization, as those possessed by the Acquired Fund
immediately prior to the Reorganization. Any assets used to pay expenses
incurred in connection with the Reorganization and all redemptions and
distributions (except for regular, normal dividends) made by the Acquired Fund
immediately before the Reorganization will, in the aggregate, constitute less
than 1% of the net assets of the Acquired Fund.
4.3. Each of the Trust, on behalf of the Acquired Fund, and the
Company, on behalf of the Acquiring Fund, represents and warrants to the other
as follows:
(a) The fair market value of the Acquiring Fund Shares, when
received by the Acquired Fund Shareholders, will be approximately equal to the
fair market value of their Acquired Fund shares constructively surrendered in
exchange therefor.
(b) Its management (i) is unaware of any plan or intention of
Acquired Fund Shareholders to redeem or otherwise dispose of any portion of the
Acquiring Fund Shares to be received by them in the Reorganization and (ii) does
not anticipate dispositions of those Acquiring Fund Shares at the time of or
soon after the Reorganization to exceed the usual rate and frequency of
dispositions of shares of the Acquired Fund as a series of an open-end
investment company. Consequently, its management expects that the percentage of
Acquired Fund Shareholder interests, if any, that will be disposed of as a
result of or at the time of the Reorganization will be DE MINIMIS. Nor does its
management anticipate that there will be extraordinary redemptions of Acquiring
Fund Shares immediately following the Reorganization.
(c) The Acquired Fund Shareholders will pay their own expenses,
if any, incurred in connection with the Reorganization.
(d) The fair market value on a going concern basis of the Assets
will equal or exceed the Liabilities to be assumed by the Acquiring Fund and
those to which the Assets are subject.
(e) [APPLICABLE ONLY WITH RESPECT TO DG LIMITED TERM GOVERNMENT
INCOME FUND, DG PRIME MONEY MARKET FUND, DG TREASURY MONEY MARKET FUND, ISG
LIMITED DURATION U.S. GOVERNMENT PORTFOLIO, ISG PRIME MONEY MARKET PORTFOLIO AND
ISG U.S. TREASURY MONEY MARKET PORTFOLIO] The total adjusted basis of the Assets
will equal or exceed the sum of the Liabilities to be assumed by the Acquiring
Fund and those to which the Assets are subject.
(f) There is no intercompany indebtedness between the Acquired
Fund and the Acquiring Fund that was issued or acquired, or will be settled, at
a discount.
(g) [APPLICABLE ONLY WITH RESPECT TO DG LIMITED TERM GOVERNMENT
INCOME FUND, DG PRIME MONEY MARKET FUND, DG TREASURY MONEY MARKET FUND, ISG
LIMITED DURATION U.S. GOVERNMENT PORTFOLIO, ISG PRIME MONEY MARKET PORTFOLIO AND
ISG U.S. TREASURY MONEY MARKET PORTFOLIO] Pursuant to the Reorganization, the
Acquired Fund will transfer to the Acquiring Fund, and the Acquiring Fund will
acquire, at least 90% of the fair market value of the net assets, and at least
70% of the fair market value of the gross assets, held by the Acquired Fund
immediately before the Reorganization. For purposes of this representation, any
amounts used by the Acquired Fund to pay its Reorganization expenses and
redemptions and distributions made by it immediately before the Reorganization
(except for (i) distributions made to conform to its policy of distributing all
or substantially all of its income and gains to avoid the obligation to pay
Federal income tax and/or excise tax under Section 4982 of the Code and (ii)
redemptions not made as part of the Reorganization) will be included as assets
thereof held immediately before the Reorganization.
(h) None of the compensation received by any Acquired Fund
Shareholder who is an employee of the Acquired Fund will be separate
consideration for, or allocable to, any of the Acquired Fund shares held by such
Acquired Fund Shareholder-employee; none of the Acquiring Fund Shares received
by any such Acquired Fund Shareholder-employee will be separate consideration
for, or allocable to, any employment agreement; and the consideration paid to
any such Acquired Fund Shareholder-employee will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's-length for similar services.
5. COVENANTS OF THE FUNDS.
5.1. Each Fund will operate its business in the ordinary course
between the date hereof and the Closing Date, it being understood that such
ordinary course of business will include payment of customary dividends and
other distributions.
5.2. The Trust will call a meeting of the Acquired Fund Shareholders
to consider and act upon this Agreement and to take all other action necessary
to obtain approval of the transactions contemplated herein.
5.3. Subject to the provisions of this Agreement, the Trust and
Company will take, or cause to be taken, all action, and do or cause to be done,
all things reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement.
5.4. As promptly as practicable, but in any case within sixty days
after the Closing Date, the Trust shall furnish the Company, in such form as is
reasonably satisfactory to the Company, a statement of the earnings and profits
of the Acquired Fund for Federal income tax purposes which will be carried over
to the Acquiring Fund as a result of Section 381 of the Code and which will be
certified by the Trust's President or its Vice President and Treasurer.
5.5. The Trust, on behalf of the Acquired Fund, and the Company, on
behalf of the Acquiring Fund, shall cooperate in the provision of all
information reasonably necessary for the preparation and filing of the
registration statement of the Company relating to the Acquiring Fund Shares on
Form N-14, in compliance with the 1933 Act, the Securities Exchange Act of 1934,
as amended, and the 1940 Act, and, if applicable, state Blue Sky laws (the
"Registration Statement"), including the Proxy Statement, referred to in
paragraph 4.1(r), in connection with the meeting of the Acquired Fund
Shareholders to consider approval of this Agreement and the transactions
contemplated herein.
5.6. The Trust, on behalf of the Acquired Fund, and the Company, on
behalf of the Acquiring Fund, shall cooperate in the preparation and filing as
promptly as practicable with the Securities and Exchange Commission of an
application, in form and substance reasonably satisfactory to their respective
counsel, for exemptive relief from the provisions of Section 17 of the 1940 Act,
and from any other provision of the 1940 Act deemed necessary or advisable by
such counsel, to permit consummation of the transactions contemplated herein
(the "Exemptive Application"). The Trust and the Company shall use all
reasonable efforts to obtain the relief requested by the Exemptive Application.
5.7. The Company, on behalf of the Acquiring Fund, agrees to use all
reasonable efforts to obtain the approvals and authorizations required by the
1933 Act, the 1940 Act and such of the state Blue Sky or securities laws as it
may deem appropriate in order to continue its operations after the Closing Date.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND. The
obligations of the Acquiring Fund to complete the transactions provided for
herein shall be subject, at the Company's election, to the performance by the
Acquired Fund of all the obligations to be performed by it hereunder on or
before the Closing Date and, in addition thereto, the following conditions:
6.1. All representations and warranties of the Trust, on behalf of the
Acquired Fund, contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date with the
same force and effect as if made on and as of the Closing Date.
6.2. The Trust, on behalf of the Acquired Fund, shall have delivered
to the Company, on behalf of the Acquiring Fund, at the Closing a statement of
the Assets and Liabilities, including a schedule of the Assets setting forth for
all of the Acquired Fund's portfolio securities their adjusted tax basis and
holding periods by lot, as of the Closing Date, certified by the Trust's
Treasurer.
6.3. The Trust, on behalf of the Acquired Fund, shall have delivered
to the Company, on behalf of the Acquiring Fund, at the Closing a certificate
executed in its name by the Trust's President or Vice President and its
Treasurer, in form and substance satisfactory to the Company, to the effect that
the representations and warranties of the Trust, on behalf of the Acquired Fund,
made in this Agreement are true and correct at and as of the Closing Date,
except as they may be affected by the transactions contemplated by this
Agreement, and as to such other matters as the Company shall reasonably request.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND.
The obligations of the Acquired Fund to complete the transactions
provided for herein shall be subject, at the Trust's election, to the
performance by the Acquiring Fund of all the obligations to be performed by it
hereunder on or before the Closing Date and, in addition thereto, the following
conditions:
7.1. All representations and warranties of the Company, on behalf of
the Acquiring Fund, contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date with the
same force and effect as if made on and as of the Closing Date.
7.2. The Company, on behalf of the Acquiring Fund, shall have
delivered to the Trust on the Closing Date a certificate executed in its name by
the Company's President or Vice President and its Treasurer, in form and
substance reasonably satisfactory to the Trust, to the effect that the
representations and warranties of the Company, on behalf of the Acquiring Fund,
made in this Agreement are true and correct at and as of the Closing Date,
except as they may be affected by the transactions contemplated by this
Agreement, and as to such other matters as the Trust shall reasonably request.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF EACH FUND.
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to either Fund, the other party to this Agreement
shall, at its option, not be required to complete the transactions contemplated
by this Agreement.
8.1. This Agreement and the transactions contemplated herein shall
have been approved by the requisite vote of the holders of the outstanding
shares of the Acquired Fund in accordance with the provisions of the Trust's
Trust Agreement.
8.2. On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with, this
Agreement or the transactions contemplated herein.
8.3. All consents of other parties and all other consents, orders and
permits of Federal, state and local regulatory authorities (including those of
the SEC and of state Blue Sky and securities authorities) deemed necessary by
the Trust or Company to permit consummation, in all material respects, of the
transactions contemplated hereby shall have been obtained, except where failure
to obtain any such consent, order or permit would not involve a risk of a
material adverse effect on the assets or properties of either Fund, provided
that either party hereto may for itself waive any of such conditions.
8.4. The Registration Statement shall have become effective under the
1933 Act and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act.
8.5. The relief requested by the Exemptive Application shall have been
granted in form and substance reasonably satisfactory to the respective counsel
for the Trust and the Company.
8.6. Prior to the Closing Date, the Acquired Fund shall have declared
and paid a dividend and/or other distribution which, together with all previous
dividends and other distributions, shall have the effect of distributing to the
Acquired Fund Shareholders all of the Acquired Fund's investment company taxable
income for all taxable years ended prior to the Closing Date and for its current
taxable year through the Closing Date (computed without regard to any deduction
for dividends paid); the excess of its interest income excludable from gross
income under Section 103(a) of the Code over its disallowed deductions under
Sections 265 and 171(a)(2) of the Code for all such taxable years (or portion
thereof); and all of its net capital gain realized in all such taxable years (or
portion thereof)(after reduction for any capital loss carryforward).
8.7. The parties shall have received an opinion of Stroock & Stroock &
Lavan LLP as to the Federal income tax consequences mentioned below ("Tax
Opinion"). In rendering the Tax Opinion, such counsel may rely as to factual
matters, exclusively and without independent verification, on the
representations made in this Agreement (or in separate letters addressed to such
counsel) and the certificates delivered pursuant to paragraphs 6.3 and 7.2 of
this Agreement. The Tax Opinion shall be substantially to the effect that, based
on the facts and assumptions stated therein and conditioned on consummation of
the Reorganization in accordance with this Agreement, for Federal income tax
purposes:
(a) The Acquired Fund's transfer of the Assets to the Acquiring
Fund in exchange solely for the Acquiring Fund Shares and the assumption by the
Acquiring Fund of the Liabilities, followed by the Acquired Fund's distribution
of those shares to the Acquired Fund Shareholders constructively in exchange for
their Acquired Fund shares, will constitute a "reorganization" within the
meaning of Section 368(a)(1) ____(6)____ of the Code; (b) No gain or loss will
be recognized by the Acquiring Fund upon its receipt of the Assets in exchange
solely for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
the Liabilities; (c) No gain or loss will be recognized by the Acquired Fund
upon the transfer of the Assets to the Acquiring Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of the
Liabilities or upon the subsequent distribution (whether actual or constructive)
of the Acquiring Fund Shares to Acquired Fund Shareholders in constructive
exchange for their shares of the Acquired Fund; (d) No gain or loss will be
recognized by the Acquired Fund Shareholders upon the exchange of their Acquired
Fund shares for Acquiring Fund Shares; (e) The aggregate tax basis for the
Acquiring Fund Shares received by each of the Acquired Fund Shareholders
pursuant to the Reorganization will be the same as the aggregate tax basis of
the Acquired Fund shares held by such shareholder immediately prior to the
Reorganization, and the holding period of the Acquiring Fund Shares to be
received by each Acquired Fund Shareholder will include the period during which
the Acquired Fund shares exchanged therefor were held by such Shareholder
(provided the Acquired Fund shares were held as capital assets on the date of
the Reorganization); and (f) The Acquiring Fund's tax basis for the Assets will
be the same as the tax basis of such assets to the Acquired Fund immediately
prior to the Reorganization, and the Acquiring Fund's holding period for the
Assets will include the period during which the Assets were held by the Acquired
Fund.
- --------
6 Insert D or F, as appropriate.
9. TERMINATION OF AGREEMENT.
9.1. This Agreement and the transactions contemplated hereby may be
terminated and abandoned by resolution of the Board of the Trust or the Company,
at any time prior to the Closing (notwithstanding any vote of the Acquired Fund
Shareholders) if circumstances should develop that, in the opinion of the Board
of the Trust or the Company, make proceeding with this Agreement inadvisable.
9.2. If this Agreement is terminated and the Reorganization is
abandoned pursuant to the provisions of this Section 9, this Agreement shall
become void and have no effect, without any liability on the part of any party
hereto or the Board members, or officers of the Trust or the Company or the
shareholders of either Fund, in respect of this Agreement.
10. WAIVER.
At any time prior to the Closing Date, any of the foregoing conditions
may be waived by the Board of the Trust or the Company if, in the judgment of
such Board, such waiver will not have a material adverse effect on the benefits
intended under this Agreement to the Acquired Fund's shareholders or the
Acquiring Fund's shareholders, as the case may be.
11. MISCELLANEOUS.
11.1. None of the representations and warranties included or provided
for herein shall survive consummation of the Reorganization.
11.2. This Agreement contains the entire agreement and understanding
between the parties hereto with respect to the subject matter hereof, and merges
and supersedes all prior discussions, agreements and understandings of every
kind and nature between them relating to the subject matter hereof. Neither
party shall be bound by any condition, definition, warranty or representation,
other than as set forth or provided in this Agreement or as may be, on or
subsequent to the date hereof, set forth in a writing signed by the party to be
bound thereby.
11.3. This Agreement shall be governed and construed in accordance
with the internal laws of the State of New York, without giving effect to
principles of conflict of laws; provided, however, that the due authorization,
execution and delivery of this Agreement by the Company, on behalf of the
Acquiring Fund, and the Trust, on behalf of the Acquired Fund, shall be governed
and construed in accordance with the internal laws of the State of Maryland and
The Commonwealth of Massachusetts, respectively, without giving effect to
principles of conflict of laws; and provided further that, in the case of any
conflict between any such laws and the Federal securities laws, the Federal
securities laws shall govern.
11.4. This Agreement may be executed in counterparts, each of which,
when executed and delivered, shall be deemed to be an original.
11.5. This Agreement shall bind and inure to the benefit of the
parties hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
11.6. (a) The names ____"7"____ and "Trustees of DG Investor Series"
refer respectively to the Acquired Fund and the Trust's Trustees, as trustees
but not individually or personally, acting from time to time under the Trust's
Trust Agreement, a copy of which is on file at the office of the Secretary of
The Commonwealth of Massachusetts and at the principal office of the Trust. The
obligations of the Trust, on behalf of the Acquired Fund, entered into by any of
the Trustees, representatives or agents are made not individually, but in such
capacities, and are not binding upon any of the Trust's Trustees, or
shareholders or representatives of the Acquired Fund personally, but bind only
the Acquired Fund's property, and all persons dealing with shares of the
Acquired Fund must look solely to the Acquired Fund's property for the
enforcement of any claims against the Acquired Fund.
- --------
7 Insert DG Equity Fund, DG Government Income Fund, DG International
Equity Fund, DG Limited Term Government Income Fund, DG Municipal
Income Fund, DG Opportunity Fund, DG Prime Money Market Fund or DG
Treasury Money Market Fund, as appropriate.
(b) The obligations of the Company, on behalf of the Acquiring
Fund, hereunder are binding only upon the assets and property of the Acquiring
Fund, and all persons dealing with shares of the Acquiring Fund must look solely
to the Acquiring Fund's assets and property for the enforcement of any claims
against the Acquiring Fund.
<PAGE>
IN WITNESS WHEREOF, the Company, on behalf of the Acquiring Fund, and
the Trust, on behalf of the Acquired Fund, have caused this Agreement and Plan
of Reorganization to be executed and attested on their behalf by their duly
authorized representatives as of the date first above written.
THE INFINITY MUTUAL FUNDS,
INC., on behalf of its *
PORTFOLIO
By: __________________________
ATTEST: __________________________
__________________________
DG INVESTOR SERIES, on behalf
of its ** FUND
By: __________________________
ATTEST: __________________________
__________________________
- --------
* Insert ISG LARGE CAP EQUITY, ISG GOVERNMENT INCOME, ISG INTERNATIONAL
EQUITY, ISG LIMITED DURATION U.S. GOVERNMENT, ISG MUNICIPAL INCOME, ISG
SMALL CAP OPPORTUNITY, ISG PRIME MONEY MARKET OR ISG U.S. TREASURY MONEY
MARKET, as appropriate.
** Insert DG EQUITY, DG GOVERNMENT INCOME, DG INTERNATIONAL EQUITY, DG LIMITED
TERM GOVERNMENT INCOME, DG MUNICIPAL INCOME, DG OPPORTUNITY, DG PRIME MONEY
MARKET or DG TREASURY MONEY MARKET, as appropriate.
<PAGE>
APPENDIX D
DG INVESTOR SERIES
NEW ADVISORY CONTRACT
This Contract is made this 1st day of May, 1998, between ParkSouth
Corporation, a Mississippi corporation having its principal place of business in
Jackson, Mississippi (the "Adviser"), and DG Investor Series, a Massachusetts
business trust having its principal place of business in Pittsburgh,
Pennsylvania (the "Trust").
WHEREAS the Trust is an open-end management investment company as that term
is defined in the Investment Company Act of 1940, as amended, and is registered
as such with the Securities and Exchange Commission; and
WHEREAS Adviser is engaged in the business of rendering investment advisory
and management services.
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. The Trust hereby appoints Adviser as Investment Adviser for each of the
portfolios ("Funds") of the Trust which executes an exhibit to this Contract,
and Adviser accepts the appointments. Subject to the direction of the Trustees,
Adviser shall provide investment research and supervision of the investments of
the Funds and conduct a continuous program of investment evaluation and of
appropriate sale or other disposition and reinvestment of each Fund's assets.
2. Adviser, in its supervision of the investments of each of the Funds will
be guided by each of the Fund's investment objective and policies and the
provisions and restrictions contained in the Declaration of Trust and By-Laws of
the Trust and as set forth in the Registration Statements and exhibits as may be
on file with the Securities and Exchange Commission.
3. Each Fund shall pay or cause to be paid all of its own expenses and its
allocable share of Trust expenses, including, without limitation, the expenses
of organizing the Trust and continuing its existence; fees and expenses of
Trustees and officers of the Trust; fees for investment advisory services and
administrative personnel and services; expenses incurred in the distribution of
its shares ("Shares"), including expenses of administrative support services;
fees and expenses of preparing and printing its Registration Statements under
the Securities Act of 1933 and the Investment Company Act of 1940, as amended,
and any amendments thereto; expenses of registering and qualifying the Trust,
the Funds, and Shares of the Funds under federal and state laws and regulations;
expenses of preparing, printing, and distributing prospectuses (and any
amendments thereto) to shareholders; interest expense, taxes, fees, and
commissions of every kind; expenses of issue (including cost of Share
certificates), purchase, repurchase, and redemption of Shares, including
expenses attributable to a program of periodic issue; charges and expenses of
custodians, transfer agents, dividend disbursing agents, shareholder servicing
agents, and registrars; printing and mailing costs, auditing, accounting, and
legal expenses; reports to shareholders and governmental officers and
commissions; expenses of meetings of Trustees and shareholders and proxy
solicitations therefor; insurance expenses; association membership dues and such
nonrecurring items as may arise, including all losses and liabilities incurred
in administering the Trust and the Funds. Each Fund will also pay its allocable
share of such extraordinary expenses as may arise including expenses incurred in
connection with litigation, proceedings, and claims and the legal obligations of
the Trust to indemnify its officers and Trustees and agents with respect
thereto.
4. Each of the Funds shall pay to Adviser, for all services rendered to
each Fund by Adviser hereunder, the fees set forth in the exhibits attached
hereto.
5. The net asset value of each Fund's Shares as used herein will be
calculated to the nearest 1/10th of one cent.
6. The Adviser may from time to time and for such periods as it deems
appropriate reduce its compensation (and, if appropriate, assume expenses of one
or more of the Funds) to the extent that any Fund's expenses exceed such lower
expense limitation as the Adviser may, by notice to the Fund, voluntarily
declare to be effective.
7. This Contract shall begin for each Fund as of the date of execution of
the applicable exhibit and shall continue in effect with respect to each Fund
presently set forth on an exhibit (and any subsequent Funds added pursuant to an
exhibit during the initial term of this Contract) for two years from the date of
this Contract set forth above and thereafter for successive periods of one year,
subject to the provisions for termination and all of the other terms and
conditions hereof if: (a) such continuation shall be specifically approved at
least annually by the vote of a majority of the Trustees of the Trust, including
a majority of the Trustees who are not parties to this Contract or interested
persons of any such party cast in person at a meeting called for that purpose;
and (b) Adviser shall not have notified a Fund in writing at least sixty (60)
days prior to the anniversary date of this Contract in any year thereafter that
it does not desire such continuation with respect to that Fund. If a Fund is
added after the first approval by the Trustees as described above, this Contract
will be effective as to that Fund upon execution of the applicable exhibit and
will continue in effect until the next annual approval of this Contract by the
Trustees and thereafter for successive periods of one year, subject to approval
as described above.
8. Notwithstanding any provision in this Contract, it may be terminated at
any time with respect to any Fund, without the payment of any penalty, by the
Trustees of the Trust or by a vote of the shareholders of that Fund on sixty
(60) days' written notice to Adviser.
9. This Contract may not be assigned by Adviser and shall automatically
terminate in the event of any assignment. Adviser may employ or contract with
such other person, persons, corporation, or corporations at its own cost and
expense as it shall determine in order to assist it in carrying out this
Contract.
10. In the absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the obligations or duties under this Contract on the part
of Adviser, Adviser shall not be liable to the Trust or to any of the Funds or
to any shareholder for any act or omission in the course of or connected in any
way with rendering services or for any losses that may be sustained in the
purchase, holding, or sale of any security.
11. This Contract may be amended at any time by agreement of the parties
provided that the amendment shall be approved both by the vote of a majority of
the Trustees of the Trust including a majority of the Trustees who are not
parties to this Contract or interested persons of any such party to this
Contract (other than as Trustees of the Trust) cast in person at a meeting
called for that purpose, and, where required by Section 15(a)(2) of the Act, on
behalf of a Fund by a majority of the outstanding voting securities of such Fund
as defined in Section 2(a)(42) of the Act.
12. The Adviser acknowledges that all sales literature for investment
companies (such as the Trust) are subject to strict regulatory oversight. The
Adviser agrees to submit any proposed sales literature for the Trust (or any
Fund) or for itself or its affiliates which mentions the Trust (or any Fund) to
the Trust's distributor for review and filing with the appropriate regulatory
authorities prior to the public release of any such sales literature, provided,
however, that nothing herein shall be construed so as to create any obligation
or duty on the part of the Adviser to produce sales literature for the Trust (or
any Fund). The Trust agrees to cause its distributor to promptly review all such
sales literature to ensure compliance with relevant requirements, to promptly
advise Adviser of any deficiencies contained in such sales literature, to
promptly file complying sales literature with the relevant authorities, and to
cause such sales literature to be distributed to prospective investors in the
Trust.
13. Adviser is hereby expressly put on notice of the limitation of
liability as set forth in Article XI of the Declaration of Trust and agrees that
the obligations pursuant to this Contract of a particular Fund and of the Trust
with respect to that particular Fund be limited solely to the assets of that
particular Fund, and Adviser shall not seek satisfaction of any such obligation
from any other Fund, the shareholders of any Fund, the Trustees, officers,
employees or agents of the Trust, or any of them.
14. The Trust and the Funds are hereby expressly put on notice of the
limitation of liability as set forth in the Declaration of Trust of the Adviser
and agree that the obligations assumed by the Adviser pursuant to this Contract
shall be limited in any case to the Adviser and its assets and, except to the
extent expressly permitted by the Investment Company Act of 1940, as amended,
the Trust and the Funds shall not seek satisfaction of any such obligation from
the shareholders of the Adviser, the Trustees, officers, employees, or agents of
the Adviser, or any of them.
15. This Contract shall be construed in accordance with and governed by the
laws of the Commonwealth of Pennsylvania.
16. This Contract will become binding on the parties hereto upon their
execution of the attached exhibits to this Contract.
<PAGE>
EXHIBIT A
to the
Investment Advisory Contract
DG INVESTOR SERIES
DG TREASURY MONEY MARKET FUND
For all services rendered by Adviser hereunder, the above-named Fund of the
DG Investor Series shall pay to Adviser and Adviser agrees to accept as full
compensation for all services rendered hereunder, an annual investment advisory
fee equal to .50 of 1% of the average daily net assets of the Fund.
The portion of the fee based upon the average daily net assets of the Fund
shall be accrued daily at the rate of 1/365th of .50 of 1% applied to the daily
net assets of the Fund.
The advisory fee so accrued shall be paid to Adviser daily.
Witness the due execution hereof this May 1, 1998.
ATTEST: PARKSOUTH CORPORATION
By:-------------------------- By:--------------------------
Title:------------------- Title:-------------------
ATTEST: DG INVESTOR SERIES
By:-------------------------- By:--------------------------
Title:------------------- Title:-------------------
<PAGE>
EXHIBIT B
to the
Investment Advisory Contract
DG INVESTOR SERIES
DG LIMITED TERM GOVERNMENT INCOME FUND
For all services rendered by Adviser hereunder, the above-named Fund of the
DG Investor Series shall pay to Adviser and Adviser agrees to accept as full
compensation for all services rendered hereunder, an annual investment advisory
fee equal to 0.60 of 1% of the average daily net assets of the Fund.
The portion of the fee based upon the average daily net assets of the Fund
shall be accrued daily at the rate of 1/365th of 0.60 of 1% applied to the daily
net assets of the Fund.
The advisory fee so accrued shall be paid to Adviser daily.
Witness the due execution hereof this May 1, 1998.
ATTEST: PARKSOUTH CORPORATION
By:-------------------------- By:--------------------------
Title:------------------- Title:-------------------
ATTEST: DG INVESTOR SERIES
By:-------------------------- By:--------------------------
Title:------------------- Title:-------------------
<PAGE>
EXHIBIT C
to the
Investment Advisory Contract
DG INVESTOR SERIES
DG GOVERNMENT INCOME FUND
For all services rendered by Adviser hereunder, the above-named Fund of the
DG Investor Series shall pay to Adviser and Adviser agrees to accept as full
compensation for all services rendered hereunder, an annual investment advisory
fee equal to 0.60 of 1% of the average daily net assets of the Fund.
The portion of the fee based upon the average daily net assets of the Fund
shall be accrued daily at the rate of 1/365th of 0.60 of 1% applied to the daily
net assets of the Fund.
The advisory fee so accrued shall be paid to Adviser daily.
Witness the due execution hereof this May 1, 1998.
ATTEST: PARKSOUTH CORPORATION
By:-------------------------- By:--------------------------
Title:------------------- Title:-------------------
ATTEST: DG INVESTOR SERIES
By:-------------------------- By:--------------------------
Title:------------------- Title:-------------------
<PAGE>
EXHIBIT D
to the
Investment Advisory Contract
DG INVESTOR SERIES
DG EQUITY FUND
For all services rendered by Adviser hereunder, the above-named Fund of the
DG Investor Series shall pay to Adviser and Adviser agrees to accept as full
compensation for all services rendered hereunder, an annual investment advisory
fee equal to 0.75 of 1% of the average daily net assets of the Fund.
The portion of the fee based upon the average daily net assets of the Fund
shall be accrued daily at the rate of 1/365th of 0.75 of 1% applied to the daily
net assets of the Fund.
The advisory fee so accrued shall be paid to Adviser daily.
Witness the due execution hereof this May 1, 1998.
ATTEST: PARKSOUTH CORPORATION
By:-------------------------- By:--------------------------
Title:------------------- Title:-------------------
ATTEST: DG INVESTOR SERIES
By:-------------------------- By:--------------------------
Title:------------------- Title:-------------------
<PAGE>
EXHIBIT E
to the
Investment Advisory Contract
DG INVESTOR SERIES
DG MUNICIPAL INCOME FUND
For all services rendered by Adviser hereunder, the above-named Fund of the
DG Investor Series shall pay to Adviser and Adviser agrees to accept as full
compensation for all services rendered hereunder, an annual investment advisory
fee equal to 0.60 of 1% of the average daily net assets of the Fund.
The portion of the fee based upon the average daily net assets of the Fund
shall be accrued daily at the rate of 1/365th of 0.60 of 1% applied to the daily
net assets of the Fund.
The advisory fee so accrued shall be paid to Adviser daily.
Witness the due execution hereof this May 1, 1998.
ATTEST: PARKSOUTH CORPORATION
By:-------------------------- By:--------------------------
Title:------------------- Title:-------------------
ATTEST: DG INVESTOR SERIES
By:-------------------------- By:--------------------------
Title:------------------- Title:-------------------
<PAGE>
EXHIBIT F
to the
Investment Advisory Contract
DG INVESTOR SERIES
DG OPPORTUNITY FUND
For all services rendered by Adviser hereunder, the above-named Fund of the
DG Investor Series shall pay to Adviser and Adviser agrees to accept as full
compensation for all services rendered hereunder, an annual investment advisory
fee equal to 0.95 of 1% of the average daily net assets of the Fund.
The portion of the fee based upon the average daily net assets of the Fund
shall be accrued daily at the rate of 1/365th of 0.95 of 1% applied to the daily
net assets of the Fund.
The advisory fee so accrued shall be paid to Adviser daily.
Witness the due execution hereof this May 1, 1998.
ATTEST: PARKSOUTH CORPORATION
By:-------------------------- By:--------------------------
Title:------------------- Title:-------------------
ATTEST: DG INVESTOR SERIES
By:-------------------------- By:--------------------------
Title:------------------- Title:-------------------
<PAGE>
EXHIBIT G
to the
Investment Advisory Contract
DG INVESTOR SERIES
DG PRIME MONEY MARKET FUND
For all services rendered by Adviser hereunder, the above-named Fund of the
DG Investor Series shall pay to Adviser and Adviser agrees to accept as full
compensation for all services rendered hereunder, an annual investment advisory
fee equal to 0.50% of 1% of the average daily net assets of the Fund.
The portion of the fee based upon the average daily net assets of the Fund
shall be accrued daily at the rate of 1/365th of 0.50 of 1% applied to the daily
net assets of the Fund.
The advisory fee so accrued shall be paid to Adviser daily.
Witness the due execution hereof this May 1, 1998.
ATTEST: PARKSOUTH CORPORATION
By:-------------------------- By:--------------------------
Title:------------------- Title:-------------------
ATTEST: DG INVESTOR SERIES
By:-------------------------- By:--------------------------
Title:------------------- Title:-------------------
<PAGE>
EXHIBIT H
to the
Investment Advisory Contract
DG INVESTOR SERIES
DG INTERNATIONAL EQUITY FUND
For all services rendered by Adviser hereunder, the above-named Fund of the
DG Investor Series shall pay to Adviser and Adviser agrees to accept as full
compensation for all services rendered hereunder, an annual investment advisory
fee equal to 1% of the average daily net assets of the Fund.
The portion of the fee based upon the average daily net assets of the Fund
shall be accrued daily at the rate of 1/365th of 1% applied to the daily net
assets of the Fund.
The advisory fee so accrued shall be paid to Adviser daily.
Witness the due execution hereof this May 1, 1998.
ATTEST: PARKSOUTH CORPORATION
By:-------------------------- By:--------------------------
Title:------------------- Title:-------------------
ATTEST: DG INVESTOR SERIES
By:-------------------------- By:--------------------------
Title:------------------- Title:-------------------
<PAGE>
EXHIBIT J
to the
Investment Advisory Contract
DG INVESTOR SERIES
During the period from and including May 1, 1998 (the "Escrow Beginning
Date") until the date of approval by shareholders of the relevant Funds of the
Trust in conformity with the provisions of the Investment Company Act of 1940
(the "1940 Act"), including but not limited to Section 15(c) thereof (the
"Escrow Termination Date"), any and all advisory fees (the "Advisory Fees")
payable under this Investment Advisory Contract (the "Management Agreement")
shall be paid in accordance with this Exhibit J. From and including the Escrow
Beginning Date to, but not including, the Escrow Termination Date, any and all
Advisory Fees shall be paid into an interest bearing escrow account (the "Escrow
Account") maintained by an unaffiliated financial institution (the "Escrow
Agent"). Pursuant to a letter agreement with the Escrow Agent, the Advisory Fees
(including interest earned on such Advisory Fees) will be paid to ParkSouth
Corporation (the "Adviser") only if shareholders of each Fund approve the
Management Agreement. Further pursuant to the letter agreement, on the Escrow
Termination Date the Advisory Fees will be released by the Escrow Agent from the
Escrow Account to the Adviser, only upon receipt by the Escrow Agent of a
certificate from officers of the Trust stating that the Management Agreement has
received the requisite shareholder vote. In the event that the requisite
shareholder vote is not obtained and the Escrow Termination Date does not
therefore occur, the officers of the Trust shall execute and deliver to the
Escrow Agent, no later than December 31, 1998, a certificate stating that the
requisite shareholder vote has not been obtained and that the Advisory Fees (and
interest) in the Escrow Account should be paid over to the respective Funds of
the Trust to which such Advisory Fees (and interest) relate. The provisions of
this Exhibit J shall terminate and be of no further force and effect, and may be
removed from the Management Agreement, upon (i) the Escrow Termination Date, or
(ii) December 31, 1998.
<PAGE>
APPENDIX E
DG INVESTOR SERIES
NEW SUB-ADVISORY AGREEMENT
THIS INVESTMENT SUB-ADVISORY AGREEMENT (the "Agreement") is made and
entered into as of the 1st day of May, 1998 by and between ParkSouth Corporation
(the "Adviser") and Womack Asset
Management (the "Sub-Adviser").
PRELIMINARY STATEMENTS
A. DG Investor Series, a Massachusetts business trust (the "Trust"), is an
open-end management company as defined in the Investment Company Act of 1940 and
is registered as such with the Securities and Exchange Commission.
B. The Adviser has been retained by the Trust under the Investment Advisory
Contract dated as of May 1, 1998 (the "Contract") to act as investment adviser
with respect to each of the Trust's investment portfolios, including the DG
Opportunity Fund (the "Fund").
C. The Adviser is authorized under the Contract to "contract with such
other person, persons, corporation, or corporations at its own cost and expense
as it shall determine in order to assist it in carrying out this Contract."
D. The Adviser wishes to retain the Sub-Adviser to provide, and the
Sub-Adviser wishes to render, portfolio management services for the Fund, all
upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and the covenants
herein contained, the Adviser and the Sub-Adviser agree as follows:
1. APPOINTMENT. The Adviser hereby appoints the Sub- Adviser to act as a
discretionary sub-adviser to the Fund for all assets of the Fund other than cash
and cash equivalents. The Sub-Adviser hereby accepts the appointment and agrees
to use its best professional judgment to make and implement investment decisions
for the Fund in accordance with the provisions of this Agreement.
2. DUTIES OF THE SUB-ADVISER.
(a) Subject to the direction and control of the Adviser and the Board
of Trustees of the Trust, the Sub-Adviser shall be responsible for the
management of the investment operations of the Fund and the determination of
what portion of the Fund's assets will be held in cash and cash equivalents and
what portion will be invested in equity securities and other assets. Any cash
and cash equivalents in the Fund shall be managed by the Adviser. The
Sub-Adviser is hereby authorized to select portfolio securities for investment,
to determine whether to purchase and sell securities for the Fund, and upon
making any purchase or sale decision for the Fund, to place orders for the
execution of such portfolio transactions in accordance with Section 4 of this
Agreement and any operational procedures that may be specified by the Adviser
from time to time ("Operational Procedures"). The Sub-Adviser shall consult with
the Adviser upon the Adviser's reasonable request with respect to any investment
decision made by it for the Fund and assist the Adviser and the Trust's officers
in connection with the operation of the Fund and perform any further acts that
may be necessary to effectuate the purposes of this Agreement.
(b) In providing portfolio management services to the Fund, the
Sub-Adviser shall be subject to such investment restrictions as are set forth in
the Investment Company Act of 1940 and rules thereunder; the Internal Revenue
Code; applicable state securities laws; the supervision and control of the Board
of Trustees; such specific instructions as the Board of Trustees may adopt and
as may be communicated to the Sub-Adviser; the investment objectives, policies
and restrictions of the Fund; and instructions from the Adviser.
3. SUPERVISION AND COMPLIANCE. Notwithstanding any provision of this
Agreement, the Adviser shall retain all rights to supervise, and, in its
discretion, conduct investment advisory activities relating to the Fund. The
activities of the Sub- Adviser shall be subject at all times to the direction
and control of the Board of Trustees of the Trust and the Adviser, and shall
comply with: (a) the Declaration of Trust and By-Laws of the Trust; (b) the
Registration Statement of the Trust, as it may be amended from time to time,
including the investment objectives and policies set forth therein; (c) the
Investment Company Act of 1940 and the Investment Advisers Act of 1940 and the
regulations thereunder; (d) the Internal Revenue Code and the regulations
thereunder applicable to regulated investment companies; (e) any other
applicable laws or regulations; and (f) such other limitations as the Adviser or
the Board of Trustees of the Trust may adopt. The Sub-Adviser shall comply with
all requests by the officers and agents of the Trust to review, examine or audit
any records concerning the Sub-Adviser's investment advisory activities in
connection with the Fund. The Sub-Adviser shall provide all information, records
or other materials as the Adviser may reasonably request in order to oversee
compliance by the Sub-Adviser with the provisions of this Agreement and with
applicable law and shall take such actions or refrain from taking such actions
as the Adviser in its best judgment may reasonably request as necessary to
promote or ensure such compliance.
4. PURCHASE AND SALE OF SECURITIES. The Sub-Adviser shall place orders for
the purchase or sale of securities on behalf of the Fund with any broker and/or
dealer who deals in such securities, all in the manner as set forth herein and
in accordance with the Operational Procedures.
(a) In placing orders with brokers and/or dealers, the Sub-Adviser
shall use its best efforts to obtain the best net price and the most favorable
execution of its orders, after taking into account all factors it deems
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker and/or
dealer, and the reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis. Consistent with this obligation, the
Sub-Adviser may, to the extent permitted by law, purchase and sell portfolio
securities using brokers who provide brokerage and research services (within the
meaning of Section 28(e) of the Securities Exchange Act of 1934) to or for the
benefit of the Fund and/or other accounts over which the Sub-Adviser or the
Adviser exercises investment discretion. The Sub-Adviser is authorized to pay a
broker who provides such brokerage and research services a commission for
effecting a securities transaction which is in excess of the amount of
commission another broker would have charged for effecting that transaction, if
the Sub-Adviser determines in good faith that such commission was reasonable in
relation to the value of brokerage and research services provided by such
broker. This determination may be viewed in terms of either that particular
transaction or of the overall responsibilities of the Sub-Adviser with respect
to the accounts as to which it exercises investment discretion.
(b) Notwithstanding the foregoing, the Board of Trustees and the
Adviser periodically may review the commissions paid by the Fund and determine
whether those commissions were reasonable in relation to the brokerage and
research services received.
5. EXPENSES. The Sub-Adviser shall furnish, at its own expense, all office
space, office facilities, equipment and personnel necessary or appropriate to
the performance of its duties under this Agreement. The Sub-Adviser also shall
pay the salaries of all personnel performing services related to the Sub-
Adviser's duties under this Agreement.
6. COMPENSATION OF THE SUB-ADVISER. In consideration of the services to be
rendered by the Sub-Adviser under this Agreement, the Adviser shall pay the
Sub-Adviser a fee as set forth in EXHIBIT A to this Agreement.
7. SERVICES TO OTHERS. The services of the Sub-Adviser to the Adviser and
the Trust are not to be deemed exclusive, and, except as may be provided in any
other agreement between the Sub- Adviser and the Adviser, the Sub-Adviser may
render services to others and to engage in other activities, so long as such
services and activities do not adversely affect the Sub-Adviser's ability to
perform its obligations under this Agreement; provided, however, that during the
term of this Agreement, the Sub-Adviser shall not render any portfolio
management services to any other open-end management company except with the
prior written consent of the Adviser.
8. REPRESENTATIONS, WARRANTIES, AND AGREEMENTS OF THE SUB-ADVISER.
(a) As of the Effective Date of this Agreement (as defined below in
Section 10(a) of this Agreement), the Sub- Adviser will be registered as an
"investment adviser" under the Investment Advisers Act of 1940.
(b) The Sub-Adviser will comply with the provisions of the Adviser's
written code of ethics and any policies and procedures thereunder (including any
sanctions imposed by the Adviser), and with the Adviser's policies and
procedures designed to detect and prevent the misuse of material, nonpublic
information that are applicable to its sub-advisory services rendered under this
Agreement. In addition, the Sub-Adviser will adopt or has adopted a written code
of ethics complying with the requirements of Rule 17j-1 under the Investment
Company Act of 1940, will provide the Adviser with a copy of that code of ethics
and evidence of its adoption, and will make such reports to the Trust as
required by Rule 17j-1. The Sub-Adviser will also adopt or has adopted policies
and procedures sufficient to enable the Sub-Adviser to detect and prevent the
misuse of material, nonpublic information by the Sub-Adviser or any person
associated with the Sub-Adviser, in compliance with the federal and state
securities laws.
(c) The Sub-Adviser will prepare, maintain, keep current and preserve
on behalf of the Trust and the Adviser all records concerning the Sub-Adviser's
activities in connection with the Fund that the Fund is required by law to
maintain, including, but not limited to, records required under paragraphs
(b)(5), (b)(6), (b)(9), (b)(10), and (f) of Rule 31a-1 under the Investment
Company Act (a summary of these provisions as currently in effect is attached
hereto as EXHIBIT B). Any records required to be maintained and preserved
pursuant to the provisions of Rule 31a-1 and Rule 31a-2 under the Investment
Company Act of 1940 that are prepared by the Sub-Adviser on behalf of the Fund
are the property of the Fund and will be surrendered promptly on request to the
Fund or any person acting on behalf of the Trust during the term of this
Agreement and at any time after the termination of this Agreement. The Sub-
Adviser will comply with all reasonable requests for information by the Adviser
or the Trust's officers or Board of Trustees, including information required for
the Fund's filings with the Securities and Exchange Commission and state
securities commissions.
(d) The Sub-Adviser will promptly after filing with the Securities and
Exchange Commission any amendment to its Form ADV furnish a copy of such
amendment to the Trust and the Adviser.
(e) The Sub-Adviser will immediately notify the Adviser of the
occurrence of any event which would disqualify the Sub-Adviser from serving as
an investment adviser of an investment company under Section 9(a) of the
Investment Company Act or otherwise.
9. LIMITATIONS ON LIABILITY; INDEMNIFICATION.
(a) The Sub-Adviser hereby is notified expressly of the limitation of
liability as set forth in Article XI of the Declaration of Trust and agrees that
the obligations under this Agreement of the Fund and of the Trust with respect
to the Fund are limited solely to the assets of the Fund, and the Sub-Adviser
shall not seek satisfaction of any such obligation from any other investment
portfolio of the Trust; any shareholders of any investment portfolio; any
Trustee; or officers, employees or agents of the Trust.
(b) The Sub-Adviser shall give the Adviser and the Trust the benefit
of its best judgment and efforts in rendering services under this Agreement. The
Sub-Adviser agrees to indemnify and hold harmless the Adviser, its shareholders,
officers, directors, employees, agents and affiliates (referred to collectively
herein as the Adviser) from and against any and all claims, demands, judgments,
losses, costs, expenses (including, without limitation, court costs and
attorneys' fees), liabilities, or damages, which at any time or from time to
time may be paid, incurred or suffered by or asserted against the Adviser,
arising out of, based upon or resulting from any act or omission of the
Sub-Adviser in performing its obligations under this Agreement; provided,
however, that the Sub-Adviser shall not be obligated to indemnify the Adviser to
the extent that such matters arise from or are caused by the Adviser's willful
malfeasance or bad faith.
10. EFFECTIVE DATE; TERMINATION; AND ASSIGNMENT.
(a) This Agreement shall become effective as of the Effective Date as
defined below and shall continue in effect for two years from the Effective Date
and thereafter for successive periods of one year, subject to the provisions for
termination and all of the other terms and conditions in this Agreement if: (i)
such continuation is specifically approved at least annually by the vote of a
majority of the Trustees of the Trust, including a majority of the Trustees who
are not parties to this Agreement or interested persons of any such party (other
than as Trustees of the Trust), cast in person at a meeting called for that
purpose, and, where required under the Investment Company Act of 1940, by vote
of a majority of the outstanding voting securities of the Fund; and (ii) neither
party has notified the other in writing at least sixty (60) days prior to the
anniversary date of the Effective Date in any year thereafter that it does not
desire such continuation. The Effective Date is the date on which this Agreement
is approved by the vote of a majority of the outstanding voting securities of
the Fund.
(b) This Agreement may be terminated at any time without the payment
of any penalty (i) by action of the Board of Trustees or by vote of a majority
of the outstanding voting securities of the Fund upon sixty (60) days' written
notice to the Sub-Adviser and (ii) in the event of termination of the Contract
for any reason whatsoever. This Agreement also may be terminated at any time by
the Adviser (i) on account of the Sub- Adviser's repeated failure to comply with
the Adviser's requests or instructions issued hereunder, or (ii) in the event of
a breach of fiduciary duty by the Sub-Adviser.
(c) Termination of this Agreement will not affect (i) the validity of
any action previously taken by the Adviser or the Sub-Adviser under this
Agreement or (ii) liabilities or obligations of the parties from transactions
initiated before termination of this Agreement. Anything herein to the contrary
notwithstanding, termination of this Agreement shall not affect the
indemnification provisions set forth above in Section 9 of this Agreement, which
shall remain operative and in full force and effect notwithstanding such
termination.
(d) The Agreement shall terminate automatically in the event of its
assignment (as defined in the Investment Company Act of 1940 and any rules
thereunder, as they may be interpreted by the staff of the Securities and
Exchange Commission).
(e) So long as both the Adviser and the Sub-Adviser shall be legally
qualified to act an investment adviser to the Fund, neither the Adviser nor the
Sub-Adviser shall act as an investment adviser (as such term is defined in the
Investment Company Act of 1940) to the Fund except as provided herein and in the
Contract or in such other manner as may be expressly agreed between the Adviser
and the Sub-Adviser; provided, however, that if the Adviser or the Sub-Adviser
shall resign or for any reason by unable or unwilling to serve prior to the end
of the term of this Agreement, the remaining party, the Sub-Adviser or the
Adviser as the case may be, shall not be prohibited from serving as an
investment adviser to the Fund by reason of the provisions of this Subsection
10(e).
11. GOVERNING LAW. This Agreement shall be construed in accordance with the
laws of the Commonwealth of Pennsylvania without giving effect to the choice of
law provisions thereof, to the extent that such laws are consistent with
provisions of the Investment Company Act of 1940 and the regulations thereunder.
12. AMENDMENT. This Agreement may be amended from time to time by agreement
of the parties; provided, however, such amendment shall be approved by the vote
of a majority of the Trustees of the Trust, including a majority of the Trustees
who are not parties to this Agreement or interested persons of any such party
(other than as Trustees of the Trust), cast in person at a meeting called for
that purpose, and, where required under the Investment Company Act of 1940, by
vote of a majority of the outstanding voting securities of the Fund.
13. WAIVER. The failure of either party to insist, in one or more
instances, upon strict performance of the obligations of this Agreement, or to
exercise any rights contained herein, shall not be construed as a waiver, or
relinquishment for the future of such obligation or right, which shall remain
and continue in full force and effect.
14. MISCELLANEOUS. The captions in this Agreement are included for the
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. Should any
part of this Agreement be held or made invalid by a court decision, statute,
regulation, or otherwise, the remainder of this Agreement shall not be affected
thereby. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the Adviser and the Sub-Adviser have caused this
Agreement to be executed and delivered in their names and on their behalf by the
undersigned, duly authorized officers, all as of the day and year first above
written.
PARKSOUTH CORPORATION
By:------------------------------------------
Name: Raymond F. Thompson, Jr.
Title: President and Chief
Executive Officer
WOMACK ASSET MANAGEMENT, INC.
By:------------------------------------------
Name: William A. Womack
Title: President
<PAGE>
EXHIBIT A
DG INVESTOR SERIES
DG OPPORTUNITY FUND
Sub-Advisory Agreement
SUB-ADVISORY FEES
For all services rendered by the Sub-Adviser hereunder, the Adviser shall
pay, on a monthly basis, a Sub-Advisory Fee, based on the average daily net
assets of the Fund under management by the Sub-Adviser during the preceding
month, as described below. The Sub-Advisory fee shall be the sum of: 0.32% of
average daily net assets up to $50 million; 0.075% of average daily net assets
in excess of $50 million and up to $70 million; and 0.25% of average daily net
assets in excess of $70 million. The Sub- Advisory Fee will be accrued daily,
and for any period in which the Sub-Advisor provides portfolio management
services under this Agreement for less than one full month, the Sub-Advisory Fee
will be prorated by the number of the days of the month during which such
services were rendered.
Notwithstanding anything herein to the contrary, if the Sub- Advisory Fee
received by the Sub-Adviser during the first year of this Agreement, when added
to any other compensation paid by the Adviser to the Sub-Adviser for any
purposes during the same one-year period, does not equal or exceed $190,000 (One
Hundred Ninety Thousand Dollars) (the "Threshold Amount"), the Adviser shall
pay, at its own expense and cost, any resulting shortfall at the end of that
one-year period. If this Agreement is terminated before the end of that one-year
period, there shall be subtracted from the Threshold Amount a percentage of the
Threshold Amount equal to (x) a fraction equal to the number of the days of the
one-year period remaining at the date of termination, divided by 365, multiplied
by (y) a fraction equal to the total net assets of clients of the Adviser
managed by the Sub-Adviser at the time of such termination ("Aggregate net
Assets"), divided by the Aggregate Net Assets minus the amount, if any, of net
assets of other clients remaining under management by the Sub-Adviser following
such termination.
<PAGE>
EXHIBIT B
DG INVESTOR SERIES
DG OPPORTUNITY FUND
Sub-Advisory Agreement
RECORDS TO BE MAINTAINED BY THE SUB-ADVISER
1. (RULE 31A-1(B)(5) AND (6) OF THE INVESTMENT COMPANY ACT OF 1940). A
record of each brokerage order, and all other portfolio purchase and sales
orders by the Sub-Adviser or on behalf of the Fund for, or in connection with,
the purchase or sale of securities, whether executed or unexecuted. Such records
shall include:
A. The name of the broker,
B. The terms and conditions of the order, and of any modification or
cancellation thereof,
C. The time of entry or cancellation,
D. The price at which executed,
E. The time of receipt of report of execution, and
F. The name of the person who placed the order on behalf of the Fund.
2. (RULE 31A-1(B)(9) OF THE INVESTMENT COMPANY ACT OF 1940). A record for
each fiscal quarter, completed within ten (10) days after the end of the
quarter, showing specifically the basis or bases upon which the allocation of
orders for the purchase and sale of portfolio securities to brokers or dealers
was made, and the division of brokerage commissions or other compensation on
such purchase and sale orders. The record:
A. Shall include the consideration given to:
(i) the sale of shares of a feeder fund of the Portfolio
(ii) the supplying of services or benefits by brokers or dealers to:
(a) The Fund,
(b) The Adviser,
(c) Yourself (the Sub-Adviser), and
(d) Any person other than the foregoing.
(iii) Any other considerations other than the technical
qualifications of the brokers and dealers as such.
B. Shall show the nature of the services or benefits made available.
C. Shall describe in detail the application of any general or specific
formula or other determinant used in arriving at such allocation of
purchase and sale orders and such division of brokerage commissions
or other compensation.
D. Shall include the name of the person responsible for making the
determination of such allocation and such division of brokerage
commissions or other compensation.
3. (RULE 31A-1(B)(10) OF THE INVESTMENT COMPANY ACT OF 1940). A record in
the form of an appropriate memorandum identifying the person or persons,
committees, or groups authorizing the purchase or sale of portfolio securities.
Where an authorization is made by a committee or group, a record shall be kept
of the names of its members who participate in the authorization. There shall be
retained as part of this record any memorandum, recommendation, or instruction
supporting or authorizing the purchase or sale of portfolio securities and such
other information as is appropriate to support the authorization.*
- --------
* Such information might include: the current Form 10-K, annual and quarterly
reports, press releases, reports by analysts and from brokerage firms
(including their recommendations, i.e., buy, sell, hold), and any internal
reports of portfolio manager reviews.
4. (RULE 31A-1(F) OF THE INVESTMENT COMPANY ACT OF 1940). Such accounts,
books and other documents as are required to be maintained by registered
investment advisers by rule adopted under Section 204 of the Investment Advisers
Act of 1940, to the extent such records are necessary or appropriate to record
the Sub-Adviser's transactions made with respect to the Fund Account.
<PAGE>
EXHIBIT C
to the
Sub-Advisory Agreement
DG INVESTOR SERIES
DG OPPORTUNITY FUND (THE "FUND")
During the period from and including May 1, 1998 (the "Escrow Beginning
Date") until the date of approval by shareholders of the Fund in conformity with
the provisions of the Investment Company Act of 1940 (the "1940 Act"), including
but not limited to Section 15(c) thereof (the "Escrow Termination Date"), any
and all advisory fees (the "Advisory Fees") payable under this Sub-Advisory
Agreement (the "Sub-Advisory Agreement") shall be paid in accordance with this
Exhibit C. From and including the Escrow Beginning Date to, but not including,
the Escrow Termination Date, any and all Advisory Fees shall be paid into an
interest bearing escrow account (the "Escrow Account") maintained by an
unaffiliated financial institution (the "Escrow Agent"). Pursuant to a letter
agreement with the Escrow Agent, the Advisory Fees (including interest earned on
such Advisory Fees) will be paid to Womack Asset Management (the "Sub-Adviser")
only if shareholders of the Fund approve the Sub-Advisory Agreement. Further
pursuant to the letter agreement, on the Escrow Termination Date the Advisory
Fees will be released by the Escrow Agent from the Escrow Account to the
Sub-Adviser, only upon receipt by the Escrow Agent of a certificate from
officers of the Trust stating that the Sub-Advisory Agreement has received the
requisite shareholder vote. In the event that the requisite shareholder vote is
not obtained and the Escrow Termination Date does not therefore occur, the
officers of the Trust shall execute and deliver to the Escrow Agent, no later
than December 31, 1998, a certificate stating that the requisite shareholder
vote has not been obtained and that the Advisory Fees (and interest) in the
Escrow Account should be paid over to the Fund. The provisions of this Exhibit C
shall terminate and be of no further force and effect, and may be removed from
the Sub-Advisory Agreement, upon (i) the Escrow Termination Date, or (ii)
December 31, 1998.
<PAGE>
APPENDIX F
DG INVESTOR SERIES
NEW SUB-ADVISORY AGREEMENT
THIS AGREEMENT is made between ParkSouth Corporation, a Mississippi
corporation (hereinafter referred to as "Adviser") and Lazard Asset Management,
a division of Lazard Freres & Co. L.L.C., a New York limited liability company
(hereinafter referred to as the "Sub-Adviser").
WITNESSETH:
That the parties hereto, intending to be legally bound hereby agree as
follows:
1. The Adviser in its capacity as investment adviser to the DG
International Equity Fund (the "Fund"), a portfolio of DG Investor Series
("Trust"), appoints the Sub-Adviser as a discretionary investment sub-adviser to
the Fund pursuant to the terms set forth in this Agreement.
2. (a) The Sub-Adviser will deal in good faith and with due diligence and
will use professional skill, care and judgment in the performance of its duties
under this Agreement. In so doing, the Sub-Adviser shall formulate and implement
a continuing program for the management of the assets of the Fund. The
Sub-Adviser shall amend and update such program from time to time as financial
and other economic conditions warrant. The Sub-Adviser shall make all
determinations with respect to the investment of the assets of the Fund and
shall take such steps as may be necessary to implement the same, including the
placement of purchase and sale orders on behalf of the Fund. The Adviser shall
be responsible for the administration of the investment activities of the Fund,
including compliance with the requirements of the Investment Company Act of
1940, except for the investment management activities specifically delegated to
the Sub-Adviser to this Agreement.
(b) The Sub-Adviser will adopt or has adopted a written code of ethics
complying with the requirements of Rule 17j-1 under the Investment Company Act
of 1940, will provide the Adviser with a copy of the code of ethics and evidence
of its adoption, and will make such reports to the Trust as required by Rule
17j-1. The Sub-Adviser will also adopt or has adopted policies and procedures
sufficient to enable the Sub-Adviser to detect and prevent the misuse of
material, nonpublic information by the Sub-Adviser or any person associated with
the Sub-Adviser, in compliance with federal and state securities laws.
(c) The Sub-Adviser will prepare, maintain, keep current and preserve
on behalf of the Trust and the Adviser all records concerning the Sub-Adviser's
activities in connection with the Fund that the Fund is required by law to
maintain, including, but not limited to, records required under paragraphs
(b)(5), (b)(6), (b)(9), (b)(10), and (f) of rule 31a-1 under the Investment
Company Act. Any records required to be maintained and preserved pursuant to the
provisions of Rule 31a-1 and Rule 31a-2 under the Investment Company Act of 1940
that are prepared by the Sub-Adviser on behalf of the Fund are the property of
the Fund and will be surrendered promptly on request to the Fund or any person
acting on behalf of the Trust during the term of this Agreement and at any time
after the termination of this Agreement; provided, however, that the Sub-Adviser
has the right to make and retain copies. The Sub-Adviser will comply with all
reasonable requests for information by the Adviser or the Trust's officers or
Board of Trustees, including information required for the Fund's filings with
the Securities and Exchange Commission and state securities commissions.
(d) The Sub-Adviser will promptly after filing with the Securities and
Exchange Commission an amendment to its Form ADV furnish a copy of such
amendment to the Trust and the Adviser.
(e) The Sub-Adviser will immediately notify the Adviser of the
occurrence of any event which would disqualify the Sub-Adviser from serving as
an investment adviser of an investment company pursuant to Section 9(a) of the
Investment Company Act of 1940 or otherwise.
3. (a) The Sub-Adviser's power to direct the investment and reinvestment of
the assets of the Fund shall be exercised in accordance with applicable law, the
Fund's governing documents and the investment objectives, policies and
restrictions set forth in the then-current Prospectus and Statement of
Additional Information (collectively the "Prospectus") relating to the Fund
contained in the Trust's Registration Statement under the Investment Company Act
of 1940 and the Securities Act of 1933, as amended. The Adviser may also place
additional limitations on the Sub-Adviser's investment decisions by written
notice to the Sub-Adviser. The Adviser agrees to provide promptly, or cause to
be provided promptly, to the Sub-Adviser a copy of the documents mentioned above
and all changes made to such documents.
(b) While the Sub-Adviser will have day-to-day responsibility for the
discretionary investment decisions to be made on behalf of the Fund, the
Sub-Adviser will be subject to oversight by the Adviser. Such oversight,
however, shall not require prior approval of discretionary investment decisions
made by the Sub-Adviser by the Adviser pursuant to the preceding sentence.
(c) The Trust retains the right, on reasonable prior written notice to
the Adviser and the Sub-Adviser, to amend the Fund's investment objectives,
policies and restrictions placed on the Sub-Adviser's investment decisions.
Similarly, the Adviser retains the right, on reasonable prior written notice to
the Sub-Adviser, to amend any additional limitations, if any, that have been
placed on the Sub-Adviser's investment decisions with respect to the Fund. Upon
receipt of such prior notice from either the Trust or the Adviser, the
Sub-Adviser will promptly notify both the Fund and the Adviser if adoption of
such amendment would interfere with the completion of any transaction commenced
on behalf of the Fund prior to the Sub-Adviser's receipt of the notice. In the
event that the Trust or the Adviser proceeds to amend the Fund's investment
objectives, policies and restrictions or any additional limitations after being
notified by the Sub-Adviser of the pending transaction commenced on behalf of
the Fund, or in the event that the Trust or the Adviser amends the Fund's
investment objectives, policies and restrictions or any additional limitations
without providing reasonable prior notice to the Sub-Adviser, the Sub-Adviser
may complete such transaction unless doing so would violate any applicable law,
rule or regulation. In such an event, the Sub-Adviser will not be responsible
for any loss that may result from the completion of the transaction.
(d) Except as may be qualified elsewhere in this Agreement, the
Sub-Adviser is hereby authorized, for and on behalf of the Fund, in its
discretion, to:
(i) exercise any conversion and/or subscription rights available in
connection with any securities or other investments held in the Fund;
(ii) maintain all or part of the Fund's assets uninvested in
short-term income-producing instruments for such periods of time as shall be
deemed responsible and prudent by the Sub-Adviser;
(iii) instruct the Custodian, to deliver for cash received,
securities or other cash and/or securities instruments sold, exchanged, redeemed
or otherwise disposed of from the Fund, and to pay cash for securities or other
cash and/or securities instruments delivered to the Custodian and/or credited to
the Fund upon acquisition of the same for the Fund;
(iv) determine how to vote all proxies received with respect to
securities held in the Fund and direct the Custodian as to the voting of such
proxies; and
(v) generally, perform any other act necessary to enable the
Sub-Adviser to carry out its obligations under the Agreement.
4. (a) The Sub-Adviser shall select the brokers and dealers through whom
transactions on behalf of the Fund will be executed and the markets on or in
which such transactions will be executed. The Sub-Adviser shall place, in the
name of the Fund or its nominee (or appropriate foreign equivalent), all such
orders for the purchase or sale or of securities due to or from the Fund with
any broker and/or dealer who deals in such securities, all in the manner as set
forth below and in accordance with such operational procedures as may be agreed
to from time to time by the Adviser and the Sub-Adviser.
(b) In placing orders with brokers and/or dealers, the Sub-Adviser
shall use its best efforts to obtain the best net price and the most favorable
execution of its orders, after taking into account all factors it deems
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker and/or
dealer, and the reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis. Consistent with this obligation, the
Sub-Adviser may, to the extent permitted by law, purchase and sell portfolio
securities using brokers who provide brokerage and research services (within the
meaning of Section 28(e) of the Securities Exchange Act of 1934) to or for the
benefit of the Fund and/or other accounts over which the Sub-Adviser or the
Adviser exercises investment discretion. The Sub-Adviser is authorized to pay a
broker that provides such brokerage and research services a commission for
effecting a securities transaction which is in excess of the amount of
commission another broker would have charged for effecting that transaction, if
the Sub-Adviser determines in good faith that such commission was reasonable in
relation to the value of brokerage and research services provided by such
broker. This determination may be viewed in terms of either that particular
transactions or of the overall responsibilities of the Sub-Adviser with respect
to the accounts as to which it exercises investment discretion.
(c) Notwithstanding the foregoing, the Board of Trustees and the
Adviser periodically shall review the commissions paid by the Fund and determine
whether those commissions were reasonable in relation to the brokerage and
research services received. In addition, the Board of Trustees of the Trust, in
its discretion, may instruct the Sub-Adviser to effect all or a portion of its
securities transactions with one or more brokers and/or dealers selected by the
Board of Trustees, if it determines that the use of such brokers and/or dealers
is in the best interest of the Fund.
5. It is understood that certain other clients (including other funds,
portfolios and accounts) of the Sub-Adviser may have investment objectives and
policies similar to those of the Fund and that the Sub-Adviser may, from time to
time, make recommendations that result in the purchase (or sale) of a particular
security by its other clients and the Fund during the same period of time. If
transactions on behalf of more than one client during the same period increase
the demand for securities being purchased or the supply of securities being
sold, there may be an adverse effect on price or quantity. In such event, the
Sub-Adviser shall allocate the securities or investments to be purchased or
sold, as well as the expense incurred in the transactions (including price) in a
manner the Sub-Adviser considers equitable and consistent with its obligations
to the Fund and the Sub-Adviser's other clients.
6. The Sub-Adviser agrees that it will only enter into transactions that
are covered by Section 10(f) or Section 17(e) of the Investment Company Act of
1940 if it has (i) complied with Rule 10f-3 or Rule 17e-1 thereunder,
respectively, or the terms of an appropriate exemptive order issued to the Fund
by the SEC, and (ii) has complied with the procedures adopted thereunder by the
Board of Trustees of the Trust which may, pursuant to authority granted by the
Trust, be supplemented by interpretive guidelines of the Adviser. Aside from
parties that are known or should be known by the Sub-Adviser, the Adviser shall
promptly notify the Sub-Adviser of any additional parties with whom engaging in
a transaction for the Fund would result in a violation of the Investment Company
Act of 1940.
7. For its services under this Agreement, Sub-Adviser shall receive from
Adviser an annual fee (the "Sub-Advisory Fee"), as set forth in the exhibit
hereto.
8. This Agreement shall begin for the Fund on the date that the parties
execute the exhibit to this Agreement relating to such Fund and shall continue
in effect for the Fund for two years from the date of its execution and from
year to year thereafter, subject to the provisions for termination and all of
the other terms and conditions hereof if: (a) such continuation shall be
specifically approved at least annually by the vote of a majority of the
Trustees of the Trust, including a majority of the Trustees who are not parties
to this Agreement or interested persons of any such party (other than as
Trustees of the Trust) cast in person at a meeting called for that purpose; and
(b) the Adviser shall not have notified the Trust in writing at least sixty (60)
days prior to the anniversary date of this Agreement in any year thereafter that
it does not desire such continuation with respect to the Fund.
9. Notwithstanding any provision in this Agreement, it may be terminated at
any time without the payment of any penalty: (a) by the Trustees of the Trust or
by a vote of a majority of the outstanding voting securities (as defined in
Section 2(a)(42) of the Act) of the Fund on sixty (60) days' written notice to
the Adviser; (b) by the Sub-Adviser or the Adviser upon 60 days' written notice
to the other party to the Agreement. Termination of this Agreement will not
affect (i) the validity of any action previously taken by the Adviser or the
Sub-Adviser under this Agreement or (ii) liabilities or obligations of the
parties from transactions initiated before termination of this Agreement.
10. This Agreement shall automatically terminate:
(a) in the event of its assignment (as defined in the Investment
Company Act of 1940); or
(b) in the event of termination of the Investment Advisory Contract for
any reason whatsoever.
11. So long as both the Adviser and the Sub-Adviser shall be legally
qualified to act as an investment adviser to the Fund, neither the Adviser nor
the Sub-Adviser shall act as an investment adviser (as such term is defined in
the Investment Company Act of 1940) to the Fund except as provided herein and in
the Investment Advisory Contract or in such other manner as may be expressly
agreed between the Adviser and the Sub-Adviser.
Provided, however, that if the Adviser or Sub-Adviser shall resign prior to
the end of any term of this Agreement or for any reason be unable or unwilling
to serve for a successive term which has been approved by the Trustees of the
Trust pursuant to the provisions of Paragraph 8 of this Agreement or Paragraph 6
of the Investment Advisory Contract, the remaining party, the Sub-Adviser or the
Adviser, as the case may be, shall not be prohibited from serving as an
investment adviser to such Fund by reason of the provisions of this Paragraph
11.
12. This Agreement may be amended from time to time by agreement of the
parties hereto provided that such amendment shall be approved both by the vote
of a majority of Trustees of the Trust, including a majority of Trustees who are
not parties to this Agreement or interested persons, as defined in Section
2(a)(19) of the Investment Company Act of 1940, of any such party at a meeting
called for that purpose, and, where required by Section 15(a)(2) of the
Investment Company Act of 1940, by the holders of a majority of the outstanding
voting securities (as defined in Section 2(a)(42) of the Investment Company Act
of 1940) of the Fund.
13. This Agreement shall be construed in accordance with the laws of the
Commonwealth of Pennsylvania without giving effect to the choice of law
provisions thereof, to the extent that such laws are consistent with provisions
of the Investment Company Act of 1940 and the regulations thereunder. The
failure of either party to insist, in one or more instances, upon strict
performance of the obligations of this Agreement, or to exercise any rights
contained herein, shall not be construed as a waiver, or relinquishment for the
future of such obligation of right, which shall remain and continue in full
force and effect. Should any part of this Agreement be held or made invalid by a
court decision, statute, regulation, or otherwise, the remainder of this
Agreement shall not be affected thereby. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
<PAGE>
EXHIBIT A
DG INVESTOR SERIES
DG INTERNATIONAL EQUITY FUND
Sub-Advisory Agreement
For all services rendered by Sub-Adviser hereunder, Adviser shall pay
Sub-Adviser a Sub-Advisory Fee equal to .50% (one-half of one percent) of the
average daily net assets of the above-mentioned portfolio. The Sub-Advisory Fee
shall be accrued daily, and paid monthly as set forth in the Investment Advisory
Contract dated May 1, 1998.
This Exhibit duly incorporates by reference the Sub-Advisory Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Exhibit to be
executed on their behalf by their duly authorized officers, and their corporate
seals to be affixed hereto this 1st day of May, 1998.
ATTEST: PARKSOUTH CORPORATION
By:--------------------------- By:----------------------------------
Title:-------------------- Title:---------------------------
ATTEST: LAZARD ASSET MANAGEMENT, A
DIVISION OF LAZARD FRERES & CO.,
L.L.C.
By:--------------------------- By:----------------------------------
Title:-------------------- Title:---------------------------
<PAGE>
EXHIBIT B
to the
Sub-Advisory Agreement
DG INVESTOR SERIES
DG INTERNATIONAL EQUITY FUND (THE "FUND")
During the period from and including May 1, 1998 (the "Escrow Beginning
Date") until the date of approval by shareholders of the Fund in conformity with
the provisions of the Investment Company Act of 1940 (the "1940 Act"), including
but not limited to Section 15(c) thereof (the "Escrow Termination Date"), any
and all advisory fees (the "Advisory Fees") payable under this Sub-Advisory
Agreement (the "Sub-Advisory Agreement") shall be paid in accordance with this
Exhibit B. From and including the Escrow Beginning Date to, but not including,
the Escrow Termination Date, any and all Advisory Fees shall be paid into an
interest bearing escrow account (the "Escrow Account") maintained by an
unaffiliated financial institution (the "Escrow Agent"). Pursuant to a letter
agreement with the Escrow Agent, the Advisory Fees (including interest earned on
such Advisory Fees) will be paid to Lazard Asset Management, a division of
Lazard Fr_res & Co., L.L.C. (the "Sub-Adviser") only if shareholders of the Fund
approve the Sub-Advisory Agreement. Further pursuant to the letter agreement, on
the Escrow Termination Date the Advisory Fees will be released by the Escrow
Agent from the Escrow Account to the Sub-Adviser, only upon receipt by the
Escrow Agent of a certificate from officers of the Trust stating that the
Sub-Advisory Agreement has received the requisite shareholder vote. In the event
that the requisite shareholder vote is not obtained and the Escrow Termination
Date does not therefore occur, the officers of the Trust shall execute and
deliver to the Escrow Agent, no later than December 31, 1998, a certificate
stating that the requisite shareholder vote has not been obtained and that the
Advisory Fees (and interest) in the Escrow Account should be paid over to the
Fund. The provisions of this Exhibit B shall terminate and be of no further
force and effect, and may be removed from the Sub-Advisory Agreement, upon (i)
the Escrow Termination Date, or (ii) December 31, 1998.
<PAGE>
APPENDIX G
The principal executive officer and directors of First American are listed in
the table below. The business address of each such individual is First American
Center, 315 Deaderick Street, Nashville, Tennessee 37237. Certain executive
officers and directors of First American also hold or have held various
positions with bank and non-bank affiliates of First American, including First
American Corporation.
Position with Other Substantial Business,
First American Profession, Vocation
NAME NATIONAL BANK or Employment
Dennis C. Bottorff Chairman and Chairman and Chief Executive
Chief Officer of First American
Executive Corporation
Officer
Earnest W. Deavenport, Director Chairman and Chief Executive
Jr. Officer of Eastman Chemical
Company
Reginald D. Dickson Director President Emeritus of
INROADS, Inc.
James A. Haslam, II Director Chairman of the Board of
Pilot Corporation
Warren A. Hood, Jr. Director Chairman of Hood Industries,
Inc.
Martha R. Ingram Director Chairman of the Board of
Ingram Industries, Inc.
Walter G. Knestrick Director Chairman of the Board of
Walter Knestrick Contractor,
Inc.
Gene C. Koonce Director Vice Chairman of United
Cities Gas Company
James R. Martin Director Chairman and Chief Executive
Officer of Plasti-Line, Inc.
Robert A. McCabe, Jr. Director Vice Chairman of First
American Corporation and
President of First American
Enterprises
Howard L. McMillan, Director Chairman of Deposit Guaranty
Jr. System
John N. Palmer Director Chairman and Chief Executive
Officer of SkyTel
Communications, Inc.
Dale W. Polley Director President and Principal
Financial Officer of First
American Corporation
E.B. Robinson, Jr. Director Vice Chairman and Chief
Operating Officer of First
American Corporation and
President of First American
National Bank
Roscoe R. Robinson Director Former Vice Chancellor for
Health Affairs of Vanderbilt
University Medical Center
James F. Smith Director Former Chairman of the Board
of First American
Corporation
Cal Turner, Jr. Director Chairman and Chief Executive
Officer of Dollar General
Corporation
Celia A. Wallace Director Chairman and Chief Executive
Officer of Southern Medical
Health Systems, Inc.
Ted H. Welch Director Real Estate Developer,
President and Chief
Executive Officer of Eagle
Communications
J. Kelley Williams, Director Chairman and Chief Executive
Sr. Officer of ChemFirst, Inc.
David K. Wilson Director Chairman of the Board of
Cherokee Equity Corporation
Toby S. Wilt Director President of TSW Investment
Company
William S. Wire, II Director Former Chairman of the Board
of Genesco, Inc.
<PAGE>
Preliminary Copy
DG INVESTOR SERIES
The undersigned shareholder of the [Insert Name of DG Fund] (the
"Fund"), a series of DG Investor Series (the "Trust"), hereby appoints
______________ and _____________, and each of them, the attorneys and proxies of
the undersigned, with full power of substitution, to vote, as indicated herein,
all of the shares of beneficial interest of the Fund standing in the name of the
undersigned at the close of business on October 15, 1998, at a Special Meeting
of Shareholders to be held at the Trust's principal place of business located at
5800 Corporate Drive, Pittsburgh, Pennsylvania, at 10:00 a.m. (Eastern time) on
Friday, December 11, 1998, and at any and all adjournments thereof, with all of
the powers the undersigned would possess if then and there personally present
and especially (but without limiting the general authorization and power hereby
given) to vote as indicated on the proposal, as more fully described in the
Prospectus/Proxy Statement for the meeting.
Please mark boxes in blue or black ink.
1. To approve or disapprove an Agreement and Plan of Reorganization
providing for the transfer of all of the assets of the Fund in exchange solely
for Class A Shares and Trust Shares of [Insert Name of ISG Portfolio], a series
of The Infinity Mutual Funds, Inc., and the assumption by [Insert Name of ISG
Portfolio] of the Fund's liabilities, and the pro rata distribution of those
shares, as applicable, to Fund shareholders and subsequent termination of the
Fund as a series of the Trust.
FOR AGAINST ABSTAIN
___ ___ ___
2. To approve or disapprove a New Advisory Contract with ParkSouth
Corporation.
FOR AGAINST ABSTAIN
___ ___ ___
* * *
3. To approve or disapprove a New Sub-Advisory Agreement:
(A) With respect to DG Opportunity Fund ONLY -- a New Sub-Advisory
Agreement between ParkSouth Corporation and Womack Asset
Management, Inc.
FOR AGAINST ABSTAIN
___ ___ ___
(B) With respect to DG International Equity Fund ONLY -- a New
Sub-Advisory Agreement between ParkSouth Corporation and Lazard
Asset Management.
FOR AGAINST ABSTAIN
___ ___ ___
* * *
4. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting, or any adjournment(s) thereof.
<PAGE>
THIS PROXY IS SOLICITED BY THE TRUST'S BOARD OF TRUSTEES AND WILL BE VOTED FOR
THE ABOVE PROPOSALS UNLESS OTHERWISE INDICATED.
Signature(s) should be exactly as name or names appearing on
this proxy. If shares are held jointly, each holder should
sign. If signing is by attorney, executor, administrator,
trustee or guardian, please give full title.
Dated: __________________, 1998
--------------------------
Signature(s)
--------------------------
Signature(s)
Sign, Date and Return the Proxy
Card Promptly Using the
Enclosed Envelope
<PAGE>
PRELIMINARY COPY
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 19, 1998
Transfer of the Assets of
DG INVESTOR SERIES
DG Equity Fund
DG Government Income Fund
DG International Equity Fund
DG Limited Term Government Income Fund
DG Municipal Income Fund
DG Opportunity Fund
DG Prime Money Market Fund
DG Treasury Money Market Fund
5800 Corporate Drive
Pittsburgh, PA 15237-7010
1-800-554-4611
To and in Exchange for Shares of Corresponding
ISG FUNDS
ISG Large Cap Equity Portfolio
ISG Government Income Portfolio
ISG International Equity Portfolio
ISG Limited Duration U.S. Government Portfolio
ISG Municipal Income Portfolio
ISG Small Cap Opportunity Portfolio
ISG Prime Money Market Portfolio
ISG U.S. Treasury Money Market Portfolio
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-852-0045
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the Prospectus/Proxy
Statement dated October 19, 1998, relating to the proposed transfer of all of
the assets and liabilities of each series of DG Investor Series (collectively,
the "DG Funds") in exchange for Class A Shares and Trust Shares of corresponding
series of The Infinity Mutual Funds, Inc. (collectively, the "ISG Funds"), and
the approval of certain advisory agreements with respect to the DG Funds. The
transfer is to occur pursuant to an Agreement and Plan of Reorganization. This
Statement of Additional Information consists of this cover page and the
following described documents, each of which is attached hereto or incorporated
herein by reference:
1. The Statements of Additional Information of the ISG Funds
dated April 24, 1998 and October __, 1998.
2. The Statement of Additional Information of the DG Funds dated
June 30, 1998.
3. Annual Report of the Pre-Existing ISG Funds (as defined below)
for the fiscal year ended December 31, 1997.
4. Semi-Annual Report of the Pre-Existing ISG Funds (as defined
below) for the six-month period ended June 30, 1998 (unaudited).
5. Annual Report of the DG Funds for the fiscal year ended
February 28, 1998.
6. Pro forma financial statements with respect to the ISG Limited
Duration U.S. Government Portfolio, ISG Prime Money Market Portfolio
and ISG U.S. Treasury Money Market Portfolio (collectively, the
"Pre-Existing ISG Funds"), which are the only ISG Funds that commenced
investment operations prior to the proposed transfer.
The Prospectus/Proxy Statement dated October 19, 1998 may be
obtained by writing to DG Investor Series, 5800 Corporate Drive, Pittsburgh,
Pennsylvania 15237-7010, or calling 1-800-554-4611.
<PAGE>
AMERISTAR MUTUAL FUNDS
CAPITAL GROWTH PORTFOLIO
DIVIDEND GROWTH PORTFOLIO
LIMITED DURATION U.S. GOVERNMENT PORTFOLIO
LIMITED DURATION INCOME PORTFOLIO
LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO
CORE INCOME PORTFOLIO
TENNESSEE TAX EXEMPT BOND PORTFOLIO
PRIME MONEY MARKET PORTFOLIO
U.S. TREASURY MONEY MARKET PORTFOLIO
CLASS A SHARES, CLASS B SHARES AND TRUST SHARES
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
April 24, 1998
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current Prospectus for
the AmeriStar Portfolios listed above (each, a "Portfolio" and collectively, the
"Portfolios") of The Infinity Mutual Funds, Inc. (the "Fund"), dated April 24,
1998, as it may be revised from time to time. To obtain a copy of the
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.
The U.S. Treasury Money Market Portfolio does not offer Class B Shares.
TABLE OF CONTENTS
PAGE
Investment Objectives and Management Policies...................... B-2
Management of the Fund............................................. B-22
Management Arrangements............................................ B-24
Purchase and Redemption of Shares.................................. B-28
Determination of Net Asset Value................................... B-32
Performance Information............................................ B-34
Dividends, Distributions and Taxes................................. B-38
Portfolio Transactions............................................. B-40
Information About the Portfolios................................... B-42
Custodian, Transfer and Dividend Disbursing
Agent, Counsel and Independent Auditors.......................... B-44
Financial Statements............................................... B-44
Appendix........................................................... B-45
<PAGE>
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN CONJUNCTION
WITH THE SECTIONS IN EACH PROSPECTUS ENTITLED "DESCRIPTION OF THE PORTFOLIOS"
AND "APPENDIX."
PORTFOLIO SECURITIES
BANK OBLIGATIONS. (All Portfolios, except the Limited Duration U.S.
Government Portfolio and U.S. Treasury Money Market Portfolio) 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. The
Prime Money Market Portfolio's investment in obligations of foreign subsidiaries
of domestic banks are subject, to the extent required by the Investment Company
Act of 1940, as amended (the "1940 Act"), to the limitations on investing in the
securities of other investment companies.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by Federal and state
regulation as well as governmental action in the country in which the foreign
bank has its head office. In addition, Federal branches licensed by the
Comptroller of the Currency and branches licensed by certain states ("State
Branches") may be required to: (1) pledge to the regulator, by depositing assets
with a designated bank within the state, a certain percentage of their assets as
fixed from time to time by the appropriate regulatory authority; and (2)
maintain assets within the state in an amount equal to a specified percentage of
the aggregate amount of liabilities of the foreign bank payable at or through
all of its agencies or branches within the state. The deposits of Federal and
State Branches generally must be insured by the FDIC if such branches take
deposits of less than $100,000.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, or by domestic branches of foreign banks, the Adviser carefully
evaluates such investments on a case-by-case basis.
Each of these Portfolios 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 of these Portfolios 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.
Under normal circumstances, and as a matter of fundamental policy, the
Prime Money Market Portfolio will "concentrate" at least 25% of its assets in
debt instruments issued by domestic and foreign companies engaged in the banking
industry, including bank holding companies. Such investments may include CDs,
TDs, bankers' acceptances and obligations issued by bank holding companies, as
well as repurchase agreements entered into with banks (as distinct from non-bank
dealers) in accordance with the policies set forth in "Repurchase Agreements"
below. During periods when the Adviser determines that the Prime Money Market
Portfolio should be in a temporary defensive position, the Portfolio may invest
less than 25% of its total assets in the banking industry; during such times the
Prime Money Market Portfolio's assets will be invested in accordance with its
other investment policies. The Adviser may determine that the adoption of a
temporary defensive position with respect to issuers in the banking industry is
appropriate on the basis of such factors as political, economic, market or
regulatory developments adversely affecting that industry as compared to the
industries of other issuers of securities available for investment by the Prime
Money Market Portfolio.
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 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. (Core Income Portfolio, Capital Growth
Portfolio, Dividend Growth Portfolio and Limited Duration 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--Each of these Portfolios 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.
STANDARD & POOR'S DEPOSITARY RECEIPTS. (Capital Growth Portfolio and
Dividend Growth Portfolio) These securities, commonly referred to as "spiders,"
represent an interest in a fixed portfolio of common stocks designed to track
the price and dividend yield performance of the Standard & Poor's 500 Index or
the Standard & Poor's MidCap 400 Index, as the case may be.
MUNICIPAL OBLIGATIONS. (Core Income Portfolio, Limited Duration Income
Portfolio, Limited Duration Tennessee Tax Free Portfolio, Tennessee Tax Exempt
Bond Portfolio and, to a limited extent, Prime 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 the Tennessee Tax Exempt Bond Portfolio and Limited Duration
Tennessee Tax Free Portfolio may invest up to 5% of the value of its total
assets in municipal lease obligations or installment purchase contract
obligations (collectively, "lease obligations"). Lease obligations have special
risks not ordinarily associated with Municipal Obligations. Although lease
obligations do not constitute general obligations of the municipality for which
the municipality's taxing power is pledged, a lease obligation ordinarily is
backed by the municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. Certain lease obligations in which
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 the Tennessee Tax Exempt Bond Portfolio and Limited Duration
Tennessee Tax Free Portfolio will purchase tender option bonds only when it is
satisfied that the custodial and tender option arrangements, including the fee
payment arrangements, will not adversely affect the tax exempt status of the
underlying Municipal Obligations and that payment of any tender fees will not
have the effect of creating taxable income for the Portfolio. Based on the
tender option bond agreement, 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.
The distribution of investments (at value) in Municipal Obligations by
ratings for the fiscal year ended December 31, 1997 for the Tennessee Tax Exempt
Bond Portfolio and Limited Duration Tennessee Tax Free Portfolio was as follows:
PERCENTAGE OF VALUE
MOODY'S FITCH S&P LIMITED DURATION
TENNESSEE TAX EXEMPT TENNESSEE TAX
BOND PORTFOLIO FREE PORTFOLIO
-------------------- ----------------
Aaa AAA AAA 59.3% 50.4%
Aa AA AA 35.9% 31.9%
A A A 4.8% 17.7%
100.0% 100.0%
MANAGEMENT POLICIES
OPTIONS TRANSACTIONS. (Capital Growth Portfolio and Dividend Growth
Portfolio) Each of the Capital Growth Portfolio and Dividend Growth Portfolio
may engage in options transactions, such as purchasing or writing covered call
or put options. The principal reason for the Portfolio writing covered call
options is to realize, through the receipt of premiums, a greater return than
would be realized on its portfolio securities alone. In return for a premium,
the writer of a covered call option forfeits the right to any appreciation in
the value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). Nevertheless,
the call writer retains the risk of a decline in the price of the underlying
security. Similarly, the principal reason for writing covered put options is to
realize income in the form of premiums. The writer of a covered put option
accepts the risk of a decline in the price of the underlying security. The size
of the premiums that the Portfolio may receive may be adversely affected as new
or existing institutions, including other investment companies, engage in or
increase their option-writing activities.
Options written ordinarily will have expiration dates between one and nine
months from the date written. The exercise price of the options may be below,
equal to or above the market values of the underlying securities at the time the
options are written. In the case of call options, these exercise prices are
referred to as "in-the-money," "at-the-money" and "out-of-the-money,"
respectively. The Portfolio may write (a) in-the-money call options when the
Adviser expects that the price of the underlying security will remain stable or
decline moderately during the option period, (b) at-the-money call options when
the Adviser expects that the price of the underlying security will remain stable
or advance moderately during the option period and (c) out-of-the-money call
options when the Adviser expects that the premiums received from writing the
call option plus the appreciation in market price of the underlying security up
to the exercise price will be greater than the appreciation in the price of the
underlying security alone. In these circumstances, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the-money, at-the-money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be utilized in the same market environments that such call options are used
in equivalent transactions.
So long as the Portfolio's obligation as the writer of an option continues,
it may be assigned an exercise notice by the broker-dealer through which the
option was sold, requiring it to deliver, in the case of a call, or take
delivery of, in the case of a put, the underlying security against payment of
the exercise price. This obligation terminates when the option expires or the
Portfolio effects a closing purchase transaction. The Portfolio can no longer
effect a closing purchase transaction with respect to an option once it has been
assigned an exercise notice.
While it may choose to do otherwise, the Portfolio generally will purchase
or write only those options for which the Adviser believes there is an active
secondary market so as to facilitate closing transactions. There is no assurance
that sufficient trading interest to create a liquid secondary market on a
securities exchange will exist for any particular option or at any particular
time, and for some options no such secondary market may exist. A liquid
secondary market in an option may cease to exist for a variety of reasons. In
the past, for example, higher than anticipated trading activity or order flow,
or other unforeseen events, at times have rendered certain clearing facilities
inadequate and resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that otherwise may interfere with the timely execution of
customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. If, as a covered call option
writer, the Portfolio is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise or it
otherwise covers its position.
The Portfolio intends to treat options in respect of specific securities
that are not traded on a national securities exchange and the securities
underlying covered call options written by the Portfolio as illiquid securities.
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. (Capital Growth Portfolio and Dividend Growth
Portfolio) Each of the Capital Growth Portfolio and Dividend Growth Portfolio
may purchase and write put and call options on stock indexes to the extent of
15% of the value of its net assets. Options on stock indexes are similar to
options on stock except that (a) the expiration cycles of stock index options
are monthly, while those of stock options are currently quarterly, and (b) the
delivery requirements are different. Instead of giving the right to take or make
delivery of a stock at a specified price, an option on a stock index gives the
holder the right to receive a cash "exercise settlement amount" equal to (i) the
amount, if any, by which the fixed exercise price of the option exceeds (in the
case of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
times a specified multiple. The writer of the option is obligated, in return for
the premium received, to make delivery of this amount. The writer may offset its
position in stock index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. (Capital Growth
Portfolio, Dividend Growth Portfolio, Tennessee Tax Exempt Bond Portfolio and
Limited Duration Tennessee Tax Free 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. (Prime Money Market Portfolio and U.S.
Treasury Money Market Portfolio) Each of these Portfolios 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 CONSIDERATIONS AND RISK FACTORS
INVESTING IN TENNESSEE MUNICIPAL OBLIGATIONS. (Tennessee Tax Exempt Bond
Portfolio and Limited Duration Tennessee Tax Free Portfolio) Investors in the
Tennessee Tax Exempt Bond Portfolio and Limited Duration Tennessee Tax Free
Portfolio should consider carefully the special risks inherent in such
Portfolios' investment in Tennessee Municipal Obligations. These risks result
from the financial condition of the State of Tennessee. The following
information constitutes only a brief summary, does not purport to be a complete
description, and is based on information drawn from official statements relating
to securities offerings of the State of Tennessee (the "State") and various
local agencies, available as of the date of the Statement of Additional
Information. While the Fund has not independently verified such information, it
has no reason to believe that such information is not correct in all material
respects.
In 1978, the voters of the State of Tennessee approved an amendment to the
State Constitution requiring that (1) the total expenditures of the State for
any fiscal year shall not exceed the State's revenues and reserves, including
the proceeds of debt obligations issued to finance capital expenditures and (2)
in no year shall the rate of growth of appropriations from State tax revenues
exceed the estimated rate of growth of the State's economy. In the past the
Governor and the General Assembly have had to restrict expenditures to comply
with the State Constitution.
The Constitution of the State of Tennessee requires a balanced budget. As
required by law, the legislature enacted a balanced budget for fiscal year
1994-95. Beginning January 1, 1994, the State of Tennessee received a waiver
from the Federal government to replace Medicaid with the new program, TennCare.
TennCare was implemented to help control the increasing cost of health care and
to provide insurance coverage not only to previous Medicaid eligible individuals
but also to uninsured Tennesseans. Due principally to inaccurate funding
assumptions with respect to TennCare program, the fiscal ended June 30, 1995 had
an estimated budgetary shortfall of $126 million.
Despite the budgetary concerns caused by the costs associated with
implementing TennCare, the economic outlook for Tennessee remains favorable. The
State's economic diversity has improved substantially over the last eleven
years. Investments announced in new and expanding business exceeded $1 billion
in each of those years and exceeded $2 billion in the last two years. The $3.2
billion in announced capital investments in 1989 was the single largest year and
exceeded the $2.78 billion in 1985 when Saturn Corporation chose Tennessee for
its plant site. This growth created 23,800 new jobs in Tennessee for the year
ended June 1994.
The Tennessee General Assembly enacted a balanced budget for fiscal year
1994-95. The budget included a two percent salary increase for State employees,
public higher education employees and teachers in the public school system
effective on July 1, 1994, and another two percent salary increase effective on
October 1, 1994. The revenue estimates were officially revised at March 1 when
the budget for the fiscal year 1995-96 was presented to the General Assembly.
Actual revenue collections for fiscal year 1994-95 through January 1995
reflected increases of 9.68% for the sales tax and 17.45% for the combined
excise tax and franchise tax. Total growth in collections, excluding the health
services tax, is 9.07%. Expenditures for TennCare (a recently implemented
managed care program for Tennessee's poor and uninsured, under a Medicaid
waiver), the housing of state prisoners, institutional operating costs in
prisons, the children's plan and some other services were in excess of the
original budgeted amounts for fiscal year 1994-95. Supplemental appropriations
were accommodated within the revised revenue estimates and a proposal to use
one-time reserves. The recommended budget for 1995-96 continues the funding of
improvements in the Basic Education Program for public schools and begins
funding teacher salary equalization. It funds TennCare and the Administration's
proposed crime legislation. The revenue estimates for fiscal year 1995-96
assumed a 6.3% growth in the sales tax, and a 5.0% growth in the excise and
franchise taxes. The assumed growth in all collections by the Department of
Revenue is 5.08%. The Revenue Fluctuation Reserve was reduced to $101.4 million
at June 30, 1994 due to accrued liabilities in the children's plan and other
programs. The new budget maintains the reserve at $101.4 million for fiscal
years 1994-95 and 1995-96.
On March 22, 1993, the Tennessee Supreme Court affirmed a lower court
decision that funding for the pubic school system in Tennessee is
unconstitutional because citizens in more affluent school districts receive
greater educational funding. The case was remanded to the trial court for
further proceedings with respect to the State's providing additional funding to
less affluent school systems. After substantial subsequent litigation, the
Tennessee Supreme Court issued on February 16, 1995, an opinion approving the
State's plan set forth in the Educational Improvement Act of 1992 with the
modification that the plan should also include a provision to equalize teachers'
salaries in the same way that other expenditures were to be equalized under the
program. The result of this decision may be that the State must provide
additional funding to less affluent school systems. Currently, the general
obligation ratings for the State are Aaa by Moody's, AA+ by S&P and AAA by
Fitch.
LOWER RATED SECURITIES. (Capital Growth Portfolio and Dividend Growth
Portfolio) Each of the Capital Growth Portfolio and Dividend Growth Portfolio is
permitted to invest in securities rated as low as Ba by Moody's or BB by S&P,
Fitch or Duff & Phelps Credit Rating Co. ("Duff"). Such securities, though
higher yielding, are characterized by risk. See "Description of the
Portfolios--Investment Considerations and Risk Factors--Lower Rated Securities"
in the Prospectus for a discussion of certain risks and the "Appendix" for a
general description of Moody's, S&P, Fitch and Duff ratings. Although ratings
may be useful in evaluating the safety of interest and principal payments, they
do not evaluate the market value risk of these securities. The Portfolio will
rely on the Adviser's judgment, analysis and experience in evaluating the
creditworthiness of an issuer.
Investors should be aware that the market values of many of these
securities tend to be more sensitive to economic conditions than are higher
rated securities and will fluctuate over time. These securities are considered
by S&P, Moody's, Fitch and Duff generally to be predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation and generally will involve more credit risk than
securities in the higher rating categories.
Companies that issue certain of these securities often are highly leveraged
and may not have available to them more traditional methods of financing.
Therefore, the risk associated with acquiring the securities of such issuers
generally is greater than is the case with the higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of these securities may not have sufficient
revenues to meet their interest payment obligations. The issuer's ability to
service its debt obligations also may be affected adversely by specific
corporate developments, forecasts, or the unavailability of additional
financing. The risk of loss because of default by the issuer is significantly
greater for the holders of these securities because such securities generally
are unsecured and often are subordinated to other creditors of the issuer.
Because there is no established retail secondary market for many of these
securities, the Portfolio anticipates that such securities could be sold only to
a limited number of dealers or institutional investors. To the extent a
secondary trading market for these securities does exist, it generally is not as
liquid as the secondary market for higher rated securities. The lack of a liquid
secondary market may have an adverse impact on market price and yield and the
Portfolio's ability to dispose of particular issues when necessary to meet its
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities also may make it more difficult for the
Portfolio to obtain accurate market quotations for purposes of valuing its
securities and calculating its net asset value. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of these securities. In such cases, judgment may play a
greater role in valuation because less reliable, objective data may be
available.
These securities may be particularly susceptible to economic downturns. It
is likely that an economic recession could disrupt severely the market for such
securities and may have an adverse impact on the value of such securities. In
addition, it is likely that any such economic downturn could adversely affect
the ability of the issuers of such securities to repay principal and pay
interest thereon and increase the incidence of default for such securities.
Each of these Portfolios may acquire these securities during an initial
offering. Such securities may involve special risks because they are new issues.
The Portfolio does not have any arrangement with any persons concerning the
acquisition of such securities, and the Adviser will review carefully the credit
and other characteristics pertinent to such new issues.
The credit risk factors pertaining to lower rated securities also apply to
lower rated zero coupon securities. Such zero coupon securities carry an
additional risk in that, unlike securities which pay interest throughout the
period to maturity, the Portfolio will realize no cash until the cash payment
date unless a portion of such securities are sold and, if the issuer defaults,
the Portfolio may obtain no return at all on its investment. See "Dividends,
Distributions and Taxes."
INVESTMENT RESTRICTIONS
Each Portfolio has adopted investment restrictions numbered 1 through 7 as
fundamental policies and the Prime Money Market Portfolio has adopted investment
restrictions numbered 14 and 15 and each other Portfolio has adopted investment
restriction number 16 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 8 through 13 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 Tennessee Tax Exempt
Bond Portfolio, Limited Duration Tennessee Tax Free Portfolio, Limited Duration
Income Portfolio and Core Income 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, 9 and 10 are not considered senior securities for purposes of this
Investment Restriction when asset coverage is maintained in accordance with
guidelines established by the Securities and Exchange Commission.
7. Purchase securities on margin, but each Portfolio may make margin
deposits in connection with transactions in options, forward contracts, futures
contracts, including those relating to indexes, and options on futures contracts
or indexes.
8. Invest in the securities of a company for the purpose of exercising
management or control, but each Portfolio will vote the securities it owns as a
shareholder in accordance with its views.
9. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
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.
10. Purchase, sell or write puts, calls or combinations thereof, except as
may be described in the Portfolios' Prospectus and this Statement of Additional
Information.
11. Enter into repurchase agreements providing for settlement in more than
seven days after notice or purchase securities which are illiquid, if, in the
aggregate, more than 10% of the value of the Portfolio's net assets would be so
invested.
12. Purchase securities of other investment companies, except to the extent
permitted under the 1940 Act.
The following investment restriction numbered 13 is a non-fundamental
policy which applies to each Portfolio, except the Prime Money Market Portfolio
and U.S. Treasury Money Market Portfolio. None of these Portfolios may:
13. Purchase securities of any company having less than three years'
continuous operations (including operations of any predecessors) if such
purchase would cause the value of the Portfolio's investments in all such
companies to exceed 5% of the value of its total assets.
The following investment restrictions numbered 14 and 15 are fundamental
policies which apply only to the Prime Money Market Portfolio. The Prime Money
Market Portfolio may not:
14. Invest more than 5% of its assets in the obligations of any one issuer,
except that up to 25% of the value of the Prime Money Market Portfolio's total
assets may be invested without regard to any such limitation, provided that not
more than 10% of its assets may be invested in securities issued or guaranteed
by any single guarantor of obligations held by the Prime Money Market Portfolio.
15. Invest less than 25% of its total assets in securities issued by banks
or invest more than 25% of its assets in the securities of issuers in any other
industry, provided that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Notwithstanding the foregoing, for temporary defensive
purposes the Prime Money Market Portfolio may invest less than 25% of its assets
in bank obligations.
The following investment restriction number 16 is a fundamental policy
which applies to each Portfolio, except the Prime Money Market Portfolio. None
of these Portfolios may:
16. Invest more than 25% of its assets in the securities of issuers in any
single industry, provided that, in the case of the Tennessee Tax Exempt Bond
Portfolio and Limited Duration Tennessee Tax Free 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.
For purposes of Investment Restriction No. 16, 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 125
West 55th Street, New York, New York 10019.
NORMA A. COLDWELL, DIRECTOR. International Economist and Consultant;
Executive Vice President of Coldwell Financial Consultants; Trustee
and Treasurer of Meridian House International (International Education
and Cultural Group); Member of the Board of Advisors of Meridian
International Center and Emerging Capital Markets, S.A. (Montevideo,
Uruguay); formerly, Chief International Economist of Riggs National
Bank, Washington, D.C. She is 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.
NIMISH S. BHATT, TREASURER. An employee of BISYS Fund Services, Inc. since
July 1996, and an officer of other investment companies
administered by BISYS or its affiliates. Prior thereto, he was an
Assistant Vice President with Evergreen Asset Management Corp./First
Union Bank. 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 March 27, 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 EACH 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 November 11, 1997. As to each Portfolio, the Agreement is terminable
without penalty, on 60 days' notice, by the Fund's Board of Directors or by vote
of the holders of a majority of such Portfolio's shares, or, on not less than 90
days' notice, by the Adviser. The Agreement will terminate automatically, as to
the relevant Portfolio, in the event of its assignment (as defined in the 1940
Act).
As compensation for the Adviser's services, the Fund has agreed to pay the
Adviser a monthly investment advisory fee at the annual rate of .50 of 1% of the
value of Limited Duration Income Portfolio's, Core Income Portfolio's, Tennessee
Tax Exempt Bond Portfolio's, Limited Duration Tennessee Tax Free Portfolio's and
Limited Duration U.S. Government Portfolio's average daily net assets, .65 of 1%
of the value of the Capital Growth Portfolio's and Dividend Growth Portfolio's
average daily net assets, and .25 of 1% of the value of the Prime Money Market
Portfolio's and U.S. Treasury Money Market Portfolio's average daily net assets.
Prior to January 30, 1998, the fee payable by the Fund to the Adviser with
respect to the Prime Money Market Portfolio, was .25 of 1% of the value of such
Portfolio's average daily net assets, less any amount payable by the Fund to
Barnett Capital Advisors, Inc. (the "Sub-Adviser"), the Portfolio's
sub-investment adviser prior to such date. Pursuant to a Sub-Investment Advisory
Agreement among the Fund, the Adviser and the Sub-Adviser, which was terminated
as of January 30, 1998, the Fund agreed to pay the Sub-Adviser a monthly fee at
the annual rate of .15 of 1% of the value of the Prime Money Market Portfolio's
average daily net assets. For the fiscal years ended December 31, 1995, 1996 and
1997, $491,561, $519,442 and $496,933, respectively, was payable by the Limited
Duration Income Portfolio, and $463,502, $456,926 and $502,268, respectively,
was payable by the Tennessee Tax Exempt Bond Portfolio pursuant to the
Agreement. The Adviser waived $72,002 and $78,469 of such fees payable for the
fiscal year ended December 31, 1997 by the Limited Duration Income Portfolio and
Tennessee Tax Exempt Bond Portfolio, respectively, resulting in net fees being
paid to the Adviser of $424,931 by the Limited Duration Income Portfolio and
$423,799 by the Tennessee Tax Exempt Bond Portfolio during 1997. For the period
April 1, 1996 (commencement of operations) through December 31, 1996 and for the
fiscal year ended December 31, 1997, $214,961 and $783,646, respectively, was
payable by the Capital Growth Portfolio and $136,354 and $328,302, respectively,
was payable by the Core Income Portfolio pursuant to the Agreement. The Adviser
waived $141,465 and $55,665 of such fees payable for the fiscal year ended
December 31, 1997 by the Capital Growth Portfolio and Core Income Portfolio,
respectively, resulting in net fees being paid to the Adviser of $642,181 by the
Capital Growth Portfolio and $272,637 by the Core Income Portfolio during 1997.
For the fiscal years ended December 31, 1995, 1996 and 1997, $64,959, $74,618
and $80,064, respectively, was payable by the Prime Money Market Portfolio and
$358,127, $459,479 and $474,129, respectively, was payable by the U.S. Treasury
Money Market Portfolio pursuant to the Agreement. For the fiscal years ended
December 31, 1995, 1996 and 1997, $97,438, $111,623 and $120,097, respectively,
was payable by the Prime Money Market Portfolio to the Sub-Adviser. For the
period February 27, 1997 (commencement of operations) through December 31, 1997,
$332,185 was payable by the Dividend Growth Portfolio, $81,110 was payable by
the Limited Duration U.S. Government Portfolio and $93,669 was payable by the
Limited Duration Tennessee Tax Free Portfolio pursuant to the Agreement. The
Adviser waived $65,601, $41,559 and $34,669 of such fees payable for the period
ended December 31, 1997 by the Dividend Growth Portfolio, Limited Duration U.S.
Government Portfolio and Limited Duration Tennessee Tax Free Portfolio,
respectively, resulting in net fees being paid to the Adviser of $266,584 by the
Dividend Growth Portfolio, $39,551 by the Limited Duration U.S. Government
Portfolio and $59,000 by the Limited Duration Tennessee Tax Free Portfolio
during 1997.
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 February 11, 1997. 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 of .10 of 1% 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 1% of the value of each other Portfolio's
average daily net assets. For the fiscal years ended December 31, 1995, 1996 and
1997, $147,468, $155,644 and $149,081, respectively, was payable to BISYS or the
Portfolios' predecessor administrator during such periods by the Limited
Duration Income Portfolio, and $139,051, $137,079 and $150,681, respectively,
was payable to BISYS or the Portfolios' predecessor administrator by the
Tennessee Tax Exempt Bond Portfolio pursuant to the Administration Agreement.
For the period April 1, 1996 (commencement of operations) through December 31,
1996, and for the fiscal year ended December 31, 1997, $49,609 and $180,842,
respectively, was payable by the Capital Growth Portfolio and $40,906 and
$98,491, respectively, was payable by the Core Income Portfolio pursuant to the
Administration Agreement. For the fiscal years ended December 31, 1995, 1996 and
1997, $64,959, $74,618 and $80,064, respectively, was payable to BISYS or the
Portfolios' predecessor administrator during such periods by the Prime Money
Market Portfolio and $143,251, $183,791 and $189,650, respectively, was payable
to BISYS or the Portfolios' predecessor administrator by the U.S. Treasury Money
Market Portfolio. For the period February 27, 1997 (commencement of operation)
through December 31, 1997, $76,658 was payable to BISYS by the Dividend Growth
Portfolio, $24,333 was payable to BISYS by the Limited Duration U.S. Government
Portfolio and $28,101 was payable to BISYS by the Limited Duration Tennessee Tax
Free Portfolio pursuant to the Administration Agreement. BISYS waived $17,844
and $20,607 of such fee payable by the Limited Duration U.S. Government
Portfolio and Limited Duration Tennessee Tax Free Portfolio, respectively,
resulting in net fees paid to BISYS of $6,489 by the Limited Duration U.S.
Government Portfolio and $7,494 by the Limited Duration Tennessee Tax Free
Portfolio during 1997.
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.
For the fiscal years ended December 31, 1995 and 1996, BISYS did not retain
any amounts from sales loads on shares of any Portfolio. For the fiscal year
ended December 31, 1997, BISYS retained $28,514 and re-allowed $28,434 to
affiliated broker/dealers of the Fund from sales loads on Class A Shares.
DISTRIBUTION PLAN. (Applicable only with respect to Class A Shares of
each Portfolio other than the Prime Money Market Portfolio and U.S. Treasury
Money Market Portfolio and Class B Shares of each Portfolio offering Class B
Shares) Rule 12b-1 (the "Rule") adopted by the Securities and Exchange
Commission under the 1940 Act provides, among other things, that an investment
company may bear expenses of distributing its shares only pursuant to a plan
adopted in accordance with the Rule. The Fund's Directors have adopted such a
plan (the "Distribution Plan") with respect to Class A Shares of each
Portfolio other than the Prime Money Market Portfolio and U.S. Treasury Money
Market Portfolio and Class B Shares of each Portfolio offering Class B Shares
pursuant to which each such Portfolio pays BISYS for advertising, marketing and
distributing Class A Shares and Class B Shares at an annual rate of .25% and
.75% of the value of Class A Shares and Class B Shares, respectively. 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 November 11, 1997. 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 the 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).
For the fiscal year ended December 31, 1997, with respect to Class A Shares
pursuant to the Distribution Plan, $193,649 was payable by the Limited Duration
Income Portfolio, of which amount BISYS waived receipt of $192,875, $189,842 was
payable by the Tennessee Tax Exempt Bond Portfolio, of which amount BISYS waived
receipt of $189,623, $46,847 was payable by the Limited Duration Tennessee Tax
Free Portfolio, all of which was waived by BISYS, $88,282 was payable by the
Dividend Growth Portfolio, of which amount BISYS waived receipt of $88,242,
$214,963 was payable by the Capital Growth Portfolio, of which amount BISYS
waived receipt of $214,887, $120,305 was payable by the Core Income Portfolio,
of which amount BISYS waived receipt of $120,300, and $40,554 was payable by the
Limited Duration U.S. Government Portfolio, all of which was waived by BISYS.
SHAREHOLDER SERVICES PLAN. (Applicable only with respect to Class A Shares
of the Prime Money Market Portfolio and U.S. Treasury Money Market Portfolio and
Class B Shares of each Portfolio offering Class B Shares). The Fund's
Directors have adopted a shareholder services plan (the "Shareholder Services
Plan") with respect to Class A Shares of the Prime Money Market Portfolio and
U.S. Treasury Money Market Portfolio and Class B Shares of each Portfolio
offering Class B Shares pursuant to which each such Portfolio pays BISYS for the
provision of certain services to the holders of such shares at an annual rate of
.25% of the value of the respective Class of 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 November
11, 1997. 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).
For the fiscal year ended December 31, 1997, fees paid pursuant to the Plan
with respect to Class A Shares by the Prime Money Market Portfolio and U.S.
Treasury Money Market Portfolio amounted to $93,044 and $201,894, respectively.
EXPENSES. All expenses incurred in the operation of the Fund are borne by
the Fund, except to the extent specifically assumed by others. The expenses
borne by the Fund include: organizational costs, taxes, interest, brokerage fees
and commissions, if any, fees of Directors who are not officers, directors,
employees or holders of 5% or more of the outstanding voting securities of the
Adviser or BISYS 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 EACH 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
Prime Money Market Portfolio and U.S. Treasury Money Market Portfolio) The scale
of sales loads applies to purchases of Class A Shares of each Portfolio other
than the Prime Money Market Portfolio and U.S. Treasury 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.
Set forth below are examples of the method of computing the offering price
of the Class A Shares. The examples assume a purchase of Class A Shares of the
indicated Portfolio aggregating less than $50,000 subject to the current
schedule of sales charges set forth in the Portfolios' Prospectus for Class A
Shares at a price based upon the net asset value of the Portfolio's Class A
Shares on December 31, 1997:
CAPITAL GROWTH PORTFOLIO*:
Net Asset Value per Share $12.80
Per Share Sales Charge - 4.75%
of offering price (4.99% of
net asset value per share) $ 0.64
------
Per Share Offering Price to
the Public $13.44
DIVIDEND GROWTH PORTFOLIO*:
Net Asset Value per Share $10.37
Per Share Sales Charge - 4.75%
of offering price (4.99% of
net asset value per share) $ 0.52
------
Per Share Offering Price to
the Public $10.89
- -----------
* Class A Shares of the Capital Growth Portfolio and Dividend Growth Portfolio
purchased by shareholders beneficially owning Class A Shares of such Portfolios
on September 30, 1997 are subject to a different sales load schedule, as
described under "How to Buy Shares--Purchase Price" in the Portfolios'
Prospectus for Class A Shares.
LIMITED DURATION INCOME PORTFOLIO:
Net Asset Value per Share $ 9.99
Per Share Sales Charge - 3.00%
of offering price (3.09% of $ 0.31
------
net asset value per share)
Per Share Offering Price to
the Public $10.30
LIMITED DURATION U.S. GOVERNMENT PORTFOLIO:
Net Asset Value per Share $10.12
Per Share Sales Charge - 3.00%
of offering price (3.09% of $ 0.31
------
net asset value per share)
Per Share Offering Price to
the Public $10.43
LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO:
Net Asset Value per Share $10.13
Per Share Sales Charge - 3.00%
of offering price (3.09% of $ 0.31
------
net asset value per share)
Per Share Offering Price to
the Public $10.44
TENNESSEE TAX EXEMPT BOND PORTFOLIO:
Net Asset Value per Share $10.18
Per Share Sales Charge - 3.00%
of offering price (3.09% of
net asset value per share) $ 0.31
------
Per Share Offering Price to
the Public $10.49
CORE INCOME PORTFOLIO:
Net Asset Value per Share $10.25
Per Share Sales Charge - 3.00%
of offering price (3.09% of
net asset value per share) $ 0.32
------
Per Share Offering Price to
the Public $10.57
"SWEEP" PROGRAM. (Applicable to the Prime Money Market Portfolio and U.S.
Treasury Money Market Portfolio only) Shares of the Prime Money Market Portfolio
and U.S. Treasury 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 EACH PROSPECTUS ENTITLED "HOW TO BUY SHARES."
GENERAL. Expenses and fees, including the advisory fee and fees paid by
Class A Shares and Class B Shares 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.
CAPITAL GROWTH PORTFOLIO AND DIVIDEND GROWTH 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. 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.
CORE INCOME PORTFOLIO, LIMITED DURATION INCOME PORTFOLIO AND LIMITED
DURATION U.S. GOVERNMENT PORTFOLIO. Each of these Portfolios' investments are
valued each business day using available market quotations or at fair value as
determined by one or more independent pricing services (collectively, the
"Service") approved by the Board of Directors. The Service may use available
market quotations, employ electronic data processing techniques and/or a matrix
system to determine valuations. The Service's procedures are reviewed by the
Fund's officers under the general supervision of the Board of Directors.
TENNESSEE TAX EXEMPT BOND PORTFOLIO AND LIMITED DURATION TENNESSEE TAX FREE
PORTFOLIO. Each of these Portfolios' 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.
PRIME MONEY MARKET PORTFOLIO AND U.S. TREASURY 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.
The current yield for Class A Shares of each indicated Portfolio for the
30-day period ended December 31, 1997 was as follows:
NET OF ABSORBED
NAME OF PORTFOLIO CURRENT YIELD EXPENSES
Divided Growth Portfolio 2.10% 1.25%
Limited Duration U.S.
Government Portfolio 5.46% 4.90%
Limited Duration Income
Portfolio 5.92% 5.21%
Limited Duration Tennessee
Tax Free Portfolio 3.78% 3.30%
Core Income Portfolio 5.89% 5.18%
Tennessee Tax Exempt Bond
Portfolio 4.14% 3.44%
Based upon a combined 1997 Federal and Tennessee income tax rate of 39.78%
and 40.89%, the tax equivalent yield for Class A Shares of the Limited Duration
Tennessee Tax Free Portfolio and Tennessee Tax Exempt Bond Portfolio,
respectively, for the 30-day period ended December 31, 1997 was as follows:
NAME OF PORTFOLIO TAX EQUIVALENT NET OF ABSORBED
YIELD EXPENSES
Limited Duration Tennessee
Tax Free Portfolio 6.28% 5.48%
Tennessee Tax Exempt
Bond Portfolio 7.00% 5.82%
Tax equivalent yield is computed by dividing that portion of the current
yield (calculated as described above) which is tax exempt by 1 minus a stated
tax rate and adding the quotient to that portion, if any, of the yield of the
Portfolio that is not tax exempt.
The tax equivalent yield quoted above represents the application of the
highest Federal and State of Tennessee marginal personal income tax rates
presently in effect. For Federal personal income tax purposes, a 39.6% tax rate
has been used. For Tennessee personal income tax purposes, a 6.0% tax rate has
been used. For the fiscal period ended December 31, 1997, 78.5% of the Tennessee
Tax Exempt Bond Portfolio's assets and 96.95% of the Limited Duration Tennessee
Tax Free Portfolio's assets were invested in Tennessee Municipal Obligations,
which reduced the effect of the State's tax rate to 1.29% and 0.19%,
respectively. The tax equivalent figure, however, does not include the potential
effect of any local (including, but not limited to, county, district or city)
taxes, including applicable surcharges. In addition, there may be pending
legislation which could affect such stated tax rates or yield. Each investor
should consult its tax adviser, and consider its own factual circumstances and
applicable tax laws, in order to ascertain the relevant tax equivalent yield.
Average annual total return is calculated by determining the ending
redeemable value of an investment purchased with a hypothetical $1,000 payment
made at the beginning of the period (assuming the reinvestment of dividends and
distributions), dividing by the amount of the initial investment, taking the
"n"th root of the quotient (where "n" is the number of years in the period) and
subtracting 1 from the result. A Class's average annual total return 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.
The average annual total return for Class A Shares of each Portfolio for
the indicated period ended December 31, 1997 was as follows:
NAME OF PORTFOLIO 1-YEAR 5-YEARS 10-YEARS
Capital Growth Portfolio(1) 24.62% 15.41% 13.43%
Dividend Growth Portfolio(1) 26.22% 14.36% 13.44%
Limited Duration U.S. Government
Portfolio(1) 2.97% 4.45% 6.50%
Limited Duration Income Portfolio 3.26% 4.79%(2) N/A
Limited Duration Tennessee
Tax Free Portfolio(1) 2.22% 3.24% 4.73%
Core Income Portfolio(1) 5.40% 5.69% 7.36%
Tennessee Tax Exempt Bond
Portfolio 3.87% 3.78%(2) N/A
- ---------------------
1 The Capital Growth Portfolio and Core Income Portfolio commenced operations
on April 1, 1996, and the Dividend Growth Portfolio, Limited Duration
Tennessee Tax Free Portfolio and Limited Duration U.S. Government Portfolio
commence operations on February 28, 1997, through a transfer of assets from
common trust funds managed by the Adviser, using substantially the same
investment objective, policies, restrictions and methodologies as the
corresponding Portfolio. The performance information set forth above for
each such Portfolio includes the performance of its predecessor common
trust fund for the period prior to the commencement of operations of the
Portfolio, as adjusted to reflect the maximum operating expenses that may
be charged Class A Shares of the respective Portfolio. The common trust
funds did not charge any expenses. This performance information is not
necessarily indicative of the future performance of a Portfolio. Because
each Portfolio is actively managed, its investments will vary from time to
time and will not be identical to the past portfolio investments of the
predecessor. Moreover, the predecessor common trust funds were not
registered under the 1940 Act and therefore were not subject to certain
investment restrictions that are imposed by the 1940 Act, which, if
imposed, could have adversely affected the common trust funds' performance.
2 For the period March 28, 1994 (commencement of operations) through
December 31, 1997.
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.
The total return for Class A Shares of each Portfolio for the period from
commencement of operations of the Portfolio through December 31, 1997 was as
follows:
BASED ON MAXIMUM BASED ON NET
NAME OF PORTFOLIO OFFERING PRICE ASSET VALUE
PRICE
Capital Growth Portfolio(1) 41.00% 48.06%
Dividend Growth Portfolio(2) 18.29% 24.20%
Limited Duration U.S.
Government Portfolio(2) 2.37% 5.54%
Limited Duration Income
Portfolio(3) 21.42% 23.98%
Limited Duration Tennessee
Tax Free Portfolio(2) 1.13% 4.26%
Core Income Portfolio(1) 9.74% 13.14%
Tennessee Tax Exempt Bond
Portfolio(3) 16.32% 19.92%
- -----------------------
1 For the period from April 1, 1996 (commencement of operations) through
December 31, 1997.
2 For the period from February 28, 1997 (commencement of operations)
through December 31, 1997.
3 For the period from March 28, 1994 (commencement of operations) through
December 31, 1997.
For the seven-day period ended December 31, 1997, the Prime Money Market
Portfolio's yield was 5.10% for Class A Shares and 5.35% for Trust Shares, and
its effective yield was 5.22% for Class A Shares and 5.48% for Trust Shares. The
U.S. Treasury Money Market Portfolio's yield for such period was 4.82% for Class
A Shares and 5.07% for Trust Shares, and its effective yield was 4.93% for Class
A Shares and 5.19% for Trust Shares. 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.
No performance figures are provided for Class B Shares which had not been
offered as of the date of the financial information.
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."
The Adviser believes that each Portfolio qualified as a "regulated
investment company" under the Code for the fiscal year ended December 31, 1997.
Each Portfolio intends to continue to so qualify if such qualification is in the
best interests of its shareholders. To qualify as a regulated investment
company, the Portfolio must pay out to its shareholders at least 90% of its net
income (consisting of net investment income from tax exempt obligations and net
short-term capital gain), 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 will 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.
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.
CAPITAL GROWTH PORTFOLIO AND DIVIDEND GROWTH Portfolio. Brokers also are
selected because of their ability to handle special executions such as are
involved in large block trades or broad distributions, provided the primary
consideration is met. Large block trades may, in certain cases, result from two
or more clients the Adviser might advise being engaged simultaneously in the
purchase or sale of the same security. Portfolio turnover may vary from year to
year, as well as within a year. It is anticipated that in any fiscal year, the
turnover rate for 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.
For the period April 1, 1996 (commencement of operations) through December
31, 1996 and for the fiscal year ended December 31, 1997, the Capital Growth
Portfolio paid total brokerage commissions of $88,860 and $360,208,
respectively, none of which was paid to affiliates of the Adviser or BISYS. For
the period February 27, 1997 (commencement of operations) through December 31,
1997, the Dividend Growth Portfolio paid total brokerage commissions of
$166,678, none of which was paid to affiliates of the Adviser or BISYS. There
were no gross spreads or concessions on principal transactions for the periods.
CORE INCOME PORTFOLIO, LIMITED DURATION INCOME PORTFOLIO, TENNESSEE TAX
EXEMPT BOND PORTFOLIO, LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO, LIMITED
DURATION U.S. GOVERNMENT PORTFOLIO, PRIME MONEY MARKET PORTFOLIO AND U.S.
TREASURY 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.
As of March 27, 1998, the following shareholders owned of record 5% or
more of the outstanding shares of the indicated Portfolio and Class:
PERCENT OF
TOTAL SHARES
NAME AND ADDRESS OF CLASS OUTSTANDING
CAPITAL GROWTH PORTFOLIO:
JC Bradford Company 27.26% (Class A Shares)
F/B/O Robert Jernigan
330 Commerce Street
Nashville, TN 37201
FTC & Company 21.61% (Class A Shares)
Attn: Datalynx No. 106
P.O. Box 173736
Denver, CO 80217
BHC Securites, Inc. 6.14% (Class A Shares)
Attn: Cash Sweeps Dept. 64.21% (Class B Shares)
2005 Market Street, 12th Floor
Philadelphia, PA 19103
First American National Bank 6.05% (Class A Shares)
Attn: AmeriStar Investment Management 98.32% (Trust Shares)
and Trust
800 First American Center
Nashville, TN 37237
CORE INCOME PORTFOLIO:
First American National Bank 80.76% (Class A Shares)
Attn: AmeriStar Investment Management 99.99% (Trust Shares)
and Trust
800 First American Center
Nashville, TN 37237
BHC Securities, Inc. 19.23% (Class A Shares)
Attn: Cash Sweeps Dept. 91.69% (Class B Shares)
2005 Market Street, 12th Floor
Philadelphia, PA 19103
DIVIDEND GROWTH PORTFOLIO:
BHC Securities, Inc. 44.30% (Class A Shares)
Attn: Cash Sweeps Dept. 68.93% (Class B Shares)
2005 Market Street, 12th Floor
Philadelphia, PA 19103
First American National Bank 17.67% (Class A Shares)
Attn: AmeriStar Investment Management 98.71% (Trust Shares)
and Trust
800 First American Center
Nashville, TN 37237
LIMITED DURATION INCOME PORTFOLIO:
FTC & Company 54.74% (Class A Shares)
Attn: Datalynx No. 106
P.O. Box 173736
Denver, CO 80217
CoreLink Financial Inc. 38.29% (Class A Shares)
1855 Gateway Blvd. Suite 500
P.O. Box 4054
Concord, CA 94520
BHC Securities, Inc. 97.47% (Class B Shares)
Attn: Cash Sweeps Dept.
2005 Market Street, 12th Floor
Philadelphia, PA 19103
First American National Bank 99.99% (Trust Shares)
Attn: AmeriStar Investment Management
and Trust
800 First American Center
Nashville, TN 37237
LIMITED DURATION U.S. GOVERNMENT PORTFOLIO:
First American National Bank 95.96% (Class A Shares)
Attn: AmeriStar Investment Management
and Trust
800 First American Center
Nashville, TN 37237
BHC Securities, Inc. 99.98% (Class B Shares)
Attn: Cash Sweeps Dept.
2005 Market Street, 12th Floor
Philadelphia, PA 19103
LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO:
First American National Bank 99.96% (Class A Shares)
Attn: AmeriStar Investment Management
and Trust
800 First American Center
Nashville, TN 37237
BHC Securities, Inc. 99.99% (Class B Shares)
Attn: Cash Sweeps Dept.
2005 Market Street, 12th Floor
Philadelphia, PA 19103
TENNESSEE TAX EXEMPT BOND PORTFOLIO:
JC Bradford Company 29.60% (Class A Shares)
F/B/O Robert Jernigan
330 Commerce Street
Nashville, TN 37201
BHC Securities, Inc. 22.73% (Class A Shares)
Attn: Cash Sweeps Dept. 99.99% (Class B Shares)
2005 Market Street, 12th Floor
Philadelphia, PA 19103
CoreLink Financial Inc. 19.32% (Class A Shares)
1855 Gateway Blvd. Suite 500
P.O. Box 4054
Concord, CA 94520
First American National Bank 8.12% (Class A Shares)
Attn: AmeriStar Investment Management and Trust 96.86% (Trust Shares)
800 First American Center
Nashville, TN 37237
PRIME MONEY MARKET PORTFOLIO:
BHC Securities, Inc. 51.68% (Class A Shares)
Attn: Cash Sweeps Dept.
2005 Market Street
Philadelphia, PA 19103
First American National Bank 46.60% (Class A Shares)
Attn: AmeriStar Investment Management & Trust 94.74% (Trust Shares)
800 First American Center
Nashville, TN 37237
U.S. TREASURY MONEY MARKET PORTFOLIO:
First American National Bank 54.07% (Class A Shares)
Attn: AmeriStar Investment 97.67% (Trust Shares)
Management & Trust
800 First American Center
Nashville, TN 37237
Hare & Co. 37.76% (Class A Shares)
c/o The Bank of New York
Attn: Stif/Master Note
One Wall Street
New York, NY 10286
A shareholder who beneficially owns, directly or indirectly, more than 25%
of a Portfolio's voting securities may be deemed a "control person" (as defined
in the 1940 Act) of the Portfolio.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
AND INDEPENDENT AUDITORS
The Bank of New York, 90 Washington Street, New York, New York 10286, acts
as custodian of each Portfolio's investments. BISYS Fund Services Ohio, Inc., an
affiliate of 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. Neither The Bank of New York nor
BISYS Fund Services Ohio, Inc. has any part in determining the investment
policies of any Portfolio or which securities are to be purchased or sold by a
Portfolio.
Stroock & Stroock & Lavan 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, has been selected as each Portfolio's auditors.
FINANCIAL STATEMENTS
The Portfolios' Annual Report to Shareholders for the fiscal year ended
December 31, 1997 is a separate document supplied with this Statement of
Additional Information, and the financial statements, accompanying notes and
report of independent auditors appearing therein are incorporated by reference
in this Statement of Additional Information.
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
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.
<PAGE>
SUBJECT TO COMPLETION
DATED, JULY 28, 1998
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
_________, 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 __________,
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.
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.
NIMISH BHATT, TREASURER. An employee of BISYS Fund Services, Inc. since July,
1996, and an officer of other investment companies administered by BISYS or
its affiliates. Prior thereto, he was an Assistant Vice President with
Evergreen Asset Management Corp./First Union Bank, from January 1995 to
July 1996, and, from September 1990 to January 1995, he was an accountant
with Price Waterhouse. 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 July 27, 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 from
Name of Aggregate Compensation Fund and Fund Complex
Board Member from Fund* Paid 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 _________, 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 ______, 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
_________, 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 only 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) 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 charac terized as
"mixed straddles" if the futures or options trans actions 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
First American National Bank, First American Center, 315 Deaderick Street,
Nashville, Tennessee 37237, also acts as custodian for the Portfolios'
investments. Under a custody agreement with the Fund, the Adviser holds each
Portfolio's securities and keeps all necessary accounts and records. For its
custody services, the Adviser receives a monthly fee based on the market value
of the Portfolios' assets held in custody and receives certain securities
transaction charges. The Bank of New York, 90 Washington Street, New York, New
York 10286, acts as sub-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.
______________________________________________, 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.
<PAGE>
DG Investor Series
Stock and Bond Funds
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relates to the following six
portfolios (individually or collectively referred to as the "Fund" or
"Funds" as the context requires) of DG Investor Series (the "Trust"):
DG Equity Fund;
DG Opportunity Fund;
DG International Equity Fund;
DG Limited Term Government Income Fund;
DG Government Income Fund; and
DG Municipal Income Fund.
This Statement should be read with the prospectus of the Funds dated June
30, 1998. This Statement is not a prospectus. You may request a copy of a
prospectus or a paper copy of this Statement, if you have received it
electronically, free of charge by calling 1-800-530-7377, or you can visit
the DG Investor Series' Internet site on the World Wide Web at
(www.dgb.com).
DG INVESTOR SERIES
DG Equity Fund
DG Opportunity Fund
DG International Equity Fund
DG Limited Term Government Income Fund
DG Government Income Fund
DG Municipal Income Fund
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
Statement dated June 30, 1998
[GRAPHIC OMITTED]
Cusip 23321N301 Cusip 23321N400
Cusip 23321N806 Cusip 23321N103
Cusip 23321N509 Cusip 23321N202 G00499-13 (6/98)
<PAGE>
TABLE OF CONTENTS
- ---------------------------------------------------------------------------
I
General Information About the Funds 1
Investment Objectives and Policies 1
Equity Fund and Opportunity Fund 1
Types of Investments 1
Zero Coupon Convertible Securities 1
Convertible Securities 1
Money Market Instruments 2
Warrants 2
Corporate Debt Securities 2
International Equity Fund 2
Types of Investments 2
Restricted and Illiquid Securities 2
Warrants 3
Special Considerations Affecting
Emerging Markets 3
Portfolio Turnover 4
Limited Term Fund and Government Income Fund 4
Types of Investments 4
Weighted Average Portfolio Duration 4
Mortgage-Backed and Asset-Backed Securities
Risks 4
Municipal Income Fund 5
Types of Investments 5
Temporary Investments 6
Other Investment Techniques 6
Investment Policies and Strategies 6
Futures and Options Transactions 6
Repurchase Agreements 8
Reverse Repurchase Agreements 9
When-Issued and Delayed
Delivery Transactions 9
Lending of Portfolio Securities 9
Investing in Securities of Other
Investment Companies 9
Portfolio Turnover 9
Investment Limitations 9
DG Investor Series Management 14
Trust Ownership 18
Trustees' Compensation 19
Trustee Liability 19
Investment Advisory Services 19
Adviser to the Funds 19
Advisory Fees 20
Sub-Adviser to the International Equity Fund 20
Sub-Advisory Fees 20
Brokerage Transactions 20
Other Services 21
Administration of the Trust 21
Custodian 21
Transfer Agent, Dividend Disbursing
Agent, and Shareholder Servicing Agent 21
Independent Auditors 21
Purchasing Shares 21
Distribution and Shareholder Services Plans 21
Conversion to Federal Funds 22
Determining Net Asset Value 22
Determining Market Value of Securities 22
Trading in Foreign Securities 23
Valuing Municipal Securities 23
Exchange Privilege 23
Requirements for Exchange 23
Making an Exchange 23
Redeeming Shares 23
Redemption in Kind 23
Massachusetts Partnership Law 24
Tax Status 24
The Funds' Tax Status 24
Foreign Taxes 24
Shareholders' Tax Status 24
Total Return 24
Yield 25
Tax-Equivalent Yield 25
Tax-Equivalency Table 26
Performance Comparisons 27
Economic and Market Information 28
Financial Statements 28
Appendix 29
General Information About the Funds
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated February 7, 1992. This Statement of Additional Information
relates to the following six portfolios: DG Equity Fund ("Equity Fund"), DG
Opportunity Fund ("Opportunity Fund"), DG International Equity Fund
("International Equity Fund"), DG Limited Term Government Income Fund ("Limited
Term Fund"), DG Government Income Fund ("Government Income Fund"), and DG
Municipal Income Fund ("Municipal Income Fund").
The Funds are advised by ParkSouth Corporation (the "Adviser") and are
sub-advised (with respect to International Equity Fund) by Lazard Asset
Management (the "Sub-Adviser") and (with respect to Opportunity Fund) by Womack
Asset Management, Inc. (the "Sub-Adviser").
Investment Objectives and Policies
The prospectus discusses the objective of each Fund and the policies employed to
achieve those objectives. The following discussion supplements the description
of the Funds' investment policies in the prospectus. The Funds' respective
investment objectives cannot be changed without approval of shareholders. Unless
otherwise indicated, the investment policies described below may be changed by
the Board of Trustees ("Trustees") without shareholder approval. Shareholders
will be notified before any material change in these policies becomes effective.
Additional information about investment limitations, strategies that one or more
Funds may employ, and certain investment policies mentioned below appear in the
prospectus sections, "Objective and Policies of Each Fund" and "Portfolio
Investments and Strategies."
Equity Fund and Opportunity Fund
Types of Investments
Acceptable investments for Equity Fund and Opportunity Fund include but are not
limited to: convertible securities, money market instruments, common stocks,
preferred stocks, corporate bonds, notes and put options on stocks.
Zero Coupon Convertible Securities
Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon
convertible securities accretes at a stated yield until the security reaches its
face amount at maturity. Zero coupon convertible securities are convertible into
a specific number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide the holder
with the opportunity to put the bonds back to the issuer at a stated price
before maturity. Generally, the prices of zero coupon convertible securities may
be more sensitive to market interest rate fluctuations than conventional
convertible securities.
Federal income tax law requires the holder of a zero coupon convertible security
to recognize income with respect to the security prior to the receipt of cash
payments. To maintain its qualification as a regulated investment company and
avoid liability of federal income taxes, Equity Fund will be required to
distribute income accrued with respect to zero coupon convertible securities
which it owns, and may have to sell portfolio securities (perhaps at
disadvantageous times) in order to generate cash to satisfy these distribution
requirements.
Convertible Securities
Convertible securities are fixed income securities which may be exchanged or
converted into a predetermined number of the issuer's underlying common stock at
the option of the holder during a specified time period. Convertible securities
may take the form of convertible preferred stock, convertible bonds or
debentures, units consisting of "usable" bonds and warrants, or a combination of
the features of several of these securities. The investment characteristics of
each convertible security vary widely, which allows convertible securities to be
employed for different investment objectives.
Equity Fund and Opportunity Fund will exchange or convert the convertible
securities held in their portfolios into shares of the underlying common stock
in instances in which, in the Adviser's opinion, the investment characteristics
of the underlying common shares will assist the Funds in achieving their
investment objectives. Otherwise, the Funds may hold or trade convertible
securities. In selecting convertible securities for the Funds, the Adviser
evaluates the investment characteristics of the convertible security as a fixed
income instrument and the investment potential of the underlying equity security
for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the Adviser considers numerous factors,
including the economic and political outlook, the value of the security relative
to other investment alternatives, trends in the determinants of the issuer's
profits, and the issuer's management capability and practices.
Money Market Instruments
Equity Fund and Opportunity Fund may invest in money market instruments of
domestic and foreign banks and savings associations if they have capital,
surplus, and undivided profits of over $100,000,000, or if the principal amount
of the instrument is insured in full by the Bank Insurance Fund ("BIF") or the
Savings Association Insurance Fund ("SAIF"), both of which are administered by
the Federal Deposit Insurance Corporation ("FDIC").
Warrants
Warrants are basically options to purchase common stock at a specific price
(usually at a premium above the market value of the optioned common stock at
issuance) valid for a specific period of time. Warrants may have a life ranging
from less than a year to twenty years or may be perpetual. However, most
warrants have expiration dates after which they are worthless. In addition, if
the market price of the common stock does not exceed the warrant's exercise
price during the life of the warrant, the warrant will expire as worthless.
Warrants have no voting rights, pay no dividends, and have no rights with
respect to the assets of the corporation issuing them. The percentage increase
or decrease in the market price of the warrant may tend to be greater than the
percentage increase or decrease in the market price of the optioned common
stock.
Corporate Debt Securities
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest. They may involve equity features such as conversion or
exchange rights, warrants for the acquisition of common stock of the same or
different issuer, participations based on revenues, sales, or profits, or the
purchase of common stock in a unit transaction (where corporate debt securities
and common stock are offered as a unit).
International Equity Fund
Types of Investments
International Equity Fund invests in a diversified portfolio composed primarily
of non-U.S. securities. A substantial portion of these instruments will be
equity securities of companies in economically developed countries that the
Sub-Adviser considers inexpensively priced relative to the return on total
capital or equity. International Equity Fund will invest at least 65%, and under
normal market conditions, substantially all of its total assets, in equity
securities denominated in foreign currencies, including European Currency Units,
of issuers located in at least three countries outside of the United States and
sponsored or unsponsored American Depositary Receipts , Global Depositary
Receipts , and European Depositary Receipts , collectively, "Depositary
Receipts." International Equity Fund may also purchase investment grade fixed
income securities and foreign government securities; enter into forward
commitments, repurchase agreements, and foreign currency transactions; and
maintain reserves in foreign or U.S. money market instruments.
Restricted and Illiquid Securities
International Equity Fund expects that any restricted securities would be
acquired either from institutional investors who originally acquired the
securities in private placements or directly from the issuers of the securities
in private placements. Restricted securities and securities that are not readily
marketable may sell at a discount from the price they would bring if freely
marketable.
The Trustees consider the following criteria in determining the liquidity of
certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
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When the International Equity Fund invests in certain restricted securities
determined by the Trustees to be liquid, such investments could have the effect
of increasing the level of International Equity Fund illiquidity to the extent
that the buyers in the secondary market for such securities (whether in Rule
144A resales or other exempt transactions) become, for a time, uninterested in
purchasing these securities.
Warrants
International Equity Fund may invest in warrants. For a description of
these securities, see "Equity Fund and Opportunity Fund-Warrants."
Special Considerations Affecting Emerging Markets
Investing in equity securities of companies in emerging markets may entail
greater risks than investing in equity securities in developed countries. These
risks include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict
International Equity Fund's investment opportunities, including restrictions on
investment in issuers or industries deemed sensitive to national interest; (iv)
foreign taxation; and (v) the absence of developed structures governing private
or foreign investment or allowing for judicial redress for injury to private
property. Investing in the securities of companies in emerging markets, may
entail special risks relating to the potential political and economic
instability and the risks of expropriation, nationalization, confiscation or the
imposition of restrictions on foreign investment, convertibility of currencies
into U.S. dollars and on repatriation of capital invested. In the event of such
expropriation, nationalization or other confiscation by any country,
International Equity Fund could lose its entire investment in any such country.
Settlement mechanisms in emerging markets may be less efficient and reliable
than in more developed markets. In such emerging securities markets there may be
share registration and delivery delays or failures.
Most Latin American countries have experienced substantial, and in some periods
extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates and corresponding currency devaluations have had
and may continue to have negative effects on the economies and securities
markets of certain Latin American countries.
POLITICAL, SOCIAL AND ECONOMIC RISKS. Even though opportunities for investment
may exist in emerging markets, any change in the leadership or policies of the
governments of those countries or in the leadership or policies of any other
government which exercises a significant influence over these countries, may
halt the expansion of or reverse the liberalization of foreign investment
policies now occurring and thereby eliminate any investment opportunities which
may currently exist.
Investors should note that upon the accession to power of authoritarian regimes,
the governments of a number of Latin American countries previously expropriated
large quantities of real and personal property similar to the property which
will be represented by the securities purchased by International Equity Fund.
The claims of property owners against those governments were never finally
settled. There can be no assurance that any property represented by securities
purchased by International Equity Fund will not also be expropriated,
nationalized, or otherwise confiscated. If such confiscation were to occur,
International Equity Fund could lose its entire investment in such countries.
International Equity Fund's investment would similarly be adversely affected by
exchange control regulation in any of those countries.
Certain countries in which International Equity Fund may invest may have groups
that advocate radical religious or revolutionary philosophies or support ethnic
independence. Any disturbance on the part of such individuals could carry the
potential for widespread destruction or confiscation of property owned by
individuals and entities foreign to such country and could cause the loss of
International Equity Fund's investment in those countries. Instability may also
result from, among other things: (i) authoritarian governments or military
involvement in political and economic decision-making, including changes in
government though extraconstitutional means; (ii) popular unrest associated with
demands for improved political, economic and social conditions; and (iii)
hostile relations with neighboring or other countries. Such political, social
and economic instability could disrupt the principal financial markets in which
International Equity Fund invests and adversely affect the value of the Fund's
assets.
In the absence of willful misfeasance, bad faith or gross negligence on the part
of the Adviser or Sub-Adviser, any losses resulting from the holding of the
International Equity Fund's portfolio securities in foreign countries and/or
with securities depositories will be at the risk of shareholders. No assurance
can be given that the Sub-Adviser's appraisal of the risks will always be
correct or that such exchange control restrictions or political acts of foreign
governments might not occur.
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Portfolio Turnover
The International Equity Fund will not attempt to set or meet a portfolio
turnover rate since any turnover would be incidental to transactions undertaken
in an attempt to achieve the International Equity Fund's investment objective.
Portfolio securities will be sold when the Adviser believes it is appropriate,
regardless of how long those securities have been held. The Adviser does not
anticipate that the Fund's portfolio turnover rate will exceed 50%. For the
period from August 15, 1997 (date of initial public investment) to February 28,
1998, International Equity Fund's portfolio turnover rate was 21%.
Limited Term Fund and Government Income Fund
Types of Investments
Limited Term Fund invests primarily in a portfolio of government and corporate
securities and Government Income Fund invests primarily in a portfolio of
government and corporate securities. The investment portfolios include the
following securities:
o U.S. government securities, including Treasury bills, notes, bonds,
and securities issued by agencies and instrumentalities of the U.S.
government;
o mortgage-backed securities;
o corporate debt securities rated within the three highest categories by
a nationally recognized statistical rating organization, including
bonds, notes, and debentures;
o asset-backed securities; and
o bank instruments.
Weighted Average Portfolio Duration
With respect to Limited Term Fund, duration is a commonly used measure of the
potential volatility of the price of a debt security, or the aggregate market
value of a portfolio of debt securities, prior to maturity. Duration measures
the magnitude of the change in the price of a debt security relative to a given
change in the market rate of interest. The duration of a debt security depends
upon three primary variables: the security's coupon rate, maturity date and the
level of market interest rates for similar debt securities. Generally, debt
securities with lower coupons or longer maturities will have a longer duration
than securities with higher coupons or shorter maturities.
Duration is calculated by dividing the sum of the time-weighted values of cash
flows of a security or portfolio of securities, including principal and interest
payments, by the sum of the present values of the cash flows. Certain debt
securities, such as asset-backed securities, may be subject to prepayment at
irregular intervals. The duration of these instruments will be calculated based
upon assumptions established by the Adviser as to the probable amount and
sequence of principal prepayments.
Mortgage-Backed and Asset-Backed Securities Risks
Mortgage-backed and asset-backed securities generally pay back principal and
interest over the life of the security. At the time the Funds reinvest the
payments and any unscheduled prepayments of principal received, the Funds may
receive a rate of interest which is actually lower than the rate of interest
paid on these securities ("prepayment risks"). Mortgage-backed and asset-backed
securities are subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans or the
collateral supporting asset-backed securities may be prepaid without penalty or
premium. Prepayment risks on mortgaged-backed securities tend to increase during
periods of declining mortgage interest rates because many borrowers refinance
their mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are less
likely to experience substantial prepayments than are mortgage-backed
securities, certain of the factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on asset-backed
securities.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and is
then reregistered because the owner and obligor moves to another state, such
reregistration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
Municipal Income Fund
Types of Investments
Municipal Income Fund will invest in a diversified portfolio of municipal
securities.
CHARACTERISTICS
The municipal securities in which Municipal Income Fund invests have the
characteristics set forth in the prospectus. Municipal Income Fund may use
similar services or ratings other than Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's ("S&P"), or Fitch IBCA, Inc. ("Fitch"). If
a security's rating is reduced below the required minimum after the Fund
has purchased it, the Fund is not required to sell the security, but may
consider doing so. If ratings made by Moody's, S&P, or Fitch change
because of changes in those organizations or in their rating systems, the
Fund will try to use comparable ratings as standards in accordance with
the investment policies described in the Fund's prospectus.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases participation
interests frequently provide or secure from another financial institution
irrevocable letters of credit or guarantees and give the Fund the right to
demand payment of the principal amounts of the participation interests,
plus accrued interest, on short notice (usually within seven days). These
financial institutions may charge certain fees in connection with their
repurchase commitments, including a fee equal to the excess of the
interest paid on the municipal securities over the negotiated yield at
which the participation interests were purchased by the Fund. By
purchasing participation interests having a seven-day demand feature, the
Fund is buying a security meeting the maturity and quality requirements of
the Fund and also is receiving the tax-free benefits of the underlying
securities.
VARIABLE RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital
appreciation or depreciation is less for variable rate municipal
securities than for fixed income obligations. Many municipal securities
with variable interest rates purchased by the Fund are subject to
repayment of principal (usually within seven days) on the Fund's demand.
The terms of these variable rate demand instruments require payment of
principal and accrued interest from the issuer of the municipal
obligations, the issuer of the participation interests, or a guarantor of
either issuer.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests that represent an undivided proportional interest in lease
payments by a governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure payments on the
certificates. Lease obligations may be limited by municipal charter or the
nature of the appropriation for the lease. In particular, lease
obligations may be subject to periodic appropriation. If the entity does
not appropriate funds for future lease payments, the entity cannot be
compelled to make such payments. Furthermore, a lease may provide that the
participants cannot accelerate lease obligations upon default. The
participants would only be able to enforce lease payments as they became
due. In the event of a default or failure of appropriation, unless the
participation interests are credit enhanced, it is unlikely that the
participants would be able to obtain an acceptable substitute source of
payment.
In determining the liquidity of municipal lease securities, the Adviser,
under the authority delegated by the Trustees, will base its determination
on the following factors:
o whether the lease can be terminated by the lessee; o the potential
recovery, if any, from a sale of the leased property;
o upon termination of the lease; o the lessee's general credit strength
(e.g., its debt, administrative, economic and financial characteristics
and prospects);
o the likelihood that the lessee will discontinue appropriating funding
for the leased property because the property is no longer deemed
essential to its operations (e.g., the potential for an "event of
non-appropriation");
o any credit enhancement or legal recourse provided upon an event of
non-appropriation or other termination of the lease.
Temporary Investments
The Fund may also invest in temporary investments from time to time for
defensive purposes.
BANK INSTRUMENTS
The Fund only invests in Bank Instruments (as defined in the prospectus)
either issued by an institution having capital, surplus, and undivided
profits over $100 million or insured by the BIF or the SAIF, both of which
are administered by the FDIC.
Other Investment Techniques
The Fund may acquire securities that are subject to puts and standby commitments
("demand features") to purchase the securities at their principal amount
(usually with accrued interest) within a fixed period (usually seven days)
following a demand by the Fund. The demand feature may be issued by the issuer
of the underlying securities, a dealer in the securities or by another third
party, and may not be transferred separately from the underlying security. The
Fund uses these arrangements to provide the Fund with liquidity and not to
protect against changes in the market value of the underlying securities. The
bankruptcy, receivership or default by the issuer of the demand feature, or a
default on the underlying security or other event that terminates the demand
feature before its exercise, will adversely affect the liquidity of the
underlying security.
Investment Policies and Strategies
Futures and Options Transactions
As a means of reducing fluctuations in the net asset value of shares of the
Funds by hedging all or a portion of their portfolios, and in the case of put
and call options on portfolio securities, to increase their current income,
Equity Fund, Opportunity Fund, International Equity Fund, Limited Term Fund and
Government Income Fund may buy and sell financial futures and stock index
futures contracts, buy and write put options on portfolio securities and listed
put options on futures contracts, and write and buy call options on portfolio
securities and on futures contracts. The Funds will maintain their positions in
securities, option rights, and segregated cash subject to puts and calls until
the options are exercised, closed, or have expired. An option position on
financial futures contracts may be closed out only on an exchange which provides
a secondary market from options of the same series.
FUTURES CONTRACTS
A futures contract is a firm commitment between the seller, who agrees to
make delivery of the specific type of security called for in the contract
("going short"), and the buyer, who agrees to take delivery of the
security ("going long") at a certain time in the future.
When the Funds purchase futures contracts, an amount of cash and cash
equivalents, equal to the underlying commodity value of the futures
contracts (less any related margin deposits), will be deposited in a
segregated account with the Funds' custodian (or the broker, if legally
permitted) to collateralize the position and thereby insure that the use
of such futures contract is unleveraged.
Financial futures contracts call for the delivery of particular debt
instruments at a certain time in the future. The seller of the contract
agrees to make delivery of the type of instrument called for in the
contract and the buyer agrees to take delivery of the instrument at the
specified future time.
Stock index futures contracts are based on indexes that reflect the market
value of common stock of the firms included in the indexes. An index
futures contract is an agreement pursuant to which two parties agree to
take or make delivery of an amount of cash equal to the differences
between the value of the index at the close of the last trading day of the
contract and the price at which the index contract was originally written.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Funds may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also decrease in
value and the option will increase in value. In such an event, the Funds
will normally close out their options by selling identical options. If the
hedge is successful, the proceeds received by the Funds upon the sale of
the second option will be large enough to offset both the premiums paid by
the Funds for the original option plus the decrease in value of the hedged
securities.
Alternatively, the Funds may exercise their put options to close out the
position. To do so, they would simultaneously enter into a futures
contract of the type underlying the option (for a price less than the
strike price of the option) and exercise the option. The Funds would then
deliver the futures contract in return for payment of the strike price. If
the Funds neither close out nor exercise an option, the option will expire
on the date provided in the option contract, and only the premium paid for
the contract will be lost.
When the Fund sells a put on a futures contract, it receives a cash
premium which can be used in whatever way is deemed most advantageous to
the Fund. In exchange for such premium, the Fund grants to the purchaser
of the put the right to receive from the Fund, at the strike price, a
short position in such futures contract, even though the strike price upon
exercise of the option is greater than the value of the futures position
received by such holder. If the value of the underlying futures position
is not such that exercise of the option would be profitable to the option
holder, the option will generally expire without being exercised. The Fund
has no obligation to return premiums paid to it whether or not the option
is exercised. It will generally be the policy of the Fund, in order to
avoid the exercise of an option sold by it, to cancel its obligation under
the option by entering into a closing purchase transaction, if available,
unless it is determined to be in the Fund's interest to deliver the
underlying futures position. A closing purchase transaction consists of
the purchase by the Fund of an option having the same term as the option
sold by the Fund, and has the effect of canceling the Fund's position as a
seller. The premium which the Fund will pay in executing a closing
purchase transaction may be higher than the premium received when the
option was sold, depending in large part upon the relative price of the
underlying futures position at the time of each transaction.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Funds may write
listed call options on futures contracts to hedge their portfolios. When
the Funds write a call option on a futures contract, they are undertaking
the obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As stock prices fall, causing the
prices of futures to go down, the Funds' obligations under a call option
on a future (to sell a futures contract) costs less to fulfill, causing
the value of the Funds' call option positions to increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Funds keep the premiums received for the options. This premium can
substantially offset the drop in value of the Funds' fixed income or
indexed portfolios which are occurring as interest rates rise.
Prior to the expiration of a call written by the Funds, or exercise of it
by the buyer, the Funds may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be
less than the premium received by the Funds for the initial option. The
net premium income of the Funds will then substantially offset the
decrease in value of the hedged securities.
When the Fund purchases a call on a financial futures contract, it
receives in exchange for the payment of a cash premium the right, but not
the obligation, to enter into the underlying futures contract at a strike
price determined at the time the call was purchased, regardless of the
comparative market value of such futures position at the time the option
is exercised. The holder of a call option has the right to receive a long
(or buyer's) position in the underlying futures contract.
The Funds will not maintain open positions in futures contracts they have
sold or call options they have written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of their securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Funds will take
prompt action to close out a sufficient number of open contracts to bring
their open futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Funds do not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Funds
are required to deposit an amount of "initial margin" in cash or U.S.
Treasury bills with the custodian (or the broker, if legally permitted).
The nature of initial margin in futures transactions is different from
that of margin in securities transactions in that initial margin in
futures transactions does not involve the borrowing of funds by the Funds
to finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned
to a Funds upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Funds is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Funds
pay or receive cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the
Funds but is instead settlement between the Funds and the broker of the
amount one would owe the other if the futures contract expired. In
computing their respective daily net asset value, the Funds will mark to
market their open futures positions.
The Funds are also required to deposit and maintain margin when they write
call options on futures contracts.
PURCHASING AND WRITING PUT OPTIONS ON PORTFOLIO SECURITIES
The Funds may purchase and write put options on portfolio securities. The
purchase of a put option gives the Funds, in return for a premium, the
right to sell the underlying security to the writer (seller) at a
specified price during the term of the option. When the Funds write a put,
they receive a premium and give the purchaser of the put the right to sell
the underlying security to the Funds at the exercise price at any time
during the option period.
WRITING AND PURCHASING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Funds may write and purchase call options. As writer of a call option,
the Funds have the obligation upon exercise of the option during the
option period to deliver the underlying security upon payment of the
exercise price. The Funds may only sell call options either on securities
held in their portfolios or on securities which they have the right to
obtain without payment of further consideration (or has segregated cash in
the amount of any additional consideration). As the purchaser of a call
option, the Funds have the right to purchase common stock at a specific
price (usually at a premium above the market value of the optioned
security at the date the option is issued) valid for a specified period of
time. If the market price of the security does not exceed the option's
exercise price during the life of the option, the option will expire as
worthless. The percentage increase or decrease in the market price of the
option may tend to be greater than the percentage increase or decrease of
the market price of the optioned security.
Repurchase Agreements
The Funds or their custodian will take possession of the securities subject to
repurchase agreements and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Funds, the Funds could receive less than the repurchase price on any sale of
such securities. In the event that such a defaulting seller filed for bankruptcy
or became insolvent, disposition of such securities by the Funds might be
delayed pending court action. The Funds believe that under the regular
procedures normally in effect for custody of the Funds' portfolio securities
subject to repurchase agreements, a court of competent jurisdiction would rule
in favor of the Funds and allow retention or disposition of such securities. The
Funds will only enter into repurchase agreements with banks and other recognized
financial institutions, such as broker/dealers, which are found by the Adviser
or Sub-Adviser to be creditworthy pursuant to guidelines established by the
Trustees.
<PAGE>
Reverse Repurchase Agreements
The Funds may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In reverse repurchase agreements, the Funds
transfer possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agree that on a stipulated date in the
future the Funds will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate.
When effecting reverse repurchase agreements, liquid assets of the Funds, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and are maintained until the transaction is settled.
The use of reverse repurchase agreements may enable the Funds to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Funds will be able to avoid selling portfolio instruments at a
disadvantageous time.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price or yield for the Funds. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Funds sufficient
to make payment for the securities to be purchased are segregated on the Funds'
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Funds do not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of their respective
assets.
With the exception of Municipal Income Fund and International Equity Fund,
during the current year, the Funds do not anticipate investing more than 10% of
their respective total assets in when-issued and delayed delivery transactions.
Lending of Portfolio Securities
The collateral received when the Funds lend portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Funds. During the time
portfolio securities are on loan, the borrower pays the Funds any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Funds or the borrower. The Funds may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
Investing in Securities of Other Investment Companies
The Funds may invest in the securities of affiliated money market funds as
an efficient means of managing the Funds' uninvested cash.
Portfolio Turnover
The Funds do not intend to invest for the purpose of seeking short-term profits.
Securities in the portfolio will be sold whenever the Adviser believes it is
appropriate to do so in light of each Fund's investment objective, without
regard to the length of time a particular security may have been held. The
Adviser does not anticipate that any Fund's portfolio turnover rate will exceed
100%. For the fiscal year ended February 28, 1998, the portfolio turnover rates
for Equity Fund, Limited Term Fund, Government Income Fund and Municipal Income
Fund were 6%, 42%, 25%, and 6%, respectively. For the fiscal year ended February
29, 1997, the portfolio turnover rate for Equity Fund, Limited Term Fund,
Government Income Fund and Municipal Income Fund were 7%, 28%, 7% and 9%
respectively.
Investment Limitations
Acquiring Securities
International Equity Fund will not acquire more than 10% of the
outstanding voting securities of any one issuer, or acquire any securities
of Deposit Guaranty Corp. or its affiliates.
Selling Short and Buying on Margin
The Funds will not sell any securities short (except as noted below with
respect to International Equity Fund) or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of portfolio securities. The deposit or
payment by the Funds of initial or variation margin in connection with
financial futures contracts or related options transactions is not
considered the purchase of a security on margin.
International Equity Fund will not sell securities short unless (1) it
owns, or has a right to acquire, an equal amount of such securities, or
(2) it has segregated an amount of its other assets equal to the lesser of
the market value of the securities sold short or the amount required to
acquire such securities. The segregated amount will not exceed 10% of the
International Equity Fund's net assets. While in a short position, the
International Equity Fund will retain the securities, rights, or
segregated assets.
Issuing Senior Securities and Borrowing Money
Equity Fund, Opportunity Fund and Municipal Income Fund will not issue
senior securities except that they may borrow money directly or through
reverse repurchase agreements as a temporary measure for extraordinary or
emergency purposes and then only in amounts not in excess of one-third of
the value of their respective total assets; provided that, while
borrowings exceed 5% of each Fund's total assets, any such borrowings will
be repaid before additional investments are made. The Funds will not
borrow money or engage in reverse repurchase agreements for investment
leverage purposes.
Limited Term Fund and Government Income Fund will not issue senior
securities, except that they may borrow money directly or through reverse
repurchase agreements in amounts up to one-third of the value of their
respective total assets including the amount borrowed. The Funds will not
borrow money or engage in reverse repurchase agreements for investment
leverage, but rather as a temporary, extraordinary, or emergency measure
or to facilitate management of the portfolios by enabling the Funds to
meet redemption requests when the liquidation of portfolio securities is
deemed to be inconvenient or disadvantageous. The Funds will not purchase
any securities while borrowings in excess of 5% of their respective total
assets are outstanding.
International Equity Fund will not issue senior securities except in
connection with transactions described in other investment limitations or
as required by forward commitments to purchase securities or currencies.
International Equity Fund will not borrow money except as a temporary
measure for extraordinary or emergency purposes and then only in amounts
up to one-third of the value of its total assets, including the amount
borrowed. International Equity Fund will not purchase securities while
outstanding borrowings exceed 5% of the value of its total assets. (This
borrowing provision is not for investment leverage but solely to
facilitate management of the portfolio by enabling International Equity
Fund to meet redemption requests when the liquidation of portfolio
securities would be inconvenient or disadvantageous. )
Concentration of Investments
Equity Fund, Opportunity Fund and Municipal Income Fund will not purchase
securities if, as a result of such purchase, 25% or more of the value of
their respective total assets would be invested in any one industry.
However, Equity Fund, Opportunity Fund and Municipal Income may at times
invest 25% or more of the value of their respective total assets in
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
Municipal Income Fund will not purchase securities if, as a result of such
purchase, 25% or more of its total assets would be invested in any one
industry or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar type projects.
Municipal Income Fund may invest, as temporary investments, 25% or more of
its total assets in cash or cash items, securities issued and/or
guaranteed by the U.S. government, its agencies or instrumentalities, or
instruments secured by these money market instruments, such as repurchase
agreements.
Municipal Income Fund does not intend to purchase securities that would
increase the percentage of its total assets invested in the securities of
governmental subdivisions located in any one state, territory, or U.S.
possession to 25% or more. However, it may invest 25% or more of its
assets in tax-exempt project notes guaranteed by the U.S. government,
regardless of the location of the issuing municipality. If the value of
Municipal Income Fund assets invested in the securities of a governmental
subdivision changes because of changing values, the Fund will not be
required to make any reduction in its holdings.
International Equity Fund will not invest more than 25% of its total
assets in securities of issuers having their principal business activities
in the same industry.
<PAGE>
Investing in Commodities
Equity Fund and Opportunity Fund will not purchase or sell commodity
contracts, or commodity futures contracts except that they may purchase
and sell financial futures and stock index futures contracts and related
options.
Limited Term Fund and Government Income Fund will not buy or sell
commodities. However, these Funds may purchase put options on portfolio
securities and on financial futures contracts. In addition, Limited Term
Fund and Government Income Fund reserve the right to hedge their
portfolios by entering into financial futures contracts and selling calls
on financial futures contracts.
Municipal Income Fund will not purchase or sell commodity contracts or
commodity futures contracts.
International Equity Fund will not purchase or sell commodities or
commodity contracts, except that the International Equity Fund may
purchase and sell financial futures contracts and options on financial
futures contracts, provided that the sum of its initial margin deposits
for financial futures contracts held by the International Equity Fund,
plus premiums paid by it for open options on financial futures contracts
may not exceed 5% of the fair market value of the International Equity
Fund's total assets, after taking into account the unrealized profits and
losses on those contracts. Further, the International Equity Fund may
engage in foreign currency transactions and purchase or sell forward
contracts with respect to foreign currencies and related options.
Investing in Real Estate
Equity Fund, Opportunity Fund, Limited Term Fund and Government Income
Fund will not purchase or sell real estate, including limited partnership
interests in real estate, although they may invest in securities secured
by real estate or interests in real estate.
Municipal Income Fund will not purchase or sell real estate, including
limited partnership interests in real estate, although it may invest in
securities of companies whose business involves the purchase or sale of
real estate or in securities secured by real estate or interests in real
estate.
International Equity Fund will not invest in real estate, although it may
invest in securities secured by real estate or interests in real estate or
issued by companies, including real estate investment trusts, which invest
in real estate or interests therein.
Investing to Exercise Control
Equity Fund will not purchase securities for the purpose of exercising
control over the issuer of securities.
Investing in Minerals
International Equity Fund will not invest in interests in oil, gas, or
other mineral exploration or development programs, other than debentures
or equity stock interests.
Lending Cash or Securities
Equity Fund, Limited Term Fund and Government Income Fund will not lend
any of their respective assets, except that they may purchase or hold
corporate or government bonds, debentures, notes, certificates of
indebtedness or other debt securities of an issuer, repurchase agreements,
or other transactions which are permitted by the Funds' investment
objectives and policies or the Trust's Declaration of Trust, or lend
portfolio securities valued at not more than 5% of their respective total
assets to brokers/dealers.
Opportunity Fund and International Equity Fund will not lend any of their
respective assets except portfolio securities except that they may
purchase or hold corporate or government bonds, debentures, notes,
certificates of indebtedness or other debt securities of an issuer,
repurchase agreements, or other transactions which are permitted by each
Fund's investment objectives and policies or the Trust's Declaration of
Trust.
Municipal Income Fund will not lend any of its assets, except portfolio
securities up to one-third of the value of its total assets. This shall
not prevent Municipal Income Fund from purchasing or holding corporate or
government bonds, debentures, notes, certificates of indebtedness or other
debt securities of an issuer, entering into repurchase agreements or
engaging in other transactions which are permitted by Municipal Income
Fund's investment objective and policies or the Trust's Declaration of
Trust.
Underwriting
The Funds will not underwrite any issue of securities or participate in
the marketing of securities of other issuers (with respect to the
International Equity Fund), except as a Fund may be deemed to be an
underwriter under the Securities Act of 1933 in connection with the sale
of securities in accordance with a Fund's investment objectives, policies,
and limitations.
Pledging Assets
The Funds will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, the Funds may pledge assets
having a market value not exceeding the lesser of the dollar amounts
borrowed or 15% of the value of total assets at the time of the pledge.
For purposes of this limitation, the following are not deemed to be
pledges: margin deposits for the purchase and sale of financial futures
contracts and related options, and segregation or collateral arrangements
made in connection with options activities or the purchase of securities
on a when-issued basis.
International Equity Fund will not mortgage, pledge, or hypothecate
assets, except when necessary for permissible borrowings. In those cases,
it may pledge assets having a value of 15% of its assets taken at cost.
Neither the deposit of underlying securities or other assets in escrow in
connection with the writing of put or call options or the purchase of
securities on a when-issued basis, nor margin deposits for the purchase
and sale of financial futures contracts and related options are deemed to
be a pledge.
Diversification of Investments
With respect to 75% of the value of their respective assets, Equity Fund,
Opportunity Fund, Limited Term Fund and Government Income Fund will not
purchase the securities of any issuer (other than cash, cash items, or
securities issued or guaranteed by U.S. government, its agencies or
instrumentalities, and with respect to Municipal Income Fund, repurchase
agreements) if, as a result, more than 5% of the value of the Funds'
respective total assets would be invested in the securities of that
issuer. Also, the Funds will not purchase more than 10% of the outstanding
voting securities of any one issuer.
With respect to 75% of its assets, Municipal Income Fund will not invest
more than 5% of its total assets in any one issuer (except cash and cash
items, repurchase agreements, and U.S. government obligations). Also,
Municipal Income Fund will not purchase more than 10% of the outstanding
voting securities of any one issuer.
Municipal Income Fund considers common stock and all preferred stock of an
issuer each as a single class, regardless of priorities, series,
designations, or other differences. Under this limitation, each
governmental subdivision, including states and the District of Columbia,
territories and possessions of the United States or their political
subdivisions, agencies, authorities, instrumentalities, or similar
entities, will be considered a separate issuer if its assets and revenues
are separate from those of the governmental body creating it and the
security is backed only by its own assets and revenues.
Private activity bonds backed only by the assets and revenues of a
non-governmental user are considered to be issued solely by that user. If,
in the case of a private activity bond or government-issued security, a
governmental or other entity guarantees the security, such guarantee would
be considered a separate security issued by the guarantor as well as the
other issuer, subject to limited exclusions allowed by the Investment
Company Act of 1940.
Except as noted, the above investment limitations cannot be changed without
shareholder approval. The following limitations, however, may be changed by the
Trustees without shareholder approval. Shareholders will be notified before any
material changes in these limitations become effective.
Investing in Illiquid Securities
The Funds will not invest more than 15% of the value of their respective
net assets in illiquid securities, including repurchase agreements
providing for settlement more than seven days after notice;
over-the-counter options (for those Funds which are permitted to invest in
options); and certain restricted securities not determined by the Trustees
to be liquid.
Arbitrage Transactions
Equity Fund, Opportunity Fund and Municipal Income Fund will not enter
into transactions for the purpose of engaging in arbitrage.
Investing to Exercise Control
Opportunity Fund and International Equity Fund will not purchase
securities for the purpose of exercising control over the issuer of
securities.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
Opportunity Fund and International Equity Fund has no present intent to borrow
money or pledge securities in excess of 5% of the value of its total assets
during the coming fiscal year.
For the purposes of their policies and limitations, the Funds consider
certificates of deposit and demand and time deposits issued by a U.S. branch of
a domestic bank or savings association having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment to be "cash items."
<PAGE>
DG Investor Series Management
Officers and Trustees are listed with their addresses, birthdates, present
positions with DG Investor Series, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chief Executive Officer and Director or Trustee of the Funds; Chairman and
Director, Federated Investors, Inc.; Chairman and Trustee, Federated Advisers,
Federated Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport Research,
Ltd.; Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Company.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director or Trustee of the Funds; Director, Member of the Executive Committee,
Children's Hospital of Pittsburgh; formerly, Senior Partner, Ernst & Young LLP;
Director, MED 3000 Group, Inc.; Director, Member of Executive Committee,
University of Pittsburgh.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
Director or Trustee of the Funds; President, Investment Properties
Corporation; Senior Vice-President, John R. Wood and Associates, Inc., Realtors;
Partner or Trustee in private real estate ventures in Southwest Florida;
formerly, President, Naples Property Management, Inc. and Northgate Village
Development Corporation. Nicholas P. Constantakis 175 Woodshire Drive
Pittsburgh, PA Birthdate: September 3, 1939
Trustee
Director or Trustee of the Funds; formerly, Partner, Andersen Worldwide SC.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director or Trustee of the Funds; Director and Member of the Executive
Committee, Michael Baker, Inc.; formerly, Vice Chairman and Director, PNC Bank,
N.A., and PNC Bank Corp.; Director, Ryan Homes, Inc.; Director, United Refinery;
Chairman, Pittsburgh Foundation; Director, Forbes Fund; Chairman, Pittsburgh
Civic Light Opera.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Director or Trustee of the Funds; Attorney-at-law; Director, The Emerging
Germany Fund, Inc.; formerly, President, Boston Stock Exchange, Inc.; Regional
Administrator, United States Securities and Exchange Commission.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Director or Trustee of the Funds; Professor of Medicine, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center -
Downtown; Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; formerly, Member, National Board of Trustees, Leukemia Society of
America.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Director or Trustee of the Funds; Attorney Of Counsel, Miller, Ament, Henny &
Kochuba; Director, Eat'N Park Restaurants, Inc.; formerly, Counsel, Horizon
Financial, F.A., Western Region; Partner, Meyer and Flaherty.
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President, Treasurer and Trustee
Trustee or Director of some of the Funds; President, Executive Vice President
and Treasurer of some of the Funds; Vice Chairman, Federated Investors, Inc.;
Vice President, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Director or Trustee of the Funds; formerly, Representative, Commonwealth of
Massachusetts General Court; President, State Street Bank and Trust Company and
State Street Corporation; Director, VISA USA and VISA International; Chairman
and Director, Massachusetts Banker Association; Director, Depository Trust
Corporation.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
Director or Trustee of the Funds; President, Law Professor, Duquesne University;
Consulting Partner, Mollica & Murray; formerly, Dean and Professor of Law,
University of Pittsburgh School of Law; Dean and Professor of Law, Villanova
University School of Law.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Director or Trustee of the Funds; President, World Society for Ekistics, Athens;
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University and U.S. Space Foundation; President
Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council
for Environmental Policy and Technology, Federal Emergency Management Advisory
Board and Czech Management Center, Prague; formerly, Professor, United States
Military Academy; Professor, United States Air Force Academy.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Director or Trustee of the Funds; Public relations/Marketing/Conference
Planning; formerly, National Spokesperson, Aluminum Company of America; business
owner.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President or Executive Vice President of the Funds; President and Director,
Federated Investors, Inc. President and Trustee, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services Company, and Federated Shareholder
Services; Director, Federated Services Company; Director or Trustee of some of
the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Trustee of
the Company.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President and Secretary of the Funds; Treasurer of some of the
Funds; Executive Vice President, Secretary, and Director, Federated Investors,
Inc.; Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.; Trustee,
Federated Shareholder Services Company; Director, Federated Services Company;
President and Trustee, Federated Shareholder Services; Director, Federated
Securities Corp.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
President or Vice President of some of the Funds; Director or Trustee of
some of the Funds; Executive Vice President, Federated Investors, Inc.; Chairman
and Director, Federated Securities Corp.
Charles L. Davis, Jr.
Federated Investors Tower
Pittsburgh, PA
Birthdate: March 23, 1960
Vice President and Assistant Treasurer
Vice President and Assistant Treasurer of some of the Funds.
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board between meetings
of the Board.
As referred to in the list of Trustees and Officers, "Funds" includes the
following investment companies: 111 Corcoran Funds; Automated Government Money
Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series
II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Core
Trust; Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated
Fund for U.S. Government Securities, Inc.; Federated GNMA Trust; Federated
Government Income Securities, Inc.; Federated Government Trust; Federated High
Income Bond Fund, Inc.; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal
Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust;
Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated U.S.
Government Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years;
Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government
Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds;
Fixed Income Securities, Inc.; High Yield Cash Trust; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S. Government Money
Market Trust; Liquid Cash Trust; Managed Series Trust; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market Obligations Trust II; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds;
The Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; WCT Funds; and World Investment Series,
Inc.
Trust Ownership
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of June 1, 1998, the following shareholders of record owned 5% or more of the
outstanding shares of Equity Fund: Deposit Guaranty National Bank, Jackson, MS,
acting in various capacities for numerous accounts was the owner of record of
approximately 20,088,725 shares (62.71%); and Commercial National Bank, Jackson,
MS, acting in various capacities for numerous accounts, was the owner of record
of approximately 6,259,217 shares (19.54%).
As of June 1, 1998, the following shareholders of record owned 5% or more of the
outstanding shares of Opportunity Fund: Deposit Guaranty National Bank, Jackson,
MS, acting in various capacities for numerous accounts was the owner of record
of approximately 6,014,608 shares (74.64%); and Commercial National Bank,
Jackson, MS, acting in various capacities for numerous accounts, was the owner
of record of approximately 593,512 shares (7.36%).
As of June 1, 1998, the following shareholder of record owned 5% or more of the
outstanding shares of International Equity Fund: Deposit Guaranty National Bank,
Jackson, MS, acting in various capacities for numerous accounts, was the owner
of record of approximately 2,499,678 shares (86.58).
As of June 1, 1998, the following shareholders of record owned 5% or more of the
outstanding shares of Limited Term Fund: Deposit Guaranty National Bank,
Jackson, MS, acting in various capacities for numerous accounts was the owner of
record of approximately 3,363,751 shares (75.64%); and Commercial National Bank,
Jackson, MS, acting in various capacities for numerous accounts, was the owner
of record of approximately 742,821 shares (16.70%).
As of June 1, 1998, the following shareholders of record owned 5% or more of the
outstanding shares of Government Income Fund: Deposit Guaranty National Bank,
Jackson, MS, acting in various capacities for numerous accounts was the owner of
record of approximately 18,121,490 shares (64.36%); and Commercial National
Bank, Jackson, MS, acting in various capacities for numerous accounts, was the
owner of record of approximately 6,624,432 shares (23.53%).
As of June 1, 1998, the following shareholders of record owned 5% or more of the
outstanding shares of Municipal Income Fund: Deposit Guaranty National Bank,
Jackson, MS, acting in various capacities for numerous accounts was the owner of
record of approximately 4,632,278 shares (92.72%).
<PAGE>
Trustees' Compensation
Name, Aggregate
Position With Trust Compensation From Trust+
John F. Donahue, $0
Chairman and Trustee
Thomas G. Bigley, $402.17
Trustee
John T. Conroy, Jr., $442.46
Trustee
Nicholas P. Constantakis++, $140.71
Trustee
William J. Copeland, $442.46
Trustee
James E. Dowd, $442.46
Trustee
Lawrence D. Ellis, M.D., $402.17
Trustee
Edward L. Flaherty, Jr., $442.46
Trustee
Edward C. Gonzales, $0
President, Treasurer and Trustee
Peter E. Madden, $402.17
Trustee
John E. Murray, Jr., $402.17
Trustee
Wesley W. Posvar, $402.17
Trustee
Marjorie P. Smuts, $402.17
Trustee
+The aggregate compensation is provided for the Trust which is currently
comprised of nine portfolios. Information is furnished for the fiscal year ended
February 28, 1998.
++ Mr. Constantakis became a member of the Board of Trustees on February 23,
1998.
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees will only be liable
for their own willful defaults. If reasonable care has been exercised in the
selection of officers, agents, employees, or investment advisers, a Trustee
shall not be liable for any neglect or wrong doing of any such person. However,
they are not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of their office.
Investment Advisory Services
Adviser to the Funds
The Funds' investment adviser is ParkSouth Corporation (the "Adviser"), a
subsidiary of Deposit Guaranty National Bank, a national banking association
founded in 1925 which, in turn, is a subsidiary of Deposit Guaranty Corp. The
Adviser shall not be liable to the Trust, the Funds or any shareholder of any of
the Funds for any losses that may be sustained in the purchase, holding, or sale
of any security, or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
Because of the internal controls maintained by Deposit Guaranty National Bank to
restrict the flow of non-public information, Fund investments are typically made
without any knowledge of Deposit Guaranty National Bank's or its affiliates'
lending relationships with an issuer.
Advisory Fees
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
For the fiscal years ended February 28, 1998, February 28, 1997, and February
29, 1996, the Adviser earned fees from: Equity Fund of $4,445,559, $3,213,522,
and $2,568,435, respectively, none of which were waived; Limited Term Fund of
$482,331, $527,974, and $572,084, respectively, of which $131,070, $175,992, and
$190,371, respectively, were voluntarily waived; Government Income Fund of
$1,580,350, $1,369,096, and $892,734, respectively, of which $163,534, $228,183,
and $148,789, respectively, were voluntarily waived; and Municipal Income Fund
of $289,417, $279,232, and $262,552, respectively, of which $150,568, $162,886
and $155,258, respectively, were voluntarily waived. For the period from
February 28, 1997 to July 20, 1997, the Adviser earned fees from Opportunity
Fund of $319,968, of which $44,051 were voluntarily waived. For the fiscal years
ended February 28, 1997 and February 29, 1996, the Adviser earned fees from
Opportunity Fund of $684,142 and $441,513, respectively, of which $115,580 and
$162,538, respectively, were voluntarily waived.
Sub-Adviser to the International Equity Fund and the Opportunity Fund
The International Equity Fund's Sub-Adviser is Lazard Asset Management, a
division of Lazard & Co. LLC.
The Opportunity Fund's Sub-Adviser is Womack Asset Management, Inc.
Prior to March 1, 1997, the Funds (with the exception of International Equity
Fund) were sub-advised by Commercial National Bank, a subsidiary of Deposit
Guaranty Corp.
Sub-Advisory Fees
For its sub-advisory services, the Sub-Adviser receives an annual sub-advisory
fee as described in the prospectus.
For the period from August 15, 1997 (start of business) to February 28, 1998,
the Sub-Adviser earned fees from International Equity Fund of $95,011, of which
$47,505 were voluntarily waived.
For the period from July 21, 1997 to February 28, 1998, the Sub-Adviser earned
fees from Opportunity Fund of $170,212, none of which were voluntarily waived.
For its sub-advisory services, Commercial National Bank, the Fund's former
sub-adviser received annual sub-advisory fees as follows: For the fiscal year
ended February 28, 1997, the previous sub-adviser collected fees net of any
waivers from: Equity Fund of $779,409; Limited Term Fund of $41,294; Government
Income Fund of $310,466; Opportunity Fund of 29,876; and Municipal Income Fund
of $5,098.
For the fiscal years ended February 29, 1996 and February 28, 1995, the previous
sub-adviser earned fees from: Equity Fund of $856,145 and $635,882,
respectively, none of which were waived; Limited Term Fund of $238,368 and
$267,570, all of which were voluntarily waived; Government Income Fund of
$371,923 and $386,009, respectively, all of which were voluntarily waived; and
Municipal Income Fund of $109,397 and $93,970, respectively, all of which were
voluntarily waived. For the fiscal year ended February 29, 1996 and the period
from August 1, 1994 (date of initial public investment) to February 28, 1995,
the previous sub-adviser earned fees from Opportunity Fund of $116,188 and
$34,649, respectively, all of which was voluntarily waived.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees. The Adviser may select brokers and dealers who offer
brokerage and research services. These services may be furnished directly to the
Funds or to the Adviser and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and similar
services. Research services provided by brokers may be used by the Adviser in
advising the Funds and other accounts. To the extent that receipt of these
services may supplant services for which the Adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses. The Adviser and its
affiliates exercise reasonable business judgment in selecting brokers who offer
brokerage and research services to execute securities transactions. They
determine in good faith that commissions charged by such persons are reasonable
in relationship to the value of the brokerage and research services provided.
For the fiscal years ended February 28, 1998, February 28, 1997, and February
29, 1996, Equity Fund paid $74,672, $75,624, and $158,777, respectively, in
brokerage commissions on brokerage transactions. For the fiscal years ended
February 28, 1998, February 28, 1997, and February 29, 1996, Opportunity Fund
paid $498,832, $315,139 and $161,370, respectively, in brokerage commissions on
brokerage transactions. For the period from August 15, 1997 (start of business)
to February 28, 1998, the International Equity Fund paid $67,394 in brokerage
commissions on brokerage transactions. For the fiscal years ended February 28,
1998, February 28, 1997, and February 29, 1996, Limited Term Fund, Government
Income Fund and Municipal Income Fund paid no brokerage commissions on brokerage
transactions.
Although investment decisions for the Funds are made independently from those of
the other accounts managed by the Adviser, investments of the type the Funds may
make may also be made by those other accounts. When the Funds and one or more
other accounts managed by the Adviser are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for sales
will be allocated in a manner believed by the Adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received by
the Funds or the size of the position obtained or disposed of by the Funds. In
other cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Funds.
Other Services
Administration of the Trust
Federated Administrative Services, a subsidiary of Federated Investors, Inc.,
provides administrative personnel and services to the Funds for a fee as set
forth in the prospectus. For the fiscal years ended February 28, 1998, February
28, 1997, and February 29, 1996, administrative services fees were incurred on
behalf of Equity Fund of $587,750 , $467,226, and $401,890, respectively, none
of which were voluntarily waived; Limited Term Fund of $100,000, $96,156, and
$112,018, respectively, none of which were voluntarily waived; Government Income
Fund of $261,726, $248,963, and $174,394, respectively, none of which were
voluntarily waived; Municipal Income Fund of $100,000, $100,000, and $100,000,
respectively, of which $34,479, $49,179, and $48,579, respectively, were
voluntarily waived; and Opportunity Fund of $105,468, $100,000, and $100,000,
respectively, none of which were voluntarily waived. For the period from August
15, 1997 (start of business) to February 28, 1998, administrative services fees
of $9,237 were incurred on behalf of International Equity Fund, none of which
were voluntarily waived.
Custodian
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Funds.
Transfer Agent, Dividend Disbursing Agent, and Shareholder Servicing Agent
Federated Shareholder Services Company, Pittsburgh, Pennsylvania, a subsidiary
of Federated Investors, Inc., serves as transfer agent for the shares of the
Funds, dividend disbursing agent for the Funds, and shareholder servicing agent
for the Funds.
Independent Auditors
The independent auditors for the Funds are KPMG Peat Marwick LLP, Pittsburgh,
Pennsylvania.
Purchasing Shares
Shares of the Funds are sold at their net asset value next determined after an
order is received, plus any applicable sales charge on days the New York Stock
Exchange and Federal Reserve Wire System are open for business. The procedure
for purchasing shares is explained in the prospectus under "Investing in the
Funds."
Distribution and Shareholder Services Plans
These arrangements permit the payment of fees to financial institutions to
stimulate distribution activities and services to shareholders provided by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
By adopting the Distribution Plan, the Trustees expect that the Funds will be
able to achieve a more predictable flow of cash for investment purposes and to
meet redemptions. This will facilitate more efficient portfolio management and
assist the Funds in pursuing their investment objectives. By identifying
potential investors whose needs are served by the Funds' objectives, and
properly servicing these accounts, it may be possible to curb sharp fluctuations
in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; and (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
For the fiscal year ended February 28, 1998, the Funds made no payments pursuant
to the Distribution Plan. For the period from August 15, 1997 (start of
business) to February 28, 1998, International Equity Fund made no payments
pursuant to the Distribution Plan. In addition, for the fiscal year ended
February 28, 1998, the Funds' made payments pursuant to the Shareholder Services
Plan as follows: Equity Fund paid $554,868; Opportunity Fund paid $97,554;
Limited Term Fund paid $68,469; Government Income Fund paid $232,460; and
Municipal Income Fund paid $42,564. For the period from August 15, 1997 (start
of business) to February 28, 1998, International Equity Fund made payments
pursuant to the Shareholder Services Plan of $14,252.
Conversion to Federal Funds
It is each Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Deposit Guaranty National Bank
(the "Bank"), as well as Federated Shareholder Services Company, act as the
shareholder's agent in depositing checks and converting them to federal funds.
Determining Net Asset Value
The Funds net asset value generally changes each day and with respect to
Municipal Income Fund is based on market value of securities and other assets
held by Municipal Income Fund. The days on which the net asset value is
calculated by the Funds are described in the prospectus.
With respect to International Equity Fund, dividend income is recorded on the
ex-dividend date, except certain dividends from foreign securities where the
ex-dividend date may have passed, are recorded as soon as the Fund is informed
of the ex-dividend date.
Determining Market Value of Securities
Market value of the portfolio securities for Equity Fund, Opportunity Fund,
International Equity Fund, Limited Term Fund and Government Income Fund are
determined as follows:
o for equity securities and bonds and other fixed income securities,
according to the last sale price in the market in which they are
primarily traded (either national securities exchange or the OTC), if
available;
o in the absence of recorded sales of equity securities, according to the
mean between the last closing bid and asked prices, and for bonds and
other fixed income securities as determined by an independent pricing
service;
o for unlisted equity securities, the latest bid prices;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service or for short-term
obligations with remaining maturities of 60 days or less at the time of
purchase, at amortized cost, unless the Trustees determine that
particular circumstances of the security indicate otherwise; or
o for all other securities, at fair value as determined in good
faith by the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
<PAGE>
The International Equity Fund will value futures contracts and options at their
market values established by the exchanges on which they are traded at the close
of trading on such exchanges unless the Trustees determine in good faith that
another method of valuing such investments is necessary. Trading in Foreign
Securities
With respect to International Equity Fund, trading in foreign securities may be
completed at times which vary from the closing of the New York Stock Exchange.
In computing the net asset value, International Equity Fund values foreign
securities at the latest closing price on the exchange on which they are traded
immediately prior to the closing of the New York Stock Exchange. Foreign
securities quoted in foreign currencies are translated into U.S. dollars at
current rates. Occasionally, events that affect these values and exchange rates
may occur between the times at which they are determined and the closing of the
New York Stock Exchange. If such events materially affect the value of portfolio
securities, these securities may be valued at their fair value as determined in
good faith by the Trustees, although the actual calculation may be done by
others.
Valuing Municipal Securities
With respect to Municipal Income Fund, the Trustees use an independent pricing
service to value municipal securities. The independent pricing service takes
into consideration: yield; stability; risk; quality; coupon rate; maturity; type
of issue; trading characteristics; special circumstances of a security or
trading market; and any other factors or market data it considers relevant in
determining valuations for normal institutional size trading units of debt
securities and does not rely exclusively on quoted prices.
Exchange Privilege
Requirements for Exchange
Before the exchange, the shareholder must receive a prospectus of the fund for
which the exchange is being made. This privilege is available to shareholders
resident in any state in which the fund shares being acquired may be sold. Upon
receipt of proper instructions and required supporting documents, shares
submitted for exchange are redeemed and the proceeds invested in shares of the
other fund.
Further information on the exchange privilege may be obtained by calling the
Funds.
Making an Exchange
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee.
Redeeming Shares
Shares of the Funds are redeemed at the next computed net asset value after the
Bank receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares." Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays when
wire transfers are restricted.
Although State Street Bank does not charge for telephone redemptions, it
reserves the right to charge a fee for the cost of wire-transferred redemptions
of less than $5,000.
Redemption in Kind
Although the Funds intend to redeem shares in cash, they reserve the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from each Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission ("SEC") rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a manner
the Trustees determine to be fair and equitable.
The Funds have elected to be governed by Rule 18f-1 of the Investment Company
Act of 1940 under which each Fund is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of each Fund's net
asset value during any 90-day period.
Massachusetts Partnership Law
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust itself cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
Tax Status
The Funds' Tax Status
The Funds will pay no federal income tax because they expect to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, each Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
Foreign Taxes
With respect to the International Equity Fund, investment income on certain
foreign securities in which the Fund may invest may be subject to foreign
withholding or other taxes that could reduce the return on these securities. Tax
treaties between the United States and foreign countries, however, may reduce or
eliminate the amount of foreign taxes to which the Fund would be subject.
Shareholders' Tax Status
Shareholders of Equity Fund, Opportunity Fund, International Equity Fund,
Limited Term Fund and Government Income Fund are subject to federal income tax
on dividends received as cash or additional shares. These dividends, and any
short-term capital gains, are taxable as ordinary income. With respect to
International Equity Fund, Limited Term Fund and Government Income Fund, no
portion of any income dividend paid by one of these Funds is eligible for the
dividends received deduction available to corporations.
Total Return
The one-year and five-year average annual total returns for the fiscal year
ended February 28, 1998, and for the period from August 3, 1992 (date of initial
public investment) to February 28, 1998 for Equity Fund, Limited Term Fund, and
Government Income Fund were 39.74%, 20.33% and 19.36%, 6.16%, 4.87% and 5.16%,
and 9.90%, 6.02% and 6.55%, respectively. The average annual total returns for
the fiscal year ended February 28, 1998 and for the period from December 21,
1992 (date of initial public investment) to February 28, 1998 for Municipal Fund
were 7.70% and 6.45%, respectively, The average annual total returns for the
fiscal year ended February 28, 1998 and for the period from August 1, 1994 (date
of initial public investment) to February 28, 1998 for Opportunity Fund were
37.81% and 25.74%, respectively.
The average annual total return for the Funds is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the maximum offering price per share at the end of the period. The number of
shares owned at the end of the period is based on the number of shares purchased
at the beginning of the period with $1,000, less any applicable sales charge,
adjusted over the period by any additional shares, assuming the quarterly
reinvestment of all dividends and distributions.
International Equity Fund's cumulative total return for the period from August
15, 1997 (date of initial public investment) to February 28, 1998, was 4.71%.
Cumulative total return reflects International Equity Fund's total performance
over a specific period of time. International Equity Fund's cumulative total
return is representative of approximately 6 months of investment activity since
International Equity Fund's effective date.
Yield
The yields for the thirty-day period ended February 28, 1998, for Equity Fund,
Opportunity Fund, Limited Term Fund, Government Income Fund, Municipal Income
Fund, and International Equity Fund were 0.26%, 0.00%, 4.69%, 4.73%, 3.59%, and
0.00%, respectively.
The yield for the Funds is determined by dividing the net investment income per
share (as defined by the SEC) earned by each Fund over a thirty-day period by
the offering price per share of each Fund on the last day of the period. This
value is then annualized using semi-annual compounding. This means that the
amount of income generated during the thirty-day period is assumed to be
generated each month over a 12-month period and is reinvested every six months.
The yield does not necessarily reflect income actually earned by the Funds
because of certain adjustments required by the SEC and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with investments in the Funds,
performance will be reduced for those shareholders paying those fees.
Tax-Equivalent Yield
Municipal Income Fund's tax-equivalent yield for the thirty-day period ended
February 28, 1998 was 5.20%.
The tax-equivalent yield of Municipal Income Fund is calculated similarly to the
yield, but is adjusted to reflect the taxable yield that Municipal Income Fund
would have had to earn to equal its actual yield, assuming a 31% tax rate (the
maximum effective federal rate for individuals) and assuming that the income of
Municipal Income Fund is 100% tax-exempt.
Tax-Equivalency Table
Municipal Income Fund may also use a tax-equivalency table in advertising and
sales literature. The interest earned by the municipal securities in Municipal
Income Fund's portfolio generally remains free from federal regular income tax,*
and is often free from state and local taxes as well. As the table below
indicates, a "tax-free" investment is an attractive choice for investors,
particularly in times of narrow spreads between tax-free and taxable yields.
TAXABLE YIELD EQUIVALENT FOR 1998
MULTISTATE MUNICIPAL FUND
FEDERAL INCOME TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
JOINT $1- $42,351- $102,301- $155,951- OVER
RETURN 42,350 102,300 155,950 278,450 $278,450
SINGLE $1- $25,351- $61,401- $128,101- OVER
RETURN 25,350 61,400 128,100 278,450 $278,450
Tax-Exempt
Yield Taxable Yield Equivalent
1.00% 1.18% 1.39% 1.45% 1.56% 1.66%
1.50% 1.76% 2.08% 2.17% 2.34% 2.48%
2.00% 2.35% 2.78% 2.90% 3.13% 3.31%
2.50% 2.94% 3.47% 3.62% 3.91% 4.14%
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
3.50% 4.12% 4.86% 5.07% 5.47% 5.79%
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
4.50% 5.29% 6.25% 6.52% 7.03% 7.45%
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
5.50% 6.47% 7.64% 7.97% 8.59% 9.11%
6.00% 7.06% 8.33% 8.70% 9.38% 9.93%
6.50% 7.65% 9.03% 9.42% 10.16% 10.76%
7.00% 8.24% 9.72% 10.14% 10.94% 11.59%
7.50% 8.82% 10.42% 10.87% 11.72% 12.42%
8.00% 9.41% 11.11% 11.59% 12.50% 13.25%
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. The chart above is for
illustrative purposes only. It is not an indicator of past or future
performance of Fund shares. * Some portion of the Fund's income may be
subject to the federal alternative minimum tax and state and local income
taxes.
<PAGE>
Performance Comparisons
The Funds' performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Funds' expenses; and
o various other factors.
The performance of Equity Fund, Opportunity Fund, International Equity Fund,
Limited Term Fund, Government Income Fund and Municipal Income Fund fluctuates
on a daily basis largely because net earnings and offering price per share
fluctuate daily. Both net earnings and offering price per share are factors in
the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Funds' performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Funds use in advertising may include but
are not limited to:
o Lipper Analytical Services, Inc.(Equity Fund, Opportunity Fund,
International Equity Fund, Limited Term Fund and Government Income
Fund), ranks funds in various fund categories by making comparative
calculations for one-month, three-month, one-year, and five-year
periods using total return, and assumes the reinvestment of all
capital gains distributions and income dividends. Total return assumes
the reinvestment of all income dividends and capital gains
distributions, if any. From time to time, the Equity Fund,
International Equity Fund and Opportunity Fund will quote its Lipper
ranking in the "equity, growth and income, equity, growth equity,
international equity and small company" category in advertising and
sales literature.
o Europe, Australia, and Far East (EAFE) Index (International Equity
Fund) is a market capitalization weighted foreign securities index,
which is widely used to measure the performance of European,
Australian, New Zealand and Far Eastern stock markets. The index
covers approximately 1,020 companies drawn from 18 countries in the
above regions. The index values its securities daily in both U.S.
dollars and local currency and calculates total returns monthly. EAFE
U.S. dollar total return is a net dividend figure less Luxembourg
withholding tax. The EAFE is monitored by Capital International, S.A.,
Geneva, Switzerland.
o Dow Jones Industrial Average ("DJIA")(Equity Fund and Opportunity
Fund) represents share prices of selected blue-chip industrial
corporations as well as public utility and transportation companies.
The DJIA indicates daily changes in the average price of stocks in any
of its categories. It also reports total sales for each group of
industries. Because it represents the top corporations of America, the
DJIA's index movements are leading economic indicators for the stock
market as a whole.
o Standard & Poor's Daily Stock Price Index of 500 Common Stocks (Equity
Fund and Opportunity Fund), a composite index of common stocks in
industry, transportation, and financial and public utility companies
can be used to compare to the total returns of funds whose portfolios
are invested primarily in common stocks. In addition, the Standard &
Poor's index assumes reinvestments of all dividends paid by stocks
listed on its index. Taxes due on any of these distributions are not
included, nor are brokerage or other fees calculated, in Standard &
Poor's figures.
o Russell 2000 Small Stock Index (Opportunity Fund) is a broadly
diversified index consisting of approximately 2,000 small
capitalization common stocks that can be used to compare to the total
returns of funds whose portfolios are invested primarily in small
capitalization common stocks.
o Morningstar, Inc. (Equity Fund and Opportunity Fund), an independent
rating service, is the publisher of the bi-weekly Mutual Fund Values.
Mutual Fund Values rates more than 1,000 NASDAQ-listed mutual funds of
all types, according to their risk-adjusted returns. The maximum
rating is five stars, and ratings are effective for two weeks.
o NASDAQ Over-the-Counter Composite Index (Opportunity Fund) covers
4,500 stocks traded over the counter. It represents many small company
stocks but is heavily influenced by about 100 of the largest NASDAQ
stocks. It is a value-weighted index calculated on price change only
and does not include income.
o Merrill Lynch 1-3 Year Treasury Index (Limited Term Fund) is an
unmanaged index tracking short-term U.S. government securities with
maturities between 1 and 2.99 years. The index is produced by Merrill
Lynch, Pierce, Fenner & Smith, Inc.
o Lehman Brothers Government/Corporate (Total) Index (Government Income
Fund) is comprised of approximately 5,000 issues which include:
non-convertible bonds publicly issued by the U.S. government or its
agencies; corporate bonds guaranteed by the U.S. government and
quasi-federal corporations; and publicly issued, fixed rate,
non-convertible domestic bonds of companies in industry, public
utilities, and finance. The average maturity of these bonds
approximates nine years. Tracked by Lehman Brothers, Inc., the index
calculates total returns for one month, three month, twelve month, and
ten year periods and year-to-date.
o Lehman Brothers Municipal Bond Index (Municipal Income Fund) is a
total return performance benchmark for the long-term, investment
grade, tax-exempt bond market. Returns and attributes for this index
are calculated semi-monthly using municipal bonds classified as
General Obligation Bonds (state and local), Revenue Bonds (excluding
insured revenue bonds), Insured Bonds (includes all bond insurers with
Aaa/AAA ratings), and Prerefunded Bonds.
Advertisements and other sales literature for the Funds may quote total returns
which are calculated on non-standardized base periods. These total returns
represent the change, over a specified period of time, in the value of an
investment in the Funds based on monthly reinvestment of dividends and other
investments.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Funds' returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Funds can
compare their performance, or performance for the types of securities in which
it invests, to a variety of other investments, such as bank savings accounts,
certificates of deposit, and Treasury bills.
Economic and Market Information
Advertising and sales literature for the Funds may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Funds. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute ("ICI"). For example, according to the ICI,
thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion to the more than 6,000 funds available.
Financial Statements
The financial statements for the fiscal year ended February 28, 1998, are
incorporated herein by reference to the Annual Report of the Funds dated
February 28, 1998 (File Nos. 33-46431 and 811-6607). A copy of the Funds' Annual
Report may be obtained without charge by contacting the Trust.
<PAGE>
Appendix
Standard and Poor's Corporate/Municipal Bond Ratings
AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
NR--NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Standard and Poor's Commercial Paper Rating Definitions
A-1-This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
Moody's Investors Service, Inc. Corporate/Municipal 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
edged". 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 are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
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.
NR--Not rated by Moody's.
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Fitch IBCA, Inc. Long-Term Debt Ratings
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+".
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
NR--NR indicates that Fitch does not rate the specific issue.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
Standard and Poor's Ratings Group Commercial Paper Ratings
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
Standard & Poor's Municipal Note Ratings
SP-1--Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
(+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
Moody's Investors Service, Inc., Short-Term Municipal Obligations Ratings
MIG1/VMIG1--This designation denotes best quality. There is a present strong
protection by established cash flows, superior liquidity support or demonstrated
broadbased access to the market for refinancing.
MIG2/VMIG2--This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
Moody's Investors Service, Inc., Commercial Paper Ratings
Prime-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
leading market positions in well established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternative liquidity.
Prime-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally 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 IBCA, Inc. Commercial Paper Ratings
F-1+(Exceptionally Strong Credit Quality)Issues assigned this rating is 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--(Very Good Grade) Issued assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
<PAGE>
DG Investor Series
Money Market Funds
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relates to the following two
portfolios (individually or collectively referred to as the "Fund" or
"Funds" as the context requires) of DG Investor Series (the "Trust"):
DG Prime Money Market Fund ("Prime Money Market Fund"); and
DG Treasury Money Market Fund ("Treasury Money Market Fund")
(formerly, DG U.S. Government Money Market Fund).
This Statement of Additional Information should be read with the prospectus
of the Funds dated June 30, 1998. This Statement is not a prospectus. You
may request a copy of a prospectus or a paper copy of this Statement, if
you have received it electronically, free of charge by calling
1-800-530-7377, or you can visit the DG Investor Series' Internet site on
the World Wide Web at (www.dgb.com).
DG INVESTOR SERIES
DG Prime Money Market Fund
DG Treasury Money Market Fund
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
Statement dated June 30, 1998
[GRAPHIC OMITTED]
Cusip 23321N707
Cusip 23321N608
G00499-12 (6/98)
<PAGE>
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
I
Investment Objectives and Policies 1
Prime Money Market Fund 1
Acceptable Investments 1
U.S. Government Securities 1
Bank Instruments 1
Ratings 1
Treasury Money Market Fund 1
Types of Investments 1
Investment Policies and Strategies 2
Repurchase Agreements 2
Reverse Repurchase Agreements 2
Credit Enhancement 2
When-Issued and Delayed
Delivery Transactions 2
Investing in Securities of Other
Investment Companies 3
Lending of Portfolio Securities 3
Investment Limitations 3
Regulatory Compliance 4
DG Investor Series Management 5
Trust Ownership 9
Trustees' Compensation 10
Trustee Liability 10
Investment Advisory Services 10
Investment Adviser 10
Advisory Fees 11
Brokerage Transactions 11
Other Services 11
Fund Administration 11
Custodian 11
Transfer Agent, Dividend Disbursing
Agent, and Shareholder Servicing Agent 11
Independent Auditors 12
Purchasing Shares 12
Distribution and Shareholder Services Plans 12
Conversion to Federal Funds 12
Determining Net Asset Value 12
Exchange Privilege 13
Requirements for Exchange 13
Making an Exchange 13
Redeeming Shares 13
Redemption in Kind 13
Massachusetts Partnership Law 13
Tax Status 13
The Funds' Tax Status 13
Shareholders' Tax Status 14
Performance Information 14
Yield 14
Effective Yield 14
Total Return 14
Performance Comparisons 14
Economic and Market Information 15
Financial Statements 15
<PAGE>
Investment Objectives and Policies
The prospectus discusses the objective of each Fund and the policies employed to
achieve those objectives. The following discussion supplements the description
of the Funds' investment policies in the prospectus. The Funds' respective
investment objectives cannot be changed without approval of shareholders. Unless
indicated otherwise, the policies described below may be changed by the Board of
Trustees ("Trustees") without shareholder approval. Shareholders will be
notified before any material change in these policies becomes effective. On
August 20, 1997, the Trustees of DG Investor Series approved changing the name
of the fund from DG U.S. Government Money Market Fund to DG Treasury Money
Market Fund. This change became effective October 1, 1997. Prime Money Market
Fund
Acceptable Investments
When determining whether a security presents minimal credit risks, the
investment adviser will consider the creditworthiness of: the issuer of the
security; the issuer of any demand feature applicable to the security; or any
guarantor of either the security or any demand feature.
U.S. Government Securities
The types of U.S. government securities in which the Prime Money Market
Fund may invest generally include direct obligations of the U.S. Treasury (such
as U.S. Treasury bills, notes, and bonds) and obligations issued or guaranteed
by U.S. government agencies or instrumentalities. These securities are backed
by:
o the full faith and credit of the U.S. Treasury;
o the issuer's right to borrow from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
o the credit of the agency or instrumentality issuing the obligations.
Bank Instruments
The instruments of banks and savings associations whose deposits are insured by
the Bank Insurance Fund or the Savings Association Insurance Fund, such as
certificates of deposit, demand and time deposits, savings shares, and bankers'
acceptances, are not necessarily guaranteed by those organizations. In addition
to domestic bank instruments, the Prime Money Market Fund may invest in:
Eurodollar Certificates of Deposit issued by foreign branches of U.S. or foreign
banks; Eurodollar Time Deposits, which are U.S. dollar-denominated deposits in
foreign branches of U.S. or foreign banks; Canadian Time Deposits, which are
U.S. dollar-denominated deposits issued by branches of major Canadian banks
located in the United States; and Yankee Certificates of Deposit, which are U.S.
dollar-denominated certificates of deposit issued by U.S. branches of foreign
banks and held in the United States.
Ratings
An NRSRO's highest rating category is determined without regard for
sub-categories and gradations. For example, securities rated A-1 or A-1+ by
Standard & Poor's ("S&P"), Prime-1 by Moody's Investors Service, Inc.
("Moody's"), or F-1 (+ or -) by Fitch IBCA, Inc. ("Fitch") are all considered
rated in the highest short-term rating category. The Prime Money Market Fund
will follow applicable regulations in determining whether a security rated by
more than one NRSRO can be treated as being in the highest short-term rating
category; currently, such securities must be rated by two NRSROs in their
highest rating category. See "Regulatory Compliance."
Treasury Money Market Fund
Types of Investments
Treasury Money Market Fund invests only in short-term U.S. Treasury securities
which are issued by the U.S. government and are fully guaranteed as to principal
and interest by the United States.
<PAGE>
VARIABLE RATE U.S. TREASURY SECURITIES
Some of the short-term U.S. Treasury securities Treasury Money Market
Fund may purchase have variable interest rates. These securities have a
rate of interest subject to adjustment at least annually. This adjusted
interest rate is ordinarily tied to some objective standard, such as
the 91-day U.S. Treasury bill rate.
Variable interest rates will reduce the changes in the market value of
such securities from their original purchase prices. Accordingly, the
potential for capital appreciation or capital depreciation should not
be greater than the potential for capital appreciation or capital
depreciation of fixed interest rate U.S. Treasury securities having
maturities equal to the interest rate adjustment dates of the variable
rate U.S. Treasury securities.
Treasury Money Market Fund may purchase variable rate U.S. Treasury securities
upon the determination by the Fund that the interest rate as adjusted will cause
the instrument to have a current market value that approximates its par value on
the adjustment date.
Investment Policies and Strategies
Repurchase Agreements
The Funds or their custodian will take possession of the securities subject to
repurchase agreements and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Funds, the Funds could receive less than the repurchase price on any sale of
such securities. In the event that such a defaulting seller filed for bankruptcy
or became insolvent, disposition of such securities by the Funds might be
delayed pending court action. The Funds believe that under the regular
procedures normally in effect for custody of the Funds' portfolio securities
subject to repurchase agreements, a court of competent jurisdiction would rule
in favor of the Funds and allow retention or disposition of such securities. The
Funds will only enter into repurchase agreements with banks and other recognized
financial institutions, such as broker/dealers, which are found by the Funds'
adviser to be creditworthy pursuant to guidelines established by the Trustees.
Reverse Repurchase Agreements
The Funds may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In reverse repurchase agreements, the Funds
transfer possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agree that on a stipulated date in the
future the Funds will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate.
When effecting reverse repurchase agreements, liquid assets of the Funds, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and are maintained until the transaction is settled.
The use of reverse repurchase agreements may enable the Funds to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Funds will be able to avoid selling portfolio instruments at a
disadvantageous time.
Credit Enhancement
The Prime Money Market Fund typically evaluates the credit quality and ratings
of credit-enhanced securities based upon the financial condition and ratings of
the party providing the credit enhancement (the "credit enhancer"), rather than
the issuer. Generally, the Fund will not treat credit-enhanced securities as
being issued by the credit enhancer for diversification purposes. However, under
certain circumstances applicable regulations may require the Fund to treat
securities as having been issued by both the issuer and the credit enhancer.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price or yield for the Funds. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the Funds
sufficient to make payment for the securities to be purchased are segregated on
the Funds' records at the trade date. These assets are marked to market daily
and are maintained until the transaction has been settled. The Funds do not
intend to engage in when-issued and delayed delivery transactions to an extent
that would cause the segregation of more than 20% of the total value of their
respective assets.
The Treasury Money Market Fund does not anticipate investing more than 5% of its
respective total assets in when-issued and delayed delivery transactions.
Investing in Securities of Other Investment Companies The Funds may invest in
the securities of affiliated money market funds as an efficient means of
managing the Funds' uninvested cash.
Lending of Portfolio Securities
The collateral received when the Funds lend portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Funds. During the time
portfolio securities are on loan, the borrower pays the Funds any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Funds or the borrower. The Funds may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
Investment Limitations
Selling Short and Buying on Margin
The Funds will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as are necessary for
clearance of transactions.
Issuing Senior Securities and Borrowing Money
The Funds will not issue senior securities except that the Funds may
borrow money directly or through reverse repurchase agreements in amounts
up to one-third of the value of their total assets, including the amounts
borrowed.
The Funds will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure or to facilitate management of the portfolio by enabling
the Funds to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Funds will
not purchase any securities while borrowings in excess of 5% of the value
of its total assets are outstanding.
Pledging Assets
The Funds will not mortgage, pledge, or hypothecate any assets except as
necessary to secure permitted borrowings.
Lending Cash or Securities
The Funds will not lend any assets, except portfolio securities and except
that the Funds may purchase or hold corporate or government bonds,
debentures, notes, certificates of indebtedness or other debt securities
of an issuer, repurchase agreements, or other transactions permitted by
their investment objective, policies, and limitations or the Trust's
Declaration of Trust.
Investing in Commodities
The Funds will not purchase or sell commodities, commodity contracts, or
commodity futures contracts.
Investing in Real Estate
Treasury Money Market Fund will not purchase or sell real estate,
including limited partnership interests in real estate, although it may
invest in securities secured by real estate or interests in real estate.
Underwriting
The Funds will not underwrite any issue of securities, except as a Fund
may be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with a Fund's
investment objective, policies, and limitations.
Concentration of Investments
Prime Money Market Fund will not invest 25% or more of the value of its
total assets in any one industry except that the Fund will invest 25% or
more of the value of its total assets in commercial paper issued by
finance companies. The Fund may invest 25% or more of the value of its
total assets in cash, cash items, or securities issued or guaranteed by
the government of the United States or its agencies, or instrumentalities
and repurchase agreements collateralized by such U.S. government
securities. The U.S. government is not considered to be an industry.
Diversification of Investments
With respect to securities comprising 75% of the value of its total
assets, the Prime Money Market Fund will not purchase securities of any
one issuer (other than cash, cash items, or securities issued or
guaranteed by the government of the United States or its agencies or
instrumentalities and repurchase agreements collateralized by such U.S.
government securities) if as a result more than 5% of the value of its
total assets would be invested in the securities of that issuer, or if it
would own more than 10% of the outstanding voting securities of that
issuer.
The above limitations cannot be changed without shareholder approval. The
following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
Investing in Illiquid Securities
The Funds will not invest more than 10% of the value of their net assets
in illiquid securities, including securities not determined by the Trustee
to be liquid and repurchase agreements providing for settlement in more
than seven days after notice, and with respect to the Prime Money Market
Fund, non-negotiable time deposits.
Investing for Control
Prime Money Market Fund will not invest in securities of a company for the
purpose of exercising control or management.
Investing in Options
The Funds will not invest in puts, calls, straddles, spreads, or any
combination of them.
For purposes of the above limitations, the Funds consider certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings association having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items." Except with
respect to borrowing money, if a percentage limitation is adhered to at the time
of investment, a later increase or decrease in percentage resulting from any
change in value or net assets will not result in a violation of such limitation.
Prime Money Market Fund has no present intent to borrow money or pledge
securities in excess of 5% of the value of its net assets during the coming
fiscal year.
Regulatory Compliance
The Funds may follow non-fundamental operational policies that are more
restrictive than their fundamental investment limitations, as set forth in the
prospectus and this Statement of Additional Information, in order to comply with
applicable laws and regulations, including the provisions of and regulations
under the Investment Company Act of 1940. In particular, the Funds will comply
with the various requirements of Rule 2a-7, which regulates money market mutual
funds. For example, with limited exceptions, Rule 2a-7 prohibits the investment
of more than 5% of its assets in the securities of any one issuer, although
Treasury Money Market Fund's investment limitation only requires such 5%
diversification with respect to 75% of its assets. Treasury Money Market Fund
will invest more than 5% of its assets in any one issuer only under the
circumstances permitted by Rule 2a-7. The Funds will also determine the
effective maturity of their investments , as well as their ability to consider a
security as having received the requisite short-term ratings by NRSROs,
according to Rule 2a-7. The Funds may change these operational policies to
reflect changes in the laws and regulations without the approval of their
shareholders.
<PAGE>
DG Investor Series Management
Officers and Trustees are listed with their addresses, birthdates, present
positions with DG Investor Series, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chief Executive Officer and Director or Trustee of the Funds; Chairman and
Director, Federated Investors, Inc., Chairman and Trustee, Federated Advisers,
Federated Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport Research,
Ltd. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Company.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director or Trustee of the Funds; Member of the Executive Committee, Children's
Hospital of Pittsburgh; formerly, Senior Partner, Ernst & Young LLP; Director,
MED 3000 Group, Inc.; Director, Member of Executive Committee, University of
Pittsburgh.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
Director of Trustee of the Funds; President, Investment Properties
Corporation; Senior Vice-President, John R. Wood and Associates, Inc., Realtors;
Partner or Trustee in private real estate ventures in Southwest Florida;
formerly, President, Naples Property Management, Inc. and Northgate Village
Development Corporation.
Nicholas P. Constantakis
175 Woodshire Drive
Pittsburgh, PA
Birthdate: September 3, 1939
Trustee
Director of Trustee of the Funds; formerly, Partner, Andersen Worldwide SC.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director of Trustee of the Funds; Director and Member of the Executive
Committee, Michael Baker, Inc.; formerly, Vice Chairman and Director, PNC Bank,
N.A., and PNC Bank Corp.; Director, Ryan Homes, Inc.; Director, United Refinery;
Chairman, Pittsburgh Foundation; Director, Forbes Fund; Chairman, Pittsburgh
Civic Light Opera.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Director of Trustee of the Funds; Attorney-at-law; Director, The Emerging
Germany Fund, Inc.; formerly, President, Boston Stock Exchange, Inc.; Regional
Administrator, United States Securities and Exchange Commission.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Director of Trustee of the Funds; Professor of Medicine, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center -
Downtown; Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; formerly, Member, National Board of Trustees, Leukemia Society of
America.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Director of Trustee of the Funds; Attorney Of Counsel, Miller, Ament, Henny &
Kochuba; Director, Eat'N Park Restaurants, Inc.; formerly, Counsel, Horizon
Financial, F.A., Western Region; Partner, Meyer and Flaherty.
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President, Treasurer and Trustee
Director of Trustee of the Funds; President, Executive Vice President and
Treasurer of some of the Funds; Vice Chairman, Federated Investors, Inc.; Vice
President, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Director of Trustee of the Funds; formerly, Representative, Commonwealth of
Massachusetts General Court; President, State Street Bank and Trust Company and
State Street Corporation; Director, VISA USA and VISA International; Chairman
and Director, Massachusetts Banker Association; Director, Depository Trust
Corporation.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
Director of Trustee of the Funds; President, Law Professor, Duquesne University;
Consulting Partner, Mollica & Murray; formerly, Dean and Professor of Law,
University of Pittsburgh School of Law; Dean and Professor of Law, Villanova
University School of Law.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Director of Trustee of the Funds; President, World Society for Ekistics, Athens;
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University and U.S. Space Foundation; President
Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council
for Environmental Policy and Technology, Federal Emergency Management Advisory
Board and Czech Management Center, Prague; formerly, Professor, United States
Military Academy; Professor, United States Air Force Academy.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Director of Trustee of the Funds; Public relations/Marketing/Conference
Planning; formerly, National Spokesperson, Aluminum Company of America; business
owner.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President or Executive Vice President of the Funds; President and Director,
Federated Investors, Inc.; President and Trustee, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services Company, and Federated Shareholder
Services; Director, Federated Services Company; Director or Trustee of some of
the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Trustee of
the Company.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President and Secretary of the Funds; Treasurer of some of the
Funds; Executive Vice President, Secretary, and Director, Federated Investors,
Inc.; Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.; Trustee,
Federated Shareholder Services Company; Director, Federated Services Company;
President and Trustee, Federated Shareholder Services; Director, Federated
Securities Corp.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
President or Vice President of some of the Funds; Director of Trustee of
some of the Funds; Executive Vice President, Federated Investors, Inc.; Chairman
and Director, Federated Securities Corp.
Charles L. Davis, Jr.
Federated Investors Tower
Pittsburgh, PA
Birthdate: March 23, 1960
Vice President and Assistant Treasurer
Vice President and Assistant Treasurer of some of the Funds.
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board between meetings
of the Board.
As referred to in the list of Trustees and Officers, "Funds" includes the
following investment companies: 111 Corcoran Funds; Automated Government Money
Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series
II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Core
Trust; Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated
Fund for U.S. Government Securities, Inc.; Federated GNMA Trust; Federated
Government Income Securities, Inc.; Federated Government Trust; Federated High
Income Bond Fund, Inc.; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal
Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust;
Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated U.S.
Government Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years;
Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government
Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds;
Fixed Income Securities, Inc.; High Yield Cash Trust; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S. Government Money
Market Trust; Liquid Cash Trust; Managed Series Trust; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market Obligations Trust II; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds;
The Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; WCT Funds; and World Investment Series,
Inc.
Trust Ownership
Officers and Trustees as a group own less than 1% of the Fund`s outstanding
shares.
As of June 1, 1998, the following shareholders of record owned 5% or more of the
outstanding shares of Treasury Money Market Fund: Deposit Guaranty National
Bank, Jackson, MS, acting in various capacities for numerous accounts was the
owner of record of approximately 197,002,462 shares (65.04%); RELICO Reliance
Trust Company, Atlanta, GA, acting in various capacities for numerous accounts,
was the owner of record of approximately 18,712,360 shares (6.18%);.and
Commercial National Bank, Jackson, MS, acting in various capacities for numerous
accounts, was the owner of record of approximately 58,848,328 shares (19.43%).
As of June 1, 1998, the following shareholder of record owned 5% or more of the
outstanding shares of Prime Money Market Fund: National Financial Services
Corp., New York, NY, for the exclusive benefit of its customers, was the owner
of record of approximately 212,614 shares (99.59%).
<PAGE>
Trustees' Compensation
Name, Aggregate
Position With Trust Compensation From Trust+
John F. Donahue, $0
Chairman and Trustee
Thomas G. Bigley, $402.17
Trustee
John T. Conroy, Jr., $442.46
Trustee
Nicholas P. Constantakis++, $140.71
Trustee
William J. Copeland, $442.46
Trustee
James E. Dowd, $442.46
Trustee
Lawrence D. Ellis, M.D., $402.17
Trustee
Edward L. Flaherty, Jr., $442.46
Trustee
Edward C. Gonzales, $0
President, Treasurer and Trustee
Peter E. Madden, $402.17
Trustee
John E. Murray, Jr., $402.17
Trustee
Wesley W. Posvar, $402.17
Trustee
Marjorie P. Smuts, $402.17
Trustee
+The aggregate compensation is provided for the Trust which is currently
comprised of nine portfolios. Information is furnished for the fiscal year ended
February 28, 1998.
++ Mr. Constantakis became a member of the Board of Trustees on February 23,
1998.
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees will only be liable
for their own willful defaults. If reasonable care has been exercised in the
selection of officers, agents, employees, or investment advisers, a Trustee
shall not be liable for any neglect or wrong doing of any such person. However,
they are not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of their office.
Investment Advisory Services
Investment Adviser
The Funds' investment adviser is ParkSouth Corporation (the "Adviser"), a
subsidiary of Deposit Guaranty National Bank, a national banking association
founded in 1925 which, in turn, is a subsidiary of Deposit Guaranty Corp. The
Adviser shall not be liable to the Trust, the Funds or any shareholder of the
Funds for any losses that may be sustained in the purchase, holding, or sale of
any security, or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
<PAGE>
Because of the internal controls maintained by Deposit Guaranty National
Bank to restrict the flow of non-public information, Fund investments are
typically made without any knowledge of Deposit Guaranty National Bank's or its
affiliates' lending relationships with an issuer. Advisory Fees
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus. For the fiscal years ended February 28,
1998, February 28, 1997, and February 29, 1996, the Adviser earned fees from
Treasury Money Market Fund of $1,407,882, $1,138,567, and $1,044,577,
respectively, of which $563,153, $455,427, and $417,831, respectively, were
voluntarily waived. For the period from March 10, 1997 (start of business) to
February 28, 1998, the Adviser earned advisory fees from Prime Money Market Fund
of $810,951, of which $324,380 were voluntarily waived.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the Trustees. The Adviser may select brokers and
dealers who offer brokerage and research services. These services may be
furnished directly to the Fund or to the Adviser and may include: advice as to
the advisability of investing in securities; security analysis and reports;
economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. Research services provided by brokers and
dealers may be used by the Adviser or its affiliates in advising the Fund and
other accounts. To the extent that receipt of these services may supplant
services for which the Adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The Adviser and its affiliates exercise
reasonable business judgment in selecting brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. For the fiscal years
ended February 28, 1998, February 28, 1997, and February 29, 1996, Treasury
Money Market Fund paid no brokerage commissions on brokerage transactions. For
the period from March 10, 1997 (start of business) to February 28, 1998, Prime
Money Market Fund paid no brokerage commissions on brokerage transactions.
Although investment decisions for the Fund are made independently from those of
the other accounts managed by the Adviser, investments of the type the Fund may
make may also be made by those other accounts. When the Fund and one or more
other accounts managed by the Adviser are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for sales
will be allocated in a manner believed by the Adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received by
the Fund or the size of the position obtained or disposed of by the Fund. In
other cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
Other Services
Fund Administration
Federated Administrative Services, a subsidiary of Federated Investors, Inc.,
provides administrative personnel and services to the Funds for a fee as
described in the prospectus. For the fiscal years ended February 28, 1998,
February 28, 1997, and February 29, 1996, the administrator earned $278,821,
$248,304, and $244,926, respectively, on behalf of Treasury Money Market Fund,
none of which was waived. For the period from March 10, 1997 (start of business)
to February 28, 1998, the administrator earned $160,588 on behalf of Prime Money
Market Fund, $95,518 of which were waived.
Custodian
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Funds.
Transfer Agent, Dividend Disbursing Agent, and Shareholder Servicing Agent
Federated Shareholder Services Company, Pittsburgh, Pennsylvania, a subsidiary
of Federated Investors, Inc., serves as transfer agent for the shares of the
Funds, dividend disbursing agent for the Funds, and shareholder servicing agent
for the Funds.
<PAGE>
Independent Auditors
The independent auditors for the Fund are KPMG Peat Marwick LLP, Pittsburgh,
Pennsylvania.
Purchasing Shares
Shares of the Funds are sold at their net asset value next determined after an
order is received on days the New York Stock Exchange and Federal Reserve Wire
System are open for business. The procedure for purchasing shares is explained
in the prospectus under "Investing in the Fund." Distribution and Shareholder
Services Plans
These arrangements permit the payment of fees to financial institutions to
stimulate distribution activities and services to shareholders provided by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
By adopting the Distribution Plan, the Trustees expect that the Funds will be
able to achieve a more predictable flow of cash for investment purposes and to
meet redemptions. This will facilitate more efficient portfolio management and
assist the Funds in pursuing their investment objectives. By identifying
potential investors whose needs are served by the Funds' objectives, and
properly servicing these accounts, it may be possible to curb sharp fluctuations
in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; and (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
For the fiscal year ended February 28, 1998, Treasury Money Market Fund made no
payments pursuant to the Distribution Plan. For the period from March 10, 1997
(start of business) to February 28, 1998, Prime Money Market Fund made payments
pursuant to the Distribution Plan of $405,475. In addition, for the fiscal year
ended February 28, 1998, Treasury Money Market Fund, made payments pursuant to
the Shareholder Services Plan of $275,682. For the period from March 10, 1997
(start of business) to February 28, 1998, Prime Money Market Fund made no
payments pursuant to the Shareholder Services Plan.
Conversion to Federal Funds
It is the Funds' policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Deposit Guaranty National Bank
(the "Bank"), as well as Federated Shareholder Services Company, act as the
shareholder's agent in depositing checks and converting them to federal funds.
Determining Net Asset Value
The Trustees have decided that the best method for determining the value of
portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for amortization of
premium or accumulation of discount rather than at current market value.
Accordingly, neither the amount of daily income nor the net asset value is
affected by any unrealized appreciation or depreciation of the portfolio. In
periods of declining interest rates, the indicated daily yield on shares of the
Funds computed by dividing the annualized daily income on the Funds' portfolio
by the net asset value computed as above may tend to be higher than a similar
computation made by using a method of valuation based upon market prices and
estimates. In periods of rising interest rates, the opposite may be true.
The Funds' use of the amortized cost method of valuing portfolio instruments
depends on its compliance with certain conditions in Rule 2a-7 (the "Rule")
promulgated by the Securities and Exchange Commission under the Investment
Company Act of 1940. Under the Rule, the Trustees must establish procedures
reasonably designed to stabilize the net asset value per share, as computed for
purposes of distribution and redemption, at $1.00 per share, taking into account
current market conditions and the Funds' investment objective. The procedures
include monitoring the relationship between the amortized cost value per share
and the net asset value per share based upon available indications of market
value. The Trustees will decide what, if any, steps should be taken if there is
a difference of more than 0.5% between the two values. The Trustees will take
any steps they consider appropriate (such as redemption in kind or shortening
the average portfolio maturity) to minimize any material dilution or other
unfair results arising from differences between the two methods of determining
net asset value.
Exchange Privilege
Requirements for Exchange
Before the exchange, the shareholder must receive a prospectus of the fund
for which the exchange is being made. Upon receipt of proper instructions and
required supporting documents, shares submitted for exchange are redeemed and
the proceeds invested in shares of the other fund.
Further information on the exchange privilege may be obtained by calling
the Funds.
Making an Exchange
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee. Redeeming Shares Shares of the Funds are redeemed
at the next computed net asset value after the Bank receives the redemption
request. Redemption procedures are explained in the prospectus under "Redeeming
Shares." Redemption requests cannot be executed on days on which the New York
Stock Exchange is closed or on federal holidays when wire transfers are
restricted. Although State Street Bank does not charge for telephone
redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $5,000. Redemption in Kind
Although the Funds intend to redeem shares in cash, they reserve the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the Funds' portfolio. Redemption in kind will be
made in conformity with applicable Securities and Exchange Commission rules,
taking such securities at the same value employed in determining net asset value
and selecting the securities in a manner the Trustees determine to be fair and
equitable. The Funds have elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which each Fund is obligated to redeem shares for any
one shareholder in cash only up to the lesser of $250,000 or 1% of each Fund's
net asset value during any 90-day period. Massachusetts Partnership Law
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Trust. These documents require notice of this disclaimer to be given in each
agreement, obligation, or instrument the Trust or its Trustees enter into or
sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust itself cannot meet its obligations to
indemnify shareholders and pay judgments against them.
Tax Status
The Funds' Tax Status
The Funds will pay no federal income tax because they expect to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, each Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
Shareholders' Tax Status
Shareholders of the Funds are subject to federal income tax on dividends
received as cash or additional shares. These dividends, and any short-term
capital gains, are taxable as ordinary income. No portion of any income dividend
paid by the Funds is eligible for the dividends received deduction available to
corporations. Performance Information
Performance depends upon such variables as: portfolio quality; average portfolio
maturity; type of instruments in which the portfolio is invested; changes in
interest rates; changes in expenses; and the relative amount of cash flow. To
the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in shares of
the Funds, the performance will be reduced for those shareholders paying those
fees.
Yield
The yield is calculated based upon the seven days ending on the day of the
calculation, called the "base period." This yield is computed by: determining
the net change in the value of a hypothetical account with a balance of one
share at the beginning of the base period, with the net change excluding capital
changes but including the value of any additional shares purchased with
dividends earned from the original one share and all dividends declared on the
original and any purchased shares; dividing the net change in the account's
value by the value of the account at the beginning of the base period to
determine the base period return; and multiplying the base period return by
365/7.
Treasury Money Market Fund's and Prime Money Market Fund's yields for the
seven-day period ended February 28, 1998 were 4.73% and 4.93%, respectively.
Effective Yield
The effective yield is calculated by compounding the unannualized base period
return by: adding 1 to the base period return; raising the sum to the 365/7th
power; and subtracting 1 from the result.
Treasury Money Market Fund's and Prime Money Market Fund's effective yields for
the seven-day period ended February 28, 1998 were 4.85% and 5.05%, respectively.
Total Return
Average annual total return is the average compounded rate of return for a given
period that would equate a $1,000 initial investment to the ending redeemable
value of that investment. The ending redeemable value is computed by multiplying
the number of shares owned at the end of the period by the net asset value per
share at the end of the period. The number of shares owned at the end of the
period is based on the number of shares purchased at the beginning of the period
with $1,000, adjusted over the period by any additional shares, assuming the
monthly reinvestment of all dividends and distributions.
The Treasury Money Market Fund's average annual total returns for the one-year
and five-year periods ended February 28, 1998, and for the period from March 31,
1992 (date of initial public investment) to February 28, 1998, were 4.90%, 4.40%
and 4.23%, respectively.
Prime Money Market Fund's cumulative total return for the period from March 10,
1997 (date of initial public investment) to February 28, 1998, was 4.93%.
Cumulative total return reflects Prime Money Market Fund's total performance
over a specific period of time. Prime Money Market Fund's cumulative total
return is representative of approximately 11 months of investment activity since
Prime Money Market Fund's effective date.
Performance Comparisons
Investors may use financial publications and/or indices to obtain a more
complete view of the Funds' performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Funds use in advertising may include:
o Lipper Analytical Services, Inc. , ranks funds in various fund
categories based on total return, which assumes the reinvestment of
all income dividends and capital gains distributions, if any.
o Donoghue's Money Fund Report publishes annualized yields of money
market funds weekly. Donoghue's MONEY MARKET INSIGHT publication
reports monthly and 12-month-to-date investment results for the same
money funds.
o Money, a monthly magazine, regularly ranks money market funds in
various categories based on the latest available seven-day effective
yield.
o Bank Rate Monitor(C) National Index , Miami Beach, Florida, published
weekly, is an average of the interest rates of personal money market
deposit accounts at ten of the largest banks and thrifts in each of
the five largest Standard Metropolitan Statistical Areas. If more than
one rate is offered, the lowest rate is used. Account minimums and
compounding methods may vary.
o Discount Corporation of New York 30-Day Federal Agencies (Treasury
Money Market Fund), for example, is a weekly quote of the average
daily offering price for selected federal agency issues maturing in 30
days.
o Salomon 30-Day Treasury Bill Index (Treasury Money Market Fund) is a
weekly quote of the most representative yields for selected securities
issued by the U.S. Treasury, maturing in 30 days.
Advertisements and other sales literature for the Funds may quote total returns
which are calculated on non-standardized base periods. These total returns
represent the historic change in the value of an investment in the Funds based
on monthly reinvestment of dividends over a specified period of time.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Funds' returns in general, that demonstrate basic
investment concepts such as tax-deferred compounding, dollar-cost averaging and
systematic investment. In addition, the Funds can compare its performance, or
performance for the types of securities in which it invests, to a variety of
other investments, such as bank savings accounts, certificates of deposit, and
Treasury bills. Economic and Market Information Advertising and sales literature
for the Funds may include discussions of economic, financial and political
developments and their effect on the securities market. Such discussions may
take the form of commentary on these developments by Fund portfolio managers and
their views and analysis on how such developments could affect the Funds. In
addition, advertising and sales literature may quote statistics and give general
information about the mutual fund industry, including the growth of the
industry, from sources such as the Investment Company Institute ("ICI"). For
example, according to the ICI, thirty-seven percent of American households are
pursuing their financial goals through mutual funds. These investors, as well as
businesses and institutions, have entrusted over $4.4 trillion to the more than
6,700 funds available. Financial Statements
The financial statements for the fiscal year ended February 28, 1998, are
incorporated herein by reference to the Annual Report of the Funds dated
February 28, 1998 (File Nos. 33-46431 and 811-6607). A copy of the Funds' Annual
Report may be obtained without charge by contacting the Trust.
<PAGE>
FUND FACTS
[AMERISTAR MUTUAL FUNDS LOGO]
AMERISTAR PRIME
MONEY MARKET PORTFOLIO
AMERISTAR U.S. TREASURY
MONEY MARKET PORTFOLIO
AMERISTAR CAPITAL
GROWTH PORTFOLIO
AMERISTAR DIVIDEND
GROWTH PORTFOLIO
ANNUAL REPORT
AMERISTAR CORE
INCOME PORTFOLIO
AMERISTAR LIMITED
DURATION INCOME PORTFOLIO
AMERISTAR LIMITED DURATION
U.S. GOVERNMENT PORTFOLIO
AMERISTAR TENNESSEE TAX
EXEMPT BOND PORTFOLIO
AMERISTAR LIMITED DURATION
TENNESSEE TAX FREE PORTFOLIO
DECEMBER 31, 1997
<PAGE>
LETTER FROM THE CHIEF INVESTMENT OFFICER
- --------------------------------------------------------------------------------
To Our Shareholders:
I am pleased to send you the AmeriStar Mutual Funds' annual report for the 12
months ended December 31, 1997, a period that was kind to investors in both the
equity and fixed-income markets. The year 1997 also saw the introduction of
three new AmeriStar funds: the Dividend Growth Portfolio, the Limited Duration
U.S. Government Portfolio and the Limited Duration Tennessee Tax Free Portfolio.
NEW HEIGHTS FOR STOCKS; SOLID RETURNS FOR BONDS
Defying the dire warnings of many pundits and shrugging off often-vicious bouts
of volatility, the stock market finished substantially higher for the third
straight year. In fact, when the Dow Jones Industrial Average ended 1997 with a
gain of more than 22%, a historic milestone was achieved: For the first time
since the Dow was established in 1896, the blue-chip average rose more than 20%
for three consecutive years. Long-time investors will be even more heartened to
learn that the 300% gain stocks had since 1987 (again, as measured by the Dow)
represented the best ten-year gain of the market ever. Other market benchmarks,
such as the S&P 500 and Nasdaq, posted impressive gains, as well.
Shareholders in fixed-income funds also had reason to cheer, as interest rates
fell during the course of the year--the yield on the 30-year U.S. Treasury bond
dipped 72 basis points (0.72%)--boosting total returns for investors. Even
better, with the rate of inflation holding at a benign 1.7% at year's end, bond
investors enjoyed "real returns" (total return minus inflation) that were
positive by historical standards.
WHAT DROVE THE MARKETS?
Four essential factors were responsible for propelling stock and bond prices
higher: Along with declining interest rates and virtually negligible inflation,
other heroes were strong economic growth and higher productivity. If anything,
it was the influence and power of productivity that helped drive the current
economic expansion through its seventh year. Although unemployment was low--in
fact, one could argue that by most standards, this country's workforce was
virtually fully employed--and wages continued to rise, inflation was dampened by
the productivity gains of the American worker.
This is an essential point that the markets have come to understand and
appreciate: If wages go up 4%, such a rise can ignite inflationary pressures.
But if we see an equivalent increase in productivity, as measured by the
year-to-year gains in the amount of goods produced by a worker in a single hour
or work week, inflation becomes less of a concern.
CAN IT HAPPEN AGAIN?
What are the prospects for continued strength in stocks and bonds? This is the
million-dollar question, one that bedevils professional money managers and
individual investors alike. A year ago, many stock market experts warned that
after two years of sterling performance (the Dow rose 33% in 1995 and 26% in
1996), investors should be prepared for average, or even below-average, returns
in 1997. Then, despite some tense moments, the Dow raced to a high of 8259 in
early August, though it gave up some ground in the fourth quarter.
Who is to say it won't happen again? Not I. Here at AmeriStar, we think of
ourselves as dedicated stock pickers, not momentum-driven market timers.
At the same time, we believe a note of caution is appropriate. From a historical
perspective, stocks provide excellent returns on a long-term basis, but they
simply do not go up sharply every year. They certainly cannot be expected to
deliver 20%-plus returns year after year, without pause. As we enter 1998, we
see some positive trends in the economy--the old refrain of low inflation, low
interest rates and solid economic growth stills sounds good to us--yet it is
hard to feel wildly bullish on stocks. The chief cause for our concern? In a
word: Asia.
By now, you have certainly become aware that many of the economies in the Far
East find themselves in desperate straits. Thailand, Indonesia, South Korea,
even Japan--the world's second-largest economy--are struggling against a tidal
wave of economic stagnation, devalued currencies, countless bankruptcies and
plummeting stock market values. At this point, we do not believe that all the
news is in, nor are we confident that the full extent of the fallout from Asia
has been discounted by our markets. At the very least, the earnings of American
companies dependent on exports for a significant portion of their income will be
depressed in 1998.
The other side is that the cost of imported goods should continue to fall. Lower
costs can lead to lower, or at least steady, prices for goods and services in
this country, which could help keep inflation in check for another year.
Moreover, with continued low inflation, the Federal Reserve Board may very well
decide not to raise interest rates. All of which works to produce an environment
in which bonds might flourish and stocks could beat off the threat posed by
sluggish earnings growth.
WHAT SHOULD YOU DO?
Admittedly, what we have here is a complicated mixture of competing and
complementary crosscurrents, but the world's markets are never easy to predict.
Still, as an investor, you have to make decisions to ensure your short- and
long-term financial well-being.
With this in mind, my colleagues and I offer the following suggestion: We
encourage you to take the time to reexamine your investment goals, review your
portfolio and, if you're satisfied with your present investment strategy, simply
remain patient and calm. If your personal circumstances have changed over the
last year, feel free to talk with your investment representative.
In either case, remember that it is best to take a long-term view on the equity
and fixed-income markets, and on the funds in which you have invested your
money. The year just past was an unusually volatile period for both stocks and
bonds, and we expect more volatility in the months ahead. However, with
volatility, comes opportunity, and the portfolio managers in the fund family
remain focused on finding good investments for you, the shareholders, wherever
they may lie.
We thank you for your continued trust and support.
Sincerely,
/s/ Frederick S. Crown Jr.
Frederick S. Crown Jr., CFA
Chief Investment Officer
<PAGE>
<TABLE>
<S> <C> <C> <C>
DONALD F. TURK, CFA
JACQUELINE R. LUNSFORD, CFA Portfolio Manager
Portfolio Manager U.S. Treasury Money
[Lunsford Photo] Prime Money Market Portfolio [Turk Photo] Market Portfolio
</TABLE>
INVESTMENT GOAL
The AmeriStar Money Market Portfolios seek to provide as high a level of
current income as is consistent with the preservation of capital and the
maintenance of liquidity.* Each Portfolio seeks its objective by investing in:
PRIME MONEY MARKET PORTFOLIO -- A broad range of U.S. Government, bank and
corporate short-term, money-market obligations.
U.S. TREASURY MONEY MARKET PORTFOLIO -- U.S. Treasury securities, other
obligations that are guaranteed as to principal and interest by the U.S.
Government and related repurchase agreements.*
Q. WHAT FACTORS AFFECTED THE PERFORMANCE OF THE MONEY MARKET FUNDS?*
A. Interest-rate movements, in and of themselves, were not a significant factor
this past year; the Federal Reserve Board (the Fed) changed rates just once,
raising them 25 basis points (0.25%) in March. Although fluctuations in economic
indicators and the resulting perception of impending rate changes did have some
impact on market prices from time to time, for most of the year short-term rates
traded in a very narrow range of plus or minus 10 basis points (0.10%). Since
the short-term yield curve has been very flat over the past few months, the
greatest challenge has been to find, and take advantage of, any undervalued
maturity or issuer sectors in the markets.
Another significant factor has been a continuing supply and demand problem in
the short-term markets, which has kept prices somewhat higher due to the lack of
supply. Finally, one last factor is that past issuers of short-term products are
now cash-rich themselves, which means that they are no longer issuers of
securities, but purchasers. They are competing directly with the investors who
used to purchase their products. This situation has resulted in too much cash
chasing too few opportunities.
Q. WHAT IS YOUR OUTLOOK FOR THE NEXT SIX TO 12 MONTHS, AND HOW HAVE YOU
POSITIONED THE PORTFOLIOS?
A. With inflation very low, a continuing rally in bonds and persistent problems
in the international markets, it now appears that the next Fed movement will
likely be a decrease, rather than an increase. However, we do not expect the Fed
to make any changes to interest rates in the early part of the year. Employment
numbers and the housing market both remain strong, and early releases of holiday
retail sales figures seem to be mixed. Therefore, we believe that the Fed will
continue its watchful stance and hold short-term rates stable through their
meeting in early February, rather than risk easing credit too soon. We expect to
lengthen the average maturity of the Portfolios as opportunities arise.
- ---------------
* An investment in the AmeriStar Money Market Portfolios is neither insured nor
guaranteed by the U.S. Government. Yields will fluctuate, and there is no
assurance that the Portfolios will be able to maintain a stable net asset
value of $1.00 per share.
- --------------------------------------------------------------------------------
AMERISTAR CAPITAL GROWTH PORTFOLIO
PERFORMANCE (AS OF DECEMBER 31, 1997)
- --------------------------------------------------------------------------------
INVESTOR SHARES
<TABLE>
<CAPTION>
Investor Investor
Measurement Shares Shares
Period (without S&P (with
(Fiscal Year sales 500 sales
Covered) charge) Index charge)
<S> <C> <C> <C>
80 10000 10000 9717
81 9918 9508 9623
82 12104 11557 11745
83 13135 14113 12783
84 12163 14937 11840
85 15388 19440 14953
86 18271 23068 17736
87 19397 24217 18868
88 20714 28182 20142
89 26696 37030 25943
90 25194 35794 24481
91 31434 46674 30519
92 33457 50160 32500
93 34602 55124 33632
94 34491 55777 33491
95 44951 76714 43679
96 54958 94315 53396
97 71879 125778 68544
</TABLE>
Past performance is no guarantee of future results.
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITH SALES WITHOUT SALES
CHARGE* CHARGE
INVESTOR SHARES ---------- -------------
<S> <C> <C>
1-Year........................ 24.62% 30.79%
5-Year........................ 15.41% 16.53%
10-Year....................... 13.43% 14.00%
Since Inception (4/1/96)**.... 11.98% 12.29%
*Reflects 4.75% sales charge.
</TABLE>
TRUST SHARES***
<TABLE>
<CAPTION>
Measurement
Period
(Fiscal Year Trust S&P 500
Covered) Shares Index
<S> <C> <C>
80 10000 10000
81 9918 9508
82 12104 11557
83 13135 14113
84 12163 14937
85 15388 19440
86 18271 23068
87 19397 24217
88 20714 28182
89 26696 37030
90 25194 35794
91 31434 46674
92 33457 50160
93 34602 55124
94 34491 55777
95 44951 76714
96 54958 94315
97 71127 125778
</TABLE>
Past performance is no guarantee of future results.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
TRUST SHARES***
<S> <C>
1-Year.............. 29.68%
5-Year.............. 16.33%
10-Year............. 13.90%
Since Inception
(10/3/97)**....... 12.24%
</TABLE>
SECTOR PROFILE
<TABLE>
<CAPTION>
<S> <C>
Transportation 2.9%
Depositary Receipts 2.4%
Cash 2.8%
Consumer Services 7.9%
Energy 5.2%
Capital Goods - Tech 11.2%
Consumer Cyclicals 19.4%
Capital Goods - Industry 5.8%
Utilities/Telecommunications 2.5%
Consumer Staples 5.3%
Financial Services 17.4%
Health Care 17.2%
</TABLE>
The AmeriStar Capital Growth Portfolio invests in a portfolio designed to
provide capital growth, which consists primarily of stocks of large, well-
capitalized U.S. companies. The Portfolio's adviser has latitude in
deciding which companies and industries provide the greatest growth
potential at any given time. The Portfolio currently invests in 10 major
industry groups, including health care, energy and consumer staples.
TOP 10 EQUITY HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
TOTAL ASSETS
------------
<S> <C>
1. General Electric Co.................. 3.2%
2. Norwest Corp......................... 3.2%
3. Newell Co............................ 3.1%
4. Arbor Drugs, Inc..................... 3.0%
5. Federal Natl. Mtg. Assn.............. 3.0%
6. Home Depot, Inc...................... 3.0%
7. Wachovia Corp........................ 3.0%
8. Southwest Airlines................... 2.9%
9. Pfizer, Inc.......................... 2.8%
10. Walgreen's........................... 2.7%
</TABLE>
A hypothetical $10,000 investment made on December 31, 1980, would have been
worth on December 31, 1997, $71,879 without the sales charge and $68,544 after
taking the maximum 4.75% sales charge into account.
The AmeriStar Capital Growth Portfolio is compared to the Standard & Poor's 500
Stock Index, a broad measure of the stock market as a whole. The index is
unmanaged and does not reflect expenses associated with a mutual fund, such as
sales charges, expenses for fund operations, management fees, portfolio
transaction costs or the cash reserves required to provide daily liquidity. The
Portfolio's performance reflects the deduction of fees for these value-added
services.
**The AmeriStar Capital Growth Portfolio commenced operations on 4/1/96, through
a transfer of assets from certain collective trust fund ("Commingled") accounts
managed by First American National Bank, using materially equivalent investment
objectives, policies and methodologies as the Portfolio. The quoted performance
of the Portfolio includes performance of the Commingled accounts for periods
dating back to 12/31/80, and prior to the Portfolio's commencement of
operations, as adjusted to reflect the expenses associated with the Portfolio.
The Commingled accounts were not registered with the Securities and Exchange
Commission and, therefore, were not subject to the investment restrictions
imposed by law on registered mutual funds. If the Commingled accounts had been
so registered, the Commingled accounts' performance may have been adversely
affected. The performance also reflects reinvestment of all dividends and
capital gains distributions. Past performance is not a prediction of future
results. The Portfolio's investment return and principal value will fluctuate,
so that an investor's shares, when redeemed, may be worth more or less than
their original purchase price.
***The Trust Share class reflects the historical performance of the Investor
(no-load) share class.
<PAGE>
CHARLES WINGER
Portfolio Manager
Capital Growth
[Winger Photo] Portfolio
===============================================================
INVESTMENT GOAL
The Portfolio seeks to provide investors with the potential to achieve
long-term capital growth by investing primarily in the equity securities of
domestic issuers whose earnings are growing faster than the economy as a
whole. The portfolio invests primarily in large U.S. companies with market
capitalization of at least $500 million. This Portfolio maybe suitable for
investors who are investing for the long term and are comfortable assuming the
additional risk of investing in stocks in exchange for potentially higher
total returns.
- ---------------------------------------------------------------
Q. HOW DID THE PORTFOLIO PERFORM DURING 1997?
A. It was an excellent year for us, especially relative to our benchmark, the
Standard & Poor's 500 Index. For the 12 months ended December 31, 1997, the
Portfolio's total return was 30.79% (Net Asset Value).* In comparison, the
Lipper Growth Fund Index was up 28.08%, and the S&P 500 rose 33.36%. The Lipper
Growth Fund Index is an index of managed funds that is generally representative
of growth stock funds. The S&P 500 is an unmanaged index that is considered to
be generally representative of the U.S. market as a whole.
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. Our good performance was attributable as much to what we avoided as to what
we were invested in throughout the year. We were underweighted in basic industry
stocks--for example, the shares of paper, chemical and steel companies--which
performed poorly. As far as what we did own, our emphasis on buying
large-capitalization issues was a positive factor. Larger stocks did
particularly well in 1997. We enjoyed great success with a sector in which we
are still overweighted: health care. Pharmaceutical stocks as Bristol Myers
Squibb (2.5% of the Portfolio), Eli Lilly (2.7%) and Pfizer (2.8%) all
contributed to our performance. The drug industry fits one of our primary
investment themes: capitalizing on changing demographics. The aging population
in this country favors the entire health-care industry, and pharmaceutical
companies in particular.**
We also were overweighted in selected consumer stocks. We liked Dayton-Hudson
(2.7%), which has turned around their Mervyn's and Target department store
operations. The stock rose sharply last year, and we think the discount-
retailer concept will continue to grow in 1998. In addition, we did well, for
the year as a whole, with Halliburton (2.2%) and Schlumberger (2.2%), two
oil-services companies. However, we were hurt in the fourth quarter by these and
other energy stocks, such as Texaco and Mobil Oil (neither is presently in the
Portfolio). The energy sector as a whole took a fall at the end of the year.**
Q. WHAT ARE SOME OF THE "INVESTMENT THEMES" THAT GUIDE YOUR STOCK SELECTION?
A. We have five basic themes. First, we look for large, domestic growth
companies that offer the prospect of solid earnings growth. Second, we employ an
emphasis on changing demographics, as we discussed earlier. Third, we look for
opportunities in the financial services sector, which, we think, is ripe for
significant merger activity. Fourth, we like companies that provide productivity
enhancement, which is a fancy way of saying "technology." We think tech stocks
will perform well in the long term, though they will be exceedingly volatile.
Fifth, we are searching for good stocks in the mid-cap universe.
Q. WHAT IS YOUR STRATEGY FOR 1998?
A. For the time being, we are going to stay away from the basic industry
companies we avoided last year. We would not be surprised to see a significant
slowdown in the U.S. economy, especially during the first half of the year. In
that scenario, the basic industry stocks, which are very sensitive to the
economic cycle, would be hurt. We are also trying to avoid those stocks that
appear to be most vulnerable to problems stemming from the situation in Asia.
There are a lot of risks out there. Overall, we are cautiously optimistic that
the market offers a number of good opportunities.
- ---------------
* Including the 4.75% sales load, the Portfolio's return was 24.62% for the
period.
** The portfolio composition is subject to change.
<PAGE>
- --------------------------------------------------------------------------------
AMERISTAR DIVIDEND GROWTH PORTFOLIO
PERFORMANCE (AS OF DECEMBER 31, 1997)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investor Shares
Investor Investor
Measurement Share Share
Period (without S&P (with
(Fiscal Year sales 500 sales
Covered) charge) Index charge)
<S> <C> <C> <C>
86 10000 10000 9522
87 10510 10523 10000
88 11722 12292 11164
89 15132 16163 14418
90 15102 15650 14388
91 18454 20431 17582
92 18964 21998 18060
93 20850 24196 19851
94 19518 24512 18597
95 25593 33687 24388
96 29350 41460 27970
97 38916 55291 37075
</TABLE>
Past Performance is no guarantee of future results.
<TABLE>
<CAPTION>
Trust Shares***
Investor
Share
Measurement Period (without
(Fiscal Year sales S&P 500
Covered) charge) Index
<S> <C> <C>
86 10000 10000
87 10510 10523
88 11722 12292
89 15132 16163
90 15102 15650
91 18454 20431
92 18964 21998
93 20850 24196
94 19518 24512
95 25593 33687
96 29350 41460
97 38916 55291
Past Performance is no guarantee of future results.
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITH SALES WITHOUT SALES
CHARGE* CHARGE
INVESTOR SHARES ---------- -------------
<S> <C> <C>
1-Year........................ 26.22% 32.59%
5-Year........................ 14.36% 15.46%
10-Year....................... 13.44% 13.99%
Since Inception (2/28/97)**... 12.64% 13.14%
*Reflects 4.75% sales charge.
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
TRUST SHARES*** ---------------------------
<S> <C>
1-Year.............. 32.60%
5-Year.............. 15.46%
10-Year............. 13.99%
Since Inception
(10/3/97)**....... 13.14%
</TABLE>
<TABLE>
<CAPTION>
Sector Profile
<S> <C>
Financial Services 22.7%
Comsumer Staples 17.4%
Capital Goods and
Technology 7.7%
S&P Depositary
Receipts 2.0%
Cash and Cash
Equivalents 5.9%
Health Care 10.0%
Energy 6.5%
Consumer Cyclicals 8.5%
Capital Goods 16.9%
Utilities/Telecommunications 16.0%
</TABLE>
TOP 10 EQUITY HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
TOTAL ASSETS
------------
<S> <C>
1. Emerson Electric..................... 3.7%
2. Sysco Corp........................... 3.5%
3. Duke Energy Corp..................... 3.3%
4. Bristol-Myers Squibb Co.............. 3.3%
5. Consolidated Natural Gas............. 2.9%
6. Automatic Data Processing............ 2.8%
7. Johnson Controls..................... 2.7%
8. Mellon Bank Corp..................... 2.7%
9. Abbott Labs.......................... 2.6%
10. Pepsico.............................. 2.6%
</TABLE>
A hypothetical $10,000 investment made on December 31, 1986, would have been
worth on December 31, 1997, $38,916 without the sales charge and $37,075
after taking the maximum 4.75% sales charge into account.
The AmeriStar Dividend Growth Portfolio is compared to the Standard & Poor's
500 Stock Index, a broad measure of the stock market as a whole. The index is
unmanaged and does not reflect expenses associated with a mutual fund, such
as sales charges, expenses for fund operations, management fees, portfolio
transaction costs or the cash reserves required to provide daily liquidity.
The Portfolio's performance reflects the deduction of fees for these
value-added services.
** The AmeriStar Dividend Growth Portfolio commenced operations on 2/28/97,
through a transfer of assets from certain collective trust fund
("Commingled") accounts managed by First American National Bank, using
materially equivalent investment objectives, policies and methodologies as
the Portfolio. The quoted performance of the Portfolio includes performance
of the Commingled accounts for periods dating back to 12/31/86, and prior to
the Portfolio's commencement of operations, as adjusted to reflect the
expenses associated with the Portfolio. The Commingled accounts were not
registered with the Securities and Exchange Commission and, therefore, were
not subject to the investment restrictions imposed by law on registered
mutual funds. If the Commingled accounts had been so registered, the
Commingled accounts' performance may have been adversely affected. The
performance also reflects reinvestment of all dividends and capital gains
distributions. Past performance is not a prediction of future results. The
Portfolio's investment return and principal value will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less than their
original purchase price.
***The Trust Share class reflects the historical performance of the Investor
(no-load) share class.
JAY BAUMGARDNER
Portfolio Manager
Dividend Growth
[Baumgardner Photo] Portfolio
===============================================================
INVESTMENT GOAL
The Portfolio seeks to provide investors with current income and capital
appreciation. This Portfolio invests primarily in dividend-paying equity
securities of domestic issuers that are expected to provide reasonable income
and may have capital appreciation potential.
- ---------------------------------------------------------------
Q. HOW DID THE PORTFOLIO PERFORM DURING 1997?
A. We had a very good year, thanks to outstanding performance in each of our key
sectors. For the 12 months ended December 31, 1997, the Portfolio's total return
was 32.59% (at Net Asset Value).* In comparison, the Lipper Equity Income Index
rose 27.51%. The Lipper Equity Index is an index of managed funds that is
generally representative of funds that invest more than 60% of assets in
equities.
Considering that our goal is to provide current income, and not just focus on
capital appreciation, outperforming our benchmark index by nearly five
percentage points was very gratifying.
Q. WHAT FACTORS LED TO THESE STRONG RETURNS?
A. First, like other equity income funds, we were heavily invested in three
sectors: financial services, energy stocks and utilities. These companies
historically provide the price stability and higher-than-average dividends that
we seek. In 1997, all three sectors performed well, which is unusual, since they
don't generally move up at the same time. For example, when energy stocks are
rising, it's often the result of higher oil prices and rising inflation. And in
times of rising inflation, companies in the financial and utility sectors
usually perform poorly. This past year was atypical, but positive for investors.
Second, we did some good stock-picking in the broader list of stocks we own
outside our three key sectors. Colgate Palmolive (1.1% of the Portfolio), in the
consumer staples area, was up nearly 60% for the year. McGraw Hill (1.1%), the
publishing giant, also rose in the neighborhood of 60%. And Gannett Co. (1.6%),
the publisher of USA Today, gained 65%. These are the types of stocks we
expected to provide stable growth; instead, they all exploded upward.
Getting back to the sectors that we focus on, we enjoyed great success with
Mellon Bank Corp. (2.7%), up more than 70% in 1997. During the year, there was
some speculation that the bank would be taken over; this certainly pushed the
stock's price up. At the same time, Mellon is a very solid "fee-based bank,"
generating healthy revenues with money-management businesses such as credit
cards and foreign loans. Another bank that did well for us was First Tennessee
National Corp. (1.2%), a home state bank that we know quite well.**
Q. IN ORDER TO PROVIDE ABOVE-AVERAGE DIVIDEND INCOME, WHAT OTHER AREAS IN THE
MARKET DID YOU PURSUE?
A. Along with searching for good, solid companies offering above-average yields,
we've had good success investing in real estate investment trusts (REITs) since
late 1996. One of our REIT stocks, Crescent Real Estate (1.6%), was up nearly
50% in 1997. Another holding in our portfolio, Equity Residential Properties
(1.8%), the largest apartment REIT in the United States, rose more than 22% for
the year. We believe REITs offer the potential for significant, long-term
capital appreciation, along with yields that often are in the 5%-6% range.
High relative yield is important to us, especially in the current stock market
environment. When the market runs up as it has the last three years, yields
generally fall; the yield for the stocks in the S&P 500 was down to
approximately 1.6% at the end of 1997.
Q. WHAT IS YOUR STRATEGY FOR THE NEXT 12 MONTHS?
A. We believe the equity markets look very challenging. Stocks have run up so
much that their valuations are pretty full. It will take a lot of good
stock-picking this year to generate a double-digit return. With that in mind,
our strategy is to take less risk than the market in general. For example, we're
maintaining a higher-than-average weighting in utilities, and a
lower-than-average weighting in technology. With this approach, we hope to
provide shareholders with superior, risk-adjusted returns.
- ---------------
* Including the 4.75% sales load, the Portfolio's return was 26.22% for the
period.
** The portfolio composition is subject to change.
- --------------------------------------------------------------------------------
AMERISTAR CORE INCOME PORTFOLIO
PERFORMANCE (AS OF DECEMBER 31, 1997)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investor Merrill Investor
Measurement Shares Lynch Shares
Period (without Corp./Gov't. (with
(Fiscal Year sales Master sales
Covered) charge) Index charge)
<S> <C> <C> <C>
80 10000 10000 9711
81 10378 10700 10083
82 13777 13892 13388
83 14646 14973 14215
84 16372 17237 15909
85 19859 20998 19256
86 23274 24281 22603
87 22940 24791 22273
88 24480 26704 23760
89 27232 30476 26446
90 28946 33065 28099
91 33412 38319 32438
92 35437 41264 34380
93 38996 45826 37851
94 37579 44329 36488
95 43840 52745 42562
96 44330 54312 43024
97 48171 59624 46751
</TABLE>
Past performance is no guarantee of future results.
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITH SALES WITHOUT SALES
CHARGE* CHARGE
INVESTOR SHARES ---------- -------------
<S> <C> <C>
1-Year........................ 5.40% 8.66%
5-Year........................ 5.69% 6.33%
10-Year....................... 7.36% 7.70%
Since Inception (4/1/96)**.... 9.49% 9.68%
*Reflects 3.00% sales charge.
</TABLE>
<TABLE>
<CAPTION>
Measurement Merrill Lynch
Period Corp./Gov't.
(Fiscal Year Trust Master
Covered) Shares Index
<S> <C> <C>
80 10000 10000
81 10378 10700
82 13777 13892
83 14646 14973
84 16372 17237
85 19859 20998
86 23274 24281
87 22940 24791
88 24480 26704
89 27232 30476
90 28946 33065
91 33412 38319
92 35437 41264
93 38996 45826
94 37579 44329
95 43840 52745
96 44330 54312
97 48143 59624
</TABLE>
Past performance is no guarantee of future results.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
TRUST SHARES***
<S> <C>
1-Year.............. 8.60%
5-Year.............. 6.32%
10-Year............. 7.69%
Since Inception
(10/3/97)**....... 9.68%
</TABLE>
SECTOR PROFILE
<TABLE>
<S> <C>
U.S. Treasuries 11.0%
U.S. Agencies 11.3%
Cash and Cash
Equivalents 2.4%
Bonds 75.3%
</TABLE>
The AmeriStar Core Income Portfolio invests primarily in investment-grade, U.S.
dollar denominated, fixed-income securities of domestic and foreign issuers.
The Portfolio is designed to provide current income without assuming undue
risk. The Portfolio's adviser has latitude in deciding how assets are invested
among corporate and government obligations. As a result, the Portfolio enjoys
flexibility to make the most of changing market conditions.
MATURITY PROFILE
<TABLE>
<S> <C>
0-5 years 44.6%
6-10 years 24.7%
11-20 years 4.5%
over 20 years 26.1%
</TABLE>
By design, the Portfolio attempts to generate current income without undue
risk to principal. The chart shows that the Portfolio is currently focused on
bonds with maturities of 1 to 7 years and those with maturities greater than
20 years.
QUALITY PROFILE
<TABLE>
<S> <C>
A 51.0%
AA 10.8%
AAA 31.8%
BBB 6.4%
</TABLE>
The Portfolio's research team and the Portfolio Manager continuously monitor
debt instruments and issuer quality to identify fixed-income securities for
the Portfolio.
A hypothetical $10,000 investment made on December 31, 1980, would have been
worth on December 31, 1997, $48,171 without the sales charge and $46,751 after
taking the maximum 3% sales charge into account.
The AmeriStar Core Income Portfolio is compared to the Merrill Lynch
Corporate/Government Master Index, which is generally representative of the
performance of corporate and U.S. Government bonds. The index is unmanaged and
does not reflect expenses associated with a mutual fund, such as sales charges,
expenses for fund operations, management fees, portfolio transaction costs or
the cash reserves required to provide daily liquidity. The Portfolio's
performance reflects the deduction of fees for these value-added services.
**The AmeriStar Core Income Portfolio commenced operations on 4/1/96, through a
transfer of assets from certain collective trust fund ("Commingled") accounts
managed by First American National Bank, using materially equivalent investment
objectives, policies and methodologies as the Portfolio. The quoted performance
of the Portfolio includes performance of the Commingled accounts for periods
dating back to 12/31/80, and prior to the Portfolio's commencement of
operations, as adjusted to reflect the expenses associated with the Portfolio.
The Commingled accounts were not registered with the Securities and Exchange
Commission and, therefore, were not subject to the investment restrictions
imposed by law on registered mutual funds. If the Commingled accounts had been
so registered, the Commingled accounts' performance may have been adversely
affected. The performance also reflects reinvestment of all dividends and
capital gains distributions. The service contractors are currently waiving a
portion of their fees; without such waivers the 30-day SEC yield would have been
5.03%. This voluntary waiver may be terminated or modified at anytime, which
would reduce the Portfolio's performance. Past performance is not a prediction
of future results. The Portfolio's investment return and principal value will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than their original purchase price.
***The Trust Share class reflects the historical performance of the Investor
(no-load) share class.
DONALD F. TURK, CFA
Portfolio Manager
Core Income
[Turk Photo] Portfolio
===============================================================
INVESTMENT GOAL
The Portfolio seeks to provide investors with current income without assuming
undue risk. It invests primarily in investment-grade, U.S. dollar-denominated
fixed-income securities of domestic and foreign issuers with maturities of any
length. This Portfolio may be suitable for investors seeking regular monthly
income without undue risk to principal.
- ---------------------------------------------------------------
Q. HOW DID THE PORTFOLIO PERFORM DURING 1997?
A We were pleased with our performance for the year, which enabled us to
emphasize current income while providing a competitive total return. For the 12
months ended December 31, 1997, the Portfolio produced a total return of 8.66%
(at Net Asset Value).* In comparison, the Merrill Lynch Corporate/Government
Index, an unmanaged benchmark, produced a total return of 9.78%. The Merrill
Lynch Corporate/Government Master Index is generally representative of U.S.
Treasury and Agency bonds and investment-grade bonds. Total return equals yield,
plus or minus the change in the Portfolio's net asset values (NAV) during the
period.
It is also important to recognize income yield to shareholders. As of December
31, 1997, the Portfolio's 30-day SEC yield was 5.89% (at Net Asset Value),**
compared to 5.30% at the end of 1996. The yield percentage is annualized.
We achieved our objectives while maintaining an average credit quality of Aa3
(as rated by Moody's) and AA- (Standard & Poor's). As of December 31, 1997, the
average maturity of the Portfolio was 11.16 years.
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. It was a good year for bond investors, who are mostly concerned with "real
return" (total return minus inflation). Inflation was exceptionally mild during
1997, with the consumer price index rising just 1.7%. Therefore, our real return
to shareholders was 6.96%, which is very strong by historical standards.
At the same time, long-term interest rates were very volatile during the year.
The yield on the 30-year U.S. Treasury bond bounced up and down during the first
third of 1997, rising from a low of 6.35% in February to a peak of 7.17% in
April. That jump of 82 basis points (0.82%) in just two months caused some
damage to the bond market. From early spring to the end of 1997, however, the
general trend in interest rates was down, and for the full year, the 30-year
bond yield fell 72 basis points (0.72%). Because bond prices move inversely to
interest rates, this drop in rates benefited the bonds in our portfolio.
Q WITH ALL OF THIS VOLATILITY, WHAT STRATEGIES DID YOU EMPLOY TO HELP YOU MEET
YOUR OBJECTIVES?
A. Our key strategy was to participate in the downward move in rates, which we
did over the course of the year, by keeping our maturity structure as long, or
longer, than the Fund's benchmark. We lengthened maturities, especially in the
last six months, and we moved a lot of the Portfolio from government issues to
corporate bonds--to boost our yield. As always, we remained very conscious of
providing the highest possible yield, with an eye toward preserving capital.
In recent months, we have bought bonds issued by utilities, such as Virginia
Electric (2.5% of the Portfolio) and Puget Sound Power & Light (2.1%). Some of
our recent corporate purchases include the bonds of J.C. Penney (2.1%) and
Anheuser-Busch (2.2%). All of these issuers are good, solid companies offering
attractive yields.***
Q WHAT IS YOUR OUTLOOK FOR 1998?
A. We believe the economy will slow rather significantly over the next year. If
so, what does that do to the value of the bonds we hold? We think the companies
whose debt we own will continue to be stable businesses, and that there will be
a demand for the bonds that they have issued. On the Treasury side, the federal
government is backing away from the issuance of debt, especially long-term debt.
In all probability, the United States will have a balanced budget for this
fiscal year, perhaps even a slight surplus. These two factors could result in a
scarcity of all but the shortest term Treasury debt.
- ---------------
* Including the 3.00% sales load, the Portfolio's return was 5.40% for the
period.
** During the period, certain expenses were voluntarily waived and/or
reimbursed. Had these waivers and/or reimbursements not been in effect, the
30-day SEC yield would have been lower.
*** The portfolio composition is subject to change.
- --------------------------------------------------------------------------------
AMERISTAR LIMITED DURATION INCOME PORTFOLIO
PERFORMANCE (AS OF DECEMBER 31, 1997)
- --------------------------------------------------------------------------------
INVESTER SHARES
<TABLE>
<CAPTION>
Merrill Lynch Investor Investor Merrill Lynch
1-5-Year Share (without share (with 1-3-Year Gov't/
Measurement Period Gov't/Corp. sales charge) sales charge Corp. Bond Index
(Fiscal Year Covered) Bond Index+
<S> <C> <C> <C> <C>
82 |Sept. 10000 9695 10000
82 |Dec. 10672 10335 10774
83 11528 11193 11729
84 12899 12513 13344
85 14720 14289 15206
86 16223 15736 16780
87 16698 16193 17727
88 10000 17668 17132 18831
89 11164 19414 18833 20878
90 12260 20982 20355 22909
91 13839 23751 23046 25585
92 14770 24901 24162 27197
93 15794 26449 25660 18668
94 15873 26275 25487 28832
95 17900 29218 28341 29149
96 18713 30467 29407 30601
97 20043 32440 31467 32639
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITH SALES WITHOUT SALES
CHARGE* CHARGE
INVESTOR SHARES ---------- -------------
<S> <C> <C>
1-Year........................ 3.26% 6.47%
5-Year........................ 4.79% 5.43%
10-Year....................... 6.54% 6.87%
Since Inception (4/1/96)**.... 7.76% 7.97%
*Reflects 3.00% sales charge.
</TABLE>
<TABLE>
<CAPTION>
TRUST SHARES
Investor Merrill Merrill
Share Lynch Lynch
Measurement Period (without 1-5-Year 1-3-Year
(Fiscal Year sales Gov't/Corp. Gov't/Corp
Covered) charge) Bond Index+ Bond Index
<S> <C> <C> <C>
82 |Sept. 10000 10000
82 |Dec. 10672 10774
83 11528 11729
84 12899 13344
85 14728 15206
86 16223 16780
87 16698 17727
88 17668 10000 18831
89 19414 11164 20878
90 20982 12260 22909
91 23751 13839 25585
92 24901 14770 27197
93 26449 15794 28668
94 26275 15873 28832
95 29218 17900 29149
96 30467 18713 30601
97 32402 20043 32639
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
TRUST SHARES***
<S> <C>
1-Year.............. 6.35%
5-Year.............. 5.41%
10-Year............. 6.85%
Since Inception
(10/3/97)**....... 7.96%
</TABLE>
SECTOR PROFILE
<TABLE>
<S> <C> <C> <C>
Cash and Corporate U.S. Government U.S. Treasuries
Cash Equivalents Bonds Agencies 18.8%
2.6% 54.0% 24.6%
</TABLE>
The AmeriStar Limited Duration Income Portfolio invests primarily in
investment-grade, U.S. dollar-denominated, fixed-income securities of domestic
and foreign issuers. The Portfolio is designed to provide investors with
current income without assuming undue risk. The Portfolio's adviser has
latitude in deciding how assets are invested among corporate and government
obligations. As a result, the Portfolio enjoys flexibility to make the most of
changing market conditions.
MATURITY PROFILE
<TABLE>
<S> <C>
6-10 years 8.0%
0-5 years 92.0%
</TABLE>
By design, the Portfolio attempts to generate current income without undue
risk to principal. The chart shows that the Portfolio is focused on bonds with
maturities of 1 to 5 years.
QUALITY PROFILE
<TABLE>
<S> <C>
A 35.3%
AA 11.5%
AAA 47.5%
BBB 5.7%
</TABLE>
The Portfolio's research team a the Portfolio Manager continuously monitor
debt instruments and issuer quality to identify fixed-income securities for
the Portfolio.
A hypothetical $10,000 investment made on September 30, 1982, would have been
worth on December 31, 1997, $32,440 without the sales charge and $31,467
after taking the maximum 3.00% sales charge into account.
+ The AmeriStar Limited Duration Income Portfolio is measured against the
Merrill Lynch 1-3-Year Government/Corporate Bond Index from 9/30/82 to
12/31/88, prior to the creation of the Portfolio's benchmark of the Merrill
Lynch 1-5-Year Government/Corporate Bond Index. Both indices are
representative of the total return of short-term government and corporate
bonds. These indices are unmanaged and do not reflect the expenses associated
with a mutual fund, such as sales charges, expenses for fund operations,
management fees, portfolio transaction costs or the cash reserves required to
provide daily liquidity. The Portfolio's performance reflects the deduction
of fees for these value-added services.
** The AmeriStar Limited Duration Income Portfolio commenced operations on
4/1/96, through a transfer of assets from certain collective trust fund
("Commingled") accounts managed by First American National Bank, using
materially equivalent investment objectives, policies and methodologies as
the Portfolio. The quoted performance of the Portfolio includes performance
of the Commingled accounts for periods dating back to 9/1/82, and prior to
the Portfolio's commencement of operations, as adjusted to reflect the
expenses associated with the Portfolio. The Commingled accounts were not
registered with the Securities and Exchange Commission and, therefore, were
not subject to the investment restrictions imposed by law on registered
mutual funds. If the Commingled accounts had been so registered, the
Commingled accounts' performance may have been adversely affected. The
performance also reflects reinvestment of all dividends and capital gains
distributions. The service contractors are currently waiving a portion of
their fees; without such waivers the 30-day SEC yield would have been 5.05%.
This voluntary waiver may be terminated or modified at anytime, which would
reduce the Portfolio's performance. Past performance is not a prediction of
future results. The Portfolio's investment return and principal value will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than their original purchase price.
*** The Trust Share class reflects the historical performance of the Investor
(no-load) share class.
DONALD F. TURK, CFA
Portfolio Manager
Limited Duration
[Turk Photo] Income Portfolio
===============================================================
INVESTMENT GOAL
The Portfolio seeks to provide investors with current income without assuming
undue risk. It invests primarily in investment-grade, U.S. dollar-denominated
fixed-income securities of domestic and foreign issuers that generally have a
duration of less than four years. This Portfolio maybe suitable for investors
seeking regular monthly income without undue risk to principal.
- ---------------------------------------------------------------
Q. HOW DID THE PORTFOLIO PERFORM IN 1997?
A. We were pleased with our performance for the year, which enabled us to
emphasize current income while providing a competitive total return. For the 12
months ended December 31, 1997, the Portfolio produced a total return of 6.47%
(at Net Asset Value).* In comparison, the Merrill Lynch 1-5-Year
Government/Corporate Index, an unmanaged benchmark, produced a total return of
7.16%. The index is a broad performance measure of bonds with maturities in the
one-to-five-year range. Total return equals yield, plus or minus the change in
the Portfolio's net asset values (NAV) during the period.
It is also important to recognize income yield to shareholders. As of December
31, 1997, the Portfolio's 30-day SEC yield was 5.92%( at Net Asset Value),**
compared to 5.32% at the end of 1996. The yield percentage is annualized.
We achieved our objectives, while maintaining an average credit quality of Aa2
(as rated by Moody's) and AA (Standard & Poor's). As of December 31, 1997, the
average maturity of the Portfolio was 3.14 years.
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. It was a good year for bond investors, who are mostly concerned with "real
return" (total return minus inflation). Inflation was exceptionally mild during
1997, with the consumer price index rising just 1.7%. Therefore, our real return
to shareholders was 4.77%, which is very strong by historical standards for a
Portfolio with a relatively short average maturity.
At the same time, interest rates were very volatile during the year. The yield
on the five-year U.S. Treasury bond rose from 6.21% at the end of 1996 to a peak
of 6.86% in April 1997. From early spring to the end of 1997, however, the
general trend in interest rates was down, and for the full year, the five-year
bond's yield fell 6.77%, to settle at 5.77%. Because bond prices move inversely
to interest rates, this drop in rates benefited the bonds in our portfolio.
Q. DID LONG- AND SHORT-TERM BONDS MOVE IN TANDEM THROUGHOUT THE YEAR?
A. No, and that did not surprise us. Bonds of various maturities do not always
move in lockstep. What counts is where you are in the economic cycle. If you are
in an expanding economy, long- and short-term interest rates will move in the
same direction. However, when you are late in the economic cycle, as we were in
1997, short-term rates will not move down as much as long-term rates do--or, as
very short-term securities did last year, they may even start moving up. This
causes the yield curve to flatten; that is, shorter maturities yield just about
the same as longer maturities.
Q. WHAT STRATEGIES DID YOU EMPLOY?
A. We consciously took steps to lengthen the Portfolio's average maturity, to
the point where it was markedly longer than the benchmark's. This helped our
relative performance when rates began to fall. As the spread between Treasury
and corporate bond yields widened, we were also able to boost the Portfolio's
yield while maintaining high credit quality.
Q. WHAT IS YOUR OUTLOOK FOR 1998?
A. We believe the economy will slow rather significantly over the next year, and
that interest rates could fall even further than they did at the end of 1997. If
so, demand for the Treasury and corporate bonds we hold could rise, which would
provide higher total return to our shareholders. Overall, the trend in interest
rates is very constructive, and we are approaching the New Year with optimism.
- ---------------
* Including the 3.00% sales load, the Portfolio's return was 3.26% for the
period.
** During the period, certain expenses were voluntarily waived and/or
reimbursed. Had these waivers and/or reimbursements not been in effect, the
30-day SEC yield would have been lower.
- --------------------------------------------------------------------------------
AMERISTAR LIMITED DURATION U.S. GOVERNMENT PORTFOLIO
PERFORMANCE (AS OF DECEMBER 31, 1997)
- --------------------------------------------------------------------------------
Investor Shares
<TABLE>
<CAPTION>
Investor Investor Merrill Lynch Merrill Lynch
Measurement Share Share 1-5 Year 1-3 Year
Period (without (with Gov't Gov't
(Fiscal Year sales sales Bond Bond
Covered) charge) charge) Index+ Index
<S> <C> <C> <C> <C>
86 10000 9692 10000
87 10205 9891 10564
88 10799 10472 10000 11160
89 11998 11633 11164 11855
90 12960 12577 12260 13144
91 14607 14174 13839 14423
92 15426 14955 14771 16107
93 16502 16007 15794 17122
94 16325 15844 15695 18048
95 18105 17568 17699 18151
96 18598 18040 18503 20148
97 19746 19154 19818 21151
</TABLE>
Past Performance is no guarantee of future results.
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITH SALES WITHOUT SALES
CHARGE* CHARGE
INVESTOR SHARES ---------- -------------
<S> <C> <C>
1-Year...................... 2.97% 6.18%
5-Year...................... 4.45% 5.06%
10-Year..................... 6.50% 6.82%
Since Inception
(2/28/97)**............... 6.08% 6.38%
*Reflects 3.00% sales charge.
</TABLE>
<TABLE>
Sector Profile
<S> <C>
U.S. Government Agencies 48.8%
Cash and Cash Equivalents 2.7%
U.S. Treasury Notes 48.5%
</TABLE>
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. The
Portfolio is designed to provide high current income without assuming undue
risk.
<TABLE>
<CAPTION>
Maturity Profile
<S> <C>
0-5 years 76.9%
6-10 years 23.1%
</TABLE>
By design, the Portfolio attempts to generate current income without undue
risk to principal. The chart above shows that the Portfolio is focused on
bonds with maturities of 1 to 5 years.
<TABLE>
<CAPTION>
Quality Profile
<S> <C>
AAA 100.0%
</TABLE>
The Portfolio's research team and the Portfolio Manager continuously monitor
debt instruments and issuer quality to identify fixed-income securities for
the Portfolio.
A hypothetical $10,000 investment made on December 31, 1986, would have been
worth on December 31, 1997, $19,746 without the sales charge and $19,154
after taking the maximum 3% sales charge into account.
+ The Ameristar Limited Duration U.S. Government Portfolio is measured against
the Merrill Lynch 1-3-Year Government Bond Index from 12/31/86 to 12/31/88,
prior to the creation of the Portfolio's benchmark of the Merrill Lynch
1-5-Year Government Bond Index. Both indices reflect the performance of
government bonds in that maturity range with a rating of at least Baa. The
index is unmanaged and does not reflect expenses associated with a mutual
fund, such as sales charges, expenses for fund operations, management fees,
portfolio transaction costs or the cash reserves required to provide daily
liquidity. The Portfolio's performance reflects the deduction of fees for
these value-added services.
** The AmeriStar Limited Duration U.S. Government Portfolio commenced operations
on 2/28/97 through a transfer of assets from certain collective trust fund
("Commingled") accounts managed by First American National Bank, using
materially equivalent investment objectives, policies and methodologies as
the Portfolio. The quoted performance of the Portfolio includes performance
of the Commingled accounts for periods dating back to 12/31/86, and prior to
the Portfolio's commencement of operations, as adjusted to reflect the
expenses associated with the Portfolio. The Commingled accounts were not
registered with the Securities and Exchange Commission and, therefore, were
not subject to the investment restrictions imposed by law on registered
mutual funds. If the Commingled accounts had been so registered, the
Commingled accounts' performance may have been adversely affected.
Total return figures include changes in share price, reinvestment of
dividends and capital gains distributions, if any. The service contractors
are currently waiving a portion of their fees; without such waivers the
30-day SEC yield would have been 5.29%. This voluntary waiver may be
terminated or modified at any time, which would reduce the Portfolio's
performance. Past performance is not a prediction of future results.
Investment return and principal value will fluctuate, so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
DONALD F. TURK, CFA
Portfolio Manager
Limited Duration
U.S. Government
[Turk Photo] Portfolio
===============================================================
INVESTMENT GOAL
The 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 a
duration that approximates that of the Merrill Lynch 1-5-Year Government Bond
Index.
- ---------------------------------------------------------------
Q. HOW DID THE PORTFOLIO PERFORM IN 1997?
A. We were satisfied with our performance for the year, which enabled us to
emphasize current income while providing a competitive total return. For the 12
months ended December 31, 1997, the Portfolio produced a total return of 6.18%
(at Net Asset Value).* In comparison, the Merrill Lynch 1-5-Year Government Bond
Index, an unmanaged benchmark, produced a total return of 7.11%. The index is a
broad performance measure of government bonds with maturities in the
one-to-five-year range. Total return equals yield, plus or minus the change in
the Portfolio's net asset value (NAV) during the period.
It is also important to recognize income yield to shareholders. As of December
31, 1997, the Portfolio's 30-day SEC yield was 5.46%** at NAV, compared to 5.30%
at the end of 1996. The yield percentage is annualized.
As of December 31, 1997, the Portfolio's average maturity was 4.64 years.
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. It was a good year for bond investors, who are mostly concerned with "real
return" (total return minus inflation). Inflation was exceptionally mild during
1997, with the consumer price index rising just 1.7%. So, our real return to
shareholders was 4.48%, which is very strong by historical standards for a
Portfolio with a relatively short average maturity.
At the same time, interest rates were very volatile during the year. The yield
on the five-year U.S. Treasury bond rose from 6.21% at the end of 1996 to a peak
of 6.86% in April 1997. From early spring to the end of 1997, however, the
general trend in interest rates was down, and for the full year, the five-year
bond's yield fell 6.33%, to settle at 5.77%. Because bond prices move inversely
to interest rates, this drop in rates added value to the bonds in our portfolio.
Q. WHAT STRATEGY DID YOU EMPLOY?
A. We consciously took steps to lengthen the Portfolio's average maturity, to
the point were it was markedly longer than the benchmark's. This helped our
relative performance when rates began to fall. We also focused on generating
higher income, because that's what our shareholders want. We bought a number of
agency securities--such as Freddie Macs (Federal Home Loan Mortgage Corporation
bonds) due in 2002 and Fannie Maes (Federal National Mortgage Association bonds)
due in 2007.*** These moves helped increase our yield to shareholders.
We stayed away from new purchases of Ginnie Maes (securities issued by the
Government National Mortgage Association). They're a mixed blessing. They
generally offer solid yields, which we like, but as interest rates have dropped,
homeowners have been refinancing their mortgages. When that happens, you lose
your extra income quickly, and you find yourself in the situation of having to
buy new securities with lower yields.
Q. WHAT IS YOUR OUTLOOK FOR 1998?
A. We believe the economy will slow rather significantly over the next year and
that interest rates could fall even further than they did at the end of 1997. If
so, demand for the Treasury bonds we hold could rise, which would provide higher
total return to our shareholders. Overall, the trend in interest rates is very
constructive, and we're approaching the new year with optimism.
- ---------------
* Including the 3.00% sales load, the Portfolio's return was 2.97% for the
period.
** During the period, certain expenses were voluntarily waived and/or
reimbursed. Had these waivers and/or reimbursements not been in effect, the
30-day SEC yield would have been lower.
*** The portfolio composition is subject to change.
- --------------------------------------------------------------------------------
AMERISTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
PERFORMANCE (AS OF DECEMBER 31, 1997)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTOR SHARES
Investor Lehman
Measurement Shares Brothers Investor
Period (without Municipal Shares
(Fiscal Year sales 10-Year (with sales
Covered) charge) Index charge)
<S> <C> <C> <C>
80 10000 10000 9696
81 9107 8893 8836
82 11954 12610 11595
83 12941 13580 12532
84 13841 14696 13418
85 15774 17779 15291
86 18224 21161 17671
87 18313 21831 17747
88 19227 23532 18633
89 20702 26045 20076
90 21893 27959 21215
91 23922 31344 23190
92 25240 34139 24456
93 27809 38496 26962
94 25436 36659 24651
95 28843 42950 27953
96 29243 44901 28341
97 31327 49047 30360
Past performance is no guarantee of future results.
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITH SALES WITHOUT SALES
CHARGE* CHARGE
---------- -------------
<S> <C> <C>
INVESTOR SHARES
1-Year........................ 3.87% 7.13%
5-Year........................ 3.78% 4.42%
10-Year....................... 5.19% 5.52%
Since Inception (3/28/94)**... 6.75% 6.94%
*Reflects 3.00% sales charge.
</TABLE>
<TABLE>
<CAPTION>
TRUST SHARES***
Lehman
Measurement Brothers
Period Municipal
(Fiscal Year Trust 10-Year
Covered) Shares Index
<S> <C> <C>
80 10000 10000
81 9318 8893
82 11954 12610
83 12941 13580
84 13841 14969
85 15774 17779
86 18224 21161
87 18313 21831
88 19227 23532
89 20702 26045
90 21893 27959
91 23922 31344
92 25240 34139
93 27809 38496
94 25436 36659
95 28843 42950
96 29243 44901
97 31331 49047
Past performance is no guarantee of future results.
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
<S> <C>
TRUST SHARES***
1-Year.............. 7.14%
5-Year.............. 4.42%
10-Year............. 5.52%
Since Inception
(10/3/97)**....... 6.94%
</TABLE>
<TABLE>
SECTOR PROFILE
<S> <C>
Municipal Bonds 99.1%
Cash and Cash
Equivalents 0.9%
</TABLE>
The AmeriStar Tennessee Tax Exempt Bond Portfolio invests primarily in
investment-grade, Tennessee Municipal Obligations. The Portfolio is designed
to provide investors with current income exempt from federal and Tennessee
personal income taxes, without assuming undue risk.
<TABLE>
MATURITY PROFILE
<S> <C>
0-5 years 7.7%
6-10 years 59.4%
11-20 years 29.3%
over 20 years 3.6%
</TABLE>
By design, the Portfolio attempts to generate current income without undue
risk to principal. The chart shows that the Portfolio is focused on bonds
primarily with maturities of 10 to 15 years.
<TABLE>
QUALITY PROFILE
<S> <C>
A 4.8%
AA 35.9%
AAA 59.3%
</TABLE>
By focusing on more general obligations and school and "essential services"
bonds the Portfolio Manager and the research team provided an additional
measure of security to the Portfolio.
A hypothetical $10,000 investment made on December 31, 1980, would have been
worth on December 31, 1997, $31,327 without the sales charge and $30,360 after
taking the maximum 3% sales charge into account.
The AmeriStar Tennessee Tax Exempt Bond Portfolio is compared to the Lehman
Brothers Municipal 10-Year Index, an unmanaged index that includes municipal
bonds issued within the last five years by municipalities throughout the United
States, with maturities of at least one year, but no more than 12 years, and a
credit quality of at least Baa. In contrast, the Tennessee Tax Exempt Bond
Portfolio targets higher quality bonds with a minimum rating of A, and at least
65% of the Portfolio must be comprised of Tennessee issues. The Lehman Brothers
index does not reflect expenses associated with a mutual fund, such as sales
charges, expenses for fund operations, management fees, portfolio transaction
costs or the cash reserves required to provide daily liquidity. The Portfolio's
performance reflects the deduction of fees for these value-added services.
**The AmeriStar Tennessee Tax Exempt Bond Portfolio commenced operations on
3/28/94 through a transfer of assets from certain collective trust fund
("Commingled") accounts managed by First American National Bank, using
materially equivalent investment objectives, policies and methodologies as the
Portfolio. The quoted performance of the Portfolio includes performance of the
Commingled accounts for periods dating back to 12/31/80, and prior to the
Portfolio's commencement of operations, as adjusted to reflect the expenses
associated with the Portfolio. The Commingled accounts were not registered with
the Securities and Exchange Commission and, therefore, were not subject to the
investment restrictions imposed by law on registered mutual funds. If the
Commingled accounts had been so registered, the Commingled accounts' performance
may have been adversely affected.
Total return figures include changes in share price, reinvestment of dividends
and capital gains distributions, if any. The service contractors are currently
waiving a portion of their fees; without such waivers, the 30-day SEC yield
would have been 4.01%. This voluntary waiver may be terminated or modified at
any time, which would reduce the Portfolio's performance. Past performance is
not a prediction of future results. Investment return and principal value will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than the original cost.
Some investors may be subject to the federal alternative minimum tax and to
certain state and local taxes.
***The Trust Share class reflects the historical performance of the Investor
(no-load) share class.
SHARON BROWN
Portfolio Manager
Tennessee
Tax Exempt
[Brown Photo] Bond Portfolio
===============================================================
INVESTMENT GOAL
The Portfolio seeks to provide investors with current income exempt from federal
and Tennessee state income taxes without assuming undue risk. The Portfolio
invests primarily in investment-grade Tennessee municipal obligations, and is
suitable for Tennessee residents seeking monthly income exempt from both federal
and Tennessee personal income taxes.(1) The Portfolio affords greater
diversification and liquidity than most investors would achieve by purchasing
municipal securities directly.
- ---------------------------------------------------------------
Q. HOW DID THE PORTFOLIO PERFORM DURING 1997?
A. For the 12 months ended December 31, 1997, the Portfolio produced a total
return of 7.13% (at Net Asset Value).* In comparison, the Portfolio's benchmark,
the Lehman Brothers Municipal 10-Year Index, produced a total return of 9.24%.
The index is a broad performance measure of municipal bonds with
intermediate-term maturities. Total return equals yield, plus or minus the
change in the Portfolio's net asset value (NAV) during the period.
It is also important to recognize income yield to shareholders. As of December
31, 1997, the Portfolio's 30-day SEC yield was 4.14% (at Net Asset Value).** For
investors in the 36% federal income tax bracket, that is equivalent to a taxable
yield of 6.46%.** The yield percentage is annualized.
We achieved our objectives while maintaining an average credit quality of Aa1
(as rated by Moody's) and AA+ (Standard & Poor's). As of December 31, 1997, the
average maturity of the Portfolio was 9.45 years.
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. The strong economy resulted in narrow yield spreads between highly rated and
lower rated bonds, which meant that there was little incentive to buy lower-tier
issues. In addition, the yield curve flattened as 1997 progressed, with the
municipal market offering very little additional yield for longer maturity
bonds. So, it did not make sense for us to go out much further than 12 years on
the yield curve. We would have liked to have our average maturity a little
longer than ten years. But with the market moving as quickly as it did during
the year and with most municipal bonds carrying call features that tend to
shorten duration as interest rates decline, we found it difficult to keep our
duration as long as we wanted it to be, especially during the third quarter. At
the same time, the decline in interest rates helped boost the Portfolio's total
return for the year.
Q. WHAT ARE A FEW OF YOUR FAVORITE BONDS IN THE PORTFOLIO?
A. We own noncallable Shelby County, TN 6.25% bonds maturing in 2007 (2.2% of
the Portfolio). They are providing good current income, with no risk of being
called. We already have a significant gain in this holding, but if interest
rates drop further, we should see continued good price appreciation. Another
issue we own is a Charleston (S.C.) 5% bond due in 2022 (2.2%). We bought it at
a discount to par, and it has provided a solid rate of return, with more upside
potential remaining. Moreover, while an out-of-state issue such as this one is
not exempt from Tennessee state income tax, its dividend is exempt from federal
taxes in most cases. (We are permitted to own out-of-state bonds comprising up
to 35% of the Portfolio. As of December 31, 1997, approximately 31.0% of the
Portfolio was invested in bonds issued outside Tennessee.)***
Q. WHAT IS YOUR OUTLOOK FOR THE TENNESSEE MUNI MARKET IN 1998?
A. A lot depends on the infrastructure needs within the state. We saw a
significant lack of supply in the Tennessee muni market in 1997, but there are
some indications that activity could pick up in the coming year. With interest
rates dropping, a number of government agencies will be interested in refunding
their debt at lower rates.
- ---------------
(1) The Portfolio's income may be subject to certain state and local taxes
and, depending on your tax status, the federal alternative minimum tax.
* Including the 3.00% sales load, the Portfolio's return was 3.87% for the
period.
** During the period, certain expenses were voluntarily waived and/or
reimbursed. Had these waivers and/or reimbursements not been in effect, the
30-day SEC yield would have been lower.
*** The portfolio composition is subject to change.
- --------------------------------------------------------------------------------
AMERISTAR LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO
PERFORMANCE (AS OF DECEMBER 31, 1997)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investor Investor Lehman
Measurement Share Share Brothers
Period (without (with Municipal
(Fiscal Year sales sales 1-5 Year
Covered) charge) charge) Index
<S> <C> <C> <C>
86 10000 9694 10000
87 10070 9755 10310
88 10584 10260 10969
89 11351 10995 11964
90 12038 11669 12885
91 13024 12619 14355
92 13629 13201 15449
93 14500 14043 16798
94 14114 13675 16579
95 15301 14824 18519
96 15633 15145 19297
97 16480 15967 20532
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITH SALES WITHOUT SALES
CHARGE* CHARGE
INVESTOR SHARES ---------- -------------
<S> <C> <C>
1-Year...................... 2.22% 5.42%
5-Year...................... 3.24% 3.87%
10-Year..................... 4.73% 5.05%
Since Inception
(2/28/97)**............... 4.34% 4.64%
*Reflects 3.00% sales charge.
</TABLE>
<TABLE>
<CAPTION>
Sector Profile
<S> <C>
Cash and Cash Equivalents 8.3%
Muni Bonds 91.7%
</TABLE>
The AmeriStar Limited Duration Tennessee Tax Free Portfolio invests primarily
in a portfolio of investment-grade Tennessee Municipal Obligations that, under
normal market conditions, has a duration of under five years and an effective
average portfolio maturity ranging between 3 - 5 years. With an emphasis on
quality, the Portfolio seeks to generate current income that is exempt from
federal and Tennessee personal income taxes without undue risk to principal.
<TABLE>
<CAPTION>
Maturity Profile
<S> <C>
0-5 years 40.6%
6-10 years 49.7%
over 20 years 9.7%
</TABLE>
By design, the Portfolio focuses on achieving an average maturity of 3 to 5
years. By emphasizing overall average maturity, the Portfolio attempts to
provide a high current tax-free yield while controlling principal value.
<TABLE>
<CAPTION>
Quality Profile
<S> <C>
A 17.7%
AA 31.9%
AAA 50.4%
</TABLE>
By focusing on more general obligations and school and "essential service"
bonds, the Portfolio Manager and the research team provide an additional
measure of security to the Portfolio.
A hypothetical $10,000 investment made on December 31, 1986, would have been
worth on December 31, 1997, $16,480 without the sales charge and $15,967 after
taking the maximum 3% sales charge into account.
The AmeriStar Limited Duration Tennessee Tax Free Portfolio is compared to the
Lehman Brothers Municipal 1-5 Year Index, an unmanaged index that is generally
representative of municipal bonds with maturities between 1 and 5 years. The
index does not reflect the expenses associated with a mutual fund, such as sales
charges, expenses for fund operations, management fees, portfolio transaction
costs or the cash reserves required to provide daily liquidity. The Portfolios
performance reflects the deduction of fees for these value-added services.
**The AmeriStar Limited Duration Tennessee Tax Free Portfolio commenced
operations on 2/28/97 through a transfer of assets from certain collective trust
fund ("Commingled") accounts advised by First American National Bank, using
materially equivalent investment objectives, policies and methodologies as the
Portfolio. The quoted performance of the Portfolio includes performance of the
Commingled accounts for periods dating back to 12/31/86 and prior to the mutual
fund's commencement of operations, as adjusted to reflect the expenses
associated with the mutual funds. The Commingled accounts were not registered
with the Securities and Exchange Commission and, therefore, were not subject to
the investment restrictions imposed by law on registered mutual funds. If the
Commingled accounts had been so registered, the Commingled accounts' performance
may have been adversely affected. The performance shown reflects the deduction
of fees for value-added services associated with a mutual fund, such as
investment management and fund accounting fees. The performance also reflects
reinvestment of all dividends and capital gains distributions.
Total return figures include changes in share price, reinvestment of dividends
and capital gains distributions, if any. The service contractors are currently
waiving a portion of their fees; without such waivers, the 30-day SEC yield
would have been 3.67%. This voluntary waiver may be terminated or modified at
any time, which would reduce the Portfolio's performance. Past performance is
not a prediction of future results. Investment return and principal value will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than the original cost.
Some investors may be subject to the federal alternative minimum tax and to
certain state and local taxes.
SHARON BROWN
Portfolio Manager
Limited Duration
Tennessee Tax Free
[Brown Photo] Portfolio
===============================================================
INVESTMENT GOAL
The Portfolio seeks to provide investors with current income exempt from
federal and Tennessee State income taxes without assuming undue risk.(1) The
Portfolio invests primarily in investment-grade Tennessee Municipal
Obligations that generally have a duration of under five years, producing an
effective average portfolio maturity ranging between three and five years.
- ---------------------------------------------------------------
Q. HOW DID THE PORTFOLIO PERFORM DURING 1997?
A. For the 12 months ended December 31, 1997, the Portfolio produced a total
return of 5.42% (at Net Asset Value).* In comparison, the Portfolio's unmanaged
benchmark, the Lehman Brothers Municipal 1-5 Year Index, produced a total return
of 6.38%. The index is a broad performance measure of municipal bonds with
short-term maturities. Total return equals yield, plus or minus the change in
the Portfolio's net asset value (NAV) during the period.
It is also important to recognize income yield to shareholders. As of December
31, 1997, the Portfolio's 30-day SEC yield was 3.78% (at Net Asset Value).** For
investors in the 36% federal income tax bracket, that is equivalent to a taxable
yield of 5.91%.** The yield percentage is annualized.
We achieved our objectives while maintaining an average credit quality of Aa2
(as rated by Moody's) and AA+ (Standard & Poor's). As of December 31, 1997, the
average maturity of the Portfolio was 4.6 years.
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. The strong economy resulted in narrow yield spreads between highly rated and
lower rated bonds, which meant that there was little incentive to buy lower tier
issues. In addition, the general decline in interest rates helped boost the
Portfolio's total return for the year (bond prices go up when interest rates
fall).
We saw perhaps a little more activity and stronger overall performance in this
Portfolio than in our longer term Tennessee Tax Exempt Bond Portfolio. Because
the yield curve flattened, and shorter maturities yielded nearly as much as
longer ones, many investors were content to buy into the short end of market.
Consequently, there was more demand for the type of securities we held, and the
value of those securities rose.
Q. WHAT ARE A FEW OF YOUR FAVORITE BONDS IN THE PORTFOLIO?
A. Last year, we followed a "barbell" approach: buying bonds that were both
longer and shorter than the Portfolio's average weighted maturity of 4.6 years.
We pursued short-term bonds with high coupons, to enhance the Portfolio's yield,
and sought capital appreciation through the purchase of longer term securities.
Among the attractive issues in our Portfolio are Tennessee state 6.50% bonds
maturing in 2003 (4.5% of the Portfolio), an issue that provides high current
yield, on the long end of the yield parameters for this Portfolio. As rates have
come down, this issue has appreciated in value.
Q. WHAT IS YOUR OUTLOOK FOR 1998?
A. We see two factors that could cause continued volatility in the muni bond
market. First, we've witnessed in recent months a great deal of trading from
"crossover" buyers, such as insurance companies and funds serving individual
investors in the highest tax brackets. With these parties moving back and forth
between the taxable and tax-free bond markets, a lot of volatility has ensued.
That activity could continue well into 1998. Also, there is the outgrowth that
comes when some of the money that might be earmarked for muni bonds instead
finds its way into the stock market. The driving force behind this shift is
current demographics: baby boomers investing in stocks to help fund their
retirement. Until equities prove that they really are overvalued, we think we
are going to see this type of investment climate prevail, and under these
circumstances, the muni market can become volatile.
With this in mind, we will take every possible measure to limit volatility as
much as possible and provide stability--along with tax-exempt, current income.
With a relatively short-term bond Portfolio such as ours, volatility is somewhat
dampened naturally.
- ---------------
(1) The Portfolio's income may be subject to certain state and local taxes
and, depending on your tax status, the federal alternative minimum tax.
* Including the 3.00% sales load, the Portfolio's return was 2.22% for the
period.
** During the period, certain expenses were voluntarily waived and/or
reimbursed. Had these waivers and/or reimbursements not been in effect, the
30-day SEC yield would have been lower.
*** The portfolio composition is subject to change.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR PRIME MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P/MOODY'S AMORTIZED
RATINGS MATURITY PRINCIPAL COST
(UNAUDITED) RATE DATE AMOUNT (NOTE 2)
----------- -------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
BANK NOTES -- 10.9%
AMEX Centurian.................................. A1/P1 6.05%* 1/12/98 $ 3,000,000 $ 3,002,230
First USA Bank.................................. A1+/P1 6.01* 1/21/98 3,000,000 3,000,919
Northern Trust Bank............................. A1+/P1 5.75 3/4/98 3,000,000 2,999,511
-----------
Total Bank Notes (Cost $9,002,660)................ 9,002,660
-----------
CERTIFICATES OF DEPOSIT -- 14.5%
DOMESTIC -- 8.4%
CS First Boston................................. A1/P1 6.04* 1/6/98 4,000,000 4,000,000
Regions Bank.................................... A1+/P1 5.69 1/5/98 3,000,000 3,000,005
-----------
7,000,005
-----------
YANKEE -- 6.1%
Canadian Imperial Bank, New York Branch......... A1+/P1 5.84 2/27/98 3,000,000 3,001,083
Swiss Bank, New York Branch..................... A1+/P1 5.98 3/19/98 2,000,000 1,999,585
-----------
5,000,668
-----------
Total Certificates of Deposit (Cost
$12,000,673).................................... 12,000,673
-----------
COMMERCIAL PAPER -- 29.0%
DOMESTIC -- 25.4%
Ameritech Capital Corp.......................... A1+/P1 5.85 1/29/98 3,000,000 2,986,350
Block Finance................................... A1/P1 6.02 1/22/98 3,000,000 2,989,465
Chrysler Financial Corp......................... A1/P2 5.80 1/16/98 3,000,000 2,992,751
Compagnie Bancaire USA Finance.................. A1/P1 5.84 2/24/98 3,000,000 2,974,035
Lehman Brothers Holdings Corp................... A1/P2 5.98 1/21/98 3,000,000 2,990,033
Sanwa Business Credit........................... A2/P1 6.75 1/21/98 3,000,000 2,988,750
Toyota Motor Credit Corp........................ A1+/P1 5.77 2/18/98 3,000,000 2,976,920
-----------
20,898,304
-----------
PRIVATE PLACEMENT -- 3.6%
Barton Capital Corp. (b)........................ A1+/P1 5.91 1/27/98 3,000,000 2,987,195
-----------
Total Commercial Paper (Cost $23,885,499)......... 23,885,499
-----------
CORPORATE OBLIGATIONS -- 20.6%
CSFP Capital/Sparcs Trust, Series 97-A, (c)..... NR/P1 6.09 1/9/98 3,000,000 3,000,000
CTN Trust, Series 1, Medium Term Note (c)....... A1/P1 6.32* 1/2/98 4,000,000 4,009,286
Dean Witter, Medium Term Note................... A1/P1 6.04* 1/21/98 3,000,000 3,000,341
Merrill Lynch & Co, Medium Term Note............ A1+/P1 6.03* 1/6/98 4,000,000 4,000,000
U.S. Leasing Capital Corp., Medium Term Note.... A1/P1 5.86* 1/6/98 3,000,000 3,000,971
-----------
Total Corporate Obligations (Cost $17,010,598).... 17,010,598
-----------
</TABLE>
<TABLE>
<CAPTION>
S&P/MOODY'S AMORTIZED
RATINGS MATURITY PRINCIPAL COST
(UNAUDITED) RATE DATE AMOUNT/SHARES (NOTE 2)
----------- -------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
TIME DEPOSITS -- 3.6%
Banque Paribas TD -- Grand Cayman Branch (b).... A1/P1 5.63% 2/5/98 $ 3,000,000 $ 3,000,000
-----------
Total Time Deposits (Cost $3,000,000)............. 3,000,000
-----------
REGULATED INVESTMENT COMPANIES -- 0.0%
Dreyfus Cash Management Fund.................... 1 1
Provident National Fund......................... 1 1
-----------
Total Regulated Investment Companies (Cost $2).... 2
-----------
REPURCHASE AGREEMENTS -- 21.2%
Goldman Sachs, dated 1/2/98, with a maturity
value of $17,504,391, (Collateralized by
$18,500,00 Commercial Paper, 4/6/98, fair
value -- $18,137,255)........................ 6.65 1/2/98 17,497,926 17,497,926
-----------
Total Repurchase Agreements (Cost $17,497,926).... 17,497,926
-----------
TOTAL (AMORTIZED COST $82,397,358) (A) 99.8%...... $82,397,358
===========
</TABLE>
- ---------------
Percentages indicated are based on net assets of $82,550,347.
(a) Cost for federal income tax and financial reporting purposes are the same.
(b) Illiquid
(c) Represents a restricted security, purchased under Rule 144A, which is exempt
from registration under the Securities Act of 1933, as amended. These
securities have been deemed liquid under guidelines established by the Board
of Directors.
* Variable rate security. Rate represents rate in effect at December 31, 1997.
Maturity date reflects the next rate change date.
NR -- Not Rated
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR PRIME MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at amortized cost.............. $64,899,432
Repurchase agreements, at amortized cost.................. 17,497,926
Interest receivable....................................... 512,761
Receivable for capital shares issued...................... 8,590
Deferred organization costs............................... 16,788
Prepaid expenses and other assets......................... 7,299
-----------
Total assets................................................ 82,942,796
-----------
LIABILITIES
Distributions payable..................................... 333,009
Payable for capital shares redeemed....................... 629
Accrued expenses:
Advisory fees.......................................... 6,611
Sub-advisory fees...................................... 9,917
Administration fees.................................... 6,611
Shareholder service fees--Investor Shares.............. 10,053
Accounting fees........................................ 4,462
Custodian fees......................................... 6,132
Audit fees............................................. 7,286
Other.................................................. 7,739
-----------
Total liabilities........................................... 392,449
-----------
NET ASSETS
Investor Shares........................................ 56,161,196
Trust Shares........................................... 26,389,151
-----------
Total Net Assets............................................ $82,550,347
===========
Shares Outstanding ($0.001 par value, 1 billion shares
authorized)
Investor Shares........................................ 56,162,574
Trust Shares........................................... 26,389,571
-----------
82,552,145
===========
Net Asset Value, Offering Price and Redemption Price per
Share
Investor Shares........................................ $1.00
-----
Trust Shares........................................... $1.00
-----
COMPOSITION OF NET ASSETS:
Shares of beneficial interest, at par..................... $ 82,552
Additional paid-in capital................................ 82,466,030
Undistributed net investment income....................... 3,563
Accumulated net realized losses on investment
transactions........................................... (1,798)
-----------
Net Assets, December 31, 1997............................... $82,550,347
===========
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR PRIME MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................... $4,549,373
Expenses
Advisory fees............................................. $ 80,064
Sub-advisory fees......................................... 120,097
Administration fees....................................... 80,064
Shareholder service fees--Investor Shares................. 93,044
Custodian fees............................................ 34,049
Accounting fees........................................... 60,127
Transfer agent fees and expenses.......................... 52,685
Legal fees................................................ 4,650
Audit fees................................................ 18,029
Reports to shareholders................................... 17,006
Amortization of organization expenses..................... 12,410
Directors' fees........................................... 7,642
Insurance expense......................................... 6,005
Registration fees......................................... 5,606
Other expenses............................................ 1,448
--------
Total expenses.............................................. 592,926
----------
Net Investment Income....................................... 3,956,447
----------
REALIZED GAINS (LOSSES) ON INVESTMENT TRANSACTIONS
Net realized gains (losses) on investment transactions.... (760)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $3,955,687
==========
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR PRIME MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income..................................... $ 3,956,447 $ 3,612,781
Net realized gains (losses) on investment transactions.... (760) (149)
------------- -------------
Net increase in net assets resulting from operations...... 3,955,687 3,612,632
------------- -------------
Distributions to Investor Class:
From net investment income................................ (1,794,260) (2,446,618)
Distributions to Trust Class:
From net investment income................................ (2,162,187) (1,166,163)(a)
------------- -------------
Total distributions to shareholders......................... (3,956,447) (3,612,781)
------------- -------------
Capital Share Transactions (at $1.00 per share)
Proceeds from shares issued............................... 347,193,012 381,614,137
Dividends reinvested...................................... 357,817 26,543
Cost of shares redeemed................................... (335,936,165) (374,623,264)
------------- -------------
Net increase in net assets from capital share
transactions........................................... 11,614,664 7,017,416
------------- -------------
Total increase (decrease) in Net Assets..................... 11,613,904 7,017,267
NET ASSETS
Beginning of period....................................... 70,936,443 63,919,176
------------- -------------
End of period............................................. $ 82,550,347 $ 70,936,443
============= =============
SHARE TRANSACTIONS:
Issued.................................................... 347,193,012 381,614,137
Reinvested................................................ 357,817 26,543
Redeemed.................................................. (335,936,165) (374,623,264)
------------- -------------
Change in shares.......................................... 11,614,664 7,017,416
============= =============
</TABLE>
- ---------------
(a) For the period from July 1, 1996 (commencement of operations of Trust
Shares) through December 31, 1996.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR U.S. TREASURY MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMORTIZED
MATURITY PRINCIPAL COST
RATE DATE AMOUNT (NOTE 2)
---- -------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. TREASURY BILLS -- 5.2%
U.S. Treasury Bill..................................... 5.15%* 3/12/98 $10,000,000 $ 9,900,931
------------
Total U.S. Treasury Bills (Cost $9,900,931).............. 9,900,931
------------
U.S. TREASURY NOTES -- 23.6%
U.S. Treasury Note..................................... 5.63 1/31/98 10,000,000 10,000,649
U.S. Treasury Note..................................... 5.13 2/28/98 5,000,000 4,996,353
U.S. Treasury Note..................................... 5.88 4/30/98 5,000,000 5,006,368
U.S. Treasury Note..................................... 6.13 5/15/98 5,000,000 5,010,007
U.S. Treasury Note..................................... 6.00 5/31/98 5,000,000 5,010,678
U.S. Treasury Note..................................... 5.13 6/30/98 5,000,000 4,991,786
U.S. Treasury Note..................................... 6.25 7/31/98 5,000,000 5,019,521
U.S. Treasury Note..................................... 5.88 8/15/98 5,000,000 5,006,564
------------
Total U.S. Treasury Notes (Cost $45,041,926)............. 45,041,926
------------
U.S. TREASURY STRIPS -- 18.1%
U.S. Treasury Strip.................................... 5.67* 2/15/98 15,000,000 14,902,391
U.S. Treasury Strip.................................... 5.67* 2/15/98 10,000,000 9,934,010
U.S. Treasury Strip.................................... 5.48* 5/15/98 5,000,000 4,901,439
U.S. Treasury Strip.................................... 5.61* 8/15/98 5,000,000 4,828,468
------------
Total U.S. Treasury Strips (Cost $34,566,308)............ 34,566,308
------------
REPURCHASE AGREEMENTS -- 53.2%
Goldman Sachs, dated 1/2/98, with a maturity value of
$46,438,003, (Collateralized by $46,035,000 U.S.
Treasury Bonds, 6.13%, 11/15/27, fair
value -- $47,352,483)............................... 5.75 1/2/98 46,423,173 46,423,173
Merrill Lynch, dated 1/5/98, with a maturity value of
$9,007,375, (Collateralized by $8,945,000 U.S.
Treasury Notes, 5.88%, 1/31/99, fair
value -- $9,180,307)................................ 5.90 1/5/98 9,000,000 9,000,000
Prudential, dated 1/5/98, with a maturity value of
$46,461,859, (Collateralized by $58,538,263
Government National Mortgage Assoc., 7.00%-8.50%,
1/1/00-11/15/27, fair value -- $47,351,637)......... 6.00 1/5/98 46,423,172 46,423,172
------------
Total Repurchase Agreements (Cost $101,846,345).......... 101,846,345
------------
TOTAL (AMORTIZED COST $191,355,510) (A) -- 100.1%........ $191,355,510
============
</TABLE>
- ------------------
Percentages indicated are based on net assets of $191,239,762.
(a) Cost for federal income tax and financial reporting purposes are the same.
* Yield effective at issue.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR U.S. TREASURY MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at amortized cost.............. $ 89,509,165
Repurchase agreements, at amortized cost.................. 101,846,345
Interest receivable....................................... 698,003
Receivable for capital shares issued...................... 3,478
Deferred organization costs............................... 17,904
Prepaid expenses and other assets......................... 53,710
------------
Total assets................................................ 192,128,605
------------
LIABILITIES
Distributions payable..................................... 769,813
Payable for capital shares redeemed....................... 169
Accrued expenses:
Advisory fees.......................................... 39,027
Administration fees.................................... 15,610
Shareholder service fees--Investor Shares.............. 16,369
Accounting fees........................................ 8,886
Custodian fees......................................... 10,502
Audit fees............................................. 9,635
Other.................................................. 18,832
------------
Total liabilities........................................... 888,843
------------
NET ASSETS
Investor Shares........................................... $ 77,065,086
Trust Shares.............................................. 114,174,676
------------
$191,239,762
============
Shares Outstanding ($0.001 par value, 1 billion shares
authorized)
Investor Shares........................................... 77,065,086
Trust Shares.............................................. 114,174,676
------------
191,239,762
------------
Net Asset Value, Offering Price and Redemption Price per
Share
Investor Shares........................................... $1.00
-----
Trust Shares.............................................. $1.00
-----
COMPOSITION OF NET ASSETS:
Shares of beneficial interest, at par..................... $ 191,240
Additional paid-in capital................................ 191,044,983
Undistributed net investment income....................... 3,539
------------
Net Assets, December 31, 1997............................... $191,239,762
============
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR U.S. TREASURY MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................... $10,306,993
Expenses
Advisory fees............................................. $474,129
Administration fees....................................... 189,650
Shareholder service fees--Investor Shares................. 201,894
Custodian fees............................................ 44,524
Accounting fees........................................... 73,102
Transfer agent fees and expenses.......................... 44,043
Legal fees................................................ 16,272
Audit fees................................................ 20,066
Reports to shareholders................................... 44,472
Amortization of organization expenses..................... 12,410
Directors' fees........................................... 4,535
Insurance expense......................................... 5,583
Registration fees......................................... 18,608
--------
Total expenses......................................... 1,149,288
-----------
Net Investment Income....................................... 9,157,705
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 9,157,705
===========
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR U.S. TREASURY MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income..................................... $ 9,157,705 $ 8,714,947
------------- -------------
Distributions to Investor Class
From net investment income................................ (3,780,942) (5,988,175)
Distributions to Trust Class
From net investment income................................ (5,376,763) (2,726,772)(a)
------------- -------------
Total distributions to shareholders......................... (9,157,705) (8,714,947)
------------- -------------
Capital Share Transactions (at $1.00 per share)
Proceeds from shares issued............................... 469,670,555 460,104,988
Dividends reinvested...................................... 107,555 56,500
Cost of shares redeemed................................... (466,544,751) (440,585,214)
------------- -------------
Net increase (decrease) in net assets from capital share
transactions........................................... 3,233,359 19,576,274
------------- -------------
Total Increase (Decrease) in Net Assets..................... 3,233,359 19,576,274
NET ASSETS
Beginning of period....................................... 188,006,403 168,430,129
------------- -------------
End of period............................................. $ 191,239,762 $ 188,006,403
============= =============
SHARE TRANSACTIONS:
Issued.................................................... 469,670,545 460,104,988
Reinvested................................................ 107,555 56,500
Redeemed.................................................. (466,544,741) (440,585,214)
------------- -------------
Change in shares.......................................... 3,233,359 19,576,274
============= =============
</TABLE>
- ---------------
(a) For the period from July 1, 1996 (commencement of operations of Trust
Shares) through December 31, 1996.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<S> <C> <C>
COMMON STOCKS -- 94.9%
AIR TRANSPORTATION -- 2.9%
Southwest Airlines Co..................................... 169,950 $ 4,185,019
------------
BANKING -- 10.1%
Banc One Corp............................................. 65,000 3,530,313
First Union Corp.......................................... 42,000 2,152,500
Norwest Corp.............................................. 117,080 4,522,214
Wachovia Corp............................................. 52,000 4,218,500
------------
14,423,527
------------
COMPUTER SOFTWARE -- 6.4%
Cisco Systems, Inc. (b)................................... 65,825 3,669,744
Computer Sciences Corp. (b)............................... 33,500 2,797,250
Microsoft Corp. (b)....................................... 21,000 2,714,250
------------
9,181,244
------------
CONSUMER -- MISCELLANEOUS SERVICES -- 5.9%
Cendant Corp.............................................. 102,500 3,523,438
Corrections Corp. of America (b).......................... 36,200 1,341,663
Service Corp. International............................... 95,500 3,527,530
------------
8,392,631
------------
COSMETICS & TOILETRIES -- 2.3%
Gillette Co............................................... 32,000 3,214,000
------------
DATA PROCESSING -- 2.7%
Automatic Data Processing, Inc............................ 63,500 3,897,313
------------
ELECTRICAL EQUIPMENT -- 3.2%
General Electric Co....................................... 62,500 4,585,938
------------
ELECTRONIC COMPONENTS -- 1.0%
Intel Corp................................................ 20,000 1,405,000
------------
ENTERTAINMENT -- 2.1%
Time Warner, Inc.......................................... 48,000 2,976,000
------------
FINANCIAL SERVICES -- 3.0%
Fannie Mae................................................ 75,500 4,308,219
------------
FOOD & RELATED -- 2.2%
Conagra, Inc.............................................. 97,400 3,195,938
------------
HEALTH CARE -- DRUGS -- 8.0%
Bristol Myers Squibb Co................................... 37,500 3,548,438
Eli Lilly & Co............................................ 54,600 3,801,525
Pfizer, Inc............................................... 54,400 4,056,199
------------
11,406,162
------------
HEALTH CARE -- REHABILITATIVE SERVICES -- 2.1%
HEALTHSOUTH Rehabilitation Corp. (b)...................... 105,500 2,927,625
------------
HOUSEHOLD -- GENERAL PRODUCTS -- 3.1%
Newell Co................................................. 102,500 4,356,250
------------
INSURANCE -- LIFE -- 1.7%
Hartford Life -- Class A.................................. 52,000 2,356,250
------------
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
INSURANCE -- PROPERTY & CASUALTY -- 2.6%
American International Group, Inc......................... 34,500 $ 3,751,875
------------
MACHINERY & EQUIPMENT -- 0.6%
Deere & Co................................................ 15,000 874,688
------------
MANUFACTURING -- 2.0%
Tyco International........................................ 64,510 2,906,982
------------
MEDICAL -- HOSPITAL MANAGEMENT SERVICES -- 3.5%
Health Care & Retirement Corp. (b)........................ 77,500 3,119,375
HealthCare Compare Corp. (b).............................. 37,250 1,904,406
------------
5,023,781
------------
MEDICAL EQUIPMENT & SUPPLIES -- 3.6%
Biomet, Inc............................................... 90,000 2,306,250
Sybron International Corp. -- Wisconsin (b)............... 60,780 2,852,861
------------
5,159,111
------------
OIL & GAS -- 0.9%
Mitchell Energy & Development, Class B.................... 43,300 1,261,113
------------
PETROLEUM -- SERVICES -- 4.3%
Halliburton Co............................................ 59,500 3,090,281
Schlumberger Ltd.......................................... 38,500 3,099,250
------------
6,189,531
------------
RETAIL -- 2.7%
Dayton Hudson Corp........................................ 56,000 3,780,000
------------
RETAIL-SPECIALTY STORES -- 14.4%
Arbor Drugs, Inc.......................................... 233,250 4,315,124
AutoZone, Inc. (b)........................................ 67,500 1,957,500
Barnes & Noble, Inc. (b).................................. 112,000 3,738,000
Home Depot, Inc........................................... 72,750 4,283,156
Office Depot, Inc. (b).................................... 92,000 2,202,250
Walgreen Co............................................... 124,400 3,903,050
------------
20,399,080
------------
TELECOMMUNICATIONS -- 2.5%
Ericsson (LM) Telephone................................... 39,300 1,466,381
Lucent Technologies Inc................................... 26,500 2,116,688
------------
3,583,069
------------
TOOLS -- 1.1%
Stanley Works............................................. 33,300 1,571,344
------------
Total Common Stocks (Cost $98,072,289)...................... 135,311,690
------------
REGULATED INVESTMENT COMPANIES -- 4.2%
AIM Liquid Assets Money Market Fund....................... 8,095 8,095
AIM Prime Money Market Fund............................... 2,543,846 2,543,846
Dreyfus Prime Money Market Fund........................... 1 1
S & P 500 Depository Receipt.............................. 35,000 3,392,813
------------
Total Regulated Investment Companies (Cost $5,982,821)...... 5,944,755
------------
</TABLE>
<TABLE>
<CAPTION>
MATURITY PRINCIPAL VALUE
RATE DATE AMOUNT (NOTE 2)
-------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
U.S. TREASURY BILLS -- 1.0%
U.S. Treasury Bill............................................. 5.12%* 2/5/98 $1,500,000 $ 1,492,555
------------
TOTAL U.S. TREASURY BILLS (COST $1,492,417)...................... 1,492,555
------------
TOTAL (COST $105,547,527)(A) -- 100.1%........................... $142,749,000
============
</TABLE>
- ---------------
Percentages indicated are based on net assets of $142,619,358.
(a) Represents cost for financial reporting purposes and differs from cost basis
from income tax purposes by the amount of losses recognized for financial
reporting in excess of federal income reporting of approximately $115,791.
Cost for federal income tax purposes differs from value by net unrealized
appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $37,375,032
Unrealized depreciation..................................... $ (289,350)
-----------
Net unrealized appreciation................................. $37,085,682
===========
</TABLE>
(b) Non-income producing security
* Yield at issue
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (Cost $105,547,527)... $142,749,000
Interest and dividends receivable......................... 141,877
Receivable for capital shares sold........................ 15,000
Deferred organization costs............................... 7,413
Prepaid expenses and other assets......................... 19,481
------------
Total assets................................................ 142,932,771
------------
LIABILITIES
Distributions payable..................................... 268,135
Accrued expenses:
Administration fees.................................... 18,083
Distribution fees -- Investor Shares................... 76
Accounting fees........................................ 3,509
Custodian fees......................................... 2,531
Audit fees............................................. 6,824
Other.................................................. 14,255
------------
Total liabilities........................................... 313,413
------------
NET ASSETS
Investor Shares........................................ 858,264
Trust Shares........................................... 141,761,094
------------
$142,619,358
------------
Shares Outstanding ($0.001 par value, 500 million shares
authorized)
Investor Shares........................................ 67,077
Trust Shares........................................... 11,172,613
------------
11,239,690
============
NET ASSET VALUE
Investor Shares -- redemption price per share............. $12.80
------
Investor Shares -- maximum sales charge................... 4.75%
------
Investor Shares -- maximum sales charge per share
(100%/(100% -- maximum sales charge)
of net asset adjusted to nearest cent)................. $13.44
======
Trust Shares -- offering and redemption price per share..... $12.69
======
COMPOSITION OF NET ASSETS:
Shares of common stock, at par............................ $ 11,240
Additional paid-in capital................................ 105,273,051
Undistributed (distributions in excess of) net investment
income................................................. (2,107)
Net unrealized appreciation from investments.............. 37,201,473*
Accumulated net realized gains on investment
transactions........................................... 135,701
------------
Net Assets, December 31, 1997............................... $142,619,358
============
</TABLE>
- ---------------
* Represents sum of current periods unrealized appreciation plus common trust
fund appreciation. See Note 7.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................... $ 114,616
Dividends................................................... 1,527,699
-----------
Total Investment Income..................................... 1,642,315
Expenses
Advisory fees............................................. $ 783,646
Administration fees....................................... 180,842
Distribution fees -- Investor Shares...................... 214,963
Custodian fees............................................ 19,058
Accounting fees........................................... 57,524
Transfer agent fees and expenses.......................... 19,567
Legal fees................................................ 10,550
Audit fees................................................ 19,734
Reports to shareholders................................... 34,253
Amortization of organization expenses..................... 3,039
Directors' fees........................................... 6,555
Insurance expense......................................... 4,527
Registration fees......................................... 1,869
Other expenses............................................ 665
----------
Total expenses before fee waivers...................... 1,356,792
Less: Fee waivers...................................... (356,352)
----------
Total expenses......................................... 1,000,440
-----------
Net Investment Income....................................... 641,875
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENTS
Net realized gains (losses) on investment transactions.... 19,491,761
Net change in unrealized appreciation (depreciation) on
investments............................................ 11,188,742
-----------
Net Realized and Unrealized Gains (Losses) from
Investments............................................... 30,680,503
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $31,322,378
===========
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 (A)
----------------- ---------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income..................................... $ 641,875 $ (5,801)
Net realized gains (losses) on investment transactions.... 19,491,761 (182,054)
Net change in unrealized appreciation (depreciation) on
investments............................................ 11,188,742 5,843,782
------------ -----------
Net increase in net assets resulting from operations...... 31,322,378 5,655,927
------------ -----------
Distributions to Investor Class
From net investment income................................ (374,481) --
From net realized gains................................... (121,087) --
Distributions to Trust Class (b)
From net investment income................................ (266,590) --
From net realized gains................................... (19,052,919) --
------------ -----------
Total distributions to shareholders......................... (19,815,077) --
------------ -----------
Capital Share Transactions
Proceeds from shares issued............................... 248,661,873 47,441,776
Dividends reinvested...................................... 19,301,059 --
Cost of shares redeemed................................... (185,858,842) (4,089,736)
------------ -----------
Net increase in net assets from capital share
transactions........................................... 82,104,090 43,352,040
------------ -----------
Total increase (decrease) in Net Assets..................... 93,611,391 49,007,967
NET ASSETS
Beginning of period....................................... 49,007,967 --
------------ -----------
End of period............................................. $142,619,358 $49,007,967
============ ===========
SHARE TRANSACTIONS
Issued.................................................... 17,028,511 4,712,999
Reinvested................................................ 1,524,272 --
Redeemed.................................................. (11,641,375) (384,717)
------------ -----------
Change in shares.......................................... 6,911,408 4,328,282
============ ===========
</TABLE>
- ---------------
(a) For the period from April 1, 1996 (commencement of operations) through
December 31, 1996.
(b) For the period from October 3, 1997 (commencement of operations of Trust
Shares) through December 31, 1997.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR DIVIDEND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<S> <C> <C>
COMMON STOCKS -- 93.0%
BANKING -- 9.4%
Crestar Financial Corp.................................... 12,000 $ 684,000
First Tennessee National Corp............................. 13,000 867,750
Mellon Bank Corp.......................................... 31,000 1,879,374
NationsBank Corp.......................................... 21,000 1,277,063
Wells Fargo & Co.......................................... 5,000 1,697,187
------------
6,405,374
------------
BEVERAGES -- 2.7%
PepsiCo,Inc............................................... 50,000 1,821,875
------------
BUSINESS EQUIPMENT & SERVICES -- 2.6%
Xerox Corp................................................ 24,000 1,771,500
------------
CHEMICALS-SPECIALTY -- 1.1%
Witco Corp................................................ 19,000 775,438
------------
COSMETICS & TOILETRIES -- 1.1%
Colgate Palmolive Co...................................... 10,000 735,000
------------
DATA PROCESSING -- 4.2%
Automatic Data Processing, Inc............................ 31,400 1,927,175
First Data Corp........................................... 32,176 941,148
------------
2,868,323
------------
ELECTRICAL EQUIPMENT -- 3.8%
Emerson Electric.......................................... 46,000 2,596,125
------------
FINANCIAL SERVICES -- 4.3%
American Express Co....................................... 13,000 1,160,250
Fannie Mae................................................ 31,000 1,768,938
------------
2,929,188
------------
FOOD & RELATED -- 3.5%
Conagra, Inc.............................................. 29,000 951,563
H.J. Heinz Co............................................. 28,000 1,422,750
------------
2,374,313
------------
HEALTH CARE -- DRUGS -- 8.7%
Abbott Labs............................................... 28,000 1,835,750
Bristol Myers Squibb Co................................... 24,000 2,270,999
Glaxo Wellcome PLC--ADR................................... 38,000 1,819,250
------------
5,925,999
------------
HOUSEHOLD -- GENERAL PRODUCTS -- 2.5%
Newell Co................................................. 41,000 1,742,500
------------
INSURANCE -- 2.1%
Allstate Corp............................................. 16,000 1,454,000
------------
INSURANCE -- LIFE -- 1.1%
Jefferson Pilot Corp...................................... 10,000 778,750
------------
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
MANUFACTURING -- 5.4%
Fortune Brands Inc........................................ 48,000 $ 1,779,000
Johnson Controls, Inc..................................... 40,000 1,910,000
------------
3,689,000
------------
MEDICAL EQUIPMENT & SUPPLIES -- 1.3%
Baxter International, Inc................................. 17,000 857,438
------------
OIL & GAS -- 4.3%
Exxon Corp................................................ 10,000 611,875
Mobil Corp................................................ 8,000 577,500
Royal Dutch Petroleum..................................... 13,000 704,438
Texaco, Inc............................................... 19,000 1,033,125
------------
2,926,938
------------
PETROLEUM -- SERVICES -- 2.2%
Dresser Industries, Inc................................... 36,000 1,509,750
------------
PUBLISHING -- 2.7%
Gannett Co., Inc.......................................... 18,000 1,112,625
McGraw Hill, Inc.......................................... 10,000 740,000
------------
1,852,625
------------
REAL ESTATE INVESTMENT TRUST -- 5.8%
Crescent Real Estate...................................... 28,000 1,102,499
Equity Office Properties.................................. 20,500 647,031
Equity Residential Property............................... 25,000 1,264,062
Hospitality Properties Trust.............................. 29,500 969,813
------------
3,983,405
------------
RETAIL -- 3.2%
J.C. Penney, Inc.......................................... 18,000 1,085,625
Wal Mart Stores, Inc...................................... 28,000 1,104,250
------------
2,189,875
------------
TOBACCO -- 1.5%
Philip Morris Cos., Inc................................... 23,000 1,042,188
------------
UTILITIES -- 4.3%
DPL, Inc.................................................. 48,000 1,380,000
Scana Corp................................................ 27,200 814,300
Teco Energy, Inc.......................................... 25,600 720,000
------------
2,914,300
------------
UTILITIES-ELECTRIC -- 5.4%
Carolina Power & Light Co................................. 10,000 424,375
Duke Energy Corp.......................................... 42,000 2,325,750
NIPSCO Industries, Inc.................................... 18,400 909,650
------------
3,659,775
------------
UTILITIES-GAS & PIPELINE -- 2.9%
Consolidated Natural Gas Co............................... 33,000 1,996,500
------------
UTILITIES-TELEPHONE -- 3.4%
Bellsouth Corp............................................ 12,000 675,750
GTE Corp.................................................. 23,000 1,201,750
SBC Communications, Inc................................... 6,000 439,500
------------
2,317,000
------------
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
WHOLESALE -- 3.5%
Sysco Corp................................................ 53,000 $ 2,414,813
------------
Total Common Stocks (Cost $51,154,621)...................... 63,531,992
------------
PREFERRED STOCKS -- 1.3%
COMPUTER SOFTWARE -- 1.3%
Microsoft Corp., Series A................................. 10,000 898,750
------------
Total Preferred Stocks (Cost $820,260)...................... 898,750
------------
REGULATED INVESTMENT COMPANIES -- 4.7%
AIM Liquid Assets Money Market Fund....................... 266,191 266,191
AIM Prime Money Market Fund............................... 1,602,060 1,602,060
S & P 500 Depository Receipt.............................. 14,000 1,357,125
------------
Total Regulated Investment Companies (Cost $3,246,787)...... 3,225,376
------------
</TABLE>
<TABLE>
<CAPTION>
MATURITY PRINCIPAL
RATE DATE AMOUNT
-------- -------- ----------
<S> <C> <C> <C> <C> <C>
U.S. TREASURY BILLS -- 3.2%
U.S. Treasury Bill.............................................. 5.20%* 5/28/98 $ 750,000 $ 734,055
U.S. Treasury Bill.............................................. 5.26* 7/23/98 1,000,000 970,590
U.S. Treasury Bill.............................................. 5.28* 8/20/98 500,000 483,260
-----------
TOTAL U.S. TREASURY BILLS (COST $2,187,712)....................... 2,187,905
-----------
TOTAL (Cost $57,409,380) (a) 102.2%............................... $69,844,023
===========
</TABLE>
- ---------------
Percentages indicated are based on net assets of $68,337,680.
(a) Represents cost for financial reporting purposes and differs from cost basis
from income tax purposes by the amount of losses recognized for financial
reporting in excess of federal income reporting of approximately $4,137.
Cost for federal income tax purposes differs from value by net unrealized
appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation............................. $12,979,014
Unrealized depreciation............................. $ (548,508)
-----------
Net unrealized appreciation................................. $12,430,506
===========
</TABLE>
* Yield at issue
PLC = Public Limited Company
ADR = American Depository Receipt
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR DIVIDEND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $57,409,380).... $69,844,023
Interest receivable....................................... 144,817
Receivable for investment securities sold................. 312,927
Deferred organization costs............................... 4,384
Prepaid expenses and other assets......................... 8,932
-----------
Total assets................................................ 70,315,083
-----------
LIABILITIES
Distributions payable..................................... 134,352
Payable for investment securities purchased............... 1,805,186
Accrued expenses:
Administration fees.................................... 8,499
Accounting fees........................................ 2,353
Custodian fees......................................... 5,234
Legal fees............................................. 2,859
Audit fees............................................. 9,064
Other.................................................. 9,856
-----------
Total liabilities........................................... 1,977,403
-----------
NET ASSETS
Investor Shares........................................ 388,420
Trust Shares........................................... 67,949,260
-----------
$68,337,680
===========
Shares Outstanding ($0.001 par value, 500 million shares
authorized)
Investor Shares........................................ 37,473
Trust Shares........................................... 6,554,392
-----------
6,591,865
===========
NET ASSET VALUE
Investor Shares -- redemption price per share............. $10.37
------
Investor Shares -- maximum sales charge................... 4.75%
------
Investor Shares -- maximum sales charge per share
(100%/(100% -- maximum sales charge)
of net asset adjusted to nearest cent)................. $10.89
======
Trust Shares -- offering and redemption price per share... $10.37
======
COMPOSITION OF NET ASSETS:
Shares of common stock, at par............................ $ 6,592
Additional paid-in capital................................ 53,498,948
Undistributed (distributions in excess of) net investment
income................................................. (2,069)
Net unrealized appreciation from investments.............. 12,434,643*
Accumulated net realized gains on investment
transactions........................................... 2,399,566
-----------
Net Assets, December 31, 1997............................... $68,337,680
===========
</TABLE>
- ---------------
* Represents sum of current periods unrealized appreciation plus common trust
fund appreciation. See Note 7.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR DIVIDEND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1997 (a)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................... $ 177,991
Dividends................................................... 1,384,374
-----------
Total Investment Income..................................... 1,562,365
Expenses
Advisory fees............................................. $ 332,185
Administration fees....................................... 76,658
Distribution fees -- Investor Shares...................... 88,282
Custodian fees............................................ 20,549
Accounting fees........................................... 42,513
Transfer agent fees and expenses.......................... 19,243
Legal fees................................................ 14,631
Audit fees................................................ 15,523
Reports to shareholders................................... 13,494
Amortization of organization expenses..................... 3,648
Directors' fees........................................... 2,128
Insurance expense......................................... 1,800
Registration fees......................................... 4,022
Other expenses............................................ 11
---------
Total expenses before fee waivers...................... 634,687
Less: Fee waivers...................................... (153,843)
---------
Total expenses............................................ 480,844
-----------
Net Investment Income....................................... 1,081,521
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENTS
Net realized gains (losses) on investment transactions.... 12,492,214
Net change in unrealized appreciation (depreciation) on
investments............................................ 132,903
-----------
Net Realized and Unrealized Gains (Losses) from
Investments............................................... 12,625,117
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $13,706,638
===========
</TABLE>
- ---------------
(a) For the period from February 28, 1997 (commencement of operations) to
December 31, 1997.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR DIVIDEND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997 (a)
---------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income..................................... $ 1,081,521
Net realized gains (losses) on investment transactions.... 12,492,214
Net change in unrealized appreciation (depreciation) on
investments............................................ 132,903
------------
Net increase in net assets resulting from operations...... 13,706,638
------------
Distributions to Investor Class
From net investment income................................ (723,804)
From net realized gains................................... (45,604)
Distributions to Trust Class (b)
From net investment income................................ (361,492)
From net realized gains................................... (10,045,338)
------------
Total distributions to shareholders......................... (11,176,238)
------------
Capital Share Transactions
Proceeds from shares issued............................... 137,340,554
Dividends reinvested...................................... 10,088,221
Cost of shares redeemed................................... (81,621,495)
------------
Net increase in net assets from capital share
transactions........................................... 65,807,280
------------
Total increase (decrease) in Net Assets..................... 68,337,680
NET ASSETS
Beginning of period....................................... --
------------
End of period............................................. $ 68,337,680
============
SHARE TRANSACTIONS
Issued.................................................... 11,546,178
Reinvested................................................ 988,858
Redeemed.................................................. (5,943,171)
------------
Change in shares.......................................... 6,591,865
============
</TABLE>
- ---------------
(a) For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
(b) For the period from October 3, 1997 (commencement of operations of Trust
Shares) through December 31, 1997.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CORE INCOME PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P/MOODY'S
RATINGS MATURITY PRINCIPAL VALUE
(UNAUDITED) RATE DATE AMOUNT (NOTE 2)
----------- -------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS -- 73.5%
BANKING -- 11.9%
ABN AMRO Bank.................................... A/Aa3 6.63% 10/31/01 $ 1,550,000 $ 1,567,438
First Union Corp., Putable on 2/15/06 @ 100...... A/A1 6.18 2/15/36 1,500,000 1,488,750
NationsBank Corp................................. A/A1 7.75 8/15/15 925,000 1,018,656
SunTrust Banks................................... A/A2 7.38 7/1/06 2,200,000 2,332,000
Wachovia Corp.................................... AA-/A1 6.61 10/1/25 2,100,000 2,160,375
-----------
8,567,219
-----------
FINANCIAL SERVICES -- 10.0%
Associates Corp. N.A............................. AA-/Aa3 7.30 3/15/98 1,000,000 1,003,060
Associates Corp. N.A............................. AA-/Aa3 7.32 1/13/03 800,000 841,000
Ford Motor Credit Corp........................... A/A1 6.38 10/6/00 500,000 503,750
General Electric Capital Corp.................... AAA/Aaa 7.50 8/21/35 1,500,000 1,680,000
General Motors Acceptance Corp................... A-/A3 7.25 5/5/99 1,925,000 1,953,875
USLIFE Corp...................................... AA-/A2 6.38 6/15/00 1,250,000 1,246,875
-----------
7,228,560
-----------
INDUSTRIAL GOODS & SERVICES -- 21.2%
Air Products & Chemicals......................... A/A2 7.80 6/15/26 1,750,000 1,949,063
Anheuser-Busch Cos., Callable 7/1/07 @ 103.03.... A+/A1 7.13 7/1/17 1,500,000 1,560,000
Harris Corp., Callable 12/1/98 @ 105.14.......... A-/A3 10.38 12/1/18 1,050,000 1,139,250
IBM Corp......................................... A/A1 7.00 10/30/25 2,000,000 2,070,000
Lockheed Martin Corp............................. BBB+/A3 6.55 5/15/99 2,400,000 2,414,999
Motorola, Inc.................................... AA/Aa3 6.50 3/1/08 2,150,000 2,195,688
Reliance Electric Co............................. AA-/A2 6.80 4/15/03 1,500,000 1,545,000
Weyerhaeuser Paper Products Co................... A/A2 7.13 7/15/23 2,250,000 2,334,374
-----------
15,208,374
-----------
INSURANCE-PROPERTY & CASUALTY -- 2.6%
Travelers/Aetna Property & Casualty.............. A+/A1 6.75 4/15/01 1,850,000 1,882,375
-----------
RETAIL-STORES -- 5.6%
Dayton Hudson Co................................. BBB+/Baa1 6.80 10/1/01 1,500,000 1,524,375
J C Penney & Co.................................. A/A2 7.25 4/1/02 1,000,000 1,036,250
J C Penney & Co.................................. A/A2 6.50 6/15/02 1,500,000 1,511,250
-----------
4,071,875
-----------
TELECOMMUNICATIONS -- 5.7%
Ameritech Cap. Funding........................... AA+/Aa3 6.88 10/15/27 2,000,000 2,060,000
BellSouth Corp................................... AAA/Aaa 8.25 7/1/32 450,000 504,000
GTE Corp., Callable 2/1/07 @ 103.95.............. A/Baa1 7.90 2/1/27 1,450,000 1,524,313
-----------
4,088,313
-----------
</TABLE>
<TABLE>
<CAPTION>
S&P/MOODY'S
RATINGS MATURITY PRINCIPAL VALUE
(UNAUDITED) RATE DATE AMOUNT (NOTE 2)
----------- -------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS, CONTINUED:
UTILITIES-ELECTRIC--13.4%
Florida Power Corp............................... A+/A1 6.54% 7/1/02 $ 1,500,000 $ 1,520,625
Houston Light & Power Corp....................... A-/A3 6.10 3/1/00 1,725,000 1,725,000
National Rural Utilities Corp.................... AA-/A1 6.49* 7/10/02 1,600,000 1,618,000
Public Service Electric & Gas.................... A-/A3 6.50 6/1/00 1,500,000 1,516,875
Puget Sound Power & Light........................ A-/Baa1 6.61 2/9/00 1,500,000 1,513,125
Virginia Electric & Power........................ A/A2 6.63 4/1/03 1,750,000 1,785,000
-----------
9,678,625
-----------
UTILITIES-GAS--3.1%
Smith Enron...................................... NR/NR 5.97 12/15/06 2,229,000 2,206,710
-----------
Total Corporate Bonds (Cost $51,612,007)........... 52,932,051
-----------
MUNICIPAL BONDS -- 1.1%
GEORGIA -- 1.1%
Atlanta Downtown Development Lease Revenue Bond,
Callable 2/1/10 @ 100......................... AAA/NR 6.88 2/1/21 750,000 794,063
-----------
Total Municipal Bonds (Cost $708,275).............. 794,063
-----------
U.S. GOVERNMENT AGENCIES -- 11.1%
FEDERAL HOME LOAN MORTGAGE CORP. -- 2.7%
Federal Home Loan Mortgage Corp.................. 6.44 10/24/07 1,900,000 1,953,998
-----------
FEDERAL NATIONAL MORTGAGE ASSOC. -- 2.8%
Federal National Mortgage Assoc., Callable
11/23/99 @ 100................................ 6.35 11/23/01 2,000,000 2,006,620
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOC. -- 5.6%
Government National Mortgage Assoc.,
Pool # 407413................................. 8.00 5/15/10 644,027 669,987
Government National Mortgage Assoc.,
Pool # 780479................................. 6.50 8/15/11 990,816 997,623
Government National Mortgage Assoc.,
Pool # 423914................................. 7.50 8/15/11 918,199 946,314
Government National Mortgage Assoc.,
Pool # 423923................................. 7.00 9/15/11 1,421,262 1,448,792
-----------
4,062,716
-----------
Total U.S. Government Agencies (Cost $8,103,076)... 8,023,334
-----------
U.S. TREASURY NOTES -- 5.2%
U.S. Treasury Note............................... 7.50 5/15/02 1,000,000 1,067,450
U.S. Treasury Note............................... 6.88 5/15/06 1,500,000 1,605,570
U.S. Treasury Note............................... 7.00 7/15/06 1,000,000 1,079,850
-----------
Total U.S. Treasury Notes (Cost $3,629,861)........ 3,752,870
-----------
</TABLE>
<TABLE>
<CAPTION>
S&P/MOODY'S
RATINGS MATURITY PRINCIPAL VALUE
(UNAUDITED) RATE DATE AMOUNT/SHARES (NOTE 2)
----------- -------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
U.S. TREASURY BOND--5.7%
U.S. Treasury Bond............................... 8.13% 8/15/21 $ 900,000 $ 1,135,710
U.S. Treasury Bond............................... 6.75 8/15/26 2,700,000 2,975,049
-----------
Total U.S. Treasury Bond (Cost $3,846,524)......... 4,110,759
-----------
REGULATED INVESTMENT COMPANIES -- 2.4%
AIM Liquid Assets Money Market Fund................................................... 12,669 $ 12,669
AIM Prime Money Market Fund........................................................... 1,724,372 1,724,372
-----------
Total Regulated Investment Companies (Cost $1,737,041)............................................... 1,737,041
-----------
TOTAL (COST $69,636,785) (a) -- 99.0%................................................................ $71,350,118
===========
</TABLE>
- ---------------
Percentages indicated are based on net assets of $72,085,674.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation............................. $1,913,840
Unrealized depreciation............................. (200,507)
----------
Net unrealized depreciation......................... $1,713,333
==========
</TABLE>
* Floating rate certificates are securities with interest rates that change
whenever a specific interest rate changes. The interest rate is based on an
index of market rates or other index. The rate reflected is the rate in
effect on December 31, 1997.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CORE INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $69,636,785).... $71,350,118
Interest receivable....................................... 1,204,976
Receivable for capital shares sold........................ 14
Prepaid expenses and other assets......................... 7,213
-----------
Total assets................................................ 72,562,321
-----------
LIABILITIES
Distributions payable....................................... 442,725
Accrued expenses:
Administration fees.................................... 9,279
Accounting fees........................................ 2,595
Custodian fees......................................... 3,691
Legal fees............................................. 2,258
Audit fees............................................. 7,969
Other.................................................. 8,130
-----------
Total liabilities........................................... 476,647
-----------
NET ASSETS
Investor Shares........................................ 94,671
Trust Shares........................................... 71,991,003
-----------
$72,085,674
===========
Shares Outstanding ($0.001 par value, 500 million shares
authorized)
Investor Shares........................................ 9,233
Trust Shares........................................... 7,026,230
-----------
7,035,463
===========
Net Asset Value
Investor Shares -- redemption price per share............. $10.25
------
Investor Shares -- maximum sales charge................... 3.00%
------
Investor Shares -- maximum sales charge per share
(100%/(100% -- maximum sales charge)
of net asset adjusted to nearest cent)................. $10.57
======
Trust Shares -- offering and redemption price per share... $10.25
======
COMPOSITION OF NET ASSETS:
Shares of common stock, at par............................ $ 7,035
Additional paid-in capital................................ 70,436,270
Undistributed (distributions in excess of) net investment
income................................................. (32,876)
Net unrealized appreciation from investments.............. 1,713,333*
Accumulated net realized losses on investment
transactions........................................... (38,088)
-----------
Net Assets, December 31, 1997............................... $72,085,674
===========
</TABLE>
- ---------------
* Represents sum of current periods unrealized appreciation plus common trust
fund appreciation. See Note 7.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CORE INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................... $4,283,522
Dividends................................................... 96,251
----------
Total Investment Income..................................... 4,379,773
Expenses
Advisory fees............................................. $ 328,302
Administration fees....................................... 98,491
Distribution fees -- Investor Shares...................... 120,305
Custodian fees............................................ 8,595
Accounting fees........................................... 57,397
Transfer agent fees and expenses.......................... 19,753
Legal fees................................................ 8,799
Audit fees................................................ 20,081
Reports to shareholders................................... 16,299
Amortization of organization expenses..................... 9,572
Directors' fees........................................... 4,420
Insurance expense......................................... 2,860
Registration fees......................................... 3,081
Other expenses............................................ 618
---------
Total expenses before fee waivers...................... 698,573
Less: Fee waivers...................................... (175,965)
---------
Total expenses............................................ 522,608
----------
Net Investment Income....................................... 3,857,165
----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENTS
Net realized gains (losses) on investment transactions.... 14,563
Net change in unrealized appreciation (depreciation) on
investments............................................ 1,897,381
----------
Net Realized and Unrealized Gains (Losses) from
Investments............................................... 1,911,944
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $5,769,109
==========
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CORE INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 (a)
----------------- ---------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income..................................... $ 3,857,165 $ 1,465,659
Net realized gains (losses) on investment transactions.... 14,563 (85,527)
Net change in unrealized appreciation (depreciation) on
investments............................................ 1,897,381 143,278
------------ -----------
Net increase in net assets resulting from operations... 5,769,109 1,523,410
------------ -----------
Distributions to Investor Class
From net investment income................................ (2,755,744) (1,465,659)
Distributions to Trust Class (b)
From net investment income................................ (1,101,421) --
------------ -----------
Total distributions to shareholders......................... (3,857,165) (1,465,659)
------------ -----------
Capital Share Transactions
Proceeds from shares issued............................... 117,853,442 39,728,939
Dividends reinvested...................................... 1,329,244 754,643
Cost of shares redeemed................................... (87,824,216) (1,726,073)
------------ -----------
Net increase in net assets from capital share
transactions........................................... 31,358,470 38,757,509
------------ -----------
Total increase (decrease) in Net Assets..................... 33,270,414 38,815,260
NET ASSETS
Beginning of period....................................... 38,815,260 --
------------ -----------
End of period............................................. $ 72,085,674 $38,815,260
============ ===========
SHARE TRANSACTIONS
Issued.................................................... 11,695,438 3,978,187
Reinvested................................................ 132,886 76,179
Redeemed.................................................. (8,673,388) (173,839)
------------ -----------
Change in shares.......................................... $ 3,154,936 $ 3,880,527
============ ===========
</TABLE>
- ---------------
(a) For the period from April 1, 1996 (commencement of operations) through
December 31, 1996.
(b) For the period from October 3, 1997 (commencement of operations of Trust
Shares) through December 31, 1997.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P/MOODY'S
RATINGS MATURITY PRINCIPAL VALUE
(UNAUDITED) RATE DATE AMOUNT (NOTE 2)
----------- ---- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS -- 53.4%
BANKING -- 6.2%
ABN AMRO Bank......................... A/Aa3 6.63% 10/31/01 $2,000,000 $ 2,022,500
Bankers Trust......................... A/A2 6.75 10/3/01 1,500,000 1,524,375
NationsBank Corp...................... A+/Aa3 7.00 9/15/01 2,000,000 2,050,000
5,596,875
-----------
ENTERTAINMENT -- 1.7%
The Walt Disney Co.................... A/A2 6.38 3/30/01 1,500,000 1,516,875
-----------
FINANCIAL SERVICES -- 9.2%
Associates Corp. N.A.................. AA-/Aa3 7.68 3/3/00 1,500,000 1,548,750
Ford Motor Credit Co.................. A/A1 6.50 2/28/02 2,500,000 2,521,875
General Motors Acceptance Corp........ A-/A3 7.75 1/15/99 2,500,000 2,543,750
Merrill Lynch & Co., Inc.............. AA-/Aa3 6.00 1/15/01 1,750,000 1,745,625
-----------
8,360,000
-----------
INDUSTRIAL GOODS & SERVICES -- 6.3%
Imperial Oil Ltd...................... AA+/Aa2 8.75 10/15/19 3,000,000 3,217,500
Martin Marietta Tech.................. BBB+/A3 6.50 4/15/03 2,500,000 2,531,250
-----------
5,748,750
-----------
INSURANCE -- PROPERTY & CASUALTY -- 3.4%
Travelers/Aetna Property & Casualty... A+/A1 6.75 4/15/01 3,000,000 3,052,500
-----------
PAPER PRODUCTS -- 2.2%
International Paper Co................ A-/A3 6.88 7/10/00 2,000,000 2,037,500
-----------
RAILROADS -- 3.3%
Union Pacific Railroad Co............. A/Aa3 6.44 1/15/98 3,000,000 3,000,524
-----------
RETAIL-STORES -- 4.5%
Dayton Hudson Co...................... BBB+/Baa1 7.50 3/1/99 2,000,000 2,035,000
J C Penney & Co....................... A/A2 7.25 4/1/02 2,000,000 2,072,500
-----------
4,107,500
-----------
UTILITIES-ELECTRIC -- 13.8%
Central Power & Light Co.............. A/A3 6.00 4/1/00 2,000,000 1,995,000
Florida Power & Light Co.............. AA-/Aa3 6.20 2/2/98 2,000,000 2,000,000
Florida Power Corp.................... A+/A1 6.54 7/1/02 2,000,000 2,027,500
MidAmerican Energy.................... A/A3 6.50 12/15/01 2,500,000 2,524,999
National Rural Utilities Corp......... AA-/A1 6.49* 7/10/02 2,000,000 2,022,500
Puget Sound Power & Light............. A-/Baa1 6.61 2/9/00 2,000,000 2,017,500
-----------
12,587,499
-----------
</TABLE>
<TABLE>
<CAPTION>
S&P/MOODY'S
RATINGS MATURITY PRINCIPAL VALUE
(UNAUDITED) RATE DATE AMOUNT (NOTE 2)
----------- ---- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS, CONTINUED:
UTILITIES-GAS -- 2.8%
ENSERCH Corp.......................... BBB/Baa2 7.00% 8/15/99 $ 1,000,000 $ 1,013,750
Smith Enron........................... NR/NR 5.97 12/15/06 1,518,000 1,502,820
-------------
2,516,570
-------------
Total Corporate Bonds (Cost
$48,099,751).......................... 48,524,593
-------------
U.S. GOVERNMENT AGENCIES -- 24.3%
FEDERAL HOME LOAN BANK -- 2.7%
Federal Home Loan Bank,
Callable 2/28/98 @ 100............. 6.00 8/28/01 2,500,000 2,490,825
-------------
FEDERAL HOME LOAN MORTGAGE CORP. -- 2.8%
Federal Home Loan Mortgage Corp.,
Callable 1/23/98 @ 100................ 6.51 12/10/01 2,500,000 2,500,100
-------------
FEDERAL NATIONAL MORTGAGE ASSOC. -- 1.7%
Federal National Mortgage Assoc.,
Callable 11/23/99 @ 100............... 6.35 11/23/01 1,500,000 1,504,965
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOC. -- 15.5%
Government National Mortgage Assoc.,
Pool # 339455...................... 8.00 12/15/07 757,815 788,363
Government National Mortgage Assoc.,
Pool # 358725...................... 8.00 8/15/08 1,371,313 1,426,590
Government National Mortgage Assoc.,
Pool # 392085...................... 7.50 4/15/09 717,155 739,114
Government National Mortgage Assoc.,
Pool # 368641...................... 7.50 4/15/09 648,264 668,114
Government National Mortgage Assoc.,
Pool # 345752...................... 7.50 6/15/09 633,492 652,889
Government National Mortgage Assoc.,
Pool # 376589...................... 8.50 9/15/09 1,167,411 1,215,929
Government National Mortgage Assoc.,
Pool # 380660...................... 8.00 11/15/09 1,466,904 1,526,035
Government National Mortgage Assoc.,
Pool # 392770...................... 8.50 12/15/09 543,702 566,298
Government National Mortgage Assoc.,
Pool # 392814...................... 8.50 12/15/09 951,045 990,571
Government National Mortgage Assoc.,
Pool # 405445...................... 8.00 4/15/10 1,708,307 1,777,169
Government National Mortgage Assoc.,
Pool # 407337...................... 8.00 4/15/10 1,446,950 1,505,276
Government National Mortgage Assoc.,
Pool # 423983...................... 7.50 8/15/11 2,129,497 2,194,702
-------------
14,051,050
-------------
STUDENT LOAN MARKETING ASSOC. -- 1.6%
Student Loan Marketing Assoc.,
Callable 7/23/98 @ 100............. 5.81 1/23/01 1,500,000 1,491,645
-------------
Total U.S. Government Agencies
(Cost $21,522,621).................... 22,038,585
-------------
U.S. TREASURY NOTES -- 18.6%
U.S. Treasury Note.................... 7.75 1/31/00 1,500,000 1,560,600
U.S. Treasury Note.................... 6.63 7/31/01 2,000,000 2,057,060
U.S. Treasury Note.................... 6.25 10/31/01 1,000,000 1,017,200
</TABLE>
<TABLE>
<CAPTION>
MATURITY PRINCIPAL VALUE
RATE DATE AMOUNT/SHARES (NOTE 2)
---- -------- ------------- -----------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES, CONTINUED:
U.S. Treasury Note.................... 5.88% 11/30/01 $1,600,000 $ 1,606,800
U.S. Treasury Note.................... 6.13 12/31/01 2,000,000 2,027,120
U.S. Treasury Note.................... 6.25 1/31/02 4,000,000 4,073,000
U.S. Treasury Note.................... 6.25 6/30/02 2,000,000 2,040,680
U.S. Treasury Note.................... 5.88 2/15/04 2,500,000 2,523,425
-----------
Total U.S. Treasury Notes (Cost
$16,689,126).......................... 16,905,885
-----------
REGULATED INVESTMENT COMPANIES -- 2.6%
AIM Liquid Assets Money Market Fund... 68,357 68,357
AIM Prime Money Market Fund........... 2,267,373 2,267,373
-----------
Total Regulated Investment Companies
(Cost $2,335,730)..................... 2,335,730
-----------
TOTAL (Cost $88,647,228) (a) -- 98.9%... $89,804,793
===========
</TABLE>
- ---------------
Percentages indicated are based on net assets of $90,779,511.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation............................. $ 1,168,424
Unrealized depreciation............................. (10,859)
-----------
Net unrealized appreciation......................... $ 1,157,565
===========
</TABLE>
* Variable rate security. Rate represents rate in effect at December 31, 1997.
Maturity date reflects the next rate change date.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $88,647,228).... $89,804,793
Interest receivable....................................... 1,501,315
Receivable for capital shares issued...................... 470
Deferred organization costs............................... 15,804
Prepaid expenses.......................................... 9,818
-----------
Total assets................................................ 91,332,200
-----------
LIABILITIES
Distributions payable..................................... 490,633
Payable for capital shares redeemed....................... 21,788
Accrued expenses and other payables:
Administration fees.................................... 11,689
Distribution fees -- Investor Shares................... 775
Accounting fees........................................ 2,740
Custodian fees......................................... 7,021
Audit fees............................................. 8,643
Other.................................................. 9,400
-----------
Total liabilities........................................... 552,689
-----------
NET ASSETS
Investor Shares........................................... 5,893,596
Trust Shares.............................................. 84,885,915
-----------
$90,779,511
===========
Shares Outstanding ($0.001 par value, 500 million shares
authorized)
Investor Shares........................................... 590,238
Trust Shares.............................................. 8,502,439
-----------
9,092,677
===========
NET ASSET VALUE
Investor Shares -- redemption price per share............. $9.99
------
Investor Shares -- maximum sales charge................... 3.00%
------
Investor Shares -- maximum sales charge per share
(100%/(100% -- maximum sales charge) of net asset
adjusted to nearest cent).............................. $10.30
======
Trust Shares -- offering and redemption price per share... $9.98
======
COMPOSITION OF NET ASSETS:
Shares of common stock, at par............................ $ 9,093
Additional paid-in capital................................ 89,601,873
Undistributed net investment income....................... 843
Net unrealized appreciation from investments.............. 1,157,565
Accumulated net realized gains from investment
transactions........................................... 10,137
-----------
Net Assets, December 31, 1997............................... $90,779,511
===========
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................... $6,476,662
Dividends................................................... 191,281
----------
Total Investment Income..................................... 6,667,943
Expenses
Advisory fees............................................. $ 496,933
Administration fees....................................... 149,081
Distribution fees -- Investor Shares...................... 193,649
Custodian fees............................................ 27,190
Accounting fees........................................... 54,640
Transfer agent fees and expenses.......................... 25,538
Legal fees................................................ 6,410
Audit fees................................................ 24,047
Reports to shareholders................................... 23,398
Amortization of organization expenses..................... 11,680
Directors' fees........................................... 5,024
Insurance fees............................................ 4,028
Registration fees......................................... 4,533
Other expenses............................................ 1,466
----------
Total expenses before fee waivers...................... 1,027,617
Less: Fee Waivers...................................... (264,877)
----------
Total expenses......................................... 762,740
----------
Net Investment Income....................................... 5,905,203
----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENTS
Net realized gains (losses) on investment transactions.... 87,039
Net change in unrealized appreciation (depreciation) on
investments............................................ 185,389
----------
Net Realized and Unrealized Gains (Losses) from
Investments............................................... 272,428
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $6,177,631
==========
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income..................................... $ 5,905,203 $ 6,053,847
Net realized gains (losses) on investment transactions.... 87,039 11,672
Net change in unrealized appreciation (depreciation) on
investments............................................ 185,389 (1,745,157)
------------- ------------
Net increase in net assets resulting from operations...... 6,177,631 4,320,362
------------- ------------
Distributions to Investor Class
From net investment income................................ (4,572,712) (6,053,731)
From net realized gains................................... (3,598) (11,672)
In excess of net realized gains........................... -- (38,269)
Distributions to Trust Class (a)
From net investment income................................ (1,330,194) --
From net realized gains................................... (49,934) --
------------- ------------
Total distributions to shareholders......................... (5,956,438) (6,103,672)
------------- ------------
Capital Share Transactions
Proceeds from shares issued............................... 115,326,621 25,676,365
Dividends reinvested...................................... 2,802,526 2,714,914
Cost of shares redeemed................................... (125,767,873) (31,792,677)
------------- ------------
Net increase (decrease) in net assets from capital share
transactions........................................... (7,638,726) (3,401,398)
------------- ------------
Total increase (decrease) in Net Assets..................... (7,417,533) (5,184,708)
NET ASSETS
Beginning of period....................................... 98,197,044 103,381,752
------------- ------------
End of period............................................. $ 90,779,511 $ 98,197,044
============= ============
SHARE TRANSACTIONS:
Issued.................................................... 11,542,505 2,575,513
Reinvested................................................ 281,855 272,329
Redeemed.................................................. (12,593,661) (3,194,471)
------------- ------------
Change in shares.......................................... (769,301) (346,629)
============= ============
</TABLE>
- ---------------
(a) For the period from October 3, 1997 (commencement of operations of Trust
Shares) through December 31, 1997.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION U.S. GOVERNMENT PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATURITY PRINCIPAL VALUE
RATE DATE AMOUNT (NOTE 2)
---- -------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCIES -- 48.3%
FEDERAL FARM CREDIT BANK -- 3.7%
Federal Farm Credit Bank, Callable 8/27/98 @ 100.......... 7.34% 8/27/07 $ 750,000 $ 753,248
-----------
FEDERAL HOME LOAN BANK -- 3.7%
Federal Home Loan Bank, Callable 2/28/98 @ 100............ 6.00 8/28/01 750,000 747,248
-----------
FEDERAL HOME LOAN MORTGAGE CORP. -- 5.0%
Federal Home Loan Mortgage Corp........................... 6.16 9/25/02 500,000 503,515
Federal Home Loan Mortgage Corp., Callable 9/30/98 @
100.................................................... 6.58 9/30/02 500,000 500,040
-----------
1,003,555
-----------
FEDERAL NATIONAL MORTGAGE ASSOC. -- 8.8%
Federal National Mortgage Assoc........................... 6.10 10/5/00 750,000 751,597
Federal National Mortgage Assoc........................... 6.44 8/14/07 500,000 512,185
Federal National Mortgage Assoc.,Callable 11/14/02 @
100.................................................... 6.65 11/14/07 500,000 507,520
-----------
1,771,302
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOC. -- 21.6%
Government National Mortgage Assoc., Pool # 152718........ 9.00 12/15/01 63,029 66,279
Government National Mortgage Assoc., Pool # 248038........ 9.00 2/15/03 167,741 176,390
Government National Mortgage Assoc., Pool # 407408........ 7.50 5/15/10 771,751 795,382
Government National Mortgage Assoc., Pool # 423984........ 7.00 8/15/11 920,257 938,081
Government National Mortgage Assoc., Pool # 423914........ 7.50 8/15/11 918,199 946,313
Government National Mortgage Assoc., Pool # 423923........ 7.00 9/15/11 723,858 737,879
Government National Mortgage Assoc., Pool # 431451........ 7.50 10/15/11 663,425 683,739
-----------
4,344,063
-----------
STUDENT LOAN MARKETING ASSOC. -- 3.0%
Student Loan Marketing Assoc., Callable 7/23/98 @ 100..... 5.81 1/23/01 600,000 596,658
-----------
US GOVERNMENT AGENCY -- DISCOUNT -- 2.5%
FC Discount Note Security................................. 5.95* 1/21/98 500,000 498,332
-----------
Total U.S. Government Agencies (Cost $9,634,281)............ 9,714,406
-----------
U.S. TREASURY NOTES -- 48.6%
U.S. Treasury Note........................................ 6.13 5/15/98 750,000 751,875
U.S. Treasury Note........................................ 5.75 12/31/98 1,000,000 1,001,720
U.S. Treasury Note........................................ 5.88 3/31/99 1,250,000 1,253,638
U.S. Treasury Note........................................ 6.00 8/15/99 1,000,000 1,005,100
U.S. Treasury Note........................................ 6.38 5/15/00 500,000 507,670
U.S. Treasury Note........................................ 6.25 5/31/00 750,000 759,458
U.S. Treasury Note........................................ 7.50 11/15/01 2,500,000 2,651,349
U.S. Treasury Note........................................ 7.50 5/15/02 1,000,000 1,067,450
U.S. Treasury Note........................................ 6.25 6/30/02 750,000 765,255
-----------
Total U.S. Treasury Notes (Cost $9,596,089)................. 9,763,515
-----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------- -----------
<S> <C> <C>
REGULATED INVESTMENT COMPANIES -- 2.7%
Dreyfus Prime Money Market Fund........................... 44,443 $ 44,443
AIM Treasury Money Market Fund............................ 492,142 492,142
-----------
Total Regulated Investment Companies (Cost $536,585)........ 536,585
-----------
TOTAL (COST $19,766,955) (A) 99.6%.......................... $20,014,506
===========
</TABLE>
- ---------------
Percentages indicated are based on net assets of $20,103,351.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation................................. $265,958
Unrealized depreciation................................. $(18,407)
--------
Net unrealized appreciation............................. $247,551
========
</TABLE>
* Yield effective at issue
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION U.S. GOVERNMENT PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $19,766,955).... $20,014,506
Interest and dividends receivable......................... 219,220
Deferred organization costs............................... 1,586
Prepaid expenses and other assets......................... 749
-----------
Total assets................................................ 20,236,061
-----------
LIABILITIES
Distributions payable..................................... 95,806
Accrued expenses:
Administration fees.................................... 677
Accounting fees........................................ 4,522
Custodian fees......................................... 2,961
Legal fees............................................. 13,091
Audit fees............................................. 9,496
Registration fees...................................... 2,284
Reports to shareholders................................ 3,645
Other.................................................. 228
-----------
Total liabilities........................................... 132,710
===========
NET ASSETS
Investor Shares........................................... $20,103,351
===========
Shares Outstanding ($0.001 par value, 500 million shares
authorized)
Investor Shares........................................... 1,985,989
===========
NET ASSET VALUE
Investor Shares -- redemption price per share............. $10.12
------
Investor Shares -- maximum sales charge................... 3.00%
------
Investor Shares -- maximum sales charge per share
(100%/(100% -- maximum sales charge)
of net asset adjusted to nearest cent)................. $10.43
======
COMPOSITION OF NET ASSETS:
Shares of common stock, at par............................ $ 1,986
Additional paid-in capital................................ 19,856,153
Undistributed (distributions in excess of) net investment
income................................................. (1,440)
Net unrealized appreciation from investments.............. 247,551*
Accumulated net realized losses on investment
transactions........................................... (899)
-----------
Net Assets, December 31, 1997............................... $20,103,351
===========
</TABLE>
- ---------------
* Represents sum of current periods unrealized appreciation plus common trust
fund appreciation. See Note 7.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION U.S. GOVERNMENT PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1997 (a)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................... $ 990,841
Dividends................................................... 37,978
----------
Total Investment Income..................................... 1,028,819
Expenses
Advisory fees............................................. $ 81,110
Administration fees....................................... 24,333
Distribution fees......................................... 40,554
Custodian fees............................................ 9,110
Accounting fees........................................... 42,745
Transfer agent fees and expenses.......................... 19,012
Legal fees................................................ 17,196
Audit fees................................................ 15,523
Reports to shareholders................................... 4,707
Amortization of organization expenses..................... 1,520
Directors' fees........................................... 807
Insurance expense......................................... 689
Registration fees......................................... 4,952
Other expenses............................................ 599
---------
Total expenses before fee waivers...................... 262,857
Less: Fee waivers...................................... (99,957)
---------
Total expenses....................................... 162,900
----------
Net Investment Income....................................... 865,919
----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENTS
Net realized gains (losses) on investment transactions.... (2,339)
Net change in unrealized appreciation (depreciation) on
investments............................................ 220,368
----------
Net Realized and Unrealized Gains (Losses) from
Investments............................................... 218,029
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $1,083,948
==========
</TABLE>
- ---------------
(a) For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION U.S. GOVERNMENT PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997 (a)
---------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income..................................... $ 865,919
Net realized gains (losses) on investment transactions.... (2,339)
Net change in unrealized appreciation (depreciation) on
investments............................................ 220,368
-----------
Net increase in net assets resulting from operations...... 1,083,948
-----------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income................................ (865,919)
-----------
Total distributions to shareholders......................... (865,919)
-----------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares issued............................... 22,172,121
Dividends reinvested...................................... 4,769
Cost of shares redeemed................................... (2,291,568)
-----------
Net increase in net assets from capital share
transactions........................................... 19,885,322
-----------
Total increase (decrease) in Net Assets..................... 20,103,351
NET ASSETS
Beginning of period....................................... --
-----------
End of period............................................. $20,103,351
-----------
SHARE TRANSACTIONS
Issued.................................................... 2,213,380
Reinvested................................................ 473
Redeemed.................................................. (227,864)
-----------
Change in shares.......................................... 1,985,989
===========
</TABLE>
- ---------------
(a) For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P/MOODY'S
RATINGS MATURITY PRINCIPAL VALUE
(UNAUDITED) RATE DATE AMOUNT (NOTE 2)
----------- ----- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS -- 97.8%
GEORGIA -- 2.7%
Georgia Municipal Electric Authority
Power Revenue, Callable 1/1/08 @
100, MBIA.......................... AAA/Aaa 6.50% 1/1/12 $2,300,000 $ 2,714,000
------------
KENTUCKY -- 4.7%
Kentucky Infrastructure Authority
Ref-Revolving, Series L, Callable
6/1/07 @ 101....................... A/A2 5.00 6/1/09 2,680,000 2,770,449
Louisville & Jefferson County
Metropolitan Sewer District, Sewer
& Drain Systems,
Revenue Bond, MBIA................. AAA/Aaa 6.50 5/15/07 1,770,000 2,050,988
------------
4,821,437
------------
MASSACHUSETTS -- 1.9%
Worcester Mass, GO, Callable 8/1/07 @
101, MBIA.......................... AAA/Aaa 5.00 8/1/15 1,970,000 1,972,463
------------
MICHIGAN -- 1.7%
Detroit, Michigan City School
District,
Series A, GO, AMBAC................ AAA/Aaa 6.50 5/1/08 1,500,000 1,747,500
------------
MINNESOTA -- 2.0%
Minnesota State, GO................... AAA/Aaa 5.50 5/1/04 1,000,000 1,075,000
Minnesota State, GO, Callable 8/1/07 @
100................................ AAA/Aaa 4.90 8/1/13 1,000,000 1,003,750
------------
2,078,750
------------
MISSISSIPPI -- 2.1%
Mississippi State Capital
Improvements -- A, GO, Callable
7/1/07 @ 100....................... AA/Aa3 5.00 7/1/08 1,000,000 1,038,750
Mississippi State Refunded, Series B,
GO................................. AA/Aa3 5.90 11/15/10 1,000,000 1,135,000
------------
2,173,750
------------
NEW YORK -- 4.3%
Suffolk County Water Authority
Waterworks, Revenue Bonds, Callable
6/1/08
@ 100, MBIA........................ AAA/Aaa 6.00 6/1/09 2,000,000 2,262,500
Transportation Authority, NY & NJ
Construction,
Eighty-Fifth Series................ AA-/A1 5.38 3/1/28 2,000,000 2,130,000
------------
4,392,500
------------
PENNSYLVANIA -- 1.0%
Indiana County Industrial Development
Authority, Pollution Control
Revenue, MBIA...................... AAA/Aaa 5.35 11/1/10 1,000,000 1,070,000
------------
</TABLE>
<TABLE>
<CAPTION>
S&P/MOODY'S
RATINGS MATURITY PRINCIPAL VALUE
(UNAUDITED) RATE DATE AMOUNT (NOTE 2)
----------- ----- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS, CONTINUED:
SOUTH CAROLINA -- 2.2%
Charleston Waterworks & Sewer Revenue
Refunded & Improvements, Callable
1/1/02 @ 100, MBIA................. AAA/Aaa 5.00% 1/1/22 $ 2,250,000 $ 2,213,438
--------------
TENNESSEE -- 69.2%
Blount County Public Building
Authority, GO, Callable 3/1/07 @
101, FGIC.......................... AA+/Aaa 5.13 3/1/19 1,000,000 1,001,250
Bristol Health & Educational
Facilities Revenue, Bristol
Memorial Hospital, Revenue Bond,
FGIC............................... AAA/Aaa 6.75 9/1/07 2,140,000 2,530,549
Dickson County, GO, FGIC.............. NR/Aaa 6.25 4/1/08 1,220,000 1,377,075
Dickson County, GO, Callable 4/1/08
@ 100, FGIC........................ NR/Aaa 5.00 4/1/14 2,120,000 2,122,650
Hamilton County Industrial Development
Board Lease, Rent Revenue, FGIC.... AAA/Aaa 5.75 9/1/05 1,000,000 1,092,500
Hamilton County Public School
Improvements, Series A, GO,
Callable 10/1/02 @ 102............. NR/Aa2 5.50 10/1/04 1,930,000 2,065,100
Humphreys County Industrial
Development Board, Solid Waste
Disposal Revenue,
E.I. Dupont de Nemours & Co.
Project, Callable 5/1/04 @ 102..... AA-/Aa3 6.70 5/1/24 1,455,000 1,616,869
Johnson City Health & Educational
Improvements, Revenue Bond,
Prerefunded 7/1/01 @ 102, MBIA..... AAA/Aaa 6.75 7/1/16 1,000,000 1,102,500
Johnson City Medical Center, Revenue
Bond, Callable 7/1/04 @ 102,
MBIA............................... AAA/Aaa 5.00 7/1/13 1,000,000 996,250
Johnson City Public Works, Callable
9/1/04
@ 101, MBIA........................ AAA/Aaa 5.00 9/1/22 1,000,000 980,000
Johnson City Refunding, GO, FGIC...... AAA/Aaa 5.60* 5/1/11 1,430,000 756,113
Knox County, GO, Callable 4/1/03 @
102................................ AA/Aa 6.50 4/1/04 1,965,000 2,203,256
Knox County, GO, Callable 2/1/04 @
101................................ AA/Aa3 5.00 2/1/15 1,000,000 1,006,250
Knox County Health, Education &
Housing Facilities Board, Hospital
Facilities Revenue, Fort Sanders
Alliance, MBIA..................... AAA/Aaa 6.25 1/1/13 1,000,000 1,155,000
Lawrenceburg Electric, Revenue Bond,
MBIA............................... AAA/Aaa 6.63 7/1/18 1,250,000 1,514,063
Memphis, GO........................... AA/Aa 6.25 7/1/04 1,000,000 1,111,250
Memphis, GO........................... AA/Aa 6.00 11/1/06 1,000,000 1,113,750
Memphis, GO, Callable 7/1/05 @ 101.... AA/Aa 5.00 7/1/17 1,200,000 1,189,500
Memphis-Shelby County Airport
Authority,
Revenue Bonds, MBIA................ AAA/Aaa 6.25 2/15/09 1,790,000 2,033,888
Metropolitan Government, Nashville &
Davidson County, GO, Callable
5/15/06 @ 101...................... AA/Aa 5.60 5/15/07 1,045,000 1,137,744
Metropolitan Government, Nashville &
Davidson County, GO, Callable
5/15/07 @ 102...................... AA/Aa2 5.00 5/15/13 2,000,000 2,002,500
Metropolitan Government, Nashville &
Davidson County, GO, Callable
11/15/06 @ 101..................... AA/Aa2 5.13 11/15/13 1,555,000 1,582,213
Metropolitan Government, Nashville &
Davidson County, GO, Callable
5/15/07 @ 102...................... AA/Aa2 5.13 5/15/18 1,000,000 1,002,500
Metropolitan Government, Nashville &
Davidson County, Series A, GO,
Callable 11/15/06 @ 101............ AA/Aa2 5.13 11/15/19 1,000,000 1,007,500
Metropolitan Government, Nashville &
Davidson County TN Health &
Education Facilities Board,
Refunding & Improvement -- Meharry
Medical College, AMBAC............. AAA/Aaa 6.00 12/1/09 1,000,000 1,142,500
</TABLE>
<TABLE>
<CAPTION>
S&P/MOODY'S
RATINGS MATURITY PRINCIPAL VALUE
(UNAUDITED) RATE DATE AMOUNT (NOTE 2)
----------- ----- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS, CONTINUED:
TENNESSEE, CONTINUED:
Metropolitan Government, Nashville &
Davidson County Water & Sewer
Revenue............................ AAA/AAA 6.50% 4/1/03 $ 1,000,000 $ 1,102,500
Metropolitan Government, Nashville &
Davidson County, Health &
Educational Facilities Board,
Refunding & Improvements, Meharry
Medical College, AMBAC............. AAA/Aaa 6.00 12/1/13 2,030,000 2,293,900
Metropolitan Government, Nashville &
Davidson County, Meharry Medical
College Project, Prerefunded
12/1/04 @ 102, AMBAC............... AAA/AAA 6.88 12/1/24 4,750,000 5,545,624
Metropolitan Government, Nashville &
Davidson County, TN Energy Project,
Series B,
Revenue Bond....................... AAA/Aaa 6.00 7/1/10 1,335,000 1,513,556
Metropolitan Government, Nashville &
Davidson County, Vanderbilt
University, Series A............... AA/Aa3 5.75 1/1/07 1,035,000 1,135,913
Rutherford County Capital Outlay,
GO................................. AA-/Aa3 6.00 4/1/04 1,370,000 1,498,438
Rutherford County Capital Outlay,
Series A........................... AA-/Aa3 6.25 5/1/05 3,500,000 3,919,999
Shelby County, Series A, GO........... AA+/Aa2 6.75 4/1/05 1,000,000 1,148,750
Shelby County, Series A, GO........... AA+/Aa2 5.63 6/1/05 1,000,000 1,083,750
Shelby County, Series B, GO........... AA+/Aa2 6.00 12/1/05 2,000,000 2,230,000
Shelby County, Series B, GO,
Callable 8/1/07 @ 101.............. AA+/Aa2 5.13 8/1/19 1,000,000 1,005,000
Shelby County Health, Education &
Housing Facilities Board, Hospital
Revenue, Methodist Health Systems,
Inc., Callable 8/1/07 @ 102,
MBIA............................... AAA/Aaa 5.20 8/1/13 2,020,000 2,050,300
Shelby County Health, Education &
Housing Facilities Board, Hospital
Revenue Bond, Methodist Health
Systems, Inc., MBIA................ AAA/Aaa 6.25 8/1/07 2,000,000 2,285,000
Shelby County Health, Educational &
Housing Facilities Board, Hospital
Revenue, Methodist Health Systems,
Inc., MBIA......................... AAA/Aaa 5.50 8/1/05 3,000,000 3,228,749
Shelby County Health, Educational &
Housing Facilities Board, Hospital
Revenue, Methodist Health Systems,
Inc., MBIA......................... AAA/Aaa 6.25 8/1/08 2,000,000 2,307,500
Tennessee State, Series B, GO......... AA+/Aaa 6.20 6/1/01 1,350,000 1,447,875
Tennessee State Reference, Series B,
GO................................. AA+/Aaa 6.00 5/1/05 1,000,000 1,112,500
Williamson County Public Improvement,
GO................................. NR/Aa1 6.25 4/1/06 1,000,000 1,130,000
--------------
70,882,124
--------------
TEXAS -- 3.2%
Humble Independent School District,
GO................................. AAA/Aaa 6.00 2/15/09 1,900,000 2,135,125
University of Texas Revenue Financing
System, Series A................... AAA/Aa1 6.00 8/15/05 1,000,000 1,108,750
--------------
3,243,875
--------------
WISCONSIN -- 2.8%
Milwaukee, GO......................... AA+/Aa1 6.00 2/1/10 2,540,000 2,873,375
--------------
Total Municipal Bonds (Cost
$97,291,469).......................... 100,183,212
--------------
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
-------- ------------
<S> <C> <C>
REGULATED INVESTMENT COMPANIES -- 0.9%
AIM Tax Free Money Market Fund............................ 882,167 $ 882,167
Dreyfus Tax Free Money Market Fund........................ 1,264 1,264
------------
Total Regulated Investment Companies (Cost $883,431)........ 883,431
------------
TOTAL (COST $98,174,899) (A) -- 98.7%....................... $101,066,643
============
</TABLE>
- ---------------
Percentages indicated are based on net assets of $102,410,895.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation............................. $2,891,744
Unrealized depreciation............................. --
----------
Net unrealized depreciation......................... $2,891,744
==========
</TABLE>
* Yield effective at issue.
AMBAC = Insured by American Municipal Bond Assurance Corp.
FGIC = Insured by Financial Guaranty Insurance Corp.
GO = General Obligation
MBIA = Insured by Municipal Bond Insurance Assoc.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $98,174,899).... $101,066,643
Interest receivable....................................... 1,428,989
Receivable for investment securities sold................. 1,311,083
Deferred organization costs............................... 15,712
Prepaid expenses.......................................... 9,697
------------
Total assets................................................ 103,832,124
------------
LIABILITIES
Distributions payable..................................... 377,948
Payable for investment securities purchased............... 995,000
Payable for capital shares redeemed....................... 10,263
Accrued expenses:
Administration fees.................................... 13,036
Distribution fees--Investor Shares..................... 218
Accounting fees........................................ 3,124
Custodian fees......................................... 2,833
Audit fees............................................. 9,595
Other.................................................. 9,212
------------
Total liabilities........................................... 1,421,229
------------
NET ASSETS
Investor Shares........................................ 1,668,661
Trust Shares........................................... 100,742,234
------------
$102,410,895
============
Shares Outstanding ($0.001 par value, 500 million shares
authorized)
Investor Shares........................................ 163,916
Trust Shares........................................... 9,897,987
------------
10,061,903
============
NET ASSET VALUE
Investor Shares -- redemption price per share............. $10.18
------
Investor Shares -- maximum sales charge................... 3.00%
------
Investor Shares -- maximum sales charge per share
(100%/(100%--maximum sales charge)
of net asset adjusted to nearest cent)................. $10.49
======
Trust Shares--offering and redemption price per share....... $10.18
-----
------
COMPOSITION OF NET ASSETS:
Shares of common stock, at par............................ $ 10,062
Additional paid-in capital................................ 100,163,732
Undistributed net investment income....................... 5,860
Net unrealized appreciation from investments.............. 2,891,744*
Accumulated net realized losses from investment
transactions........................................... (660,503)
------------
Net Assets, December 31, 1997............................... $102,410,895
============
</TABLE>
- ---------------
* Represents sum of current period's unrealized appreciation plus common trust
fund appreciation. See Note 7.
See Notes to Financial Statements
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................... $4,769,144
Dividends................................................... 158,366
----------
Total Investment Income..................................... 4,927,510
Expenses
Advisory fees............................................. $ 502,268
Administration fees....................................... 150,681
Distribution fees--Investor Shares........................ 189,842
Custodian fees............................................ 26,724
Accounting fees........................................... 51,211
Transfer agent fees and expenses.......................... 25,511
Legal fees................................................ 8,360
Audit fees................................................ 26,032
Reports to shareholders................................... 22,841
Amortization of organization expenses..................... 11,680
Directors' fees........................................... 5,841
Insurance expense......................................... 4,232
Registration fees......................................... 4,333
Other expenses............................................ 7,553
-----------
Total expenses before fee waivers...................... 1,037,109
Less: Fee waivers...................................... (268,092)
-----------
Total expenses......................................... 769,017
----------
Net Investment Income....................................... 4,158,493
----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENTS
Net realized gains (losses) on investment transactions.... 495,596
Net change in unrealized appreciation (depreciation) on
investments............................................ 2,311,170
----------
Net Realized and Unrealized Gains (Losses) from
Investments............................................... 2,806,776
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $6,965,259
==========
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income..................................... $ 4,158,493 $ 3,906,644
Net realized gains (losses) on investment transactions.... 495,596 (577,774)
Net change in unrealized appreciation (depreciation) on
investments............................................ 2,311,170 (2,118,918)
------------- ------------
Net increase in net assets resulting from operations... 6,965,259 1,209,952
------------- ------------
DISTRIBUTIONS TO INVESTOR CLASS
From net investment income................................ (3,124,095) (3,905,475)
DISTRIBUTIONS TO TRUST CLASS (A)
From net investment income................................ (1,034,398) --
------------- ------------
Total distributions to shareholders......................... (4,158,493) (3,905,475)
------------- ------------
Capital Share Transactions
Proceeds from shares issued............................... 126,708,115 9,672,959
Dividends reinvested...................................... 233,018 187,651
Cost of shares redeemed................................... (115,420,799) (13,224,484)
------------- ------------
Net increase (decrease) in net assets from capital share
transactions........................................... 11,520,334 (3,363,874)
------------- ------------
Total increase (decrease) in Net Assets..................... 14,327,100 (6,059,397)
NET ASSETS
Beginning of period....................................... 88,083,795 94,143,192
------------- ------------
End of period............................................. $ 102,410,895 $ 88,083,795
============= ============
SHARE TRANSACTIONS
Issued.................................................... 12,634,903 980,116
Reinvested................................................ 23,483 19,014
Redeemed.................................................. (11,495,098) (1,339,773)
------------- ------------
Change in shares.......................................... 1,163,288 (340,643)
============= ============
</TABLE>
- ---------------
(a) For the period from October 3, 1997 (commencement of operations of Trust
Shares) through December 31, 1997.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P/MOODY'S
RATINGS MATURITY PRINCIPAL VALUE
(UNAUDITED) RATE DATE AMOUNT (NOTE 2)
----------- -------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS -- 98.7%
ALABAMA -- 10.5%
Columbia Industrial Development Board............ A/A2 4.50%* 10/1/22 $ 2,400,000 $ 2,400,000
-----------
NEW JERSEY -- 4.8%
Morris County, GO................................ AAA/Aaa 6.50 8/1/02 1,000,000 1,101,250
-----------
TENNESSEE -- 83.4%
Chattanooga Public & Sewer Improvements, GO...... AA-/A1 7.75 8/1/01 550,000 616,688
Hamilton County Industrial Development Board,
Lease/Rent Revenue Bond, FGIC................. AAA/Aaa 5.50 9/1/02 750,000 792,188
Hamilton County Public School Improvements,
Series A, GO, Callable 10/1/02 @ 102.......... NR/Aa2 5.50 10/1/04 1,000,000 1,070,000
Johnson City Health & Educational Improvements,
Revenue Bond, Prerefunded 7/1/01 @ 102,
MBIA.......................................... AAA/Aaa 6.75 7/1/16 1,000,000 1,102,500
Knox County, GO, Callable 4/1/03 @ 102........... AA/Aa 6.50 4/1/04 1,000,000 1,121,250
Madison County, GO............................... NR/A1 4.40 4/1/02 1,015,000 1,023,881
Memphis, GO...................................... AA/Aa2 6.00 7/1/03 500,000 543,125
Memphis, GO...................................... AA/Aa 6.00 11/1/03 500,000 548,125
Memphis, GO...................................... AA/Aa2 6.00 7/1/04 1,000,000 1,096,250
Memphis Electrical System Revenue Refunding,
Revenue Bond.................................. AA/Aa 5.80 1/1/03 1,000,000 1,071,250
Metropolitan Government, Nashville & Davidson
County Energy Production, Series A,
Revenue Bond, Callable 7/1/07 @ 101, AMBAC.... AAA/Aaa 5.25 7/1/13 1,500,000 1,541,250
Metropolitan Government, Nashville & Davidson
County Energy Production Facilities, Revenue
Bond, AMBAC................................... AAA/Aaa 5.20 7/1/05 1,000,000 1,061,250
Metropolitan Government, Nashville & Davidson
County, TN Health & Education Facilities Board
Revenue,
The Vanderbilt University, Series A........... AA/Aa3 6.00 7/1/07 625,000 700,781
Metropolitan Nashville Airport Improvement,
Revenue Bond, FGIC............................ AAA/Aaa 5.00** 7/1/02 1,000,000 1,033,750
Shelby County Health, Education & Housing
Facilities Board, Hospital Revenue Bond,
Methodist Health Systems, Inc., MBIA.......... AAA/Aaa 6.25 8/1/07 1,500,000 1,713,749
Shelby County Health, Education & Housing
Facilities Board, Hospital Revenue Bond,
Methodist Health Systems, Callable 8/1/07 @
102, MBIA..................................... AAA/Aaa 5.25 8/1/14 750,000 761,250
Shelby County Refunded, Series B, GO............. AA+/Aa2 5.00*** 8/1/03 1,000,000 1,041,250
Tennessee State, Series B, GO,
Prerefunded 6/1/01 @ 102...................... AA+/Aaa 6.50 6/1/03 1,115,000 1,216,744
Tennessee State Reference, Series C, GO.......... AA+/Aaa 5.00 3/1/05 1,000,000 1,047,500
-----------
19,102,781
-----------
Total Municipal Bonds (Cost $22,302,745)........................ 22,604,031
-----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
--------- -----------
<S> <C> <C>
REGULATED INVESTMENT COMPANIES -- 9.0%
AIM Tax Free Money Market Fund............................ 1,071,992 1,071,992
Dreyfus Tax Free Money Market Fund........................ 985,405 985,405
-----------
Total Regulated Investment Companies (Cost $2,057,397)...... 2,057,397
-----------
TOTAL (COST $24,360,141) (A) -- 107.7%...................... $24,661,428
===========
</TABLE>
- ---------------
Percentages indicated are based on net assets of $22,893,060.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation............................. $309,338
Unrealized depreciation............................. (8,051)
--------
Net unrealized depreciation......................... $301,287
========
</TABLE>
* Variable Rate Security. Rate represents rate in effect at December 31, 1997.
** When issued security.
*** Collateral for when issued security.
AMBAC = Insured by American Municipal Bond Assurance Corp.
FGIC = Insured by Financial Guaranty Insurance Corp.
GO = General Obligation
MBIA = Insured by Municipal Bond Insurance Assoc.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $24,360,141).... $24,661,428
Interest receivable....................................... 391,578
Deferred organization costs............................... 1,767
Prepaid expenses and other assets......................... 890
-----------
Total assets................................................ 25,055,663
-----------
LIABILITIES
Distributions payable..................................... 76,494
Payable for investment securities purchased............... 2,053,065
Accrued expenses:
Administration fees.................................... 788
Accounting fees........................................ 3,966
Custodian fees......................................... 2,819
Legal fees............................................. 11,935
Audit fees............................................. 9,489
Other.................................................. 4,047
-----------
Total liabilities........................................... 2,162,603
-----------
NET ASSETS
Investor Shares........................................... $22,893,060
===========
Shares Outstanding ($0.001 par value, 500 million shares
authorized)
Investor Shares........................................... 2,259,099
===========
NET ASSET VALUE
Investor Shares -- redemption price per share............. $10.13
------
Investor Shares -- maximum sales charge................... 3.00%
------
Investor Shares -- maximum sales charge per share
(100%/(100% -- maximum sales charge)
of net asset adjusted to nearest cent)................. $10.44
======
COMPOSITION OF NET ASSETS:
Shares of common stock, at par............................ $ 2,259
Additional paid-in capital................................ 22,584,308
Net unrealized appreciation from investments.............. 301,287*
Accumulated net realized gains from investment
transactions........................................... 5,206
-----------
Net Assets, December 31, 1997............................... $22,893,060
===========
</TABLE>
- ---------------
* Represents sum of current period's unrealized appreciation plus common trust
fund appreciation. See Note 7.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1997 (a)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................... $800,918
Dividends................................................... 34,832
--------
Total Investment Income..................................... 835,750
Expenses
Advisory fees............................................. $ 93,669
Administration fees....................................... 28,101
Distribution fees......................................... 46,847
Custodian fees............................................ 10,226
Accounting fees........................................... 43,086
Transfer agent fees and expenses.......................... 18,871
Legal fees................................................ 16,836
Audit fees................................................ 15,523
Reports to shareholders................................... 5,259
Amortization of organization expenses..................... 1,824
Directors' fees........................................... 912
Insurance expense......................................... 795
Registration fees......................................... 3,836
Other expenses............................................ 257
---------
Total expenses before fee waivers...................... 286,042
Less: Fee waivers...................................... (102,123)
---------
Total expenses......................................... 183,919
--------
Net Investment Income....................................... 651,831
--------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENTS
Net realized gains (losses) on investment transactions.... 5,206
Net change in unrealized appreciation (depreciation) on
investments............................................ 174,157
--------
Net Realized and Unrealized Gains (Losses) from
Investments............................................... 179,363
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $831,194
========
</TABLE>
- ---------------
(a) For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997 (a)
---------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income..................................... $ 651,831
Net realized gains (losses) on investment transactions.... 5,206
Net change in unrealized appreciation (depreciation) on
investments............................................ 174,157
-----------
Net increase in net assets resulting from operations...... 831,194
-----------
Distributions to Shareholders
From net investment income................................ (651,831)
-----------
Total distributions to shareholders......................... (651,831)
-----------
Capital Share Transactions
Proceeds from shares issued............................... 28,464,155
Dividends reinvested...................................... 6
Cost of shares redeemed................................... (5,750,464)
-----------
Net increase in net assets from capital share
transactions........................................... 22,713,697
-----------
Total increase (decrease) in Net Assets..................... 22,893,060
NET ASSETS
Beginning of period....................................... --
-----------
End of period............................................. $22,893,060
===========
SHARE TRANSACTIONS
Issued.................................................... 2,833,470
Reinvested................................................ 1
Redeemed.................................................. (574,372)
-----------
Change in shares.......................................... 2,259,099
===========
</TABLE>
- ---------------
(a) For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
NOTE 1 -- GENERAL
The Infinity Mutual Funds, Inc. (the "Fund") was organized as a Maryland
corporation on March 6, 1990 and is registered under the Investment Company Act
of 1940, as amended (the "Act"), as an open-end, management investment company.
The Fund operates as a series company currently comprising eleven portfolios.
The accompanying financial statements and notes relate to the AmeriStar Prime
Money Market Portfolio, the AmeriStar U.S. Treasury Money Market Portfolio, the
AmeriStar Capital Growth Portfolio, the AmeriStar Dividend Growth Portfolio, the
AmeriStar Core Income Portfolio, the AmeriStar Limited Duration Income
Portfolio, the AmeriStar Limited Duration U.S. Government Portfolio, the
AmeriStar Tennessee Tax Exempt Bond Portfolio and the AmeriStar Limited Duration
Tennessee Tax Free Portfolio (together, the "Portfolios").
The Prime Money Market Portfolio and U.S. Treasury Money Market Portfolio
both seek to provide investors with as high a level of current income as is
consistent with the preservation of capital and the maintenance of liquidity.
The Prime Money Market Portfolio invests in short-term money market instruments
consisting of securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. The U.S. Treasury Money Market Portfolio invests
only in U.S. Treasury securities and in other securities guaranteed as the
principal and interest by the U.S. Government. The Capital Growth Portfolio
seeks to provide investors with capital growth by investing primarily in the
equity securities of domestic issuers. The Dividend Growth Portfolio seeks to
provide investors with current income and capital appreciation. This Portfolio
will invest primarily in dividend-paying equity securities of domestic issuers
that are expected to provide reasonable income and may have capital appreciation
potential. The Core Income Portfolio seeks to provide investors with current
income without assuming undue risk. This Portfolio will invest primarily in
investment grade, U.S. dollar denominated fixed-income securities of domestic
and foreign issuers. Under normal market conditions, the Core Income Portfolio
will invest in a portfolio of securities, except when maintaining a temporary
defensive position, that has an effective duration of 50% to 150% of that of the
Merrill Lynch Corporate Government Master Index. The Limited Duration Income
Portfolio seeks to provide investors with current income without assuming undue
risk. This Portfolio will invest primarily in investment grade, U.S. dollar
denominated fixed-income securities of domestic and foreign issuers. Under
normal market conditions, the Limited Duration Income Portfolio will invest in a
portfolio of securities that has a duration of less than four years. 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. The Tennessee Tax Exempt Bond Portfolio seeks to provide
investors with current income exempt from Federal and Tennessee income taxes
without assuming undue risk. This Portfolio will invest primarily in investment
grade Tennessee Municipal Obligations without regard to maturity. The Limited
Duration Tennessee Tax Free Portfolio seeks to provide investors with current
income exempt from Federal and Tennessee income taxes without assuming undue
risk. This Portfolio will invest primarily in a portfolio of investment grade
Tennessee Municipal Obligations that, under normal market conditions, has a
duration of under five years and an effective average portfolio maturity ranging
between three and five years.
At December 31, 1997, the Portfolios were authorized to issue two classes
of shares as follows: Investor Shares and Trust Shares. See Note 10 below.
Investor Shares and Trust Shares are substantially the same, except that
Investor Shares bear the fees that are payable under the plans adopted by the
Fund's Board of Directors. Under the shareholder services plan (the "Shareholder
Services Plan") for the Prime Money Market Portfolio and U.S. Treasury Money
Market Portfolio (the "Money Market Portfolios"), fees are payable at an annual
rate of 0.25% of each Money Market Portfolio's average daily net assets
represented by Investor Shares. Under the plan adopted pursuant to Rule 12b-1
under the Act (the "Distribution Plan"), the Capital Growth Portfolio, Dividend
Growth Portfolio, Core Income Portfolio, Limited Duration Income Portfolio,
Limited Duration U.S. Government Portfolio, Tennessee Tax Exempt Bond Portfolio
and Limited Duration Tennessee Tax Free Portfolio (the "Variable Net Asset Value
Portfolios") pay fees at an annual rate of 0.25% of each Variable Net Asset
Value Portfolio's average daily net assets represented by Investor Shares. As of
December 31, 1997, both the Limited Duration U.S. Government Portfolio and the
Limited Duration Tennessee Tax Free Portfolio offered only Investor Shares.
At December 31, 1997, there were 2.0 billion shares of the Money Market
Portfolios' $0.001 par value common stock authorized, of which each Portfolio's
shares are classified into Investor Shares (500 million shares authorized per
Portfolio) and Trust Shares (500 million shares authorized per Portfolio). There
were 3.5 billion shares of the Variable Net Asset Value
- --------------------------------------------------------------------------------
Portfolios' $0.001 par value common stock authorized, of which each Portfolio's
shares are classified into Investor Shares (250 million shares authorized per
Portfolio) and Trust Shares (250 million shares authorized per Portfolio).
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Portfolios in preparation of their financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses for the
period. Actual results could differ from those estimates.
A) Security Valuation:
The Money Market Portfolios' securities are valued at amortized cost, which
approximates market value. The amortized cost method involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of the difference between the principal amount due at
maturity and cost. In addition, the Money Market Portfolios may not (a) purchase
any instrument with a remaining maturity greater than 397 days unless such
investment is subject to a demand feature, or (b) maintain a dollar-weighted
average portfolio maturity which exceeds 90 days.
The Variable Net Asset Value Portfolios' investments are valued each
business day using available market quotations or at fair value as determined by
one or more independent pricing services (collectively, the "Service") approved
by the Board of Directors. The Service may use available market quotations,
employ electronic data processing techniques and/or a matrix system to determine
valuations. Restricted securities and securities for which market quotations are
not readily available, if any, are valued at fair value using methods approved
by the Board of Directors. Unit investment trusts are valued at the published
unit value per share. Debt securities with remaining maturities of 60 days or
less are normally valued at amortized cost, which approximates market value. The
amortized cost method involves valuing a security at its cost on the date of
purchase or, in the case of securities purchased more than 60 days to maturity,
at their market value each day until the 61st day prior to maturity, and there
after assuming a constant amortization to maturity of the difference between the
principal amount due at maturity and such valuation.
B) Security Transactions and Investment Income:
Security transactions are recorded on trade date. Realized gains and losses
from sales of investments are calculated on the identified cost basis. Interest
income, including accretion of discount and amortization of premium on
investments, is accrued daily. Dividend income is recorded on the ex-dividend
date.
C) Repurchase Agreements:
The Portfolios' custodian and other banks acting in a sub-custodian
capacity take possession of the collateral pledged for investments in repurchase
agreements. The underlying collateral is valued daily on a mark-to-market basis
to determine that the value, including accrued interest, exceeds the repurchase
price. In the event of the seller's default on the obligation to repurchase, the
Portfolios have the right to liquidate the collateral and apply the proceeds in
satisfaction of the obligation. Under certain circumstances, in the event of
default or bankruptcy by the other party to the agreement, realization and/or
retention of the collateral may be subject to legal proceedings.
D) Expenses:
The Portfolios incurred certain costs in connection with their
organization. These costs were deferred and are being amortized on a
straight-line basis over five years from their commencement of operations. The
Fund accounts separately for the assets, liabilities and operations of each
Portfolio. Direct expenses of a Portfolio are charged to that Portfolio while
general Fund expenses are allocated among the Fund's respective portfolios based
on the relative net assets of each Portfolio.
At December 31, 1997, deferred organization costs were $16,788, $17,904
$7,413, $4,384, $15,804, $1,586, $15,712 and $1,767 for the Prime Money Market
Portfolio, U.S. Treasury Money Market Portfolio, Capital Growth Portfolio,
Dividend Growth Portfolio, Limited Duration Income Portfolio, Limited Duration
U.S. Government Portfolio, Tennessee Tax Exempt Bond Portfolio and Limited
Duration Tennessee Tax Free Portfolio, respectively.
- --------------------------------------------------------------------------------
E) Federal Income Taxes:
For federal income tax purposes, each Portfolio is treated as a separate
entity for the purpose of determining its qualification as a regulated
investment company under the Internal Revenue Code (the "Code"). It is the
policy of each Portfolio to meet the requirements of the Code applicable to
regulated investment companies, including the requirement that they distribute
substantially all of their income to shareholders. Therefore, no federal income
tax provision is required.
For federal income tax purposes, the following Portfolios have capital loss
carryovers as of December 31, 1997, which are available to offset future capital
gains, if any, on securities transactions to the extent provided for in the
Code:
<TABLE>
<CAPTION>
AMOUNT EXPIRES
-------- -------
<S> <C> <C>
Prime Money Market Portfolio................................ $ 889 2002
Prime Money Market Portfolio................................ 149 2004
Prime Money Market Portfolio................................ 9 2005
Core Income Portfolio....................................... 16,266 2004
Tennessee Tax Exempt Portfolio.............................. 82,323 2002
Tennessee Tax Exempt Portfolio.............................. 578,180 2004
</TABLE>
Under current tax law, capital losses realized after October 31 may be deferred
and treated as occurring on the first day of the fiscal year ending December 31,
1998. Prime Money Market Portfolio, Core Income Portfolio and Limited Duration
U.S. Government Portfolio deferred such losses of $751, $21,821 and $1,547,
respectively.
F) Dividends and Distributions to Shareholders:
Dividends are declared daily to shareholders of record at the close of
business on the day of declaration and are paid monthly for the Prime Money
Market Portfolio, U.S. Treasury Money Market Portfolio, Core Income Portfolio,
Limited Duration Income Portfolio, Limited Duration U.S. Government Portfolio,
Tennessee Tax Exempt Bond Portfolio and the Limited Duration Tennessee Tax Free
Portfolio. Dividends are declared and paid quarterly for the Capital Growth
Portfolio. Dividends are declared and paid monthly for the Dividend Growth
Portfolio. For all Portfolios, distributions of net realized gains, if any, will
be paid at least annually. Dividends and distributions are recorded on the
ex-dividend date. Distributions from net investment income and from net realized
gains are determined in accordance with income tax regulations that may differ
from generally accepted accounting principles. Timing differences relating to
shareholder distributions have been reclassified to paid-in-capital. These
differences are primarily due to deferrals of certain losses and expiring
capital loss carryovers.
G) Other:
Each Portfolio maintains a cash balance with its custodian and receives a
reduction of its custody fees for the amounts of interest earned on such
uninvested cash balances. For financial reporting purposes for the year ended
December 31, 1997, there were no reductions in custodian fees and expenses paid
by third parties.
NOTE 3 -- AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES
First American National Bank ("First American") serves as the Portfolios'
investment adviser. At December 31, 1997, Barnett Capital Advisors, Inc.
("Barnett") serves as the sub-investment adviser with respect to the Prime Money
Market Portfolio. See Note 10 below. BISYS Fund Services Limited Partnership
("BISYS") serves as the Portfolios' administrator and distributor of the
Portfolios' shares. BISYS is a subsidiary of The BISYS Group, Inc.
As investment adviser, First American manages the investments of each
Portfolio, supervises the sub-investment adviser with respect to the Prime Money
Market Portfolio and is responsible for all purchases and sales of each
Portfolio's investment securities.
As sub-investment adviser, Barnett provides the day-to-day management of
the Prime Money Market Portfolio's investments. For its services, the Prime
Money Market Portfolio has agreed to pay Barnett a fee at an annual rate of
0.15% of the Prime Money Market Portfolio's average daily net assets. Such fees
are accrued daily and paid monthly.
As administrator, BISYS assists in supervising the operations of the
Portfolios. For its services, BISYS is entitled to receive a fee at the annual
rate of 0.10% of the average daily net assets of each Money Market Portfolio and
0.15% of the average daily net assets of each Variable Net Asset Value
Portfolio.
- --------------------------------------------------------------------------------
Pursuant to the Shareholder Services Plan, the Money Market Portfolios pay
BISYS for the provision of certain services to the holders of Investor Shares at
an annual rate of 0.25% of the average daily net assets of the Money Market
Portfolios' Investor Shares. The services provided may include personal services
relating to shareholder accounts and services related to the maintenance of such
shareholder accounts. BISYS may pay financial institutions, including the
investment adviser, broker/dealers and other institutions in respect of these
services.
Pursuant to the Distribution Plan, each Variable Net Asset Value Portfolio
pays BISYS for advertising, marketing and distributing such Portfolios' Investor
Shares at an annual rate of 0.25% of the average daily net assets of such
Investor Shares. BISYS may pay financial institutions, broker/dealers and other
institutions, in respect of these services. For the year ended December 31,
1997, BISYS realized $28,514 from commissions on sales of Investor Shares of
which $28,434 was allowed to affiliated broker/dealers of the Funds.
Pursuant to the Fund Accounting Agreement, BISYS is entitled to receive a
fee at the annual rate of 0.03% of the daily net assets of each Portfolio,
provided, however, that such fee shall be subject to a minimum annual fee amount
of $48,000 per Portfolio. Also, Portfolios having two or more classes of shares
each having different net asset values or paying different daily dividends are
subject to an additional annual fee of $10,000 per additional class per
Portfolio.
Information regarding these transactions for the year ended December 31,
1997 is as follows:
<TABLE>
<CAPTION>
INVESTMENT ADVISORY FEES
-------------------------------
ANNUAL FEE AS A
PERCENTAGE OF FEES ADMINISTRATION 12b-1 FEES
AVERAGE DAILY NET VOLUNTARILY FEES VOLUNTARILY VOLUNTARILY ACCOUNTING
ASSETS WAIVED WAIVED WAIVED FEES*
----------------- ----------- ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Prime Money Market Portfolio..................... 0.25% $ -- $ -- $ -- $58,258
U.S. Treasury Money Market Portfolio............. 0.25% -- -- -- 63,416
Capital Growth Portfolio......................... 0.65% 141,465 -- 214,887 54,748
Dividend Growth Portfolio........................ 0.65% 65,601 -- 88,242 40,149
Core Income Portfolio............................ 0.50% 55,665 -- 120,300 51,469
Limited Duration Income Portfolio................ 0.50% 72,002 -- 192,875 47,343
Limited Duration U.S. Government Portfolio....... 0.50% 41,559 17,844 40,554 40,159
Tennessee Tax Exempt Bond Portfolio.............. 0.50% 78,469 -- 189,623 41,449
Limited Duration Tennessee Tax Free Portfolio.... 0.50% 34,669 20,607 46,847 40,140
</TABLE>
- ---------------
* Accounting fees do not include out-of-pocket expenses.
Certain officers and Directors of the Fund are "affiliated persons" (as
defined in the Act) of BISYS. Each "non-affiliated" Director receives an annual
fee of $12,000 and a meeting fee of $1,500 per meeting for services relating to
all the Portfolios constituting the Fund.
NOTE 4 -- SECURITIES TRANSACTIONS
For the year ended December 31, 1997, the cost of purchases and the
proceeds from sales of portfolio securities (excluding short-term investments)
were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
<S> <C> <C>
Capital Growth Portfolio.................................... $168,037,290 $124,757,203
Dividend Growth Portfolio (a)............................... $ 89,153,783 $ 48,291,070
Core Income Portfolio....................................... $ 65,642,639 $ 33,959,785
Limited Duration Income Portfolio........................... $ 42,224,609 $ 45,317,533
Limited Duration U.S. Government Portfolio (a).............. $ 27,300,694 $ 9,298,281
Tennessee Tax Exempt Bond Portfolio......................... $252,538,427 $241,195,208
Limited Duration Tennessee Tax Free Portfolio (a)........... $ 59,862,930 $ 37,401,431
</TABLE>
- ---------------
(a) For the period from February 28, 1997(commencement of operations) through
December 31, 1997.
NOTE 5 -- CONCENTRATION OF CREDIT RISK
The Prime Money Market Portfolio invests substantially all of its assets in
a diversified portfolio of high quality U.S. dollar denominated money market
instruments as disclosed in the Portfolio of Investments by security type. The
issuers' abilities to meet their obligations may be affected by domestic and
foreign economic, regional and political developments.
The Tennessee Tax Exempt Bond Portfolio and Limited Duration Tennessee Tax
Free Portfolio invest substantially all of their assets in a non-diversified
portfolio of tax-exempt debt obligations primarily consisting of securities
issued by the State of
- --------------------------------------------------------------------------------
Tennessee, its municipalities, counties and other taxing districts. The issuers'
abilities to meet their obligations may be affected by Tennessee economic,
regional and political developments.
The Tennessee Tax Exempt Bond Portfolio and Limited Duration Tennessee Tax
Free Portfolio had the following concentrations by sector at December 31, 1997
(as a percentage of total investments):
<TABLE>
<CAPTION>
LIMITED DURATION
TENNESSEE TENNESSEE
TAX EXEMPT TAX FREE
BOND PORTFOLIO PORTFOLIO
-------------- ----------------
<S> <C> <C>
General Obligations......................................... 48.7% 42.3%
Utilities................................................... 17.0% 24.6%
Health & Medical............................................ 15.5% 14.5%
Educational................................................. 11.1% 2.9%
Transportation.............................................. 4.1% 4.2%
Housing..................................................... 1.1% 3.2%
Others...................................................... 1.6% --
Cash and Cash
Equivalents............................................... 0.9% 8.3%
------ ------
100.0% 100.0%
====== ======
</TABLE>
NOTE 6 -- CAPITAL SHARE TRANSACTIONS
Transactions in shares in the multi-class Portfolios are summarized below:
<TABLE>
<CAPTION>
U.S.
PRIME TREASURY
MONEY MONEY
MARKET MARKET
PORTFOLIO PORTFOLIO
------------ ------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1997
------------ ------------
<S> <C> <C>
INVESTOR SHARES
Shares issued............................................. 203,448,543 261,551,242
Dividends reinvested...................................... 357,816 107,555
Shares redeemed........................................... (170,480,515) (262,902,182)
------------ ------------
33,325,844 (1,243,385)
============ ============
TRUST SHARES
Shares issued............................................. 143,744,469 208,119,313
Dividends reinvested...................................... 1 --
Shares redeemed........................................... (165,455,650) (203,642,569)
------------ ------------
(21,711,180) 4,476,744
============ ============
Net increase/(decrease)..................................... 11,614,664 3,233,359
============ ============
</TABLE>
<TABLE>
<CAPTION>
DIVIDEND GROWTH
CAPITAL GROWTH PORTFOLIO PORTFOLIO
---------------------------- ------------------------
FOR THE YEAR ENDED FOR THE PERIOD ENDED
DECEMBER 31, 1997 December 31, 1997 (b)
---------------------------- ------------------------
AMOUNT SHARES AMOUNT SHARES
------------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
INVESTOR SHARES
Shares issued............................................. $ 101,329,579 6,860,600 $71,071,654 5,889,075
Dividends reinvested...................................... 250,838 19,516 58,646 5,646
Shares redeemed........................................... (179,442,673) (11,141,321) (80,669,327) (5,857,248)
------------- ------------ ----------- ----------
$ (77,862,256) (4,261,205) $(9,539,027) 37,473
============= ============ =========== ==========
TRUST SHARES (A)
Shares issued............................................. $ 147,332,294 10,167,911 $66,268,900 5,657,103
Dividends reinvested...................................... 19,050,221 1,504,756 10,029,575 983,212
Shares redeemed........................................... (6,416,169) (500,054) (952,168) (85,923)
------------- ------------ ----------- ----------
$ 159,966,346 11,172,613 $75,346,307 6,554,392
============= ============ =========== ==========
Net increase/(decrease)..................................... $ 82,104,090 6,911,408 $65,807,280 6,591,865
============= ============ =========== ==========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIMITED DURATION INCOME
CORE INCOME PORTFOLIO PORTFOLIO
------------------------------- -----------------------------
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1997
------------------------------- -----------------------------
AMOUNT SHARES AMOUNT SHARES
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
INVESTOR SHARES
Shares issued............................................. $ 43,676,646 4,394,727 $ 18,061,691 1,811,625
Dividends reinvested...................................... 1,100,106 110,432 2,425,448 244,124
Shares redeemed........................................... (84,785,631) (8,376,453) (113,120,158) (11,327,489)
------------- ------------ ------------ -----------
$ (40,008,879) (3,871,294) $(92,633,019) (9,271,740)
============= ============ ============ ===========
TRUST SHARES (a)
Shares issued............................................. $ 74,176,796 7,300,711 $ 97,264,930 9,730,880
Dividends reinvested...................................... 229,138 22,454 377,078 37,731
Shares redeemed........................................... (3,038,585) (296,935) (12,647,715) (1,266,172)
------------- ------------ ------------ -----------
$ 71,367,349 7,026,230 $ 84,994,293 8,502,439
============= ============ ============ ===========
Net increase/(decrease)................................... $ 31,358,470 3,154,936 $ (7,638,726) (769,301)
============= ============ ============ ===========
</TABLE>
- ---------------
(a) Trust Shares commenced operations on October 3, 1997
(b) For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
<TABLE>
<CAPTION>
TENNESSEE TAX
EXEMPT BOND PORTFOLIO
---------------------------
FOR THE YEAR ENDED
DECEMBER 31, 1997
---------------------------
AMOUNT SHARES
------------- -----------
<S> <C> <C>
INVESTOR SHARES
Shares issued............................................. $ 23,465,567 2,362,712
Dividends reinvested...................................... 208,184 21,009
Shares redeemed........................................... (111,627,908) (11,118,420)
------------- -----------
$ (87,954,157) (8,734,699)
============= ===========
TRUST SHARES (a)
Shares issued............................................. $ 103,242,548 10,272,191
Dividends reinvested...................................... 24,834 2,474
Shares redeemed........................................... (3,792,891) (376,678)
------------- -----------
$ 99,474,491 9,897,987
============= ===========
Net increase/(decrease)................................... $ 11,520,334 1,163,288
============= ===========
</TABLE>
- ---------------
(a) Trust Shares commenced operations on October 3, 1997.
NOTE 7 -- COMMON TRUST CONVERSION
On March 3, 1997, the Capital Growth Portfolio, Dividend Growth Portfolio,
Core Income Portfolio, Limited Duration U.S. Government Portfolio, Tennessee Tax
Exempt Bond Portfolio and Limited Duration Tennessee Tax Free Portfolio issued
shares to acquire all of the assets and liabilities of certain common trust
funds of First American National Bank. The following is a summary of shares
issued, net assets converted, net asset value per share and unrealized
appreciation (depreciation) as of the conversion date (amounts in thousands,
except per share amounts):
<TABLE>
<CAPTION>
NET ASSET UNREALIZED
NET VALUE APPRECIATION
SHARES ASSETS PER SHARE (DEPRECIATION)
------ ------ --------- --------------
<S> <C> <C> <C> <C>
Capital Growth Portfolio.................................... 6,276 $73,749 $11.75 $20,169
Dividend Growth Portfolio................................... 5,499 54,987 10.00 12,302
Core Income Portfolio....................................... 3,314 32,904 9.93 (327)
Limited Duration U.S. Government Portfolio.................. 1,993 19,925 10.00 27
Tennessee Tax Exempt Bond Portfolio......................... 1,679 16,624 9.90 78
Limited Duration Tennessee Tax Free Portfolio............... 2,105 21,050 10.00 127
</TABLE>
- --------------------------------------------------------------------------------
NOTE 8 -- ELIGIBLE DISTRIBUTIONS (UNAUDITED)
The Fund designates the following eligible distributions for the dividends
received deduction for corporations for the Fund's taxable year ended December
31, 1997.
<TABLE>
<S> <C>
Capital Growth Portfolio
Investor Shares........................................... $522,227
Trust Shares.............................................. $399,118
Dividend Growth Portfolio
Investor Shares........................................... $560,629
Trust Shares.............................................. $257,550
</TABLE>
NOTE 9 -- EXEMPT-INTEREST INCOME DESIGNATION
(UNAUDITED)
The Fund designates the following exempt-interest dividends for the Fund's
taxable year ended December 31, 1997.
<TABLE>
<S> <C>
Tennessee Tax Exempt Bond Portfolio
Investor Shares........................................ $10,636,950
Trust Shares........................................... $ 3,521,929
Limited Duration Tennessee Tax Free Portfolio
Investor Shares........................................ $ 638,420
</TABLE>
- --------------------------------------------------------------------------------
The percentage break-down of the exempt-interest income by state for the
Tennessee Tax Exempt Bond Portfolio and the Limited Duration Tennessee Tax Free
for the taxable year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
LIMITED
DURATION
TENNESSEE TAX TENNESSEE TAX
EXEMPT BOND FREE
------------- -------------
<S> <C> <C>
Alabama..................................................... -- 0.20%
Alaska...................................................... 0.77% --
Arizona..................................................... 0.14% --
Arkansas.................................................... 1.00% --
Connecticut................................................. 0.05% --
Florida..................................................... 0.66% --
Georgia..................................................... 3.39% 0.64%
Illinois.................................................... 0.29% --
Kentucky.................................................... 3.52% --
Maryland.................................................... 0.33% --
Massachusetts............................................... 0.31% --
Michigan.................................................... 0.76% --
Minnesota................................................... 0.75% --
Mississippi................................................. 0.38% --
Missouri.................................................... 0.07% --
New Jersey.................................................. 0.30% 2.14%
New York.................................................... 0.27% 0.02%
North Carolina.............................................. 0.90% --
Oklahoma.................................................... 0.44% --
Oregon...................................................... 0.18% --
Pennsylvania................................................ 0.47% --
South Carolina.............................................. 1.00% 0.05%
Tennessee................................................... 78.54% 96.95%
Texas....................................................... 2.25% --
Utah........................................................ 0.42% --
Virginia.................................................... 1.02% --
Washington.................................................. 0.54% --
Wisconsin................................................... 1.25% --
------ ------
100.00% 100.00%
====== ======
</TABLE>
NOTE 10--SUBSEQUENT EVENTS
Effective January 30, 1998, the sub-investment advisory agreement among the
funds, First American and Barnett was terminated and First American assumed the
day-to-day management of the Prime Money Market Portfolio's investments.
As of January 30, 1998, the Variable Net Asset Value Portfolios were authorized
to issue an additional class of shares -- Class B Shares -- and the Portfolios'
Investor Shares were redesignated Class A Shares. It is anticipated that the
Prime Money Market Portfolio will by authorized to issue Class B Shares by March
1998. The U.S. Treasury Money Market Portfolio currently will not offer Class B
Shares.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR PRIME MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
INVESTOR SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994*
------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD...... $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- -------
Income from investment operations:
Net investment income................... 0.048 0.048 0.054 0.031
Less distributions:
Net investment income................... (0.048) (0.048) (0.054) (0.031)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD............ $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- -------
Total Return.............................. 4.90% 4.88% 5.51% 3.13%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)....... $56,163 $22,836 $63,919 $82,351
Ratio of expenses to average net
assets............................... 0.87% 0.68% 0.65% 0.63%(b)
Ratio of net investment income to
average net assets................... 4.82% 4.83% 5.37% 4.00%(b)
Ratio of expenses to average net
assets**............................. 0.87%(c) 0.86% 0.90% 0.93%(b)
Ratio of net investment income to
average net assets**................. 4.82%(c) 4.65% 5.12% 3.76%(b)
</TABLE>
- ---------------
* For the period March 29, 1994 (commencement of operations) through December
31, 1994.
** During the period certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Not annualized.
(b) Annualized.
(c) There were no fee waivers or expense reimbursements for this fund during
this period.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR PRIME MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
TRUST SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1997 1996*
------------ -----------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 1.00 $ 1.00
------- -------
Income from investment operations:
Net investment income..................................... 0.051 0.024
------- -------
Less distributions:
Net investment income..................................... (0.051) (0.024)
------- -------
NET ASSET VALUE, END OF PERIOD.............................. $ 1.00 $ 1.00
======= =======
Total Return................................................ 5.17% 2.46%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $26,389 $48,101
Ratio of expenses to average net assets................... 0.62% 0.65%(b)
Ratio of net investment income to average net assets...... 5.05% 4.86%(b)
Ratio of expenses to average net assets**................. 0.62% 0.65%(b)
Ratio of net investment income to average net assets**.... 5.05% 4.86%(b)
</TABLE>
- ---------------
* For the period from July 1, 1996 (commencement of operations) through
December 31, 1996.
** There were no fee waivers or expense reimbursements for this fund.
(a) Not annualized.
(b) Annualized.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR U.S. TREASURY MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
INVESTOR SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994*
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD...... $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- -------- --------
Income from investment operations:
Net investment income................... 0.047 0.047 0.053 0.030
------- ------- -------- --------
Less distributions:
Net investment income................... (0.047) (0.047) (0.053) (0.030)
------- ------- -------- --------
NET ASSET VALUE, END OF PERIOD............ $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======== ========
Total Return.............................. 4.78% 4.78% 5.41% 3.01%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)....... $77,065 $78,308 $168,430 $139,715
Ratio of expenses to average net
assets............................... 0.75% 0.56% 0.50% 0.54%(b)
Ratio of net investment income to
average net assets................... 4.68% 4.72% 5.28% 4.02%(b)
Ratio of expenses to average net
assets**............................. 0.75%(c) 0.74% 0.75% 0.83%(b)
Ratio of net investment income to
average net assets**................. 4.68%(c) 4.54% 5.03% 3.73%(b)
</TABLE>
- ---------------
* 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 for this fund during
this period.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR U.S. TREASURY MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
TRUST SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996*
----------------- ------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 1.00 $ 1.00
-------- --------
Income from investment operations:
Net investment income..................................... 0.049 0.024
-------- --------
Less distributions:
Net investment income..................................... (0.049) (0.024)
-------- --------
NET ASSET VALUE, END OF PERIOD.............................. $ 1.00 $ 1.00
======== ========
Total Return................................................ 5.05% 2.43%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $114,175 $109,698
Ratio of expenses to average net assets................... 0.50% 0.52%(b)
Ratio of net investment income to average net assets...... 4.94% 4.78%(b)
Ratio of expenses to average net assets**................. 0.50% 0.52%(b)
Ratio of net investment income to average net assets**.... 4.94% 4.78%(b)
</TABLE>
- ---------------
* For the period from July 1, 1996 (commencement of operations) through
December 31, 1996.
** There were no fee waivers or expense reimbursements for this fund.
(a) Not annualized.
(b) Annualized.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
INVESTOR SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996*
----------------- -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 11.32 $ 10.00
------- -------
Income from investment operations:
Net investment income..................................... 0.06 --
Net realized and unrealized gains on securities
transactions........................................... 3.40 1.32
------- -------
Net income from investment operations..................... 3.46 1.32
------- -------
Less distributions:
Net investment income..................................... (0.06) --
Net realized gains........................................ (1.92) --
------- -------
Net change in net asset value............................... 1.48 1.32
------- -------
NET ASSET VALUE, END OF PERIOD.............................. $ 12.80 $ 11.32
======= =======
Total Return (excluding sales charge)....................... 30.79% 13.20%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $ 858 $49,008
Ratio of expenses to average net assets................... 0.93% 1.20%(b)
Ratio of net investment income to average net assets...... 0.42% (0.02)%(b)
Ratio of expenses to average net assets**................. 1.18% 1.39%(b)
Ratio of net investment income to average net assets**.... 0.17% (0.21)%(b)
Portfolio Turnover (c).................................... 116% 69%
Average Commission rate paid (d).......................... $0.0800 $0.0838
</TABLE>
- ---------------
* For the period from April 1, 1996 (commencement of operations) through
December 31, 1996.
** 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 Fund, as a whole,
without distinguishing between the classes of shares issued.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
TRUST SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997*
------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 14.51
--------
Income from investment operations:
Net investment income..................................... 0.02
Net realized and unrealized gains (losses) on securities
transactions........................................... 0.10
--------
Net income from investment operations..................... 0.12
--------
Less distributions:
Net investment income..................................... (0.02)
Net realized gains........................................ (1.92)
--------
Net change in net asset value............................... (1.82)
--------
NET ASSET VALUE, END OF PERIOD.............................. $ 12.69
========
Total Return (excluding sales charge)....................... 0.88%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $141,761
Ratio of expenses to average net assets................... 0.58%(b)
Ratio of net investment income to average net assets...... 0.80%(b)
Ratio of expenses to average net assets**................. 0.99%(b)
Ratio of net investment income to average net assets**.... 0.39%(b)
Portfolio Turnover (c).................................... 116%
Average Commission rate paid (d).......................... $ 0.0800
</TABLE>
- ---------------
* For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
** 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 Fund, as a whole,
without distinguishing between the classes of shares issued.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR DIVIDEND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
INVESTOR SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997*
------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.00
-------
Income from investment operations:
Net investment income..................................... 0.65
Net realized and unrealized gains on securities
transactions........................................... 1.71
-------
Net income from investment operations..................... 2.36
-------
Less distributions:
Net investment income..................................... (0.19)
Net realized gains........................................ (1.80)
-------
Net change in net asset value............................... 0.37
-------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.37
=======
Total Return (excluding sales charge)....................... 24.20%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $ 388
Ratio of expenses to average net assets................... 1.06%(b)
Ratio of net investment income to average net assets...... 2.11%(b)
Ratio of expenses to average net assets**................. 1.31%(b)
Ratio of net investment income to average net assets**.... 1.86%(b)
Portfolio Turnover(c)..................................... 86%
Average commission rate paid(d)........................... $0.0934
</TABLE>
- ---------------
* For period from February 28, 1997 (commencement of operations) through
December 31, 1997.
** 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 Fund, as a whole,
without distinguishing between the classes of shares issued.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR DIVIDEND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
TRUST SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997*
------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 11.73
-------
Income from investment operations:
Net investment income..................................... 0.06
Net realized and unrealized gains (losses) on securities
transactions........................................... 0.44
-------
Net income from investment operations..................... 0.50
-------
Less distributions:
Net investment income..................................... (0.06)
Net realized gains........................................ (1.80)
-------
Total distributions......................................... (1.86)
-------
Net change in net asset value............................... (1.36)
-------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.37
=======
Total Return (excluding sales charge)....................... 4.62%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $67,949
Ratio of expenses to average net assets................... 0.68%(b)
Ratio of net investment income to average net assets...... 2.15%(b)
Ratio of expenses to average net assets**................. 1.09%(b)
Ratio of net investment income to average net assets**.... 1.74%(b)
Portfolio Turnover (c).................................... 86%
Average commission rate paid (d).......................... $0.0934
</TABLE>
- ---------------
* For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
** 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 Fund, as a whole,
without distinguishing between the classes of shares issued.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CORE INCOME MARKET PORTFOLIO
- --------------------------------------------------------------------------------
INVESTOR SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996*
----------------- ------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.00 $ 10.00
------- -------
Income from investment operations:
Net investment income..................................... 0.58 0.40
Net realized and unrealized gains on securities
transactions........................................... 0.26 --
------- -------
Net income from investment operations..................... 0.84 0.40
------- -------
Less distributions:
Net investment income..................................... (0.59) (0.40)
------- -------
Net change in net asset value............................... 0.25 0.00
------- -------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.25 $ 10.00
======= =======
Total Return (excluding sales charge)....................... 8.66% 4.12%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $ 95 $38,815
Ratio of expenses to average net assets................... 0.87% 1.13%(b)
Ratio of net investment income to average net assets...... 5.74% 5.37%(b)
Ratio of expenses to average net assets**................. 1.12% 1.32%(b)
Ratio of net investment income to average net assets**.... 5.49% 5.18%(b)
Portfolio Turnover (c).................................... 56% 65%
</TABLE>
- ---------------
* For the period from April 1, 1996 (commencement of operations) through
December 31, 1996.
** 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 Fund, as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CORE INCOME MARKET PORTFOLIO
- --------------------------------------------------------------------------------
TRUST SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997*
------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.16
-------
Income from investment operations:
Net investment income..................................... 0.16
Net realized and unrealized gains (losses) on securities
transactions........................................... 0.09
-------
Net income from investment operations..................... 0.25
-------
Less distributions:
Net investment income..................................... (0.16)
-------
Net change in net asset value............................... 0.09
-------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.25
=======
Total Return (excluding sales charge)....................... 2.45%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $71,991
Ratio of expenses to average net assets................... 0.60%(b)
Ratio of net investment income to average net assets...... 6.28%(b)
Ratio of expenses to average net assets**................. 0.92%(b)
Ratio of net investment income to average net assets**.... 5.96%(b)
Portfolio Turnover (c).................................... 56%
</TABLE>
- ---------------
* For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
** 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 Fund, as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
INVESTOR SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994*
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........ $ 9.96 $ 10.13 $ 9.66 $ 10.00
------- ------- -------- -------
Income from investment operations:
Net investment income..................... 0.59 0.58 0.59 0.38
Net realized and unrealized gains (losses)
on securities transactions............. 0.04 (0.16) 0.47 (0.34)
------- ------- -------- -------
Net income from investment operations..... 0.63 0.42 1.06 0.04
------- ------- -------- -------
Less distributions:
Net investment income..................... (0.59) (0.58) (0.59) (0.38)
Net realized gains........................ (0.01) (0.01) -- --
------- ------- -------- -------
Net change in net asset value............... 0.03 (0.17) 0.47 (0.34)
------- ------- -------- -------
NET ASSET VALUE, END OF PERIOD.............. $ 9.99 $ 9.96 $ 10.13 $ 9.66
======= ======= ======== =======
Total Return (excluding sales charge)....... 6.47% 4.28% 11.20% 0.42%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......... $ 5,894 $98,197 $103,382 $93,189
Ratio of expenses to average net assets... 0.83% 0.83% 0.87% 0.83%(b)
Ratio of net investment income to average
net assets............................. 5.92% 5.84% 5.89% 5.27%(b)
Ratio of expenses to average net
assets**............................... 1.09% 1.08% 1.12% 1.28%(b)
Ratio of net investment income to average
net assets**........................... 5.66% 5.59% 5.64% 4.82%(b)
Portfolio Turnover (c).................... 45% 51% 28% 6%
</TABLE>
- ---------------
* For the period from March 28, 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) Portfolio turnover is calculated on the basis of the Fund, as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
TRUST SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997*
------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.00
-------
Income from investment operations:
Net investment income..................................... 0.15
Net realized and unrealized gains (losses) on securities
transactions........................................... (0.01)
-------
Net income from investment operations..................... 0.14
-------
Less distributions:
Net investment income..................................... (0.15)
Net realized gains........................................ (0.01)
-------
Net change in net asset value............................... (0.02)
-------
NET ASSET VALUE, END OF PERIOD.............................. $ 9.98
=======
Total Return (excluding sales charge)....................... 1.36%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $84,886
Ratio of expenses to average net assets................... 0.56%(b)
Ratio of net investment income to average net assets...... 6.08%(b)
Ratio of expenses to average net assets**................. 0.87%(b)
Ratio of net investment income to average net assets**.... 5.77%(b)
Portfolio Turnover (c).................................... 45%
</TABLE>
- ---------------
* For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
** 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 Fund, as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION U.S. GOVERNMENT PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997*
------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.00
-------
Income from investment operations:
Net investment income..................................... 0.42
Net realized and unrealized gains on securities
transactions........................................... 0.12
-------
Net income from investment operations..................... 0.54
-------
Less distributions:
Net investment income..................................... (0.42)
-------
Net change in net asset value............................... 0.12
-------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.12
=======
Total Return (excluding sales charge)....................... 5.54%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $20,103
Ratio of expenses to average net assets................... 1.00%(b)
Ratio of net investment income to average net assets...... 5.34%(b)
Ratio of expenses to average net assets**................. 1.62%(b)
Ratio of net investment income to average net assets**.... 4.72%(b)
Portfolio Turnover........................................ 52%
</TABLE>
- ---------------
* For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
** 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.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
- --------------------------------------------------------------------------------
INVESTOR SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994*
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD............................. $ 9.90 $ 10.19 $ 9.40 $ 10.00
------- ------- ------- -------
Income from investment operations:
Net investment income.............. 0.44 0.42 0.45 0.34
Net realized and unrealized gains
(losses) on securities
transactions.................... 0.25 (0.29) 0.79 (0.60)
------- ------- ------- -------
Net income (loss) from investment
operations...................... 0.69 0.13 1.24 (0.26)
------- ------- ------- -------
Less distributions:
Net investment income.............. (0.41) (0.42) (0.45) (0.34)
------- ------- ------- -------
Net change in net asset value........ 0.28 (0.29) 0.79 (0.60)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD....... $ 10.18 $ 9.90 $ 10.19 $ 9.40
======= ======= ======= =======
Total Return (excluding sales
charge)............................ 7.13% 1.39% 13.40% (2.63)%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's)......................... $ 1,669 $88,084 $94,143 $86,127
Ratio of expenses to average net
assets.......................... 0.84% 0.86% 0.87% 0.82%(b)
Ratio of net investment income to
average net assets.............. 4.13% 4.29% 4.52% 4.61%(b)
Ratio of expenses to average net
assets**........................ 1.09% 1.11% 1.12% 1.18%(b)
Ratio of net investment income to
average net assets**............ 3.88% 4.04% 4.27% 4.25%(b)
Portfolio Turnover (c)............. 253% 219% 188% 0.41%
</TABLE>
- ---------------
* For the period from March 28, 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) Portfolio turnover is calculated on the basis of the Fund, as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
- --------------------------------------------------------------------------------
TRUST SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997*
------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.05
Income from investment operations:.......................... --
Net investment income..................................... 0.10
Net realized and unrealized gains (losses) on securities
transactions........................................... 0.13
--------
Net income from investment operations..................... 0.23
--------
Less distributions:
Net investment income..................................... (0.10)
--------
Net change in net asset value............................... 0.13
--------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.18
========
Total Return (excluding sales charge)....................... 2.35%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $100,742
Ratio of expenses to average net assets................... 0.56%(b)
Ratio of net investment income to average net assets...... 4.22%(b)
Ratio of expenses to average net assets**................. 0.87%(b)
Ratio of net investment income to average net assets**.... 3.91%(b)
Portfolio Turnover (c).................................... 253%
</TABLE>
- ---------------
* For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
** 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 Fund, as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997*
------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.00
-------
Income from investment operations:
Net investment income..................................... 0.29
Net realized and unrealized gains on securities
transactions........................................... 0.13
-------
Net income from investment operations..................... 0.42
-------
Less distributions:
Net investment income..................................... (0.29)
-------
Net change in net asset value............................... 0.13
-------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.13
=======
Total Return (excluding sales charge)....................... 4.26%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $22,893
Ratio of expenses to average net assets................... 0.98%(b)
Ratio of net investment income to average net assets...... 3.48%(b)
Ratio of expenses to average net assets**................. 1.52%(b)
Ratio of net investment income to average net assets**.... 2.94%(b)
Portfolio Turnover........................................ 179%
</TABLE>
- ---------------
* For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
** 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.
See Notes to Financial Statements.
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
The Infinity Mutual Funds, Inc.--
The AmeriStar Mutual Funds:
We have audited the accompanying statements of assets and liabilities of The
Infinity Mutual Funds, Inc. -- The AmeriStar Mutual Funds (AmeriStar Money
Market Portfolio, AmeriStar U.S. Treasury Money Market Portfolio, AmeriStar
Capital Growth Portfolio, AmeriStar Dividend Growth Portfolio, AmeriStar Limited
Duration U.S. Government Portfolio, AmeriStar Limited Duration Income Portfolio,
AmeriStar Limited Duration Tennessee Tax Free Portfolio, AmeriStar Core Income
Portfolio, and AmeriStar Tennessee Tax Exempt Bond Portfolio) including the
schedules of portfolio investments, as of December 31, 1997, and the related
statements of operations, statements of changes in net assets and the financial
highlights for each of the periods indicated herein. These financial statements
and the financial highlights are the responsibility of The Infinity Mutual
Funds, Inc.'s management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification of securities owned as of
December 31, 1997, by confirmation with the custodian and brokers and other
appropriate audit procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the aforementioned portfolios comprising The Infinity Mutual Funds, Inc. at
December 31, 1997, the results of their operations, the changes in their net
assets and the financial highlights for each of the periods indicated herein, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
February 20, 1998
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR MUTUAL FUNDS
3435 Stelzer Road * Columbus, Ohio 43219
INVESTMENT ADVISER
First American National Bank
315 Deaderick Street * Nashville, TN 37237-0401
ADMINISTRATOR
BISYS Fund Services Limited Partnership
3435 Stelzer Road * Columbus, OH 43219
DISTRIBUTOR
BISYS Fund Services Limited Partnership
3435 Stelzer Road * Columbus, OH 43219
CUSTODIAN
The Bank of New York
90 Washington Street * New York, NY 10286
TRANSFER AGENT & DIVIDEND DISBURSING AGENT
BISYS Fund Services
3435 Stelzer Road * Columbus, OH 43219
BISYS Fund Services Limited Partnership
is the Portfolios' distributor and is
unaffiliated with First American
National Bank, the Portfolios' adviser.
Investments in the Portfolios are
neither guaranteed by nor obligations of
First American National Bank or any
other bank and are not insured by the
FDIC or any other government agency.
Investments in mutual funds involve
risk, including the possible loss of
principal. This material must be
preceded or accompanied by a current
prospectus.
[AMERISTAR MUTUAL FUNDS LOGO]
HELPING PEOPLE PLAN
FOR A BRIGHTER FUTURE. (SM)
760007 2/98
BULK RATE
U.S. POSTAGE
PAID
COLUMBUS, OH
PERMIT NO. 688
<PAGE>
[AMERISTAR MUTUAL FUNDS LOGO]
[EYE IN PYRAMID BACKGROUND]
AMERISTAR PRIME
MONEY MARKET PORTFOLIO
AMERISTAR U.S. TREASURY
MONEY MARKET PORTFOLIO
AMERISTAR CAPITAL
GROWTH PORTFOLIO
AMERISTAR DIVIDEND
GROWTH PORTFOLIO
SEMI-ANNUAL REPORT
AMERISTAR CORE
INCOME PORTFOLIO
AMERISTAR LIMITED
DURATION INCOME PORTFOLIO
AMERISTAR LIMITED DURATION
U.S. GOVERNMENT PORTFOLIO
AMERISTAR TENNESSEE TAX
EXEMPT BOND PORTFOLIO
AMERISTAR LIMITED DURATION
TENNESSEE TAX FREE PORTFOLIO
<PAGE>
JUNE 30, 1998
FUND FACTS
The AmeriStar Funds provide shareholders with a variety of features to
make investing in the Portfolios easy, convenient and manageable.
<TABLE>
<S> <C> <C>
------------------------------------------------------------------------------------------
AMERISTAR FUND FEATURES AMERISTAR FUND BENEFITS
PROFESSIONAL INVESTMENT The investment managers at First American National Bank are
MANAGEMENT experienced investment professionals who oversee the
investments in each mutual fund.
------------------------------------------------------------------------------------------
LOW MINIMUM INVESTMENT Initial investments in the Portfolios can be as low as
$1,000.
DEDICATED CUSTOMER Account information is available from helpful
SERVICE representatives. Just call 1-800-852-0045.
------------------------------------------------------------------------------------------
AUTOMATIC INVESTMENTS Investments can be made once or twice a month with automatic
transfers from your checking account to your Portfolio
account.
DOLLAR COST AVERAGING Dollar Cost Averaging is a means of investing by which you
invest a fixed dollar amount on a consistent basis. You
invest whether the financial markets are high or low. As a
result, you buy more shares when prices are low and fewer
when prices are high. In this way, you can achieve a lower
average cost per share.*
------------------------------------------------------------------------------------------
AUTOMATIC WITHDRAWALS Automatic withdrawals from your Portfolio account can be
made and credited to any account you designate.
FREE EXCHANGE PRIVILEGES Shares of a Portfolio can be exchanged into shares of other
AmeriStar Portfolios at no cost.**
------------------------------------------------------------------------------------------
REGULAR, INFORMATIVE You will receive account statements after each transaction,
STATEMENTS AND REPORTS plus regular financial reports highlighting performance and
investment strategies.
DIVIDEND REINVESTMENT Dividend income and capital gains can be reinvested
automatically in additional shares of a Portfolio.
------------------------------------------------------------------------------------------
DAILY REDEMPTIONS Shares are redeemable each business day (at the net asset
value per share, which may be worth more or less than your
original cost, next determined after receipt of your
redemption request) by mail, telephone or bank wire.
* Dollar Cost Averaging does not assure a profit and does not protect against loss in
declining markets. You should consider your financial ability to continue your investment
program during periods of extreme share price fluctuations.
** Exchange privileges may be modified or discontinued by the Portfolios at any time. Upon
redemption, shares may be worth more or less than their original cost.
HELPING PEOPLE PLAN FOR A BRIGHTER FUTURE.(SM)
</TABLE>
LETTER FROM THE CHIEF INVESTMENT OFFICER
- --------------------------------------------------------------------------------
To Our Shareholders:
I am pleased to send you the AmeriStar Mutual Funds' semi-annual report for the
six months ended June 30, 1998, a period that saw stocks soar to new levels.
Bond investors also enjoyed returns that were healthy by historical standards,
especially when measured against the tame level of inflation we experienced
during the period.
In January, we introduced Class B shares to our fund family. Unlike our
traditional Class A shares, which carry front-end sales charges, the Class B
shares come with a deferred load, also known as a "contingent deferred sales
charge or CDSC." We feel that Class B shares are ideal for long-term
shareholders.
STOCKS PROVED THAT BIG WAS BETTER
As 1998 began, we felt that the stock market would rotate away from large-cap
stocks and toward mid- and small-cap issues. We believed that larger stocks were
fundamentally overvalued relative to the smaller names in the market. Our
feeling was that smaller stocks -- by that, I mean issues with market
capitalizations of less than $5 billion -- were somewhat sheltered from the
problems in Asia, and that investors would appreciate the relative merits of
these stocks.
However, this scenario simply didn't play out. Instead, a huge flow of money
continued to pour into an extremely narrow group of very large stocks. Investors
preferred companies they believed would continue to generate consistently high
earnings growth for years to come. Foreign players, in particular, focused on
the market's most recognizable names. Fleeing economic turmoil in Asia and
elsewhere, these investors felt comfortable only with the most familiar
companies, and they pushed price-to-earnings multiples and other valuation
measures to extraordinarily high -- some would say dangerous -- levels.
History suggests that these large-cap stocks could be ripe for a fall, but
that's been the case for some time, and market historians have made little money
in recent years. Consequently, we've decided not to "fight the tape," and we've
returned to a strategy of investing in what we perceive to be the best of the
large-cap stocks. For the time being, liquidity, rather than stocks' underlying
fundamentals or valuations, is driving the market. The lion's share of this
liquidity is being driven through the large caps.
BONDS DEPENDED ON THE KINDNESS OF NUMBERS
For the period as a whole, fixed-income investors enjoyed relatively high
returns that were enhanced by continued low inflation. The yield on the
bellwether 30-year Treasury bond fell about 30 basis points (0.30%), which
supported moderately higher bond prices. Overall, the yield curve flattened
dramatically, with shorter-term rates remaining very steady. This was mostly due
to the Federal Reserve Board's (the Fed) decision not to lower the fed funds
rate, the rate banks charge one another for overnight loans. So we saw a
situation in which market forces drove long-term rates down, while the Fed kept
short-term rates artificially high. With inflation virtually nonexistent, our
fixed-income shareholders experienced "real returns" (total return minus
inflation) that were generous by historical standards.
If long-term interest rates continue to decline, investment in capital goods and
building activity could be stimulated. The housing market, for example, could
continue to power up. Our sense is that the Fed doesn't want that to happen;
they're looking to cool off the economy to some degree. Therefore, the Fed is
not likely to lower short-term rates. This suggests that the yield curve could
stay in its current, flat position, which typically has been a precursor to
slower economic growth.
Asia remains the wildest of wild cards. The problems in Asia have had a negative
effect on the earnings of many companies with overseas customers. However, we
believe that Asia is also being used as an excuse for bad management decisions,
or for the normal ebbs and flows of the economic cycle.
Still, we're concerned about Japan, which seems unable or unwilling to do what's
necessary to right its economy. Japan's government has taken some measures in
recent months to mollify critics in the United States and China, but these
actions may prove to be more cosmetic than substantive. Despite the fact that
the prime minister was forced to resign from office in early July, it's possible
that Japan will continue to suffer, at least in the banking sector, in the near
term.
All in all, we think that the climate for stocks and bonds is neutral over the
next six months. There are some underlying forces that remain positive for
investments, including the aging of the population and the move toward saving
for retirement, and a federal government that is as stable as any in the world.
For those and other reasons, we believe that money will continue to flow into
our markets. Frankly, we're surprised that stocks have risen as much as they
have this year. As previously mentioned, we're not going to fight that upward
momentum, and we intend to remain as fully invested as possible.
We thank you for your support and look forward to serving your investment needs
in the months and years to come.
Sincerely,
/s/ Frederick S. Crown Jr.
Frederick S. Crown Jr., CFA
Chief Investment Officer
SHARON BROWN DONALD F. TURK, CFA
Portfolio Manager Portfolio Manager
Prime Money Market U.S. Treasury Money
[Brown Photo] Portfolio+ [Turk Photo] Market Portfolio+
INVESTMENT GOAL
The AmeriStar Money Market Portfolios seek to provide as high a level of
current income as is consistent with the preservation of capital and the
maintenance of liquidity. Each Portfolio seeks its objective by investing in:
PRIME MONEY MARKET PORTFOLIO -- A broad range of U.S. Government, bank and
corporate short-term, money-market obligations.
U.S. TREASURY MONEY MARKET PORTFOLIO -- U.S. Treasury securities, other
obligations that are guaranteed as to principal and interest by the U.S.
Government and related repurchase agreements.
Q. WHAT FACTORS AFFECTED THE PERFORMANCE OF THE MONEY MARKET FUNDS?
A. For the last six months, Treasury bill rates were very stable. From January
into April, the 3-month T-bill rate drifted within a fairly tight range of
5.10%-5.22%. Then, from April through the end of June, the rate stayed within an
equally narrow range of 5.03%-5.15%. This was a direct consequence of the
Federal Reserve's keeping the fed funds rate (the rate banks charge one another
for overnight loans) artificially high at 5.5%.
As of June 30, 1998, the average maturity of the Prime Money Market Portfolio
was 9 days; for the U.S. Treasury Money Market Portfolio, it was 52 days.
With the Prime Money Market Portfolio, there was no enticement to go out long on
the yield curve. With the commercial (corporate) paper that is bought by the
Portfolio, we were being offered yields on the short end that were within five
basis points (0.05%) of longer debt. It made more sense to us to stick with
shorter paper and stay as liquid as possible.
With the U.S. Treasury Money Market Portfolio, we were concerned about a
downtrend in interest rates. Consequently, during the period, we made
appropriate adjustments to the Portfolio's average maturity, and to the type of
debt we held. The Fund has maintained Standard & Poor's highest quality rating
of AAA over the reporting period.*
Q. WHAT IS YOUR OUTLOOK FOR THE NEXT SIX MONTHS?
A. We do not believe the Fed will change the fed funds rate, which should leave
the money markets steady. We will buy short-term paper when it makes sense to do
so and also buy longer-term debt when we can get sufficiently high yields. As
always, remaining liquid for our shareholders will be a priority.
- ---------------
* The Fund is rated AAA by Standard & Poor's. This rating is historical and is
based upon the Fund's credit quality, market exposure and management. It
signifies that the Fund's safety is excellent and that it has a superior
capacity to maintain a $1.00 net asset value per share.
+ An investment in the AmeriStar Money Market Portfolios is neither insured nor
guaranteed by the U.S. Government. Yields will fluctuate, and there is no
assurance that the Portfolios will be able to maintain a stable net asset
value of $1.00 per share.
CHARLES WINGER
Portfolio Manager
Capital Growth
[Winger Photo] Portfolio
- ---------------------------------------------------------------
- ---------------------------------------------------------------
INVESTMENT GOAL
The Portfolio seeks to provide investors with the potential to achieve
long-term capital growth by investing primarily in the equity securities of
domestic issuers whose earnings are growing faster than the economy as a
whole. It invests primarily in large U.S. companies with market
capitalizations of at least $500 million. The Portfolio is suitable for
investors who are investing for the long term and are comfortable assuming
the additional risk of investing in stocks in exchange for potentially
higher total returns.
- ---------------------------------------------------------------
Q. HOW DID THE PORTFOLIO PERFORM DURING THE PERIOD?
A. Despite some volatility, we had a good first half of the year, relative to
historical returns. For the six months ended June 30, 1998, the Portfolio's
total return was 14.22% (Class A Shares at NAV).* In comparison, the Lipper
Growth Fund Index was up 15.57%, and the Standard & Poor's 500 Index rose
17.72%. The Lipper Growth Fund Index is an index of managed funds that is
generally representative of growth stock funds. The S&P 500 is an unmanaged
index that is considered to be generally representative of the U.S. stock market
as a whole.
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. In the first quarter of 1998, we were overweighed in health care and
technology; both sectors performed quite well and helped our performance.
However, in April and May, we became concerned with valuation levels and took a
defensive posture. We raised cash and reduced some of our positions in health
care and technology, two sectors that continued to move upward. We also bought
into the energy sector. Unfortunately, it turned out to be a bad time for energy
stocks, and the Portfolio suffered as a result. The best way to put it is, we
got out of sync with the market. But we righted ourselves and ended up having a
satisfactory period.**
Q. DID YOU CHANGE YOUR FUNDAMENTAL STRATEGY?
A. No, our fundamental investment themes remain the same. We still like
productivity enhancement, which means we believe in technology. We still like
financial services and domestic growth companies. For example, we added Dollar
General (1.23% of the Portfolio), a discount merchandise retailer and Lowe's
Companies (1.89%), a distributor of building materials and supplies. These are
growth companies that have little or no exposure to foreign markets; their
earnings may not be hurt by the problems in Asia.**
Q. WHAT OTHER STOCKS DO YOU PARTICULARLY LIKE?
A. We are still overweighed in technology and health care. Dell Computer (2.3%
of the Portfolio) has performed very well for us. We still like Cisco Systems
(3.1%); it has been among our favorite stocks for some time. Also, Microsoft
(1.8%) remains a leader in its industry and Lucent Technologies (2.6%) has been
a big performer for us in 1998. In health care, two new names in our Portfolio
are Warner-Lambert (2.6%) and Schering-Plough (2.6%).**
Also, at the beginning of the year, we had 25%-30% of our assets invested in the
mid-cap sector (stocks with market capitalization of less than $8 billion).
Those stocks significantly underperformed the market, and we reduced our
position to less than 10% of the Portfolio in mid-caps.**
Q. WHAT'S YOUR OUTLOOK FOR THE REMAINDER OF 1998?
A. We are very concerned with the valuation levels in the market. But being
cautious has not paid off in this bull market. Interest rates are still low, and
corporate earnings are coming through okay. We are not ready to abandon stocks.
- ---------------
* Including the 4.75% sales load, the Portfolio's return was 8.78%, year to
date; 22.49%, 1-year; 18.33%, 5-year; and 14.33%, for the 10-year period.
** The Portfolio composition is subject to change.
JAY BAUMGARDNER
Portfolio Manager
Dividend Growth
[Baumgardner Photo] Portfolio
- ---------------------------------------------------------------
- ---------------------------------------------------------------
INVESTMENT GOAL
The Portfolio seeks to provide investors with current income and capital
appreciation. The Portfolio invests primarily in dividend-paying equity
securities of domestic issuers that are expected to provide reasonable income
and may have capital appreciation potential.
- ---------------------------------------------------------------
Q. HOW DID THE PORTFOLIO PERFORM DURING THE PERIOD?
A. We had a very good period relative to our benchmark. For the six months ended
June 30, 1998, the Portfolio's total return was 12.66% (Class A Shares at NAV).*
In comparison, the Lipper Equity Income Index rose 9.59%. The Lipper Equity
Income Index is an index of managed funds that is generally representative of
funds that invest more than 60% of assets in equities.
We were very satisfied with the Portfolio's total return. As noted above, our
Investment Goal stresses current income as well as capital appreciation.
Therefore, such outperformance rewarded our shareholders handsomely.
Q. WHAT FACTORS LED TO THESE STRONG RETURNS?
A. We continued to do well with two of our three primary sectors: financial
stocks and utilities. Our energy holdings didn't fare quite as well, however. In
the first six months of 1998, oil prices plummeted from $18-$20 a barrel to
$12-$13 a barrel. But despite problems with oil stocks, we more than made up
ground in other areas. For example, we had great success in the consumer
staples, health care and technology sectors especially those companies that were
not affected by the "Asian contagion." The key factor driving each of those
areas was consistent, reliable earnings. Food companies such as Heinz (1.8% of
the Portfolio) and Best Foods (2.2%), along with consumer product companies such
as Procter & Gamble (2.2%) and Colgate Palmolive (2.3%), continued to charge
right along. In technology, one of our best stocks was Automatic Data Processing
(2.6%), a payroll processing firm that had very little exposure in Asia. The
stock was up more than 20% during the period. We also benefited from the drop in
interest rates and continued low inflation. This environment was ideal for
financial and utility stocks, which represented a significant portion of our
Portfolio.**
Q. WHAT OTHER STOCKS PERFORMED WELL FOR YOU?
A. We were very happy with the performance of Wal-Mart (1.0% of the Portfolio),
which rose nearly 60% during the period. We were attracted to the stock because
it's a retailer--we were looking to expand our presence in the retail
sector--the company has been a consistent earnings grower and its foreign
exposure is relatively small. Also, Gannett (2.7%), the publisher of USA Today
and other papers, continued to deliver solid returns. As with Wal-Mart, Gannett
has a domestic orientation and delivers consistent earnings growth. The company
also has profited from flat newsprint prices, newsprint being its largest cost
component.**
Q. WITH THE PORTFOLIO'S IMPRESSIVE CAPITAL APPRECIATION, HAVE YOU BEEN ABLE TO
MAINTAIN AN ABOVE-AVERAGE YIELD FOR SHAREHOLDERS?
A. Yes. As of June 30, the Portfolio's dividend yield was 2.3%, versus just 1.4%
for the S&P 500. We received significant yield from our utility holdings and the
real estate investment trusts (REITs) in the Portfolio. After several years of
strong performance, REITs underperformed during the period, due to some negative
stories in the media and skeptical investor psychology. But we believe the real
estate sector is still very viable, and we expect to be rewarded for our
patience.**
Q. WHAT IS YOUR STRATEGY FOR THE NEXT SIX MONTHS?
A. Although we wouldn't be surprised to see the U.S. economy slow down, it still
looks solid compared to the rest of the world. The kinds of companies we focus
on are not necessarily dependent on a growing economy; they're not cyclical in
nature. Asia may continue to be a drag throughout the world, but if you own
Wal-Mart, you may not be terribly concerned about economic conditions in, say,
Japan. We anticipate stable interest rates and benign inflation--all of which
bodes well for a portfolio such as ours. And if oil prices begin to rise, we're
confident our energy holdings will do very well.
- ---------------
* Including the 4.75% sales load, the Portfolio's return was 7.28%, year to
date; 20.29%, 1-year; 15.12%, 5-year; and 13.92%, for the 10-year period.
** The Portfolio's composition is subject to change.
DONALD F. TURK, CFA
Portfolio Manager
Core Income
[Turk Photo] Portfolio
- ---------------------------------------------------------------
- ---------------------------------------------------------------
INVESTMENT GOAL
The Portfolio seeks to provide investors with current income without assuming
undue risk. It invests primarily in investment-grade, U.S. dollar-denominated,
fixed-income securities of domestic and foreign issuers with maturities of any
length. The Portfolio is suitable for investors seeking regular monthly income
without undue risk to principal.
- ---------------------------------------------------------------
Q. HOW DID THE PORTFOLIO PERFORM DURING THE FIRST HALF OF 1998?
A. Despite some volatility in the market, the Portfolio performed very well
during the period. For the six months ended June 30, 1998, the Portfolio
produced a total return of 3.93% (Class A Shares at NAV).* In comparison, the
Merrill Lynch Corporate/Government Master Index, an unmanaged benchmark,
produced a total return of 4.24%. The Merrill Lynch Corporate/Government Index
is generally representative of U.S. Treasury and Agency bonds and
investment-grade corporate bonds.
It is also important to recognize income yield to shareholders. As of June 30,
1998, the Portfolio's 30-day SEC yield was 5.00% (Class A Shares at NAV)**,
compared to 5.89% at the end of 1997. The yield percentage is annualized. We
achieved our objectives while maintaining an average credit quality of AA-
(rated by Standard & Poor's). As of June 30, 1998, the Portfolio's average
maturity was 11.4 years.***
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. As the period progressed, corporate spreads widened, largely due to fears
caused by the situation in Asia and the decision by many investors to favor
super-safe Treasury bonds. (Corporate spreads are the additional yield provided
by a corporate bond over a Treasury bond of similar maturity. Spreads often
widen when the demand for a class of security, such as corporate paper, is lower
than the demand for another security, such as Treasury debt.) Also, as interest
rates declined, the prepayments on our limited holdings of mortgage-backed
securities increased, resulting in slightly fewer high-yielding instruments in
our Portfolio.
Q. WITH ALL THIS MOVEMENT IN THE MARKET, WHAT STRATEGIES DID YOU EMPLOY TO HELP
YOU MEET YOUR OBJECTIVES?
A. First, we extended the Portfolio's average weighted maturity from 11.2 years
at the end of December to 11.4 years at the end of June. Second, to increase
income to shareholders, we sold some of our lower-yielding Treasury securities
and replaced them with higher-yielding corporate paper. For example, we moved
from Treasury securities of 2026 into AA-rated Consolidated Natural Gas Bonds of
2027 (2.1% of the Portfolio), which added 63 basis points (0.63%) in yield. And
third, we increased our use of callable bonds. Although callable bonds can be
redeemed before maturity by the issuer, this move enabled us to maintain the
same approximate maturity as with our noncallable bonds, while increasing
interest income significantly. To illustrate, we bought Xerox Credit 7.5% bonds
due in 2012 (0.6% of the Portfolio); these bonds are callable in 1999, but still
increased yield by 2.26% over Treasury securities that come due in 1999. We are
very sensitive to the fact that our shareholders are focused on current income,
and we took prudent steps to boost yield while maintaining the relative
stability of the Portfolio.***
As of June 30, 1998, 79% of the Portfolio was invested in corporate paper, with
a total of 21% invested in Treasury, government agency and pass-through
securities.***
Q. WHAT IS YOUR OUTLOOK?
A. We continue to be positive on the bond market, though we feel most of the
downtrend in yields is behind us. Over the next six months, the yield on the
30-year Treasury bond should remain within a range of 5.5%-6.0%. Looking ahead
into 1999, we expect the yield to dip below 5%. However, the largest wild card
is Asia, especially with regard to the state of the Japanese financial industry.
The trouble in Japan is far from over, and that could have a major impact on the
U.S. economy and our markets.
- ---------------
* Including the 3.00% sales load, the Portfolio's return was 0.78%, year to
date; 7.23%, 1-year; 5.03%, 5-year; and 7.34%, for the 10-year period.
** During the period, certain expenses were voluntarily waived and/or
reimbursed. Had these waivers and/or reimbursements not been in effect, the
30-day SEC yield would have been lower.
*** The Portfolio composition is subject to change.
DONALD F. TURK, CFA
Portfolio Manager
Limited Duration
[Turk Photo] Income Portfolio
- ---------------------------------------------------------------
- ---------------------------------------------------------------
INVESTMENT GOAL
The Portfolio seeks to provide investors with current income without assuming
undue risk. It invests primarily in investment-grade, U.S. dollar-denominated,
fixed-income securities of domestic and foreign issuers that generally have a
duration of under four years. This Portfolio is suitable for investors seeking
regular monthly income without undue risk to principal.
- ---------------------------------------------------------------
Q. HOW DID THE PORTFOLIO PERFORM DURING THE FIRST HALF OF 1998?
A. The Portfolio performed well during the period. For the six months ended June
30, 1998, the Portfolio produced a total return of 2.74% (Class A Shares at
NAV).* In comparison, the Merrill Lynch 1-5 Year Corporate/Government Index, an
unmanaged benchmark, produced a total return of 3.19%. The index is a broad
performance measure of bonds with maturities in the one-to-five-year range.
It is also important to recognize income yield to shareholders. As of June 30,
1998, the Portfolio's 30-day SEC yield was 5.00% (Class A Shares at NAV)**,
compared to 5.92% at the end of 1997. The yield percentage is annualized. We
achieved our objectives while maintaining an average credit quality of AA (rated
by Standard & Poor's). As of June 30, 1998, the Portfolio's average maturity was
3.0 years.***
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. As the period progressed, corporate spreads widened, largely due to fears
caused by the situation in Asia and the decision by many investors to favor
super-safe Treasury bonds. (Corporate spreads are the additional yield provided
by a corporate bond over a Treasury bond of similar maturity. Spreads often
widen when the demand for a class of security, such as corporate paper, is lower
than the demand for another security, such as Treasury debt.) Also, as interest
rates declined, the prepayments on our limited holdings of mortgage-backed
securities increased, resulting in slightly fewer high-yielding instruments in
the Portfolio.
The short end of the yield curve was very flat, and, in fact, was slightly
inverted at times during the period. (An inverted yield curve results when
securities with shorter maturities offer higher yields than securities with
longer maturities.) This was due partly to the fact that the Federal Reserve
kept the fed funds rate "artificially" high, and partly to the widening of
spreads. Consequently, some of the short-maturity paper we held didn't
appreciate in value as much as we expected.
Q. WHAT STRATEGIES DID YOU EMPLOY?
A. We took prudent measures to boost yield for our shareholders while preserving
the relative stability of the Portfolio. First, we continued to maintain the
Portfolio's average maturity at about 3 years throughout the period. Second, we
increased our use of callable agency bonds, which helped us maintain the same
approximate maturity, while increasing interest income significantly. For
example, we bought Federal Home Loan Mortgage Corporation 6.75% notes that
mature in 2008 (2.2% of the Portfolio); these notes are callable in 1999, but
still increased yield by 1.46% over Treasury securities that come due in 1999.
Third, we sold lower-yielding Treasury securities and replaced them with
higher-yielding corporate paper. To illustrate, we moved some money from
Treasury securities into SCANA Corp. 6.25% notes due in 2003 (2.2%). SCANA is
the solid, A-rated parent of South Carolina Electric and Gas, and the paper
yields 75 basis points (0.75%) more than similar Treasury notes.***
As of June 30, 1998, 63% of the Portfolio was invested in corporate paper, with
a total of 37% invested in Treasury, agency and pass-through securities.
Q. WHAT IS YOUR OUTLOOK?
A. The key question to consider is: What will the Fed do? It appears to us that,
unless the economy has a huge, unexpected spurt, the Fed will not raise the fed
funds rate. In that case, the bond market should be in pretty good shape,
barring widespread selling by foreign investors. Over the next six months, the
yield on the 30-year Treasury bond should remain within a range of 5.5%-6.0%.
Looking ahead into 1999, we expect the yield to dip below 5%.***
- ---------------
* Including the 3.00% sales load, the Portfolio's return was -0.35%, year to
date; 3.44%, 1-year; 4.48%, 5-year; and 6.41%, for the 10-year period.
** During the period, certain expenses were voluntarily waived and/or
reimbursed. Had these waivers and/or reimbursements not been in effect, the
30-day SEC yield would have been lower.
*** The Portfolio's composition is subject to change.
DONALD F. TURK
Portfolio Manager
Limited Duration
U.S. Government
[Turk Photo] Portfolio
- ---------------------------------------------------------------
- ---------------------------------------------------------------
INVESTMENT GOAL
The Portfolio seeks to provide investors with high current income without
assuming undue risk. The Portfolio will invest primarily in a portfolio of
U.S. Government securities that, under normal market conditions, has a
duration that approximates that of the Merrill Lynch 1-5 Year Government Bond
Index.
- ---------------------------------------------------------------
Q. HOW DID THE PORTFOLIO PERFORM DURING THE FIRST HALF OF 1998?
A. The Portfolio did very well during the period. For the six months ended June
30, 1998, the Portfolio produced a total return of 2.74% (Class A Shares at
NAV).* In comparison, the Merrill Lynch 1-5 Year Government Bond Index, an
unmanaged benchmark, produced a total return of 3.19%. The index is a broad
performance measure of government bonds with maturities in the one-to-five-year
range.
It is also important to recognize income yield to shareholders. As of June 30,
1998, the Portfolio's 30-day SEC yield was 4.99% (Class A Shares at NAV)**,
compared to 5.92% at the end of 1997. The yield percentage is annualized. We
achieved our objectives while maintaining an average credit quality of AAA (as
rated by Standard & Poor's). As of June 30, 1998, the Portfolio's average
maturity was 3.4 years.***
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. The short end of the yield curve was very flat, and, in fact, was slightly
inverted at times during the period. (An inverted yield curve results when
securities with shorter maturities offer higher yields than securities with
longer maturities.) This was due partly to the fact that the Federal Reserve
kept the fed funds rate "artificially" high, and partly to the widening of
spreads between Treasury and corporate debt. Consequently, some of the
short-maturity paper we held didn't appreciate in value as much as we expected.
Also, as interest rates declined, the prepayments on our limited holdings of
mortgage-backed securities increased, resulting in slightly fewer high-yielding
instruments in the Portfolio.
Q. WHAT STRATEGIES DID YOU EMPLOY?
A. We took prudent measures to generate more yield for our shareholders while
preserving the relative stability of the Portfolio. First, we extended the
Portfolio's average maturity from 3.1 years at the end of December to 3.4 years
at the end of June. Second, we increased our use of callable agency bonds. This
enabled us to maintain the same approximate maturity, but boosted our interest
income significantly. For example, we sold a position in Treasury notes and used
the proceeds to buy Federal Home Loan Bank notes due in 2007 (3.8% of the
Portfolio). These notes are callable in 1999, but still offer 54 basis points
(0.54%) more yield than Treasury securities that come due in 1999. We believe
this was a great opportunity for us; the notes come with virtually no risk of
default and offer a greater spread than we could find in the riskier, corporate
market.***
As of June 30, 1998, 45% of the Portfolio was invested in Treasury securities,
with 51% invested in government agencies and pass-through securities.***
Q. WHAT IS YOUR OUTLOOK?
A. Basically, the economy keeps rolling along in an accommodating environment of
stable interest rates and low inflation. A key question to consider is: What
will the Fed do? It appears to us that, unless the economy has a huge,
unexpected spurt, the Fed will not raise the fed funds rate. In that case, the
bond market should be in pretty good shape, barring widespread selling by
foreign investors. Over the next six months, the yield on the 30-year Treasury
bond should remain within a range of 5.5%-6.0%. Looking ahead into 1999, we
expect the yield to dip below 5%, which would be good for virtually all types of
bonds.***
- ---------------
* Including the 3.00% sales load, the Portfolio's return was -0.32%, year to
date; 3.45%, 1-year; 3.93%, 5-year; and 6.42%, for the 10-year period.
** During the period, certain expenses were voluntarily waived and/or
reimbursed. Had these waivers and/ or reimbursements not been in effect,
the 30-day SEC yield would have been lower.
*** The Portfolio's composition is subject to change.
SHARON BROWN
Portfolio Manager
Tennessee
Tax Exempt
[Brown Photo] Bond Portfolio
- ---------------------------------------------------------------
INVESTMENT GOAL
The Portfolio seeks to provide investors with current income exempt from
Federal and Tennessee state income taxes without assuming undue risk. The
Portfolio invests primarily in investment-grade Tennessee municipal
obligations, and is suitable for Tennessee residents seeking monthly income
exempt from both federal and Tennessee personal income taxes.+ The Portfolio
affords greater diversification and liquidity than most investors would
achieve by purchasing municipal securities directly.
- ---------------------------------------------------------------
Q. HOW DID THE PORTFOLIO PERFORM DURING THE PERIOD?
A. For the six months ended June 30, 1998, the Portfolio produced a total return
of 1.17% (Class A Shares at NAV).* In comparison, the Portfolio's unmanaged
benchmark, the Lipper States Intermediate Municipal Index, produced a total
return of 2.19%. (The index is a broad performance measure of municipal bonds
with intermediate-term maturities.)
It is also important to recognize income yield to shareholders. As of June 30,
1998, the Portfolio's 30-day SEC yield was 3.11% (Class A Shares at NAV).** For
investors in the 36% federal income tax bracket, that is equivalent to a taxable
yield of 4.86%. The yield percentage is annualized.
We achieved our objectives while maintaining an average credit quality of Aa
(rated by Moody's) and AA (rated by Standard & Poor's). As of June 30, 1998, the
Portfolio's average maturity was 8.9 years.***
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. We saw a good bit of supply come into the market. The period included a new
fiscal year for many municipalities and other government entities; this is a
time when issuers traditionally begin a new borrowing cycle.
For most of the period, municipal bonds in general underperformed Treasury
bonds, which turned in a particularly strong performance. This variance was due
partly to the amount of supply in the municipal market and partly to the fact
that many fixed-income investors continued to show an interest in the equity
market. With stocks soaring the last three years, many long-time bond investors
may have felt that equities offered a better risk-reward tradeoff.
The only significant move we made was a concerted effort to bring this to be an
all-Tennessee fund; we sold most of our out-of-state holdings and used the
proceeds to buy Tennessee municipals. Even though our prospectus allows us to
invest up to 35% of the Portfolio in out-of-state bonds, the vast majority of
our shareholders are residents of Tennessee, and we wanted to give them the
greatest possible tax advantage.
Q. WHAT ARE A FEW OF YOUR FAVORITE BONDS IN THE PORTFOLIO?
A. One of our favorite bonds has been Memphis 6.25%, due 2009 (2.1% of the
Portfolio). This is a noncallable bond, so we're getting an attractive yield
guaranteed for 11 years. On the longer end of the market, we like the Hamilton
County 5.10%, due 2024 (1.7%). We bought these bonds at a discount, and as
interest rates fell during the period, the bonds gained in value.***
Q. WHAT IS YOUR OUTLOOK FOR THE REMAINDER OF 1998?
A. We don't see a whole lot of change going on in the municipal market for the
rest of the year. We're going to still be faced with a healthy amount of supply.
We feel the 30-year Treasury bond is going to remain in a trading range of
5.5%-6.0%, and while municipals don't move in lockstep with Treasuries, they key
off moves in the Treasury market. So we don't foresee a lot of volatility. We're
pretty comfortable with the composition of our Portfolio.***
- ---------------
+ Some investors may be subject to the federal alternative minimum tax and to
certain state and local taxes.
* Including the 3.00% sales load, the Portfolio's return was -1.82%, year to
date; 3.55%, 1-year; 2.77%, 5-year; and 5.07%, for the 10-year period.
** During the period, certain expenses were voluntarily waived and/or
reimbursed. Had these waivers and/or reimbursements not been in effect, the
30-day SEC yield would have been lower.
*** The Portfolio's composition is subject to change.
SHARON BROWN
Portfolio Manager
Limited Duration
Tennessee Tax Free
[Brown Photo] Portfolio
- ---------------------------------------------------------------
INVESTMENT GOAL
The Portfolio seeks to provide investors with current income exempt from
Federal and Tennessee state income taxes without assuming undue risk+. The
Portfolio invests primarily in investment-grade Tennessee Municipal
Obligation Bonds that generally have a duration of under five years,
producing an effective average portfolio maturity ranging between three and
five years.
- ---------------------------------------------------------------
Q. HOW DID THE PORTFOLIO PERFORM DURING 1997?
A. For the six months ended June 30, 1998, the Portfolio produced a total return
of 1.40% (Class A Shares at NAV).* In comparison, the Portfolio's unmanaged
benchmark, the Lehman Brothers Municipal 1-5 Year Index, produced a total return
of 2.3%, while Lipper states that the Short Intermediate Municipal Debt Index 6
month return was 1.96%. The index is a broad performance measure of municipal
bonds with short-term maturities.
It is also important to recognize income yield to shareholders. As of June 30,
1998, the Portfolio's 30-day SEC yield was 3.11% (Class A Shares at NAV).** For
investors in the 36% federal income tax bracket, that is equivalent to a taxable
yield of 4.83%. The yield percentage is annualized.
We achieved our objectives while maintaining an average credit quality of Aa
(rated by Moody's) and AA (rated by Standard & Poor's). As of June 30, 1998, the
Portfolio's average maturity was 4.6 years.***
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. We saw a good bit of supply come into the market. The period included a new
fiscal year for many municipalities and other government entities; this is a
time when issuers traditionally begin a new borrowing cycle.
The yield curve continued to flatten during the period. We saw rates on the
shorter end of the yield curve, where we mostly operate, come down more sharply
than on the longer end of the curve. This was due in part to the Federal
Reserve's decision to keep the fed funds rate (the rate banks charge one another
for overnight loans) at an artificially high 5.5%. Demand on the short end
tended to keep up with supply; the short end didn't underperform, relative to
Treasuries, as much as the longer end of the market.
Q. WHAT ARE A FEW OF YOUR FAVORITE BONDS IN THE PORTFOLIO?
A. We like Metro Nashville Davidson County 6.25%, due 2001 (4.4% of the
Portfolio). This is almost a four-year piece of paper with a good coupon. On the
long end of the yield curve is a bond we've had for quite a while: Knoxville
7.25%, due 2008 (5.0%). We've held this issue for its current yield and the
coupon. Sometime in the next few years we might see a need to change into a
longer bond with the same coupon or rearrange the Portfolio to protect our
yield. But for right now, this bond is adding very nicely to the Portfolio's
yield.***
Q. WHAT IS YOUR OUTLOOK FOR 1998?
A. We don't see a whole lot of change going on in the municipal market for the
rest of the year. We're going to still be faced with a healthy amount of supply.
If the Fed were to juggle the fed funds rate around, obviously that would have
an effect on a Portfolio such as ours. But we don't anticipate such a move and
feel that our end of the market should remain steady. We're pretty comfortable
with the composition of our Portfolio.***
- ---------------
+ Some investors may be subject to the federal alternative minimum tax and to
certain state and local taxes.
* Including the 3.00% sales load, the Portfolio's return was -1.61%, year to
date; 1.92%, 1-year; 2.69%, 5-year; and 4.62%, for the 10-year period.
** During the period, certain expenses were voluntarily waived and/or
reimbursed. Had these waivers and/or reimbursements not been in effect, the
30-day SEC yield would have been lower.
*** The Portfolio's composition is subject to change.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR PRIME MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMORTIZED
MOODY'S/S&P MATURITY PRINCIPAL COST
RATINGS RATE DATE AMOUNT (NOTE 2)
----------- -------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
BANK NOTES -- 1.8%
AMEX Centurian.................................. P1/A1 5.71%* 7/13/98 $ 3,000,000 $ 3,000,635
------------
Total Bank Notes (Cost $3,000,635)................ 3,000,635
------------
CERTIFICATES OF DEPOSIT -- 2.4%
DOMESTIC -- 2.4%
CS First Boston................................. P1/A1 5.74* 7/7/98 4,000,000 4,000,000
------------
Total Certificates of Deposit (Cost $4,000,000)... 4,000,000
------------
COMMERCIAL PAPER -- 59.2%
Banca CRT Finance............................... P1/A1 5.58** 7/6/98 5,000,000 4,996,160
Bank One Funding................................ P1/A1+ 5.55** 7/21/98 5,000,000 4,984,694
Banque et d'Epargne de L'Etat................... P1/A1+ 5.55** 7/7/98 5,000,000 4,995,417
Bil North America Inc Bank Luxemborg............ P1/A1+ 5.54** 7/28/98 5,000,000 4,979,375
British Telecommunication PLC................... P1/A1+ 6.05** 7/1/98 5,000,000 5,000,000
Caisse Centrale................................. P1/A1+ 5.55** 7/17/98 5,000,000 4,987,778
Check Point Charley, Inc........................ P1/A1 5.60** 7/8/98 5,000,000 4,994,594
Commonwealth Bank of Australia.................. P1/A1+ 5.55** 7/17/98 5,000,000 4,987,733
Cooperative Tractor A........................... P1/A1+ 5.96** 7/2/98 7,000,000 6,998,844
Deutsche Bank................................... P1/A1+ 5.52** 7/6/98 5,000,000 4,996,201
Ford Motor Co................................... P1/A1 5.68** 7/2/98 5,000,000 4,999,213
General Motors.................................. P1/A1 5.67** 7/2/98 5,000,000 4,999,214
Halifax Building Society........................ P1/A1 5.69** 7/2/98 5,000,000 4,999,211
KFW International Finance....................... P1/A1+ 6.10** 7/2/98 6,900,000 6,898,831
Lloyds Bank PLC................................. P1/A1+ 5.51** 8/14/98 5,000,000 4,966,633
Nordbanken...................................... P1/A1 5.55** 7/17/98 5,000,000 4,987,778
PHH Corp........................................ P1/A1 5.72** 7/27/98 5,000,000 4,979,525
Svenska Handelsbanken........................... P1/A1 5.53** 7/6/98 5,000,000 4,996,194
Thunder Bay..................................... P1/A1 5.61** 7/21/98 3,000,000 2,990,733
------------
Total Commercial Paper (Cost $96,738,128)......... 96,738,128
------------
CORPORATE OBLIGATIONS -- 4.9%
CTN Trust, Series 1, MTN (b).................... P1/A1 6.01* 7/2/98 4,000,000 4,002,398
Merrill Lynch & Co, MTN......................... P1/A1+ 5.72* 7/7/98 4,000,000 4,000,000
------------
Total Corporate Obligations (Cost $8,002,398)..... 8,002,398
------------
U.S. GOVERNMENT AGENCY SECURITIES -- 10.4%
FEDERAL HOME LOAN BANK -- 3.1%
Federal Home Loan Bank.......................... 5.58* 7/1/98 5,000,000 4,998,328
------------
FEDERAL NATIONAL MORTGAGE ASSOC -- 4.2%
Federal National Mortgage Assoc................. 5.60* 7/7/98 5,000,000 4,999,516
Federal National Mortgage Assoc................. 5.35* 9/14/98 2,000,000 1,998,680
------------
6,998,196
------------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED
MOODY'S/S&P MATURITY PRINCIPAL COST
RATINGS RATE DATE AMOUNT/SHARES (NOTE 2)
----------- -------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
STUDENT LOAN MARKETING ASSOC. -- 3.1%
Student Loan Marketing Association.............. 5.34%* 7/7/98 $ 5,000,000 $ 4,994,244
------------
Total U.S. Government Agency Securities (Cost
$16,990,768).................................... 16,990,768
------------
REPURCHASE AGREEMENTS -- 21.5%
Goldman Sachs, dated 6/30/98, with a maturity
value of $35,271,924 (Collateralized by
$38,530,577 Federal National Mortgage Assoc.,
6.46%, 5/18/28, fair value -- 36,324,431).... 5.60 7/1/98 35,266,438 35,266,438
------------
Total Repurchase Agreements (Cost $35,266,438).... 35,266,438
------------
MONEY MARKET FUNDS -- 0.0%
Bank of New York Cash Reserve Money Market
Fund......................................... 1,016 1,016
------------
Total Money Market Funds (Cost $1,016)............ 1,016
------------
TOTAL INVESTMENTS (COST $163,999,383)
(a) -- 100.2%................................... 163,999,383
LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.2%)... (293,856)
------------
TOTAL NET ASSETS -- 100.0%........................ $163,705,527
============
</TABLE>
- ---------------
(a) Cost for federal income tax and financial reporting purposes are the same.
(b) Represents a restricted security, purchased under Rule 144A, which is exempt
from registration under the Securities Act of 1933, as amended. These
securities have been deemed liquid under guidelines established by the Board
of Directors.
* Variable rate security. Rate represents rate in effect at June 30, 1998.
Maturity date reflects the next rate change date.
** Yield effective at purchase.
PLC - Public Limited Company
MTN - Medium Term Note
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR PRIME MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at amortized cost.............. $128,732,945
Repurchase agreements, at amortized cost.................. 35,266,438
------------
Total Investments...................................... 163,999,383
Interest receivable....................................... 291,393
Receivable for capital shares issued...................... 17,421
Deferred organization costs............................... 10,134
Prepaid expenses and other assets......................... 6,504
------------
Total assets................................................ 164,324,835
------------
LIABILITIES
Distributions payable..................................... 519,631
Payable for capital shares redeemed....................... 18,738
Accrued expenses:
Advisory fees.......................................... 26,369
Administration fees.................................... 10,547
Shareholder servicing fees--Class A Shares............. 14,722
Accounting fees........................................ 5,185
Transfer agent fees.................................... 3,296
Custodian fees......................................... 8,090
Audit fees............................................. 5,927
Other.................................................. 6,803
------------
Total liabilities........................................... 619,308
------------
NET ASSETS
Class A Shares......................................... 107,989,421
Trust Shares........................................... 55,716,106
------------
Total Net Assets............................................ $163,705,527
============
Shares Outstanding ($0.001 par value, 1 billion shares
authorized)
Class A Shares......................................... 107,991,769
Trust Shares........................................... 55,717,185
------------
163,708,954
============
Net Asset Value, Offering Price and Redemption Price per
Share
Class A Shares......................................... $1.00
-----
Trust Shares........................................... $1.00
-----
COMPOSITION OF NET ASSETS:
Shares of beneficial interest, at par..................... $ 163,709
Additional paid-in capital................................ 163,541,682
Undistributed net investment income....................... 3,563
Accumulated net realized losses on investment
transactions........................................... (3,427)
------------
Net Assets, June 30, 1998................................... $163,705,527
============
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR PRIME MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................... $3,075,279
Expenses
Advisory fees............................................. $124,342
Sub-advisory fees......................................... 11,578
Administration fees....................................... 54,367
Shareholder servicing fees--Class A Shares................ 80,978
Accounting fees........................................... 31,962
Transfer agent fees and expenses.......................... 31,427
Directors' fees........................................... 2,636
Audit fees................................................ 13,482
Custodian fees............................................ 13,172
Registration fees......................................... 10,792
Legal fees................................................ 10,360
Other expenses............................................ 18,055
--------
Total expenses.............................................. 403,151
----------
Net Investment Income....................................... 2,672,128
----------
REALIZED GAINS (LOSSES) ON INVESTMENT TRANSACTIONS
Net realized gains (losses) on investment transactions.... (1,629)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $2,670,499
==========
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR PRIME MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income..................................... $ 2,672,128 $ 3,956,447
Net realized gains (losses) on investment transactions.... (1,629) (760)
------------- -------------
Net increase in net assets resulting from operations...... 2,670,499 3,955,687
------------- -------------
Distributions to Class A Shares
From net investment income................................ (1,560,096) (1,794,260)
Distributions to Trust Shares
From net investment income................................ (1,112,032) (2,162,187)
------------- -------------
Total distributions to shareholders......................... (2,672,128) (3,956,447)
------------- -------------
Capital Share Transactions (at $1.00 per share)
Proceeds from shares issued............................... 291,486,745 347,193,012
Dividends reinvested...................................... 776,167 357,817
Cost of shares redeemed................................... (211,106,103) (335,936,165)
------------- -------------
Net increase in net assets from capital share
transactions........................................... 81,156,809 11,614,664
------------- -------------
Total increase (decrease) in Net Assets..................... 81,155,180 11,613,904
NET ASSETS
Beginning of period....................................... 82,550,347 70,936,443
------------- -------------
End of period............................................. $ 163,705,527 $ 82,550,347
============= =============
SHARE TRANSACTIONS:
Issued.................................................... 291,486,745 347,193,012
Reinvested................................................ 776,167 357,817
Redeemed.................................................. (211,106,103) (335,936,165)
------------- -------------
Change in shares.......................................... 81,156,809 11,614,664
============= =============
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR U.S. TREASURY MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMORTIZED
MATURITY PRINCIPAL COST
RATE DATE AMOUNT/SHARES (NOTE 2)
---- -------- ------------- ------------
<S> <C> <C> <C> <C>
U.S. TREASURY BILLS -- 3.0%
U.S. Treasury Bill.................................... 4.54%* 7/9/98 $ 5,000,000 $ 4,994,967
------------
Total U.S. Treasury Bills (Cost $4,994,967)............. 4,994,967
------------
U.S. TREASURY NOTES -- 38.6%
U.S. Treasury Note.................................... 6.25 7/31/98 5,000,000 5,002,775
U.S. Treasury Note.................................... 5.88 8/15/98 5,000,000 5,001,307
U.S. Treasury Note.................................... 9.25 8/15/98 5,000,000 5,023,176
U.S. Treasury Note.................................... 4.75 9/30/98 10,000,000 9,983,295
U.S. Treasury Note.................................... 6.00 9/30/98 5,000,000 5,006,927
U.S. Treasury Note.................................... 5.88 10/31/98 5,000,000 5,005,037
U.S. Treasury Note.................................... 5.50 11/15/98 5,000,000 5,000,000
U.S. Treasury Note.................................... 5.75 12/31/98 15,000,000 15,028,362
U.S. Treasury Note.................................... 5.88 1/31/99 5,000,000 5,010,335
U.S. Treasury Note.................................... 5.00 2/15/99 5,000,000 4,984,966
------------
Total U.S. Treasury Notes (Cost $65,046,180)............ 65,046,180
------------
U.S. TREASURY STRIPS -- 2.9%
U.S. Treasury Strip................................... 5.69* 8/15/98 5,000,000 4,965,845
------------
Total U.S. Treasury Strips (Cost $4,965,845)............ 4,965,845
------------
REPURCHASE AGREEMENTS -- 55.4%
Goldman Sachs, dated 6/30/98, with a maturity value of
$9,353,454 (Collateralized by $35,943,000 U.S.
Treasury Strips, 8/15/21, fair
value -- $9,539,380)............................... 5.25 7/1/98 9,352,090 9,352,090
Merrill Lynch, dated 6/30/98, with a maturity value of
$41,951,015 (Collateralized by $14,225,000 U.S.
Treasury Bonds, 10.63%, 8/15/15 fair
value -- $22,399,020; $20,077,000 U.S. Treasury
Notes, 5.50%-6.25%, 5/31/00, fair
value -- $20,391,720).............................. 5.60 7/1/98 41,944,490 41,944,490
------------
Prudential, dated 6/30/98, with a maturity value of
$41,958,052 (Collateralized by $43,236,418
Government National Mortgage Assoc., 4.50%-6.00%,
10/20/27-6/20/28, fair value -- $42,783,380)....... 5.82 7/2/98 41,944,490 41,944,490
------------
Total Repurchase Agreements (Cost $93,241,070).......... 93,241,070
------------
MONEY MARKET FUNDS -- 0.0%
Bank of New York Cash Reserve Money Market Fund....... 1,011 1,011
------------
Total Money Market Funds (Cost $1,011).................. 1,011
------------
TOTAL INVESTMENTS (COST $168,249,073)(a) -- 99.9%....... 168,249,073
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.1%........... 205,075
------------
TOTAL NET ASSETS -- 100.0%.............................. $168,454,148
============
</TABLE>
- ------------------
(a) Cost for federal income tax and financial reporting purposes are the same.
* Yield effective at purchase.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR U.S. TREASURY MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at amortized cost.............. $ 75,008,003
Repurchase agreements, at amortized cost.................. 93,241,070
------------
Total Investments...................................... 168,249,073
Interest receivable....................................... 927,837
Receivable for capital shares issued...................... 3,397
Deferred organization costs............................... 10,748
Prepaid expenses and other assets......................... 31,377
------------
Total assets................................................ 169,222,432
------------
LIABILITIES
Distributions payable..................................... 653,943
Payable for capital shares redeemed....................... 722
Accrued expenses:
Advisory fees.......................................... 33,680
Administration fees.................................... 13,472
Shareholder servicing fees--Class A Shares............. 16,263
Accounting fees........................................ 6,615
Transfer agent fees.................................... 278
Custodian fees......................................... 14,932
Audit fees............................................. 6,772
Other.................................................. 21,607
------------
Total liabilities........................................... 768,284
------------
NET ASSETS
Class A Shares......................................... $ 82,829,141
Trust Shares........................................... 85,625,007
------------
$168,454,148
============
Shares Outstanding ($0.001 par value, 1 billion shares
authorized)
Class A Shares......................................... 82,829,141
Trust Shares........................................... 85,625,007
------------
168,454,148
============
Net Asset Value, Offering Price and Redemption Price per
Share
Class A Shares......................................... $1.00
-----
Trust Shares........................................... $1.00
-----
COMPOSITION OF NET ASSETS:
Shares of beneficial interest, at par..................... $ 168,454
Additional paid-in capital................................ 168,282,155
Undistributed net investment income....................... 3,539
------------
Net Assets, June 30, 1998................................... $168,454,148
============
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR U.S. TREASURY MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................... $4,664,619
Expenses
Advisory fees............................................. $212,319
Administration fees....................................... 84,927
Shareholder servicing fees -- Class A Shares.............. 98,227
Accounting fees........................................... 29,817
Transfer agent fees and expenses.......................... 25,344
Directors' fees........................................... 4,411
Reports to shareholders................................... 26,994
Custodian fees............................................ 18,245
Legal fees................................................ 17,364
Audit fees................................................ 9,841
Other Expenses............................................ 28,185
--------
Total expenses.............................................. 555,674
----------
Net Investment Income....................................... 4,108,945
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $4,108,945
==========
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR U.S. TREASURY MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income..................................... $ 4,108,945 $ 9,157,705
------------- -------------
Distributions to Class A Shares:
From net investment income................................ (1,847,664) (3,780,942)
Distributions to Trust Shares:
From net investment income................................ (2,261,281) (5,376,763)
------------- -------------
Total distributions to shareholders......................... (4,108,945) (9,157,705)
------------- -------------
Capital Share Transactions (at $1.00 per share)
Proceeds from shares issued............................... 245,391,183 469,670,555
Dividends reinvested...................................... 122,095 107,555
Cost of shares redeemed................................... (268,298,892) (466,544,751)
------------- -------------
Net increase (decrease) in net assets from capital share
transactions........................................... (22,785,614) 3,233,359
------------- -------------
Total increase (decrease) in Net Assets..................... (22,785,614) 3,233,359
NET ASSETS
Beginning of period....................................... 191,239,762 188,006,403
------------- -------------
End of period............................................. $ 168,454,148 $ 191,239,762
============= =============
SHARE TRANSACTIONS:
Issued.................................................... 245,391,183 469,670,545
Reinvested................................................ 122,095 107,555
Redeemed.................................................. (268,298,892) (466,544,741)
------------- -------------
Change in shares.......................................... (22,785,614) 3,233,359
============= =============
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE 2)
------ --------
<S> <C> <C>
COMMON STOCKS -- 92.7%
TRANSPORTATION -- 2.0%
Southwest Airlines Co..................................... 106,450 $ 3,153,581
------------
BANKING -- 7.0%
Banc One Corp. (c)........................................ 41,500 2,316,219
Norwest Corp.............................................. 85,080 3,179,865
Star Banc Corp............................................ 38,500 2,459,188
Wachovia Corp............................................. 38,000 3,210,999
------------
11,166,271
------------
COMPUTER SOFTWARE AND SERVICES -- 9.5%
Cisco Systems, Inc. (b)................................... 54,325 5,001,295
Dell Computer Corp. (b)................................... 40,000 3,712,500
Microsoft Corp. (b)....................................... 27,200 2,947,800
SunGard Data Systems, Inc. (b)............................ 88,000 3,377,000
------------
15,038,595
------------
CONSUMER -- MISCELLANEOUS SERVICES -- 2.1%
Service Corp. International............................... 77,000 3,301,375
------------
COSMETICS & TOILETRIES -- 2.0%
Gillette Co............................................... 56,000 3,174,500
------------
DATA PROCESSING -- 2.9%
Automatic Data Processing, Inc............................ 63,500 4,627,563
------------
ELECTRICAL EQUIPMENT -- 3.6%
General Electric Co....................................... 62,500 5,687,500
------------
ELECTRONIC COMPONENTS -- 0.2%
Applied Materials, Inc. (b)............................... 1,000 29,500
Intel Corp................................................ 3,500 259,438
------------
288,938
------------
ENTERTAINMENT -- 3.0%
The Walt Disney Co........................................ 21,000 2,206,313
Time Warner, Inc.......................................... 29,500 2,520,406
------------
4,726,719
------------
FINANCIAL SERVICES -- 4.3%
Fannie Mae................................................ 73,500 4,465,125
Household International, Inc.............................. 48,500 2,412,875
------------
6,878,000
------------
HEALTH CARE -- DRUGS -- 13.2%
Abbott Labs............................................... 67,000 2,738,625
Amgen, Inc. (b)........................................... 26,000 1,699,750
Bristol Myers Squibb Co................................... 36,500 4,195,218
Pfizer, Inc............................................... 33,400 3,630,163
Schering-Plough Corp...................................... 46,500 4,260,562
Warner-Lambert Co......................................... 61,500 4,266,562
------------
20,790,880
------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE 2)
------ --------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
HEALTH CARE -- REHABILITATIVE SERVICES -- 2.2%
HEALTHSOUTH Rehabilitation Corp. (b)(c)................... 130,500 $ 3,482,719
------------
HOUSEHOLD -- GENERAL PRODUCTS -- 3.6%
Newell Co................................................. 64,200 3,197,963
Procter & Gamble Co....................................... 28,000 2,549,750
------------
5,747,713
------------
INDUSTRIAL GOODS & SERVICES -- 2.4%
Computer Sciences Corp. (b)............................... 46,500 2,976,000
IBM Corp.................................................. 7,000 803,688
------------
3,779,688
------------
INSURANCE -- PROPERTY & CASUALTY -- 2.6%
American International Group, Inc......................... 28,500 4,161,000
------------
MACHINERY & EQUIPMENT -- 0.4%
Sundstrand Corp........................................... 12,000 687,000
------------
MANUFACTURING -- 1.8%
Tyco International (c).................................... 44,510 2,804,130
------------
MEDICAL EQUIPMENT & SUPPLIES -- 2.2%
Boston Scientific Corp. (b)............................... 1,000 71,625
Medtronic, Inc............................................ 39,500 2,518,125
Sybron International Corp. (b)............................ 34,160 862,540
------------
3,452,290
------------
OIL & GAS -- 2.0%
Ensco International, Inc.................................. 2,000 34,750
Texaco, Inc............................................... 51,500 3,073,906
------------
3,108,656
------------
PAPER AND FOREST -- 0.0%
Mead Corp................................................. 2,000 63,500
------------
PETROLEUM -- SERVICES -- 3.7%
Dresser Industries, Inc................................... 36,500 1,608,281
Halliburton Co. (c)....................................... 26,500 1,180,906
Schlumberger Ltd.......................................... 45,500 3,108,219
------------
5,897,406
------------
RETAIL -- 6.2%
Dayton Hudson Corp........................................ 92,000 4,462,000
Dollar General Corp....................................... 50,000 1,978,125
Wal-Mart Stores, Inc...................................... 55,500 3,371,625
------------
9,811,750
------------
RETAIL-SPECIALTY STORES -- 11.8%
Barnes & Noble, Inc. (b).................................. 46,500 1,740,844
CVS Corp.................................................. 66,618 2,593,938
Home Depot, Inc. (c)...................................... 56,750 4,713,797
Lowe's Cos., Inc.......................................... 75,000 3,042,188
Office Depot, Inc. (b).................................... 76,000 2,398,750
Walgreen Co............................................... 102,400 4,230,400
------------
18,719,917
------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE 2)
------ --------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
TELECOMMUNICATIONS -- 4.0%
Ascend Communications, Inc. (b).................................................................. 30,500 $ 1,511,656
Lucent Technologies, Inc......................................................................... 50,800 4,225,925
Premiere Technologies, Inc. (b).................................................................. 70,700 586,589
--------------
6,324,170
--------------
Total Common Stocks (Cost $109,027,889)............................................................ 146,873,861
--------------
REGULATED INVESTMENT COMPANIES -- 6.0%
AIM Liquid Assets Money Market Fund.............................................................. 6,575,551 6,575,551
AIM Prime Money Market Fund...................................................................... 942,752 942,752
Dreyfus Prime Money Market Fund.................................................................. 1 1
S & P 500 Depository Receipt..................................................................... 17,700 2,005,631
--------------
Total Regulated Investment Companies (Cost $9,540,251)............................................. 9,523,935
--------------
</TABLE>
<TABLE>
<CAPTION>
MATURITY PRINCIPAL
RATE DATE AMOUNT
-------- -------- -----------
<S> <C> <C> <C> <C>
U.S. TREASURY BILLS -- 3.1%
U.S. Treasury Bill (c)....................................................... 5.28%* 9/3/98 $ 5,000,000 $4,956,600
------------
Total U.S. Treasury Bills (Cost $4,955,422).................................... 4,956,600
------------
SHORT-TERM SECURITY PURCHASED WITH COLLATERAL -- 25.4%
REPURCHASE AGREEMENTS -- 25.4%
Lehman Brothers, dated 6/30/98, with a maturity value of
$40,244,625, (Collateralized by $41,015,000 Federal
Home Loan Bank, 6.10%, 3/19/03, fair
value -- $41,043,300)..................................................... 6.38 7/1/98 40,237,500 40,237,500
------------
Total Short-Term Security Purchased With Collateral
(Cost $40,237,500)........................................................... 40,237,500
------------
TOTAL INVESTMENTS (COST $163,761,062) (a) -- 127.2%............................ 201,591,896
LIABILITIES IN EXCESS OF OTHER ASSETS -- (27.2%)............................... (43,116,883)
------------
TOTAL NET ASSETS -- 100.0%..................................................... $158,475,013
============
</TABLE>
- ---------------
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $40,458,274
Unrealized depreciation..................................... (2,627,440)
-----------
Net unrealized appreciation................................. $37,830,834
===========
</TABLE>
(b) Non-income producing security.
(c) All or a portion of this security has been loaned at June 30, 1998.
* Yield effective at purchase.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $123,523,562)... $161,354,396
Repurchase agreement, at amortized cost................... 40,237,500
------------
Total Investments....................................... 201,591,896
Interest and dividends receivable......................... 89,713
Receivable for investment securities sold................. 737,660
Receivable for capital shares sold........................ 80,439
Deferred organization costs............................... 6,285
Prepaid expenses and other assets......................... 33,004
------------
Total assets................................................ 202,538,997
------------
LIABILITIES
Payable for return of collateral held for securities on
loan.................................................... 40,237,500
Distributions payable..................................... 30,777
Payable for investment securities purchased............... 3,660,174
Accrued expenses:
Advisory fees........................................... 81,833
Administration fees..................................... 18,885
Shareholder servicing fees -- Class B Shares............ 180
Distribution fees -- Class A Shares..................... 429
Distribution fees -- Class B Shares..................... 539
Accounting fees......................................... 5,206
Directors' fees......................................... 106
Reports to shareholders................................. 11,571
Other................................................... 16,784
------------
Total liabilities........................................... 44,063,984
------------
NET ASSETS
Class A Shares.......................................... 2,863,130
Class B Shares.......................................... 1,087,884
Trust Shares............................................ 154,523,999
------------
$158,475,013
============
Shares Outstanding ($0.001 par value, 500 million shares
authorized)
Class A Shares.......................................... 195,856
Class B Shares.......................................... 75,357
Trust Shares............................................ 10,650,474
------------
10,921,687
============
NET ASSET VALUE
Class A Shares -- redemption price per share.............. $14.62
------
Class A Shares -- maximum sales charge.................... 4.75%
------
Class A Shares -- maximum offering price per share
(100%/(100% -- maximum sales charge) of net asset value
adjusted to nearest cent)............................... $15.35
======
Class B Shares -- offering and redemption price per
share*.................................................. $14.44
======
Trust Shares -- offering and redemption price per share... $14.51
======
COMPOSITION OF NET ASSETS:
Shares of common stock, at par............................ $ 10,922
Additional paid-in capital................................ 100,890,191
Undistributed (distributions in excess of) net investment
income.................................................. 11,618
Net unrealized appreciation from investments.............. 37,830,834
Accumulated net realized gains on investment
transactions............................................ 19,731,448
------------
Net Assets, June 30, 1998................................... $158,475,013
============
</TABLE>
- ---------------
* Redemption price per share varies by length of time shares are held.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................... $ 87,374
Dividends................................................... 738,940
-----------
Total Investment Income..................................... 826,314
Expenses
Advisory fees............................................. $ 490,231
Administration fees....................................... 113,131
Shareholder servicing fees -- Class B Shares.............. 411
Distribution fees -- Class A Shares....................... 1,749
Distribution fees -- Class B Shares....................... 1,233
Accounting fees........................................... 35,197
Transfer agent fees and expenses.......................... 33,743
Directors' fees........................................... 3,880
Registration fees......................................... 24,118
Custodian fees............................................ 20,361
Legal fees................................................ 14,180
Other expenses............................................ 25,035
----------
Total expenses before fee waivers...................... 763,269
Less: Fee waivers...................................... (10,128)
----------
Total expenses......................................... 753,141
-----------
Net Investment Income....................................... 73,173
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENTS
Net realized gains (losses) on investment transactions.... 19,595,747
Net change in unrealized appreciation (depreciation) on
investments............................................ 629,361
-----------
Net Realized and Unrealized Gains (Losses) from
Investments............................................... 20,225,108
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $20,298,281
===========
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income..................................... $ 73,173 $ 641,875
Net realized gains (losses) on investment transactions.... 19,595,747 19,491,761
Net change in unrealized appreciation (depreciation) on
investments............................................ 629,361 11,188,742
------------ -------------
Net increase in net assets resulting from operations...... 20,298,281 31,322,378
------------ -------------
Distributions to Class A Shares
From net investment income................................ -- (374,481)
From net realized gains................................... -- (121,087)
Distributions to Trust Shares
From net investment income................................ (59,448) (266,590)(a)
From net realized gains................................... -- (19,052,919)(a)
------------ -------------
Total distributions to shareholders......................... (59,448) (19,815,077)
------------ -------------
Capital Share Transactions
Proceeds from shares issued............................... 10,076,788 248,661,873
Dividends reinvested...................................... 101,521 19,301,059
Cost of shares redeemed................................... (14,561,487) (185,858,842)
------------ -------------
Net increase in net assets from capital share
transactions........................................... (4,383,178) 82,104,090
------------ -------------
Total increase (decrease) in Net Assets..................... 15,855,655 93,611,391
NET ASSETS
Beginning of period....................................... 142,619,358 49,007,967
------------ -------------
End of period............................................. $158,475,013 $ 142,619,358
============ =============
SHARE TRANSACTIONS
Issued.................................................... 731,379 17,028,511
Reinvested................................................ 7,906 1,524,272
Redeemed.................................................. (1,057,288) (11,641,375)
------------ -------------
Change in shares.......................................... (318,003) 6,911,408
============ =============
</TABLE>
- ---------------
(a) For the period from October 3, 1997 (commencement of operations of Trust
Shares) through December 31, 1997.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Total Investment Income................................... $ 826,314
Net Expenses.............................................. (753,141)
-------------
Net Investment Income (loss)........................... 73,173
Adjustment to reconcile net investment income to net cash
provided (used) by operating activities:
Amortization of discount/premium.......................... (86,987)
Change in interest and dividend receivable................ 52,164
Change in accrued expenses, other payables, prepaid
expenses and other assets.............................. 77,860
-------------
Total Adjustments......................................... 43,037
-------------
Net cash provided (used) by operating activities....... 116,210
CASH FLOWS FROM INVESTING ACTIVITES:
Proceeds from sales of investments........................ 172,971,186
Purchases of investments.................................. (168,341,972)
Net purchases of short-term investments with cash received
as collateral from securities lending.................. (40,237,500)
-------------
Net cash provided (used) by investing activities....... (35,608,286)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shares issued............................... 10,011,348
Cost of shares redeemed................................... (14,561,487)
Distributions paid to shareholders........................ (296,806)
Dividends reinvested...................................... 101,521
Net collateral received from securities lending........... 40,237,500
-------------
Net cash provided (used) by financing activities....... 35,492,076
Net increase (decrease) in cash............................. --
Cash at beginning of period................................. --
-------------
Cash at end of period....................................... $ --
=============
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR DIVIDEND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE 2)
------ --------
<S> <C> <C>
COMMON STOCKS -- 96.0%
AEROSPACE & MILITARY TECHNOLOGY -- 0.1%
United Technologies Corp.................................. 1,000 $ 92,500
------------
AUTOMOBILES -- 0.1%
Ford Motor Co............................................. 1,000 59,000
------------
BANKING -- 7.3%
First Tennessee National Corp............................. 44,000 1,388,750
First Union Corp.......................................... 45,000 2,621,249
NationsBank Corp.......................................... 22,000 1,683,000
Wells Fargo & Co.......................................... 500 184,500
------------
5,877,499
------------
BEVERAGES -- 3.7%
Coca-Cola Co.............................................. 13,000 1,111,500
PepsiCo, Inc.............................................. 45,000 1,853,438
------------
2,964,938
------------
BUILDING & CONSTRUCTION -- 3.0%
Masco Corp................................................ 40,000 2,420,000
------------
CONTAINERS & PACKAGING -- 1.9%
Sherwin Williams Co....................................... 45,000 1,490,625
------------
COSMETICS & TOILETRIES -- 4.4%
Avon Products, Inc........................................ 22,000 1,705,000
Colgate Palmolive Co...................................... 21,000 1,848,000
------------
3,553,000
------------
DATA PROCESSING -- 2.7%
Automatic Data Processing, Inc. (b)....................... 29,400 2,142,525
------------
ELECTRICAL EQUIPMENT -- 6.9%
Emerson Electric.......................................... 35,900 2,165,218
General Electric Co. (b).................................. 22,000 2,002,000
Honeywell, Inc............................................ 16,000 1,337,000
------------
5,504,218
------------
FINANCIAL SERVICES -- 6.2%
American Express Co....................................... 7,000 798,000
Citicorp.................................................. 10,000 1,492,500
Fannie Mae................................................ 43,500 2,642,625
------------
4,933,125
------------
FOOD & RELATED -- 4.1%
Bestfoods................................................. 31,000 1,799,938
H.J. Heinz Co............................................. 26,000 1,459,250
------------
3,259,188
------------
FOOD PRODUCTS & SERVICES -- 1.1%
Kimberly Clark Corp....................................... 20,000 917,500
------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE 2)
------ --------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
HEALTH CARE -- DRUGS -- 9.4%
Abbott Labs (b)........................................... 22,000 $ 899,250
Bristol Myers Squibb Co. (b).............................. 19,000 2,183,813
Glaxo Wellcome PLC -- ADR................................. 30,000 1,794,375
Schering-Plough Corp...................................... 29,000 2,657,124
------------
7,534,562
------------
HOUSEHOLD -- GENERAL PRODUCTS -- 4.4%
Newell Co................................................. 35,000 1,743,438
Procter & Gamble Co....................................... 20,000 1,821,250
------------
3,564,688
------------
INDUSTRIAL GOODS & SERVICES -- 2.7%
Hewlett-Packard Co........................................ 13,000 778,375
IBM Corp.................................................. 12,000 1,377,750
------------
2,156,125
------------
MACHINERY & EQUIPMENT -- 1.2%
Grainger, Inc............................................. 20,000 996,250
------------
MANUFACTURING -- 2.5%
Fortune Brands, Inc....................................... 52,000 1,998,750
------------
MATERIALS -- 1.4%
Textron, Inc.............................................. 16,000 1,147,000
------------
OIL & GAS -- 8.3%
Chevron Corp.............................................. 15,000 1,245,938
Enron Corp................................................ 22,000 1,189,375
Exxon Corp................................................ 18,000 1,283,624
Mobil Corp................................................ 10,000 766,250
Royal Dutch Petroleum..................................... 1,000 54,813
Texaco, Inc. (b).......................................... 35,000 2,089,062
------------
6,629,062
------------
PETROLEUM -- SERVICES -- 2.5%
Dresser Industries, Inc................................... 18,000 793,125
Schlumberger Ltd.......................................... 18,000 1,229,625
------------
2,022,750
------------
PUBLISHING -- 2.7%
Gannett Co., Inc.......................................... 31,000 2,202,938
------------
REAL ESTATE INVESTMENT TRUST -- 4.9%
Equity Office Properties.................................. 14,500 411,438
Equity Residential Property............................... 30,000 1,423,125
Post Properties........................................... 17,000 654,500
Simon Debartolo Group, Inc................................ 19,000 617,500
Trinet Corporate Realty Trust, Inc........................ 24,600 836,400
------------
3,942,963
------------
RETAIL -- 2.5%
Dollar General Stores..................................... 30,000 1,179,375
Wal-Mart Stores, Inc...................................... 13,000 789,750
------------
1,969,125
------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE 2)
------ --------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
UTILITIES -- 3.2%
DPL, Inc.......................................................................................... 46,000 $ 833,750
Scana Corp........................................................................................ 27,200 810,900
Sierra Pacific Resources.......................................................................... 25,000 907,813
--------------
2,552,463
--------------
UTILITIES-ELECTRIC -- 3.0%
Duke Energy Corp.................................................................................. 24,000 1,422,000
NIPSCO Industries, Inc............................................................................ 36,500 1,022,000
--------------
2,444,000
--------------
UTILITIES-GAS & PIPELINE -- 1.1%
Consolidated Natural Gas Co....................................................................... 15,000 883,125
--------------
UTILITIES-TELEPHONE -- 1.9%
Bell Atlantic Corp................................................................................ 2,000 91,250
Sprint Corp....................................................................................... 20,000 1,410,000
--------------
1,501,250
--------------
WHOLESALE -- 2.8%
Sysco Corp........................................................................................ 88,000 2,255,000
--------------
Total Common Stocks (Cost $69,535,696).............................................................. 77,014,169
--------------
REGULATED INVESTMENT COMPANIES -- 5.2%
AIM Liquid Assets Money Market Fund............................................................... 3,551,877 3,551,877
AIM Prime Money Market Fund....................................................................... 592,029 592,029
--------------
Total Regulated Investment Companies (Cost $4,143,906).............................................. 4,143,906
--------------
</TABLE>
<TABLE>
<CAPTION>
MATURITY PRINCIPAL
RATE DATE AMOUNT
---- -------- ----------
<S> <C> <C> <C> <C>
SHORT-TERM SECURITY PURCHASED WITH COLLATERAL -- 10.6%
REPURCHASE AGREEMENT -- 10.6%
Lehman Brothers, dated 6/30/98, with a maturity value of
$8,532,311, (Collateralized by $3,855,000 Federal Home
Loan Bank, 6.10%, 3/19/03, fair value -- $3,857,660; by
23,270,000 Federal Home Loan Mortgage Corp., 0.00%,
11/13/17, fair value -- $4,847,141)..................................... 6.38% 7/1/98 $8,530,800 $ 8,530,800
-----------
Total Short-Term Security Purchased With Collateral (Cost $8,530,800)........ 8,530,800
-----------
TOTAL INVESTMENTS (COST $82,210,402) (a) -- 111.8%........................... 89,688,875
LIABILITIES IN EXCESS OF OTHER ASSETS -- (11.8%)............................. (9,487,720)
-----------
TOTAL NET ASSETS -- 100.0%................................................... $80,201,155
===========
</TABLE>
- ---------------
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation............................. $ 8,721,626
Unrealized depreciation............................. (1,243,153)
-----------
Net unrealized appreciation......................... $ 7,478,473
===========
</TABLE>
(b) All or a portion of this security has been loaned at June 30, 1998.
PLC - Public Limited Company
ADR - American Depository Receipt
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR DIVIDEND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $73,679,602).... $81,158,075
Repurchase agreement, at amortized cost................... 8,530,800
-----------
Total Investments...................................... 89,688,875
Interest receivable....................................... 157,441
Receivable for capital shares sold........................ 7,240
Deferred organization costs............................... 3,715
Prepaid expenses and other assets......................... 24,607
-----------
Total assets................................................ 89,881,878
-----------
LIABILITIES
Payable for return of collateral held for securities on
loan................................................... 8,530,800
Distributions payable..................................... 82,776
Payable for investment securities purchased............... 987,184
Accrued expenses:
Advisory fees.......................................... 42,113
Administration fees.................................... 9,718
Shareholder servicing fees -- Class B Shares........... 261
Distribution fees -- Class A Shares.................... 270
Distribution fees -- Class B Shares.................... 783
Accounting fees........................................ 4,225
Audit fees............................................. 10,030
Custodian fees......................................... 7,429
Other.................................................. 5,134
-----------
Total liabilities........................................... 9,680,723
-----------
NET ASSETS
Class A Shares......................................... 2,312,541
Class B Shares......................................... 1,652,020
Trust Shares........................................... 76,236,594
-----------
$80,201,155
===========
Shares Outstanding ($0.001 par value, 500 million shares
authorized)
Class A Shares......................................... 198,780
Class B Shares......................................... 142,116
Trust Shares........................................... 6,552,329
-----------
6,893,225
===========
NET ASSET VALUE
Class A Shares -- redemption price per share.............. $11.63
------
Class A Shares -- maximum sales charge.................... 4.75%
------
Class A Shares -- maximum offering price per share
(100%/(100% -- maximum sales charge) of net asset value
adjusted to nearest cent).............................. $12.21
======
Class B Shares -- offering and redemption price per
share*................................................. $11.62
======
Trust Shares -- offering and redemption price per share... $11.64
======
COMPOSITION OF NET ASSETS:
Shares of common stock, at par............................ $ 6,893
Additional paid-in capital................................ 56,834,872
Undistributed (distributions in excess of) net investment
income................................................. 12,939
Net unrealized appreciation from investments.............. 7,478,473
Accumulated net realized gains on investment
transactions........................................... 15,867,978
-----------
Net Assets, June 30, 1998................................... $80,201,155
===========
</TABLE>
- ---------------
* Redemption price per share varies by length of time shares are held.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR DIVIDEND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................... $ 11,067
Dividends................................................... 850,022
-----------
Total Investment Income..................................... 861,089
Expenses
Advisory fees............................................. $ 242,849
Administration fees....................................... 56,042
Shareholder servicing fees -- Class B Shares.............. 611
Distribution fees -- Class A Shares....................... 909
Distribution fees -- Class B Shares....................... 1,832
Accounting fees........................................... 35,579
Transfer agent fees and expenses.......................... 34,162
Directors' fees........................................... 1,817
Registration fees......................................... 16,340
Custodian fees............................................ 13,211
Other expenses............................................ 19,320
---------
Total expenses before fee waivers...................... 422,672
Less: Fee waivers...................................... (4,867)
---------
Total expenses......................................... 417,805
-----------
Net Investment Income....................................... 443,284
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENTS
Net realized gains (losses) on investment transactions.... 13,468,412
Net change in unrealized appreciation (depreciation) on
investments............................................ (4,956,170)
-----------
Net Realized and Unrealized Gains (Losses) from
Investments............................................... 8,512,242
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 8,955,526
===========
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR DIVIDEND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997 (A)
---------------- ---------------------
(UNAUDITED)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income..................................... $ 443,284 $ 1,081,521
Net realized gains (losses) on investment transactions.... 13,468,412 12,492,214
Net change in unrealized appreciation (depreciation) on
investments............................................ (4,956,170) 132,903
------------- -------------
Net increase in net assets resulting from operations...... 8,955,526 13,706,638
------------- -------------
Distributions Class A Shares
From net investment income................................ (4,671) (723,804)
From net realized gains................................... -- (45,604)
Distributions to Class B Shares (c)
From net investment income................................ (1,441) --
Distributions to Trust Shares
From net investment income................................ (422,164) (361,492)(b)
From net realized gains................................... -- (10,045,338)(b)
------------- -------------
Total distributions to shareholders......................... (428,276) (11,176,238)
------------- -------------
Capital Share Transactions
Proceeds from shares issued............................... 9,407,733 137,340,554
Dividends reinvested...................................... 27,112 10,088,221
Cost of shares redeemed................................... (6,098,620) (81,621,495)
------------- -------------
Net increase in net assets from capital share
transactions........................................... 3,336,225 65,807,280
------------- -------------
Total increase (decrease) in Net Assets..................... 11,863,475 68,337,680
NET ASSETS
Beginning of period....................................... 68,337,680 --
------------- -------------
End of period............................................. $ 80,201,155 $ 68,337,680
============= =============
SHARE TRANSACTIONS:
Issued.................................................... 837,959 11,546,178
Reinvested................................................ 2,452 988,858
Redeemed.................................................. (539,051) (5,943,171)
------------- -------------
Change in shares.......................................... 301,360 6,591,865
============= =============
</TABLE>
- ---------------
(a) For the period from February 28, 1997 (commencement of operations) to
December 31, 1997.
(b) For the period from October 3, 1997 (commencement of operations of Trust
Shares) through December 31, 1997.
(c) For the period from January 30, 1998 (commencement of operations of Class B
Shares) through June 30, 1998.
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR DIVIDEND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Total Investment Income................................... $ 861,089
Net Expenses.............................................. (417,805)
-------------
Net Investment Income (loss)........................... 443,284
Adjustment to reconcile net investment income to net cash
provided (used) by operating activities:
Amortization of discount/premium.......................... (10,972)
Change in interest and dividend receivable................ (12,624)
Change in accrued expenses, other payables, prepaid
expenses and other assets.............................. 27,092
-------------
Total Adjustments......................................... 3,496
-------------
Net cash provided (used) by operating activities....... 446,780
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments........................ 107,962,249
Purchases of investments.................................. (111,258,162)
Net purchases of short-term investments with cash received
as collateral from securities lending.................. (8,530,800)
-------------
Net cash provided (used) by investing activities....... (11,826,713)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shares issued............................... 9,400,493
Cost of shares redeemed................................... (6,098,620)
Distributions paid to shareholders........................ (479,852)
Dividends reinvested...................................... 27,112
Net collateral received from securities lending........... 8,530,800
-------------
Net cash provided (used) by financing activities....... 11,379,933
Net increase (decrease) in cash............................. --
Cash at beginning of period................................. --
-------------
Cash at end of period....................................... $ --
=============
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CORE INCOME PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
MOODY'S/S&P MATURITY PRINCIPAL VALUE
RATINGS RATE DATE AMOUNT (NOTE 2)
----------- -------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS -- 79.5%
BANKING -- 10.7%
ABN AMRO Bank.................................... Aa3/A 6.63% 10/31/01 $ 1,550,000 $ 1,575,188
Bank One, Texas.................................. Aa3/AA- 6.25 2/15/08 2,000,000 1,995,000
First Union Corp................................. A1/A 6.18 2/15/36 1,700,000 1,708,500
NationsBank Corp................................. A1/A 7.75 8/15/15 925,000 1,048,719
Wachovia Corp.................................... A1/AA- 6.61 10/1/25 2,100,000 2,197,124
-----------
8,524,531
-----------
FINANCIAL SERVICES -- 15.5%
Associates Corp. N.A............................. Aa3/AA- 7.32 1/13/03 800,000 839,000
Countrywide Home Loan............................ A3/A 6.84 10/22/04 2,400,000 2,474,999
Ford Motor Credit Corp........................... A1/A 7.35 11/7/11 2,000,000 2,092,500
General Electric Capital Corp.................... Aaa/AAA 7.50 8/21/35 1,500,000 1,745,625
General Motors Acceptance Corp................... A3/A- 7.25 5/5/99 1,925,000 1,948,023
Salomon Smith Barney Holdings.................... A2/A 6.13 1/15/03 2,000,000 1,985,000
USLIFE Corp...................................... A2/AA- 6.38 6/15/00 1,250,000 1,251,563
-----------
12,336,710
-----------
INDUSTRIAL GOODS & SERVICES -- 18.5%
Albertson's, Inc................................. Aa3/A+ 6.52 4/10/28 2,000,000 2,032,500
Anheuser-Busch Cos............................... A1/A+ 7.13 7/1/17 1,500,000 1,571,250
General Mills.................................... A2/A+ 7.50 5/1/09 250,000 251,875
Harris Corp...................................... A3/A- 10.38 12/1/18 1,050,000 1,120,875
IBM Corp......................................... A1/A+ 6.25 2/24/00 1,000,000 1,003,500
IBM Corp......................................... A1/A+ 6.50 1/15/28 2,000,000 2,002,500
Lockheed Martin Corp............................. A3/BBB+ 6.55 5/15/99 2,400,000 2,411,999
Reliance Electric Co............................. A2/AA- 6.80 4/15/03 1,500,000 1,554,375
Weyerhaeuser Co.................................. A2/A 7.13 7/15/23 2,250,000 2,354,063
Xerox Corp....................................... A2/A 7.50 4/16/12 500,000 507,411
-----------
14,810,348
-----------
INSURANCE -- PROPERTY & CASUALTY -- 2.4%
Travelers/Aetna Property & Casualty.............. A1/A+ 6.75 4/15/01 1,850,000 1,887,000
-----------
RETAIL-STORES -- 5.2%
Dayton Hudson Co................................. A3/BBB+ 6.80 10/1/01 1,500,000 1,530,000
J C Penney & Co.................................. A2/A 6.50 6/15/02 1,500,000 1,520,625
May Department Stores Co......................... A2/A 7.15 8/15/04 1,000,000 1,055,000
-----------
4,105,625
-----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
MOODY'S/S&P MATURITY PRINCIPAL VALUE
RATINGS RATE DATE AMOUNT (NOTE 2)
----------- ------- ------- ------------- -------------
CORPORATE BONDS, CONTINUED:
<S> <C> <C> <C> <C> <C>
TELECOMMUNICATIONS -- 5.1%
BellSouth Corp..................................... Aaa/AAA 8.25% 7/1/32 $ 475,000 $ 520,719
BellSouth Corp..................................... Aaa/AAA 6.75 10/15/33 2,000,000 1,967,500
GTE Corp., Callable 2/1/07 @ 103.95................ Baa/A 7.90 2/1/27 1,450,000 1,562,375
-------------
4,050,594
-------------
UTILITIES-ELECTRIC -- 15.2%
Florida Power Corp................................. A1/A+ 6.54 7/1/02 1,500,000 1,528,125
Houston Light & Power Corp......................... A3/A- 6.10 3/1/00 1,725,000 1,729,313
National Rural Utilities Corp., Series C, MTN...... A1/AA- 6.49 7/10/02 1,600,000 1,626,000
Public Service Electric & Gas...................... A3/A- 6.25 1/1/07 2,400,000 2,420,999
Puget Sound Power & Light.......................... Baa1/A- 6.61 2/9/00 1,500,000 1,513,125
SCANA Corp., Series B, MTN......................... A3/A- 6.25 7/8/03 1,500,000 1,500,000
Virginia Electric & Power.......................... A2/A 6.63 4/1/03 1,750,000 1,795,938
-------------
12,113,500
-------------
UTILITIES-GAS -- 4.9%
Consolidated Natural Gas........................... A1/AA- 6.80 12/15/27 1,600,000 1,652,000
Smith Enron........................................ NR/NR 5.97 12/15/06 2,263,700 2,258,041
-------------
3,910,041
-------------
UTILITIES-GAS & ELECTRIC -- 2.0%
Washington Gas Light, Series D, MTN................ Aa3/AA- 6.85 3/9/28 1,500,000 1,563,750
-------------
Total Corporate Bonds (Cost $62,044,715).............
63,302,099
-------------
MUNICIPAL BONDS -- 1.1+
GEORGIA -- 1.1%
Atlanta Downtown Development Lease Revenue Bond.... NR/AAA 6.88 2/1/21 800,000 865,000
-------------
Total Municipal Bonds (Cost $761,101)................ 865,000
-------------
U.S. GOVERNMENT AGENCIES -- 8.9%
FEDERAL HOME LOAN MORTGAGE CORP. -- 3.0%
Federal Home Loan Mortgage Corp.................... 6.44 10/24/07 2,300,000 2,392,782
-------------
FEDERAL NATIONAL MORTGAGE ASSOC. -- 1.3%
Federal National Mortgage Assoc., (b).............. 6.35 11/23/01 1,000,000 1,006,780
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOC. -- 4.6%
Government National Mortgage Assoc., Pool # 407413. 8.00 5/15/10 459,632 476,579
Government National Mortgage Assoc., Pool # 780479. 6.50 8/15/11 925,882 937,159
Government National Mortgage Assoc., Pool # 423914. 7.50 8/15/11 871,128 899,439
Government National Mortgage Assoc., Pool # 423923. 7.00 9/15/11 1,366,772 1,401,365
-------------
3,714,542
-------------
</TABLE>
<TABLE>
<CAPTION> MARKET
MOODY'S/S&P MATURITY PRINCIPAL VALUE
RATINGS RATE DATE AMOUNT/SHARES (NOTE 2)
------------- ----------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C>
Total U.S. Government Agencies (Cost $7,115,532)............... $7,114,104
-----------
U.S. TREASURY BOND -- 8.1%
U.S. Treasury Bond........................................... 8.13% 8/15/21 $ 600,000 781,872
U.S. Treasury Bond........................................... 6.75 8/15/26 1,000,000 1,144,650
U.S. Treasury Bond (b)....................................... 6.13 11/15/27 4,250,000 4,556,553
-----------
Total U.S. Treasury Bond (Cost $6,189,949)..................... 6,483,075
REGULATED INVESTMENT COMPANIES -- 2.7% -----------
AIM Liquid Assets Money Market Fund.......................... 2,103,078 2,103,078
AIM Prime Money Market Fund.................................. 27,089 27,089
Total Regulated Investment Companies -----------
(Cost $2,130,167)............................................ 2,130,167
SHORT-TERM SECURITY PURCHASED WITH COLLATERAL -- 6.8% -----------
REPURCHASE AGREEMENTS -- 6.8%
Lehman Brothers, dated 6/30/98, with a maturity value of
$5,422,210, (Collateralized by $26,550,000 Federal Home
Loan Mortgage Corp., 0.00%, 11/13/17, fair
value-$5,530,365)......................................... 6.38 7/1/98 $ 5,421,250 5,421,250
Total Short-Term Security Purchased With Collateral (Cost -----------
$5,421,250).................................................. 5,421,250
-----------
TOTAL INVESTMENTS (COST $83,662,714) (a) -- 107.1%............. 85,315,695
LIABILITIES IN EXCESS OF OTHER ASSETS -- (7.1%)................ (5,761,612)
-----------
TOTAL NET ASSETS -- 100.0%..................................... $79,644,083
===========
</TABLE>
- ---------------
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
Unrealized appreciation............................. $1,830,351
Unrealized depreciation............................. (177,370)
----------
Net unrealized appreciation......................... $1,652,981
(b) All or a portion of this security has been loaned at June 30, 1998.
MTN - Medium Term Note
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CORE INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $78,241,464).... $79,894,445
Repurchase agreement, at amortized cost................... 5,421,250
-----------
Total Investments...................................... 85,315,695
Interest receivable....................................... 1,310,817
Receivable for capital shares sold........................ 347,926
Prepaid expenses and other assets......................... 13,434
-----------
Total assets................................................ 86,987,872
-----------
LIABILITIES
Payable for return of collateral held for securities on
loan................................................... 5,421,250
Distributions payable..................................... 356,489
Payable for investment securities purchased............... 1,500,000
Accrued expenses:
Advisory fees.......................................... 32,714
Administration fees.................................... 9,814
Shareholder servicing fees -- Class B Shares........... 109
Distribution fees -- Class A Shares.................... 145
Distribution fees -- Class B Shares.................... 328
Accounting fees........................................ 4,563
Audit fees............................................. 9,202
Other.................................................. 9,175
-----------
Total liabilities........................................... 7,343,789
-----------
NET ASSETS
Class A Shares......................................... 2,055,813
Class B Shares......................................... 623,359
Trust Shares........................................... 76,964,911
-----------
$79,644,083
===========
Shares Outstanding ($0.001 par value, 500 million shares
authorized)
Class A Shares......................................... 198,081
Class B Shares......................................... 60,104
Trust Shares........................................... 7,419,355
-----------
7,677,540
===========
Net Asset Value
Class A Shares -- redemption price per share.............. $10.38
------
Class A Shares -- maximum sales charge.................... 3.00%
------
Class A Shares -- maximum offering price per share
(100%/(100% -- maximum sales charge) of net asset value
adjusted to nearest cent).............................. $10.70
------
------
Class B Shares -- offering and redemption price per
share*................................................. $10.37
------
------
Trust Shares -- offering and redemption price per share... $10.37
------
------
COMPOSITION OF NET ASSETS:
Shares of common stock, at par............................ $ 7,678
Additional paid-in capital................................ 77,056,139
Undistributed (distributions in excess of) net investment
income................................................. (32,876)
Net unrealized appreciation from investments.............. 1,652,981
Accumulated net realized gains on investment
transactions........................................... 960,161
-----------
Net Assets, June 30, 1998................................... $79,644,083
===========
</TABLE>
- ---------------
* Redemption price per share varies by length of time shares are held.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CORE INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................... $2,408,264
Dividends................................................... 43,046
----------
Total Investment Income..................................... 2,451,310
Expenses
Advisory fees............................................. $190,128
Administration fees....................................... 57,039
Shareholder servicing fees -- Class B Shares.............. 300
Distribution fees -- Class A Shares....................... 312
Distribution fees -- Class B Shares....................... 900
Accounting fees........................................... 37,235
Transfer agent fees and expenses.......................... 31,265
Directors' fees........................................... 1,900
Custodian fees............................................ 10,885
Audit fees................................................ 10,219
Registration fees......................................... 11,724
Other expenses............................................ 13,925
--------
Total expenses before fee waivers...................... 365,832
Less: Fee waivers...................................... (3,965)
--------
Total expenses......................................... 361,867
----------
Net Investment Income....................................... 2,089,443
----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENTS
Net realized gains (losses) on investment transactions.... 998,249
Net change in unrealized appreciation (depreciation) on
investments............................................ (60,352)
----------
Net Realized and Unrealized Gains (Losses) from
Investments............................................... 937,897
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $3,027,340
==========
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CORE INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income..................................... $ 2,089,443 $ 3,857,165
Net realized gains (losses) on investment transactions.... 998,249 14,563
Net change in unrealized appreciation (depreciation) on
investments............................................ (60,352) 1,897,381
----------- ------------
Net increase in net assets resulting from operations... 3,027,340 5,769,109
----------- ------------
Distributions to Class A Shares
From net investment income................................ (6,517) (2,755,744)
Distributions to Class B Shares (b)
From net investment income................................ (5,332) --
Distributions to Trust Shares
From net investment income................................ (2,077,594) (1,101,421)(a)
----------- ------------
Total distributions to shareholders......................... (2,089,443) (3,857,165)
----------- ------------
Capital Share Transactions
Proceeds from shares issued............................... 12,310,354 117,853,442
Dividends reinvested...................................... 735,798 1,329,244
Cost of shares redeemed................................... (6,425,640) (87,824,216)
----------- ------------
Net increase in net assets from capital share
transactions........................................... 6,620,512 31,358,470
----------- ------------
Total increase (decrease) in Net Assets..................... 7,558,409 33,270,414
NET ASSETS
Beginning of period....................................... 72,085,674 38,815,260
----------- ------------
End of period............................................. $79,644,083 $ 72,085,674
=========== ============
SHARE TRANSACTIONS
Issued.................................................... 1,193,971 11,695,438
Reinvested................................................ 71,573 132,886
Redeemed.................................................. (623,467) (8,673,388)
----------- ------------
Change in shares.......................................... 642,077 3,154,936
=========== ============
</TABLE>
- ---------------
(a) For the period from October 3, 1997 (commencement of operations of Trust
Shares) through December 31, 1997.
(b) For the period from January 30, 1998 (commencement of operations of Class B
Shares) through June 30, 1998.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CORE INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Total Investment Income................................... $ 2,451,310
Net Expenses.............................................. (361,867)
------------
Net Investment Income (loss)........................... 2,089,443
Adjustment to reconcile net investment income to net cash
provided (used) by operating activities:
Amortization of discount/premium.......................... 23,704
Change in interest and dividend receivable................ (105,841)
Change in accrued expenses, other payables, prepaid
expenses and other assets.............................. 25,907
------------
Total Adjustments......................................... (56,230)
------------
Net cash provided (used) by operating activities....... 2,033,213
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments........................ 40,021,202
Purchases of investments.................................. (46,151,336)
Net purchases of short-term investments with cash received
as collateral from securities lending.................. (5,421,250)
------------
Net cash provided (used) by investing activities....... (11,551,384)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shares issued............................... 11,962,442
Cost of shares redeemed................................... (6,425,640)
Distributions paid to shareholders........................ (2,175,679)
Dividends reinvested...................................... 735,798
Net collateral received from securities lending........... 5,421,250
------------
Net cash provided (used) by financing activities.......... 9,518,171
Net increase (decrease) in cash............................. --
Cash at beginning of period................................. --
------------
Cash at end of period....................................... $ --
============
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
MOODY'S/S&P MATURITY PRINCIPAL VALUE
RATINGS RATE DATE AMOUNT (NOTE 2)
----------- ---- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS -- 62.2%
BANKING -- 6.1%
ABN AMRO Bank......................... Aa3/A 6.63% 10/31/01 $ 2,000,000 $ 2,032,500
Bankers Trust......................... A2/A 6.75 10/3/01 1,500,000 1,530,000
NationsBank Corp...................... Aa3/A+ 7.00 9/15/01 2,000,000 2,060,000
------------
5,622,500
------------
ENTERTAINMENT -- 1.6%
The Walt Disney Co.................... A2/A 6.38 3/30/01 1,500,000 1,522,500
------------
FINANCIAL SERVICES -- 11.2%
Associates Corp. N.A.................. Aa3/AA- 7.68 3/3/00 1,500,000 1,541,250
Ford Motor Credit Co.................. A1/A 6.50 2/28/02 2,500,000 2,543,750
General Motors Acceptance Corp........ A3/A- 7.75 1/15/99 2,500,000 2,526,825
Merrill Lynch & Co., Inc.............. Aa3/AA- 6.00 1/15/01 1,750,000 1,754,375
Salomon Smith Barney Holdings......... A2/A 6.13 1/15/03 2,000,000 1,985,000
------------
10,351,200
------------
INDUSTRIAL GOODS & SERVICES -- 10.0%
Archer Daniels Midland................ Aa3/AA- 6.25 5/15/03 1,500,000 1,515,000
IBM Corp.............................. A1/A+ 6.25 2/24/00 1,036,000 1,039,626
IBM Corp., MTN........................ A1/A+ 6.04 8/7/00 1,000,000 1,005,000
Imperial Oil Ltd...................... Aa2/AA+ 8.75 10/15/19 3,000,000 3,202,500
Martin Marietta Tech.................. A3/BBB+ 6.50 4/15/03 2,500,000 2,540,625
------------
9,302,751
------------
INSURANCE -- PROPERTY & CASUALTY -- 2.2%
Travelers/Aetna Property & Casualty... A1/A+ 6.75 4/15/01 2,000,000 2,040,000
------------
PAPER PRODUCTS -- 2.2%
International Paper Co................ A3/A- 6.88 7/10/00 2,000,000 2,037,500
------------
RETAIL-STORES -- 7.7%
Dayton Hudson Co...................... A3/BBB+ 6.40 2/15/03 2,500,000 2,528,125
J C Penney & Co....................... A2/A 7.25 4/1/02 2,000,000 2,080,000
Wal-Mart Stores....................... Aa2/AA 5.85 6/1/18 2,500,000 2,500,000
------------
7,108,125
------------
TELECOMMUNICATIONS -- 1.6%
MCI Communication Corp................ Baa2/A 7.13 1/20/00 1,500,000 1,522,500
------------
UTILITIES-ELECTRIC -- 16.4%
Baltimore Gas & Electric.............. A1/AA- 6.50 2/15/03 2,500,000 2,559,375
Central Power & Light Co.............. A3/A 6.00 4/1/00 2,000,000 2,002,500
Florida Power Corp.................... A1/A+ 6.54 7/1/02 2,000,000 2,037,500
MidAmerican Energy.................... A3/A 6.50 12/15/01 2,500,000 2,537,500
National Rural Utilities Corp., Series
C, MTN............................. A1/AA- 6.49 7/10/02 2,000,000 2,032,500
Puget Sound Power & Light............. Baa1/A- 6.61 2/9/00 2,000,000 2,017,500
SCANA Corp., Series B, MTN............ A3/A- 6.25 7/8/03 2,000,000 2,000,000
------------
15,186,875
------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
MOODY'S/S&P MATURITY PRINCIPAL VALUE
RATINGS RATE DATE AMOUNT (NOTE 2)
----------- ---- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS, CONTINUED:
UTILITIES-GAS -- 3.2%
ENSERCH Corp.......................... Baa2/BBB 7.00% 8/15/99 $ 1,000,000 $ 1,010,000
Smith Enron........................... NR/NR 5.97 12/15/06 1,995,248 1,990,260
--------------
3,000,260
--------------
Total Corporate Bonds (Cost
$57,206,172).......................... 57,694,211
--------------
U.S. GOVERNMENT AGENCIES -- 23.1%
FEDERAL HOME LOAN BANK -- 4.9%
Federal Home Loan Bank (b)............ 6.00 8/28/01 2,500,000 2,499,675
Federal Home Loan Bank................ 6.10* 12/24/07 2,000,000 2,013,726
--------------
4,513,401
--------------
FEDERAL HOME LOAN MORTGAGE CORP. -- 2.2%
Federal Home Loan Mortgage Corp.
(b)................................ 6.75 4/1/08 2,000,000 2,002,020
--------------
FEDERAL NATIONAL MORTGAGE ASSOC. -- 1.6%
Federal National Mortgage Assoc.
(b)................................ 6.35 11/23/01 1,500,000 1,510,170
--------------
GOVERNMENT NATIONAL MORTGAGE
ASSOC. -- 12.8%
Government National Mortgage Assoc.,
Pool # 339455...................... 8.00 12/15/07 628,922 652,111
Government National Mortgage Assoc.,
Pool # 358725...................... 8.00 8/15/08 1,192,437 1,236,402
Government National Mortgage Assoc.,
Pool # 392085...................... 7.50 4/15/09 675,905 697,872
Government National Mortgage Assoc.,
Pool # 368641...................... 7.50 4/15/09 569,417 587,923
Government National Mortgage Assoc.,
Pool # 345752...................... 7.50 6/15/09 589,403 608,559
Government National Mortgage Assoc.,
Pool # 376589...................... 8.50 9/15/09 817,729 856,056
Government National Mortgage Assoc.,
Pool # 380660...................... 8.00 11/15/09 1,389,799 1,441,040
Government National Mortgage Assoc.,
Pool # 392814...................... 8.50 12/15/09 687,707 719,940
Government National Mortgage Assoc.,
Pool # 392770...................... 8.50 12/15/09 437,418 457,920
Government National Mortgage Assoc.,
Pool # 407337...................... 8.00 4/15/10 1,202,228 1,246,554
Government National Mortgage Assoc.,
Pool # 405445...................... 8.00 4/15/10 1,369,545 1,420,040
Government National Mortgage Assoc.,
Pool # 423983...................... 7.50 8/15/11 1,871,178 1,931,992
--------------
11,856,409
--------------
STUDENT LOAN MARKETING ASSOC. -- 1.6%
Student Loan Marketing Assoc.......... 5.81 1/23/01 1,500,000 1,499,565
--------------
Total U.S. Government Agencies (Cost
$20,945,486).......................... 21,381,565
--------------
U.S. TREASURY NOTES -- 11.6%
U.S. Treasury Note.................... 7.75 1/31/00 1,500,000 1,550,160
U.S. Treasury Note.................... 6.25 10/31/01 1,000,000 1,020,930
U.S. Treasury Note.................... 6.25 6/30/02 2,000,000 2,050,260
U.S. Treasury Note (b)................ 6.63 7/31/01 2,000,000 2,060,600
U.S. Treasury Note (b)................ 6.25 1/31/02 4,000,000 4,089,560
--------------
Total U.S. Treasury Notes (Cost
$10,566,255).......................... 10,771,510
--------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
MOODY'S/S&P MATURITY PRINCIPAL VALUE
REGULATED INVESTMENT COMPANIES -- 1.9% RATINGS RATE DATE AMOUNT/SHARES (NOTE 2)
------------- --------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
1,774,490 $ 1,774,489
AIM Liquid Assets Money Market Fund...
1,527 1,527
AIM Prime Money Market Fund...........
--------------
Total Regulated Investment Companies 1,776,016
(Cost $1,776,016).....................
--------------
SHORT-TERM SECURITY PURCHASED WITH COLLATERAL -- 12.7%
REPURCHASE AGREEMENT -- 12.7%
Lehman Brothers, dated 6/30/98, with a
maturity value of $11,796,589,
(Collateralized by $57,760,000 Federal
Home Loan Mortgage Corp., 0.00%, 6.38% 7/1/98 $ 11,794,500 11,794,500
11/13/17, $12,031,408)................
--------------
Total Short-Term Security Purchased With 11,794,500
Collateral (Cost $11,794,500).........
--------------
TOTAL INVESTMENTS (COST $102,288,429) 103,417,802
(A) -- 111.5%.........................
LIABILITIES IN EXCESS OF OTHER (10,692,488)
ASSETS -- (11.5%).....................
--------------
$ 92,725,314
TOTAL NET ASSETS -- 100.0%..............
==============
</TABLE>
- ---------------
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<CAPTION>
<S> <C>
Unrealized appreciation..................................... $1,158,322
Unrealized depreciation..................................... (28,949)
----------
Net unrealized appreciation................................. $1,129,373
==========
</TABLE>
(b) All or a portion of this security has been loaned at June 30, 1998.
* Variable rate security. Rate represents rate in effect at June 30, 1998.
MTN -- Medium Term Note
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $90,493,929).... $91,623,302
Repurchase agreement, at amortized cost................... 11,794,500
-----------
Total Investments...................................... 103,417,802
Interest receivable....................................... 1,524,952
Receivable for capital shares sold........................ 22,020
Receivable for investment securities sold................. 2,034,688
Deferred organization costs............................... 9,511
Prepaid expenses.......................................... 10,616
-----------
Total assets................................................ 107,019,589
-----------
LIABILITIES
Payable for return of collateral held for securities on
loan................................................... 11,794,500
Distributions payable..................................... 416,093
Payable for investment securities purchased............... 2,000,000
Payable for capital shares redeemed....................... 2,935
Accrued expenses and other payables:
Advisory fees.......................................... 38,189
Administration fees.................................... 11,457
Shareholder servicing fees -- Class B Shares........... 62
Distribution fees -- Class A Shares.................... 1,227
Distribution fees -- Class B Shares.................... 185
Accounting fees........................................ 4,572
Custodian fees......................................... 11,174
Audit fees............................................. 8,419
Other.................................................. 5,462
-----------
Total liabilities........................................... 14,294,275
-----------
NET ASSETS
Class A Shares......................................... 7,077,462
Class B Shares......................................... 310,959
Trust Shares........................................... 85,336,893
-----------
$92,725,314
===========
Shares Outstanding ($0.001 par value, 500 million shares
authorized)
Class A Shares......................................... 708,078
Class B Shares......................................... 31,164
Trust Shares........................................... 8,538,736
-----------
9,277,978
===========
NET ASSET VALUE
Class A Shares -- redemption price per share.............. $10.00
------
Class A Shares -- maximum sales charge.................... 3.00%
------
Class A Shares -- maximum sales charge per share
(100%/(100% -- maximum sales charge) of net asset value
adjusted to nearest cent).............................. $10.31
======
Class B Shares -- offering and redemption price per
share*................................................. $9.98
======
Trust Shares -- offering and redemption price per share... $9.99
======
COMPOSITION OF NET ASSETS:
Shares of common stock, at par............................ $ 9,278
Additional paid-in capital................................ 91,453,523
Undistributed (distributions in excess of) net investment
income................................................. (1,454)
Net unrealized appreciation from investments.............. 1,129,373
Accumulated net realized gains from investment
transactions........................................... 134,594
-----------
Net Assets, June 30, 1998................................... $92,725,314
===========
</TABLE>
- ---------------
* Redemption price per share varies by length of time shares are held.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................... $2,823,619
Dividends................................................... 103,040
----------
Total Investment Income..................................... 2,926,659
Expenses
Advisory fees............................................. $ 227,538
Administration fees....................................... 68,262
Shareholder servicing fees -- Class B Shares.............. 206
Distribution fees -- Class A Shares....................... 7,333
Distribution fees -- Class B Shares....................... 619
Accounting fees........................................... 37,222
Transfer agent fees and expenses.......................... 33,285
Directors' fees........................................... 2,359
Custodian fees............................................ 12,323
Audit fees................................................ 11,060
Reports to shareholders................................... 9,690
Other expenses............................................ 21,073
----------
Total expenses before fee waivers...................... 430,970
Less: Fee waivers...................................... (4,977)
----------
Total expenses......................................... 425,993
----------
Net Investment Income....................................... 2,500,666
----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENTS
Net realized gains (losses) on investment transactions.... 124,457
Net change in unrealized appreciation (depreciation) on
investments............................................ (28,192)
----------
Net Realized and Unrealized Gains (Losses) from
Investments............................................... 96,265
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $2,596,931
==========
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income..................................... $ 2,500,666 $ 5,905,203
Net realized gains (losses) on investment transactions.... 124,457 87,039
Net change in unrealized appreciation (depreciation) on
investments............................................ (28,192) 185,389
------------ ------------
Net increase in net assets resulting from operations...... 2,596,931 6,177,631
------------ ------------
Distributions to Class A Shares
From net investment income................................ (155,284) (4,572,712)
From net realized gains................................... -- (3,598)
Distributions to Class B Shares (b)
From net investment income................................ (3,708) --
Distributions to Trust Shares
From net investment income................................ (2,343,971) (1,330,194)(a)
From net realized gains................................... -- (49,934)(a)
------------ ------------
Total distributions to shareholders......................... (2,502,963) (5,956,438)
------------ ------------
Capital Share Transactions
Proceeds from shares issued............................... 12,721,782 115,326,621
Dividends reinvested...................................... 996,613 2,802,526
Cost of shares redeemed................................... (11,866,560) (125,767,873)
------------ ------------
Net increase (decrease) in net assets from capital share
transactions........................................... 1,851,835 (7,638,726)
------------ ------------
Total increase (decrease) in Net Assets..................... 1,945,803 (7,417,533)
NET ASSETS
Beginning of period....................................... 90,779,511 98,197,044
------------ ------------
End of period............................................. $ 92,725,314 $ 90,779,511
============ ============
SHARE TRANSACTIONS:
Issued.................................................... 1,272,303 11,542,505
Reinvested................................................ 99,720 281,855
Redeemed.................................................. (1,186,722) (12,593,661)
------------ ------------
Change in shares.......................................... 185,301 (769,301)
============ ============
</TABLE>
- ---------------
(a) For the period from October 3, 1997 (commencement of operations of Trust
Shares) through December 31, 1997.
(b) For the period from January 30, 1998 (commencement of operations of Class B
Shares) through June 30, 1998.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Total Investment Income................................... $ 2,926,659
Net Expenses.............................................. (425,993)
------------
Net Investment Income (loss).............................. 2,500,666
Adjustment to reconcile net investment income to net cash
provided (used) by operating activities:
Amortization of discount/premium.......................... 50,698
Change in interest and dividend receivable................ (23,637)
Change in accrued expenses, other payables, prepaid
expenses and other assets.............................. 45,974
------------
Total Adjustments......................................... 73,035
------------
Net cash provided (used) by operating activities....... 2,573,701
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments........................ 47,098,490
Purchases of investments.................................. (48,906,120)
Net purchases of short-term investments with cash received
as collateral from securities lending.................. (11,794,500)
------------
Net cash provided (used) by investing activities....... (13,602,130)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shares issued............................... 12,700,232
Cost of shares redeemed................................... (11,885,413)
Distributions paid to shareholders........................ (2,577,503)
Dividends reinvested...................................... 996,613
Net collateral received from securities lending........... 11,794,500
------------
Net cash provided (used) by financing activites........... 11,028,429
Net increase (decrease) in cash............................. --
Cash at beginning of period................................. --
------------
Cash at end of period....................................... $ --
============
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION U.S. GOVERNMENT PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
MATURITY PRINCIPAL VALUE
RATE DATE AMOUNT (NOTE 2)
---- -------- ------------- -----------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCIES -- 50.9%
FEDERAL FARM CREDIT BANK -- 8.7%
Federal Farm Credit Bank.................................. 6.15% 3/23/05 $1,000,000 $ 999,870
Federal Farm Credit Bank.................................. 7.34 8/27/07 750,000 751,305
-----------
1,751,175
-----------
FEDERAL HOME LOAN BANK -- 7.4%
Federal Home Loan Bank.................................... 6.00 8/28/01 750,000 749,903
Federal Home Loan Bank.................................... 6.10* 12/24/07 750,000 755,147
-----------
1,505,050
-----------
FEDERAL HOME LOAN MORTGAGE CORP. -- 5.0%
Federal Home Loan Mortgage Corp........................... 6.16 9/25/02 500,000 508,415
Federal Home Loan Mortgage Corp........................... 6.58 9/30/02 500,000 500,430
-----------
1,008,845
-----------
FEDERAL NATIONAL MORTGAGE ASSOC. -- 7.6%
Federal National Mortgage Assoc........................... 5.98 11/12/02 500,000 505,105
Federal National Mortgage Assoc........................... 6.44 8/14/07 500,000 519,500
Federal National Mortgage Assoc........................... 6.65 11/14/07 500,000 510,170
-----------
1,534,775
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOC. -- 19.2%
Government National Mortgage Assoc., Pool # 152718........ 9.00 12/15/01 45,466 47,711
Government National Mortgage Assoc., Pool # 248038........ 9.00 2/15/03 152,519 160,049
Government National Mortgage Assoc., Pool # 407408........ 7.50 5/15/10 604,035 623,667
Government National Mortgage Assoc., Pool # 423984........ 7.00 8/15/11 846,796 868,228
Government National Mortgage Assoc., Pool # 423914........ 7.50 8/15/11 871,128 899,438
Government National Mortgage Assoc., Pool # 423923........ 7.00 9/15/11 696,106 713,724
Government National Mortgage Assoc., Pool # 431451........ 7.50 10/15/11 558,530 576,682
-----------
3,889,499
-----------
STUDENT LOAN MARKETING ASSOC. -- 3.0%
Student Loan Marketing Assoc.............................. 5.81 1/23/01 600,000 599,826
-----------
Total U.S. Government Agencies (Cost $10,181,183)........... 10,289,170
-----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
MATURITY PRINCIPAL VALUE
RATE DATE AMOUNT/SHARES (NOTE 2)
--------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES -- 44.6%
U.S. Treasury Note........................................................ 5.75% 12/31/98 $ 250,000 $ 250,545
U.S. Treasury Note........................................................ 6.00 8/15/99 1,000,000 1,005,500
U.S. Treasury Note........................................................ 6.38 5/15/00 500,000 507,545
U.S. Treasury Note........................................................ 6.25 5/31/00 750,000 759,908
U.S. Treasury Note........................................................ 7.50 11/15/01 2,500,000 2,647,799
U.S. Treasury Note........................................................ 7.50 5/15/02 1,000,000 1,067,370
U.S. Treasury Note........................................................ 6.25 6/30/02 750,000 768,848
U.S. Treasury Note........................................................ 5.63 12/31/02 1,250,000 1,255,150
U.S. Treasury Note........................................................ 5.50 1/31/03 750,000 749,348
-------------
Total U.S. Treasury Notes (Cost $8,846,604)................................. 9,012,013
-------------
REGULATED INVESTMENT COMPANIES -- 4.0%
AIM Treasury Money Market Fund............................................ 807,254 807,255
Dreyfus Prime Money Market Fund........................................... 1,585 1,585
-------------
Total Regulated Investment Companies (Cost $808,840)........................ 808,840
-------------
TOTAL INVESTMENTS (COST $19,836,627) (a) -- 99.5%........................... 20,110,023
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.5%............................... 92,739
-------------
TOTAL NET ASSETS -- 100.0%.................................................. $20,202,762
=============
</TABLE>
- ---------------
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
Unrealized appreciation..................................... $289,530
Unrealized depreciation..................................... (16,134)
--------
Net unrealized appreciation................................. $273,396
========
* Variable rate security. Rate represents rate in effect at June 30, 1998.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION U.S. GOVERNMENT PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $19,836,627).... $20,110,023
Interest and dividends receivable......................... 214,920
Deferred organization costs............................... 1,349
Prepaid expenses and other assets......................... 1,041
-----------
Total assets................................................ 20,327,333
-----------
LIABILITIES
Distributions payable..................................... 86,062
Accrued expenses:
Advisory fees.......................................... 5,640
Administration fees.................................... 664
Shareholder servicing fees -- Class B Shares........... 23
Distribution fees -- Class B Shares.................... 70
Accounting fees........................................ 5,118
Directors' fees........................................ 34
Audit fees............................................. 10,831
Legal fees............................................. 6,147
Other.................................................. 9,982
-----------
Total liabilities........................................... 124,571
-----------
NET ASSETS
Class A Shares............................................ 20,049,523
Class B Shares............................................ 153,239
-----------
$20,202,762
===========
Shares Outstanding ($0.001 par value, 500 million shares
authorized)
Class A Shares............................................ 1,978,620
Class B Shares............................................ 15,110
-----------
1,993,730
===========
NET ASSET VALUE
Class A Shares -- redemption price per share.............. $ 10.13
-----------
Class A Shares -- maximum sales charge.................... 3.00%
-----------
Class A Shares -- maximum offering price per share
(100%/(100% -- maximum sales charge) of net asset value
adjusted to nearest cent).............................. $ 10.44
===========
Class B Shares -- offering and redemption price per
share*................................................. $ 10.14
===========
COMPOSITION OF NET ASSETS:
Shares of common stock, at par............................ $ 1,994
Additional paid-in capital................................ 19,932,157
Undistributed (distributions in excess of) net investment
income................................................. (1,440)
Net unrealized appreciation from investments.............. 273,396
Accumulated net realized losses on investment
transactions........................................... (3,345)
-----------
Net Assets, June 30, 1998................................... $20,202,762
===========
</TABLE>
- ---------------
* Redemption price per share varies by length of time shares are held.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION U.S. GOVERNMENT PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................... $608,886
Dividends................................................... 16,684
--------
Total Investment Income..................................... 625,570
Expenses
Advisory fees............................................. $ 49,864
Administration fees....................................... 14,959
Shareholder servicing fees -- Class B Shares.............. 60
Distribution fees -- Class A Shares....................... 24,733
Distribution fees -- Class B Shares....................... 178
Accounting fees........................................... 29,593
Transfer agent fees and expenses.......................... 16,604
Directors' fees........................................... 516
Audit fees................................................ 5,507
Registration fees......................................... 5,280
Other expenses............................................ 7,226
--------
Total expenses before fee waivers...................... 154,520
Less: Fee waivers...................................... (52,609)
--------
Total expenses......................................... 101,911
--------
Net Investment Income....................................... 523,659
--------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENTS
Net realized gains (losses) on investment transactions.... (2,446)
Net change in unrealized appreciation (depreciation) on
investments............................................ 25,845
--------
Net Realized and Unrealized Gains (Losses) from
Investments............................................ 23,399
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $547,058
========
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION U.S. GOVERNMENT PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997 (A)
---------------- ---------------------
(UNAUDITED)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations Net investment income............................ $ 523,659 $ 865,919
Net realized gains (losses) on investment transactions.... (2,446) (2,339)
Net change in unrealized appreciation (depreciation) on
investments............................................ 25,845 220,368
----------- -----------
Net increase in net assets resulting from operations...... 547,058 1,083,948
----------- -----------
Distributions to Class A Shares
From net investment income................................ (522,700) (865,919)
Distributions to Class B Shares (b)
From net investment income................................ (959) --
----------- -----------
Total distributions to shareholders......................... (523,659) (865,919)
----------- -----------
Capital Share Transactions
Proceeds from shares issued............................... 2,383,373 22,172,121
Dividends reinvested...................................... 5,061 4,769
Cost of shares redeemed................................... (2,312,422) (2,291,568)
----------- -----------
Net increase in net assets from capital share
transactions........................................... 76,012 19,885,322
----------- -----------
Total increase (decrease) in Net Assets..................... 99,411 20,103,351
NET ASSETS
Beginning of period....................................... 20,103,351 --
----------- -----------
End of period............................................. $20,202,762 $20,103,351
=========== ===========
SHARE TRANSACTIONS
Issued.................................................... 235,075 2,213,380
Reinvested................................................ 499 473
Redeemed.................................................. (227,833) (227,864)
----------- -----------
Change in shares............................................ 7,741 1,985,989
=========== ===========
</TABLE>
- ---------------
(a) For the period from February 28, 1997 (commencement of operations) to
December 31, 1997.
(b) For the period from January 30, 1998 (commencement of operations of Class B
Shares) to June 30, 1998.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
MOODY'S/S&P MATURITY PRINCIPAL VALUE
RATINGS RATE DATE AMOUNT (NOTE 2)
----------- ----- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS -- 99.0%
GEORGIA -- 1.7%
Fulton County School District
Refunded, GO....................... Aa2/AA 6.38% 5/1/11 $1,480,000 $ 1,722,350
------------
PENNSYLVANIA -- 1.1%
Indiana County Industrial Development
Authority, Pollution Control
Revenue, MBIA...................... Aaa/AAA 5.35 11/1/10 1,000,000 1,067,500
------------
TENNESSEE -- 94.6%
Bristol Health & Educational
Facilities Revenue, Bristol
Memorial Hospital, Revenue Bond,
FGIC............................... Aaa/AAA 6.75 9/1/07 2,140,000 2,503,800
Chattanooga-Hamilton County Hospital
Authority, Hospital Revenue,
Erlanger Medical Center, Series A,
Callable 4/1/08 @ 101.............. Aaa/AAA 5.00 10/1/28 1,000,000 971,250
Dickson County, GO, FGIC.............. Aaa/NR 6.25 4/1/08 1,220,000 1,395,375
Hamilton County, Callable 8/1/07 @
101, GO............................ Aa2/NR 4.75 8/1/11 1,200,000 1,212,000
Hamilton County Industrial Development
Board Lease, Rent Revenue, FGIC.... Aaa/AAA 5.75 9/1/05 1,000,000 1,085,000
Hamilton County Refunded, Series B,
GO................................. Aa2/NR 5.10 8/1/24 1,585,000 1,622,644
Humphreys County Industrial
Development Board, Solid Waste
Disposal Revenue, E.I. Dupont de
Nemours & Co. Project, Callable
5/1/04 @ 102....................... Aa3/AA- 6.70 5/1/24 1,455,000 1,609,594
Johnson City Health & Educational
Improvements, Revenue Bond,
Prerefunded 7/1/01 @ 102, MBIA..... Aaa/AAA 6.75 7/1/16 1,000,000 1,095,000
Johnson City Refunded, FGIC........... Aaa/AAA 5.25 6/1/10 1,260,000 1,337,175
Johnson City Refunded Water & Sewer,
FGIC............................... Aaa/AAA 5.25 6/1/10 1,270,000 1,347,788
Knox County, GO, Callable 4/1/03 @
102................................ Aa/AA 6.50 4/1/04 1,965,000 2,186,063
Knox County, Callable 2/1/04 @ 101.... Aa3/AA 5.00 2/1/13 2,000,000 2,030,000
Knox County, GO, Callable 2/1/04 @
101................................ Aa3/AA 5.00 2/1/15 1,000,000 1,006,250
Knox County Health, Education &
Housing Facilities Board, Hospital
Facilities Revenue, Fort Sanders
Alliance, MBIA..................... Aaa/AAA 6.25 1/1/13 1,000,000 1,143,750
Knoxville, Refunded Public Improvement
GO, Callable 5/1/05 @ 101.......... Aa3/AA 5.00 5/1/09 2,820,000 2,915,175
Lawrenceburg Electric, Revenue Bond,
MBIA............................... Aaa/AAA 6.63 7/1/18 1,250,000 1,507,813
Memphis, GO........................... Aa/AA 6.25 7/1/04 1,500,000 1,657,500
Memphis, GO........................... Aa/AA 6.00 11/1/06 1,000,000 1,113,750
Memphis Electric System Revenue....... Aa/AA 5.90 1/1/04 1,415,000 1,531,738
Memphis-Shelby County Airport
Authority, Revenue Bonds, MBIA..... Aaa/AAA 6.25 2/15/09 1,790,000 2,024,938
Metropolitan Government Nashville &
Davidson County, Series A, GO,
Callable 11/15/06 @ 101............ Aa2/AA 5.13 11/15/10 2,000,000 2,077,500
Metropolitan Government Nashville &
Davidson County Electric Revenue
Refunded, Series B................. Aa3/AA 5.50 5/15/08 3,780,000 4,039,874
Metropolitan Government Nashville &
Davidson County Health & Education
Facility, Series C................. Aa3/AA 5.00 10/1/10 1,955,000 2,006,319
</TABLE>
<TABLE>
<CAPTION>
MARKET
MOODY'S/S&P MATURITY PRINCIPAL VALUE
RATINGS RATE DATE AMOUNT (NOTE 2)
----------- ----- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS, CONTINUED:
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
TENNESSEE, CONTINUED:
Metropolitan Government Nashville &
Davidson County Health & Education
Revenue, Series A, Callable 5/1/08
@ 101.............................. Aaa/AAA 4.75% 11/1/18 $ 3,750,000 $ 3,553,125
Metropolitan Government Nashville &
Davidson County Health & Education
Revenue, Series A, Callable 5/1/08
@ 101.............................. Aaa/AAA 4.88 11/1/28 3,000,000 2,842,500
Metropolitan Government, Nashville &
Davidson County, GO, Callable
5/15/06 @ 101...................... Aa/AA 5.60 5/15/07 1,045,000 1,135,131
Metropolitan Government, Nashville &
Davidson County, Series A, GO,
Callable 11/15/06 @ 101............ Aa2/AA 5.13 11/15/19 2,000,000 2,000,000
Metropolitan Government, Nashville &
Davidson County Energy Project,
Series B, Revenue Bond............. Aaa/AAA 6.00 7/1/10 1,335,000 1,506,881
Metropolitan Government, Nashville &
Davidson County Health &
Educational Facilities Board,
Refunding & Improvements, Meharry
Medical College, AMBAC............. Aaa/AAA 6.00 12/1/09 1,000,000 1,122,500
Metropolitan Government, Nashville &
Davidson County Water & Sewer
Revenue............................ Aaa/AAA 6.50 4/1/03 1,000,000 1,100,000
Metropolitan Government, Nashville &
Davidson County, Health &
Educational Facilities Board,
Refunding & Improvements, Meharry
Medical College, AMBAC............. Aaa/AAA 6.00 12/1/13 2,030,000 2,276,138
Metropolitan Government, Nashville &
Davidson County, Meharry Medical
College Project, Prerefunded
12/1/04 @ 102, AMBAC............... Aaa/AAA 6.88 12/1/24 4,750,000 5,527,812
Metropolitan Government, Nashville &
Davidson County, Vanderbuilt
University, Series A............... Aa3/AA 5.75 1/1/07 1,035,000 1,129,444
Rutherford County Capital Outlay,
GO................................. Aa3/AA- 6.00 4/1/04 1,370,000 1,489,875
Rutherford County Capital Outlay,
Series A........................... Aa3/AA- 6.25 5/1/05 3,500,000 3,893,749
Shelby County, Series A, GO........... Aa2/AA+ 6.75 4/1/05 1,000,000 1,142,500
Shelby County, Series A, GO........... Aa2/AA+ 5.63 6/1/05 1,000,000 1,078,750
Shelby County, Series B, GO........... Aa2/AA+ 6.00 12/1/05 2,000,000 2,212,500
Shelby County Health, Education &
Housing Facilities Board, Hospital
Revenue, Methodist Health Systems,
Inc., MBIA......................... Aaa/AAA 6.25 8/1/07 3,500,000 3,933,124
Shelby County Health, Educational &
Housing Facilities Board, Hospital
Revenue, Methodist Health Systems,
Inc., MBIA......................... Aaa/AAA 5.50 8/1/05 3,000,000 3,195,000
Shelby County Health, Educational &
Housing Facilities Board, Hospital
Revenue, Methodist Health Systems,
Inc., MBIA......................... Aaa/AAA 6.25 8/1/08 2,000,000 2,262,500
Shelby County Refunded, Series A,
GO................................. Aa2/AA+ 5.25 4/1/06 1,000,000 1,058,750
Shelby County Refunded, Series B, GO,
Callable 8/1/07 @ 101.............. Aa2/AA+ 5.00 8/1/11 2,500,000 2,571,875
Tennessee State Refunded, Series B,
GO................................. Aaa/AAA 5.50 5/1/03 1,000,000 1,061,250
Tennessee State Refunded, Series B,
GO................................. Aaa/AA+ 6.00 5/1/05 3,000,000 3,307,500
Tennessee State Refunded, Series B,
GO................................. Aaa/AAA 6.00 5/1/06 1,000,000 1,111,250
</TABLE>
<TABLE>
MARKET
MOODY'S/S&P MATURITY PRINCIPAL VALUE
RATINGS RATE DATE AMOUNT/SHARES (NOTE 2)
------------- --------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS, CONTINUED:
TENNESSEE, CONTINUED:
Tennessee State, Series A, GO,
Callable 5/1/08 @ 101.............. Aaa/AAA 5.00% 5/1/11 $2,000,000 $ 2,055,000
Williamson County Public Improvement,
GO................................. Aa1/NR 6.25 4/1/06 1,000,000 1,126,250
--------------
93,113,700
--------------
WISCONSIN -- 1.6%
Milwaukee Refunding, GO............... Aa1/AA+ 6.00 2/1/09 1,380,000 1,550,775
--------------
Total Municipal Bonds (Cost
$95,659,388).......................... 97,454,325
--------------
REGULATED INVESTMENT COMPANIES -- 0.7%
AIM Tax Free Money Market Fund........ 686,061 686,061
Dreyfus Tax Free Money Market Fund.... 15,849 15,849
--------------
Total Regulated Investment Companies
(Cost $701,910)....................... 701,910
--------------
TOTAL INVESTMENTS (COST $96,361,298) (A)
- 99.7%............................... 98,156,235
OTHER ASSETS IN EXCESS OF LIABILITIES -
0.3%.................................. 305,451
--------------
TOTAL NET ASSETS -- 100.0%............. $ 98,461,686
==============
</TABLE>
- ---------------
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
Unrealized appreciation............................. $1,924,111
Unrealized depreciation............................. (129,174)
----------
Net unrealized appreciation......................... $1,794,937
==========
AMBAC - Insured by American Municipal Bond Assurance Corp.
FGIC - Insured by Financial Guaranty Insurance Corp.
GO - General Obligation
MBIA - Insured by Municipal Bond Insurance Assoc.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $96,361,298).... $ 98,156,235
Cash...................................................... 3,129
Interest receivable....................................... 1,395,470
Receivable for investment securities sold................. 3,060,110
Receivable for capital shares issued...................... 4,223
Deferred organization costs............................... 9,418
Prepaid expenses.......................................... 12,309
------------
Total assets................................................ 102,640,894
------------
LIABILITIES
Distributions payable..................................... 303,154
Payable for investment securities purchased............... 3,800,854
Accrued expenses:
Advisory fees.......................................... 40,946
Administration fees.................................... 12,284
Shareholder servicing fees -- Class B Shares........... 147
Distribution fees -- Class A Shares.................... 542
Distribution fees -- Class B Shares.................... 440
Accounting fees........................................ 4,688
Audit fees............................................. 7,747
Other.................................................. 8,406
------------
Total liabilities........................................... 4,179,208
------------
NET ASSETS
Class A Shares......................................... 2,705,060
Class B Shares......................................... 735,254
Trust Shares........................................... 95,021,372
------------
$ 98,461,686
============
Shares Outstanding ($0.001 par value, 500 million shares
authorized)
Class A Shares......................................... 267,237
Class B Shares......................................... 72,484
Trust Shares........................................... 9,388,840
------------
9,728,561
============
NET ASSET VALUE
Class A Shares -- redemption price per share.............. $10.12
------
Class A Shares -- maximum sales charge.................... 3.00%
------
Class A Shares -- maximum offering price per share
(100%/(100% -- maximum sales charge) of net asset value
adjusted to nearest cent).............................. $10.43
======
Class B Shares -- offering and redemption price per
share*................................................. $10.14
======
Trust Shares -- offering and redemption price per share... $10.12
======
COMPOSITION OF NET ASSETS:
Shares of common stock, at par............................ $ 9,729
Additional paid-in capital................................ 96,761,695
Undistributed (distributions in excess of) net investment
income................................................. 5,860
Net unrealized appreciation from investments.............. 1,794,937
Accumulated net realized losses from investment
transactions........................................... (110,535)
------------
Net Assets, June 30, 1998................................... $ 98,461,686
============
</TABLE>
- ---------------
* Redemption price per share varies by length of time shares are held.
See Notes to Financial Statements
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................... $2,276,206
Dividends................................................... 61,440
----------
Total Investment Income..................................... 2,337,646
Expenses Advisory fees...................................... $248,500
Administration fees....................................... 74,550
Shareholder servicing fees -- Class B Shares.............. 411
Distribution fees -- Class A Shares....................... 2,815
Distribution fees -- Class B Shares....................... 1,231
Accounting fees........................................... 37,702
Transfer agent fees and expenses.......................... 34,043
Directors' fees........................................... 2,604
Custodian fees............................................ 15,158
Reports to shareholders................................... 12,904
Audit fees................................................ 11,513
Other expenses............................................ 23,961
--------
Total expenses before fee waivers...................... 465,392
Less: Fee waivers...................................... (5,617)
--------
Total expenses......................................... 459,775
----------
Net Investment Income....................................... 1,877,871
----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENTS
Net realized gains (losses) on investment transactions.... 549,968
Net change in unrealized appreciation (depreciation) on
investments............................................ (1,096,807)
----------
Net Realized and Unrealized Gains (Losses) from
Investments............................................ (546,839)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $1,331,032
==========
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income..................................... $ 1,877,871 $ 4,158,493
Net realized gains (losses) on investment transactions.... 549,968 495,596
Net change in unrealized appreciation (depreciation) on
investments............................................ (1,096,807) 2,311,170
----------- ------------
Net increase in net assets resulting from operations...... 1,331,032 6,965,259
----------- ------------
Distributions to Class A Shares
From net investment income................................ (39,812) (3,124,095)
Distributions to Class B Shares (b)
From net investment income................................ (4,423) --
Distributions to Trust Shares
From net investment income................................ (1,833,636) (1,034,398)(a)
----------- ------------
Total distributions to shareholders......................... (1,877,871) (4,158,493)
----------- ------------
Capital Share Transactions
Proceeds from shares issued............................... 6,863,364 126,708,115
Dividends reinvested...................................... 78,705 233,018
Cost of shares redeemed................................... (10,344,439) (115,420,799)
----------- ------------
Net increase (decrease) in net assets from capital share
transactions........................................... (3,402,370) 11,520,334
----------- ------------
Total increase (decrease) in Net Assets..................... (3,949,209) 14,327,100
NET ASSETS
Beginning of period....................................... 102,410,895 88,083,795
----------- ------------
End of period............................................. $98,461,686 $102,410,895
=========== ============
SHARE TRANSACTIONS
Issued.................................................... 676,688 12,634,903
Reinvested................................................ 7,756 23,483
Redeemed.................................................. (1,017,786) (11,495,098)
----------- ------------
Change in shares.......................................... (333,342) 1,163,288
=========== ============
</TABLE>
- ---------------
(a) For the period from October 3, 1997 (commencement of operations of Trust
Shares) through December 31, 1997.
(b) For the period from January 30, 1998 (commencement of operations of Class B
Shares) through June 30, 1998.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
MOODY'S/S&P MATURITY PRINCIPAL VALUE
RATINGS RATE DATE AMOUNT (NOTE 2)
----------- -------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS -- 96.9%
TENNESSEE -- 96.9%
Chattanooga Public & Sewer Improvements, GO...... A1/AA- 7.75% 8/1/01 $ 550,000 $ 608,438
Chattanooga, Health Education & Housing,
Facilities Board Revenue, Series A............ Aa2/AA 5.25 12/1/02 1,000,000 1,040,000
Hamilton County Industrial Development Board,
Lease/Rent Revenue Bond, FGIC................. Aaa/AAA... 5.50 9/1/02 750,000 789,375
Knox County, GO, Callable 4/1/03 @ 102........... Aa/AA 6.50 4/1/04 1,000,000 1,112,500
Knox County, Health Education & Housing,
Facilities Board Hospital Revenue Refunding,
MBIA.......................................... Aaa/AAA... 7.25 1/1/08 1,000,000 1,201,250
Memphis, GO...................................... Aa2/AA 6.00 7/1/03 500,000 541,875
Memphis, GO...................................... Aa/AA 6.00 11/1/03 500,000 544,375
Memphis, GO...................................... Aa2/AA 6.00 7/1/04 1,000,000 1,091,250
Memphis Electrical System Revenue Refunding,
Revenue Bond.................................. Aa/AA 5.80 1/1/03 1,000,000 1,068,750
Memphis, GO...................................... Aa/AA 5.25 7/1/02 1,200,000 1,251,000
Memphis, Sanitary Sewer System Revenue Bond...... Aa2/AA+ 5.25 1/1/03 1,000,000 1,047,500
Metropolitan Government, Nashville & Davidson
County........................................ Aa2/AA 6.25 12/1/01 1,000,000 1,071,250
Metropolitan Government, Nashville & Davidson
County Energy Production Facilities, Revenue
Bond, AMBAC................................... Aaa/AAA 5.20 7/1/05 1,000,000 1,050,000
Metropolitan Government, Nashville & Davidson
County, Electric Revenue, Callable 5/15/02 @
102........................................... Aa/AA 5.63 5/15/03 1,000,000 1,065,000
Metropolitan Government, Nashville & Davidson
County, Health & Education Facilities Board
Revenue, The Vanderbilt University, Series
A............................................. Aa3/AA 6.00 7/1/07 625,000 696,094
Metropolitan Nashville Airport Authority Revenue,
5.00%, 7/1/03, FGIC........................... Aaa/AAA 5.00 7/1/03 1,920,000 1,988,582
Shelby County Refunding, Series B, GO............ Aa2/AA+ 5.00 8/1/03 1,000,000 1,041,250
Shelby County, Series A, GO...................... Aa2/AA+ 5.70 12/1/00 1,275,000 1,326,000
Tennessee State, Series B, GO.................... Aaa/AA+ 6.20 6/1/01 1,350,000 1,434,375
Tennessee State, Series B, GO, Prerefunded 6/1/01
@ 102......................................... Aaa/AA+... 6.50 6/1/01 1,115,000 1,205,594
Tennessee State Refunded, Series B, GO........... Aaa/AAA 5.50 5/1/03 1,000,000 1,061,250
Tennessee State Refunding Bonds, Series C, GO.... Aaa/AA+ 5.00 3/1/05 1,000,000 1,042,500
-----------
Total Municipal Bonds (Cost $23,098,521)........... 23,278,208
-----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE 2)
------- -----------
<S> <C> <C>
REGULATED INVESTMENT COMPANIES -- 3.8%
AIM Tax Free Money Market Fund............................ 923,657 923,657
Dreyfus Tax Free Money Market Fund........................ 1,308 1,308
-----------
Total Regulated Investment Companies (Cost $924,965)........ 924,965
-----------
TOTAL INVESTMENTS (COST $24,023,486) (A) -- 100.7%.......... 24,203,173
LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.7%)............. (163,042)
-----------
TOTAL NET ASSETS -- 100.0%.................................. $24,040,131
===========
</TABLE>
- ---------------
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation............................. $194,178
Unrealized depreciation............................. (14,491)
--------
Net unrealized appreciation......................... $179,687
========
</TABLE>
AMBAC - Insured by American Municipal Bond Assurance Corp.
FGIC - Insured by Financial Guaranty Insurance Corp.
GO - General Obligation
MBIA - Insured by Municipal Bond Insurance Assoc.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $24,023,486).... $24,203,173
Interest receivable....................................... 420,409
Receivable for investment securities sold................. 1,506,409
Deferred organization costs............................... 1,516
-----------
Total assets................................................ 26,131,507
-----------
LIABILITIES
Distributions payable..................................... 61,674
Payable for investment securities purchased............... 1,988,582
Cash overdraft............................................ 3,647
Accrued expenses:
Advisory fees.......................................... 7,693
Administration fees.................................... 789
Shareholder servicing fees -- Class B Shares........... 110
Distribution fees -- Class B Shares.................... 330
Accounting fees........................................ 4,621
Transfer agent fees.................................... 360
Audit fees............................................. 10,795
Custodian fees......................................... 3,986
Other.................................................. 8,789
-----------
Total liabilities........................................... 2,091,376
-----------
NET ASSETS
Class A Shares............................................ 23,501,127
Class B Shares............................................ 539,004
-----------
$24,040,131
===========
Shares Outstanding ($0.001 par value, 500 million shares
authorized)
Class A Shares............................................ 2,324,704
Class B Shares............................................ 53,317
-----------
2,378,021
===========
NET ASSET VALUE
Class A Shares -- redemption price per share.............. $10.11
------
Class A Shares -- maximum sales charge.................... 3.00%
------
Class A Shares -- maximum offering price per share
(100%/(100% -- maximum sales charge) of net asset value
adjusted to nearest cent).............................. $10.42
------
------
Class B Shares -- offering and redemption price per
share*................................................. $10.11
------
------
COMPOSITION OF NET ASSETS:
Shares of common stock, at par............................ $ 2,378
Additional paid-in capital................................ 23,790,793
Net unrealized appreciation from investments.............. 179,687
Accumulated net realized gains from investment
transactions........................................... 67,273
-----------
Net Assets, June 30, 1998................................... $24,040,131
===========
</TABLE>
- ---------------
* Redemption price per share varies by length of time shares are held.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................... $472,056
Dividends................................................... 21,700
--------
Total Investment Income..................................... 493,756
Expenses
Advisory fees............................................. $ 58,497
Administration fees....................................... 17,549
Shareholder servicing fees -- Class B..................... 304
Distribution fees -- Class A Shares....................... 28,787
Distribution fees -- Class B.............................. 913
Accounting fees........................................... 29,484
Transfer agent fees and expenses.......................... 20,151
Directors' fees........................................... 576
Registration fees......................................... 6,587
Custodian fees............................................ 5,829
Other expenses............................................ 7,782
--------
Total expenses before fee waivers...................... 176,459
Less: Fee waivers...................................... (55,504)
--------
Total expenses......................................... 120,955
--------
Net Investment Income....................................... 372,801
--------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENTS
Net realized gains (losses) on investment transactions.... 62,067
Net change in unrealized appreciation (depreciation) on
investments............................................ (121,600)
--------
Net Realized and Unrealized Gains (Losses) from
Investments............................................... (59,533)
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $313,268
========
</TABLE>
- ---------------
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, DECEMBER 31,
1998 1997 (A)
---------------- -------------
(UNAUDITED)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income..................................... $ 372,801 $ 651,831
Net realized gains (losses) on investment transactions.... 62,067 5,206
Net change in unrealized appreciation (depreciation) on
investments............................................ (121,600) 174,157
----------- -----------
Net increase in net assets resulting from operations...... 313,268 831,194
----------- -----------
Distributions to Class A Shares
From net investment income................................ (370,192) (651,831)
Distributions to Class B Shares (b)
From net investment income................................ (2,609) --
----------- -----------
Total distributions to shareholders......................... (372,801) (651,831)
----------- -----------
Capital Share Transactions
Proceeds from shares issued............................... 2,828,313 28,464,155
Dividends reinvested...................................... 1,337 6
Cost of shares redeemed................................... (1,623,046) (5,750,464)
----------- -----------
Net increase in net assets from capital share
transactions........................................... 1,206,604 22,713,697
----------- -----------
Total increase (decrease) in Net Assets..................... 1,147,071 22,893,060
NET ASSETS
Beginning of period....................................... 22,893,060 --
----------- -----------
End of period............................................. $24,040,131 $22,893,060
=========== ===========
SHARE TRANSACTIONS
Issued.................................................... 279,031 2,833,470
Reinvested................................................ 132 1
Redeemed.................................................. (160,241) (574,372)
----------- -----------
Change in shares.......................................... 118,922 2,259,099
=========== ===========
</TABLE>
- ---------------
(a) For the period from February 28, 1997 (commencement of operations) to
December 31, 1997.
(b) For the period from January 30, 1998 (commencement of operations of Class B
Shares) through June 30, 1998.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 -- GENERAL
The Infinity Mutual Funds, Inc. (the "Fund") was organized as a Maryland
corporation on March 6, 1990 and is registered under the Investment Company Act
of 1940, as amended (the "Act"), as an open-end, management investment company.
The Fund operates as a series company currently comprising eleven portfolios.
The accompanying financial statements and notes relate to the AmeriStar Prime
Money Market Portfolio, the AmeriStar U.S. Treasury Money Market Portfolio, the
AmeriStar Capital Growth Portfolio, the AmeriStar Dividend Growth Portfolio, the
AmeriStar Core Income Portfolio, the AmeriStar Limited Duration Income
Portfolio, the AmeriStar Limited Duration U.S. Government Portfolio, the
AmeriStar Tennessee Tax Exempt Bond Portfolio and the AmeriStar Limited Duration
Tennessee Tax Free Portfolio (together the "Portfolios" and individually a
"Portfolio").
The Prime Money Market Portfolio and U.S. Treasury Money Market Portfolio
both seek to provide investors with as high a level of current income as is
consistent with the preservation of capital and the maintenance of liquidity.
The Prime Money Market Portfolio invests in short-term money market instruments
consisting of securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. The U.S. Treasury Money Market Portfolio invests
only in U.S. Treasury securities and in other securities guaranteed as the
principal and interest by the U.S. Government.
The Capital Growth Portfolio seeks to provide investors with capital growth
by investing primarily in the equity securities of domestic issuers. The
Dividend Growth Portfolio seeks to provide investors with current income and
capital appreciation. This Portfolio will invest primarily in dividend-paying
equity securities of domestic issuers that are expected to provide reasonable
income and may have capital appreciation potential.
The Core Income Portfolio seeks to provide investors with current income
without assuming undue risk. This Portfolio will invest primarily in investment
grade, U.S. dollar denominated fixed-income securities of domestic and foreign
issuers. The Limited Duration Income Portfolio's investment objective is to
provide investors with current income without assuming undue risk. This
Portfolio will invest primarily in investment grade, U.S. dollar denominated
fixed-income securities of domestic and foreign issuers. Under normal market
conditions, the Limited Duration Income Portfolio will invest in a portfolio of
securities that has a duration of less than four years. 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.
The Tennessee Tax Exempt Bond Portfolio's investment objective is to
provide investors with current income exempt from Federal and Tennessee income
taxes without assuming undue risk. This Portfolio will invest primarily in
investment grade Tennessee Municipal Obligations without regard to maturity. The
Limited Duration Tennessee Tax Free Portfolio seeks to provide investors with
current income exempt from Federal and Tennessee income taxes without assuming
undue risk. This Portfolio will invest primarily in a portfolio of investment
grade Tennessee Municipal Obligations that, under normal market conditions, has
a duration of under five years and an effective average portfolio maturity
ranging between three and five years.
The Portfolios are authorized to issue three classes of shares as follows:
Class A Shares, Class B Shares (effective January 30, 1998) and Trust Shares.
Class A and B Shares and Trust Shares are substantially the same, except that
Class A and B Shares bear the fees that are payable under the plans adopted by
the Fund's Board of Directors. Under the shareholder services plan (the
"Shareholder Service Plan") for the Prime Money Market Portfolio and U.S.
Treasury Money Market Portfolio (the "Money Market Portfolios"), fees are
payable at an annual rate of 0.25% of each Money Market Portfolio's average
daily net assets represented by Class A Shares and 0.75% of the Prime Money
Market Portfolio's average daily net assets represented by Class B Shares. Under
the plan adopted pursuant to Rule 12b-1 under the Act (the "Distribution Plan"),
the Capital Growth Portfolio, Dividend Growth Portfolio, Core Income Portfolio,
Limited Duration Income Portfolio, Limited Duration U.S. Government Portfolio,
Tennessee Tax Exempt Bond Portfolio and Limited Duration Tennessee Tax Free
Portfolio (the "Variable Net Asset Value Portfolios") pay fees at an annual rate
of 0.25% of each Variable Net Asset Value Portfolio's average daily net assets
represented by Class A Shares and 0.75% of each Variable Net Asset Value
Portfolio's average daily net assets represented by Class B Shares. As of June
30, 1998, both the Limited Duration U.S. Government Portfolio and the Limited
Duration Tennessee Tax Free Portfolio offer only Class A Shares and Class B
Shares.
- --------------------------------------------------------------------------------
At June 30, 1998, there were 2.25 billion shares of the Money Markets
Portfolios' $0.001 par value common stock authorized, of which each Portfolio's
shares are classified into Class A Shares (500 million shares authorized per
Portfolio), Class B Shares (250 million shares authorized for the Prime Money
Market Portfolio), and Trust Shares (500 million shares authorized per
Portfolio). There were 5.25 billion shares of the Variable Net Asset Value
Portfolios' $0.001 par value common stock authorized, of which each Portfolio's
shares are classified into Class A Shares (250 million shares authorized per
Portfolio), Class B Shares (250 million shares authorized per Portfolio), and
Trust Shares (250 million shares authorized per Portfolio).
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Portfolios in preparation of their financial statements. The policies are in
conformity with generally accepted accounting principles (GAAP). The preparation
of financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses for the
period. Actual results could differ from those estimates.
A) Security Valuation:
The Money Market Portfolios' securities are valued at amortized cost, which
approximates market value. The amortized cost method involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of the difference between the principal amount due at
maturity and cost.
The Variable Net Asset Value Portfolios' investments are valued each
business day using available market quotations or at fair value as determined by
one or more independent pricing services (collectively, the "Service") approved
by the Board of Directors. The Service may use available market quotations,
employ electronic data processing techniques and/or a matrix system to determine
valuations. Restricted securities and securities for which market quotations are
not readily available, if any, are valued at fair value using methods approved
by the Board of Directors. Debt securities with remaining maturities of 60 days
or less are normally valued at amortized cost, which approximates market value.
The amortized cost method involves valuing a security at its cost on the date of
purchase or, in the case of securities purchased more than 60 days to maturity,
at their market value each day until the 61st day prior to maturity, and there
after assuming a constant amortization to maturity of the difference between the
principal amount due at maturity and such valuation.
B) Security Transactions and Investment Income:
Security transactions are recorded on trade date. Realized gains and losses
from sales of investments are calculated on the identified cost basis. Interest
income, including accretion of discount and amortization of premium on
investments, is accrued daily. Dividend income is recorded on the ex-dividend
date.
C) Repurchase Agreements:
The Portfolios may purchase instruments from financial institutions, such
as banks and broker-dealers approved by the Board of Directors, subject to the
seller's agreement to repurchase them at an agreed upon time and price
("repurchase agreements"). Default by the seller would expose the relevant
Portfolio to possible loss because of adverse market action or delay in
connection with the disposition of the underlying obligations. Risks may arise
from the potential inability of counterparties to honor the terms of the
repurchase agreements. Accordingly, the Portfolios could receive less than the
carrying value upon the sale of the underlying collateral securities.
D) Expenses:
The Fund accounts separately for the assets, liabilities and operations of
each Portfolio. Direct expenses of a Portfolio are charged to that Portfolio
while general Fund expenses are allocated among the Fund's respective portfolios
based on the relative net asset of each Portfolio.
E) Federal Income Taxes:
For federal income tax purposes, each Portfolio is treated as a separate
entity for the purpose of determining its qualification as a regulated
investment company under the Internal Revenue Code (the "Code"). It is the
policy of each
- --------------------------------------------------------------------------------
Portfolio to meet the requirements of the Code applicable to regulated
investment companies, including the requirement that they distribute
substantially all of their income to shareholders. Therefore, no federal income
tax provision is required.
F) Dividends and Distributions to Shareholders:
Dividends are declared daily to shareholders of record at the close of
business on the day of declaration and are paid monthly for the Prime Money
Market Portfolio, U.S. Treasury Money Market Portfolio, Core Income Portfolio,
Limited Duration Income Portfolio, Limited Duration U.S. Government Portfolio,
Tennessee Tax Exempt Bond Portfolio and the Limited Duration Tennessee Tax Free
Portfolio. Dividends are declared and paid quarterly for the Capital Growth
Portfolio. Dividends are declared and paid monthly for the Dividend Growth
Portfolio. For all Portfolios, distributions of net realized gains, if any, will
be paid at least annually. Dividends and distributions are recorded on the
ex-dividend date.
Distributions from net investment income and from net realized gains are
determined in accordance with income tax regulations that may differ from GAAP.
Timing differences relating to shareholder distributions have been reclassified
to paid-in-capital. These differences are primarily due to deferrals of certain
losses and expiring capital loss carryovers.
G) Lending Portfolio Securities:
To generate additional income, the Portfolios may lend up to 33.3% of
securities in which they are invested pursuant to agreements requiring that the
loan be continuously secured by cash, U.S. Government or U.S. Government Agency
securities, or any combination of cash and such securities as collateral equal
at all times to at least 100% of the market value plus accrued interest on the
securities lent. The Portfolios continue to earn interest and dividends on
securities lent while simultaneously seeking to earn interest on the investment
of collateral.
When cash is received as collateral for securities loaned, the Portfolios
may invest such cash in short-term U.S. Government Securities, Repurchase
Agreements, or other short-term corporate securities. The cash or subsequent
short-term investments are recorded as assets of the Portfolios, offset by a
corresponding liability to repay the cash at the termination of the loan. In
addition, the short-term securities purchased with the cash collateral are
included in the accompanying schedules of portfolio investments. Fixed income
securities received as collateral are not recorded as an asset or liability of
the Portfolio because the Portfolio does not have effective control of such
securities.
There may be risks of delay in recovery of the securities or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, loans will be made only to borrowers deemed by the Adviser to be of
good standing and creditworthy under guidelines established by the Board of
Directors and when, in the judgment of the Adviser, the consideration which can
be earned currently from such securities loans justifies the attendant risks.
Loans are subject to termination by the Portfolios or the borrower at any time,
and are, therefore, not considered to be illiquid investments. According to
GAAP, a statement of cash flows is presented if the Portfolio lent out, on
average, more than 10% of net assets during the year. Under this guideline, a
statement of cash flows is presented for each of the Portfolios listed below. As
of June 30, 1998, the following Portfolios had securities with the following
market values on loan:
<TABLE>
<CAPTION>
MARKET MARKET VALUE
VALUE OF OF LOANED
COLLATERAL SECURITIES
------------ ------------
<S> <C> <C>
Capital Growth Portfolio.................................... $40,237,500 $39,049,225
Dividend Growth Portfolio................................... 8,530,800 8,281,625
Core Income Portfolio....................................... 5,421,250 5,295,300
Limited Duration Income Portfolio........................... 11,794,500 11,362,129
</TABLE>
The loaned securities were fully collateralized by cash as of June 30,
1998.
NOTE 3 -- AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES
First American National Bank ("First American") serves as the Portfolios'
investment adviser. Barnett Capital Advisors, Inc. ("Barnett") served as the
sub-investment adviser with respect to the Prime Money Market Portfolio until
January 30, 1998 when the agreement was terminated and First American assumed
the day-to-day management of the Prime Money Market Portfolio's investments.
BISYS Fund Services Limited Partnership ("BISYS") serves as the Portfolios'
administrator and distributor of the Portfolios' shares. BISYS is a subsidiary
of The BISYS Group, Inc.
As investment adviser, First American manages the investments of each
Portfolio, and is responsible for all purchases and sales of each Portfolio's
investment securities.
- --------------------------------------------------------------------------------
As sub-investment adviser, Barnett provided the day-to-day management of
the Prime Money Market Portfolio's investments. For its services, the Prime
Money Market Portfolio had agreed to pay Barnett a fee at an annual rate of
0.15% of the Prime Money Market Portfolio's average daily net assets. Such fees
were accrued daily and paid monthly.
As administrator, BISYS assists in supervising the operations of the
Portfolios. For its services, BISYS is entitled to receive a fee at the annual
rate of 0.10% of the average daily net assets of each Money Market Portfolio and
0.15% of the average daily net assets of each Variable Net Asset Value
Portfolio.
Pursuant to the Shareholder Service Plan, the Money Market Portfolios pay
BISYS for the provision of certain services to the holders of Class A Shares at
an annual rate of 0.25% of the average daily net assets of the Money Market
Portfolios' Class A Shares. Pursuant to the Shareholder Service Plan, the Prime
Money Market Portfolio and each Variable Net Asset Value Portfolio pays BISYS
for the provision of certain services to the holders of Class B Shares at an
annual rate of 0.25% of the average daily net assets of the Prime Money Market
Portfolios' and Variable Net Asset Value Portfolios' Class B Shares. The
services provided may include personal services relating to shareholder accounts
and services related to the maintenance of such shareholder accounts. BISYS may
pay financial institutions, including the investment adviser, broker/dealers and
other institutions in respect of these services.
Pursuant to the Distribution Plan, each Variable Net Asset Value Portfolio
pays BISYS for advertising, marketing and distributing such Portfolios' Class A
Shares and Class B Shares at an annual rate of 0.25% and 0.75% of the average
daily net assets of such Class A Shares and Class B Shares, respectively. BISYS
may pay financial institutions, broker/dealers and other institutions, in
respect of these services.
Pursuant to the Fund Accounting Agreement, BISYS is entitled to receive a
fee at the annual rate of 0.03% of the daily net assets of each portfolio,
provided however that such fee shall be subject to a minimum annual fee amount
of $48,000 per Portfolio. Also, Portfolios having two or more classes of shares
each having different net asset values or paying different daily dividends are
subject to an additional annual fee of $10,000 per additional class per
Portfolio.
Certain officers and Directors of the Fund are "affiliated persons" (as
defined in the Act) of BISYS and therefore do not receive compensation for being
on the Board of Directors. Each "non-affiliated" Director receives an annual fee
of $12,000 and a meeting fee of $1,500 per meeting for services relating to all
the Portfolios constituting the Fund.
Information regarding these transactions for the six months ended June 30,
1998 is as follows:
<TABLE>
<CAPTION>
INVESTMENT ADVISORY FEES
-------------------------------
ANNUAL FEE AS A 12B-1 FEES
PERCENTAGE OF FEES ADMINISTRATION FEES VOLUNTARILY
AVERAGE DAILY NET VOLUNTARILY VOLUNTARILY REDUCED - ACCOUNTING
ASSETS REDUCED REDUCED CLASS A FEES**
----------------- ----------- ------------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Prime Money Market Portfolio....... 0.25% $ -- $ -- $ -- $23,282
U.S. Treasury Money Market
Portfolio........................ 0.25% -- -- -- 25,478
Capital Growth Portfolio........... 0.65% 10,128 -- -- 23,655
Dividend Growth Portfolio.......... 0.65% 4,867 -- -- 23,705
Core Income Portfolio.............. 0.50% 3,965 -- -- 23,789
Limited Duration Income
Portfolio........................ 0.50% 4,977 -- -- 23,648
Limited Duration U.S. Government
Portfolio........................ 0.50% 16,906 10,970 24,733 23,677
Tennessee Tax Exempt Bond
Portfolio........................ 0.50% 5,617 -- -- 23,381
Limited Duration Tennessee Tax Free
Portfolio........................ 0.50% 13,848 12,869 28,787 23,337
</TABLE>
** Accounting fees do not include out-of-pocket expenses.
- --------------------------------------------------------------------------------
NOTE 4 -- SECURITIES TRANSACTIONS
For the six months ended June 30, 1998, the cost of purchases and the
proceeds from sales of portfolio securities (excluding short-term investments)
were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
----------- ------------
<S> <C> <C>
Capital Growth Portfolio.................................... $97,624,411 $107,673,490
Dividend Growth Portfolio................................... $72,280,687 $ 69,562,859
Core Income Portfolio....................................... $29,504,300 $ 22,267,291
Limited Duration Income Portfolio........................... $25,754,376 $ 23,423,140
Limited Duration U.S. Government Portfolio.................. $ 4,776,882 $ 3,714,226
Tennessee Tax Exempt Bond Portfolio......................... $66,604,620 $ 68,537,791
Limited Duration Tennessee Tax Free Portfolio............... $25,396,830 $ 24,561,557
</TABLE>
NOTE 5 -- CONCENTRATION OF CREDIT RISK
The Tennessee Tax Exempt Bond Portfolio and Limited Duration Tennessee Tax
Free Portfolio invest substantially all of their assets in a non-diversified
portfolio of tax-exempt debt obligations primarily consisting of securities
issued by the State of Tennessee, its municipalities, counties and other taxing
districts. The issuers' abilities to meet their obligations may be affected by
Tennessee economic, regional and political developments.
The Tennessee Tax Exempt Bond Portfolio and Limited Duration Tennessee Tax
Free Portfolio had the following concentrations by sector at June 30, 1998 (as a
percentage of total investments):
<TABLE>
<CAPTION>
LIMITED DURATION
TENNESSEE TENNESSEE
TAX EXEMPT TAX FREE
BOND PORTFOLIO PORTFOLIO
-------------- ----------------
<S> <C> <C>
General Obligations......................................... 40.6% 50.6%
Revenue Bonds:
Utilities................................................. 15.3% 17.5%
Health & Medical.......................................... 15.4% 9.3%
Educational............................................... 18.8% 2.9%
Transportation............................................ 2.1% 8.2%
Housing................................................... 1.1% 3.3%
Others.................................................... 6.0% 4.4%
Cash and Cash Equivalents................................... 0.7% 3.8%
----- -----
100.0% 100.0%
===== =====
</TABLE>
- --------------------------------------------------------------------------------
NOTE 6 -- CAPITAL SHARE TRANSACTIONS
Transactions in shares in the multi-class Portfolios are summarized below:
<TABLE>
<CAPTION>
U.S. TREASURY
PRIME MONEY MARKET PORTFOLIO MONEY MARKET PORTFOLIO
------------------------------------ ------------------------------------
YEAR ENDED YEAR ENDED
SIX MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
JUNE 30, 1998 1997 JUNE 30, 1998 1997
---------------- ----------------- ---------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CLASS A SHARES
Shares issued............................ 194,390,885 203,448,543 173,027,811 261,551,242
Dividends reinvested..................... 776,166 357,816 122,095 107,555
Shares redeemed.......................... (143,337,856) (170,480,515) (167,385,851) (262,902,182)
------------ ------------ ------------ ------------
51,829,195 33,325,844 5,764,055 (1,243,385)
============ ============ ============ ============
TRUST SHARES
Shares issued............................ 97,095,860 143,744,469 72,363,372 208,119,313
Dividends reinvested..................... 1 1 -- --
Shares redeemed.......................... (67,768,247) (165,455,650) (100,913,041) (203,642,569)
------------ ------------ ------------ ------------
29,327,614 (21,711,180) (28,549,669) 4,476,744
============ ============ ============ ============
Net increase/(decrease).................. 81,156,809 11,614,664 (22,785,614) 3,233,359
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
CAPITAL GROWTH PORTFOLIO
---------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
------------------------------------ ------------------------------------
(UNAUDITED)
AMOUNT SHARES AMOUNT SHARES
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Shares issued............................ $ 1,983,412 141,776 $101,329,579 6,860,600
Dividends reinvested..................... 1,331 105 250,838 19,516
Shares redeemed.......................... (182,789) (13,102) (179,442,673) (11,141,321)
------------ ------------ ------------ ------------
$ 1,801,954 128,779 $(77,862,256) (4,261,205)
============ ============ ============ ============
CLASS B SHARES (A)
Shares issued............................ $ 1,104,646 78,803 $ -- --
Dividends reinvested..................... -- -- -- --
Shares redeemed.......................... (47,592) (3,446) -- --
------------ ------------ ------------ ------------
$ 1,057,054 75,357 $ -- --
============ ============ ============ ============
TRUST SHARES (B)
Shares issued............................ $ 6,988,730 510,800 $147,332,294 10,167,911
Dividends reinvested..................... 100,190 7,801 19,050,221 1,504,756
Shares redeemed.......................... (14,331,106) (1,040,740) (6,416,169) (500,054)
------------ ------------ ------------ ------------
$ (7,242,186) (522,139) $159,966,346 11,172,613
============ ============ ============ ============
Net increase/(decrease).................. $ (4,383,178) (318,003) $ 82,104,090 6,911,408
============ ============ ============ ============
</TABLE>
- ---------------
(a) Class B Shares commenced operations on January 30, 1998.
(b) Trust Shares commenced operations on October 3, 1997.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DIVIDEND GROWTH PORTFOLIO
---------------------------------------------------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997 (C)
---------------------- -------------------------
<CAPTION>
(UNAUDITED)
AMOUNT SHARES AMOUNT SHARES
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
CLASS A SHARES
Shares issued........................................ $1,968,341 171,797 $71,071,654 5,889,075
Dividends reinvested................................. 2,575 234 58,646 5,646
Shares redeemed...................................... (115,475) (10,724) (80,669,327) (5,857,248)
---------- -------- ----------- ----------
$1,855,441 161,307 $(9,539,027) 37,473
========== ======== =========== ==========
CLASS B SHARES (A)
Shares issued........................................ $1,635,054 143,206 $ -- --
Dividends reinvested................................. 684 60 -- --
Shares redeemed...................................... (13,312) (1,150) -- --
---------- -------- ----------- ----------
$1,622,426 142,116 $ -- --
========== ======== =========== ==========
TRUST SHARES (B)
Shares issued........................................ $5,804,338 522,956 $66,268,900 5,657,103
Dividends reinvested................................. 23,853 2,158 10,029,575 983,212
Shares redeemed...................................... (5,969,833) (527,177) (952,168) (85,923)
---------- -------- ----------- ----------
$ (141,642) (2,063) $75,346,307 6,554,392
========== ======== =========== ==========
Net increase/(decrease).............................. $3,336,225 301,360 $65,807,280 6,591,865
========== ======== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
CORE INCOME PORTFOLIO
----------------------------------------------------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
---------------------- --------------------------
<CAPTION>
(UNAUDITED)
AMOUNT SHARES AMOUNT SHARES
---------- -------- ------------ ----------
<S> <C> <C> <C> <C>
CLASS A SHARES
Shares issued....................................... $1,953,094 188,777 $ 43,676,646 4,394,727
Dividends reinvested................................ 727 71 1,100,106 110,432
Shares redeemed..................................... -- -- (84,785,631) (8,376,453)
---------- -------- ------------ ----------
$1,953,821 188,848 $(40,008,879) (3,871,294)
========== ======== ============ ==========
CLASS B SHARES (A)
Shares issued....................................... $ 615,607 59,836 $ -- --
Dividends reinvested................................ 2,771 269 -- --
Shares redeemed..................................... (11) (1) -- --
---------- -------- ------------ ----------
$ 618,367 60,104 $ -- --
========== ======== ============ ==========
TRUST SHARES (B)
Shares issued....................................... $9,741,653 945,358 $ 74,176,796 7,300,711
Dividends reinvested................................ 732,300 71,233 229,138 22,454
Shares redeemed..................................... (6,425,629) (623,466) (3,038,585) (296,935)
---------- -------- ------------ ----------
$4,048,324 393,125 $ 71,367,349 7,026,230
========== ======== ============ ==========
Net increase/(decrease)............................. $6,620,512 642,077 $ 31,358,470 3,154,936
========== ======== ============ ==========
</TABLE>
- ---------------
(a) Class B Shares commenced operations on January 30, 1998.
(b) Trust Shares commenced operations on October 3, 1997.
(c) For the period from February 28,1997 (commencements of operations) through
December 31, 1997.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIMITED DURATION INCOME PORTFOLIO
---------------------------------------------------------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
------------------------- ----------------------------
<CAPTION>
(UNAUDITED)
AMOUNT SHARES AMOUNT SHARES
----------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
CLASS A SHARES
Shares issued................................... $ 2,320,249 232,265 $ 18,061,691 1,811,625
Dividends reinvested............................ 156,739 15,676 2,425,448 244,124
Shares redeemed................................. (1,300,474) (130,101) (113,120,158) (11,327,489)
----------- ---------- ------------- -----------
$ 1,176,514 117,840 $ (92,633,019) (9,271,740)
=========== ========== ============= ===========
CLASS B SHARES (A)
Shares issued................................... $ 310,482 31,079 $ -- --
Dividends reinvested............................ 1,692 170 -- --
Shares redeemed................................. (848) (85) -- --
----------- ---------- ------------- -----------
$ 311,326 31,164 $ -- --
=========== ========== ============= ===========
TRUST SHARES (B)
Shares issued................................... $10,091,051 1,008,959 $ 97,264,930 9,730,880
Dividends reinvested............................ 838,182 83,874 377,078 37,731
Shares redeemed................................. (10,565,238) (1,056,536) (12,647,715) (1,266,172)
----------- ---------- ------------- -----------
$ 363,995 36,297 $ 84,994,293 8,502,439
=========== ========== ============= ===========
Net increase/(decrease)......................... $ 1,851,835 185,301 $ (7,638,726) (769,301)
=========== ========== ============= ===========
</TABLE>
<TABLE>
<CAPTION>
LIMITED DURATION
U.S. GOVERNMENT PORTFOLIO
----------------------------
SIX MONTHS ENDED
JUNE 30, 1998
----------------------------
(UNAUDITED)
AMOUNT SHARES
------------- -----------
<S> <C> <C>
CLASS A SHARES
Shares issued............................................... $ 2,230,857 220,020
Dividends reinvested........................................ 4,509 444
Shares redeemed............................................. (2,312,422) (227,833)
------------- -----------
$ (77,056) (7,369)
============= ===========
CLASS B SHARES (A)
Shares issued............................................... $ 152,516 15,055
Dividends reinvested........................................ 552 55
Shares redeemed............................................. -- --
------------- -----------
$ 153,068 15,110
============= ===========
Net increase/(decrease)..................................... $ 76,012 7,741
============= ===========
</TABLE>
- ---------------
(a) Class B Shares commenced operations on January 30, 1998.
(b) Trust Shares commenced operations on October 3, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TENNESSEE TAX EXEMPT BOND PORTFOLIO
--------------------------------------------------------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
------------------------ ----------------------------
<CAPTION>
(UNAUDITED)
AMOUNT SHARES AMOUNT SHARES
------------ -------- ------------- -----------
<S> <C> <C> <C> <C>
CLASS A SHARES
Shares issued................................... $ 1,293,474 126,853 $ 23,465,567 2,362,712
Dividends reinvested............................ 18,778 1,850 208,184 21,009
Shares redeemed................................. (257,277) (25,382) (111,627,908) (11,118,420)
------------ -------- ------------- -----------
$ 1,054,975 103,321 $ (87,954,157) (8,734,699)
============ ======== ============= ===========
CLASS B SHARES (A)
Shares issued................................... $ 802,682 79,265 $ -- --
Dividends reinvested............................ 1,407 139 -- --
Shares redeemed................................. (69,661) (6,920) -- --
------------ -------- ------------- -----------
$ 734,428 72,484 $ -- --
============ ======== ============= ===========
TRUST SHARES (B)
Shares issued................................... $ 4,767,208 470,570 $ 103,242,548 10,272,191
Dividends reinvested............................ 58,520 5,767 24,834 2,474
Shares redeemed................................. (10,017,501) (985,484) (3,792,891) (376,678)
------------ -------- ------------- -----------
$ (5,191,773) (509,147) $ 99,474,491 9,897,987
============ ======== ============= ===========
Net increase/(decrease)......................... $ (3,402,370) (333,342) $ 11,520,334 1,163,288
============ ======== ============= ===========
</TABLE>
<TABLE>
<CAPTION>
LIMITED DURATION TENNESSEE
TAX FREE PORTFOLIO
----------------------------
SIX MONTHS ENDED
JUNE 30, 1998
----------------------------
(UNAUDITED)
AMOUNT SHARES
------------- -----------
<S> <C> <C>
CLASS A SHARES
Shares issued............................................. $ 2,291,041 225,819
Dividends reinvested...................................... 275 27
Shares redeemed........................................... (1,623,046) (160,241)
------------- -----------
$ 668,270 65,605
============= ===========
CLASS B SHARES (A)
Shares issued............................................. $ 537,272 53,212
Dividends reinvested...................................... 1,062 105
Shares redeemed........................................... -- --
------------- -----------
$ 538,334 53,317
============= ===========
Net increase/(decrease)................................... $ 1,206,604 118,922
============= ===========
</TABLE>
- ---------------
(a) Class B Shares commenced operations on January 30, 1998.
(b) Trust Shares commenced operations on October 3, 1997
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR PRIME MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
CLASS A SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994*
------------------- ----------------- ----------------- ----------------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD................ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- ------- ------- ------- -------
Income from investment
operations:
Net investment income.... 0.024 0.048 0.048 0.054 0.031
Less distributions:
Net investment income.... (0.024) (0.048) (0.048) (0.054) (0.031)
-------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======= ======= ======= =======
Total Return............... 2.41%(a) 4.90% 4.88% 5.51% 3.13%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's)............... $107,989 $56,163 $22,836 $63,919 $82,351
Ratio of expenses to
average net assets.... 0.84%(b) 0.87% 0.68% 0.65% 0.63%(b)
Ratio of net investment
income to average net
assets................ 4.82%(b) 4.82% 4.83% 5.37% 4.00%(b)
Ratio of expenses to
average net
assets**.............. 0.84%(b)(c) 0.87%(c) 0.86% 0.90% 0.93%(b)
Ratio of net investment
income to average net
assets**.............. 4.82%(b)(c) 4.82%(c) 4.65% 5.12% 3.76%(b)
</TABLE>
- ---------------
* For the period March 29, 1994 (commencement of operations) through December
31, 1994.
** During the period certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Not annualized.
(b) Annualized.
(c) There were no fee waivers or expense reimbursements for this class during
this period.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR PRIME MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
TRUST SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996*
---------------- ----------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD..................... $ 1.000 $ 1.000 $ 1.000
------- ------- -------
Income from investment operations:
Net investment income.................................. 0.025 0.051 0.024
Less distributions:
Net investment income.................................. (0.025) (0.051) (0.024)
------- ------- -------
NET ASSET VALUE, END OF PERIOD........................... $ 1.000 $ 1.000 $ 1.000
======= ======= =======
Total Return............................................. 2.54%(a) 5.17% 2.46%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)...................... $55,716 $26,389 $48,101
Ratio of expenses to average net assets................ 0.59%(b) 0.62% 0.65%(b)
Ratio of net investment income to average net assets... 5.06%(b) 5.05% 4.86%(b)
</TABLE>
- ---------------
* For the period from July 1, 1996 (commencement of operations) through
December 31, 1996.
(a) Not annualized.
(b) Annualized.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR U.S. TREASURY MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
CLASS A SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994*
----------------- ----------------- ----------------- ----------------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD................ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- -------- -------- --------
Income from investment
operations:
Net investment income.... 0.023 0.047 0.047 0.053 0.030
Less distributions:
Net investment income.... (0.023) (0.047) (0.047) (0.053) (0.030)
------- ------- -------- -------- --------
NET ASSET VALUE, END OF
PERIOD................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======= ======= ======== ======== ========
Total Return............... 2.35%(a) 4.78% 4.78% 5.41% 3.01%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's)............... $82,829 $77,065 $ 78,308 $168,430 $139,715
Ratio of expenses to
average net assets.... 0.79%(b) 0.75% 0.56% 0.50% 0.54%(b)
Ratio of net investment
income to average net
assets................ 4.70%(b) 4.68% 4.72% 5.28% 4.02%(b)
Ratio of expenses to
average net
assets**.............. 0.79%(b)(c) 0.75%(c) 0.74% 0.75% 0.83%(b)
Ratio of net investment
income to average net
assets**.............. 4.70%(b)(c) 4.68%(c) 4.54% 5.03% 3.73%(b)
</TABLE>
- ---------------
* 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 for this class during
this period.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR U.S. TREASURY MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
TRUST SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996*
----------------- ----------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD..................... $ 1.000 $ 1.000 $ 1.000
------- -------- --------
Income from investment operations:
Net investment income.................................. 0.025 0.049 0.024
Less distributions:
Net investment income.................................. (0.025) (0.049) (0.024)
------- -------- --------
NET ASSET VALUE, END OF PERIOD........................... $ 1.000 $ 1.000 $ 1.000
======= ======== ========
Total Return............................................. 2.48%(a) 5.05% 2.43%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)...................... $85,625 $114,175 $109,698
Ratio of expenses to average net assets................ 0.54%(b) 0.50% 0.52%(b)
Ratio of net investment income to average net assets... 4.95%(b) 4.94% 4.78%(b)
</TABLE>
- ---------------
* For the period from July 1, 1996 (commencement of operations) through
December 31, 1996.
(a) Not annualized.
(b) Annualized.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
CLASS A SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996*
----------------- ----------------- -------------------
(UNAUDITED)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................... $ 12.80 $ 11.32 $ 10.00
------- ------- -------
Income from investment operations:
Net investment income................................. -- 0.06 --
Net realized and unrealized gains on securities
transactions....................................... 1.82 3.40 1.32
------- ------- -------
Net income from investment operations................. 1.82 3.46 1.32
------- ------- -------
Less distributions:
Net investment income................................. -- (0.06) --
Net realized gains.................................... -- (1.92) --
------- ------- -------
Total distributions................................... -- (1.98) --
------- ------- -------
Net change in net asset value........................... 1.82 1.48 1.32
------- ------- -------
NET ASSET VALUE, END OF PERIOD.......................... $ 14.62 $ 12.80 $ 11.32
======= ======= =======
Total Return (excluding sales charge)................... 14.22%(a) 30.79% 22.26%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)..................... $ 2,863 $ 858 $49,008
Ratio of expenses to average net assets............... 1.24%(b) 0.93% 1.20%(b)
Ratio of net investment gain (loss) to average net
assets............................................. (0.13)%(b) 0.42% (0.02)%(b)
Ratio of expenses to average net assets**............. 1.25%(b) 1.18% 1.39%(b)
Ratio of net investment gain (loss) to average net
assets**........................................... (0.14)%(b) 0.17% (0.21)%(b)
Portfolio Turnover (c)................................ 69% 116% 69%
</TABLE>
- ---------------
* For the period from April 1, 1996 (commencement of operations) through
December 31, 1996.
** 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 Fund as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
CLASS B SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
JUNE 30, 1998*
--------------
(UNAUDITED)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 13.18
--------
Income from investment operations:
Net investment income..................................... (0.02)
Net realized and unrealized gains (losses) on securities
transactions........................................... 1.28
--------
Net income from investment operations..................... 1.26
--------
Net change in net asset value............................... 1.26
--------
NET ASSET VALUE, END OF PERIOD.............................. $ 14.44
========
Total Return................................................ 10.23% (a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $ 1,088
Ratio of expenses to average net assets................... 1.93% (b)
Ratio of net investment income to average net assets...... (0.85%)(b)
Portfolio Turnover (c).................................... 69%
</TABLE>
- ---------------
* For the period from February 6, 1998 (commencement of operations) through
June 30, 1998.
(a) Not annualized.
(b) Annualized.
(c) Portfolio turnover is calculated on the basis of the Fund as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
TRUST SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997*
---------------- -------------------
(UNAUDITED)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 12.69 $ 14.51
-------- --------
Income from investment operations:
Net investment income..................................... 0.01 0.02
Net realized and unrealized gains (losses) on securities
transactions........................................... 1.82 0.10
-------- --------
Net income from investment operations..................... 1.83 0.12
-------- --------
Less distributions:
Net investment income..................................... (0.01) (0.02)
Net realized gains........................................ -- (1.92)
-------- --------
Total distributions....................................... (0.01) (1.94)
-------- --------
Net change in net asset value............................... 1.82 (1.82)
-------- --------
NET ASSET VALUE, END OF PERIOD.............................. $ 14.51 $ 12.69
======== ========
Total Return................................................ 14.39%(a) 0.88%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $154,524 $141,761
Ratio of expenses to average net assets................... 0.99%(b) 0.58%(b)
Ratio of net investment income to average net assets...... 0.10%(b) (0.80)%(b)
Ratio of expenses to average net assets**................. 1.00%(b) 0.99%(b)
Ratio of net investment income to average net assets**.... 0.09%(b) 0.39%(b)
Portfolio Turnover (c).................................... 69% 116%
</TABLE>
- ---------------
* For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
** 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 Fund as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR DIVIDEND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
CLASS A SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997*
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.37 $ 10.00
------- -------
Income from investment operations:
Net investment income..................................... 0.05 0.65
Net realized and unrealized gains on securities
transactions........................................... 1.26 1.71
------- -------
Net income from investment operations..................... 1.31 2.36
------- -------
Less distributions:
Net investment income..................................... (0.05) (0.19)
Net realized gains........................................ -- (1.80)
------- -------
Total distributions....................................... (0.05) (1.99)
------- -------
Net change in net asset value............................... 1.26 0.37
------- -------
NET ASSET VALUE, END OF PERIOD.............................. $ 11.63 $ 10.37
======= =======
Total Return (excluding sales charge)....................... 12.66%(a) 24.20%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $ 2,313 $ 388
Ratio of expenses to average net assets................... 1.36%(b) 1.06%(b)
Ratio of net investment income to average net assets...... 0.99%(b) 2.11%(b)
Ratio of expenses to average net assets**................. 1.37%(b) 1.31%(b)
Ratio of net investment income to average net assets**.... 0.98%(b) 1.86%(b)
Portfolio Turnover(c)..................................... 97% 86%
</TABLE>
- ---------------
* For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
** 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 Fund as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR DIVIDEND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
CLASS B SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
JUNE 30, 1998*
--------------
(UNAUDITED)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.63
-------
Income from investment operations:
Net investment income..................................... 0.02
Net realized and unrealized gains (losses) on securities
transactions........................................... 1.00
-------
Net income from investment operations..................... 1.02
-------
Less distributions:
Net investment income..................................... (0.03)
-------
Net change in net asset value............................... 0.99
-------
NET ASSET VALUE, END OF PERIOD.............................. $ 11.62
=======
Total Return................................................ 9.57%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $ 1,652
Ratio of expenses to average net assets................... 2.04%(b)
Ratio of net investment income to average net assets...... 0.26%(b)
Portfolio Turnover (c).................................... 97%
</TABLE>
- ---------------
* For the period from February 4, 1998 (commencement of operations) through
June 30, 1998.
(a) Not annualized.
(b) Annualized.
(c) Portfolio turnover is calculated on the basis of the Fund as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR DIVIDEND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
TRUST SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997*
---------------- ------------------
(UNAUDITED)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.37 $ 11.73
------- -------
Income from investment operations:
Net investment income..................................... 0.07 0.06
Net realized and unrealized gains (losses)
on securities transactions............................. 1.26 0.44
------- -------
Net income from investment operations..................... 1.33 0.50
------- -------
Less distributions:
Net investment income..................................... (0.06) (0.06)
Net realized gains........................................ -- (1.80)
------- -------
Total distributions....................................... (0.06) (1.86)
------- -------
Net change in net asset value............................... 1.27 (1.36)
------- -------
NET ASSET VALUE, END OF PERIOD.............................. $ 11.64 $ 10.37
======= =======
Total Return................................................ 12.88%(a) 4.62%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $76,237 $67,949
Ratio of expenses to average net assets................... 1.11%(b) 0.68%(b)
Ratio of net investment income to average net assets...... 1.19%(b) 2.15%(b)
Ratio of expenses to average net assets**................. 1.12%(b) 1.09%(b)
Ratio of net investment income to average net assets**.... 1.18%(b) 1.74%(b)
Portfolio Turnover (c).................................... 97% 86%
</TABLE>
- ---------------
* For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
** 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 Fund as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CORE INCOME PORTFOLIO
- --------------------------------------------------------------------------------
CLASS A SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996*
---------------- ----------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....................... $10.25 $10.00 $ 10.00
------ ------ -------
Income from investment operations:
Net investment income.................................... 0.27 0.58 0.40
Net realized and unrealized gains (losses) on securities
transactions.......................................... 0.13 0.26 --
------ ------ -------
Net income from investment operations.................... 0.40 0.84 0.40
------ ------ -------
Less distributions:
Net investment income.................................... (0.27) (0.59) (0.40)
------ ------ -------
Net change in net asset value.............................. 0.13 0.25 --
------ ------ -------
NET ASSET VALUE, END OF PERIOD............................. $10.38 $10.25 $ 10.00
====== ====== =======
Total Return (excluding sales charge)...................... 3.93%(a) 8.66% 1.12%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)........................ $2,056 $ 95 $38,815
Ratio of expenses to average net assets.................. 1.15%(b) 0.87% 1.13%(b)
Ratio of net investment income to average net assets..... 5.00%(b) 5.74% 5.37%(b)
Ratio of expenses to average net assets**................ 1.15%(b)(d) 1.12% 1.32%(b)
Ratio of net investment income to average net assets**... 5.00%(b)(d) 5.49% 5.18%(b)
Portfolio Turnover (c)................................... 30% 56% 65%
</TABLE>
- ---------------
* For the period from April 1, 1996 (commencement of operations) through
December 31, 1996.
** 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 Fund as a whole,
without distinguishing between the classes of shares issued.
(d) There were no fee waivers or expense reimbursements for this class during
this period.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CORE INCOME PORTFOLIO
- --------------------------------------------------------------------------------
CLASS B SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
JUNE 30, 1998*
--------------
(UNAUDITED)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.29
-------
Income from investment operations:
Net investment income..................................... 0.25
Net realized and unrealized gains (losses) on securities
transactions........................................... 0.08
-------
Net income from investment operations..................... 0.33
-------
Less distributions:
Net investment income..................................... (0.25)
-------
Net change in net asset value............................... 0.08
-------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.37
=======
Total Return................................................ 2.42%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $ 623
Ratio of expenses to average net assets................... 1.90%(b)
Ratio of net investment income to average net assets...... 4.32%(b)
Portfolio Turnover (c).................................... 30%
</TABLE>
- ---------------
* For the period from February 5, 1998 (commencement of operations) through
June 30, 1998.
(a) Not annualized.
(b) Annualized.
(c) Portfolio turnover is calculated on the basis of the Fund as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR CORE INCOME PORTFOLIO
- --------------------------------------------------------------------------------
TRUST SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997*
---------------- ------------------
(UNAUDITED)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.25 $ 10.16
------- -------
Income from investment operations:
Net investment income..................................... 0.28 0.16
Net realized and unrealized gains (losses) on securities
transactions........................................... 0.12 0.09
------- -------
Net income from investment operations..................... 0.40 0.25
------- -------
Less distributions:
Net investment income..................................... (0.28) (0.16)
------- -------
Net change in net asset value............................... 0.12 0.09
------- -------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.37 $ 10.25
======= =======
Total Return................................................ 3.96%(a) 2.45%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $76,965 $71,991
Ratio of expenses to average net assets................... 0.95%(b) 0.60%(b)
Ratio of net investment income to average net assets...... 5.50%(b) 6.28%(b)
Ratio of expenses to average net assets**................. 0.96%(b) 0.92%(b)
Ratio of net investment income to average net assets**.... 5.49%(b) 5.96%(b)
Portfolio Turnover (c).................................... 30% 56%
</TABLE>
- ---------------
* For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
** 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 Fund as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
CLASS A SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994*
---------------- ----------------- ----------------- ----------------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD..................... $ 9.99 $ 9.96 $ 10.13 $ 9.66 $ 10.00
------- ------- ------- -------- -------
Income from investment
operations:
Net investment income...... 0.26 0.59 0.58 0.59 0.38
Net realized and unrealized
gains (losses) on
securities
transactions............ 0.01 0.04 (0.16) 0.47 (0.34)
------- ------- ------- -------- -------
Net income from investment
operations.............. 0.27 0.63 0.42 1.06 0.04
------- ------- ------- -------- -------
Less distributions:
Net investment income...... (0.26) (0.59) (0.58) (0.59) (0.38)
Net realized gains......... -- (0.01) (0.01) -- --
------- ------- ------- -------- -------
Total distributions........ (0.26) (0.60) (0.59) (0.59) (0.38)
------- ------- ------- -------- -------
Net change in net asset
value...................... 0.01 0.03 (0.17) 0.47 (0.34)
------- ------- ------- -------- -------
NET ASSET VALUE, END OF
PERIOD..................... $ 10.00 $ 9.99 $ 9.96 $ 10.13 $ 9.66
======= ======= ======= ======== =======
Total Return (excluding sales
charge).................... 2.74%(a) 6.47% 4.28% 11.20% 0.42%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's)................. $ 7,077 $ 5,894 $98,197 $103,382 $93,189
Ratio of expenses to
average net assets...... 1.17%(b) 0.83% 0.83% 0.87% 0.83%(b)
Ratio of net investment
income to average net
assets.................. 5.27%(b) 5.92% 5.84% 5.89% 5.27%(b)
Ratio of expenses to
average net assets**.... 1.18%(b) 1.09% 1.08% 1.12% 1.28%(b)
Ratio of net investment
income to average net
assets**................ 5.26%(b) 5.66% 5.59% 5.64% 4.82%(b)
Portfolio Turnover (c)..... 27% 45% 51% 28% 6%
</TABLE>
- ---------------
* For the period from March 28, 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) Portfolio turnover is calculated on the basis of the Fund as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
CLASS B SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
JUNE 30, 1998*
--------------
(UNAUDITED)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.02
------
Income from investment operations:
Net investment income..................................... 0.24
Net realized and unrealized gains (losses) on securities
transactions........................................... (0.04)
------
Net income from investment operations..................... 0.20
------
Less distributions:
Net investment income..................................... (0.24)
------
Net change in net asset value............................... (0.04)
------
NET ASSET VALUE, END OF PERIOD.............................. $ 9.98
======
Total Return................................................ 1.36%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $ 311
Ratio of expenses to average net assets................... 1.89%(b)
Ratio of net investment income to average net assets...... 4.39%(b)
Portfolio Turnover (c).................................... 27%
</TABLE>
- ---------------
* For the period from February 5, 1998 (commencement of operations) through
June 30, 1998.
(a) Not annualized.
(b) Annualized.
(c) Portfolio turnover is calculated on the basis of the Fund as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
TRUST SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997*
---------------- ------------------
(UNAUDITED)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 9.98 $ 10.00
------- -------
Income from investment operations:
Net investment income..................................... 0.27 0.15
Net realized and unrealized gains (losses) on securities
transactions........................................... 0.01 (0.01)
------- -------
Net income from investment operations..................... 0.28 0.14
------- -------
Less distributions:
Net investment income..................................... (0.27) (0.15)
Net realized gains........................................ -- (0.01)
------- -------
Total distributions.................................... (0.27) (0.16)
------- -------
Net change in net asset value............................... 0.01 (0.02)
------- -------
NET ASSET VALUE, END OF PERIOD.............................. $ 9.99 $ 9.98
======= =======
Total Return................................................ 2.87%(a) 1.36%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $85,337 $84,886
Ratio of expenses to average net assets................... 0.92%(b) 0.56%(b)
Ratio of net investment income to average net assets...... 5.51%(b) 6.08%(b)
Ratio of expenses to average net assets**................. 0.93%(b) 0.87%(b)
Ratio of net investment income to average net assets**.... 5.50%(b) 5.77%(b)
Portfolio Turnover (c).................................... 27% 45%
</TABLE>
- ---------------
* For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
** 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 Fund as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION U.S. GOVERNMENT PORTFOLIO
- --------------------------------------------------------------------------------
CLASS A SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997*
---------------- ------------------
(UNAUDITED)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.12 $ 10.00
------- -------
Income from investment operations:
Net investment income..................................... 0.26 0.42
Net realized and unrealized gains (losses) on securities
transactions........................................... 0.01 0.12
------- -------
Net income from investment operations..................... 0.27 0.54
------- -------
Less distributions:
Net investment income..................................... (0.26) (0.42)
------- -------
Net change in net asset value............................... 0.01 0.12
------- -------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.13 $ 10.12
======= =======
Total Return (excluding sales charge)....................... 2.74%(a) 5.54%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $20,050 $20,103
Ratio of expenses to average net assets................... 1.02%(b) 1.00%(b)
Ratio of net investment income to average net assets...... 5.25%(b) 5.34%(b)
Ratio of expenses to average net assets**................. 1.55%(b) 1.62%(b)
Ratio of net investment income to average net assets**.... 4.72%(b) 4.72%(b)
Portfolio Turnover (c).................................... 19% 52%
</TABLE>
- ---------------
* For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
** 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 Fund as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION U.S. GOVERNMENT PORTFOLIO
- --------------------------------------------------------------------------------
CLASS B SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
JUNE 30, 1998
-------------
(UNAUDITED)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.12
------
Income from investment operations:
Net investment income..................................... 0.23
Net realized and unrealized gains (losses) on securities
transactions........................................... 0.02
------
Net income from investment operations..................... 0.25
------
Less distributions:
Net investment income..................................... (0.23)
------
Net change in net asset value............................... 0.02
------
NET ASSET VALUE, END OF PERIOD.............................. $10.14
======
Total Return................................................ 1.61%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $ 153
Ratio of expenses to average net assets................... 1.93%(b)
Ratio of net investment income to average net assets...... 3.91%(b)
Ratio of expenses to average net assets**................. 2.95%(b)
Ratio of net investment income to average net assets**.... 2.89%(b)
Portfolio Turnover (c).................................... 19%
</TABLE>
- ---------------
* 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 Fund as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
- --------------------------------------------------------------------------------
CLASS A SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994*
----------------- ----------------- ----------------- ----------------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD................. $ 10.18 $ 9.90 $ 10.19 $ 9.40 $ 10.00
------- ------- ------- ------- -------
Income from investment
operations:
Net investment income..... 0.18 0.44 0.42 0.45 0.34
Net realized and
unrealized gains
(losses) on securities
transactions............ (0.06) 0.25 (0.29) 0.79 (0.60)
------- ------- ------- ------- -------
Net income (loss) from
investment operations... 0.12 0.69 0.13 1.24 (0.26)
------- ------- ------- ------- -------
Less distributions:
Net investment income..... (0.18) (0.41) (0.42) (0.45) (0.34)
------- ------- ------- ------- -------
Net change in net asset
value..................... (0.06) 0.28 (0.29) 0.79 (0.60)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD.................... $ 10.12 $ 10.18 $ 9.90 $ 10.19 $ 9.40
======= ======= ======= ======= =======
Total Return (excluding
sales charge)............. 1.17%(a) 7.13% 1.39% 13.40% 2.63%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's)................. $ 2,705 $ 1,669 $88,084 $94,143 $86,127
Ratio of expenses to
average net assets...... 1.17%(b) 0.84% 0.86% 0.87% 0.82%(b)
Ratio of net investment
income to average net
assets.................. 3.52%(b) 4.13% 4.29% 4.52% 4.61%(b)
Ratio of expenses to
average net assets**.... 1.18%(b) 1.09% 1.11% 1.12% 1.18%(b)
Ratio of net investment
income to average net
assets**................ 3.51%(b) 3.88% 4.04% 4.27% 4.25%(b)
Portfolio Turnover (c).... 68% 253% 219% 188% 0.41%
</TABLE>
- ---------------
* For the period from March 28, 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) Portfolio turnover is calculated on the basis of the Fund as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
- --------------------------------------------------------------------------------
CLASS B SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
JUNE 30, 1998*
--------------
(UNAUDITED)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.23
------
Income from investment operations:
Net investment income..................................... 0.16
Net realized and unrealized gains (losses) on securities
transactions........................................... (0.09)
------
Net income from investment operations..................... 0.07
------
Less distributions:
Net investment income..................................... (0.16)
------
Net change in net asset value............................... (0.09)
------
NET ASSET VALUE, END OF PERIOD.............................. $10.14
======
Total Return................................................ 0.51%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $ 735
Ratio of expenses to average net assets................... 1.87%(b)
Ratio of net investment income to average net assets...... 2.63%(b)
Portfolio Turnover (c).................................... 68%
</TABLE>
- ---------------
* For the period from February 25, 1998 (commencement of operations) through
June 30, 1998.
(a) Not annualized.
(b) Annualized.
(c) Portfolio turnover is calculated on the basis of the Fund as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
- --------------------------------------------------------------------------------
TRUST SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997*
---------------- ------------------
(UNAUDITED)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....................... $ 10.18 $ 10.05
------- --------
Income from investment operations:
Net investment income.................................... 0.19 0.10
Net realized and unrealized gains (losses) on securities
transactions.......................................... (0.06) 0.13
------- --------
Net income from investment operations.................... 0.13 0.23
------- --------
Less distributions:
Net investment income.................................... (0.19) (0.10)
------- --------
Net change in net asset value.............................. (0.06) 0.13
------- --------
NET ASSET VALUE, END OF PERIOD............................. $ 10.12 $ 10.18
======= ========
Total Return............................................... 1.30%(a) 2.35%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)........................ $95,021 $100,742
Ratio of expenses to average net assets.................. 0.92%(b) 0.56%(b)
Ratio of net investment income to average net assets..... 3.79%(b) 4.22%(b)
Ratio of expenses to average net assets**................ 0.93%(b) 0.87%(b)
Ratio of net investment income to average net assets**... 3.78%(b) 3.91%(b)
Portfolio Turnover (c)................................... 68% 253%
</TABLE>
- ---------------
* For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
** 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 Fund as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO
- --------------------------------------------------------------------------------
CLASS A SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997*
---------------- ------------------
(UNAUDITED)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.13 $ 10.00
------- -------
Income from investment operations:
Net investment income..................................... 0.16 0.29
Net realized and unrealized gains (losses) on securities
transactions........................................... (0.02) 0.13
------- -------
Net income from investment operations..................... 0.14 0.42
------- -------
Less distributions:
Net investment income..................................... (0.16) (0.29)
------- -------
Net change in net asset value............................... (0.02) 0.13
------- -------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.11 $ 10.13
======= =======
Total Return (excluding sales charge)....................... 1.40%(a) 4.26%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $23,501 $22,893
Ratio of expenses to average net assets................... 1.02%(b) 0.98%(b)
Ratio of net investment income to average net assets...... 3.20%(b) 3.48%(b)
Ratio of expenses to average net assets**................. 1.49%(b) 1.52%(b)
Ratio of net investment income to average net assets**.... 2.73%(b) 2.94%(b)
Portfolio Turnover (c).................................... 113% 179%
</TABLE>
- ---------------
* For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
** 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 Fund as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO
- --------------------------------------------------------------------------------
CLASS B SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
JUNE 30, 1998*
--------------
(UNAUDITED)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.18
-------
Income from investment operations:
Net investment income..................................... 0.12
Net realized and unrealized gains (losses) on securities
transactions........................................... (0.07)
-------
Net income from investment operations..................... 0.05
-------
Less distributions:
Net investment income..................................... (0.12)
-------
Net change in net asset value............................... (0.07)
-------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.11
=======
Total Return................................................ 0.59%(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)......................... $ 539
Ratio of expenses to average net assets................... 1.98%(b)
Ratio of net investment income to average net assets...... 2.09%(b)
Ratio of expenses to average net assets**................. 2.71%(b)
Ratio of net investment income to average net assets**.... 1.36%(b)
Portfolio Turnover........................................ 113%
</TABLE>
- ---------------
* For the period from February 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 Fund as a whole,
without distinguishing between the classes of shares issued.
See Notes to Financial Statements.
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR MUTUAL FUNDS
3435 Stelzer Road - Columbus, OH 43219
INVESTMENT ADVISER
First American National Bank
315 Deaderick Street - Nashville, TN 37237-0401
ADMINISTRATOR
BISYS Fund Services Limited Partnership
3435 Stelzer Road - Columbus, OH 43219
DISTRIBUTOR
BISYS Fund Services Limited Partnership
3435 Stelzer Road - Columbus, OH 43219
CUSTODIAN
The Bank of New York
90 Washington Street - New York, NY 10286
TRANSFER AGENT & DIVIDEND DISBURSING AGENT
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road - Columbus, OH 43219
BISYS Fund Services Limited Partnership is the Portfolios'
distributor and is unaffiliated with First American National
Bank, the Portfolios' adviser.
Investments in the Portfolios are neither guaranteed by nor
obligations of First American National Bank or any other
bank and are not insured by the FDIC or any other government
agency. Investments in mutual funds involve risk, including
the possible loss of principal. This material must be preceded
or accompanied by a current prospectus.
[AMERISTAR MUTUAL FUNDS LOGO]
HELPING PEOPLE PLAN
FOR A BRIGHTER FUTURE.(SM)
[EYE IN PYRAMID BACKGROUND]
--------------
BULK RATE
U.S. POSTAGE
PAID
CLEVELAND, OH
PERMIT NO.1
--------------
8/98 AME-SANN-6/98
<PAGE>
DG
Investor Series
Money Market Funds
* DG Prime
Money Market Fund
* DG Treasury
Money Market Fund
(formerly DG U.S. Government Money Market Fund)
================================================ [LOGO]
COMBINED DG
ANNUAL REPORT INVESTOR
SERIES
Diversified Portfolios of
DG Investor Series,
an Open-End Management
Investment Company
ParkSouth
Corporation
Jackson, MS
Investment Adviser
An Affiliate of:
[LOGO] Deposit Guaranty National Bank
Jackson, MS
The shares offered by this prospectus are not deposits or obligations of Deposit
Guaranty National Bank, are not endorsed or guaranteed by Deposit Guaranty
National Bank and are not insured by the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other government agency. Investment in these
shares involves investment risks including the possible loss of principal.
February 28, 1998
=================
[LOGO] FEDERATED INVESTORS
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the funds
and is a subsidiary of Federated Investors.
[LOGO]
RECYCLED
PAPER
<PAGE>
PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
Dear Shareholder:
I'm pleased to present the Annual Report to Shareholders for the DG Investor
Series money market funds, which covers the 12-month period from March 1, 1997
through February 28, 1998. In this Report, you will find a complete list of
investments and financial statements for each fund.
Each fund gives you a convenient way to earn daily income on your ready cash. In
addition, each fund is managed to maintain the value of each share at a stable
$1.00 and give you daily access to your money.* Fund by fund highlights over the
12-month period are as follows:
- - DG PRIME MONEY MARKET FUND, which began operation on March 10, 1997, produced
income totaling $0.05 per share from a portfolio of high quality money market
securities. The fund's net assets reached $195 million.
- - DG TREASURY MONEY MARKET FUND (formerly, DG U.S. Government Money Market Fund)
produced income totaling $0.05 per share from a portfolio of U.S. Treasury
money market securities. The fund's net assets reached $349 million.
Thank you for choosing the DG Investor Series money market funds to keep your
ready cash working--and earning--on a daily basis. We'll continue to provide the
highest level of service as we keep you informed of your progress on a regular
basis.
Sincerely,
LOGO
Edward C. Gonzales
President
April 15, 1998
* Although money market funds seek to maintain a share value of $1.00, there is
no guarantee that they will do so. An investment in the fund is neither
insured nor guaranteed by the U.S. government.
<PAGE>
DG PRIME MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------
(A) COMMERCIAL PAPER--82.8%
BANKING--3.0%
$ 6,000,000 J.P. Morgan & Co., Inc.,
5.481%, 5/15/1998 $ 5,932,500
-----------
BROKERAGE--6.1%
6,000,000 Goldman Sachs & Co., 5.504%,
5/13/1998 5,933,935
6,000,000 Merrill Lynch & Co., Inc.,
5.513%, 4/15/1998 5,959,125
-----------
Total 11,893,060
-----------
FINANCE--AUTOMOTIVE--6.1%
6,000,000 Ford Motor Credit Corp.,
5.606%, 4/3/1998 5,969,585
6,000,000 General Motors Acceptance
Corp., 5.517%, 4/20/1998 5,954,583
-----------
Total 11,924,168
-----------
FINANCE--COMMERCIAL--12.5%
6,000,000 CIT Group Holdings, Inc.,
5.523%, 5/1/1998 5,944,592
6,000,000 General Electric Capital
Corp., 5.437%, 4/17/1998 5,958,013
6,000,000 IBM Credit Corp., 5.529%,
3/18/1998 5,984,502
6,500,000 MetLife Funding, Inc., 5.621%,
3/25/1998 6,475,950
-----------
Total 24,363,057
-----------
FINANCE--RETAIL--12.2%
6,000,000 American Express Credit Corp.,
5.521%, 5/20/1998 5,927,333
6,000,000 American General Finance
Corp., 5.504%, 4/13/1998 5,961,085
6,000,000 Commercial Credit Co., 5.511%,
5/4/1998 5,941,867
6,000,000 Household Finance Corp.,
5.512%, 4/6/1998 5,967,360
-----------
Total 23,797,645
-----------
FINANCIAL SERVICES--3.6%
7,000,000 National Rural Utilities
Cooperative Finance Corp.,
5.508%-5.727%,
3/12/1998-4/22/1998 6,957,204
-----------
(See Notes to Portfolio of Investments)
<PAGE>
- ----------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(A) COMMERCIAL PAPER (continued)
FOOD & BEVERAGE--5.6%
$ 6,000,000 Campbell Soup Co., 5.753%,
5/22/1998 $ 5,923,467
5,000,000 Hershey Foods Corp., 5.476%,
3/13/1998 4,990,950
-----------
Total 10,914,417
-----------
INDUSTRIAL PRODUCTS--6.1%
6,000,000 Archer-Daniels-Midland Co.,
5.553%, 3/10/1998 5,991,750
6,000,000 Cargill, Inc., 5.492%,
4/27/1998 5,948,320
-----------
Total 11,940,070
-----------
INSURANCE--6.1%
6,000,000 General RE Corp., 5.831%,
3/20/1998 5,981,792
6,000,000 USAA Capital Corp., 5.495%,
3/16/1998 5,986,375
-----------
Total 11,968,167
-----------
MISCELLANEOUS--3.1%
6,000,000 Procter & Gamble Co., 5.463%,
3/31/1998 5,972,950
-----------
OIL & OIL FINANCE--6.1%
6,000,000 Amoco Corp., 5.476%, 5/11/1998 5,935,982
6,000,000 Atlantic Richfield Co.,
5.468%, 4/8/1998 5,965,737
-----------
Total 11,901,719
-----------
PHARMACEUTICALS AND HEALTH
CARE--3.1%
6,000,000 (e)Glaxo Wellcome PLC, 5.752%,
3/3/1998 5,998,110
-----------
TELECOMMUNICATIONS--9.2%
6,000,000 AT&T Corp., 5.768%, 3/6/1998 5,995,250
6,000,000 Ameritech Capital Funding
Corp., 5.502%, 5/8/1998 5,938,460
6,000,000 BellSouth Telecommunications,
Inc., 5.499%, 4/23/1998 5,951,946
-----------
Total 17,885,656
-----------
TOTAL COMMERCIAL PAPER 161,448,723
-----------
<PAGE>
DG PRIME MONEY MARKET FUND
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------
GOVERNMENT AGENCIES--9.2%
$ 6,000,000 Federal Farm Credit System,
5.470%, 4/1/1998 $ 6,000,000
6,000,000 (b)Federal Home Loan Bank
System, 11.08%, 3/23/1998 5,980,237
6,000,000 (b)Federal National Mortgage
Association, 5.74%,
3/27/1998 5,975,863
-----------
TOTAL GOVERNMENT AGENCIES 17,956,100
-----------
- ----------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(C) REPURCHASE AGREEMENT--8.0%
$15,566,100 Cantor Fitzgerald Securities,
5.580%, dated 2/27/1998, due
3/2/1998 (at amortized cost) $ 15,566,100
-----------
TOTAL INVESTMENTS
(at amortized cost)(d) $194,970,923
===========
(See Notes to Portfolios of Investments)
<PAGE>
DG TREASURY MONEY MARKET FUND
(FORMERLY DG U.S. GOVERNMENT MONEY MARKET FUND)
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------
U.S. TREASURY OBLIGATIONS--59.9%
U.S. TREASURY BILLS--32.7%
$15,000,000 3/5/1998 $ 14,991,450
15,000,000 3/12/1998 14,976,510
15,000,000 3/19/1998 14,961,881
15,000,000 4/2/1998 14,931,600
15,000,000 4/9/1998 14,916,394
20,000,000 4/23/1998 19,845,858
20,000,000 7/23/1998 19,590,000
-----------
Total 114,213,693
-----------
U.S. TREASURY NOTES--27.2%
20,000,000 4.750%, 8/31/1998 19,937,496
10,000,000 5.125%, 3/31/1998 9,996,566
15,000,000 5.250%, 7/31/1998 14,997,751
15,000,000 5.875%, 4/30/1998 15,009,606
15,000,000 6.125%, 5/15/1998 15,021,415
20,000,000 7.875%, 4/15/1998 20,057,838
-----------
Total 95,020,672
-----------
TOTAL U.S. TREASURY
OBLIGATIONS 209,234,365
-----------
- ----------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(C) REPURCHASE
AGREEMENTS--39.8%
$74,091,900 Cantor Fitzgerald Securities,
5.580%, dated 2/27/1998, due
3/2/1998 $ 74,091,900
65,000,000 State Street Bank and Trust
Co., 5.580%, dated
2/27/1998, due 3/2/1998 65,000,000
-----------
TOTAL REPURCHASE AGREEMENTS 139,091,900
-----------
TOTAL INVESTMENTS
(at amortized cost)(d) $348,326,265
===========
(See Notes to Portfolios of Investments)
<PAGE>
NOTES TO PORTFOLIOS OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Each issue shows the rate of discount at the time of purchase for discount
issues, or the coupon for interest bearing issues.
(b) Discount rate at time of purchase.
(c) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(d) Also represents cost for federal tax purposes.
(e) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At February 28, 1998, this security amounted
to $5,998,110 which represents 3.08% of net assets.
The following acronym is used throughout the Prime Money Market Fund:
PLC -- Public Limited Company
Note: The categories of investments are shown as a percentage of net assets at
February 28, 1998.
(See Notes which are an integral part of the Financial Statements)
<PAGE>
DG INVESTOR SERIES MONEY MARKET FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DG TREASURY MONEY
MARKET FUND
(FORMERLY, DG
DG PRIME MONEY U.S. GOVERNMENT
MARKET FUND MONEY MARKET FUND)
----------- ------------------
<S> <C> <C>
ASSETS:
- ----------------------------------------------
Investments in repurchase agreements $ 15,566,100 $139,091,900
- ----------------------------------------------
Investments in other securities 179,404,823 209,234,365
- ---------------------------------------------- --------------- ------------------
Total investments in securities, at
amortized cost and value 194,970,923 348,326,265
- ----------------------------------------------
Cash 81 --
- ----------------------------------------------
Income receivable 140,974 1,954,185
- ----------------------------------------------
Receivable for shares sold -- 6,470
- ----------------------------------------------
Deferred organizational costs 15,061 --
- ---------------------------------------------- --------------- ------------------
Total assets 195,127,039 350,286,920
- ----------------------------------------------
LIABILITIES:
- ----------------------------------------------
Income distribution payable 1,451 1,173,029
- ----------------------------------------------
Accrued expenses 84,654 63,182
- ---------------------------------------------- --------------- ------------------
Total liabilities 86,105 1,236,211
- ---------------------------------------------- --------------- ------------------
Total Net Assets $195,040,934 $349,050,709
- ---------------------------------------------- --------------- ------------------
NET ASSET VALUE, OFFERING PRICE and Redemption Proceeds Per Share (net assets /
shares
outstanding) $ 1.00 $ 1.00
- ---------------------------------------------- --------------- ------------------
Shares Outstanding 195,040,934 349,050,709
- ---------------------------------------------- --------------- ------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
<PAGE>
DG INVESTOR SERIES MONEY MARKET FUNDS
STATEMENTS OF OPERATIONS
YEAR ENDED FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DG TREASURY MONEY
MARKET FUND
(FORMERLY, DG
DG PRIME MONEY U.S. GOVERNMENT
MARKET FUND(A) MONEY MARKET FUND)
-------------- ------------------
<S> <C> <C>
INVESTMENT INCOME:
- -----------------------------------------
Interest $9,175,799 $15,090,078
- -----------------------------------------
EXPENSES:
- -----------------------------------------
Investment advisory fee 810,951 1,407,882
- -----------------------------------------
Administrative personnel and services fee 160,588 278,821
- -----------------------------------------
Custodian fees 9,656 13,105
- -----------------------------------------
Transfer and dividend disbursing agent
fees and expenses 21,624 39,769
- -----------------------------------------
Directors'/Trustees' fees 400 4,417
- -----------------------------------------
Auditing fees 400 12,688
- -----------------------------------------
Legal fees 700 2,658
- -----------------------------------------
Portfolio accounting fees 45,005 68,326
- -----------------------------------------
Distribution services fee 405,475 --
- -----------------------------------------
Shareholder services fee -- 275,682
- -----------------------------------------
Share registration costs 49,592 44,163
- -----------------------------------------
Printing and postage 8,000 6,500
- -----------------------------------------
Insurance premiums 4,001 4,000
- -----------------------------------------
Miscellaneous 1,768 4,464
- ----------------------------------------- --------------- ------------------
Total expenses 1,518,160 2,162,475
- -----------------------------------------
WAIVERS--
- -----------------------------------------
Waiver of investment advisory fees (324,380) (563,153)
- -----------------------------------------
Waiver of administrative personnel and
services fee (95,518) --
- ----------------------------------------- --------------- ------------------
Total waivers (419,898) (563,153)
- ----------------------------------------- --------------- ------------------
Net expenses 1,098,262 1,599,322
- ----------------------------------------- --------------- ------------------
Net investment income $8,077,537 $13,490,756
- ----------------------------------------- --------------- ------------------
</TABLE>
(a) For the period from March 10, 1997 (date of initial public investment) to
February 28, 1998.
(See Notes which are an integral part of the Financial Statements)
<PAGE>
DG INVESTOR SERIES MONEY MARKET FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DG TREASURY MONEY
MARKET FUND
(FORMERLY, DG
DG PRIME MONEY U.S. GOVERNMENT
MARKET FUND MONEY MARKET FUND)
--------------- -----------------------------
PERIOD YEAR YEAR
ENDED ENDED ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1998(A) 1998 1997
--------------- ------------- -------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
- --------------------------------------------
OPERATIONS--
- --------------------------------------------
Net investment income $ 8,077,537 $ 13,490,756 $ 10,783,399
- -------------------------------------------- -------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS--
- --------------------------------------------
Distributions from net investment income (8,077,537) (13,490,756) (10,783,399)
- -------------------------------------------- -------------- ------------- -------------
SHARE TRANSACTIONS--
- --------------------------------------------
Proceeds from sale of shares 528,390,173 789,333,839 550,619,637
- --------------------------------------------
Net asset value of shares issued to
shareholders in payment of distributions
declared 8,066,557 457,722 167,230
- --------------------------------------------
Cost of shares redeemed (341,415,796) (714,193,778) (522,981,171)
- -------------------------------------------- -------------- ------------- -------------
Change in net assets from share
transactions 195,040,934 75,597,783 27,805,696
- -------------------------------------------- -------------- ------------- -------------
Change in net assets 195,040,934 75,597,783 27,805,696
- --------------------------------------------
NET ASSETS:
- --------------------------------------------
Beginning of period -- 273,452,926 245,647,230
- -------------------------------------------- -------------- ------------- -------------
End of period $ 195,040,934 $ 349,050,709 $ 273,452,926
- -------------------------------------------- -------------- ------------- -------------
(a) For the period from March 10, 1997 (date of initial public investment) to
February 28, 1998.
</TABLE>
(See Notes which are an integral part of the Financial Statements.)
<PAGE>
(This page intentionally left blank)
<PAGE>
DG INVESTOR SERIES MONEY MARKET FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
NET ASSET DISTRIBUTIONS
VALUE, NET FROM NET
BEGINNING INVESTMENT INVESTMENT
YEAR ENDED FEBRUARY 28 OR 29, OF PERIOD INCOME INCOME
----------------------------- --------- ------ ------
<S> <C> <C> <C>
DG PRIME MONEY MARKET FUND
1998(a) $1.00 0.05 (0.05)
DG TREASURY MONEY MARKET FUND
(FORMERLY, DG U.S. GOVERNMENT
MONEY MARKET FUND)
1993(b) $1.00 0.02 (0.02)
1994 $1.00 0.03 (0.03)
1995 $1.00 0.04 (0.04)
1996 $1.00 0.05 (0.05)
1997 $1.00 0.05 (0.05)
1998 $1.00 0.05 (0.05)
(a) For the period from March 10, 1997 (date of initial public investment), to
February 28, 1998.
(b) Reflects operations for the period from July 1, 1992 (date of initial public
investment) to February 28, 1993. For the period from March 31, 1992 (start
of business) to June 30, 1992, all income was distributed to the
administrator.
(c) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(d) Computed on an annualized basis.
(e) This voluntary expense decrease is reflected in both the expense and net
investment income ratios.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RETURN TO AVERAGE NET ASSETS
--------------------------------- NET ASSETS,
NET ASSET NET END OF
VALUE, END TOTAL INVESTMENT EXPENSE PERIOD
OF PERIOD RETURN(C) EXPENSES INCOME WAIVER(E) (000 OMITTED)
- --------- --------- -------- ------ --------- -------------
<S> <C> <C> <C> <C> <C>
$1.00 4.93% 0.68%(d) 4.98%(d) 0.26%(d) $195,041
$1.00 1.97% 0.41%(d) 2.88%(d) 0.38%(d) $189,024
$1.00 2.74% 0.54% 2.70% 0.20% $189,315
$1.00 4.06% 0.53% 3.96% 0.20% $162,515
$1.00 5.48% 0.51% 5.33% 0.20% $245,647
$1.00 4.83% 0.50% 4.74% 0.20% $273,453
$1.00 4.90% 0.57% 4.81% 0.20% $349,051
</TABLE>
<PAGE>
DG INVESTORS SERIES MONEY MARKET FUNDS
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
(1) ORGANIZATION
DG Investor Series (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the "Act"), as an open-end management investment company.
The Trust consists of eight portfolios. The following portfolios (individually
referred to as the "Fund", or collectively as the "Funds") are presented herein:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
PORTFOLIO NAME INVESTMENT OBJECTIVE
- ---------------------------------------------------------------------------------------------
<S> <C>
DG Prime Money Market Fund ("Prime Money Current income consistent with stability of
Market Fund") principal.
- ---------------------------------------------------------------------------------------------
DG Treasury Money Market Fund (formerly DG Current income consistent with
stability of U.S. Government Money Market Fund) principal and liquidity.
("Treasury Money Market Fund")
- ---------------------------------------------------------------------------------------------
</TABLE>
Effective October 1, 1997, DG U.S. Government Money Market Fund was renamed DG
Treasury Money Market Fund.
The assets of each portfolio are segregated and a shareholder's interest is
limited to the portfolio in which shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--The Funds' use of the amortized cost method to value
portfolio securities is in accordance with Rule 2a-7 under the Act.
REPURCHASE AGREEMENTS--It is the policy of the Funds to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under repurchase
agreement transactions. Additionally, procedures have been established by
the Funds to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be under the repurchase agreement
transaction.
The Funds will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Funds' adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the
<PAGE>
DG INVESTORS SERIES MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
"Trustees"). Risks may arise from the potential inability of counterparties
to honor the terms of the repurchase agreement. Accordingly, the Funds
could receive less than the repurchase price on the sale of collateral
securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code"). Dividend
income and distributions to shareholders are recorded on the ex-dividend
date.
FEDERAL TAXES--It is the Funds' policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of their income. Accordingly, no
provisions for federal tax are necessary.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Funds may engage in
when-issued or delayed delivery transactions. The Funds record when-issued
securities on the trade date and maintain security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
DEFERRED EXPENSES--The costs incurred by Prime Money Market Fund with
respect to registration of its shares in its first fiscal year, excluding
the initial expense of registering its shares, have been deferred and are
being amortized over a period not to exceed five years from its
commencement date.
Organizational expenses of $20,300 for Prime Money Market Fund were borne
initially by the Adviser. The Fund has reimbursed the Adviser for these
expenses. These expenses have been deferred and are being amortized over
the five year period following the Fund's effective date. For the year
ended February 28, 1998, the Fund expensed $1,171 of organizational
expenses.
RESTRICTED SECURITIES--Restricted securities are securities that may only
be resold upon registration under federal securities laws or in
transactions exempt from such registration. In some cases, the issuer of
restricted securities has agreed to register such securities for resale, at
the issuers' expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted securities
may be resold in the secondary market in transactions exempt from
registration. Such restricted securities may be determined to be liquid
under criteria established by the Board of Trustees. The Fund will not
incur any registration costs upon such resales. The Funds' restricted
securities are valued at the price provided by dealers in the secondary
market or, if no market prices are available, at the fair value as
determined by the Funds' pricing committee.
Additional information on each restricted security held by Prime Money
Market Fund at February 28, 1998 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Security Acquisition Date Acquisition Cost
- --------------------------------------------------------------------------------------
Glaxo Wellcome 12/2/97 $5,914,950
</TABLE>
<PAGE>
DG INVESTORS SERIES MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
USE OF ESTIMATES--The preparation of financial statements in conformity
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value). At
February 28, 1998, Prime Money Market Fund and Treasury Money Market Fund's
capital paid-in aggregated $195,040,934, and $349,050,709, respectively.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
PRIME MONEY
MARKET FUND TREASURY MONEY MARKET FUND
--------------------- ----------------------------------------
PERIOD ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, 1998(A) FEBRUARY 28, 1998 FEBRUARY 28, 1997
- ------------------------------ --------------------- ------------------- ------------------
<S> <C> <C> <C>
Shares sold 528,390,173 789,333,839 550,619,637
- ------------------------------
Shares issued to shareholders
in payment of distributions
declared 8,066,557 457,722 167,230
- ------------------------------
Shares redeemed (341,415,796) (714,193,778) (522,981,171)
- ------------------------------ ------------------ ----------------- ----------------
Net change resulting from
share transactions 195,040,934 75,597,783 27,805,696
- ------------------------------ ------------------ ----------------- ----------------
(a) For the period from March 10, 1997 (date of initial public investment), to
February 28, 1998.
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--ParkSouth Corporation, a subsidiary of Deposit Guaranty
National Bank, the Funds' investment adviser (the "Adviser"), receives for its
services an annual investment advisory fee equal to 0.50% of each Fund's average
daily net assets.
ParkSouth Corporation became the Funds' investment adviser on March 1, 1997.
Prior to March 1, 1997, Deposit Guaranty National Bank served as the Funds
investment adviser. The advisory fees charged prior to March 1, 1997 were the
same as the current fees listed above.
<PAGE>
DG INVESTORS SERIES MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
SUB-ADVISORY FEE--Prior to March 1,1997, under the terms of a sub-advisory
agreement between Deposit Guaranty National Bank and the Trust Division of
Commercial National Bank, (the "sub-adviser"), the sub-adviser received an
annual fee from the Deposit Guaranty National Bank equal to 0.25% of each Fund's
average daily net assets. Effective March 1, 1997, Commercial National Bank is
no longer the sub-adviser to the Funds.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Funds
with certain administrative personnel and services. The fee paid to FAS is based
on the level of average aggregate net assets of the Trust for the period. FAS
may voluntarily choose to waive a portion of its fee.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with FAS, the Funds will pay FAS up to 0.15% of average daily net assets of the
Fund for the period. The fee paid to FAS is used to finance certain services for
shareholders and to maintain shareholder accounts.
As of February 28, 1998, Prime Money Market Fund did not pay or accrue
shareholder services fee.
DISTRIBUTION SERVICES FEE--The Funds have adopted a Distribution Plan ("the
Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the
Funds will compensate Federated Securities Corporation ("FSC"), the principal
distributor, from the net assets of the Funds to finance activities intended to
result in the sale of the Funds' shares. The Plan provides that the Funds may
incur distribution expenses up to 0.25% of the average daily net assets of the
Funds, annually, to compensate FSC.
As of February 28, 1998, Treasury Money Market Fund did not pay or accrue 12b-1
fees.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC") serves as transfer and dividend disbursing agent for the Funds.
The fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Funds' accounting records for
which it receives a fee. The fee is based on the level of each Fund's average
daily net assets for the period, plus out-of-pocket expenses.
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Trustees and Shareholders DG INVESTOR SERIES:
We have audited the statements of assets and liabilities, including the
portfolio of investments, of the DG Prime Money Market Fund and the DG Treasury
Money Market Fund (two portfolios within DG Investor Series) as of February 28,
1998, and the related statements of operations for the year then ended, the
statements of changes in net assets for the years ended February 28, 1998 and
1997, and the financial highlights for the periods presented. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to gain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
February 28, 1998 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights of the DG
Investor Series portfolios referred to above present fairly, in all material
respects, their financial position as of February 28, 1998, and the results of
their operations for the year then ended, and the changes in their net assets
and their financial highlights for each of the periods presented, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Pittsburgh, Pennsylvania
April 10, 1998
<PAGE>
TRUSTEES OFFICERS
- ------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Edward C. Gonzales
Nicholas P. Constantakis President and Treasurer
William J. Copeland J. Christopher Donahue
James E. Dowd Executive Vice President
Lawrence D. Ellis, M.D. John W. McGonigle
Edward L. Flaherty, Jr. Executive Vice President and Secretary
Edward C. Gonzales Richard B. Fisher
Peter E. Madden Vice President
John E. Murray, Jr. Charles L. Davis, Jr.
Wesley W. Posvar Vice President and Assistant Treasurer
Marjorie P. Smuts Gail Cagney
Assistant Secretary
Although money market funds seek to maintain a stable net asset value of $1.00
per share, there is no assurance that they will be able to do so.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Funds prospectus which contains facts concerning
the Funds objectives and policies, management fees, expenses and other
information.
<PAGE>
DG
Investor Series
Stock and Bond
Funds
* DG Equity Fund
* DG International Equity Fund
* DG Opportunity Fund
* DG Limited Term
Government Income Fund
* DG Government Income Fund
* DG Municipal Income Fund
================================================ [LOGO]
COMBINED DG
ANNUAL REPORT INVESTOR
SERIES
Diversified Portfolios of
DG Investor Series,
an Open-End Management
Investment Company
ParkSouth Corporation
Jackson, MS
Investment Adviser
Lazard Freres Asset
Management
New York, NY
Sub-Advisor to DG International
Equity Fund
Womack Asset
Management, Inc.
Jackson, MS
Sub-Advisor to DG
Opportunity Fund
An Affiliate of:
[LOGO] Deposit Guaranty National Bank
Jackson, MS
The shares offered by this prospectus are not deposits or obligations of Deposit
Guaranty National Bank, are not endorsed or guaranteed by Deposit Guaranty
National Bank and are not insured by the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other government agency. Investment in these
shares involves investment risks including the possible loss of principal.
February 28, 1998
=================
[LOGO] FEDERATED INVESTORS
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the funds
and is a subsidiary of Federated Investors.
Cusip 23321N301 Cusip 23321N202 [LOGO]
Cusip 23321N400 Cusip 23321N608 RECYCLED
Cusip 23321N103 G00498-11 (4/98) PAPER
Cusip 23321N509
<PAGE>
PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
Dear Shareholder:
I'm pleased to present the Annual Report to Shareholders for the DG Investor
Series stock and bond funds, which covers the 12-month period from March 1, 1997
through February 28, 1998. In this Report, you will find an interview with each
fund's portfolio manager, as well as a complete list of investments and
financial statements for each fund.
Fund by fund highlights over the 12-month period are as follows:
- - DG EQUITY FUND, in a highly favorable stock market environment, produced an
extremely strong total return of 39.74%.* Contributing to the total return
were dividends totaling $0.11 per share, capital gains of $0.15 per share, and
a major $6.33 increase in net asset value. Net assets grew substantially from
$490 million to $716 million.
- - DG INTERNATIONAL EQUITY FUND, the newest member of the DG fund family, invests
in international stocks. Since the fund began operation on August 15, 1997
through February 28, 1998, it produced a total return of 4.71% through
dividends totaling $0.01 per share and a $0.46 increase in net asset value.
The fund's net assets totaled $26.5 million.
- - DG OPPORTUNITY FUND achieved a strong total return of 37.81%.* The fund paid
capital gains totaling $2.54 per share, while its net asset value increased by
$2.31. At the end of the report period, net assets reached $123 million.
- - DG LIMITED TERM GOVERNMENT INCOME FUND, a portfolio of shorter-maturity
government securities, paid dividends totaling $0.51 per share. The fund's
total return was 6.16%.* The fund's net asset value increased by $0.07. The
fund ended the period with $59 million in net assets.
- - DG GOVERNMENT INCOME FUND, a portfolio of U.S. government securities, paid
dividends totaling $0.55 per share, while producing a total return of 9.90%*
in an improved bond market climate. The fund's net asset value increased by
$0.38. Net assets totaled $270 million.
<PAGE>
- --------------------------------------------------------------------------------
- - DG MUNICIPAL INCOME FUND, a portfolio of high-quality municipal securities
issued across the U.S., produced federally tax-free dividends totaling $0.47
per share and capital gains totaling $0.02 per share.** Dividends, capital
gains and a $0.30 increase in net asset value produced a total return of
7.70%.* At the end of the report period, net assets stood at $49 million.
Thank you for choosing the DG Investor Series stock and bond funds to pursue
your financial goals. We hope you are pleased with the performance of your
investment. We'll continue to provide the highest level of service as we keep
you informed of your progress on a regular basis.
Sincerely,
LOGO
Edward C. Gonzales
President
April 15, 1998
* Performance quoted represents past performance and is not indicative of
future returns. Investment return and principal value will fluctuate, so an
investor's shares, when redeemed, may be worth more or less than their
original cost. Total returns quoted above are based on net asset value and do
not reflect the maximum sales charge. Total returns based on the maximum
sales charge for the twelve-month period are as follows: DG Equity Fund,
34.89%; DG Opportunity Fund, 32.99%; DG Limited Term Government Income Fund,
4.02%; DG Government Income Fund, 7.67%; and DG Municipal Income Fund, 5.50%.
** Income may be subject to the federal alternative minimum tax.
<PAGE>
INVESTMENT REVIEW
- --------------------------------------------------------------------------------
DG EQUITY FUND
As unlikely as it may seem--particularly as it does to those of us who must be
numbered among the "old hands"--we have, again, the pleasure of reporting, now,
a fourth consecutive year of exceptional investment results for the DG Equity
Fund. This latest fund fiscal year, ended February 28, 1998, saw our fund
generate a total return based on net asset value of 39.74%.* This return
bested--by some 4.7%--even the return posted by our heretofore seemingly
unbeatable "bogey," the Standard & Poor's 500 Index ("S&P 500")**. When proper
considerations are given to the return implications inherent in our fund's
important goal of providing investors an even higher quality portfolio of
equities than those comprising the venerable S&P 500, and the additional
performance-dampening drags resulting from our modest but necessary operating
cash position and from our investment management fees and expenses, we believe
most would agree, fiscal 1997 was indeed special. To provide additional
comparative perspective, as has been our custom, we note that our peers in the
Growth Investment Objective category, as included in the broad-style Lipper
Growth Fund Index, generated a not-at-all shabby 32.16% for the period. As was
the case in reporting our own fund's returns, our Growth (mutual) Fund
contemporaries' returns were also reduced by their cash position as well as by
their management fees and by their other various expenses.
At this juncture, we'll take a break in our "crowing" and offer an intentionally
brief but obligatory overview of our near-term outlook--however unimportant the
time frame for the long-term equity investor. In our view, the levels and
directions of change in the ten-year (and longer) bond rates will influence and
largely set the overall tone for our long duration growth stock portfolio. As
additional unsettling effects of the Asian and Japanese economic problems work
their way through our economy--short-term at least--the important longer-term
interest rate influences are likely to continue to remain favorable. Conversely,
however, corporate earnings over the next quarter or two are also likely to
reflect the aforementioned foreign economic problems and the earnings-per-share
comparisons for our large multi-national companies are almost certain to suffer.
Therefore, we are probably faced with a kind-of "mixed bag" at least through
mid-year or so in our equity markets. With earnings per share growth rate
expectations contracting, on the one hand, and equity market price to earnings
multiples, on the other hand, expanding--reflecting the currently low and
possibly, later, even lower interest rate expectations--stock prices seem likely
to advance, if at all, at an irregularly muted pace.
* Performance quoted represents past performance and is not indicative of
future returns. Investment return and principal value will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. The fund's total return for the period based on
offering price was 34.89%.
** The S&P 500 is an unmanaged composite index of common stocks in industrial,
transportation, and financial and public utility companies. Lipper Growth
Fund Index is an unmanaged index and represents an average of the net
asset-valuated total returns for the top 30 growth funds tracked by Lipper
Analytical Services, Inc., an independent mutual fund rating service.
Investments cannot be made in an index.
<PAGE>
- --------------------------------------------------------------------------------
Now, for the equity investor's investment horizon, none of our management views
have changed regarding the long-term appeal of those economic sectors we have
long held as those offering the greatest investment potential for the future.
For the long run, we still believe that the true growth stock investor will find
the greatest opportunities in the classic growth segments of our economy. For
us, those areas of greatest investment interest are the Technology, Consumer
Non-Durable, Health Care, Business Equipment and Services, Retail, and the
Capital Goods economic sectors. The bulk of the fund's portfolio will continue
to be diversified within the various industries comprising these broad economic
sectors unless ongoing major and largely unpredictable secular realignments
occur in the economy. This relatively narrow strategic sector focus may preclude
the fund from investing in numerous potentially rewarding opportunities, but our
goal is to afford the fund the benefits associated with a commitment to
time-tested and proven growth enterprises, while minimizing the dangers
associated with the "fad"-like influences present in today's contemporary
investment arena. However, as one might imagine, this same relatively narrow
strategic sector focus also lessens the occasionally significant benefits
derived from a less selective broad-market or market-neutral diversification
approach to investing.
We believe that by virtue of the consistent application of our long-term focus
and of our process of winnowing-down our universe to those issues we opine to be
our "very best" investment choices, we can provide a most appropriate equity
portfolio for a future of continued uncertainty. As always, rising interest
rates, or the portent of much higher rates of inflation will continue to
adversely impact our however-well chosen portfolio of growth stocks. The fund's
portfolio is most certainly not immune to shocks. But, we believe the
portfolio's very high quality focus, substantial company size, and typical
economic sector emphasis will assure its resilience during periods of extended
market distress and provide the spring-board for its success in the long run.
<PAGE>
DG EQUITY FUND
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN
DG EQUITY FUND
The graph below illustrates the hypothetical investment of $10,000 in the DG
Equity Fund (the "Fund") from August 1, 1992 (start of performance) to February
28, 1998, compared to the Standard & Poor's 500 Index ("S&P 500").+
(Graphic representation A1 omitted. See Appendix.)
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund after deducting
the original maximum sales charge of 2.00% ($10,000 investment minus $200
sales charge = $9,800). The Fund's performance assumes the reinvestment of
all dividends and distributions. The S&P 500 has been adjusted to reflect
reinvestment of dividends on securities in the index.
** Represents a hypothetical investment of $10,000 in the Fund after deducting
the current maximum sales charge of 3.50% (effective 5/1/95) ($10,000
investment minus $350 sales charge = $9,650). The Fund's performance assumes
the reinvestment of all dividends and distributions. The S&P 500 has been
adjusted to reflect reinvestment of dividends on securities in the index.
*** Total return quoted reflects all applicable current maximum sales charges.
+ The S&P 500 is not adjusted to reflect sales charges, expenses, or other
fees that the Securities and Exchange Commission requires to be reflected in
the Fund's performance. This index is unmanaged.
<PAGE>
INVESTMENT REVIEW
- --------------------------------------------------------------------------------
DG INTERNATIONAL EQUITY FUND
The DG International Equity Fund kept pace with the rapidly rising Morgan
Stanley Capital Europe, Australia, Far East Index ("EAFE")* as international
equities raced to record levels during the first quarter of 1998. EAFE jumped
nearly 15% in the first three months of the year led by a 20% appreciation in
European bonuses. Investor hopes that the new year would mark the reverse of
Japan's woes faded as the market retraced much of its January gains by the end
of the quarter.
The confluence of continued positive corporate change and signs of reinvigorated
local economics drove strong European equity performance. European themes of
restructuring, shareholder focus, and consolidation in the face of global
competition and the impending Economic and Monetary Union ("EMU") are beginning
to sound repetitive. However, they remain the underpinning of European stock
performance and are likely to remain for some time. Recall that US companies
began the same process years before their European counterparts, and continue to
reap the benefits. General Electric has been at the forefront of US change and
Fiat's (auto) appointment of GE's Vice-Chairman Paolo Fresco as its new Chairman
illustrates European corporate desire to implement change. BTR (engineering)
continued its aggressive restructuring by selling 4 significant disparate
businesses. Alcatel Alsthom will intensify its telecom equipment focus by
selling most of its engineering and systems activities to its GEC-Alsthom joint
venture before publicly floating the entity in June. Companies also continue to
unwind financial stakes in unrelated companies to free assets to fund core
businesses or return to shareholders. UPM-Kymmene (paper) sold its stakes in
Merita (banking), Sampo (insurance), and Aamuletti (media) and announced a share
buy back plan; while British Aerospace sold its 16% stake in Orange (cellular)
to build a cash hoard for a potential acquisition in the deregulating and
consolidating defense industry. Others have moved to take advantage of
telecommunication deregulation as European governments have privatized
telecommunication companies and opened the sector to competition. In Germany,
Mannesmann and Viag have shifted from industrial and utility businesses to
compete with the former monopoly Deutsche Telekom. Mannesmann also moved outside
of Germany by taking a stake in Olivetti's cellular business. Telefonica (Spain)
and Telecom Italia (Italy) are also spreading their previously shackled wings.
As a growing corporate renaissance has fueled equity performance in Europe,
Japanese equities are mired in apathetic malaise. Japanese stocks leapt on the
government's proclamation that it would use public pension money to ramp up the
Nikkei 225 Index** and introduce a fiscal stimulus package to jump-start the
economy. As nebulous proposals flowed from government officials, investors'
hopes of decisive action faded. Banks were hardest hit as financial sector
concerns were left unresolved despite
* EAFE Index is a standard, unmanaged foreign securities index representing
major non-U.S. stock markets, as monitored by Morgan Stanley Capital
International. EAFE returns are in U.S. dollars. Investments can not be made
in an index.
** The Nikkei 225 Index is calculated, published and disseminated by Nihon
Keizai Shimbum, Inc. and measures the composite price performance of
selected Japanese stocks. The Index is currently based on 225 highly
capitalized stocks trading on the Tokyo Stock Exchange (TSE) representing a
broad cross-section of Japanese industries. All 225 stocks are listed in the
First Section of the TSE. This Index is unmanaged. Investments can not be
made in an index.
<PAGE>
- --------------------------------------------------------------------------------
the impending "Big Bank" market reforms that began with foreign exchange
deregulation on April 1st. Although the current situation seems dire,
indications of change exist. Despite economic difficulties, the government is
pushing ahead with deregulation. In addition to currency deregulation, the
government is eliminating its minimum level holding requirement of Japanese
bonds in pension funds. Nempuku, Japan's largest public pension fund, recently
allocated $4 billion to foreign asset managers. The corporate world is also
slowly showing signs of change. Matsushita Electric announced a package of
management initiatives including share buybacks, stock options for executive and
board members, incentive pay based on share price performance for management,
and the creation of an outside advisory board to improve corporate governance.
As corporate change drives stock performance on a global basis, indentifying and
investing in companies that are proactively remaking themselves to generate
higher returns will be paramount. The pace of change is likely to continue in
Europe as the European Commission put 11 countries on track for the EMU
commencing January 1, 1999. Current difficulties in Japan may deter some
investors, but hopefully may force more companies and the government to finally
take the stiff medicine necessary to address fundamental problems. Change
provides exciting opportunity for companies to unleash value.
Emerging markets (10% of portfolio) began to recover from oversold levels caused
by Asia's financial crisis. In Brazil, BRAHMA (brewer) and TELEBRAS posted
positive returns. In Greece, Hellenic Telecom contributed to portfolio
performance as did Asia's Pulp and Paper in Indonesia. PANAMCO (Coke bottler) in
Mexico and SAMSUNG (electronics) in South Korea also rebounded with significant
gains.
<PAGE>
DG INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN
DG INTERNATIONAL EQUITY FUND
The graph below illustrates the hypothetical investment of $10,000 in the DG
International Equity Fund (the "Fund") from August 18, 1997 (start of
performance) to February 28, 1998, compared to the Morgan Stanley Capital
Europe, Australia, Far East Index (EAFE).*
(Graphic representation A2 omitted. See Appendix.)
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* The EAFE is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index
is unmanaged. Actual investments may not be made in an index.
** Represents a hypothetical investment of $10,000 in the Fund. The Fund's
performance assumes the reinvestment of all dividends and distributions. The
EAFE has been adjusted to reflect reinvestment of dividends on securities in
the index.
<PAGE>
INVESTMENT REVIEW
- --------------------------------------------------------------------------------
DG OPPORTUNITY FUND
DG Opportunity Fund was established in July 1994, to provide investors with
diversified portfolio of mostly smaller-capitalized companies with at least 65%
of the fund's total assets invested in equity securities of companies that have
a market value capitalization of less than $1 billion. The objective of the fund
is to provide capital appreciation. The majority of the small-cap universe is
less widely followed by institutional investors, which creates the opportunity
to add value to the fund's portfolio through research. Companies are identified
and a fundamental/technical analysis is performed to discern both potential
growth and risk. Company activities are monitored through analyst's research
reports and company conferences. Technical analysis is incorporated to derive
company specific patterns of price movement and to complete the evaluation
process. The holdings of the fund are more speculative than stocks from more
mature firms and lend characteristics which include below-market dividend
yields, above-market betas, high residual risk relative to broad market indexes,
higher price ratios, and greater variability in the earnings number. These
factors produce the potential for market appreciation which exceeds that of
larger-capitalization stocks in return for greater volatility.
For the 12-month period ended February 28, 1998, the fund's holdings were
concentrated in domestic energy and oil field services. Technology, retail, and
restaurant sectors were well represented. The portfolio fluctuated between 50
and 70 issues with an above average portfolio turnover rate. The net asset base
increased from $80.5 million as of February 28, 1997, to $122.9 million as of
February 28, 1998. Total return based on net asset value for the twelve-month
period ended February 28, 1998 was 37.81%.*
* Performance quoted represents past performance and is not indicative of
future returns. Investment return and principal value will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. The fund's total return based on offering price for the
period was 32.99%. The quoted performance data includes the performance of
the collective trust fund for the period before the date on which the fund
commenced operations (August 1, 1994), as adjusted to reflect the fund's
then anticipated expenses as set forth in the "Expenses of the Fund" section
of the fund's initial prospectus. The collective trust fund was not
registered under the Investment Company Act of 1940 (the "1940 Act"), and
therefore was not subject to certain investment restrictions that are
imposed by the 1940 Act. If the collective trust fund had been registered
under the 1940 Act, the performance may have been adversely affected.
<PAGE>
DG OPPORTUNITY FUND
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN
DG OPPORTUNITY FUND
The graph below illustrates the hypothetical investment of $10,000 in the DG
Opportunity Fund (the "Fund") from January 1, 1982+ (start of performance) to
February 28, 1998, compared to the Russell 2000 Index.++
(Graphic representation A3 omitted. See Appendix.)
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund after deducting
the original maximum sales charge of 2.00% ($10,000 investment minus $200
sales charge = $9,800). The Fund's performance assumes the reinvestment of
all dividends and distributions. The Russell 2000 Index has been adjusted to
reflect reinvestment of dividends on securities in the index.
** Represents a hypothetical investment of $10,000 in the Fund after deducting
the current maximum sales charge of 3.50% (effective 5/1/95) ($10,000
investment minus $350 sales charge = $9,650). The Fund's performance assumes
the reinvestment of all dividends and distributions. The Russell 2000 Index
has been adjusted to reflect reinvestment of dividends on securities in the
index.
*** Total return quoted reflects all applicable current maximum sales charges.
+ The Fund is the successor to the portfolio of a collective trust fund
("CTF") formerly managed by the Adviser. On August 1, 1994, (the date of the
Fund's commencement of operations), the assets of the CTF were transferred
to the Fund in exchange for Fund shares. The quoted performance data
includes the performance of the CTF for periods before the Fund's
registration statement became effective. The CTF was not registered under
the Investment Company Act of 1940 and therefore was not subject to certain
investment restrictions that are imposed by the Act. If the CTF had been
registered under the 1940 Act, the performance may have been adversely
affected.
++ The Russell 2000 Index is not adjusted to reflect sales charges, expenses,
or other fees that the Securities and Exchange Commission requires to be
reflected in the Fund's performance. This index is unmanaged.
<PAGE>
INVESTMENT REVIEW
- --------------------------------------------------------------------------------
DG LIMITED TERM GOVERNMENT INCOME FUND
Interest rates declined for the twelve-month period ended February 28, 1998.
Although reports showed an economy that continued to expand, the typical
inflationary pressures that accompany an expansion did not surface. Investors
believed that the Federal Reserve Board (the "Fed") was still vigilant in
watching for economic growth occurring at too rapid a rate. The market has been
anticipating rate increases by the Fed to head off an expanding economy. But
seeing no Fed Action since February 1997, yields on 3-, 5-, and 10-year
Treasuries decreased by 63, 73, and 85 basis points, respectively.
For the twelve-month period ended February 28, 1998, the fund's total return was
6.16%*, based on net asset value, compared to Merrill Lynch 1-3 Year Treasury
Index** total return of 7.04%. The fund's duration of 1.61 years and average
maturity of 1.8 years were maintained during the reporting period. U. S.
Treasury securities continue to hold a majority position in the fund. U. S.
agency securities are being utilized more as spreads to Treasuries have widened,
helping to provide a more adequate return for the additional risk. Corporate
issues will also be utilized, as yield spreads should be sustained with good
corporate earnings.
* Performance quoted represents past performance and is not indicative of
future returns. Investment return and principal value will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. The fund's total return based on offering price for
the period was 4.02%.
** Merrill Lynch 1-3 Year U.S. Treasury Index is an unmanaged index tracking
short-term U.S. government securities with maturities between 1 and 2.99
years. The index is produced by Merrill Lynch, Pierce, Fenner & Smith, Inc.
Investments cannot be made in an index.
<PAGE>
SHAREHOLDER MEETING RESULTS
- --------------------------------------------------------------------------------
A special meeting of DG Limited Term Government Income Fund's shareholders was
held on January 12, 1998. On November 17, 1997, the record date for shareholders
voting at the meeting, there were 8,131,725 shares of the fund outstanding and
entitled to vote. The following item was considered by shareholders and the
results were as follows:
AGENDA ITEM: Approval or disapproval of a change to the investment objective of
DG Limited Term Government Income Fund.
FOR AGAINST ABSTAINED
- --------- ------- ---------
6,027,142 0 12,301
<PAGE>
DG LIMITED TERM GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN
DG LIMITED TERM GOVERNMENT INCOME FUND
The graph below illustrates the hypothetical investment of $10,000 in DG Limited
Term Government Income Fund (the "Fund") from August 1, 1992 (start of
performance) to February 28, 1998, compared to the Merrill Lynch 1-3 Year
Treasury Index ("ML1-3").+
(Graphic representation A4 omitted. See Appendix.)
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales charge of 2.00% ($10,000 investment minus $200 sales charge
= $9,800). The Fund's performance assumes the reinvestment of all dividends
and distributions. The ML1-3 has been adjusted to reflect reinvestment of
dividends on securities in the index.
** Total return quoted reflects all applicable sales charges.
+ The ML1-3 is not adjusted to reflect sales charges, expenses, or other fees
that the Securities and Exchange Commission requires to be reflected in the
Fund's performance. This index is unmanaged.
<PAGE>
INVESTMENT REVIEW
- --------------------------------------------------------------------------------
DG GOVERNMENT INCOME FUND
Interest rates declined for the twelve-month period ended February 28, 1998.
Although reports showed an economy that continued to expand, the typical
inflationary pressures that accompany an expansion did not surface. Investors
believed that the Federal Reserve Board (the "Fed") was still vigilant in
watching for economic growth occurring at too rapid a rate. The market has been
anticipating rate increases by the Fed to head off an expanding economy. But
seeing no Fed Action since February 1997, yields on 3-, 5-, and 10-year
Treasuries decreased by 63, 73, and 85 basis points, respectively.
For the twelve-month period ended February 28, 1998, the fund's total return was
9.90%*, based on net asset value, compared to the Lehman Brothers
Government/Corporate Bond Index ("LBGCBI")** total return of 10.71%. The fund's
duration of 4.62 years and average maturity of 7.8 years continues to be shorter
than that of the LBGCBI. U. S. agency securities are being utilized more, as
spreads to Treasuries have widened helping to provide a more adequate return for
the additional risk. Corporate issues will also be utilized, as yield spreads
should be sustained with good corporate earnings. The fund's net assets
increased from $249.6 million on February 28, 1997 to 270.4 million on February
28, 1998.
* Performance quoted represents past performance and is not indicative of
future returns. Investment return and principal value will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. The fund's total return based on offering price for
the period was 7.67%.
** The LBGCBI is comprised of approximately 5,000 issues which include:
non-convertible bonds publicly issued by the U.S. government or its
agencies; corporate bonds guaranteed by the U.S. government and
quasi-federal corporations; and publicly issued, fixed rate,
non-convertible domestic bonds of companies in industry, public utilities,
and finance. This index is unmanaged. Investments cannot be made in an
index.
<PAGE>
DG GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN
DG GOVERNMENT INCOME FUND
The graph below illustrates the hypothetical investment of $10,000 in the DG
Government Income Fund (the "Fund") from August 1, 1992 (start of performance)
to February 28, 1998, compared to the Lehman Brothers Government/ Corporate
Total Index ("LBGCT").+
(Graphic representation A5 omitted. See Appendix.)
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales charge of 2.00% ($10,000 investment minus $200 sales charge
= $9,800). The Fund's performance assumes the reinvestment of all dividends
and distributions. The LBGCT has been adjusted to reflect reinvestment of
dividends on securities in the index.
** Total return quoted reflects all applicable sales charges.
+ The LBGCT is not adjusted to reflect sales charges, expenses, or other fees
that the Securities and Exchange Commission requires to be reflected in the
Fund's performance. This index is unmanaged.
<PAGE>
INVESTMENT REVIEW
- --------------------------------------------------------------------------------
DG MUNICIPAL INCOME FUND
DG Municipal Income Fund was established in December 1992 to provide investors
with the ability to invest in a diversified portfolio of quality municipal
issues. The investment objective of the fund is to provide dividend income that
is exempt from federal regular income tax.*
Massive supply in the municipal market in the latter part of the fund's fiscal
year acted to keep yields at attractive levels relative to their treasury
counterparts. While the twelve-month period ended February 28, 1998 produced
strong returns, the municipal market did not experience the rally to the extent
of other fixed income securities. The fund's investment adviser continued to
focus on higher quality municipal issues consisting primarily of general
obligations of states, counties, and cities. The fund's investment adviser
intends to focus on lengthening the average maturity of 6.08 years in the first
quarter of the upcoming fiscal year.
The fund's total return (income plus capital appreciation) for the twelve-month
period ended February 28, 1998, was 7.70%**, based on net asset value. As of
February 28, 1998, the 30-day SEC yield was 3.59%, based on net asset value
(3.52% taking into account the sales charge).
The fund's 30-day distribution rate as of February 28, 1998, was 4.17% for
shares, based on net asset value (4.09% taking into account the sales
charge)***. The fund's net assets increased from $46.9 million on February 28,
1997 to $48.6 million on February 28, 1998.
* Income may be subject to the federal alternative minimum tax and state and
local taxes.
** Performance quoted represents past performance and is not indicative of
future returns. Investment return and principal value will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. The fund's total return based on offering price for
the period was 5.50%.
*** Distribution rate reflects actual distribution made to shareholders. It is
calculated by dividing the monthly annualized dividend plus short-term
capital gains, if any, by the average 30-day offering price.
<PAGE>
DG MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN
DG MUNICIPAL INCOME FUND
The graph below illustrates the hypothetical investment of $10,000 in the DG
Municipal Income Fund (the "Fund") from December 21, 1992 (start of performance)
to February 28, 1998, compared to the Lehman Brothers Municipal Bond Index
("LBMBI").+
(Graphic representation A6 omitted. See Appendix.)
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales charge of 2.00% ($10,000 investment minus $200 sales charge
= $9,800). The Fund's performance assumes the reinvestment of all dividends
and distributions. The LBMBI has been adjusted to reflect reinvestment of
dividends on securities in the index.
** Total return quoted reflects all applicable sales charges.
+ The LBMBI is not adjusted to reflect sales charges, expenses, or other fees
that the Securities and Exchange Commission requires to be reflected in the
Fund's performance. This index is unmanaged.
<PAGE>
DG EQUITY FUND
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
SHARES VALUE
- ------------------------------------------------------------
COMMON STOCKS--95.3%
BUSINESS EQUIPMENT & SERVICES--7.8%
280,000 Automatic Data Processing,
Inc. $ 17,097,500
100,000 Cognizant Corp. 4,993,750
133,600 Donnelley (R.R.) & Sons Co. 5,293,900
74,600 Dun & Bradstreet Corp. 2,499,100
150,000 Electronic Data Systems
Corp. 6,571,875
415,400 Pitney Bowes, Inc. 19,471,875
------------
Total 55,928,000
------------
CAPITAL GOODS--9.0%
520,000 Dover Corp. 20,085,000
311,000 General Electric Co. 24,180,250
127,500 PPG Industries, Inc. 8,263,594
240,000 Tyco International, Ltd. 12,180,000
------------
Total 64,708,844
------------
CONSUMER NON-DURABLES--18.7%
75,000 BestFoods 7,903,125
280,000 Coca-Cola Co. 19,232,500
60,000 Eastman Kodak Co. 3,937,500
130,000 Gillette Co. 14,023,750
129,450 Heinz (H.J.) Co. 7,289,653
250,000 International Flavors &
Fragrances, Inc. 11,500,000
60,000 Nike, Inc., Class B 2,632,500
411,200 PepsiCo, Inc. 15,034,500
309,000 Philip Morris Cos., Inc. 13,422,188
230,000 Procter & Gamble Co. 19,535,625
209,800 Sara Lee Corp. 11,853,700
160,000 Sysco Corp. 7,530,000
------------
Total 133,895,041
------------
CONSUMER SERVICES--3.2%
204,500 Disney (Walt) Co. 22,891,219
------------
HEALTHCARE--21.5%
187,300 Abbott Laboratories 14,012,381
110,000 American Home Products Corp. 10,312,500
100,000 Bristol-Myers Squibb Co. 10,018,750
100,000 Hillenbrand Industries, Inc. 5,618,750
250,000 Johnson & Johnson 18,875,000
320,000 Medtronic, Inc. 17,000,000
166,000 Merck & Co., Inc. 21,175,375
280,000 Pfizer, Inc. 24,780,000
340,000 Schering Plough Corp. 25,861,250
100,000 United Healthcare Corp. 6,068,750
------------
Total 153,722,756
------------
SHARES OR
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------
COMMON STOCKS (continued)
RAW MATERIALS--1.5%
60,000 Avery Dennison Corp. $ 3,030,000
90,000 Lubrizol Corp. 3,470,625
120,000 Morton International, Inc. 3,967,500
------------
Total 10,468,125
------------
RETAIL--11.4%
200,000 Albertsons, Inc. 9,362,500
75,000 Gap (The), Inc. 3,351,562
225,000 Home Depot, Inc. 14,357,812
320,000 McDonald's Corp. 17,520,000
41,120 (b) Tricon Global
Restaurants, Inc. 1,166,780
240,000 Wal-Mart Stores, Inc. 11,115,000
680,000 Walgreen Co. 24,947,500
------------
Total 81,821,154
------------
TECHNOLOGY--20.8%
150,000 AMP, Inc. 6,628,125
220,000 (b) Applied Materials, Inc. 8,098,750
177,200 Boeing Co. 9,613,100
700,000 Compaq Computer Corp. 22,443,750
130,000 (b) Digital Equipment Corp. 7,401,875
277,200 Hewlett-Packard Co. 18,572,400
200,000 Intel Corp. 17,937,500
200,000 International Business
Machines Corp. 20,887,500
60,000 Lucent Technologies, Inc. 6,502,500
200,000 (b) Microsoft Corp. 16,950,000
100,000 Motorola, Inc. 5,575,000
150,000 (b) Oracle Corp. 3,693,750
100,000 (b) Sun Microsystems, Inc. 4,762,500
------------
Total 149,066,750
------------
UTILITIES--1.4%
103,800 AT&T Corp. 6,318,825
30,000 Central & SouthWest Corp. 804,375
40,000 SBC Communications, Inc. 3,025,000
------------
Total 10,148,200
------------
TOTAL COMMON STOCKS
(identified cost $317,394,839) 682,650,089
------------
(A) REPURCHASE AGREEMENT--4.5%
$32,275,400 Cantor Fitzgerald
Securities, 5.58%, dated
2/27/1998, due 3/2/1998 (at
amortized cost) 32,275,400
------------
TOTAL INVESTMENTS
(identified cost $349,670,239) $714,925,489
============
(See Notes to Portfolios of Investments)
<PAGE>
DG INTERNATIONAL EQUITY FUND
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
SHARES VALUE
- -----------------------------------------------------------
COMMON STOCKS--90.7%
ARGENTINA--1.2%
ENERGY SOURCES--1.2%
9,800 YPF Sociedad Anonima, ADR $ 309,925
-----------
AUSTRALIA--0.7%
BANKING--0.7%
28,600 Westpac Banking Corp. Ltd.,
Sydney 197,646
-----------
BRAZIL--1.3%
TELECOMMUNICATIONS--1.3%
2,740 Telecomunicacoes Brasileiras
SA, ADR 335,479
-----------
DENMARK--0.9%
BANKING--0.9%
3,250 Unidanmark, Class A 235,984
-----------
FINLAND--0.9%
BANKING--0.5%
24,400 Merita Ltd, Class A 142,702
-----------
FOREST PRODUCTS & PAPER--0.4%
3,900 UPM--Kymmene OY 101,294
-----------
TOTAL FINLAND 243,996
-----------
FRANCE--12.5%
AUTOMOBILE--0.4%
1,900 Michelin, Class B 119,189
-----------
BANKING--1.1%
5,000 Banque Nationale de Paris 302,557
-----------
CHEMICALS--1.9%
10,700 Rhone-Poulenc, Class A 493,697
-----------
COMMERCIAL SERVICES--1.9%
3,000 Compagnie Generale des Eaux 472,581
-----------
ELECTRICAL & ELECTRONICS--1.4%
2,880 Alcatel Alsthom 375,065
-----------
ENERGY SOURCES--2.1%
4,780 Elf Aquitaine SA 544,691
-----------
INSURANCE--1.6%
4,500 AXA 435,830
-----------
MISCELLANEOUS MATERIALS & COMMODITIES--1.3%
2,400 Compagnie de St. Gobain 336,627
-----------
MULTI-INDUSTRY--0.8%
1,700 Lyonnaise des Eaux SA 224,468
-----------
TOTAL FRANCE 3,304,705
-----------
SHARES VALUE
- -----------------------------------------------------------
COMMON STOCKS (continued)
GERMANY--9.1%
AUTOMOBILE--1.4%
4,500 Daimler Benz AG $ 368,643
-----------
BANKING--1.6%
2,700 Deutsche Bank, AG 185,537
5,100 Dresdner Bank AG, Frankfurt 231,390
-----------
Total 416,927
-----------
CHEMICALS--1.4%
9,400 Hoechst AG 364,299
-----------
FOOD & HOUSEHOLD PRODUCTS--0.7%
4,200 (b)Metro AG 191,020
-----------
MACHINERY & ENGINEERING--2.2%
550 Mannesmann SA 330,494
1,190 Thyssen AG 262,083
-----------
Total 592,577
-----------
UTILITIES--ELECTRICAL & GAS--1.8%
870 Viag AG 470,983
-----------
TOTAL GERMANY 2,404,449
-----------
GREECE--1.1%
TELECOMMUNICATIONS--1.1%
15,000 Hellenic Telecommunications
Organization 297,422
-----------
HONG KONG--2.1%
BANKING--1.1%
10,400 HSBC Holdings PLC 300,885
-----------
DIVERSIFIED OPERATIONS--0.5%
59,000 Wharf Holdings Ltd. 123,067
-----------
MULTI-INDUSTRY--0.5%
20,500 Swire Pacific Ltd., Class A 123,384
-----------
TOTAL HONG KONG 547,336
-----------
ITALY--4.6%
AUTOMOBILE--0.9%
64,200 Fiat SPA 225,918
-----------
BANKING--1.3%
88,000 Credito Italiano 338,225
-----------
ENERGY SOURCES--0.8%
35,700 Eni SPA 208,714
-----------
TELECOMMUNICATIONS--1.6%
89,400 Telecom Italia SpA 434,384
-----------
TOTAL ITALY 1,207,241
-----------
(See Notes to Portfolios of Investments)
<PAGE>
DG INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
SHARES VALUE
- -----------------------------------------------------------
COMMON STOCKS (continued)
JAPAN--14.9%
APPLIANCES & HOUSEHOLD
DURABLES--1.3%
24,000 Matsushita Electric
Industrial Co. $ 350,198
-----------
AUTOMOBILE--1.0%
8,000 Honda Motor Co. Ltd. 277,240
-----------
BANKING--1.3%
49,000 Sumitomo Trust & Banking 349,722
-----------
BUILDING MATERIALS &
COMPONENTS--0.7%
28,000 Sekisui Chemical Co. 178,303
-----------
ELECTRICAL & ELECTRONICS--1.9%
9,000 Omron Corp. 145,599
4,200 Sony Corp. 379,699
-----------
Total 525,298
-----------
FINANCIAL SERVICES--2.6%
5,600 Orix Corp 408,565
4,940 Promise Co. Ltd. 276,577
-----------
Total 685,142
-----------
INSURANCE--0.1%
3,000 Mitsui Marine & Fire
Insurance Co. 16,749
-----------
MERCHANDISING--1.4%
6,000 Ito-Yokado Co., Ltd. 328,311
180 Ito-Yokado Co., Ltd., ADR 39,060
-----------
Total 367,371
-----------
OFFICE EQUIPMENT--0.9%
23,000 Ricoh Co. Ltd. 246,233
-----------
RECREATION, OTHER CONSUMER
GOODS--1.2%
3,400 Nintendo Corp. Ltd. 312,768
-----------
TELECOMMUNICATIONS--1.4%
39 Nippon Telegraph & Telephone
Corp. 358,763
-----------
TOBACCO--1.1%
39 (d)Japan Tobacco, Inc. 287,320
-----------
TOTAL JAPAN 3,955,107
-----------
KOREA--1.2%
APPLIANCES & HOUSEHOLD
DURABLES--1.2%
10,000 (b)(d)Samsung Electronics
Co., GDR 326,000
-----------
SHARES VALUE
- -----------------------------------------------------------
COMMON STOCKS (continued)
MALAYSIA--0.2%
LEISURE & TOURISM--0.2%
15,000 Genting Berhad $ 49,526
-----------
MEXICO--2.1%
BANKING--0.9%
100,000 Grupo Financiero Banamex
Accivel, Class B 251,524
-----------
BEVERAGE & TOBACCO--1.2%
8,500 Pan American Beverage, Class
A 309,719
-----------
TOTAL MEXICO 561,243
-----------
NETHERLANDS--3.4%
APPLIANCES & HOUSEHOLD
DURABLES--1.2%
4,100 Philips Electronics N.V. 318,863
-----------
BEVERAGE & TOBACCO--0.9%
1,300 Heineken NV 241,503
-----------
ENERGY SOURCES--0.4%
2,100 Royal Dutch Petroleum Co.,
ADR 114,056
-----------
TELECOMMUNICATIONS--0.9%
4,900 Koninklijke PTT Nederland NV 246,863
-----------
TOTAL NETHERLANDS 921,285
-----------
PHILIPPINES--0.8%
BANKING--0.8%
100,000 (b)Philippine National Bank 204,903
-----------
SINGAPORE--1.5%
BANKING--0.3%
17,000 United Overseas Bank Ltd. 92,317
-----------
PAPER PRODUCTS--1.2%
26,000 Asia Pulp & Paper Co. Ltd.,
ADR 310,375
-----------
TOTAL SINGAPORE 402,692
-----------
SOUTH AFRICA--1.2%
BUILDING MATERIALS &
COMPONENTS--1.2%
33,159 Barlow Ltd. 310,014
-----------
SPAIN--2.6%
BANKING--1.3%
4,600 Argentaria SA 342,891
-----------
TELECOMMUNICATIONS--1.3%
10,400 Telefonica de Espana 357,851
-----------
TOTAL SPAIN 700,742
-----------
(See Notes to Portfolios of Investments)
<PAGE>
DG INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
SHARES VALUE
- -----------------------------------------------------------
COMMON STOCKS (continued)
SWEDEN--3.7%
APPLIANCES & HOUSEHOLD
DURABLES--0.9%
3,300 Electrolux AB, Class B $ 251,672
-----------
BANKING--1.9%
22,200 (b)Nordbanken Holding AB 140,164
8,100 Svenska Handelsbanken,
Stockholm 346,846
-----------
Total 487,010
-----------
HEALTH & PERSONAL CARE--0.9%
12,600 Astra AB, Class B 246,534
-----------
TOTAL SWEDEN 985,216
-----------
SWITZERLAND--7.5%
BANKING--1.2%
1,760 Credit Suisse Group 318,036
-----------
BUILDING MATERIALS &
COMPONENTS--0.9%
245 Holderbank Financiere Glaris
AG, Class B 238,902
-----------
BUSINESS & PUBLIC SERVICES--1.0%
143 SGS Societe Generale de
Surveillance Holding SA 263,280
-----------
FOOD & HOUSEHOLD PRODUCTS--0.7%
112 Nestle SA 196,277
-----------
HEALTH & PERSONAL CARE--1.1%
165 Novartis AG 301,197
-----------
INSURANCE--1.9%
900 Zurich
Versicherungsgesellschaft 490,965
-----------
RETAIL--0.7%
305 Societe Suisse pour la
Microelectronique et
l'Horlogerie 191,756
-----------
TOTAL SWITZERLAND 2,000,413
-----------
UNITED KINGDOM--17.2%
AEROSPACE & MILITARY
TECHNOLOGY--2.0%
16,400 British Aerospace 515,523
-----------
AUTOMOBILE--1.4%
97,700 (b)LucasVarity PLC 376,648
-----------
BANKING--1.5%
21,300 National Westminster Bank,
PLC, London 393,379
-----------
<PAGE>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------
COMMON STOCKS (continued)
UNITED KINGDOM (continued)
BEVERAGES--1.2%
31,968 Diageo PLC $ 327,327
-----------
BROADCASTING & PUBLISHING--0.4%
36,800 Mirror Group PLC 103,068
-----------
CHEMICALS--0.9%
13,100 Imperial Chemical Industries,
PLC 239,239
-----------
ENERGY SOURCES--1.3%
24,700 British Petroleum Co. PLC 341,010
-----------
FOOD & HOUSEHOLD PRODUCTS--3.0%
25,600 Cadbury Schweppes PLC 325,810
20,200 Prudential Corp. PLC 303,176
19,000 Unilever PLC 172,164
-----------
Total 801,150
-----------
LEISURE & TOURISM--0.9%
15,800 Granada Group PLC 247,030
-----------
MULTI-INDUSTRY--1.3%
130,100 BTR PLC 345,623
-----------
RECREATION, OTHER CONSUMER
GOODS--0.7%
21,400 EMI Group PLC 182,629
-----------
TOBACCO--1.3%
34,600 B.A.T. Industries PLC 345,441
-----------
UTILITIES--ELECTRICAL & GAS--1.3%
34,200 National Power Co. PLC 354,689
-----------
TOTAL UNITED KINGDOM 4,572,756
-----------
TOTAL COMMON STOCKS
(identified cost $22,675,623) 24,074,080
-----------
PREFERRED STOCKS--1.1%
BRAZIL--1.1%
BEVERAGE & TOBACCO--1.1%
389,000 Cia Cervejaria Brahma,
Preference (identified cost
$268,422) 292,568
-----------
(A) REPURCHASE AGREEMENT--7.2%
$1,919,000 State Street Bank and Trust
Co., 5.56%, dated 2/27/1998,
due 3/2/1998 (at amortized
cost) 1,919,000
-----------
TOTAL INVESTMENTS (identified
cost $24,863,045) $26,285,648
===========
(See Notes to Portfolios of Investments)
<PAGE>
DG OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
SHARES VALUE
- ------------------------------------------------------------
COMMON STOCKS--90.5%
BUSINESS EQUIPMENT & SERVICES--5.5%
250,000 (b) Comforce Corp. $ 2,140,625
122,000 (b) Dycom Industries, Inc. 3,111,000
295,000 (b) Employee Solutions, Inc. 1,548,750
------------
Total 6,800,375
------------
CAPITAL GOODS--6.3%
100,000 (b) Denali, Inc. 1,562,500
64,700 (b) Halter Marine Group,
Inc. 1,269,738
152,000 (b) ITEQ, Inc. 1,805,000
129,700 (b) Terex Corp. 3,096,588
------------
Total 7,733,826
------------
CAPITAL GOODS/ELECTRONICS--2.0%
55,550 Kuhlman Corp. 2,451,144
------------
COMPUTERS-PERIPHERALS &
SOFTWARE--1.0%
30,700 (b) Insight Enterprises,
Inc. 1,220,325
------------
CONSUMER DURABLES--2.0%
93,000 (b) Speedway Motorsports,
Inc. 2,499,375
------------
CONSUMER NON-DURABLES--1.4%
160,000 (b) Hollywood Entertainment
Corp. 1,760,000
------------
CONSUMER SERVICES--3.6%
115,000 (b) Mobile Telecommunication
Technologies Corp. 2,587,500
78,000 (b) SCP Pool Corp. 1,784,250
------------
Total 4,371,750
------------
ENERGY/OIL-DOMESTIC--1.6%
56,000 (b) Nuevo Energy Co. 2,009,000
------------
ENERGY/OIL FIELD SERVICES--6.5%
67,000 (b) Friede Goldman
International, Inc. 2,035,125
70,000 (b) Gulf Island Fabrication,
Inc. 1,478,750
63,300 (b) J. Ray McDermott, S.A. 2,690,250
17,900 (b) Oceaneering
International, Inc. 296,469
166,000 (b) Superior Energy
Services, Inc. 1,473,250
------------
Total 7,973,844
------------
SHARES VALUE
- ------------------------------------------------------------
COMMON STOCKS (continued)
ENERGY/OIL SERVICES--3.7%
72,500 (b) Bellwether Exploration
Co. $ 661,562
200,000 (b) EEX Corp. 1,712,500
45,500 Snyder Oil Corp. 847,438
97,000 (b) TransCoastal Marine
Services, Inc. 1,297,375
------------
Total 4,518,875
------------
FINANCIAL SERVICES--5.8%
50,430 AmerUs Life Holdings, Inc.,
Class A 1,645,279
107,200 (b) IMC Mortgage Co. 1,259,600
63,000 T. Rowe Price Associates 4,181,625
------------
Total 7,086,504
------------
FOOD & RELATED--0.3%
30,400 Sanderson Farms, Inc. 330,600
------------
HEALTHCARE--9.9%
34,000 (b) Arterial Vascular
Engineering, Inc. 2,783,750
100,000 (b) Cyberonics, Inc. 2,412,500
86,000 (b) Imnet Systems Inc. 1,800,625
122,000 (b) Neotherapeutics, Inc. 1,159,000
150,000 (b) ProMedCo Management Co. 1,893,750
63,000 (b) Res-Care, Inc. 2,110,500
------------
Total 12,160,125
------------
LEISURE--2.0%
110,000 (b) Fairfield Communities,
Inc. 2,461,250
------------
RESTAURANTS--9.7%
120,000 Apple South, Inc. 1,635,000
60,000 (b) Casa Ole Restaurants,
Inc. 255,000
170,000 (b) Foodmaker, Inc. 3,091,875
98,000 (b) Outback Steakhouse, Inc. 3,503,500
90,000 (b) ShowBiz Pizza Time, Inc. 2,610,000
29,000 (b) Sonic Corp. 848,250
------------
Total 11,943,625
------------
RETAIL/CONSUMER--1.7%
58,000 (b) I.C. Isaacs & Co., Inc. 648,875
139,000 (b) Ugly Duckling Corp. 1,390,000
------------
Total 2,038,875
------------
(See Notes to Portfolios of Investments)
<PAGE>
DG OPPORTUNITY FUND
- --------------------------------------------------------------------------------
SHARES VALUE
- ------------------------------------------------------------
COMMON STOCKS (continued)
TECHNOLOGY/COMMUNICATION--4.9%
135,000 (b) Cerprobe Corp. $ 2,927,812
97,500 (b) Cree Research, Inc. 1,584,375
53,000 (b) Semtech Corp. 1,523,750
------------
Total 6,035,937
------------
TECHNOLOGY/COMPUTERS--14.4%
30,000 (b) ACT Networks, Inc. 296,250
192,500 (b) Compucom System, Inc. 1,696,406
230,000 (b) Datastream Systems, Inc. 4,341,250
80,000 (b) Data Dimensions, Inc. 1,090,000
96,000 (b) Datatec Systems, Inc. 432,000
120,000 (b) Harbinger Corp. 3,960,000
163,000 (b) Inso Corp. 2,282,000
100,000 (b) MetaCreations Corp. 853,125
138,000 (b) Microage, Inc. 1,776,750
87,500 (b) Micrografx, Inc. 984,375
------------
Total 17,712,156
------------
TECHNOLOGY/TELECOMMUNI-
CATIONS--5.6%
30,000 (b) Boston Communications
Group, Inc. 266,250
89,000 (b) Premiere Technologies,
Inc. 2,792,375
70,000 (b) SmarTalk Teleservices,
Inc. 2,353,750
64,500 (b) World Access, Inc. 1,451,250
------------
Total 6,863,625
------------
<PAGE>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------
COMMON STOCKS (continued)
TRANSPORTATION--2.6%
25,000 (b) AirTran Holdings, Inc. $ 145,312
76,000 Hunt (J.B.) Transportation
Services, Inc. 2,033,000
38,000 (b)M.S. Carriers, Inc. 1,002,250
------------
Total 3,180,562
------------
TOTAL COMMON STOCKS
(identified cost $93,085,284) 111,151,773
------------
(A) REPURCHASE AGREEMENT--13.2%
$16,223,500 Cantor Fitzgerald
Securities, 5.58%, dated
2/27/1998, due 3/2/1998 (at
net asset value) 16,223,500
------------
TOTAL INVESTMENTS
(identified cost $109,308,784) $127,375,273
============
(See Notes to Portfolios of Investments)
DG LIMITED TERM GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------
CORPORATE BONDS--13.2%
CHEMICALS--1.7%
$1,000,000 Du Pont (E.I.) de Nemours &
Co., 6.500%, 9/1/2002 $ 1,020,660
-----------
HEALTHCARE--2.1%
1,250,000 Upjohn Co., 5.875%, 4/15/2000 1,251,413
-----------
PHARMACEUTICALS--1.8%
1,000,000 American Home Products Corp.,
7.700%, 2/15/2000 1,031,670
-----------
PRINTING & PUBLISHING--1.7%
1,000,000 Gannett Co., Inc., 5.250%,
3/1/1998 1,000,590
-----------
UTILITIES--5.9%
1,500,000 Northern States Power Co.,
5.500%, 2/1/1999 1,498,455
1,000,000 Pacific Gas & Electric Co.,
5.375%, 8/1/1998 999,800
1,000,000 Southern California Edison
Co., 5.600%, 12/15/1998 999,820
-----------
Total 3,498,075
-----------
TOTAL CORPORATE BONDS
(identified cost $7,625,682) 7,802,408
-----------
GOVERNMENT AGENCIES--18.6%
FEDERAL FARM CREDIT BANK--6.8%
2,000,000 5.480%, 5/1/1998 2,000,640
2,000,000 5.550%, 3/2/1998 2,000,000
-----------
Total 4,000,640
-----------
FEDERAL HOME LOAN BANK--5.0%
2,000,000 5.760%, 7/28/2000 1,993,620
1,000,000 6.275%, 8/13/2001 1,003,980
-----------
Total 2,997,600
-----------
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------
GOVERNMENT AGENCIES (continued)
FEDERAL HOME LOAN MORTGAGE
CORPORATION--5.1%
$2,000,000 6.130%, 5/19/2000 $ 2,003,200
1,000,000 6.790%, 5/24/2001 1,011,080
-----------
Total 3,014,280
-----------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION--1.7%
1,000,000 6.050%, 10/20/2000 1,004,020
-----------
TOTAL GOVERNMENT AGENCIES
(identified cost $10,992,344) 11,016,540
-----------
U.S. TREASURY NOTES--67.2%
6,000,000 5.125%, 3/31/1998 6,000,420
5,000,000 5.625%, 11/30/2000 5,008,550
2,000,000 6.125%, 7/31/2000 2,025,280
3,000,000 6.250%, 10/31/2001 3,063,690
5,000,000 6.250%, 8/31/2000 5,079,450
4,000,000 6.625%, 7/31/2001 4,127,480
4,000,000 6.750%, 6/30/1999 4,062,320
4,000,000 7.125%, 10/15/1998 4,039,880
2,000,000 7.500%, 10/31/1999 2,060,420
4,000,000 7.500%, 11/15/2001 4,250,920
-----------
TOTAL U.S. TREASURY NOTES
(identified cost $39,229,453) 39,718,410
-----------
(A) REPURCHASE AGREEMENT--1.1%
649,700 Cantor Fitzgerald Securities,
5.580%, dated 2/27/1998, due
3/2/1998 (at amortized cost) 649,700
-----------
TOTAL INVESTMENTS
(identified cost $58,497,179) $59,187,058
===========
(See Notes to Portfolios of Investments)
DG GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------
CORPORATE BONDS--6.4%
BANKING--0.4%
$ 1,000,000 NationsBank Corp., 5.375%,
4/15/2000 $ 988,100
------------
CONSUMER NON-DURABLES--0.7%
889,000 Anheuser-Busch Cos., Inc.,
6.900%, 10/1/2002 895,854
1,000,000 Heinz (H.J.) Co., 6.750%,
10/15/1999 1,014,530
------------
Total 1,910,384
------------
FINANCIAL SERVICES--1.5%
2,000,000 Private Export Funding
Corp., 6.310%, 9/30/2004 2,047,242
2,000,000 Private Export Funding
Corp., 6.490%, 7/15/2007 2,085,242
------------
Total 4,132,484
------------
HEALTHCARE--0.4%
1,000,000 Upjohn Co., 5.875%,
4/15/2000 1,001,130
------------
PHARMACEUTICALS-HEALTHCARE--0.5%
1,400,000 American Home Products
Corp., 7.700%, 2/15/2000 1,444,338
------------
PRINTING & PUBLISHING--0.5%
1,500,000 Gannett Co., Inc., 5.250%,
3/1/1998 1,500,885
------------
RAW MATERIALS--0.5%
889,000 Du Pont (E.I.) de Nemours &
Co., 6.750%, 10/15/2002 916,408
437,000 Du Pont (E.I.) de Nemours &
Co., 9.150%, 4/15/2000 464,837
------------
Total 1,381,245
------------
TECHNOLOGY SERVICES--0.2%
437,000 Texas Instruments, Inc.,
9.250%, 6/15/2003 496,161
------------
UTILITIES--1.7%
1,000,000 Alabama Power Co., 6.750%,
2/1/2003 1,013,880
1,500,000 Northern States Power Co.,
5.500%, 2/1/1999 1,498,455
1,000,000 Pacific Gas & Electric Co.,
6.250%, 3/1/2004 1,009,760
(See Notes to Portfolios of Investments)
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------
CORPORATE BONDS (continued)
UTILITIES (continued)
$ 1,000,000 Southern California Edison
Co., 5.625%, 10/1/2002 $ 984,680
------------
Total 4,506,775
------------
TOTAL CORPORATE BONDS
(identified cost $16,917,984) 17,361,502
------------
GOVERNMENT AGENCIES--7.0%
FEDERAL FARM CREDIT BANK--3.0%
4,000,000 5.430%, 9/1/1998 4,000,520
4,000,000 5.600%, 6/1/1998 3,999,068
------------
Total 7,999,588
------------
FEDERAL HOME LOAN BANK--2.5%
2,000,000 5.760%, 7/28/2000 1,993,620
3,000,000 5.790%, 2/18/2000 2,991,360
2,000,000 6.275%, 8/13/2001 2,007,960
------------
Total 6,992,940
------------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION--0.4%
1,000,000 6.820%, 12/13/2006 1,014,440
------------
STUDENT LOAN MARKETING
ASSOCIATION--1.1%
3,000,000 5.810%, 1/27/2000 2,994,390
------------
TOTAL GOVERNMENT AGENCIES
(identified cost $18,995,625) 19,001,358
------------
U.S. TREASURY OBLIGATIONS--73.1%
TREASURY BONDS--21.2%
10,000,000 6.750%, 8/15/2026 11,044,700
10,000,000 6.875%, 8/15/2025 11,186,000
9,000,000 7.125%, 2/15/2023 10,305,720
7,000,000 7.250%, 8/15/2022 8,113,980
7,000,000 7.500%, 11/15/2016 8,190,420
7,000,000 7.625%, 11/15/2022 8,455,090
------------
Total 57,295,910
------------
TREASURY NOTES--51.9%
8,000,000 5.750%, 10/31/2000 8,037,600
10,000,000 5.750%, 8/15/2003 10,062,100
10,000,000 5.875%, 11/15/2005 10,120,000
9,000,000 6.125%, 5/15/1998 9,014,670
10,000,000 6.125%, 7/31/2000 10,126,400
9,000,000 6.500%, 8/15/2005 9,448,920
15,000,000 7.000%, 7/15/2006 16,276,950
DG GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------
U.S. TREASURY OBLIGATIONS (continued)
TREASURY NOTES (continued)
$ 9,000,000 7.125%, 10/15/1998 $ 9,089,730
10,000,000 7.500%, 10/31/1999 10,302,100
10,000,000 7.500%, 5/15/2002 10,698,200
10,000,000 7.750%, 1/31/2000 10,393,300
9,000,000 7.750%, 2/15/2001 9,527,310
7,000,000 7.875%, 8/15/2001 7,494,830
9,000,000 8.000%, 5/15/2001 9,627,660
------------
Total $140,219,770
------------
TOTAL U.S. TREASURY
OBLIGATIONS (identified cost
$189,383,825) 197,515,680
------------
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------
(A)REPURCHASE AGREEMENT--14.0%
$37,774,400 Cantor Fitzgerald
Securities, 5.580%, dated
2/27/1998, due 3/2/1998 (at
amortized cost) $ 37,774,400
------------
TOTAL INVESTMENTS
(identified cost $263,071,834) $271,652,940
============
(See Notes to Portfolios of Investments)
DG MUNICIPAL INCOME FUND
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
PRINCIPAL CREDIT
AMOUNT RATING(C) VALUE
- ----------------------------------------------------------------
LONG-TERM MUNICIPAL
SECURITIES--95.1%
ALABAMA--3.4%
$ 500,000 Huntsville, AL, GO LT
Warrants (Series A),
6.00% (Original Issue
Yield: 6.325%),
11/1/2012 AA $ 540,950
1,000,000 Jefferson County, AL,
Sewer Revenue Bonds,
6.00% (Original Issue
Yield: 6.30%),
9/1/2013 NR 1,096,460
-----------
Total 1,637,410
-----------
ARIZONA--2.1%
1,000,000 Phoenix, AZ, GO UT
Refunding Bonds
(Series C), 4.90%
(Original Issue
Yield: 5.00%),
7/1/2008 AA+ 1,031,030
-----------
CALIFORNIA--2.2%
1,000,000 California State, GO
UT Public Improvement
Bonds, 5.75%,
5/1/2007 A+ 1,086,410
-----------
CONNECTICUT--2.2%
1,000,000 Connecticut State, GO
UT Public Improvement
Bonds (Series C),
5.80%, 8/15/2008 AA- 1,083,820
-----------
FLORIDA--8.6%
1,000,000 Broward County, FL
School District, GO
UT Refunding Bonds,
5.60% (Original Issue
Yield: 5.80%),
2/15/2007 AA- 1,071,900
1,000,000 Florida State Board
of Education
Administration, GO UT
Refunding Bonds
(Series D), 5.00%
(Original Issue
Yield: 5.15%),
6/1/2015 AA+ 1,003,280
PRINCIPAL CREDIT
AMOUNT RATING(C) VALUE
- ----------------------------------------------------------------
LONG-TERM MUNICIPAL
SECURITIES (continued)
FLORIDA (continued)
$1,000,000 Jacksonville, FL
Electric Authority,
Refunding Revenue
Bonds (Issue 2-
Series 8), 5.50% (St.
John's River)/
(Original Issue
Yield: 5.582%),
10/1/2013 AA $ 1,035,430
1,000,000 St. Petersburg, FL
Public Utility, Water
& Sewer Revenue
Bonds, 5.50%,
10/1/2009 AA- 1,060,380
-----------
Total 4,170,990
-----------
GEORGIA--2.1%
1,000,000 Fulton County, GA, GO
UT Refunding Bonds,
4.60%, 1/1/2001 AA 1,019,170
-----------
HAWAII--3.3%
500,000 Hawaii State, GO UT
Bonds (Series CB),
5.75% (Original Issue
Yield: 5.95%),
1/1/2008 A+ 549,445
1,000,000 Honolulu, HI City &
County, GO UT
Improvement Refunding
Bonds (Series B),
5.50% (Original Issue
Yield: 5.70%),
10/1/2011 AA 1,074,440
-----------
Total 1,623,885
-----------
ILLINOIS--3.3%
1,000,000 Illinois State, GO UT
Bonds, 5.60%
(Original Issue
Yield: 5.65%),
4/1/2008 AA 1,073,270
500,000 Illinois State, GO UT
Refunding Bonds,
5.875% (Original
Issue Yield: 6.05%),
6/1/2011 AA 537,550
-----------
Total 1,610,820
-----------
(See Notes to Portfolios of Investments)
DG MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
PRINCIPAL CREDIT
AMOUNT RATING(C) VALUE
- ----------------------------------------------------------------
LONG-TERM MUNICIPAL
SECURITIES (continued)
INDIANA--1.1%
$ 500,000 Indianapolis, IN,
Local Public
Improvement Revenue
Bonds, 6.00%
(Original Issue
Yield: 6.40%),
7/1/2010 AA- $ 537,185
-----------
LOUISIANA--1.1%
500,000 Louisiana PFA,
Hospital Refunding
Revenue Bonds (Series
C), 6.05% (Our Lady
of Lake
Regional)/(MBIA
Insurance Corporation
INS)/(Original Issue
Yield: 6.15%),
12/1/2008 AAA 533,165
-----------
MARYLAND--2.2%
1,000,000 Maryland State, GO UT
Bonds (Series BB),
5.50%, 6/1/2009 AAA 1,072,510
-----------
MASSACHUSETTS--3.3%
450,000 Commonwealth of
Massachusetts, GO UT
Bonds (Series A),
6.00% (FSA INS)/
(Original Issue
Yield: 7.618%),
6/1/2011 AAA 477,158
1,000,000 Commonwealth of
Massachusetts, GO UT
Refunding Revenue
Bonds (Series A),
6.25%, 7/1/2003 1,099,670
-----------
Total 1,576,828
-----------
MINNESOTA--2.2%
1,000,000 Minnesota State, GO
UT, 5.00% (Original
Issue Yield: 5.15%),
11/1/2008 AAA 1,041,370
-----------
PRINCIPAL CREDIT
AMOUNT RATING(C) VALUE
- ----------------------------------------------------------------
LONG-TERM MUNICIPAL
SECURITIES (continued)
MISSISSIPPI--13.2%
$1,000,000 Hinds County, MS, GO
UT Refunding Bonds,
5.50% (MBIA Insurance
Corporation
INS)/(Original Issue
Yield: 5.75%),
3/1/2008 AAA $ 1,083,660
1,125,000 Jackson, MS, GO UT
Refunding Bonds
(Series A), 5.85%
(MBIA Insurance
Corporation INS),
5/1/2006 AAA 1,190,070
1,000,000 Madison County, MS
School District, GO
UT Refunding Bonds,
5.10% (AMBAC
INS)/(Original Issue
Yield: 5.10%),
6/1/2008 AAA 1,033,900
1,000,000 Mississippi Hospital
Equipment &
Facilities Authority,
Refunding Revenue
Bonds, 5.50% (North
Mississippi Health
Services-1)/(AMBAC
INS)/(Original Issue
Yield: 5.93%),
5/15/2009 AAA 1,052,160
1,000,000 Mississippi State, GO
UT Bonds, 5.125%
(Original Issue
Yield: 5.30%),
12/1/2011 AA 1,027,340
1,000,000 Tupelo, MS Public
School District, GO
UT Refunding Bonds,
5.00% (AMBAC
INS)/(Original Issue
Yield: 5.10%),
12/1/2007 AAA 1,033,560
-----------
Total 6,420,690
-----------
MISSOURI--2.1%
1,000,000 Missouri State, Water
Pollution Control
Refunding Bonds
(Series B), 5.00%
(Original Issue
Yield: 5.60%),
8/1/2010 AAA 1,018,230
-----------
(See Notes to Portfolios of Investments)
<PAGE>
DG MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
PRINCIPAL CREDIT
AMOUNT RATING(C) VALUE
- ----------------------------------------------------------------
LONG-TERM MUNICIPAL
SECURITIES (continued)
MONTANA--2.1%
$1,000,000 Montana State, GO UT
Bonds (Series A),
4.875% (Long Range
Building Program)/
(Original Issue
Yield: 4.95%),
8/1/2009 AA- $ 1,021,380
-----------
NEVADA--3.2%
500,000 Las Vegas Valley, NV
Water District, GO LT
Refunding Revenue
Bonds, 5.75% (MBIA
Insurance Corporation
INS)/(Original Issue
Yield: 5.90%),
9/1/2008 AAA 529,860
1,000,000 Nevada State,
(Project R-5) GO LT
Bonds (Series A),
4.90% (Original Issue
Yield: 5.00%),
11/1/2007 AA 1,033,540
-----------
Total 1,563,400
-----------
NEW JERSEY--1.1%
500,000 New Jersey State, GO
UT Refunding Bonds
(Series D), 5.90%
(Original Issue
Yield: 6.05%),
2/15/2008 AA+ 540,950
-----------
NORTH CAROLINA--3.3%
1,000,000 North Carolina State,
GO UT Bonds, 5.10%,
3/1/2003 AAA 1,051,350
500,000 Wake County, NC, GO
UT Bonds, 4.90%,
3/1/2005 AAA 522,920
-----------
Total 1,574,270
-----------
NORTH DAKOTA--1.1%
500,000 North Dakota State
Building Authority,
Lease Revenue Bonds
(Series A), 6.00%
(Original Issue
Yield: 6.05%),
6/1/2010 AAA 540,900
-----------
<PAGE>
PRINCIPAL CREDIT
AMOUNT RATING(C) VALUE
- ----------------------------------------------------------------
LONG-TERM MUNICIPAL
SECURITIES (continued)
OREGON--2.1%
$1,000,000 Portland, OR, GO UT
Refunding Revenue
Bonds, 4.90%
(Original Issue
Yield: 5.00%),
10/1/2007 NR $ 1,026,690
-----------
RHODE ISLAND--1.1%
500,000 Providence, RI, GO UT
Bonds, 5.90% (MBIA
Insurance Corporation
INS)/ (Original Issue
Yield: 6.05%),
1/15/2009 AAA 536,445
-----------
TENNESSEE--2.1%
1,000,000 Memphis, TN, GO UT
Refunding Bonds,
4.90% (Original Issue
Yield: 5.05%),
8/1/2006 AA 1,032,620
-----------
TEXAS--8.8%
500,000 Corpus Christi, TX,
GO UT Refunding
Bonds, 6.00% (FGIC
INS)/(Original Issue
Yield: 6.15%),
3/1/2010 AAA 535,390
500,000 El Paso, TX
Independent School
District, GO UT
Refunding Bonds
(Series A), 5.75%
(PSFG INS)/ (Original
Issue Yield: 6.15%),
7/1/2007 AAA 527,610
500,000 Harris County, TX
Flood Control
District, GO LT Bonds
(Series B), 6.20%
(Original Issue
Yield: 6.25%),
10/1/2002 (@100) AA 543,435
1,000,000 Houston, TX
Independent School
District, GO UT
Refunding Bonds,
5.50% (PSFG INS)/
(Original Issue
Yield: 5.55%),
8/15/2008 AAA 1,049,940
(See Notes to Portfolios of Investments)
<PAGE>
DG MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
PRINCIPAL CREDIT
AMOUNT RATING(C) VALUE
- ----------------------------------------------------------------
LONG-TERM MUNICIPAL
SECURITIES (continued)
TEXAS (continued)
$ 500,000 Texas State Public
Finance Authority, GO
UT Refunding Bonds
(Series A), 5.90%
(Original Issue
Yield: 6.00%),
10/1/2011 AA $ 548,285
1,000,000 Texas State, GO UT
Water Development
Bonds, 5.20%
(Original Issue
Yield: 5.25%),
8/1/2010 AA 1,040,500
-----------
Total 4,245,160
-----------
VIRGINIA--4.3%
1,000,000 Fairfax County, VA,
GO UT Bonds (Series
A), 5.50% (Original
Issue Yield: 5.70%),
6/1/2008 AAA 1,058,860
500,000 Virginia Commonwealth
Transportation Board,
Refunding Revenue
Bonds, 5.125%
(Northern Virginia
Transportation
District)/(Original
Issue Yield: 5.25%),
5/15/2017 AA 501,060
500,000 Virginia State
Transportation Board,
Refunding Revenue
Bonds, 6.00%
(Original Issue
Yield: 6.45%),
4/1/2010 AA 539,195
-----------
Total 2,099,115
-----------
WASHINGTON--9.1%
1,000,000 King County, WA
Library System, UT GO
Bonds, 6.15%,
12/1/2010 AA- 1,106,090
500,000 King County, WA, GO
UT Refunding Bonds
(Series A), 6.00%,
12/1/2010 AA+ 541,340
500,000 Port of Seattle, WA,
Revenue Bonds, 6.25%
(Original Issue
Yield: 6.566%),
11/1/2010 AA- 535,195
<PAGE>
PRINCIPAL CREDIT
AMOUNT RATING
OR SHARES (C) VALUE
- ----------------------------------------------------------------
LONG-TERM MUNICIPAL
SECURITIES (continued)
WASHINGTON (continued)
$ 650,000 Tacoma, WA Electric
System, Refunding
Revenue Bonds, 6.25%
(AMBAC INS)/
(Original Issue
Yield: 6.60%),
1/1/2011 AAA $ 704,743
500,000 Washington State, GO
LT Refunding Revenue
Bonds (Series R92-B),
6.25% (Original Issue
Yield: 6.80%),
9/1/2009 AA+ 532,295
1,000,000 Washington State, GO
UT Refunding Bonds
(Series R-96B), 5.00%
(Original Issue
Yield: 5.45%),
7/1/2010 AA+ 1,022,530
-----------
Total 4,442,193
-----------
WISCONSIN--4.3%
500,000 Green Bay, WI Area
Public School
District, GO UT Bonds
(Series F), 6.00%
(Original Issue
Yield: 6.10%),
4/1/2010 NR 528,290
500,000 Wisconsin State, GO
UT Bonds (Series A),
6.30% (Original Issue
Yield: 6.60%),
5/1/2012 AA 542,505
1,000,000 Wisconsin State, GO
UT Bonds (Series C),
5.25% (Original Issue
Yield: 5.45%),
5/1/2011 AA 1,034,170
-----------
Total 2,104,965
-----------
TOTAL LONG-TERM MUNICIPALS
(identified cost
$43,592,302) 46,191,601
-----------
MUTUAL FUND SHARES--3.2%
1,523,612 Dreyfus Tax Exempt
Cash Management
(at net asset value) 1,523,612
-----------
TOTAL INVESTMENTS
(identified cost
$45,115,914) $47,715,213
===========
(See Notes to Portfolios of Investments)
<PAGE>
NOTES TO PORTFOLIOS OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) The repurchase agreement is fully collateralized by U.S. Treasury
obligations based on market prices at the date of the portfolio.
(b) Non-income producing security.
(c) Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current ratings are unaudited.
(d) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At February 28, 1998, these securities
amounted to $613,320 which represents 2.3% of net assets.
The following acronyms are used throughout the portfolios:
ADR -- American Depository Receipt
AMBAC -- American Municipal Bond Assurance Corporation
FGIC -- Financial Guaranty Insurance Company
FSA -- Financial Security Assurance
GDR -- Global Depository Receipt
GO -- General Obligation
INS -- Insured
LT -- Limited Tax
MBIA -- Municipal Bond Investors Assurance
PFA -- Public Facility Authority
PLC -- Public Limited Company
PSFG -- Permanent School Fund Guarantee
SA -- Support Agreement
SPA -- Standby Purchase Agreement
UT -- Unlimited Tax
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
COST OF NET
INVESTMENTS FOR UNREALIZED GROSS GROSS
FEDERAL TAX APPRECIATION UNREALIZED UNREALIZED
DG INVESTOR SERIES PURPOSES (DEPRECIATION) APPRECIATION DEPRECIATION TOTAL NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DG Equity Fund $349,670,239 $365,255,250 $367,411,612 $2,156,362 $715,630,667
DG International Equity
Fund 24,927,629 1,358,019 2,248,376 890,357 26,533,211
DG Opportunity Fund 109,308,784 18,066,489 25,490,965 7,424,476 122,871,510
DG Limited Term Government
Income Fund 58,497,179 689,879 764,812 74,933 59,136,926
DG Government Income Fund 263,071,834 8,581,106 9,959,695 1,378,589 270,403,564
DG Municipal Income Fund 45,115,914 2,599,299 2,603,524 4,225 48,578,607
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: The categories of investments are shown as a percentage of net assets at
February 28, 1998.
(See Notes which are an integral part of the Financial Statements)
f
<PAGE>
DG INVESTOR SERIES
STATEMENTS OF ASSETS AND LIABILITIES
FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DG DG
DG EQUITY INTERNATIONAL OPPORTUNITY
FUND EQUITY FUND FUND
------------ ------------- ------------
<S> <C> <C> <C>
ASSETS:
- ------------------------------------------------------------
Investments in repurchase agreements $ 32,275,400 $ 1,919,000 $ 16,223,500
- ------------------------------------------------------------
Investments in securities 682,650,089 24,366,648 111,151,773
- ------------------------------------------------------------ ----------- ------------ -----------
Total investments in securities, at value 714,925,489 26,285,648 127,375,273
- ------------------------------------------------------------
Income receivable 745,192 10,382 5,041
- ------------------------------------------------------------
Receivable for investments sold -- 525,978 2,045,078
- ------------------------------------------------------------
Receivable for shares sold 282,522 29,865 17,773
- ------------------------------------------------------------
Deferred organizational costs -- -- 6,420
- ------------------------------------------------------------
Deferred expenses -- -- 1,102
- ------------------------------------------------------------ ----------- ----------- ------------
Total assets 715,953,203 26,851,873 129,450,687
- ------------------------------------------------------------ ----------- ----------- ------------
LIABILITIES:
- ------------------------------------------------------------
Payable for investments purchased -- 243,665 6,514,035
- ------------------------------------------------------------
Payable for shares redeemed 197,260 -- 25,939
- ------------------------------------------------------------
Payable to bank -- 26,989 --
- ------------------------------------------------------------
Net payable for foreign exchange contracts purchased -- 1,399 --
- ------------------------------------------------------------
Payable for taxes withheld -- 2,096 --
- ------------------------------------------------------------
Accrued expenses 125,276 44,513 39,203
- ------------------------------------------------------------ ----------- ----------- ------------
Total liabilities 322,536 318,662 6,579,177
- ------------------------------------------------------------ ----------- ----------- ------------
NET ASSETS CONSIST OF:
- ------------------------------------------------------------
Paid in capital 344,394,053 25,371,801 97,575,114
- ------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments,
forward contracts and foreign currency translation 365,255,250 1,421,852 18,066,489
- ------------------------------------------------------------
Accumulated net realized gain (loss) on investments,
foreign currency transactions and forward contracts 5,543,250 (237,273) 7,229,907
- ------------------------------------------------------------
Undistributed net investment income
(distribution in excess of net investment loss) 438,114 (23,169) --
- ------------------------------------------------------------ ----------- ----------- ------------
Total Net Assets $715,630,667 $26,533,211 $122,871,510
- ------------------------------------------------------------ ----------- ----------- ------------
NET ASSET VALUE PER SHARE, and Redemption Proceeds Per Share
(net assets / shares outstanding) $ 23.01 $ 10.46 $ 15.84
- ------------------------------------------------------------ ----------- ----------- ------------
Offering Price Per Share** $ 23.84* $ 10.46 $ 16.41*
- ------------------------------------------------------------ ----------- ----------- ------------
Shares Outstanding 31,104,390 2,537,448 7,758,133
- ------------------------------------------------------------ ----------- ----------- ------------
Investments, at identified cost $349,670,239 $24,863,045 $109,308,784
- ------------------------------------------------------------ ----------- ----------- ------------
Investments, at tax cost $349,670,239 $24,927,629 $109,308,784
- ------------------------------------------------------------ ----------- ----------- ------------
* Computation of offering price: 100/96.5 of net asset value.
** See "What Shares Cost" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
</TABLE>
<PAGE>
DG INVESTOR SERIES
STATEMENTS OF ASSETS AND LIABILITIES
FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DG LIMITED
TERM DG
GOVERNMENT GOVERNMENT DG MUNICIPAL
INCOME FUND INCOME FUND INCOME FUND
----------- ------------ -------------
<S> <C> <C> <C>
ASSETS:
- ------------------------------------------------------------
Investments in repurchase agreements $ 649,700 $37,774,400 $ --
- ------------------------------------------------------------
Investments in securities 58,537,358 233,878,540 47,715,213
- ------------------------------------------------------------ ----------- ------------ -----------
Total investments in securities, at value 59,187,058 271,652,940 47,715,213
- ------------------------------------------------------------
Income receivable 1,013,104 2,574,933 672,284
- ------------------------------------------------------------
Receivable for investments sold -- -- --
- ------------------------------------------------------------
Receivable for shares sold -- 254,234 294,800
- ------------------------------------------------------------ ----------- ------------ -----------
Total assets 60,200,162 274,482,107 48,682,297
- ------------------------------------------------------------ ----------- ------------ -----------
LIABILITIES:
- ------------------------------------------------------------
Payable for investments purchased -- 4,000,000 --
- ------------------------------------------------------------
Payable for shares redeemed 1,041,793 22,478 81,400
- ------------------------------------------------------------
Payable to bank -- -- --
- ------------------------------------------------------------
Accrued expenses 21,443 56,065 22,290
- ------------------------------------------------------------ ----------- ------------ -----------
Total liabilities 1,063,236 4,078,543 103,690
- ------------------------------------------------------------ ----------- ------------ -----------
NET ASSETS CONSIST OF:
- ------------------------------------------------------------
Paid in capital 61,986,667 263,639,496 45,793,969
- ------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments 689,879 8,581,106 2,599,299
- ------------------------------------------------------------
Accumulated net realized gain (loss) on investments (3,551,095) (1,911,369) 72,524
- ------------------------------------------------------------
Undistributed net investment income 11,475 94,331 112,815
- ------------------------------------------------------------ ----------- ------------ -----------
Total Net Assets $59,136,926 $270,403,564 $48,578,607
- ------------------------------------------------------------ ----------- ------------ -----------
NET ASSET VALUE PER SHARE, and Redemption Proceeds Per Share
(net assets / shares outstanding) $ 9.78 $ 10.07 $ 10.89
- ------------------------------------------------------------ ----------- ------------ -----------
Offering Price Per Share** $ 9.98* $ 10.28* $ 11.11*
- ------------------------------------------------------------ ----------- ------------ -----------
Shares Outstanding 6,048,049 26,865,406 4,461,934
- ------------------------------------------------------------ ----------- ------------ -----------
Investments, at identified cost $58,497,179 $263,071,834 $45,115,914
- ------------------------------------------------------------ ----------- ------------ -----------
Investments, at tax cost $58,497,179 $263,071,834 $45,115,914
- ------------------------------------------------------------ ----------- ------------ -----------
* Computation of offering price: 100/98 of net asset value.
** See "What Shares Cost" in the Prospectus.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
<PAGE>
DG INVESTOR SERIES
STATEMENTS OF OPERATIONS
YEAR ENDED FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DG
DG EQUITY DG INTERNATIONAL OPPORTUNITY
FUND EQUITY FUND(A) FUND
------------ ---------------- -----------
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------
Dividends $ 7,026,887 $ 51,524 $ 180,173
- ------------------------------------------------------------
Interest 2,036,113 71,091 638,380
- ------------------------------------------------------------ ----------- ------------ -----------
Total income 9,063,000 122,615 818,553
- ------------------------------------------------------------ ----------- ------------ -----------
EXPENSES:
- ------------------------------------------------------------
Investment advisory fee 4,445,559 95,011 966,775
- ------------------------------------------------------------
Administrative personnel and services fee 587,750 9,237 105,468
- ------------------------------------------------------------
Custodian fees 28,282 27,192 8,039
- ------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 86,439 11,533 52,313
- ------------------------------------------------------------
Directors'/Trustees' fees 6,241 509 3,344
- ------------------------------------------------------------
Auditing fees 12,500 -- 12,529
- ------------------------------------------------------------
Legal fees 2,561 747 2,976
- ------------------------------------------------------------
Portfolio accounting fees 106,076 31,787 39,084
- ------------------------------------------------------------
Shareholder services fee 554,868 14,252 97,554
- ------------------------------------------------------------
Share registration costs 33,907 16,265 23,900
- ------------------------------------------------------------
Printing and postage 6,044 6,852 8,047
- ------------------------------------------------------------
Insurance premiums 4,599 1,891 2,866
- ------------------------------------------------------------
Miscellaneous 8,561 563 6,728
- ------------------------------------------------------------ ----------- ------------ -----------
Total expenses 5,883,387 215,839 1,329,623
- ------------------------------------------------------------
WAIVERS--
- ------------------------------------------------------------
Waiver of investment advisory fees -- (47,505) (112,136)
- ------------------------------------------------------------
Waiver of administrative personnel and services fee -- -- --
- ------------------------------------------------------------ ----------- ------------ -----------
Total waivers -- (47,505) (112,136)
- ------------------------------------------------------------ ----------- ------------ -----------
Net expenses 5,883,387 168,334 1,217,487
- ------------------------------------------------------------ ----------- ------------ -----------
Net investment income (loss) 3,179,613 (45,719) (398,934)
- ------------------------------------------------------------ ----------- ------------ -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCY TRANSACTIONS AND FORWARD CONTRACTS:
- ------------------------------------------------------------
Net realized gain (loss) on investment transactions, forward
contracts and foreign currency 9,991,335 (240,297) 24,232,586
- ------------------------------------------------------------
Change in unrealized appreciation (depreciation) of
investments forward contracts and foreign currency
translation 193,990,094 1,421,852 8,351,884
- ------------------------------------------------------------ ----------- ------------ -----------
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and forward contracts 203,981,429 1,181,555 32,584,470
- ------------------------------------------------------------ ----------- ------------ -----------
Change in net assets resulting from operations $207,161,042 $1,135,836 $32,185,536
- ------------------------------------------------------------ ----------- ------------ -----------
(a) Reflects operations for the period from August 15, 1997 (date of initial
public investment) to February 28, 1998.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
<PAGE>
DG INVESTOR SERIES
STATEMENTS OF OPERATIONS
YEAR ENDED FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DG LIMITED
TERM
GOVERNMENT
INCOME DG GOVERNMENT DG MUNICIPAL
FUND INCOME FUND INCOME FUND
---------- ------------- ------------
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------
Dividends $ -- $ -- $ --
- ------------------------------------------------------------
Interest 4,832,371 16,893,631 2,492,223
- ------------------------------------------------------------ ---------- ----------- ----------
Total income 4,832,371 16,893,631 2,492,223
- ------------------------------------------------------------ ---------- ----------- ----------
EXPENSES:
- ------------------------------------------------------------
Investment advisory fee 482,331 1,580,350 289,417
- ------------------------------------------------------------
Administrative personnel and services fee 100,000 261,726 100,000
- ------------------------------------------------------------
Custodian fees 2,729 16,378 1,438
- ------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 31,022 52,296 26,461
- ------------------------------------------------------------
Directors'/Trustees' fees 2,968 3,875 2,500
- ------------------------------------------------------------
Auditing fees 12,688 12,689 12,501
- ------------------------------------------------------------
Legal fees 2,458 2,458 2,100
- ------------------------------------------------------------
Portfolio accounting fees 42,532 68,285 48,359
- ------------------------------------------------------------
Shareholder services fee 68,469 232,460 42,564
- ------------------------------------------------------------
Share registration costs 14,088 22,335 14,013
- ------------------------------------------------------------
Printing and postage 5,137 5,000 5,001
- ------------------------------------------------------------
Insurance premiums 3,001 3,999 3,000
- ------------------------------------------------------------
Miscellaneous 3,779 4,199 5,800
- ------------------------------------------------------------ ---------- ----------- ----------
Total expenses 771,202 2,266,050 553,154
- ------------------------------------------------------------
WAIVERS--
- ------------------------------------------------------------
Waiver of investment advisory fees (131,070) (163,534) (150,568)
- ------------------------------------------------------------
Waiver of administrative personnel and services fee -- -- (34,479)
- ------------------------------------------------------------ ---------- ----------- ----------
Total waivers (131,070) (163,534) (185,047)
- ------------------------------------------------------------ ---------- ----------- ----------
Net expenses 640,132 2,102,516 368,107
- ------------------------------------------------------------ ---------- ----------- ----------
Net investment income (loss) 4,192,239 14,791,115 2,124,116
- ------------------------------------------------------------ ---------- ----------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ------------------------------------------------------------
Net realized gain (loss) on investment transactions (21,405) 151,276 72,332
- ------------------------------------------------------------
Change in unrealized appreciation (depreciation) of
investments 619,533 9,924,175 1,412,573
- ------------------------------------------------------------ ---------- ----------- ----------
Net realized and unrealized gain (loss) on investments 598,128 10,075,451 1,484,905
- ------------------------------------------------------------ ---------- ----------- ----------
Change in net assets resulting from operations $4,790,367 $24,866,566 $3,609,021
- ------------------------------------------------------------ ---------- ----------- ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
<PAGE>
DG INVESTOR SERIES
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DG INTERNATIONAL
DG EQUITY FUND EQUITY FUND
---------------------------- ----------------
YEAR YEAR PERIOD
ENDED ENDED ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1998 1997 1998(A)
------------- ------------ ----------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
- ------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------
Net investment income/operating loss $ 3,179,613 $ 4,083,126 $ (45,719)
- ------------------------------------------------------
Net realized gain (loss) on investment transactions
and foreign currency 9,991,335 10,108,185 (240,297)
- ------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments and foreign currency 193,990,094 63,747,215 1,421,852
- ------------------------------------------------------ ------------- ----------- -------------
Change in net assets resulting from operations 207,161,042 77,938,526 1,135,836
- ------------------------------------------------------ ------------- ----------- -------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ------------------------------------------------------
Distributions from net investment income (3,295,484) (3,964,723) --
- ------------------------------------------------------
Distributions in excess of net investment income -- -- (20,145)
- ------------------------------------------------------
Distributions from net realized gain on investments (4,463,969) (10,093,485) --
- ------------------------------------------------------ ------------- ----------- -------------
Change in net assets resulting from distributions
to shareholders (7,759,453) (14,058,208) (20,145)
- ------------------------------------------------------ ------------- ----------- -------------
CAPITAL STOCK TRANSACTIONS--
- ------------------------------------------------------
Proceeds from sale of shares 146,010,215 102,599,959 26,266,042
- ------------------------------------------------------
Net asset value of shares issued to shareholders in
payment of distributions declared 4,620,893 8,350,813 17,816
- ------------------------------------------------------
Cost of shares redeemed (124,793,931) (69,584,226) (866,338)
- ------------------------------------------------------ ------------- ----------- -------------
Change in net assets from share transactions 25,837,177 41,366,546 25,417,520
- ------------------------------------------------------ ------------- ----------- -------------
Change in net assets 225,238,766 105,246,864 26,533,211
- ------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------
Beginning of period 490,391,901 385,145,037 --
- ------------------------------------------------------ ------------- ----------- -------------
End of period $ 715,630,667 $490,391,901 $ 26,533,211
- ------------------------------------------------------ ------------- ----------- -------------
Undistributed net investment income (distribution in
excess of net investment loss) included in net assets
at end of period $ 438,114 $ 553,985 $ (23,169)
- ------------------------------------------------------ ------------- ----------- -------------
Net realized gain (loss) as computed for federal tax
purposes $ 9,991,335 $10,108,185 $ 364
- ------------------------------------------------------ ------------- ----------- -------------
(a) Reflects operations for the period from August 15, 1997 (date of initial
public investment) to February 28, 1998.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
<PAGE>
DG INVESTOR SERIES
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DG LIMITED TERM
DG OPPORTUNITY FUND GOVERNMENT INCOME FUND
--------------------------- ---------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
- -----------------------------------------------
OPERATIONS--
- -----------------------------------------------
Net investment income/operating loss $ (398,934) $ (169,394) $ 4,192,239 $ 4,742,269
- -----------------------------------------------
Net realized gain (loss) on investment
transactions and foreign currency 24,232,586 5,530,831 (21,405) (1,008,150)
- -----------------------------------------------
Net change in unrealized appreciation
(depreciation) of investments and foreign
currency 8,351,884 1,007,879 619,533 293,452
- ----------------------------------------------- ------------ ------------ ------------ ------------
Change in net assets resulting from
operations 32,185,536 6,369,316 4,790,367 4,027,571
- ----------------------------------------------- ------------ ------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -----------------------------------------------
Distributions from net investment income -- -- (4,216,317) (4,818,533)
- -----------------------------------------------
Distributions in excess of net investment
income -- -- -- --
- -----------------------------------------------
Distributions from net realized gain on
investments (16,352,806) (4,554,267) -- --
- ----------------------------------------------- ------------ ------------ ------------ ------------
Change in net assets resulting from
distributions to shareholders (16,352,806) (4,554,267) (4,216,317) (4,818,533)
- ----------------------------------------------- ------------ ------------ ------------ ------------
CAPITAL STOCK TRANSACTIONS--
- -----------------------------------------------
Proceeds from sale of shares 47,226,667 35,538,237 9,959,722 28,760,569
- -----------------------------------------------
Net asset value of shares issued to
shareholders in payment of distributions
declared 10,900,651 3,267,077 1,715,788 2,038,161
- -----------------------------------------------
Cost of shares redeemed (31,615,686) (13,570,540) (37,498,061) (38,897,952)
- ----------------------------------------------- ------------ ------------ ------------ ------------
Change in net assets from share
transactions 26,511,632 25,234,774 (25,822,551) (8,099,222)
- ----------------------------------------------- ------------ ------------ ------------ ------------
Change in net assets 42,344,362 27,049,823 (25,248,501) (8,890,184)
- -----------------------------------------------
NET ASSETS:
- -----------------------------------------------
Beginning of period 80,527,148 53,477,325 84,385,427 93,275,611
- ----------------------------------------------- ------------ ------------ ------------ ------------
End of period $122,871,510 $ 80,527,148 $ 59,136,926 $ 84,385,427
- ----------------------------------------------- ------------ ------------ ------------ ------------
Undistributed net investment income included in
net assets at end of period $ -- $ -- $ 11,475 $ 35,553
- ----------------------------------------------- ------------ ------------ ------------ ------------
Net realized gain (loss) as computed for
federal tax purposes $ 24,041,342 $ 4,663,970 $ (378,938) $ (758,580)
- ----------------------------------------------- ------------ ------------ ------------ ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
<PAGE>
DG INVESTOR SERIES
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DG GOVERNMENT DG MUNICIPAL
INCOME FUND INCOME FUND
--------------------------- ---------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
- ------------------------------------------
OPERATIONS--
- ------------------------------------------
Net investment income/operating loss $14,791,115 $13,271,431 $ 2,124,116 $ 2,183,126
- ------------------------------------------
Net realized gain (loss) on investment
transactions 151,276 (1,412,964) 72,332 116,120
- ------------------------------------------
Net change in unrealized appreciation
(depreciation) of investments 9,924,175 (92,801,515) 1,412,573 (430,649)
- ------------------------------------------ ----------- ----------- ----------- -----------
Change in net assets resulting from
operations 24,866,566 9,056,952 3,609,021 1,868,597
- ------------------------------------------ ----------- ----------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS--
- ------------------------------------------
Distributions from net investment income (14,742,578) (13,349,136) (2,122,421) (2,140,424)
- ------------------------------------------
Distributions in excess of net investment
income -- -- -- --
- ------------------------------------------
Distributions from net realized gain on
investments -- -- (104,785) (47,122)
- ------------------------------------------ ----------- ----------- ----------- -----------
Change in net assets resulting from
distributions to shareholders (14,742,578) (13,349,136) (2,227,206) (2,187,546)
- ------------------------------------------ ----------- ----------- ----------- -----------
CAPITAL STOCK TRANSACTIONS--
- ------------------------------------------
Proceeds from sale of shares 97,746,058 113,591,135 12,400,013 13,965,127
- ------------------------------------------
Net asset value of shares issued to
shareholders in payment of distributions
declared 5,515,899 5,048,640 26,535 34,266
- ------------------------------------------
Cost of shares redeemed (92,600,823) (48,955,255) (12,157,682) (11,330,842)
- ------------------------------------------ ----------- ----------- ----------- -----------
Change in net assets from share
transactions 10,661,134 69,684,520 268,866 2,668,551
- ------------------------------------------ ----------- ----------- ----------- -----------
Change in net assets 20,785,122 65,392,336 1,650,681 2,349,602
- ------------------------------------------
NET ASSETS:
- ------------------------------------------
Beginning of period 249,618,442 184,226,106 46,927,926 44,578,324
- ------------------------------------------ ----------- ----------- ----------- -----------
End of period $270,403,564 $249,618,442 $48,578,607 $ 46,927,926
- ------------------------------------------ ----------- ----------- ----------- -----------
Undistributed net investment income
included in net assets at end of period $ 94,331 $ 45,794 $ 112,815 $ 111,120
- ------------------------------------------ ----------- ----------- ----------- -----------
Net realized gain (loss) as computed for
federal tax purposes $ (763,279) $ (498,409) $ 72,332 $ 116,120
- ------------------------------------------ ----------- ----------- ----------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
<PAGE>
DG INVESTOR SERIES
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
NET REALIZED
AND UNREALIZED DISTRIBUTIONS
NET ASSET NET GAIN/(LOSS) TOTAL TO SHAREHOLDERS DISTRIBUTIONS
VALUE, INVESTMENT ON INVESTMENTS FROM FROM NET TO SHAREHOLDERS
YEAR ENDED BEGINNING INCOME AND FOREIGN INVESTMENT INVESTMENT IN EXCESS OF NET
FEBRUARY 28 OR 29, OF PERIOD (LOSS) CURRENCIES OPERATIONS INCOME INVESTMENT LOSS
------------------ --------- ------ ---------- ---------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
DG EQUITY FUND
1993(a) $10.00 0.12 0.52 0.64 (0.10) --
1994 $10.54 0.14 0.38 0.52 (0.14) --
1995 $10.87 0.16 0.71 0.87 (0.16) --
1996 $11.41 0.16 3.63 3.79 (0.17) --
1997 $14.49 0.14 2.54 2.68 (0.14) --
1998 $16.68 0.11 6.48 6.59 (0.11) --
DG INTERNATIONAL EQUITY FUND
1998(c) $10.00 (0.02)* 0.49 0.47 -- (0.01)
DG OPPORTUNITY FUND
1995(b) $10.00 0.02 1.17 1.19 (0.02) --
1996 $11.15 -- 3.30 3.30 -- --
1997 $12.79 (0.03) 1.60 1.57 -- --
1998 $13.53 (0.05) 4.90 4.85 -- --
DG LIMITED TERM
GOVERNMENT INCOME FUND
1993(a) $10.00 0.36 0.07 0.43 (0.36) --
1994 $10.07 0.52 (0.17) 0.35 (0.52) --
1995 $ 9.87 0.49 (0.23) 0.26 (0.48) --
1996 $ 9.65 0.54 0.15 0.69 (0.54) --
1997 $ 9.80 0.52 (0.08) 0.44 (0.53) --
1998 $ 9.71 0.51 0.07 0.58 (0.51) --
DG GOVERNMENT INCOME FUND
1993(a) $10.00 0.37 0.25 0.62 (0.37) --
1994 $10.25 0.55 (0.09) 0.46 (0.55) --
1995 $ 9.90 0.54 (0.44) 0.10 (0.53) --
1996 $ 9.47 0.58 0.41 0.99 (0.59) --
1997 $ 9.87 0.57 (0.18) 0.39 (0.57) --
1998 $ 9.69 0.55 0.38 0.93 (0.55) --
DG MUNICIPAL INCOME FUND
1993(d) $10.00 0.07 0.49 0.56 (0.05) --
1994 $10.51 0.48 0.08 0.56 (0.49) --
1995 $10.57 0.49 (0.43) 0.06 (0.48) --
1996 $10.15 0.49 0.50 0.99 (0.48) --
1997 $10.66 0.49 (0.07) 0.42 (0.48) --
1998 $10.59 0.47 0.32 0.79 (0.47) --
<CAPTION>
DISTRIBUTIONS
TO SHAREHOLDERS
FROM NET
REALIZED GAIN
ON INVESTMENT
TRANSACTIONS
YEAR ENDED AND FOREIGN
FEBRUARY 28 OR 29, CURRENCIES
------------------ ----------
<S> <C>
DG EQUITY FUND
1993(a) --
1994 (0.05)
1995 (0.17)
1996 (0.54)
1997 (0.35)
1998 (0.15)
DG INTERNATIONAL EQUITY FU
1998(c) --
DG OPPORTUNITY FUND
1995(b) (0.02)
1996 (1.66)
1997 (0.83)
1998 (2.54)
DG LIMITED TERM
GOVERNMENT INCOME FUND
1993(a) --
1994 (0.03)
1995 --
1996 --
1997 --
1998 --
DG GOVERNMENT INCOME FUND
1993(a) --
1994 (0.25)
1995 --
1996 --
1997 --
1998 --
DG MUNICIPAL INCOME FUND
1993(d) --
1994 (0.01)
1995 --
1996 --
1997 (0.01)
1998 (0.02)
* Per share information presented is based upon the monthly average number of
shares outstanding.
(a) Reflects operations for the period from August 3, 1992 (date of initial
public investment) to February 28, 1993.
(b) Reflects operations for the period from August 1, 1994 (date of initial
public investment) to February 28, 1995.
(c) Reflects operations for the period from August 15, 1997 (date of initial
public investment) to February 28, 1998.
(d) Reflects operations for the period from December 29, 1992 (date of initial
public investment) to February 28, 1993.
</TABLE>
(See Notes which are an integral part of the Financial Statements.)
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DISTRIBUTIONS
TO SHAREHOLDERS RATIOS TO AVERAGE NET ASSETS
IN EXCESS -----------------------------------------------------
OF NET NET ASSET NET NET ASSETS, PORTFOLIO
REALIZED GAIN TOTAL VALUE, END TOTAL INVESTMENT EXPENSE END OF PERIOD TURNOVER
ON INVESTMENTS DISTRIBUTIONS OF PERIOD RETURN(E) EXPENSES INCOME/(LOSS) WAIVER(G) (000 OMITTED) RATE
-------------- ------------- --------- --------- -------- ------------- --------- ------------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-- (0.10) $10.54 6.40% 0.51%(f) 2.15%(f) 0.53%(f) $181,239 28%
-- (0.19) $10.87 4.99% 0.96% 1.38% 0.01% $284,203 7%
-- (0.33) $11.41 8.23% 0.95% 1.54% -- $259,998 1%
-- (0.71) $14.49 33.73% 0.94% 1.24% -- $385,145 15%
-- (0.49) $16.68 18.79% 0.92% 0.95% -- $490,392 7%
-- (0.26) $23.01 39.74% 0.99% 0.54% -- $715,631 6%
-- (0.01) $10.46 4.71% 1.77%(f) (0.48)%(f) 0.50%(f) $ 26,533 21%
-- (0.04) $11.15 11.84% 0.79%(f) 0.06%(f) 1.34%(f) $ 36,664 45%
-- (1.66) $12.79 31.42% 1.17% -- 0.35% $ 53,477 154%
-- (0.83) $13.53 12.08% 1.14% (0.24)% 0.16% $ 80,527 116%
-- (2.54) $15.84 37.81% 1.20% (0.39)% 0.11% $122,872 180%
-- (0.36) $10.07 4.43% 0.50%(f) 6.25%(f) 0.42%(f) $ 99,921 18%
-- (0.55) $ 9.87 3.52% 0.59% 5.21% 0.29% $116,600 76%
-- (0.48) $ 9.65 2.72% 0.63% 5.00% 0.25% $ 96,216 14%
-- (0.54) $ 9.80 7.34% 0.69% 5.49% 0.20% $ 93,276 56%
-- (0.53) $ 9.71 4.66% 0.68% 5.39% 0.20% $ 84,385 28%
-- (0.51) $ 9.78 6.16% 0.80% 5.21% 0.16% $ 59,137 42%
-- (0.37) $10.25 6.40% 0.50%(f) 6.45%(f) 0.41%(f) $111,435 78%
(0.01)(h) (0.81) $ 9.90 4.55% 0.70% 5.34% 0.19% $118,695 49%
-- (0.53) $ 9.47 1.20% 0.68% 5.79% 0.15% $168,313 31%
-- (0.59) $ 9.87 10.70% 0.72% 5.96% 0.10% $184,226 87%
-- (0.57) $ 9.69 4.07% 0.70% 5.82% 0.10% $249,618 7%
-- (0.55) $10.07 9.90% 0.80% 5.62% 0.06% $270,404 25%
-- (0.05) $10.51 5.65% 0.48%(f) 4.11%(f) 1.02%(f) $ 15,644 93%
-- (0.50) $10.57 5.34% 0.74% 4.60% 0.67% $ 34,435 9%
-- (0.48) $10.15 0.81% 0.75% 4.93% 0.41% $ 41,542 9%
-- (0.48) $10.66 9.96% 0.70% 4.65% 0.47% $ 44,578 20%
-- (0.49) $10.59 4.12% 0.70% 4.69% 0.46% $ 46,928 9%
-- (0.49) $10.89 7.70% 0.76% 4.40% 0.31% $ 48,579 6%
<CAPTION>
DISTRIBUTIONS
TO SHAREHOLDERS
IN EXCESS
OF NET AVERAGE
REALIZED GAIN COMMISSION
ON INVESTMENTS PAID(I)
-------------- -------
<S> <C>
== ==
-- --
-- $0.0653
-- $0.0761
-- $0.0627
-- $0.0273
-- --
-- $0.0098
-- $0.0568
-- $0.0630
== ==
== ==
== ==
-- --
(0.01)(h) --
== ==
== ==
== ==
== ==
== ==
(e) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(f) Computed on an annualized basis.
(g) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(h) This distribution does not represent a return of capital for federal tax
purposes.
(i) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
</TABLE>
(See Notes which are an integral part of the Financial Statements.)
<PAGE>
DG INVESTOR SERIES
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
(1) ORGANIZATION
DG Investor Series (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the "Act"), as an open-end management investment company.
The Trust consists of eight portfolios. The following diversified portfolios
(individually referred to as the "Fund", or collectively as the "Funds") are
presented herein:
- -------------------------------------------------------------------------------
PORTFOLIO NAME INVESTMENT OBJECTIVE
- -------------------------------------------------------------------------------
DG Equity Fund Provide long term capital
appreciation with ("Equity Fund")
current income as a secondary
objective.
- -------------------------------------------------------------------------------
DG International Equity Fund Seek capital appreciation
("International Equity Fund")
- -------------------------------------------------------------------------------
DG Opportunity Fund ("Opportunity Fund") Provide capital appreciation.
- -------------------------------------------------------------------------------
DG Limited Term Government Income Fund Provide current income.
("Limited Term Fund")
- -------------------------------------------------------------------------------
DG Government Income Fund Provide current income.
("Government Income Fund")
- -------------------------------------------------------------------------------
DG Municipal Income Fund Provide dividend income that is
exempt from ("Municipal Income
Fund") federal regular income
tax.
- -------------------------------------------------------------------------------
The assets of each portfolio are segregated and a shareholder's interest is
limited to the portfolio in which shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing
service, taking into consideration yield, liquidity, risk, credit quality,
coupon, maturity, type of issue, and any other factors or market data the
pricing service deems relevant. U.S. government securities, listed
corporate bonds, and other fixed income and asset-backed securities are
generally valued at the mean of the latest bid and asked price as furnished
by an independent pricing service. Listed equity securities are valued at
the last sale price reported on a national securities exchange. Short-term
securities are valued at the prices provided by an independent pricing
service. However,
<PAGE>
DG INVESTOR SERIES
- --------------------------------------------------------------------------------
short-term securities with remaining maturities of sixty days or less at
the time of purchase may be valued at amortized cost, which approximates
fair market value. Investments in other open-end regulated investment
companies are valued at net asset value. With respect to valuation of
foreign securities, trading in foreign cities may be completed at times
which vary from the closing of the New York Stock Exchange. Therefore,
foreign securities are valued at the latest closing price on the exchange
on which they are traded prior to the closing of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated
into U.S. dollars at the foreign exchange rate in effect at noon, eastern
time, on the day the value of the foreign security is determined.
REPURCHASE AGREEMENTS--It is the policy of the Funds to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, to have segregated within the custodian
bank's vault, all securities held as collateral under repurchase agreement
transactions. Additionally, procedures have been established by the Funds
to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be under the repurchase agreement
transaction.
The Funds will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Funds' adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the
"Trustees"). Risks may arise from the potential inability of counterparties
to honor the terms of the repurchase agreement. Accordingly, the Funds
could receive less than the repurchase price on the sale of collateral
securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and paid discount, if applicable, are
amortized as required by the Internal Revenue Code, as amended (the
"Code"). Dividend income and distributions to shareholders are recorded on
the ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions and book/tax treatments of net operating
loss. The following reclassifications have been made to the financial
statements.
<TABLE>
<CAPTION>
INCREASE (DECREASE)
------------------------------------------------
ACCUMULATED UNDISTRIBUTED
PAID IN NET REALIZED NET INVESTMENT
FUND NAME CAPITAL GAIN/(LOSS) INCOME
------------------------- -------- ------------ --------------
<S> <C> <C> <C>
International Equity Fund $(45,719) 3,024 $ 42,695
Opportunity Fund -- $(398,936) $398,936
</TABLE>
Net investment income, net realized gains, and net assets were not affected
by this reclassification.
<PAGE>
DG INVESTOR SERIES
- --------------------------------------------------------------------------------
FEDERAL TAXES--It is the Funds' policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of their income. Accordingly, no
provisions for federal tax are necessary.
At February 28, 1998, the Funds, for federal tax purposes, had capital loss
carryforwards, as noted below, which will reduce each Fund's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions
to shareholders which would otherwise be necessary to relieve the Funds of
any liability for federal tax.
Pursuant to the Code, such capital loss carryforwards will expire as
follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR
--------------------------------------------- LOSS
FUND 2003 2004 2005 2006 CARRYFORWARD
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C>
Limited Term Fund $1,406,691 $1,040,337 $758,580 $378,938 $3,584,546
Government Income Fund $ 181,520 $ 467,764 $498,409 $763,279 $1,910,972
</TABLE>
Net realized losses on International Equity Fund of $204,664, attributable
to security, forward contracts and foreign currency transactions incurred
after October 31, 1997, were treated as arising on the first day of
International Equity Funds' next taxable year (March 1, 1998).
Net realized losses on Limited Term Fund of $6,643, attributable to
security transactions incurred after October 31, 1997, were treated as
arising on the first day of the Fund's next taxable year (March 1, 1998).
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Funds may engage in
when-issued or delayed delivery transactions. The Funds record when-issued
securities on the trade date and maintain security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
DEFERRED EXPENSES--The costs incurred by the Opportunity Fund with respect
to registration of their shares in its first fiscal year, excluding the
initial expense of registering their shares, have been deferred and are
being amortized over a period not to exceed five years from each Fund's
commencement date.
Organizational expenses of $22,108 for Opportunity Fund were borne
initially by the Adviser. The Fund has reimbursed the Adviser for these
expenses. These expenses have been deferred and are being amortized over
the five year period following the Fund's effective date. For the year
ended February 28, 1998, the Fund expensed $1,742 of organizational
expenses.
FOREIGN FORWARD EXCHANGE CONTRACTS--International Equity Fund may enter
into foreign forward currency exchange contracts as a way of managing
foreign exchange rate risk. The Fund may enter into these contracts for the
purchase or sale of a specific foreign currency at a fixed price
<PAGE>
DG INVESTOR SERIES
- --------------------------------------------------------------------------------
on a future date as a hedge or cross-hedge against either specific
transactions or portfolio positions. The objective of the Fund's foreign
currency hedging transactions is to reduce the risk that the U.S. dollar
value of the Fund's foreign-currency-denominated securities will decline in
value due to changes in foreign currency exchange rates. All foreign
currency exchange contracts are "marked-to-market" daily at the applicable
translation rates resulting in unrealized gains or losses. Realized gains
or losses are recorded at the time the foreign currency exchange contract
is offset by entering into a closing transaction or by delivery or receipt
of the currency. Risks may arise upon entering into these contracts from
the potential inability of the counterparties to meet the terms of their
contracts and from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar.
At February 28, 1998, International Equity Fund had outstanding foreign
exchange contracts as set forth below:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS TO IN EXCHANGE CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE FOR AT VALUE (DEPRECIATION)
--------------- ----------------------------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C>
Contracts Purchased:
3/4/98-3/5/98 69,524 Pound Sterling $114,594 $114,540 $ (54)
3/5/98 17,008 Singapore Dollar $ 10,561 $ 10,495 $ (66)
Contracts Sold:
3/4/98 132,344 Pound Sterling $217,242 $218,036 $ (794)
3/4/98 103,541,690 Italian Lira $ 57,658 $ 57,927 $ (269)
3/2/98-3/3/98 6,282,966 Japanese Yen $ 49,609 $ 49,825 $ (216)
-------
Net Unrealized Depreciation on Foreign Exchange Contracts $(1,399)
=======
</TABLE>
FOREIGN CURRENCY TRANSLATION--The accounting records of International
Equity Fund are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies ("FC") are translated into U.S. dollars
based on the rate of exchange of such currencies against U.S. dollars on
the date of valuation. Purchases and sales of securities, income, and
expenses are translated at the rate of exchange quoted on the respective
date that such transactions are recorded. Differences between income and
expense amounts recorded and collected or paid are adjusted when reported
by the custodian bank. The Fund does not isolate that portion of the
results of operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in the market prices
of securities held. Such fluctuations are included with the net realized
and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of
portfolio securities, sales and maturities of short-term securities, sales
of FCs, currency gains or losses realized between the
<PAGE>
DG INVESTOR SERIES
- --------------------------------------------------------------------------------
trade and settlement dates on securities transactions, the difference
between the amounts of dividends, interest, and foreign withholding taxes
recorded on the Fund's books, and the U.S. dollar equivalent of the amounts
actually received or paid. Net unrealized foreign exchange gains and losses
arise from changes in the value of assets and liabilities other than
investments in securities at fiscal year end, resulting from changes in the
exchange rate.
RESTRICTED SECURITIES--Restricted securities are securities that may only
be resold upon registration under federal securities laws or in
transactions exempt from such registration. In some cases, the issuer of
restricted securities has agreed to register such securities for resale, at
the issuers' expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted securities
may be resold in the secondary market in transactions exempt from
registration. Such restricted securities may be determined to be liquid
under criteria established by the Board of Trustees. The Fund will not
incur any registration costs upon such resales. The Fund's restricted
securities are valued at the price provided by dealers in the secondary
market or, if no market prices are available, at the fair value as
determined by the Funds' pricing committee.
Additional information on each restricted security held by International
Equity Fund at February 28, 1998 is as follows:
SECURITY ACQUISITION DATE ACQUISITION COST
-------- ---------------- ----------------
Japan Tobacco 8/18/97-2/12/98 $297,751
Samsung Electronics Co. 11/11/97-12/1/97 $228,600
USE OF ESTIMATES--The preparation of financial statements in conformity
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
<PAGE>
DG INVESTOR SERIES
- --------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
INTERNATIONAL
EQUITY FUND* EQUITY FUND
--------------------------- -------------
YEAR ENDED YEAR ENDED PERIOD ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1998 1997 1998(A)
- ------------------------------------------------ ------------ ------------ -------------
<S> <C> <C> <C>
Shares sold 7,924,532 6,852,631 2,623,705
- ------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 234,089 537,524 1,867
- ------------------------------------------------
Shares redeemed (6,448,544) (4,578,933) (88,124)
- ------------------------------------------------ ------------ ------------ ------------
Net change resulting from share transactions 1,710,077 2,811,222 2,537,448
- ------------------------------------------------ ------------ ------------ ------------
* On March 31, 1997, the Equity Fund acquired a common trust fund managed by an
affiliate, Commercial National Bank. The acquisition was a tax-free exchange
of 610,052 shares of the Equity Fund valued at $9,998,744.
(a) For the period from August 15, 1997 (date of initial public investment) to
February 28, 1998.
</TABLE>
<TABLE>
<CAPTION>
OPPORTUNITY FUND LIMITED TERM FUND
--------------------------- ---------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1998 1997 1998 1997
- ------------------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold 3,050,510 2,464,715 1,021,729 2,953,124
- ------------------------------------
Shares issued to shareholders in
payment of distributions declared 759,627 234,535 176,304 209,814
- ------------------------------------
Shares redeemed (2,003,613) (929,615) (3,839,432) (3,986,837)
- ------------------------------------ ------------ ----------- ------------ ------------
Net change resulting from share
transactions 1,806,524 1,769,635 (2,641,399) (823,899)
- ------------------------------------ ------------ ----------- ------------ ------------
</TABLE>
<PAGE>
DG INVESTOR SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT INCOME FUND MUNICIPAL INCOME FUND
--------------------------- ---------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1998 1997 1998 1997
- -------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold 9,911,035 11,623,519 1,162,205 1,331,086
- --------------------------
Shares issued to
shareholders in payment of
distributions declared 561,104 521,253 2,485 3,288
- --------------------------
Shares redeemed (9,367,967) (5,043,232) (1,136,101) (1,083,418)
- -------------------------- ------------ ------------ ------------ ------------
Net change resulting
from share transactions 1,104,172 7,101,540 28,589 250,956
- -------------------------- ------------ ------------ ------------ ------------
</TABLE>
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--ParkSouth Corporation, a subsidiary of Deposit Guaranty
National Bank, the Funds' investment adviser (the "Adviser"), receives for its
services an annual investment advisory fee equal to the percentage of each
Fund's average daily net assets as follows:
INVESTMENT
ADVISORY
FUND NAME FEE PERCENTAGE
--------- ---------------
Equity Fund 0.75%
International Equity Fund 1.00%
Opportunity Fund 0.95%
Limited Term Fund 0.60%
Government Income Fund 0.60%
Municipal Income Fund 0.60%
ParkSouth Corporation became the Funds' investment adviser on March 1, 1997.
Prior to March 1, 1997, Deposit Guaranty National Bank served as the Funds'
investment adviser. The advisory fees charged prior to March 1, 1997 were the
same as the current fees listed above.
SUB-ADVISORY FEE--Prior to March 1, 1997, under the terms of a sub-advisory
agreement between Deposit Guaranty National Bank and the Trust Division of
Commercial National Bank, (the "sub-adviser"), the sub-adviser received an
annual fee from the Deposit Guaranty National Bank equal to 0.25% of each Fund's
average daily net assets. Effective March 1, 1997, Commercial National Bank is
no longer the sub-adviser to the Funds.
Lazard Freres Asset Management is a sub-adviser for International Equity Fund.
Under the terms of a Sub-Advisory Agreement between ParkSouth Corporation and
Lazard Freres Asset Management, the sub-adviser receives an annual fee from the
adviser equal to 0.50% of the average daily net assets of the Fund.
Effective July 21, 1997, Womack Asset Management, Inc. (the "WAMI") became the
sub-adviser to Opportunity Fund.
For its services under the Sub-Advisory Agreement, WAMI receives a monthly fee
based on the average daily net assets of Opportunity Fund under management by
WAMI during the preceding month, as described below. The sub-advisory fee shall
be the sum of: 0.32% of the average daily net assets up to $50 million; 0.075%
of the average daily net assets in excess of $50 million and up to $70 million;
and 0.25% of the average daily net assets in excess of $70 million.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Funds
with certain administrative personnel and services. The fee paid to FAS is based
on the level of average aggregate net assets of the Trust for the period. FAS
may voluntarily choose to waive a portion of its fee.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with FAS, the Funds will pay FAS up to 0.15% of average daily net assets of the
Fund for the period. The fee paid to FAS is used to finance certain services for
shareholders and to maintain shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC") serves as transfer and dividend disbursing agent for the Funds.
The fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Funds' accounting records for
which it receives a fee. The fee is based on the level of each Fund's average
daily net assets for the period, plus out-of-pocket expenses.
17A-7 TRANSACTIONS--During the period ended February 28, 1998, the Equity Fund
engaged in a purchase transaction with a common trust fund that has a common
investment adviser. This purchase transaction was made at current market value
pursuant to Rule 17a-7 under the Act amounting to $9,345,984.
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
<PAGE>
DG INVESTOR SERIES
- --------------------------------------------------------------------------------
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term and converted
securities, for the period ended February 28, 1998, were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
- ------------------------------------------------------------ ------------ ------------
<S> <C> <C>
Equity Fund $ 59,008,225 $ 34,548,018
- ------------------------------------------------------------
International Equity Fund $ 26,424,806 $ 3,240,464
- ------------------------------------------------------------
Opportunity Fund $168,954,497 $163,774,732
- ------------------------------------------------------------
Limited Term Fund $ 30,065,321 $ 48,375,914
- ------------------------------------------------------------
Government Income Fund $ 65,754,038 $ 59,788,619
- ------------------------------------------------------------
Municipal Income Fund $ 3,043,175 $ 2,593,755
- ------------------------------------------------------------
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Trustees and Shareholders DG INVESTOR SERIES:
We have audited the statements of assets and liabilities, including the
portfolio of investments, of the DG Equity Fund, DG International Equity Fund,
DG Opportunity Fund, DG Limited Term Government Income Fund, DG Government
Income Fund, and DG Municipal Income Fund (six portfolios within DG Investor
Series) as of February 28, 1998, and the related statements of operations for
the year then ended, the statements of changes in net assets for the years ended
February 28, 1998 and 1997, and the financial highlights for the periods
presented. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to gain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
February 28, 1998 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights of the DG
Investor Series portfolios referred to above present fairly, in all material
respects, their financial position as of February 28, 1998, and the results of
their operations for the year then ended, and the changes in their net assets
and their financial highlights for each of the periods presented, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Pittsburgh, Pennsylvania
April 10, 1998
<PAGE>
TRUSTEES OFFICERS
- -------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Edward C. Gonzales
Nicholas P. Constantakis President and Treasurer
William J. Copeland J. Christopher Donahue
James E. Dowd Executive Vice President
Lawrence D. Ellis, M.D. John W. McGonigle
Edward L. Flaherty, Jr. Executive Vice President and Secretary
Edward C. Gonzales Richard B. Fisher
Peter E. Madden Vice President
John E. Murray, Jr. Charles L. Davis, Jr.
Wesley W. Posvar Vice President and Assistant Treasurer
Marjorie P. Smuts Gail Cagney
Assistant Secretary
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Funds' prospectus which contains facts concerning
their objectives and policies, management fees, expenses and other information.
APPENDIX
A1. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. DG Equity Fund
(the "Fund"), taking into account the original maximum sales charge of 2.00%, is
represented by a solid line, and the Fund taking into account the current
maximum sales charge of 3.50%, is represented by a dotted line. The Standard &
Poor's 500 Index (the "S&P 500") is represented by a broken line. The line graph
is a visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the S&P 500. The "x" axis reflects
computation periods from 8/1/92 to 2/28/98. The "y" axis reflects the cost of
the investment. The right margin reflects the ending value of the hypothetical
investment in the Fund, taking into account the 2.00% and 3.50% sales charges,
as compared to the S&P 500; the ending values were $26,302, $25,899, and
$28,359, respectively. The legend in the lower middle quadrant of the graphic
presentation indicates the Fund's Average Annual Total Return for the one-year,
five-year, and the since inception (8/1/92) periods ended 2/28/98, which were
34.89%, 19.48%, and 18.60%, respectively.
A2. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. DG
International Equity Fund (the "Fund") is represented by a solid line. The
Morgan Stanley Capital Europe, Austrailia, Far East Index ("EAFE") is
represented by a dotted line. The line graph is a visual representation of a
comparison of change in value of a $10,000 hypothetical investment in the Fund
and the EAFE. The "x" axis reflects computation periods from 8/18/97 to 2/28/98.
The "y" axis reflects the cost of the investment. The right margin reflects the
ending value of the hypothetical investment in the Fund as compared to the EAFE;
the ending values were $10,472 and $9,935, respectively. The legend in the lower
middle quadrant of the graphic presentation indicates the Fund's cumulative
Total Return for the six-month and the since inception (8/18/97) periods ended
2/28/98, which were 8.17% and 4.71%, respectively.
A3. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. DG Opportunity
Fund (the "Fund"), taking into account the original maximum sales charge of
2.00%, is represented by a solid line, and the Fund taking into account the
current maximum sales charge of 3.50%, is represented by a dotted line. The
Russell 2000 Index is represented by a broken line. The line graph is a visual
representation of a comparison of change in value of a $10,000 hypothetical
investment in the Fund and the Russell 2000 Index. The "x" axis reflects
computation periods from 1/1/82 to 2/28/98. The "y" axis reflects the cost of
the investment. The right margin reflects the ending value of the hypothetical
investment in the Fund, taking into account the 2.00% and 3.50% sales charges,
as compared to the Russell 2000 Index; the ending values were $99,160, $97,643,
and $86,293, respectively. The legend in the lower middle quadrant of the
graphic presentation indicates the Fund's Average Annual Total Return for the
one-year, five-year, ten-year, and the since inception (1/1/82) periods ended
2/28/98, which were 32.99%, 19.87%, 19.76%, and 15.13%, respectively.
A4. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. DG Limited
Term Government Income Fund (the "Fund") is represented by a solid line. The
Merrill Lynch 1-3 Year Treasury Index (the "ML1-3") is represented by a broken
line. The line graph is a visual representation of a comparison of change in
value of a $10,000 hypothetical investment in the Fund and the ML1-3. The "x"
axis reflects computation periods from 8/1/92 to 2/28/98. The "y" axis reflects
the cost of the investment. The right margin reflects the ending value of the
hypothetical investment in the Fund, based on a 2.00% sales charge, as compared
to the ML1-3; the ending values were $12,979 and $13,584, respectively. The
legend in the lower middle quadrant of the graphic presentation indicates the
Fund's Average Annual Total Return for the one-year, five-year, and the since
inception (8/1/92) periods ended 2/28/98, which were 4.02%, 4.43%, and 4.79%,
respectively.
A5. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. DG Government
Income Fund (the "Fund") is represented by a solid line. The Lehman Brothers
Government/Corporate Total Index (the "LBGCT") is represented by a dotted line.
The line graph is a visual representation of a comparison of change in value of
a $10,000 hypothetical investment in the Fund and the LBGCT. The "x" axis
reflects computation periods from 8/1/92 to 2/28/98. The "y" axis reflects the
cost of the investment. The right margin reflects the ending value of the
hypothetical investment in the Fund, based on a 2.00% sales charge, as compared
to the LBGCT; the ending values were $13,968 and $14,947, respectively. The
legend in the lower middle quadrant of the graphic presentation indicates the
Fund's Average Annual Total Return for the one-year, five-year, and the since
inception (8/1/92) periods ended 2/28/98, which were 7.67%, 5.59%, and 6.18%,
respectively.
A6. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. DG Municipal
Income Fund (the "Fund") is represented by a solid line. The Lehman Brothers
Municipal Bond Index (the "LBMBI") is represented by a dotted line. The line
graph is a visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the LBMBI. The "x" axis reflects
computation periods from 12/21/92 to 2/28/98. The "y" axis reflects the cost of
the investment. The right margin reflects the ending value of the hypothetical
investment in the Fund, based on a 2.00% sales charge, as compared to the LBMBI;
the ending values were $13,557 and $14,413, respectively. The legend in the
lower middle quadrant of the graphic presentation indicates the Fund's Average
Annual Total Return for the one-year, five-year, and the since inception
(12/21/92) periods ended 2/28/98, which were 5.50%, 5.12%, and 6.04%,
respectively.
<PAGE>
AmeriStar/DG Funds
U.S. Treasury Money Market Portfolio
Pro Forma Combining Statement of Assets and Liabilities
06/30/98
(Unaudited)
<TABLE>
<CAPTION>
AmeriStar DG Pro Forma
US Treasury Treasury Pro Forma Combined
Money Market Money Market Adjustments (Note 1)
ASSETS:
<S> <C> <C> <C> <C>
Investment securities, at amortized cost $ 168,249,073 $ 312,313,168 --- $ 480,562,241
Cash --- 9,814 --- 9,814
Income receivable 927,837 2,493,221 --- 3,421,058
Receivable for capital shares issued 3,397 --- --- 3,397
Deferred organization costs 10,748 --- --- 10,748
Other assets 31,377 --- --- 31,377
-------------- -------------- ------------ --------------
Total Assets 169,222,432 314,816,203 --- 484,038,635
-------------- -------------- ------------ --------------
LIABILITIES:
Distributions payable 653,943 1,205,465 --- 1,859,408
Payable for capital shares redeemed 722 --- --- 722
Accrued expenses 113,619 161,258 --- 274,877
-------------- -------------- ------------ --------------
Total Liabilities 768,284 1,366,723 --- 2,135,007
-------------- -------------- ------------ --------------
NET ASSETS:
Class A Shares 82,829,141 6,268,990 --- 89,098,131
Trust Shares 85,625,007 307,180,490 --- 392,805,497
-------------- -------------- ------------ --------------
$ 168,454,148 $ 313,449,480 $ --- $481,903,628
-------------- -------------- ------------ --------------
CAPITAL SHARES OUTSTANDING
Class A Shares 82,829,141 6,268,990 --- 89,098,131
Trust Shares 85,625,007 307,180,490 --- 392,805,497
-------------- -------------- ------------ --------------
168,454,148 313,449,480 --- 481,903,628
============== ============== ============ ==============
Net Asset Value, Offering Price and
Redemption Price Per Share
Class A Shares $1.00 $1.00 $1.00
-------------- -------------- --------------
Trust Shares $1.00 $1.00 $1.00
-------------- -------------- --------------
COMPOSITION OF NET ASSETS
Shares of beneficial interest, at par $ 168,454 $ --- $ 313,450 (a) $ 481,904
Additional paid-in capital 168,282,155 313,449,480 (313,450)(a) 481,418,185
Undistributed net investment income 3,539 --- --- 3,539
-------------- -------------- -------------- --------------
Net Assets, June 30, 1998 $ 168,454,148 $ 313,449,480 $ --- $481,903,628
============== ============== ============== =============
(a) To adjust DG paid in capital by shares of beneficial interest, at par.
</TABLE>
AmeriStar/DG Funds
Prime Money Market Portfolio
Pro Forma Combining Statement of Assets and Liabilities
06/30/98
(Unaudited)
<TABLE>
<CAPTION>
AmeriStar DG Pro Forma
Prime Prime Pro Forma Combined
Money Market Money Market Adjustments (Note 1)
ASSETS:
<S> <C> <C> <C> <C>
Investment securities, at amortized cost $ 163,999,383 $ 216,935,114 $ --- $ 380,934,497
Cash --- 902 --- 902
Income receivable 291,393 25,670 --- 317,063
Receivable for capital shares issued 17,421 --- --- 17,421
Deferred organization costs 10,134 17,532 (17,532)(b) 10,134
Other assets 6,504 --- --- 6,504
-------------- -------------- -------------- --------------
Total Assets 164,324,835 216,979,218 (17,532)(b) 381,286,521
-------------- -------------- -------------- --------------
LIABILITIES:
Distributions payable 519,631 873,316 --- 1,392,947
Payable for capital shares redeemed 18,738 --- --- 18,738
Accrued expenses 80,939 98,467 --- 179,406
-------------- -------------- -------------- --------------
Total Liabilities 619,308 971,783 --- 1,591,091
NET ASSETS
Class A Shares 107,989,421 213,847,361 (17,357)(b) 321,819,425
Trust Shares 55,716,106 2,160,074 (175)(b) 57,876,005
-------------- -------------- -------------- --------------
$ 163,705,527 $ 216,007,435 $ (17,532) $ 379,695,430
============== =============== ============== ==============
CAPITAL SHARES OUTSTANDING
Class A Shares 107,991,769 213,847,361 (17,357)(b) 321,821,773
Trust Shares 55,717,185 2,160,074 (175)(b) 57,877,084
-------------- -------------- -------------- --------------
$ 163,708,954 $ 216,007,435 $ (17,532) $ 379,698,857
============== ============== ============== ==============
Net Asset Value, Offering Price and
Redemption Price Per Share
Class A Shares $1.00 $1.00 $1.00
-------------- -------------- --------------
Trust Shares $1.00 $1.00 $1.00
-------------- -------------- --------------
COMPOSITION OF NET ASSETS
Shares of beneficial interest, at par $ 163,709 $ --- $ 215,990 (a) $ 379,699
Additional paid-in capital 163,541,682 216,007,435 (233,522)(a)(b) 379,315,595
Undistributed net investment income 3,563 --- --- 3,563
Accumulated net realized gains/(loss)
from investment transactions (3,427) --- --- (3,427)
-------------- -------------- -------------- --------------
Net Assets, June 30, 1998 $ 163,705,527 $ 216,007,435 $ (17,532) $ 379,695,430
============== ============== ============== ==============
Notes to Pro Forma Financial Statements
(a) To adjust DG paid in capital by shares of beneficial interest, at par.
(b) Adjustment to write off the remaining unamortized organizational costs of the DG Prime Money Market fund.
</TABLE>
AmeriStar/DG Funds
Limited Duration U.S. Government Portfolio
Pro Forma Combining Statement of Assets and Liabilities
06/30/98
(Unaudited)
<TABLE>
<CAPTION>
AmeriStar DG Pro Forma
Ltd Duration Ltd Term Pro Forma Combined
US Gov't Gov't Income Adjustments (Note 1)
ASSETS:
<S> <C> <C> <C> <C>
Investment in securities, at value
(cost $19,836,627, $29,609,023) $ 20,110,023 $ 29,958,436 --- $ 50,068,459
Cash --- 214 --- 214
Interest receivable 214,920 449,558 --- 664,478
Receivable for capital shares sold --- 176 --- 176
Deferred organization costs 1,349 --- --- 1,349
Other assets 1,041 --- --- 1,041
-------------- -------------- -------------- --------------
Total Assets 20,327,333 30,408,384 --- 50,735,717
-------------- -------------- -------------- --------------
LIABILITIES:
Distributions payable 86,062 --- --- 86,062
Accrued expenses 38,509 25,799 --- 64,308
-------------- -------------- -------------- --------------
Total Liabilities 124,571 25,799 --- 150,370
NET ASSETS
Class A Shares 1,002,476 1,822,955 --- 2,825,431
Class B Shares 153,239 --- --- 153,239
Trust Shares 19,047,047 28,559,630 --- 47,606,677
-------------- -------------- -------------- --------------
$ 20,202,762 $30,382,585 $ --- $ 50,585,347
============== ============== ============== ==============
CAPITAL SHARES OUTSTANDING
Class A Shares 98,931 186,543 (6,587)(b) 278,887
Class B Shares 15,110 --- --- 15,110
Trust Shares 1,879,689 2,922,501 (103,189)(b) 4,699,001
-------------- -------------- -------------- --------------
1,993,730 3,109,044 (109,776) 4,992,998
============== ============== ============== ==============
Net Asset Value
Class A Shares - redemption price per share $10.13 $9.77 $10.13
-------------- -------------- --------------
Class A Shares - maximum sales charge 3.00% 2.00% 3.00%
-------------- -------------- --------------
Class A Shares - POP $10.44 $9.97 $10.44
============= ============= ==============
Class B Shares - offering and redemption
price per share* $10.14 $10.14
============= ==============
Trust Shares - offering and redemption price
per share $10.13 $10.13
============= ==============
COMPOSITION OF NET ASSETS
Shares of common stock, at par $ 1,994 $ --- $ 2,999 (a) $ 4,993
Additional paid-in capital 19,932,157 33,257,291 (2,999)(a) 53,186,449
Undistributed (distributions in excess of)
net investment income (1,440) 97,938 --- 96,498
Accumulated net realized gains/(loss)
from investment transactions (3,345) (3,322,057) --- (3,325,402)
Net unrealized appreciation of investments 273,396 349,413 --- 622,809
-------------- -------------- -------------- --------------
Net Assets, June 30, 1998 $ 20,202,762 $ 30,382,585 $ --- $ 50,585,347
============== ============== ============== ==============
* Redemption price per share varies by length of time shares are held.
(a) To adjust DG paid in capital by shares of beneficial interest, at par.
(b) Adjustment to convert DG Shares Outstanding to AmeriStar Shares Outstanding based on AmeriStar NAV's.
</TABLE>
<PAGE>
AmeriStar/DG Funds
Prime Money Market Portfolio
Pro Forma Combining Schedule of Portfolio Investments
06/30/98
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma AmeriStar DG Pro Forma
Combined Prime Prime Combined
AmeriStar DG Principal Maturity Amortized Amortized Amortized
Prime Prime Amount/Shares Description Date Rate Cost Cost Cost
Bank Notes - 0.8%
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 3,000,000 $ $ 3,000,000 AMEX Centurian 7/13/98 5.71%* $ 3,000,635 $ $ 3,000,635
Total Bank Notes 3,000,635 --- 3,000,635
Certificates of Deposit - 1.1%
4,000,000 4,000,000 CS First Boston 7/7/98 5.74%* 4,000,000 4,000,000
Total Certificates of Deposit 4,000,000 --- 4,000,000
Commercial Paper - 72.6%
7,000,000 7,000,000 American Express Credit Corp. 7/10/98 5.56%** 6,990,340 6,990,340
7,000,000 7,000,000 American General Finance Corp. 9/18/98 5.60%** 6,915,053 6,915,053
6,500,000 6,500,000 American Home Products Corp. 8/11/98 5.57%** 6,459,287 6,459,287
6,500,000 6,500,000 Amoco Corp. 8/7/98 5.54%** 6,463,457 6,463,457
7,000,000 7,000,000 Associates Corp. of North America 7/13/98 5.53%** 6,987,260 6,987,260
5,000,000 5,000,000 Banca CRT Finance 7/6/98 5.58%** 4,996,160 4,996,160
5,000,000 5,000,000 Bank One Funding 7/21/98 5.55%** 4,984,694 4,984,694
5,000,000 5,000,000 Banque et d'Epargne de L'Etat 7/7/98 5.55%** 4,995,417 4,995,417
5,000,000 5,000,000 Bil North America Inc Bank Luxemborg 7/28/98 5.54%** 4,979,375 4,979,375
5,000,000 5,000,000 British Telecommunication PLC 7/1/98 6.05%** 5,000,000 5,000,000
5,000,000 5,000,000 Caisse Centrale 7/17/98 5.55%** 4,987,778 4,987,778
5,000,000 5,000,000 Check Point Charley, Inc. 7/8/98 5.60%** 4,994,594 4,994,594
7,000,000 7,000,000 Chevron Capital USA, Inc. 8/21/98 5.55%** 6,945,558 6,945,558
7,000,000 7,000,000 CIT Group Holdings, Inc. 7/29/98 5.56%** 6,970,164 6,970,164
7,000,000 7,000,000 Coca-Cola Co. 9/22/98 5.55%** 6,911,720 6,911,720
7,000,000 7,000,000 Commercial Credit Co. 7/8/98 5.56%** 6,992,514 6,992,514
5,000,000 5,000,000 Commonwealth Bank of Australia 7/17/98 5.55%** 4,987,733 4,987,733
7,000,000 7,000,000 Cooperative Tractor A 7/2/98 5.96%** 6,998,844 6,998,844
6,500,000 6,500,000 Deere & Co. 7/17/98 5.56%** 6,484,082 6,484,082
5,000,000 5,000,000 Deutsche Bank 7/6/98 5.52%** 4,996,201 4,996,201
6,000,000 6,000,000 Fluor Corp. 7/31/98 5.57%** 5,972,400 5,972,400
5,000,000 5,000,000 Ford Motor Co. 7/2/98 5.68%** 4,999,213 4,999,213
6,500,000 6,500,000 Ford Motor Credit Corp. 7/6/98 5.55%** 6,495,062 6,495,062
7,500,000 7,500,000 General Electric Capital Corp. 7/23/98 5.56%** 7,474,883 7,474,883
5,000,000 5,000,000 General Motors 7/3/98 5.67%** 4,999,214 4,999,214
7,000,000 7,000,000 General Motors Acceptance Corp. 7/20/98 5.53%** 6,979,828 6,979,828
6,000,000 6,000,000 General RE Corp. 9/10/98 5.57%** 5,935,035 5,935,035
7,000,000 7,000,000 Gillette Co. 8/24/98 5.54%** 6,942,460 6,942,460
5,000,000 5,000,000 Great Western Life 9/8/98 5.66%** 4,924,186 4,924,186
5,000,000 5,000,000 Halifax Building Society 7/4/98 5.69%** 4,999,211 4,999,211
7,000,000 7,000,000 Household Finance Corp. 7/2/98 5.55%** 6,998,927 6,998,927
7,000,000 7,000,000 IBM Credit Corp. 8/31/98 5.54%** 6,935,001 6,935,001
7,000,000 7,000,000 International Lease Finance Corp. 8/3/98 5.54%** 6,964,901 6,964,901
6,900,000 6,900,000 KFW International Finance 7/5/98 6.10%** 6,898,831 6,898,831
3,700,000 3,700,000 Kimberly-Clark Corp. 8/26/98 5.55%** 3,668,344 3,668,344
5,000,000 5,000,000 Lloyds Bank PLC 8/14/98 5.51%** 4,966,633 4,966,633
7,500,000 7,500,000 Merrill Lynch & Co., Inc. 8/13/98 5.58%** 7,450,908 7,450,908
5,000,000 5,000,000 Norbanken 7/17/98 5.55%** 4,987,778 4,987,778
5,000,000 5,000,000 PHH Corp. 7/27/98 5.72%** 4,979,525 4,979,525
7,000,000 7,000,000 Procter & Gamble Co. 9/25/98 5.56%** 6,908,529 6,908,529
7,000,000 7,000,000 Shell Oil Co. 7/15/98 5.51%** 6,985,164 6,985,164
7,000,000 7,000,000 Smithkline Beecham Corp. 8/18/98 5.56%** 6,948,573 6,948,573
5,000,000 5,000,000 Svenska Handelsbanken 7/6/98 5.53%** 4,996,194 4,996,194
6,500,000 6,500,000 Texaco, Inc. 7/22/98 5.57%** 6,479,108 6,479,108
3,000,000 3,000,000 Thunder Bay 7/21/98 5.61%** 2,990,733 2,990,733
7,000,000 7,000,000 USAA Capital Corp. 7/1/98 5.53%** 7,000,000 7,000,000
Total Commercial Paper 96,738,128 179,182,744 275,920,872
Corporate Obligations - 2.1% ------------ ------------ -----------
4,000,000 4,000,000 CTN Trust, Series 1, MTN (b) 7/2/98 6.01%* 4,002,398 4,002,398
4,000,000 4,000,000 Merrill Lynch & Co., MTN 7/7/98 5.72%* 4,000,000 4,000,000
Total Corporate Obligations 8,002,398 --- 8,002,398
U.S. Government Agencies - 9.1% -----------
6,500,000 6,500,000 Federal Home Loan Bank System 7/27/98 5.35% 6,474,885 6,474,885
5,000,000 5,000,000 Federal Home Loan Bank System 7/1/98 5.58%* 4,998,328 4,998,328
5,500,000 5,500,000 Federal Home Loan Mortgage Corp. 8/14/98 5.34% 5,464,103 5,464,103
5,500,000 5,500,000 Federal National Mortgage Assoc. 8/28/98 5.34% 5,452,682 5,452,682
5,000,000 5,000,000 Federal National Mortgage Assoc. 7/7/98 5.60%* 4,999,516 4,999,516
2,000,000 2,000,000 Federal National Mortgage Assoc. 9/14/98 5.35%* 1,998,680 1,998,680
5,000,000 5,000,000 Student Loan Marketing Assoc. 7/7/98 5.34%* 4,994,244 4,994,244
Total U.S. Government Agencies 16,990,768 17,391,670 34,382,438
------------ ------------- ----------
Repurchase Agreements - 14.6%
20,360,700 20,360,700 Cantor Fitzgerald Securities 7/1/98 5.72% 20,360,700 20,360,700
35,266,438 35,266,438 Goldman Sachs 7/1/98 5.60% 35,266,438 35,266,438
Total Repurchase Agreements 35,266,438 20,360,700 55,627,138
------------- ------------ -----------
Money Market Deposit Accounts - 0.0%
1,016 1,016 Bank of New York 1,016 1,016
Total Money Market Deposit Account 1,016 --- 1,016
---------- ----------
Total Investments (Cost - $380,934,497) (a) - 100.3% $163,999,383 $216,935,114 $380,934,497
============= ============ ============
Percentages indicated are based on net assets of $379,695,430.
(a) Cost for federal income tax and financial reporting purposes are the same.
(b) Represents a restricted security, purchased under Rule 144A, which is exempt from registration under Securities Act
of 1933, as amended.
These securities have been deemed liquid under guidelines established by the Board of Directors.
* Variable rate security. Rate represents rate in effect at June 30, 1998. Maturity date reflects the next rate change date.
** Yield effective at purchase
MTN - Medium Term Note
PLC - Public Limited Company
</TABLE>
<PAGE>
AmeriStar/DG Funds
Limited Duration U.S. Government Portfolio
Pro Forma Combining Schedule of Portfolio Investments
06/30/98
(Unaudited)
<TABLE>
<CAPTION>
AmeriStar DG
Pro Forma Ltd. Duration Ltd Term Pro Forma
AmeriStar DG Combined US Gov't Gov't Income Combined
Ltd. Duration Ltd Term Principal Maturity Market Market Market
US Gov't Gov't Income Amount/Shares Description Date Rate Value Value Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate Bonds - 16.4%
Chemicals - 2.0%
$ $ 1,000,000 $1,000,000 Du Point (E.I.) de Nemours & Co. 9/1/02 6.50% $ $1,023,100 $ 1,023,100
--- 1,023,100 1,023,100
Financial Services - 3.0%
1,000,000 1,000,000 General Electric Capital Corp. 4/3/01 5.92% 1,002,290 1,002,290
500,000 500,000 International Lease Finance Corp. 6/15/03 6.00% 499,880 499,880
--- 1,502,170 1,502,170
Health Care - 2.5%
1,250,000 1,250,000 Upjohn Co. 4/15/00 5.88% 1,253,350 1,253,350
--- 1,253,350 1,253,350
Pharmaceuticals - 2.0%
1,000,000 1,000,000 American Home Products Corp. 2/15/00 7.70% 1,026,080 1,026,080
--- 1,026,080 1,026,080
Utilities - Electric - 6.9%
1,500,000 1,500,000 Northern States Power Co. 2/1/99 5.50% 1,500,405 1,500,405
1,000,000 1,000,000 Pacific Gas & Electric Co. 8/1/98 5.38% 1,000,620 1,000,620
1,000,000 1,000,000 Southern California Edison Co. 12/15/98 5.60% 1,000,840 1,000,840
--- 3,501,865 3,501,865
Total Corporate Bonds --- 8,306,565 8,306,565
U.S. Government Agencies - 30.3%
Federal Farm Credit Bank - 3.5%
1,000,000 1,000,000 Federal Farm Credit Bank 3/23/05 6.15% 999,870 999,870
750,000 750,000 Federal Farm Credit Bank 8/27/07 7.34% 751,305 751,305
1,751,175 --- 1,751,175
Federal Home Loan Bank - 8.9%
2,000,000 2,000,000 Federal Home Loan Bank 7/28/00 5.76% 1,999,140 1,999,140
1,000,000 1,000,000 Federal Home Loan Bank 8/13/01 6.28% 1,004,370 1,004,370
750,000 750,000 Federal Home Loan Bank 8/28/01 6.00% 749,903 749,903
750,000 750,000 Federal Home Loan Bank 12/24/07 6.10%* 755,147 755,147
1,505,050 3,003,510 4,508,560
Federal Home Loan Mortgage Corp. - 4.0%
1,000,000 1,000,000 Federal Home Loan Mortgage Corp. 5/24/01 6.79% 1,009,300 1,009,300
500,000 500,000 Federal Home Loan Mortgage Corp. 9/25/02 6.16% 508,415 508,415
500,000 500,000 Federal Home Loan Mortgage Corp. 9/30/02 6.58% 500,430 500,430
1,008,845 1,009,300 2,018,145
Federal National Mortgage Assoc. - 5.0%
1,000,000 1,000,000 Federal National Mortgage Assoc. 10/20/00 6.05% 1,003,501 1,003,501
500,000 500,000 Federal National Mortgage Assoc. 11/12/02 5.98% 505,105 505,105
500,000 500,000 Federal National Mortgage Assoc. 8/14/07 6.44% 519,500 519,500
500,000 500,000 Federal National Mortgage Assoc. 11/14/07 6.65% 510,170 510,170
1,534,775 1,003,501 2,538,276
Government National Mortgage Assoc. - 7.7%
Government National Mortgage Assoc.,
45,466 45,466 Pool # 152718 12/15/01 9.00% 47,711 47,711
Government National Mortgage Assoc.,
152,519 152,519 Pool # 248038 2/15/03 9.00% 160,049 160,049
Government National Mortgage Assoc.,
604,035 604,035 Pool # 407408 5/15/10 7.50% 623,667 623,667
Government National Mortgage Assoc.,
846,796 846,796 Pool # 423984 8/15/11 7.00% 868,228 868,228
Government National Mortgage Assoc.,
871,128 871,128 Pool # 423914 8/15/11 7.50% 899,438 899,438
Government National Mortgage Assoc.,
696,106 696,106 Pool # 423923 9/15/11 7.00% 713,724 713,724
Government National Mortgage Assoc.,
558,530 558,530 Pool # 431451 10/15/11 7.50% 576,682 576,682
3,889,499 --- 3,889,499
Student Loan Marketing Assoc. - 1.2%
600,000 600,000 Student Loan Marketing Assoc. 1/23/01 5.81% 599,826 599,826
599,826 --- 599,826
Total U.S. Government Agencies 10,289,170 5,016,311 15,305,481
U.S. Treasury Notes - 46.3%
250,000 250,000 U.S. Treasury Note 12/31/98 5.75% 250,545 250,545
1,000,000 1,000,000 U.S. Treasury Note 8/15/99 6.00% 1,005,500 1,005,500
500,000 500,000 U.S. Treasury Note 5/15/00 6.38% 507,545 507,545
750,000 750,000 U.S. Treasury Note 5/31/00 6.25% 759,908 759,908
2,500,000 2,500,000 U.S. Treasury Note 11/15/01 7.50% 2,647,799 2,647,799
1,000,000 1,000,000 U.S. Treasury Note 5/15/02 7.50% 1,067,370 1,067,370
750,000 750,000 U.S. Treasury Note 6/30/02 6.25% 768,848 768,848
1,250,000 1,250,000 U.S. Treasury Note 12/31/02 5.63% 1,255,150 1,255,150
750,000 750,000 U.S. Treasury Note 1/31/03 5.50% 749,348 749,348
4,000,000 4,000,000 U.S. Treasury Note 7/31/01 6.63% 4,119,560 4,119,560
4,000,000 4,000,000 U.S. Treasury Note 10/15/98 7.13% 4,022,680 4,022,680
2,000,000 2,000,000 U.S. Treasury Note 10/31/99 7.50% 2,050,200 2,050,200
4,000,000 4,000,000 U.S. Treasury Note 11/15/01 7.50% 4,233,920 4,233,920
Total U.S. Treasury Notes 9,012,013 14,426,360 23,438,373
Repurchase Agreement - 4.4%
2,209,200 2,209,200 Cantor Fitzgerald Securities 2,209,200 2,209,200
Total Repurchase Agreement --- 2,209,200 2,209,200
Regulated Investment Companies - 1.6%
807,254 807,254 AIM Treasury Money Market Fund 807,255 807,255
1,585 1,585 Dreyfus Prime Money Market Fund 1,585 1,585
Total Regulated Investment Companies 808,840 --- 808,840
Total Investments (Cost - $ 49,445,650) - 99.0% $ 20,110,023 $29,958,436 $50,068,459
============= ============ ===========
Percentages indicated are based on net assets of $50,585,347.
(a) Represents cost for federal income tax purposes and differs from value by net unrealized depreciation of securities as follows:
Unrealized appreciation....................................................................................... $638,943
Unrealized depreciation....................................................................................... (16,134)
Net unrealized appreciation................................................................................... $622,809
* Variable rate security. Rate represents rate in effect at June 30, 1998.
</TABLE>
<PAGE>
AmeriStar/DG Funds
U.S. Treasury Money Market Portfolio
Pro Forma Combining Schedule of Portfolio Investments
06/30/98
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma AmeriStar DG Pro Forma
AmeriStar Combined US Treasury Treasury Combined
US DG Principal Amortized Amortized Amortized
Treasury Treasury Amount/Shares Description Cost Cost Cost
U.S. Treasury Bills - 13.3%
<S> <C> <C> <C> <C> <C> <C>
$ 5,000,000 $ $ 5,000,000 7/9/98 $ 4,994,967 $ $ 4,994,967
20,000,000 20,000,000 7/23/98 19,937,361 19,937,361
20,000,000 20,000,000 9/17/98 19,779,867 19,779,867
20,000,000 20,000,000 11/12/98 19,621,822 19,621,822
Total U.S. Treasury Bills 4,994,967 59,339,050 64,334,017
---------- ------------ -----------
U.S. Treasury Notes - 40.5%
20,000,000 20,000,000 8.25%, 7/15/98 20,022,241 20,022,241
15,000,000 15,000,000 5.25%, 7/31/98 14,999,556 14,999,556
5,000,000 5,000,000 6.25%, 7/31/98 5,002,775 5,002,775
5,000,000 5,000,000 5.88%, 8/15/98 5,001,307 5,001,307
5,000,000 5,000,000 9.25%, 8/15/98 5,023,176 5,023,176
20,000,000 20,000,000 4.75%, 8/31/98 19,979,165 19,979,165
20,000,000 20,000,000 4.75%, 9/30/98 19,964,623 19,964,623
10,000,000 10,000,000 4.75%, 9/30/98 9,983,295 9,983,295
5,000,000 5,000,000 6.00%, 9/30/98 5,006,927 5,006,927
20,000,000 20,000,000 7.13%, 10/15/98 20,100,065 20,100,065
5,000,000 5,000,000 5.88%, 10/31/98 5,005,037 5,005,037
5,000,000 5,000,000 5.50%, 11/15/98 5,000,000 5,000,000
20,000,000 20,000,000 5.13%, 11/30/98 19,977,381 19,977,381
15,000,000 15,000,000 5.75%, 12/31/98 15,028,362 15,028,362
15,000,000 15,000,000 6.38%, 1/15/99 15,076,987 15,076,987
5,000,000 5,000,000 5.88%, 1/31/99 5,010,335 5,010,335
5,000,000 5,000,000 5.00%, 2/15/99 4,984,966 4,984,966
Total U.S. Treasury Notes 65,046,180 130,120,018 195,166,198
------------ ------------ -------------
U.S. Treasury Strips - 1.0%
5,000,000 5,000,000 5.69%, 8/15/98 4,965,845 4,965,845
------------ -------------
Total U.S. Treasury Strips 4,965,845 --- 4,965,845
------------ -------------
Repurchase Agreements - 44.9%
74,000,000 74,000,000 Cantor Fitzgerald Securities, 74,000,000 74,000,000
5.72%, 7/1/98
48,854,100 48,854,100 State Street Bank & Trust, 48,854,100 48,854,100
5.68%, 7/1/98
9,352,090 9,352,090 Goldman Sachs, 9,352,090 9,352,090
5.25%, 7/1/98
41,944,490 41,944,490 Merrill Lynch, 41,944,490 41,944,490
5.60%, 7/1/98
41,944,490 41,944,490 Prudential, 41,944,490 41,944,490
5.82%, 7/2/98
Total Repurchase Agreements 93,241,070 122,854,100 216,095,170
------------- -------------- --------------
Money Market Deposit Accounts - 0.0%
1,011 1,011 Bank of New York 1,011 1,011
Total Money Market Deposit Account 1,011 --- 1,011
-------------- ----------------
Total Investments (Cost - $480,562,241) (a) - 99.7% $168,249,073 $312,313,168 $ 480,562,241
============== ============= ================
Percentages indicated are based on net assets of $481,903,628.
(a) Cost for federal income tax and financial reporting purposes are the same.
</TABLE>
<PAGE>
AmeriStar/DG Funds
U.S. Treasury Money Market Portfolio
Pro Forma Combining Statement of Operations
06/30/98
(Unaudited)
<TABLE>
<CAPTION>
AmeriStar DG Pro Forma
US Treasury Treasury Pro Forma Combined
Money Market Money Market Adjustments (Note 1)
INVESTMENT INCOME
<S> <C> <C> <C> <C>
Investment Income $ 10,003,339 $ 16,838,797 $ --- $ 26,842,136
-------------- ------------- -------------- --------------
10,003,339 16,838,797 --- 26,842,136
-------------- -------------- -------------- --------------
EXPENSES:
Advisory fees 454,532 1,562,048 (781,024)(a) 1,235,556
Administration fees 181,811 303,003 9,407 (b) 494,221
Shareholder servicing fees -
Class A Shares 201,263 438,751 (423,130)(c) 216,884
Accounting fees 64,956 77,268 6,043 (e) 148,267
Transfer agent fees & expenses 47,062 38,149 (53,251)(g) 31,960
Directors' fees 4,597 4,327 (4,327)(f) 4,597
Legal fees 23,796 2,963 (1,500)(f) 25,259
Audit fees 20,052 12,695 (6,500)(f) 26,247
Custodian fees 42,064 7,119 15,439 (d) 64,622
Organization costs 13,412 --- --- 13,412
Registration & filing fees 14,174 52,927 (14,174)(f) 52,927
Printing costs 59,549 7,271 (6,000)(f) 60,820
Insurance 594 3,795 --- 4,389
Other expenses 14,730 5,034 (3,000)(f) 16,764
-------------- -------------- -------------- --------------
Total Expenses: 1,142,592 2,515,350 (1,262,017) 2,395,925
Less Waivers
Advisory fees --- (624,819) 624,819 (a) ---
Administration fees --- --- --- ---
12B-1 fees --- --- --- ---
-------------- -------------- -------------- --------------
Net Expenses: 1,142,592 1,890,531 (637,198) 2,395,925
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Net Investment Income 8,860,747 14,948,266 637,198 24,446,211
-------------- -------------- -------------- --------------
Net Increase in Net Assets -------------- -------------- -------------- --------------
resulting from Operations: $ 8,860,747 $ 14,948,266 $ 637,198 $ 24,446,211
============== =============== =============== ================
Notes to Pro Forma Financial Statements
(a) Adjustment to reflect the AmeriStar contractual fee structure for Advisory fees (0.25% of net assets).
(b) Adjustment to reflect the AmeriStar contractual fee structure for Administration fees (0.10% of net assets).
(c) Adjustment to reflect the AmeriStar contractual fee structure for Shareholder Servicing fees (0.25% of Class A net assets).
(d) Adjustment to reflect the AmeriStar contractual fee structure on Custodian fees (0.02% on first $50M, 0.01% thereafter + OOP
fees).
(e) Adjustment to reflect the AmeriStar contractual fee structure for Accounting fees (0.03% of net assets + OOP fees).
(f) Reduction reflects expected savings when the two funds merge.
(g) Adjustment to reflect the AmeriStar contractual fee structure for Transfer Agency ($12,500/yr/class for 2 classes + OOP
fees).
</TABLE>
AmeriStar/DG Funds
Prime Money Market Portfolio
Pro Forma Combining Statement of Operations
06/30/98
(Unaudited)
<TABLE>
<CAPTION>
AmeriStar DG Pro Forma
Prime Prime Pro Forma Combined
Money Market Money Market Adjustments (Note 1)
INVESTMENT INCOME
<S> <C> <C> <C> <C>
Investment Income $ 5,519,959 $ 10,511,644 $ --- $ 16,031,603
-------------- -------------- -------------- --------------
5,519,959 10,511,644 --- 16,031,603
-------------- -------------- -------------- --------------
EXPENSES:
Advisory fees 242,678 930,944 (465,471)(a) 708,151
Administration fees 97,070 180,598 5,591 (b) 283,259
12B-1 fees --- 465,472 (465,472)(c) ---
Shareholder servicing fees -
Class A Shares 138,187 --- 460,818 (d) 599,005
Accounting fees 61,902 49,054 (25,978)(f) 84,978
Transfer agent fees & expenses 61,485 27,218 (56,623)(h) 32,080
Directors' fees 7,286 568 (568)(g) 7,286
Custodian fees 26,597 6,182 12,547 (e) 45,326
Legal fees 12,214 202 --- 12,416
Audit fees 21,740 1,955 --- 23,695
Organization costs 12,911 --- --- 12,911
Registration & filing fees 10,663 54,248 (10,663)(g) 54,248
Printing costs 27,029 9,202 (7,000)(g) 29,231
Insurance 4,493 3,918 --- 8,411
Other expenses --- 2,776 --- 2,776
-------------- -------------- -------------- --------------
Total Expenses: 724,255 1,732,337 (552,819) 1,903,773
Less Waivers:
Investment Advisory fees --- (372,377) 372,377(a) ---
Administration fees --- (111,714) 111,714(b) ---
-------------- -------------- -------------- --------------
Net Expenses: 724,255 1,248,246 (68,728) 1,903,773
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Net Investment Income 4,795,704 9,263,398 68,728 14,127,830
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Net Realized Gain (Loss) (2,389) --- --- (2,389)
-------------- -------------- -------------- --------------
Net Increase in Net Assets -------------- -------------- -------------- --------------
resulting from Operations: $ 4,793,315 $ 9,263,398 $ 68,728 $ 14,125,441
=============== ============== ============== ==============
Notes to Pro Forma Financial Statements
(a) Adjustment to reflect the AmeriStar contractual fee structure for Advisory fees (0.25% of net assets).
(b) Adjustment to reflect the AmeriStar contractual fee structure for Administration fees (0.10% of net assets).
(c) Adjustment to reflect the AmeriStar contractual fee structure for 12b-1 fees (0.00% of net assets).
(d) Adjustment to reflect the AmeriStar contractual fee structure for Shareholder Servicing fees (0.25% of net assets).
(e) Adjustment to reflect the AmeriStar contractual fee structure on Custodian fees (0.02% on first $50M, 0.01% thereafter + OOP
fees).
(f) Adjustment to reflect the AmeriStar contractual fee structure for Accounting fees (0.03% of net assets + OOP fees).
(g) Reduction reflects expected savings when the two funds merge.
(h) Adjustment to reflect the AmeriStar contractual fee structure for Transfer Agency ($12,500/yr/class for 3 classes + OOP
fees).
</TABLE>
AmeriStar/DG Funds
Limited Duration U.S. Government Portfolio
Pro Forma Combining Statement of Operations
06/30/98
(Unaudited)
<TABLE>
<CAPTION>
AmeriStar DG Pro Forma
Ltd Duration Ltd Term Pro Forma Combined
US Gov't Gov't Income Adjustments (Note 1)
INVESTMENT INCOME
<S> <C> <C> <C> <C>
Investment Income $ 1,254,486 $ 4,187,705 $ --- $ 5,442,191
--------------
1,254,486 4,187,705 --- 5,442,191
-------------- -------------- -------------- --------------
EXPENSES:
Advisory fees 99,457 410,982 (68,487)(a) 441,952
Administration fees 29,837 88,876 13,873 (b) 132,586
Shareholder servicing fees --- 92,347 (92,347)(d) ---
Shareholder servicing fees -
Class B Shares 60 --- --- 60
Distribution fees - Class A Shares 14,503 --- 51,730 (c) 66,233
Distribution fees - Class B Shares 178 --- --- 178
Accounting fees 55,814 41,608 (52,905)(e) 44,517
Transfer agent fees & expenses 28,184 31,049 (12,493)(g) 46,740
Directors' fees 977 2,024 (2,024)(f) 977
Custodian fees 10,141 (1,343) 12,241 (h) 21,039
Legal fees 10,500 2,835 (1,500)(f) 11,835
Audit fees 13,326 12,806 (6,000)(f) 20,132
Organization costs 1,157 --- --- 1,157
Registration & filing fees 8,772 13,132 (8,772)(f) 13,132
Printing costs 5,794 5,615 (4,000)(f) 7,409
Insurance 518 2,855 --- 3,373
Other expenses --- 3,893 --- 3,893
-------------- -------------- -------------- --------------
Total Expenses: 279,218 706,679 (170,684) 815,213
Less Waivers:
Advisory fees (45,858) (102,745) (7,075)(a) (155,678)
Administration fees (21,881) --- (75,347)(b) (97,228)
Distribution Fees - Class A Shares (12,652) --- (44,101)(c) (56,753)
-------------- -------------- -------------- --------------
Net Expenses: 198,827 603,934 (297,207) 505,554
-------------- -------------- -------------- --------------
Net Investment Income 1,055,659 3,583,771 297,207 4,936,637
-------------- -------------- -------------- --------------
Realized and Unrealized Gain/Losses
on Investments:
Net realized gains (losses) (1,541) 292,742 --- 291,201
Change in unrealized appreciation 250,759 149,277 --- 400,036
Net Realized and Unrealized Gain
on Investments 249,218 442,019 --- 691,237
Net Increase in Net Assets
resulting from Operations: $ 1,304,877 $ 4,025,790 $297,207 $ 5,627,874
Notes to Pro Forma Financial Statements
(a) Adjustment to reflect the AmeriStar contractual fee structure for Advisory fees (0.50% of net assets).
(b) Adjustment to reflect the AmeriStar contractual fee structure for Administration fees (0.15% of net assets).
(c) Adjustment to reflect the AmeriStar contractual fee structure for 12B-1 fees (0.25% of Class A net assets).
(d) Adjustment to reflect the AmeriStar contractual fee structure for Shareholder Services fees (0.25% of Class B net assets).
(e) Adjustment to reflect the AmeriStar contractual fee structure for Accounting fees (0.03% of net assets + OOP fees).
(f) Reduction reflects expected savings when the two funds merge.
(g) Adjustment to reflect the AmeriStar contractual fee structure for Transfer Agency ($12,500/yr/class for 3 classes + OOP
fees).
(h) Adjustment to reflect the AmeriStar contractual fee structure on Custodian fees (0.02% on first $50M, 0.01% thereafter + OOP
fees).
</TABLE>
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR PORTFOLIOS/DG FUNDS
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
---------
1. BASIS OF COMBINATION:
The unaudited Pro Forma Combining Statements of Assets and Liabilities,
Statements of Operations, and Schedules of Portfolio Investments reflect the
accounts of three investment portfolios offered by The Infinity Mutual Funds,
Inc. (the "Company"): AmeriStar Prime Money Market Portfolio, AmeriStar U.S.
Treasury Money Market Portfolio and AmeriStar Limited Duration U.S. Government
Portfolio (the "AmeriStar Portfolios") and three investment portfolios offered
by DG Investor Series: DG Prime Money Market Fund, DG Treasury Money Market Fund
and DG Limited Term Government Income Fund (the "DG Funds"), (collectively, the
"Funds") as if the proposed reorganization occurred as of and for the year ended
June 30, 1998. These statements have been derived from books and records
utilized in calculating daily net asset value at June 30, 1998.
The Reorganization Agreement provides that on the Closing Date of the
Reorganization, all of the assets and liabilities will be transferred as follows
such that at and after the Reorganization, the assets and liabilities of the
applicable DG Funds will become the assets and liabilities of the corresponding
AmeriStar Portfolio: DG Prime Money Market Fund assets and liabilities will be
transferred to AmeriStar Prime Money Market Portfolio, DG Treasury Money Market
Fund assets and liabilities will be transferred to AmeriStar U.S. Treasury Money
Market Portfolio and DG Limited Term Government Income Fund assets and
liabilities will be transferred to AmeriStar Limited Duration U.S. Government
Portfolio. In exchange for the transfer of assets and liabilities, the Company
will issue to the DG Funds full and fractional shares of the corresponding
AmeriStar Portfolios, and the DG Funds will make a liquidating distribution of
such shares to its shareholders. The number of shares of the AmeriStar
Portfolios so issued will be equal in value to the full and fractional shares of
the DG Funds that are outstanding immediately prior to the Reorganization. At
and after the Reorganization, all debts, liabilities and obligations of DG Funds
will attach to the AmeriStar Portfolios and may thereafter be enforced against
the AmeriStar Portfolios to the same extent as if the AmeriStar Portfolios had
incurred them. The pro forma statements give effect to the proposed transfer
described above.
Under the purchase method of accounting for business combinations under
generally accepted accounting principles, the basis on the part of the AmeriStar
Portfolios, of the assets of the DG Funds will be the fair market value of such
assets on the Closing Date of the Reorganization. The AmeriStar Portfolios will
recognize no gain or loss for federal tax purposes on its issuance of shares in
the Reorganization, and the basis to the AmeriStar Portfolios of the assets of
the DG Funds received pursuant to the Reorganization will equal the fair market
value of the consideration furnished, and costs incurred, by the AmeriStar
Portfolios in the Reorganization -- i.e., the sum of the liabilities assumed,
the fair market value of the AmeriStar Portfolios shares issued, and such costs.
For accounting purposes, the AmeriStar Portfolios are the surviving portfolios
of this Reorganization. The pro forma statements reflect the combined results of
operations of the DG Funds and the AmeriStar Portfolios. However, should such
Reorganization be effected, the statements of operations of the AmeriStar
Portfolios will not be restated for pre-combination period results of the
corresponding DG Funds.
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR PORTFOLIOS/DG FUNDS
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
-------
The Pro Forma Combining Statements of Assets and Liabilities, Statements of
Operations, and Schedules of Portfolio Investments should be read in conjunction
with the historical financial statements of the Funds incorporated by reference
in the Statement of Additional Information.
The AmeriStar Portfolios and the DG Funds are each separate portfolios of
The Infinity Mutual Funds, Inc. and DG Investor Series, respectively, which are
registered as open-end management companies under the Investment Company Act of
1940. The investment objective of AmeriStar Prime Money Market Portfolio and DG
Prime Money Market Fund is to provide investors with as high a level of current
income as is consistent with the preservation of capital and the maintenance of
liquidity. The investment objective of AmeriStar U.S. Treasury Money Market
Portfolio and DG Treasury Money Market Fund is to provide investors with as high
a level of current income as is consistent with the preservation of capital and
the maintenance of liquidity. The investment objective of AmeriStar Limited
Duration U.S. Government Portfolio and DG Limited Term Government Income Fund is
to provide investors with high current income without incurring undue risk.
EXPENSES
First American National Bank ("First American") serves as the AmeriStar
Portfolios' investment advisor. Barnett Capital Advisors, Inc. served as the
sub-investment advisor with respect to the AmeriStar Prime Money Market
Portfolio until January 30, 1998 when the agreement was terminated and First
American assumed the day-to-day management of the AmeriStar Prime Money Market
Portfolio's investments. BISYS Fund Services Limited Partnership ("BISYS")
serves as the administrator, distributor, and mutual fund accountant for the
AmeriStar Portfolios. BISYS Fund Services Ohio ("BISYS Ohio") serves as the
transfer and dividend disbursing agent for the AmeriStar Portfolios. BISYS and
BISYS Ohio are subsidiaries of The BISYS Group, Inc.
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR PORTFOLIOS/DG FUNDS
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
-------
DG FUNDS:
The DG Funds issue one class of shares, which have rights and privileges
analogous to those of the AmeriStar Portfolio's Class A Shares.
Under the terms of the investment advisory agreement between DG Investor Series
and ParkSouth Corporation (the Advisor), the Advisor is entitled to receive fees
computed at the annual rate of 0.50% for the Prime and Treasury Money Market
Funds and 0.60% for the Limited Term Government Income Fund. Such fees are
accrued daily and paid monthly. For the year ended June 30, 1998, total
investment advisory fees incurred by the DG Funds were as follows:
TOTAL FEES FEES WAIVED
Prime Money Market 930,944 372,377
Treasury Money Market 1,562,048 624,819
Limited Term Government Income 410,982 102,745
AMERISTAR PORTFOLIOS:
The Prime and U.S. Treasury Money Market Portfolios issue two classes of
shares: Class A Shares and Trust Shares. The Limited Duration U.S. Government
Portfolio issues two classes of shares: Class A Shares and Class B Shares. On
the Closing Date of the Reorganization, the Limited Duration U.S. Government
Portfolio will commence offering of Trust Shares. For pro forma purposes, the
Combining Pro Forma Statement of Assets and Liabilities and Statement of
Operations include Trust Share operations for the period presented. Each class
of shares has identical rights and privileges except with respect to fees paid
under shareholder servicing or distribution plans, expenses allocable
exclusively to each class of shares, voting rights on matters affecting a single
class of shares, and the exchange privilege of each class of shares. Class A
Shares are subject to an initial sales charge upon purchase. Class B Shares are
subject to a contingent deferred sales change (CDSC) upon redemption.
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR PORTFOLIOS/DG FUNDS
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
-------
Under the terms of the investment advisory agreement, First American is entitled
to receive fees computed at the annual rate of 0.25% for the Prime and U.S.
Treasury Money Market Portfolios and 0.50% of Limited Duration U.S. Government
Portfolio. Such fees are accrued daily and paid monthly. For the year ended June
30, 1998, total investment advisory fees incurred by the AmeriStar Portfolios
were as follows:
TOTAL FEES FEES WAIVED
Prime Money Market 708,151 -
U.S. Treasury Money Market 1,235,556 -
Limited Duration U.S. Government 820,454 133,279
Under the terms of the administration agreement BISYS' fees are computed, at the
annual rate of 0.10% of net assets of the Prime and U.S. Treasury Money Market
Portfolios, and at 0.15% of net assets of the Limited Duration U.S. Government
Portfolio. For the year ended June 30, 1998, the administration fees incurred by
the AmeriStar Portfolios were as follows:
TOTAL FEES
Prime Money Market 283,259
U.S. Treasury Money Market 494,221
Limited Duration U.S. Government 246,138
PRO FORMA ADJUSTMENTS AND PRO FORMA COMBINED COLUMNS
The pro forma adjustments and pro forma combined columns of the statements
of operations reflect the adjustments necessary to show expenses at the rates
which would have been in effect if the DG Funds were included in the AmeriStar
Portfolios for the year ended June 30, 1998. Investment advisory,
administration, 12b-1, shareholder service, accounting and custodian fees in the
pro forma combined column are calculated at the rates in effect for the
AmeriStar Portfolios based upon the combined net assets of the corresponding DG
Funds and the AmeriStar Portfolios. Certain pro forma adjustments were made to
estimate the benefit of combining operations of separate funds into one survivor
fund.
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR PORTFOLIOS/DG FUNDS
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
-------
The pro forma schedules of portfolio investments give effect to the
proposed transfer of such assets as if the Reorganization had occurred at June
30, 1998.
2. PORTFOLIO VALUATION, SECURITIES TRANSACTIONS AND RELATED INCOME:
The AmeriStar Prime and U.S. Treasury Money Market Portfolios' securities
are valued at amortized cost, which approximates market value. The amortized
cost method involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of the difference
between the principal amount due at maturity and cost.
The AmeriStar Limited Duration U.S. Government 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. Restricted securities and securities for which
market quotations are not readily available, if any, are valued at fair value
using methods approved by the Board of Directors. Debt securities with remaining
maturities of 60 days or less are normally valued at amortized cost, which
approximates market value. The amortized cost method involves valuing a security
at its cost on the date of purchase or, in the case of securities purchased more
than 60 days to maturity, at their market value each day until the 61st day
prior to maturity, and there after assuming a constant amortization to maturity
of the difference between the principal amount due at maturity and such
valuation.
Security transactions are recorded on trade date. Realized gains and losses
from sales of investments are calculated on the identified cost basis. Interest
income, including accretion of discount and amortization of premium on
investments, is accrued daily. Dividend income is recorded on the ex-dividend
date.
3. CAPITAL SHARES:
The pro forma net asset values per share assume the issuance of shares of
the AmeriStar Portfolios which would have occurred at June 30, 1998 in
connection with the proposed reorganization. The pro forma number of shares
outstanding consists of the following:
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
AMERISTAR PORTFOLIOS/DG FUNDS
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
-------
- -------------------------------------------------------------------------------
Shares Additional
Outstanding Shares Pro Forma
at June 30,1998 Assumed in Shares
(000's) the at June 30, 1998
Reorganization (000's)
(000's)
- -------------------------------------------------------------------------------
Prime Money Market 163,709 215,990 379,699
- -------------------------------------------------------------------------------
U.S. Treasury Money Market 168,454 313,450 481,904
- -------------------------------------------------------------------------------
Limited Duration U.S.
Government 1,994 2,999 4,993
- -------------------------------------------------------------------------------
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
The response to this item is incorporated by reference to Item
27 of Part C of Post-Effective Amendment No. 38 to the Registrant's Registration
Statement on Form N-1A, filed on April 30, 1998.
ITEM 16. EXHIBITS.
(1)(a) Registrant's Charter is incorporated by reference
to Exhibit (1) of Post-Effective Nos. 3, 26, and
36 to the Registration Statement on Form N-1A,
filed on June 22, 1990, April 30, 1996, and
March 31, 1998, respectively.
(2) Registrant's Bylaws are incorporated by reference
to Exhibit (2) of Pre-Effective Amendment No. 3
to the Registration Statement on Form N-1A,
filed on June 22, 1990.
(3) Not Applicable.
*(4) Form of Agreement and Plan of Reorganization.
(5) Not Applicable.
(6)(a) Investment Advisory Agreement with First American
National Bank.
(6)(b) Sub-Investment Advisory Agreement between First
American National Bank and Lazard Asset
Management.
(6)(c) Sub-Investment Advisory Agreement between First
American National Bank and Womack Asset
Management, Inc.
(7)(a) Distribution Agreement with BISYS Fund Services
Limited Partnership.
(7)(b) Forms of Shareholder Services Plan Agreements.
(7)(c) Forms of Distribution Plan Agreements.
(8) Not Applicable.
(9)(a) Custody Agreement with The Bank of New York is
incorporated by reference to Exhibit (8)(a) of
Pre-Effective Amendment No. 3 to the Registration
Statement on Form N-1A, filed on June 22, 1990.
(9)(b) Form of Foreign Sub-Custodian Agreement is
incorporated by reference to Post-Effective
Amendment No. 22 to the Registration Statement on
Form N-1A, filed on February 10, 1994.
(10) Distribution Plan.
(11) Opinion and consent of Registrant's counsel
regarding the legality of the securities being
registered is incorporated by reference to
Exhibit 10 of Registrant's Registration
Statement on Form N-1A and to Registrant's
Rule 24f-2 Notices prior to amendment of Rule 24f-2.
(12) Opinion and consent of Stroock & Stroock & Lavan LLP
regarding tax matters.
(13)(a) Administration Agreement with BISYS Fund Services
Limited Partnership.
(13)(b) Shareholder Services Plan.
(13)(c) Rule 18f-3 Plan for Registrant's Non-Money Market
Portfolios.
(13)(d) Rule 18f-3 Plan for Registrant's Money Market
Portfolios.
(14) Consent of Independent Auditors.
(15) Not Applicable.
**(16) Powers of Attorney.
***(17)(a) Form of Proxy.
(17)(b) Registrant's Preliminary Prospectus and
Prospectus.
(17)(c) DG Funds' Prospectuses.
- ------------------
* Filed herewith as Exhibit C to the Prospectus/Proxy
Statement.
** Incorporated by reference to the signature page hereto.
*** Filed herewith as part of the Prospectus/Proxy
Statement.
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any
public reoffering of the securities registered
through the use of a prospectus which is a part of
this registration statement by any person or party
who is deemed to be an underwriter within the meaning
of Rule 145(c) of the Securities Act of 1933, as
amended, the reoffering prospectus will contain the
information called for by the applicable registration
form for reofferings by persons who may be deemed
underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned registrant agrees that every
prospectus that is filed under paragraph (1) above
will be filed as a part of an amendment to the
registration statement and will not be used until the
amendment is effective, and that, in determining any
liability under the Securities Act of 1933, as
amended, each post-effective amendment shall be
deemed to be a new registration statement for the
securities offered therein, and the offering of the
securities at that time shall be deemed to be the
initial bona fide offering of them.
SIGNATURES
As required by the Securities Act of 1933, this Registration
Statement has been signed on behalf of the Registrant, in the City of New York,
State of New York, on the 18th day of September, 1998.
The Infinity Mutual Funds, Inc.
(Registrant)
By: /S/WILLIAM B. BLUNDIN
------------------------
William B. Blundin
President and Chairman
of the Board
<PAGE>
Each person whose signature appears below on this Registration
Statement hereby constitutes and appoints Jeffrey C. Cusick, Rodney Ruehle and
Robert L. Tuch, and each of them, with full power to act without the other, his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities (until revoked in writing) to sign any and all amendments to this
Registration Statement (including post-effective amendments and amendments
thereto), and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
/S/WILLIAM B. BLUNDIN President and Chairman September 18, 1998
- ---------------------- of the Board (Principal
William B. Blundin Executive Officer)
/S/GARY R. TENKMAN Treasurer (Principal September 18, 1998
- ---------------------- Financial and
Gary R. Tenkman Accounting Officer)
/S/NORMA A. COLDWELL Director September 18, 1998
- ---------------------
Norma A. Coldwell
/S/RICHARD H. FRANCIS Director September 18, 1998
- ---------------------
Richard H. Francis
/S/WILLIAM W. MCINNES Director September 18, 1998
- ---------------------
William W. McInnes
/S/ROBERT A. ROBINSON Director September 18, 1998
- ----------------------
Robert A. Robinson
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
Registration Statement on Form N-14 under
the Securities Act of 1933
--------------------------------------
EXHIBITS
--------------------------------------
<PAGE>
INDEX TO EXHIBITS
PAGE
(6)(a) Investment Advisory Agreement with
First American National Bank............................
(6)(b) Sub-Investment Advisory Agreement
between First American National Bank
and Lazard Asset Management.............................
(6)(c) Sub-Investment Advisory Agreement
between First American National Bank
and Womack Asset Management, Inc........................
(7)(a) Distribution Agreement with BISYS
Fund Services Limited Partnership.......................
(7)(b) Forms of Shareholder Services Plan
Agreements..............................................
(7)(c) Forms of Distribution Plan
Agreements..............................................
(10) Distribution Plan.......................................
(12) Opinion and consent of Stroock &
Stroock & Lavan LLP regarding tax
matters.................................................
(13)(a) Administration Agreement with BISYS
Fund Services Limited Partnership.......................
(13)(b) Shareholder Services Plan...............................
(13)(c) Rule 18f-3 Plan for Registrant's
Non-Money Market Portfolios.............................
(13)(d) Rule 18f-3 Plan for Registrant's
Money Market Portfolios.................................
(14) Consent of Independent Auditors.........................
(17)(b) Registrant's Preliminary Prospectus
and Prospectus..........................................
(17)(c) DG Funds' Prospectuses..................................
EXHIBIT (6)(a)
INVESTMENT ADVISORY AGREEMENT
Investment Advisory Agreement made as of February 15, 1994, and revised as
of August 12, 1998, between THE INFINITY MUTUAL FUNDS, INC., a Maryland
corporation having its principal office and place of business at 3435 Stelzer
Road, Columbus, Ohio 43219-3035 (herein called the "Fund"), and FIRST AMERICAN
NATIONAL BANK, a national banking association having its principal office and
place of business at First American Center, 315 Deaderick Street, Nashville,
Tennessee 37238-0035 (herein called the "Adviser").
WHEREAS, the Fund is an open-end, management investment company, registered
under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund intends to employ BISYS Fund Services Limited Partnership
(the "Administrator") to act as the Fund's administrator; and
WHEREAS, the Fund desires to retain the Adviser to provide investment
advisory services and other services to the Fund's portfolios set forth on
Schedule 1 attached hereto, as such may be revised from time to time (each, a
"Series"; the provisions herein shall apply severally to each Series), and the
Adviser is willing to furnish such services upon the terms and conditions herein
set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT.
(a) The Fund hereby appoints the Adviser to act as investment adviser
to each Series for the period and on the terms set forth in this Agreement. The
Adviser accepts such appointment and agrees to furnish the services herein set
forth for the compensation herein provided.
(b) In the event that the Fund establishes one or more portfolios,
other than those set forth on Schedule 1 hereto, and with respect to which the
Fund desires the Adviser to act as investment adviser hereunder, the Fund shall
notify the Adviser in writing. If the Adviser is willing to render such services
under this Agreement it shall notify the Fund in writing whereupon such
portfolio shall become a Series hereunder and shall be subject to the provisions
of this Agreement to the same extent as the Series currently named in Schedule
1, except to the extent that said provisions (including those relating to the
compensation payable to the Adviser) are modified with respect to such Series in
writing by the Fund and the Adviser.
2. DELIVERY OF DOCUMENTS.
The Fund has furnished the Adviser with copies properly certified or
authenticated of each of the following:
(a) The Fund's Articles of Incorporation and any amendments and
supplements thereto (as presently in effect and as from time to time
amended or supplemented, herein called the "Charter");
(b) The Fund's By-laws and any amendments thereto;
(c) Resolutions of the Fund's Board of Directors authorizing the
appointment of the Adviser and approving this Agreement;
(d) The Fund's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended (the "1933 Act"), and under the 1940 Act
most recently filed with the Securities and Exchange Commission (the
"Commission");
(e) The Fund's Notification of Registration on Form N-8A under the
1940 Act as filed with the Commission; and
(f) The Fund's current Prospectuses and Statements of Additional
Information of the Series (as presently in effect and as from time to time
amended and supplemented, herein called individually the "Prospectus" and
collectively the "Prospectuses").
The Fund promptly will furnish the Adviser with copies of all amendments of or
supplements to the foregoing, if any.
3. SERVICES OF ADVISER.
Subject to the supervision of the Fund's Board of Directors, the
Adviser will provide a continuous investment program for each Series, including
investment research and day-to-day management with respect to such Series'
assets. The Adviser will determine from time to time what securities and other
investments will be purchased, retained or sold by the Series. The Adviser will
provide the services rendered by it under this Agreement in accordance with the
investment criteria and policies established from time to time for a Series by
the Fund, such Series' investment objective, policies and restrictions as stated
in its Prospectus and resolutions of the Fund's Board of Directors. The Fund
wishes to be informed of important developments materially affecting a Series'
portfolio and the Adviser agrees to furnish to the Fund from time to time such
information as the Adviser may believe appropriate for this purpose. The Adviser
shall be permitted to employ one or more sub-investment advisers (each a
"Sub-Adviser") to provide the day-to-day management of the investments of the
Series.
4. OTHER COVENANTS.
The Adviser agrees that it will:
(a) comply with all applicable rules and regulations of the Securities
and Exchange Commission in performing its duties as investment adviser for
the Series and, in addition, will conduct its activities under this
Agreement in accordance with other applicable federal and state law;
(b) review and analyze on a periodic basis each Series' portfolio
holdings and transactions;
(c) provide, or cause to be provided, to the Board of Directors of the
Fund such reports, statistical data and economic information as may be
reasonably requested in connection with the Adviser's services hereunder;
(d) use the same skill and care in providing such services as it uses
in providing services to fiduciary accounts for which it has investment
responsibilities;
(e) place orders pursuant to its investment determinations for the
Series either directly with the issuer or with any broker or dealer. In
executing portfolio transactions and selecting brokers or dealers, the
Adviser will use its best efforts to seek on behalf of the Series the best
overall terms available. In assessing the best overall terms available for
any transaction, the Adviser shall consider all factors that it deems
relevant, including the breadth of the market in the security, the price of
the security, the financial condition and execution capability of the
broker or dealer, and the reasonableness of the commission, if any, both
for the specific transaction and on a continuing basis. In evaluating the
best overall terms available, and in selecting the broker-dealer to execute
a particular transaction, the Adviser also may consider the brokerage and
research services (as those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934) provided to the Series and other accounts
over which the Adviser or an affiliate of the Adviser exercises investment
discretion. The Adviser is authorized, subject to the prior approval of the
Fund's Board of Directors, to pay to a broker or dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for any of the Series which is in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction if, but only if, the Adviser determines in good faith that such
commission was reasonable in relation to the value of the brokerage and
research services provided by such broker or dealer as viewed in terms of
that particular transaction or in terms of the overall responsibilities of
the Adviser to the Series. In addition, the Adviser is authorized to take
into account the sale of the Fund's Shares in allocating purchase and sale
orders for portfolio securities to brokers or dealers (including brokers
and dealers that are affiliated with the Adviser or the Fund's principal
underwriter), provided the Adviser believes that the quality of the
execution and the commission are comparable to what they would be with
other qualified firms. In no instance, however, will portfolio securities
be purchased from or sold to the Adviser, the Fund's principal underwriter
or any affiliated person of either the Fund, the Adviser, or the principal
underwriter, acting as principal in the transaction, except to the extent
permitted by the Securities and Exchange Commission and other applicable
federal and state laws and regulations;
(f) maintain historical tax lots for each portfolio security held by
the Series;
(g) transmit trades to the Fund's custodian for proper settlement; and
(h) prepare a quarterly broker security transaction summary and
monthly security transaction listing for each Series.
5. SERVICES NOT EXCLUSIVE.
The services furnished by the Adviser hereunder are deemed not to be
exclusive, and the Adviser shall be free to furnish similar services to others
so long as its services under this Agreement are not impaired thereby. To the
extent that the purchase or sale of securities or other investments of the same
issuer may be deemed by the Adviser to be suitable for two or more Series,
investment companies or accounts managed by the Adviser, the available
securities or investments will be allocated in a manner believed by the Adviser
to be equitable to each of them. It is recognized and acknowledged by the Fund
that in some cases this procedure may adversely affect the price paid or
received by a Series or the size of the position obtained for or disposed of by
a Series.
6. BOOKS AND RECORDS.
In compliance with the requirements of Rule 31a-3 under the 1940 Act,
the Adviser hereby agrees that all records which it maintains for the Series are
the property of the Fund and further agrees to surrender promptly to the Fund
any of such records upon the Fund's request. The Adviser further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 31a-1 under the 1940 Act.
7. EXPENSES.
Except as otherwise stated in this section 7, the Adviser shall pay
all expenses incurred by it in performing its services and duties as investment
adviser and shall pay all fees of each Sub-Adviser in connection with such
Sub-Adviser's duties in respect of the Fund. All other expenses incurred in the
operation of the Fund will be borne by the Fund, except to the extent
specifically assumed by others. The expenses to be borne by the Fund include,
without limitation, the following: organizational costs, taxes, interest,
brokerage fees and commissions, if any, fees of Directors who are not officers,
directors, employees or holders of 5% or more of the outstanding voting
securities of the Adviser, any Sub-Adviser or the Administrator, or any of their
affiliates, Commission fees, state Blue Sky qualification fees, advisory and
administration fees, charges of custodians, transfer and dividend disbursing
agents' fees, certain insurance premiums, industry association fees, auditing
and legal expenses, costs of maintaining corporate existence, costs of
independent pricing services, costs attributable to investor services
(including, without limitation, telephone and personnel expenses), costs of
calculating the net asset value of the Series' shares, costs of shareholders'
reports and corporate meetings, costs of preparing and printing certain
prospectuses and statements of additional information, and any extraordinary
expenses.
8. COMPENSATION.
In consideration of services rendered pursuant to this Agreement, the
Fund will pay the Adviser on the first business day of each month the fee at the
annual rate set forth opposite the Series' name on Schedule 1 attached hereto,
based upon the value of the Series' average daily net assets for the previous
month. Such fee as is attributable to a Series shall be a separate charge to
such Series and shall be the several (and not joint or joint and several)
obligation of the Series. Fees hereunder shall be payable with respect to a
Series commencing on the date of the initial public sale of such Series' shares.
The Adviser agrees to accept such fee from the Fund as full compensation for the
services provided and expenses assumed by it pursuant to this Agreement, and
acknowledges that it shall not be entitled to any further compensation from the
Fund in respect of the same.
Net asset value shall be computed on such days and at such time or
times as described in the Prospectus. Upon the commencement or any termination
of this Agreement after the first day or before the end of any month, as the
case may be, the fee for such part of a month shall be pro-rated according to
the proportion which such period bears to the full monthly period and, in the
case of any termination, shall be payable upon the date of termination of this
Agreement.
For the purpose of determining fees payable to the Adviser, the value
of each Series' net assets shall be computed in the manner specified in the
Charter for the computation of the value of the Series' net assets.
Notwithstanding anything to the contrary herein, if in any fiscal year
the aggregate expenses of a Series, exclusive of taxes, brokerage, interest on
borrowings and (with the prior written consent of the necessary state securities
commissions) extraordinary expenses, but including investment advisory and
administration fees, exceed the expense limitation of any such state having
jurisdiction over such Series, the Fund may deduct from the fees to be paid
hereunder, or the Adviser will bear, to the extent required by state law, that
portion of such excess which bears the same relation to the total of such excess
as the Adviser's fee hereunder bears to the total fee otherwise payable for the
fiscal year by the Series pursuant to this Agreement and the Fund's
Administration Agreement. Such deduction or payment, if any, will be estimated
daily, and reconciled and effected or paid, as the case may be, on a monthly
basis.
9. LIMITATION OF LIABILITY.
The Adviser shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Fund in connection with the matters to
which this Agreement relates, except that the Adviser shall be liable to the
Fund for any loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of the Adviser's duties or from its
reckless disregard of its obligations and duties under this Agreement. Any
person, even though also an officer, director, partner, employee or agent of the
Adviser, who may be or become an officer, Director, employee or agent of the
Fund, shall be deemed, when rendering services to the Fund or to a Series, or
acting on any business of the Fund or of a Series (other than services or
business in connection with the Adviser's duties as investment adviser
hereunder) to be rendering such services to or acting solely for the Fund or
such Series and not as an officer, director, partner, employee or agent or one
under the control or direction of the Adviser even though paid by the Adviser.
10. TERM.
As to each Series, this Agreement shall continue until the date set
forth opposite such Series' name on Schedule 1 attached hereto (the "Reapproval
Date"), and thereafter shall continue automatically for successive annual
periods ending on the day of each year set forth opposite the Series' name on
Schedule 1 attached hereto (the "Reapproval Day"), provided such continuance is
specifically approved as to a Series at least annually by (a) the Fund's Board
of Directors or (b) vote of a majority (as defined in the 1940 Act) of such
Series' outstanding voting securities, provided that in either event its
continuance also is approved by a majority of the Fund's Directors who are not
"interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval. As to each Series, this Agreement may be terminated without
penalty, on 60 days' written notice to the Adviser (which notice may be waived
in writing by the Adviser), by the Fund's Board of Directors or by vote of the
holders of a majority of such Series' shares or may be terminated without
penalty, upon not less than 90 days' written notice to the Fund (which notice
may be waived in writing by the Fund), by the Adviser. This Agreement also will
terminate automatically, as to the relevant Series, in the event of its
assignment (as defined in the 1940 Act).
11. USE OF NAME.
The parties hereto agree that (i) in the event of the termination of
this Agreement, the Adviser shall have the right to require the Fund, within 30
days of such termination, to delete from the Series and its name, the word "ISG"
and (ii) the Adviser or any affiliate of the Adviser shall have the right to
grant to other investment companies that it may sponsor or advise the use of the
word "ISG" in the name of such investment company.
<PAGE>
12. MISCELLANEOUS.
(a) AMENDMENTS. No provision of this Agreement may be changed, waived,
discharged or terminated, except by an instrument in writing signed by the
party against whom an enforcement of the change, waiver, discharge or
termination is sought.
(b) CONSTRUCTION. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall
not be affected thereby. Subject to the provisions of Section 10 hereof,
this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and shall be governed by New
York law; PROVIDED, HOWEVER, that nothing herein shall be construed in a
manner inconsistent with the 1940 Act or any rule or regulation of the
Commission thereunder.
(c) NOTICE. Any notice or other instrument in writing, authorized or
required by this Agreement to be given to the Fund shall be effective upon
actual receipt by the Fund, or on the fourth day after the postmark if such
notice or other instrument is mailed via first class postage prepaid, at
its office at the address first above written, or at such other place as
the Fund may from time to time designate in writing. Any notice or other
instrument in writing, authorized or required by this Agreement to be given
to the Adviser shall be effective upon actual receipt by the Adviser, or on
the fourth day after the postmark if such notice or other instrument is
mailed via first class postage prepaid, at its office at the address first
above written, or at such other place as the Adviser may from time to time
designate in writing.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below as of the day and year first
above written.
THE INFINITY MUTUAL FUNDS, INC.
By:______________________________
William B. Blundin,
President and Chairman
of the Board
Attest:____________________
FIRST AMERICAN NATIONAL BANK
By:__________________________
Attest:_______________________
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
ANNUAL FEE AS
A PERCENTAGE OF
AVERAGE DAILY REAPPROVAL REAPPROVAL
NAME OF SERIES NET ASSETS DATE DAY
- -------------- ---------------- ------------ ------------
<S> <C> <C> <C>
ISG Aggressive
Growth Portfolio .20 of 1% December 31, 1999 December 31
ISG Capital
Growth Portfolio .65 of 1% December 31, 1998 December 31
ISG Core Income
Portfolio .50 of 1% December 31, 1998 December 31
ISG Current Income
Portfolio .20 of 1% December 31, 1999 December 31
ISG Dividend
Growth Portfolio .65 of 1% December 31, 1998 December 31
ISG Equity Value
Portfolio .75 of 1% December 31, 1999 December 31
ISG Government
Income Portfolio .60 of 1% December 31, 1999 December 31
ISG Government
Money Market Portfolio .25 of 1% December 31, 1999 December 31
ISG Growth
Portfolio .20 of 1% December 31, 1999 December 31
ISG Growth and
Income Portfolio .20 of 1% December 31, 1999 December 31
ISG International
Equity Portfolio* 1.00% December 31, 1999 December 31
ISG Large Cap
Equity Portfolio .75 of 1% December 31, 1999 December 31
ISG Limited
Duration Income
Portfolio .50 of 1% December 31, 1998 December 31
ISG Limited
Duration Tennessee Tax
Free Portfolio .50 of 1% December 31, 1998 December 31
ISG Limited
Duration U.S. Government
Portfolio .50 of 1% December 31, 1998 December 31
ISG Mid Cap
Portfolio** 1.00% December 31, 1999 December 31
ISG Moderate
Growth and Income
Portfolio .20 of 1% December 31, 1999 December 31
ISG Municipal
Income Portfolio .60 of 1% December 31, 1999 December 31
ISG Prime Money
Market Portfolio .25 of 1% December 31, 1998 December 31
ISG Small Cap
Opportunity Portfolio*** .95 of 1% December 31, 1999 December 31
ISG Tax Free
Money Market Portfolio .35 of 1% December 31, 1999 December 31
ISG Tennessee
Tax Exempt Bond
Portfolio .50 of 1% December 31, 1998 December 31
ISG U.S.
Treasury Money
Market Portfolio .25 of 1% December 31, 1998 December 31
- --------
* The Adviser has retained Lazard Asset Management as the Series' sub-investment
adviser.
* The Adviser has retained Bennett Lawrence Management, LLC as the Series'
sub-investment adviser.
** The Adviser has retained Womack Asset Management, Inc. as the
Series' sub-investment adviser.
</TABLE>
EXHIBIT (6)(b)
SUB-INVESTMENT ADVISORY AGREEMENT
Sub-Investment Advisory Agreement made as of the 14th day of May,
l998, between FIRST AMERICAN NATIONAL BANK, a national banking association
having its principal office and place of business at First American Center, 315
Deaderick Street, Nashville, Tennessee 37238-0035 (herein called the "Adviser"),
and LAZARD ASSET MANAGEMENT, having its principal office and place of business
at 30 Rockefeller Plaza, New York, New York 10020 (herein called the "Sub-
Adviser").
WHEREAS, The Infinity Mutual Funds, Inc. (herein called the "Fund") is
an open-end, management investment company, registered under the Investment
Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund employs the Adviser to provide advisory services
pursuant to an Investment Advisory Agreement dated February 15, 1994 between the
Fund and the Adviser (the "Investment Advisory Agreement") with respect to the
Fund's portfolio or portfolios set forth on Schedule 1 attached hereto, as such
may be revised from time to time (the "Series"; if there are more than one
Series to which this Agreement applies, the provisions herein shall apply
severally to each such Series); and
WHEREAS, the Fund intends to employ BISYS Fund Services Limited
Partnership (the "Administrator") to act as the Fund's administrator; and
WHEREAS, the Adviser, in its capacity as investment adviser to the
Series, desires to retain the Sub-Adviser to provide the day-to-day management
of the Series' investments, the Fund consents to the Adviser retaining the
Sub-Adviser to provide such services, and the Sub-Adviser is willing to perform
such services upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT.
The Adviser hereby retains the Sub-Adviser to act as sub-investment
adviser to the Series for the period and on the terms set forth in this
Agreement. The Sub-Adviser accepts such appointment and agrees to furnish the
services herein set forth for the compensation herein provided.
2. SERVICES OF SUB-ADVISER.
Subject to the oversight and supervision of the Adviser, the
Sub-Adviser will provide a continuous investment program for the Series,
including investment research and day-to-day management with respect to such
Series' assets. The Sub-Adviser will provide the services rendered by it under
this Agreement in accordance with the investment criteria and policies
established from time to time for the Series by the Adviser, the Series'
investment objective, policies and restrictions as stated in the Fund's
Prospectus and Statement of Additional Information for the Series, as from time
to time in effect, and resolutions of the Fund's Board of Directors. The Fund
and the Adviser wish to be informed of important developments materially
affecting the Series' portfolio and the Sub-Adviser agrees to furnish to the
Fund and the Adviser from time to time such information as may be appropriate
for this purpose.
3. OTHER COVENANTS.
The Sub-Adviser agrees that it will:
(a) comply with all applicable rules and regulations of the
Securities and Exchange Commission in performance of its duties as
sub-investment adviser for the Series and, in addition, will conduct its
activities under this Agreement in accordance with other applicable federal and
state law;
(b) review and analyze on a periodic basis the Series' portfolio
holdings and transactions in order to determine their appropriateness in light
of such Series' shareholder base;
(c) provide, or cause to be provided, to the Board of Directors
of the Fund such reports, statistical data and economic information as may be
reasonably requested in connection with the Sub-Adviser's services hereunder;
(d) use the same skill and care in providing such services as it
uses in providing services to fiduciary accounts for which it has investment
responsibilities;
(e) place orders pursuant to its investment determinations for
the Series either directly with the issuer or with any broker or dealer. In
executing portfolio transactions and selecting brokers or dealers, the Sub-
Adviser will use its best efforts to seek on behalf of the Series the best
overall terms available. In assessing the best overall terms available for any
transaction, the Sub-Adviser shall consider all factors that it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer, and
the reasonableness of the commission, if any, both for the specific transaction
and on a continuing basis. In evaluating the best overall terms available, and
in selecting the broker-dealer to execute a particular transaction, the
Sub-Adviser may also consider the brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of 1934)
provided to the Series and other accounts over which the Sub-Adviser or an
affiliate of the Sub-Adviser exercises investment discretion. The Sub-Adviser is
authorized, subject to the prior approval of the Adviser and the Fund's Board of
Directors, to pay to a broker or dealer who provides such brokerage and research
services a commission for executing a portfolio transaction for any of the
Series which is in excess of the amount of commission another broker or dealer
would have charged for effecting that transaction if, but only if, the
Sub-Adviser determines in good faith that such commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer as viewed in terms of that particular transaction or in terms
of the overall responsibilities of the Sub-Adviser to the Series. In addition,
the Sub-Adviser is authorized to take into account the sale of the Fund's shares
in allocating purchase and sale orders for portfolio securities to brokers or
dealers (including brokers and dealers that are affiliated with the Adviser,
Sub-Adviser or the Fund's principal underwriter), provided that the Sub-Adviser
believes that the quality of the execution and the commission are comparable to
what they would be with other qualified firms. In no instance, however, will
portfolio securities be purchased from or sold to the Adviser, Sub-Adviser, the
Fund's principal underwriter or any affiliated person of any of the Fund, the
Adviser, Sub-Adviser, or the principal underwriter, acting as principal in the
transaction, except to the extent permitted by the Securities and Exchange
Commission and other applicable federal and state laws and regulations;
(f) maintain historical tax lots for each portfolio security held
by the Series;
(g) transmit trades to the Fund's custodian for proper
settlement; and
(h) prepare a quarterly broker security transaction summary and
monthly security transaction listing for each Series.
4. SERVICES NOT EXCLUSIVE.
The services furnished by the Sub-Adviser hereunder are deemed not to
be exclusive, and the Sub-Adviser shall be free to furnish similar services to
others so long as its services under this Agreement are not impaired thereby. To
the extent that the purchase or sale of securities or other investments of the
same issuer may be deemed by the Sub-Adviser to be suitable for two or more
Series, investment companies or accounts managed by the Sub-Adviser, the
available securities or investments will be allocated in a manner believed by
the Sub-Adviser to be equitable to each of them. It is recognized and
acknowledged by the Adviser that in some cases this procedure may adversely
affect the price paid or received by the Series or the size of the position
obtained for or disposed of by Series.
5. BOOKS AND RECORDS.
In compliance with the requirements of Rule 3la-3 under the 1940 Act,
the Sub-Adviser hereby agrees that all records which it maintains for the Series
are the property of the Fund and further agrees to surrender promptly to the
Fund any of such records upon the request of the Fund or the Adviser. The
Sub-Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
6. EXPENSES.
Except as otherwise stated in this Section 6, the Sub-Adviser shall
pay all expenses incurred by it in performing its services and duties as
sub-investment adviser. The Adviser hereby agrees that all other expenses to be
incurred in the operation of the Fund shall not be borne by the Sub-Adviser. The
Adviser and the Fund have agreed that such other expenses will be borne by the
Fund, except to the extent specifically assumed by others. The expenses to be
borne by the Fund include, without limitation, the following: organizational
costs, taxes, interest, brokerage fees and commissions, if any, fees of
Directors who are not officers, directors, employees or holders of 5% or more of
the outstanding voting securities of the Adviser, Sub-Adviser or the
Administrator, or any of their affiliates, Securities and Exchange Commission
fees, state Blue Sky qualification fees, advisory and administration fees,
charges of custodians, transfer and dividend disbursing agents' fees, certain
insurance premiums, industry association fees, auditing and legal expenses,
costs of maintaining corporate existence, costs of independent pricing services,
costs attributable to investor services (including, without limitation,
telephone and personnel expenses), costs of calculating the net asset value of
the Series' shares, costs of shareholders' reports and corporate meetings, costs
of preparing and printing certain prospectuses and statements of additional
information, and any extraordinary expenses.
7. COMPENSATION.
In consideration of services rendered pursuant to this Agreement, the
Adviser will pay the Sub-Adviser on the first business day of each month the fee
at the annual rate set forth opposite the Series' name on Schedule l attached
hereto, based on the value of such Series' average daily net assets for the
previous month. The Sub-Adviser agrees to accept such fee from the Adviser as
full compensation for the services provided and expenses assumed by it pursuant
to this Agreement, and acknowledges that it shall not be entitled to any further
compensation from any other person in respect of the same.
Net asset value shall be computed on such days and at such time or
times as described in the Fund's current Prospectus for the Series. The fee for
the period from the date of the commencement of the initial public sale of the
Series' shares to the end of the month during which such sale shall have been
commenced shall be pro-rated according to the proportion which such period bears
to the full monthly period, and upon any termination of this Agreement before
the end of any month, the fee for such part of a month shall be pro-rated
according to the proportion which such period bears to the full monthly period
and shall be payable upon the date of termination of this Agreement.
For the purpose of determining fees payable to the Sub-Adviser, the
value of the Series' net assets shall be computed in the manner specified in the
Fund's Charter for the computation of the value of the Series' net assets.
8. LIMITATION OF LIABILITY.
The Sub-Adviser shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Fund or the Adviser in connection
with the matters to which this Agreement relates, except that the Sub-Adviser
shall be liable to the Fund for any loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of the Sub-Adviser's
duties or from its reckless disregard of its obligations and duties under this
Agreement. Any person, even though also an officer, director, partner, employee
or agent of the Sub-Adviser, who may be or become an officer, Director, employee
or agent of the Fund, shall be deemed, when rendering services to the Fund or to
the Series, or acting on any business of the Fund or of the Series (other than
services or business in connection with the Sub-Adviser's duties as
sub-investment adviser hereunder) to be rendering such services to or acting
solely for the Fund or the Series and not as an officer, director, partner,
employee or agent or one under the control or direction of the Sub-Adviser even
though paid by the Sub-Adviser.
9. TERM.
As to each Series, this Agreement shall continue until the date set
forth opposite such Series' name on Schedule 1 attached hereto (the "Reapproval
Date"), and thereafter shall continue automatically for successive annual
periods ending on the day of each year set forth opposite the Series' name on
Schedule 1 attached hereto (the "Reapproval Day"), provided such continuance is
specifically approved as to a Series at least annually by (a) the Fund's Board
of Directors or (b) vote of a majority (as defined in the 1940 Act) of such
Series' outstanding voting securities, provided that in either event its
continuance also is approved by a majority of the Fund's Directors who are not
"interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval. As to each Series, this Agreement may be terminated without
penalty (i) by the Fund's Board of Directors or by vote of the holders of a
majority of such Series' shares, upon written notice to the Sub-Adviser, (ii) by
the Adviser (but only upon the approval of the Fund's Board of Directors) upon
60 days' written notice to the Sub-Adviser (which notice may be waived in
writing by the Sub-Adviser), or (iii) by the Sub-Adviser upon not less than 90
days' written notice to the Fund and the Adviser (which notice may be waived in
writing by the Fund and the Adviser). This Agreement also will terminate
automatically, as to the relevant Series, in the event of its assignment (as
defined in the 1940 Act). In addition, notwithstanding anything herein to the
contrary, if the Investment Advisory Agreement is terminated for any reason
(whether by the Fund, by the Adviser or by operation of law), this Agreement
shall terminate with respect to the Series upon the effective date of such
termination of the Investment Advisory Agreement.
10. MISCELLANEOUS.
(a) AMENDMENTS. No provision of this Agreement may be changed,
waived, discharged or terminated, except by an instrument in writing signed by
the party or parties against whom an enforcement of the change, waiver,
discharge or termination is sought.
(b) CONSTRUCTION. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. Subject to the provisions of Section 10 hereof, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and shall be governed by New York law; provided,
HOWEVER, that nothing herein shall be construed in a manner inconsistent with
the 1940 Act or any rule or regulation of the Securities and Exchange Commission
thereunder.
(c) NOTICE. Any notice or other instrument in writing, authorized
or required by this Agreement to be given to the Fund shall be effective upon
actual receipt by the Fund, or on the fourth day after the postmark if such
notice or other instrument is mailed via first class postage prepaid, at its
office at 3435 Stelzer Road, Columbus, Ohio 43219-3035, Attention: Compliance
Officer, or at such other place as the Fund may from time to time designate in
writing. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Adviser or Sub-Adviser, as the case may be,
shall be effective upon actual receipt by the Adviser or Sub-Adviser, as the
case may be, or on the fourth day after the postmark if such notice or other
instrument is mailed via first class postage prepaid, at its office at the
address first above written, or at such other place as the Adviser or Sub-
Adviser, as the case may be, may from time to time designate in writing.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below as of the day and year first
above written.
FIRST AMERICAN NATIONAL BANK
By:___________________________
Attest:
LAZARD ASSET MANAGEMENT
By:____________________________
Attest: ____________________________
<PAGE>
SCHEDULE 1
ANNUAL FEE AS
A PERCENTAGE
OF AVERAGE
NAME OF DAILY NET
SERIES ASSETS REAPPROVAL DATE REAPPROVAL DAY
- -------- -------------- -------------- --------------
ISG Interna- .50 of 1% December 31, 1999 December 31
tional
Equity
Portfolio
EXHIBIT (6)(c)
SUB-INVESTMENT ADVISORY AGREEMENT
Sub-Investment Advisory Agreement made as of the 12th day of August,
l998, between FIRST AMERICAN NATIONAL BANK, a national banking association
having its principal office and place of business at First American Center, 315
Deaderick Street, Nashville, Tennessee 37238-0035 (herein called the "Adviser"),
and WOMACK ASSET MANAGEMENT, INC., having its principal office and place of
business at 2120 DG Plaza, Jackson, Mississippi 39201 (herein called the "Sub-
Adviser").
WHEREAS, The Infinity Mutual Funds, Inc. (herein called the "Fund") is
an open-end, management investment company, registered under the Investment
Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund employs the Adviser to provide advisory services
pursuant to an Investment Advisory Agreement dated February 15, 1994 between the
Fund and the Adviser (the "Investment Advisory Agreement") with respect to the
Fund's portfolio or portfolios set forth on Schedule 1 attached hereto, as such
may be revised from time to time (the "Series"; if there are more than one
Series to which this Agreement applies, the provisions herein shall apply
severally to each such Series); and
WHEREAS, the Fund intends to employ BISYS Fund Services Limited
Partnership (the "Administrator") to act as the Fund's administrator; and
WHEREAS, the Adviser, in its capacity as investment adviser to the
Series, desires to retain the Sub-Adviser to provide the day-to-day management
of the Series' investments, the Fund consents to the Adviser retaining the
Sub-Adviser to provide such services, and the Sub-Adviser is willing to perform
such services upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT.
The Adviser hereby retains the Sub-Adviser to act as sub-investment
adviser to the Series for the period and on the terms set forth in this
Agreement. The Sub-Adviser accepts such appointment and agrees to furnish the
services herein set forth for the compensation herein provided.
2. SERVICES OF SUB-ADVISER.
Subject to the oversight and supervision of the Adviser, the
Sub-Adviser will provide a continuous investment program for the Series,
including investment research and day-to-day management with respect to such
Series' assets. The Sub-Adviser will provide the services rendered by it under
this Agreement in accordance with the investment criteria and policies
established from time to time for the Series by the Adviser, the Series'
investment objective, policies and restrictions as stated in the Fund's
Prospectus and Statement of Additional Information for the Series, as from time
to time in effect, and resolutions of the Fund's Board of Directors. The Fund
and the Adviser wish to be informed of important developments materially
affecting the Series' portfolio and the Sub-Adviser agrees to furnish to the
Fund and the Adviser from time to time such information as may be appropriate
for this purpose.
3. OTHER COVENANTS.
The Sub-Adviser agrees that it will:
(a) comply with all applicable rules and regulations of the
Securities and Exchange Commission in performance of its duties as
sub-investment adviser for the Series and, in addition, will conduct its
activities under this Agreement in accordance with other applicable federal and
state law;
(b) review and analyze on a periodic basis the Series' portfolio
holdings and transactions in order to determine their appropriateness in light
of such Series' shareholder base;
(c) provide, or cause to be provided, to the Board of Directors
of the Fund such reports, statistical data and economic information as may be
reasonably requested in connection with the Sub-Adviser's services hereunder;
(d) use the same skill and care in providing such services as it
uses in providing services to fiduciary accounts for which it has investment
responsibilities;
(e) place orders pursuant to its investment determinations for
the Series either directly with the issuer or with any broker or dealer. In
executing portfolio transactions and selecting brokers or dealers, the Sub-
Adviser will use its best efforts to seek on behalf of the Series the best
overall terms available. In assessing the best overall terms available for any
transaction, the Sub-Adviser shall consider all factors that it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer, and
the reasonableness of the commission, if any, both for the specific transaction
and on a continuing basis. In evaluating the best overall terms available, and
in selecting the broker-dealer to execute a particular transaction, the
Sub-Adviser may also consider the brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of 1934)
provided to the Series and other accounts over which the Sub-Adviser or an
affiliate of the Sub-Adviser exercises investment discretion. The Sub-Adviser is
authorized, subject to the prior approval of the Adviser and the Fund's Board of
Directors, to pay to a broker or dealer who provides such brokerage and research
services a commission for executing a portfolio transaction for any of the
Series which is in excess of the amount of commission another broker or dealer
would have charged for effecting that transaction if, but only if, the
Sub-Adviser determines in good faith that such commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer as viewed in terms of that particular transaction or in terms
of the overall responsibilities of the Sub-Adviser to the Series. In addition,
the Sub-Adviser is authorized to take into account the sale of the Fund's shares
in allocating purchase and sale orders for portfolio securities to brokers or
dealers (including brokers and dealers that are affiliated with the Adviser,
Sub-Adviser or the Fund's principal underwriter), provided that the Sub-Adviser
believes that the quality of the execution and the commission are comparable to
what they would be with other qualified firms. In no instance, however, will
portfolio securities be purchased from or sold to the Adviser, Sub-Adviser, the
Fund's principal underwriter or any affiliated person of any of the Fund, the
Adviser, Sub-Adviser, or the principal underwriter, acting as principal in the
transaction, except to the extent permitted by the Securities and Exchange
Commission and other applicable federal and state laws and regulations;
(f) maintain historical tax lots for each portfolio security held
by the Series;
(g) transmit trades to the Fund's custodian for proper
settlement; and
(h) prepare a quarterly broker security transaction summary and
monthly security transaction listing for each Series.
4. SERVICES NOT EXCLUSIVE.
The services furnished by the Sub-Adviser hereunder are deemed not to
be exclusive, and the Sub-Adviser shall be free to furnish similar services to
others so long as its services under this Agreement are not impaired thereby. To
the extent that the purchase or sale of securities or other investments of the
same issuer may be deemed by the Sub-Adviser to be suitable for two or more
Series, investment companies or accounts managed by the Sub-Adviser, the
available securities or investments will be allocated in a manner believed by
the Sub-Adviser to be equitable to each of them. It is recognized and
acknowledged by the Adviser that in some cases this procedure may adversely
affect the price paid or received by the Series or the size of the position
obtained for or disposed of by Series.
5. BOOKS AND RECORDS.
In compliance with the requirements of Rule 3la-3 under the 1940 Act,
the Sub-Adviser hereby agrees that all records which it maintains for the Series
are the property of the Fund and further agrees to surrender promptly to the
Fund any of such records upon the request of the Fund of the Adviser. The
Sub-Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
6. EXPENSES.
Except as otherwise stated in this Section 6, the Sub-Adviser shall
pay all expenses incurred by it in performing its services and duties as
sub-investment adviser. The Adviser hereby agrees that all other expenses to be
incurred in the operation of the Fund shall not be borne by the Sub-Adviser. The
Adviser and the Fund have agreed that such other expenses will be borne by the
Fund, except to the extent specifically assumed by others. The expenses to be
borne by the Fund include, without limitation, the following: organizational
costs, taxes, interest, brokerage fees and commissions, if any, fees of
Directors who are not officers, directors, employees or holders of 5% or more of
the outstanding voting securities of the Adviser, Sub-Adviser or the
Administrator, or any of their affiliates, Securities and Exchange Commission
fees, state Blue Sky qualification fees, advisory and administration fees,
charges of custodians, transfer and dividend disbursing agents' fees, certain
insurance premiums, industry association fees, auditing and legal expenses,
costs of maintaining corporate existence, costs of independent pricing services,
costs attributable to investor services (including, without limitation,
telephone and personnel expenses), costs of calculating the net asset value of
the Series' shares, costs of shareholders' reports and corporate meetings, costs
of preparing and printing certain prospectuses and statements of additional
information, and any extraordinary expenses.
7. COMPENSATION.
In consideration of services rendered pursuant to this Agreement, the
Adviser will pay the Sub-Adviser on the first business day of each month the fee
at the annual rate set forth opposite the Series' name on Schedule l attached
hereto, based on the value of such Series' average daily net assets for the
previous month. The Sub-Adviser agrees to accept such fee from the Adviser as
full compensation for the services provided and expenses assumed by it pursuant
to this Agreement, and acknowledges that it shall not be entitled to any further
compensation from any other person in respect of the same.
Net asset value shall be computed on such days and at such time or
times as described in the Fund's current Prospectus for the Series. The fee for
the period from the date of the commencement of the initial public sale of the
Series' shares to the end of the month during which such sale shall have been
commenced shall be pro-rated according to the proportion which such period bears
to the full monthly period, and upon any termination of this Agreement before
the end of any month, the fee for such part of a month shall be pro-rated
according to the proportion which such period bears to the full monthly period
and shall be payable upon the date of termination of this Agreement.
For the purpose of determining fees payable to the Sub-Adviser, the
value of the Series' net assets shall be computed in the manner specified in the
Fund's Charter for the computation of the value of the Series' net assets.
8. LIMITATION OF LIABILITY.
The Sub-Adviser shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Fund or the Adviser in connection
with the matters to which this Agreement relates, except that the Sub-Adviser
shall be liable to the Fund for any loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of the Sub-Adviser's
duties or from its reckless disregard of its obligations and duties under this
Agreement. Any person, even though also an officer, director, partner, employee
or agent of the Sub-Adviser, who may be or become an officer, Director, employee
or agent of the Fund, shall be deemed, when rendering services to the Fund or to
the Series, or acting on any business of the Fund or of the Series (other than
services or business in connection with the Sub-Adviser's duties as
sub-investment adviser hereunder) to be rendering such services to or acting
solely for the Fund or the Series and not as an officer, director, partner,
employee or agent or one under the control or direction of the Sub-Adviser even
though paid by the Sub-Adviser.
9. TERM.
As to each Series, this Agreement shall continue until the date set
forth opposite such Series' name on Schedule 1 attached hereto (the "Reapproval
Date"), and thereafter shall continue automatically for successive annual
periods ending on the day of each year set forth opposite the Series' name on
Schedule 1 attached hereto (the "Reapproval Day"), provided such continuance is
specifically approved as to a Series at least annually by (a) the Fund's Board
of Directors or (b) vote of a majority (as defined in the 1940 Act) of such
Series' outstanding voting securities, provided that in either event its
continuance also is approved by a majority of the Fund's Directors who are not
"interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval. As to each Series, this Agreement may be terminated without
penalty (i) by the Fund's Board of Directors or by vote of the holders of a
majority of such Series' shares, upon written notice to the Sub-Adviser, (ii) by
the Adviser (but only upon the approval of the Fund's Board of Directors) upon
60 days' written notice to the Sub-Adviser (which notice may be waived in
writing by the Sub-Adviser), or (iii) by the Sub-Adviser upon not less than 90
days' written notice to the Fund and the Adviser (which notice may be waived in
writing by the Fund and the Adviser). This Agreement also will terminate
automatically, as to the relevant Series, in the event of its assignment (as
defined in the 1940 Act). In addition, notwithstanding anything herein to the
contrary, if the Investment Advisory Agreement is terminated for any reason
(whether by the Fund, by the Adviser or by operation of law), this Agreement
shall terminate with respect to the Series upon the effective date of such
termination of the Investment Advisory Agreement.
10. MISCELLANEOUS.
(a) AMENDMENTS. No provision of this Agreement may be changed,
waived, discharged or terminated, except by an instrument in writing signed by
the party or parties against whom an enforcement of the change, waiver,
discharge or termination is sought.
(b) CONSTRUCTION. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. Subject to the provisions of Section 10 hereof, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and shall be governed by New York law; provided,
HOWEVER, that nothing herein shall be construed in a manner inconsistent with
the 1940 Act or any rule or regulation of the Securities and Exchange Commission
thereunder.
(c) NOTICE. Any notice or other instrument in writing, authorized
or required by this Agreement to be given to the Fund shall be effective upon
actual receipt by the Fund, or on the fourth day after the postmark if such
notice or other instrument is mailed via first class postage prepaid, at its
office at 3435 Stelzer Road, Columbus, Ohio 43219-3035, Attention: Compliance
Officer, or at such other place as the Fund may from time to time designate in
writing. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Adviser or Sub-Adviser, as the case may be,
shall be effective upon actual receipt by the Adviser or Sub-Adviser, as the
case may be, or on the fourth day after the postmark if such notice or other
instrument is mailed via first class postage prepaid, at its office at the
address first above written, or at such other place as the Adviser or Sub-
Adviser, as the case may be, may from time to time designate in writing.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below as of the day and year first
above written.
FIRST AMERICAN NATIONAL BANK
By: ____________________________
Attest: ______________________
WOMACK ASSET MANAGEMENT, INC.
By: ____________________________
Attest: ________________________
<PAGE>
SCHEDULE 1
ANNUAL FEE AS
A PERCENTAGE
OF AVERAGE
NAME OF DAILY NET
SERIES ASSETS REAPPROVAL DATE REAPPROVAL DAY
- --------------- ------------- ------------------ ---------------
ISG Small Cap .35 of 1% December 31, 1999 December 31
Opportunity
Portfolio
EXHIBIT (7)(a)
DISTRIBUTION AGREEMENT
Distribution Agreement made as of February 11, 1997, and
revised as of August 12, 1998, between THE INFINITY MUTUAL FUNDS, INC., a
Maryland corporation having its principal office and place of business at 3435
Stelzer Road, Columbus, Ohio 43219-3035 (herein called the "Fund"), and BISYS
FUND SERVICES LIMITED PARTNERSHIP, an Ohio limited partnership having its
principal office and place of business at 3435 Stelzer Road, Columbus, Ohio
43219-3035 (herein called the "Distributor").
WHEREAS, the Fund is an open-end, management investment
company and is so registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), and consisting of the portfolios set forth on Schedule
1 hereto, as such Schedule may be revised from time to time (each, a "Series");
and
WHEREAS, the Fund desires to retain the Distributor as
distributor for certain Series' shares of common stock, par
value $.001 per share (the "Shares"), and the Distributor is
willing to render such services;
NOW THEREFORE, in consideration of the premises and mutual
covenants set forth herein the parties hereto agree as follows:
I. DELIVERY OF DOCUMENTS
The Fund has delivered to the Distributor copies of
the following documents and will deliver to the Distributor all
future amendments and supplements thereto, if any:
(a) The Fund's Articles of Incorporation and all amendments
and supplements thereto (as presently in effect and as from time to time amended
or supplemented, herein called the
"Charter");
(b) The Fund's By-laws (as presently in effect and as from
time to time amended, herein called the "By-laws");
(c) Resolutions of the Board of Directors of the Fund
authorizing the execution and delivery of this Agreement;
(d) The Fund's Registration Statement under the Securities Act
of 1933, as amended (the "1933 Act"), and the 1940 Act on Form N-1A most
recently filed with the Securities and Exchange Commission (the "Commission")
relating to the Shares, and all subsequent amendments or supplements thereto
(the "Registration Statement");
(e) The Fund's Notification of Registration under the 1940 Act
on Form N-8A as filed with the Commission; and
(f) The Fund's current Prospectuses and Statements of
Additional Information of the Series (as presently in effect and as from time to
time amended and supplemented, herein called individually the "Prospectus" and
collectively the "Prospectuses").
II. DISTRIBUTION
1. APPOINTMENT OF DISTRIBUTOR. The Fund hereby appoints the
Distributor as principal distributor of the Series' Shares and the Distributor
hereby accepts such appointment and agrees to render the services and duties set
forth in this Section II.
2. SERVICES AND DUTIES.
(a) The Fund agrees to sell through the Distributor, as
agent, from time to time during the term of this Agreement, Shares of the Series
(whether authorized but unissued or treasury shares, in the Fund's sole
discretion) upon the terms and at the current offering price as described in the
applicable Prospectus. The Distributor will act only in its own behalf as
principal in making agreements with selected dealers or others for the sale and
redemption of Shares, and shall sell Shares only at the offering price thereof
as set forth in the applicable Prospectus. The Distributor shall devote its best
efforts to effect the sale of Shares of each Series, but shall not be obligated
to sell any certain number of Shares.
(b) In all matters relating to the sale and redemption
of Shares, the Distributor will act in conformity with the Fund's Charter,
By-laws and Prospectuses and with the instructions and directions of the Fund's
Board of Directors and will conform to and comply with the requirements of the
1933 Act, the 1940 Act, the regulations of the National Association of
Securities Dealers, Inc. and all other applicable Federal or state laws and
regulations. In connection with the sale of Shares, the Distributor acknowledges
and agrees that it is not authorized to provide any information or make any
representation other than as contained in the Fund's Registration Statement or
Prospectuses and any sales literature specifically approved by the Fund.
(c) Unless the Fund has adopted with respect to the
Series a plan pursuant to Rule 12b-1 under the 1940 Act which provides
otherwise, the Distributor will bear the costs and expenses of (i) printing and
distributing to prospective investors copies of any Prospectus (including any
supplement thereto) and annual and interim reports of the Series (after such
items have been prepared and set in type by the Fund) which are used in
connection with the offering of Shares of a Series; and (ii) preparing, printing
and distributing any other literature used by the Distributor in connection with
the sale of the Shares; PROVIDED, HOWEVER, that the Distributor shall not be
obligated to bear the expenses incurred by the Fund in connection with the
preparation and printing Prospectuses used for regulatory purposes and for
distribution to existing shareholders.
(d) All Shares of the Series offered for sale by the
Distributor shall be offered for sale to the public at a price per Share (the
"offering price") equal to (i) their net asset value (determined in the manner
set forth in the Fund's Charter and then-current Prospectuses) plus, (ii) a
sales charge (if any) which shall be the percentage of the offering price of
such Shares as set forth in the Fund's then-current Prospectuses. The offering
price, if not an exact multiple of one cent, shall be adjusted to the nearest
cent. If a sales charge is in effect, the Distributor shall have the right to
pay a portion of the sales charge to broker-dealers and other persons who have
sold shares of the Series. Concessions by the Distributor to broker-dealers and
other persons shall be set forth in either the selling agreements between the
Distributor and such broker-dealers and persons or, if such concessions are
described in the then-current Prospectuses, shall be as so set forth. No broker-
dealer or other person who enters into a selling agreement with the Distributor
shall be authorized to act as agent for the Fund in connection with the offering
or sale of its Shares to the public or otherwise. The Fund reserves the right to
reject any order but will not do so without reasonable cause.
(e) If any Shares sold by the Distributor under the
terms of this Agreement are redeemed or repurchased by the Fund or by the
Distributor as agent or are tendered for redemption within seven business days
after the date of confirmation of the original purchase of said Shares, the
Distributor shall forfeit the amount (if any) above the net asset value received
by it in respect of such Shares, provided that the portion, if any, of such
amount (if any) re-allowed by the Distributor to broker-dealers or other persons
shall be repayable to the Fund only to the extent recovered by the Distributor
from the broker-dealer or other person concerned. The Distributor shall include
in the forms of agreement with such broker-dealers and persons a corresponding
provision for the forfeiture by them of their concession with respect to Shares
sold by them or their principals and redeemed or repurchased by the Fund or by
the Distributor as agent (or tendered for redemption) within seven business days
after the date of confirmation of such initial purchases.
3. SALES AND REDEMPTIONS.
(a) The Fund shall pay all costs and expenses in
connection with the registration of the Shares under the 1933 Act, and all
expenses in connection with maintaining facilities for the issue and transfer of
the Shares and for supplying information, prices and other data to be furnished
by the Fund hereunder, and all expenses in connection with preparing, printing
and distributing any Prospectus, except as set forth in subsection 2(c) of
Section II hereof.
(b) The Fund shall execute all documents, furnish all
information and otherwise take all actions which may be reasonably necessary in
the discretion of the Fund's officers in connection with the qualification of
the Shares for sale in such states as the Distributor may designate to the Fund
and the Fund may approve, and the Fund shall pay all fees which may be incurred
in connection with such qualification. The Distributor shall pay all expenses
connected with its qualification as a dealer under state or Federal laws and,
except as otherwise specifically provided in this Agreement, all other expenses
incurred by the Distributor in connection with the sale of the Shares as
contemplated in this Agreement. It is understood that certain advertising,
marketing, shareholder servicing, administration and/or distribution expenses to
be incurred in connection with the Shares may be paid as provided in any plan
which may be adopted by the Fund in accordance with Rule 12b-1 under the 1940
Act.
(c) The Fund shall have the right to suspend the sale
of Shares of any Series at any time in response to conditions in the securities
markets or otherwise, and to suspend the redemption of Shares of any Series at
any time permitted by the 1940 Act or the rules of the Commission.
(d) The Fund reserves the right to reject any order for
Shares.
(e) No Shares shall be offered by either the Fund or
the Distributor under any of the provisions of this Agreement and no orders for
the purchase or sale of Shares hereunder shall be accepted by the Fund if and so
long as the effectiveness of the Registration Statement shall be suspended under
any of the provisions of the 1933 Act, or if and so long as a Prospectus as
required by Section 10 of the 1933 Act is not on file with the Commission;
provided, however, that nothing contained in this sub-paragraph shall in any way
restrict or have any application to or bearing upon the Fund's obligation to
repurchase any Shares from any shareholder in accordance with the provisions of
the Charter or Prospectuses.
4. CONFIDENTIALITY. The Distributor will treat confidentially
and as proprietary information of the Fund all records and other information
relative to the Fund and each Series' prior or present shareholders or those
persons or entities who respond to inquiries concerning investment in a Series
and, except as provided below, will not use such records or information for any
other purpose other than for the performance of its responsibilities and duties
with regard to the Series which now exist or which may be added in the future.
Any other use by the Distributor of the records and information referred to
above may be made only after prior notification to and approval in writing by
the Fund. Such approval shall not be unreasonably withheld and may not be
withheld where (i) the Distributor may be exposed to civil or criminal contempt
proceedings for failure to divulge such information; (ii) the Distributor is
requested to divulge such information by duly constituted authorities; or (iii)
the Distributor is so requested by the Fund.
III. LIMITATION OF LIABILITY
The Distributor shall not be liable for any error of judgment
or mistake of law or for any loss suffered by the Fund or any Series in
connection with the matters to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the
Distributor's part in the performance of its duties or from reckless disregard
by it of its obligations and duties under this Agreement. Any person, even
though also an officer, director, partner, employee or agent of the Distributor,
who may be or become an officer, director, employee or agent of the Fund, shall
be deemed, when rendering services to the Fund or to any Series, or acting on
any business of the Fund or of any Series (other than services or business in
connection with the Distributor's duties as distributor hereunder), to be
rendering such services to or acting solely for the Fund or a Series and not as
an officer, director, partner, employee or agent or one under the control or
direction of the Distributor even though paid by the Distributor.
IV. INDEMNIFICATION
1. FUND REPRESENTATIONS. The Fund represents and warrants to
the Distributor that at all times the Registration Statement and Prospectuses
will in all material respects conform to the applicable requirements of the 1933
Act and the rules and regulations thereunder and will not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that no
representation or warranty in this subsection shall apply to statements or
omissions made in reliance upon and in conformity with written information
furnished to the Fund by, or on behalf of, and with respect to, the Distributor
expressly for use in the Registration Statement or Prospectuses.
2. DISTRIBUTOR'S REPRESENTATIONS. The Distributor represents
and warrants to the Fund that it is duly organized as a Delaware corporation and
is and at all times will remain duly authorized and licensed to carry out its
services as contemplated herein.
3. FUND INDEMNIFICATION. The Fund will indemnify, defend and
hold harmless the Distributor, its several officers and directors, and any
person who controls the Distributor within the meaning of Section 15 of the 1933
Act, from and against any losses, claims, damages or liabilities, joint or
several, to which any of them may become subject under the 1933 Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of, or are based upon, any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, the Prospectuses or in any application or other document
executed by or on behalf of the Fund, or arise out of, or are based upon,
information furnished by or on behalf of the Fund filed in any state in order to
qualify the Shares under the securities or blue sky laws thereof ("Blue Sky
Application"), or arise out of, or are based upon, the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Distributor, its several officers and directors, and any person who controls the
Distributor within the meaning of Section 15 of the 1933 Act, for any legal or
other expenses reasonably incurred by any of them in investigating, defending or
preparing to defend any such action, proceeding or claim; PROVIDED, HOWEVER,
that the Fund shall not be liable in any case to the extent that such loss,
claim, damage or liability arises out of, or is based upon, any untrue
statement, alleged untrue statement, or omission or alleged omission made in the
Registration Statement, the Prospectuses, any Blue Sky Application or any
application or other document executed by or on behalf of the Fund in reliance
upon and in conformity with written information furnished to the Fund by or on
behalf of and with respect to the Distributor specifically for inclusion
therein.
The Fund shall not indemnify any person pursuant to this
subsection 3 unless the court or other body before which the proceeding was
brought has rendered a final decision on the merits that such person was not
liable by reason of his willful misfeasance, bad faith or gross negligence in
the performance of his duties, or his reckless disregard of obligations and
duties, under this Agreement ("disabling conduct") or, in the absence of such a
decision, a reasonable determination (based upon a review of the facts) that
such person was not liable by reason of disabling conduct has been made by the
vote of a majority of a quorum of Directors of the Fund who are neither
"interested persons" of the Fund (as defined in the 1940 Act) nor parties to the
proceeding, or by an independent legal counsel in a written opinion.
The Fund shall advance attorneys' fees and other expenses
incurred by any person in defending any claim, demand, action or suit which is
the subject of a claim for indemnification pursuant to this subsection 3, so
long as such person shall: (i) undertake to repay all such advances unless it is
ultimately determined that he is entitled to indemnification hereunder; and (ii)
provide security for such undertaking, or the Series shall be insured against
losses arising by reason of any lawful advances, or a majority of a quorum of
the disinterested, non-party Directors of the Fund (or an independent legal
counsel in a written opinion) shall determine based on a review of readily
available facts (as opposed to a full trial-type inquiry) that there is reason
to believe that such person ultimately will be found entitled to indemnification
hereunder.
4. DISTRIBUTOR'S INDEMNIFICATION. The Distributor will
indemnify, defend and hold harmless the Fund, each Series, the Fund's several
officers and Directors and any person who controls the Fund or any Series within
the meaning of Section 15 of the 1933 Act, from and against any losses, claims,
damages or liabilities, joint or several, to which any of them may become
subject under the 1933 Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions or proceedings in respect hereof) arise out of, or
are based upon, any breach of its representations and warranties in subsection 2
hereof or its agreements in subsection 2 of Section II of this Agreement, or
which arise out of, or are based upon, any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, the
Prospectuses, any Blue Sky Application or any application or other document
executed by or on behalf of the Fund, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, which statement or omission was made in
reliance upon and in conformity with information furnished in writing to the
Fund or any of its several officers and Directors by or on behalf of and with
respect to the Distributor specifically for inclusion therein, and will
reimburse the Fund, each Series, the Fund's several officers and Directors, and
any person who controls the Fund or any Series within the meaning of Section 15
of the 1933 Act, for any legal or other expenses reasonably incurred by any of
them in investigating, defending or preparing to defend any such action,
proceeding or claim.
5. GENERAL INDEMNITY PROVISIONS. No indemnifying party shall be
liable under its indemnity agreement contained in subsection 3 or 4 hereof with
respect to any claim made against such indemnifying party unless the indemnified
party shall have notified the indemnifying party in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon the indemnified party (or after
the indemnified party shall have received notice of such service on any
designated agent), but failure to notify the indemnifying party of any such
claim shall not relieve it from any liability which it may otherwise have to the
indemnified party. The indemnifying party will be entitled to participate at its
own expense in the defense or, if it so elects, to assume the defense of any
suit brought to enforce any such liability, and if the indemnifying party elects
to assume the defense, such defense shall be conducted by counsel chosen by it
and reasonably satisfactory to the indemnified party. In the event the
indemnifying party elects to assume the defense of any such suit and retain such
counsel, the indemnified party shall bear the fees and expenses of any
additional counsel retained by the indemnified party.
V. TERM
This Agreement shall continue automatically for successive
annual periods ending on December 31 of each year, provided such continuance is
specifically approved at least annually by (a) the Fund's Board of Directors or
(b) vote of a majority (as defined in the 1940 Act) of the Fund's outstanding
voting securities, provided that in either event its continuance also is
approved by a majority of the Fund's Directors who are not "interested persons"
(as defined in the 1940 Act) of any party to this Agreement, cast in person at a
meeting called for the purpose of voting on such approval. This Agreement is
terminable without penalty, on 60 days' written notice to the Distributor, by
vote of a majority of the Fund's outstanding voting securities or, as to each
Series, by the Fund's Board of Directors or, on 90 days' written notice to the
Fund, by the Distributor. This Agreement will automatically terminate, as to the
relevant Series, in the event of its assignment (as defined in the 1940 Act).
VI. MISCELLANEOUS
1. AMENDMENTS. No provision of this Agreement may be changed,
waived, discharged or terminated except by an instrument in writing signed by
the party against which an enforcement of the change, waiver, discharge or
termination is sought.
2. CONSTRUCTION. The captions in this Agreement are included
for convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. Subject to the provisions of Section IV hereof, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and shall be governed by New York law; PROVIDED,
HOWEVER, that nothing herein shall be construed in a manner inconsistent with
the 1940 Act or any rule or regulation thereunder.
3. NOTICE. Any notice or other instrument in writing,
authorized or required by this Agreement to be given to the Fund shall be
sufficiently given if addressed to the Fund and mailed or delivered to it at its
office at the address first above written, or at such other place as the Fund
may from time to time designate in writing. Any notice or other instrument in
writing, authorized or required by this Agreement to be given to the Distributor
shall be sufficiently given if addressed to the Distributor and mailed or
delivered to it at its office at the address first above written, or at such
other place as the Distributor may from time to time designate in writing.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their officers designated below as of the day and
year first above written.
THE INFINITY MUTUAL FUNDS, INC.
By:___________________________
William B. Blundin,
President and Chairman of
the Board
Attest:_______________________
BISYS FUND SERVICES LIMITED
PARTNERSHIP
By: BISYS Fund Services, Inc.,
General Partner
By:___________________________
Attest:________________________
<PAGE>
SCHEDULE 1
NAME OF SERIES DATE ESTABLISHED
- ---------------- ------------------
ISG Aggressive Growth Portfolio August 12, 1998
ISG Capital Growth Portfolio February 15, 1994
ISG Core Income Portfolio February 15, 1994
ISG Current Income Portfolio August 12, 1998
ISG Dividend Growth Portfolio February 15, 1994
ISG Equity Value Portfolio May 14, 1998
ISG Government Income Portfolio May 14, 1998
ISG Government Money Market May 14, 1998
Portfolio
ISG Growth Portfolio August 12, 1998
ISG Growth and Income Portfolio August 12, 1998
ISG International Equity May 14, 1998
Portfolio
ISG Large Cap Equity Portfolio May 14, 1998
ISG Limited Duration Income February 15, 1994
Portfolio
ISG Limited Duration February 11, 1997
Tennessee Tax Free Portfolio
ISG Limited Duration U.S. February 11, 1997
Government Portfolio
ISG Mid Cap Portfolio May 14, 1998
ISG Moderate Growth and Income August 12, 1998
Portfolio
ISG Municipal Income May 14, 1998
Portfolio
ISG Prime Money Market February 15, 1994
Portfolio
ISG Small Cap Opportunity Portfolio May 14, 1998
ISG Tax Free Money Market May 14, 1998
Portfolio
ISG Tennessee Tax Exempt February 15, 1994
Bond Portfolio
ISG U.S. Treasury February 15, 1994
Money Market Portfolio
Correspondent Cash Reserves October 30, 1990
Money Market Portfolio
Correspondent Cash Reserves October 30, 1990
Tax Free Money Market Portfolio
EXHIBIT (7)(b)
SHAREHOLDER SERVICES PLAN AGREEMENT
The Infinity Mutual Funds, Inc.
3435 Stelzer Road
Columbus, Ohio 43219-3035
Gentlemen:
We wish to enter into this Shareholder Services Plan Agreement with you
concerning the provision of certain services to the beneficial holders of
certain classes (each, a "Class") of the ISG Portfolios set forth on Schedule 1
hereto, as such may be revised from time to time (each, a "Portfolio"), of The
Infinity Mutual Funds, Inc. (the "Fund"). The terms and conditions of this
Agreement are as follows:
1. We agree to provide certain services to the beneficial holders of shares of
each Class which services may include providing personal services relating to
shareholder accounts, such as answering shareholder inquiries regarding such
Class and providing reports and other information, and providing services
related to the maintenance of shareholder accounts.
2. We will act solely as agent for, upon the order of, and for the account of,
the holders of Class shares for whom we are providing the services described
herein.
3. We will provide such office space and equipment, telephone facilities and
personnel (which may be any part of the space, equipment and facilities
currently used in our business, or any personnel employed by us) as may be
reasonably necessary or beneficial in order to provide such services
contemplated hereunder.
4. We will not nor will any of our officers, employees or agents make any
representations concerning the Fund or shares of any Class except those
contained in the Portfolios' then-current prospectus, copies of which will be
supplied to us by the Fund, or in such supplemental literature or advertising as
may be authorized by the Fund in writing.
5. For all purposes of this Agreement, we will be deemed to be an independent
contractor, and will have no authority to act as agent for the Fund in any
matter or in any respect. We agree to and do release, indemnify and hold the
Fund harmless from and against any and all direct or indirect liabilities or
losses resulting from requests, directions, actions or inactions of or by us or
our officers, employees or agents regarding our responsibilities hereunder for
the purchase, redemption, transfer or registration of shares of a Class by or on
behalf of the holders of such shares. We and our employees, upon request, will
be available during normal business hours to consult with the Fund or its
designees concerning the performance of our responsibilities under this
Agreement.
6. In consideration of the services and facilities provided by us hereunder, as
to each Class, the Fund agrees to pay us and we will accept as full payment
therefor, a fee up to the annual rate set forth on Schedule 2 hereto as a
percentage of the average daily net asset value of the outstanding shares of
such Class as to which we provide the services described herein, which fee will
be computed daily and payable monthly. For purposes of determining the fees
payable under this Section 6, the average daily net asset value of the
outstanding shares of a Class will be computed in the manner specified in the
Fund's registration statement (as the same is in effect from time to time) in
connection with the computation of the net asset value of such Class for
purposes of purchases and redemptions. The Fund, in its discretion and without
notice, may suspend or withdraw the sale of shares of any Class.
7. Any person authorized to direct the disposition of monies paid or payable by
the Fund pursuant to this Agreement will provide to the Fund's Board of
Directors, and the Fund's Directors will review, at least quarterly, a written
report of the amounts so expended and the purposes for which such expenditures
were made. In addition, we will furnish the Fund or its designees with such
information as the Fund or its designees may reasonably request (including,
without limitation, periodic certifications confirming the provision of the
services described herein), and will otherwise cooperate with the Fund or its
designees (including, without limitation, any auditors designated by the Fund),
in connection with the preparation of reports to the Fund's Board of Directors
concerning this Agreement and the monies paid or payable pursuant hereto, as
well as any other reports or filings that may be required by law. We will
promptly report to the Fund any potential or existing conflicts with respect to
the investments of our clients in shares of any Class.
8. The Fund may enter into other similar Shareholder Services Plan Agreements
with any other person or persons without our consent.
9. We represent, warrant and agree that: (i) in no event will any of the
services provided by us hereunder be primarily intended to result in the sale of
any shares issued by the Fund; (ii) the compensation payable to us hereunder,
together with any other compensation payable to us by our clients in connection
with the investment of their assets in shares of a Class, will be disclosed by
us to our clients, will be authorized by our clients and will not result in an
excessive or unreasonable fee to us; (iii) we will not advertise or otherwise
promote our client accounts primarily as a means of investing in shares of a
Class or establish or maintain client accounts for the primary purpose of
investing in shares of a Class; (iv) in the event an issue pertaining to this
Agreement is submitted to shareholders of a Class for approval, we will vote the
shares of such Class held for our own account in the same proportion as the vote
of the shares of such Class held for our clients' benefit; and (v) we will not
engage in activities pursuant to this Agreement which constitute acting as a
broker or dealer under state law unless we have obtained the licenses required
by such law.
10. This Agreement will become effective on the date a fully executed copy of
this Agreement is received by the Fund or its designee. Unless sooner
terminated, this Agreement will continue until , and thereafter will continue
automatically for successive annual periods ending on , provided such
continuance is specifically approved at least annually by the Fund in the manner
described in Section 13.
11. All notices and other communications will be duly given if mailed,
telegraphed, telexed or transmitted by similar telecommunications device to the
appropriate address shown above, or to such other address as either party shall
so provide the other.
12. This Agreement shall be construed in accordance with the internal laws of
the State of New York without giving effect to principles of conflict of laws,
and is non-assignable by the parties hereto.
13. This Agreement is subject to annual approval by vote of a majority of (i)
the Board of Directors of the Fund and (ii) the Directors who are not
"interested persons" (as defined in the Investment Company Act of 1940) of the
Fund or us, by vote cast in person at a meeting called for the purpose of voting
such approval. This Agreement is terminable without penalty, on 10 days' notice,
by the Fund's Board of Directors, or, on not less than 90 days' notice, by us.
This Agreement will terminate, as to the relevant Class, automatically in the
event of its assignment (as defined in the Act).
If you agree to be legally bound by the provisions of this Agreement, please
sign a copy of this letter where indicated below and promptly return it to us.
Very truly yours,
______________________________
(Name of Service Organization)
By: _______________________________
Title: ____________________________
Date: _____________________________
Accepted and agreed to:
THE INFINITY MUTUAL FUNDS, INC.
By: _____________________________
Title: __________________________
<PAGE>
SCHEDULE 1
NAME OF PORTFOLIO AND CLASS DATE ESTABLISHED
- --------------------------- -----------------
ISG Aggressive Growth Portfolio August 12, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Capital Growth Portfolio February 15, 1994
Class A Shares
Class B Shares
Trust Shares
ISG Core Income Portfolio February 15, 1994
Class A Shares
Class B Shares
Trust Shares
ISG Current Income Portfolio August 12, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Dividend Growth Portfolio February 15, 1994
Class A Shares
Class B Shares
Trust Shares
ISG Equity Value Portfolio May 14, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Government Income Portfolio May 14, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Growth Portfolio August 12, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Growth and Income Portfolio August 12, 1998
Class A Shares
Class B Shares
Trust Shares
ISG International Equity Portfolio May 14, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Large Cap Equity Portfolio August 12, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Limited Duration Income February 15, 1994
Portfolio
Class A Shares
Class B Shares
Trust Shares
ISG Limited Duration Tennessee February 15, 1994
Tax Free Portfolio
Class A Shares
Class B Shares
ISG Limited Duration U.S. February 11, 1997
Government Portfolio
Class A Shares
Class B Shares
Trust Shares
ISG Mid Cap Portfolio May 14, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Moderate Growth and
Income Portfolio August 12, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Municipal Income Portfolio May 14, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Small Cap Opportunity Portfolio May 14, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Tennessee Tax Exempt Bond February 11, 1997
Portfolio
Class A Shares
Class B Shares
Trust Shares
ISG Tax Free Money Market Portfolio May 14, 1998
Class A Shares
Class B Shares
ISG Government Money Market Portfolio May 14, 1998
Class A Shares
Class B Shares
ISG Prime Money Market Portfolio February 15, 1994
Class A Shares
Class B Shares
ISG U.S. Treasury February 15, 1994
Money Market Portfolio
Class A Shares
<PAGE>
SCHEDULE 2
------------
ANNUAL FEE AS A
PERCENTAGE OF AVERAGE
NAME OF PORTFOLIO AND CLASSES DAILY NET ASSETS
- ------------------------------ -----------------------
ISG Aggressive Growth Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Capital Growth Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Core Income Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Current Income Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Dividend Growth Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Equity Value Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Government Income Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Growth Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Growth and Income Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG International Equity Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Large Cap Equity Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Limited Duration
Income Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Limited Duration
Tennessee Tax Free Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Limited Duration
U.S. Government Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Mid Cap Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Moderate Growth and
Income Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Municipal Income Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Small Cap Opportunity Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Tennessee Tax
Exempt Bond Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Tax Free Money Market
Portfolio
Class A Shares .25%
Class B Shares .25%
ISG Government Money Market
Portfolio
Class A Shares .25%
Class B Shares .25%
ISG Prime Money Market Portfolio
Class A Shares .25%
Class B Shares .25%
EXHIBIT (7)(c)
DISTRIBUTION PLAN AGREEMENT
with respect to
the ISG Portfolios of
THE INFINITY MUTUAL FUNDS, INC.
BISYS Fund Services Limited Partnership
3435 Stelzer Road
Columbus, Ohio 43219-3035
Gentlemen:
We wish to enter into this Agreement with you for distribution
services with respect to shares of certain classes (each, a "Class") of the ISG
Portfolios (the "Portfolios"), set forth on Schedule 1 hereto, as such may be
revised from time to time, of The Infinity Mutual Funds, Inc. (the "Fund") of
which you are the principal underwriter as defined in the Investment Company Act
of 1940, as amended (the "1940 Act"), and the exclusive agent for the continuous
distribution of its shares.
The terms and conditions of this Agreement are as follows:
1. We agree to provide reasonable assistance in connection with
the sale of shares of each Class, which assistance may include distributing
sales literature, marketing and advertising. If we are restricted or unable to
provide the services contemplated above, we agree not to perform such services
and not to accept fees thereafter. Our acceptance of any fees hereunder shall
constitute our representation (which shall survive any payment of such fees and
any termination of this Agreement and shall be reaffirmed each time we accept a
fee hereunder) that our receipt of such fee is lawful.
2. We shall provide such office space and equipment, telephone
facilities and personnel (which may be all or any part of the space, equipment
and facilities currently used in our business, or all or any personnel employed
by us) as is necessary or beneficial for distributing, marketing or advertising
shares of each Class.
3. We agree that neither we nor any of our employees or agents
are authorized to make any representation concerning shares of any Class, except
those contained in the then current Prospectus and Statement of Additional
Information for the Portfolios, copies of which will be supplied by you to us,
or in such supplemental literature or advertising materials as may be authorized
by you in writing.
4. For all purposes of this Agreement we will be deemed to be
an independent contractor, and will have no authority to act as agent for you or
the Fund in any matter or in any respect. We and our employees will, upon
request, be available during normal business hours to consult with you or your
designees concerning the performance of our responsibilities under this
Agreement.
5. In consideration of the services and facilities described
herein, we shall be entitled to receive from you, and you agree to pay to us,
the fee set forth in Exhibit A hereto. We understand that any payments pursuant
to this Agreement shall be paid only so long as this Agreement and the
Distribution Plan adopted by the Fund is in effect.
6. You reserve the right, at your discretion and without
notice, to suspend or withdraw the sale of any Class's shares.
7. We acknowledge that this Agreement shall become effective
only when approved by vote of a majority of (i) the Fund's Board of Directors,
and (ii) the Fund's Directors who are not "interested persons" (as defined in
the 1940 Act) of the Fund and have no direct or indirect financial interest in
this Agreement, cast in person at a meeting called for the purpose of voting on
such approval.
8. This Agreement shall continue until the last day of the
calendar year next following the date of execution, and thereafter shall
continue automatically for successive annual periods ending on the last day of
each calendar year, provided such continuance is approved specifically at least
annually by a vote of a majority of (i) the Fund's Board of Directors and (ii)
the Fund's Directors who are not "interested persons" (as defined in the 1940
Act) of the Fund and have no direct or indirect financial interest in this
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval. As to each Class, this Agreement is terminable without
penalty, at any time, by vote of a majority of the Fund's Directors who are not
"interested persons" (as defined in the 1940 Act) and have no direct or indirect
financial interest in this Agreement or, on not more than 60 days' written
notice, by vote of holders of a majority of the shares of such Class, or, upon
15 days' notice, by you. Notwithstanding anything contained herein, if the
Distribution Plan adopted by the Fund is terminated by the Fund's Board of
Directors, or the Distribution Plan, or any part thereof, is found invalid or is
ordered terminated by any regulatory or judicial authority, or we fail to
perform the distribution functions contemplated by the Fund or by you, this
Agreement shall be terminable effective upon receipt of notice thereof by us.
This Agreement also shall terminate automatically, as to the relevant Class, in
the event of its assignment (as defined in the 1940 Act).
9. We understand that the Fund's Board of Directors will
review, at least quarterly, a written report of the amounts expended pursuant to
this Agreement and the purposes for which such expenditures were made. In
connection with such reviews, we will furnish you or your designees with such
information as you or they may reasonably request and will otherwise cooperate
with you and your designees (including, without limitation, any auditors
designated by you), in connection with the preparation of reports to the Fund's
Board of Directors concerning this Agreement and the monies paid or payable by
you pursuant hereto, as well as any other reports or filings that may be
required by law.
10. All communications to you shall be sent to you at the
address set forth above. Any notice to us shall be duly given if mailed or
telegraphed to us at the address set forth below.
11. This Agreement shall be construed in accordance with the
internal laws of the State of New York, without giving effect to principles of
conflict of laws.
Very truly yours,
------------------------------------------
(Please Print or Type Service
Organization's Name)
------------------------------------------
Address
------------------------------------------
City State Zip Code
Date-------------------------- By:--------------------------------------
Authorized Signature
<PAGE>
NOTE: Please return both signed copies of this Agreement to
BISYS Fund Services Limited Partnership. Upon
acceptance one countersigned copy will be returned for
your files.
Accepted:
BISYS FUND SERVICES LIMITED
PARTNERSHIP
BY: BISYS Fund Services, Inc.
General Partner
Date ---------------------- By:----------------------------------
<PAGE>
EXHIBIT A
Distribution Plan Agreement
between
BISYS FUND SERVICES LIMITED PARTNERSHIP
and
---------------------------------------
Name of Service Organization
The Service Organization will be paid a monthly fee
based upon the average daily value of the shares of
the Class owned by shareholders for whom the Service
Organization is the holder of record or dealer of
record at the following annual rate:
.__ of 1% of Class A Shares
.__ of 1% of Class B Shares
For purposes of determining the fees payable
hereunder, the average daily net asset value of each
Class of shares shall be computed in the manner
specified in the Fund's Articles of Incorporation and
the Portfolios' then current Prospectus and Statement
of Additional Information.
Dated: _______________
<PAGE>
SCHEDULE 1
NAME OF PORTFOLIO AND CLASSES
- -------------------------------
ISG Aggressive Growth Portfolio
Class A Shares
Class B Shares
ISG Capital Growth Portfolio
Class A Shares
Class B Shares
ISG Core Income Portfolio
Class A Shares
Class B Shares
ISG Current Income Portfolio
Class A Shares
Class B Shares
ISG Dividend Growth Portfolio
Class A Shares
Class B Shares
ISG Equity Value Portfolio
Class A Shares
Class B Shares
ISG Government Income Portfolio
Class A Shares
Class B Shares
ISG Growth Portfolio
Class A Shares
Class B Shares
ISG Growth and Income Portfolio
Class A Shares
Class B Shares
ISG International Equity Portfolio
Class A Shares
Class B Shares
ISG Large Cap Equity Portfolio
Class A Shares
Class B Shares
ISG Limited Duration Income Portfolio
Class A Shares
Class B Shares
ISG Limited Duration Tennessee Tax Free Portfolio
Class A Shares
Class B Shares
ISG Limited Duration U.S. Government Portfolio
Class A Shares
Class B Shares
ISG Mid Cap Portfolio
Class A Shares
Class B Shares
ISG Moderate Growth and Income Portfolio
Class A Shares
Class B Shares
ISG Municipal Income Portfolio
Class A Shares
Class B Shares
ISG Small Cap Opportunity Portfolio
Class A Shares
Class B Shares
ISG Tennessee Tax Exempt Bond Portfolio
Class A Shares
Class B Shares
ISG Tax Free Money Market Portfolio
Class B Shares
ISG Government Money Market Portfolio
Class B Shares
ISG Prime Money Market Portfolio
Class B Shares
EXHIBIT 10
THE INFINITY MUTUAL FUNDS, INC.
DISTRIBUTION PLAN PURSUANT TO RULE 12b-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
ISG Portfolios
WHEREAS, The Infinity Mutual Funds, Inc. (the "Fund") is
registered under the Investment Company Act of 1940, as amended ("1940 Act"), as
an open-end, management investment company, and offers for public sale distinct
series of shares of common stock, each corresponding to a distinct portfolio;
and
WHEREAS, the Fund's Board of Directors (the "Board") has
established as separate portfolios of the Fund the ISG Portfolios set forth on
Schedule 1 hereto, as such Schedule may be revised from time to time (each, a
"Portfolio"); and
WHEREAS, the Fund currently employs BISYS Fund Services
Limited Partnership (the "Distributor") as distributor for the shares of common
stock of each Portfolio; and
WHEREAS, the Fund desires to adopt a Distribution Plan
("Plan") pursuant to Rule 12b-1 under the 1940 Act with respect to each
Portfolio and, in particular, certain classes of shares of each Portfolio set
forth on Schedule 1 hereto (each, a "Class"); and
WHEREAS, the Board, in considering whether the Fund should
implement this Plan, has requested and evaluated such information as it deemed
necessary to an informed determination as to whether a written plan should be
implemented and has considered such pertinent factors as it deemed necessary to
form the basis for a decision to use assets of each Class for the purposes set
forth below; and
WHEREAS, in voting to approve the implementation of this Plan,
the Directors have concluded, in the exercise of their reasonable business
judgment and in light of their respective fiduciary duties, that there is a
reasonable likelihood that the Plan will benefit each Class and the holders of
its shares;
NOW, THEREFORE, the Fund hereby adopts this Plan with respect
to each Class in accordance with Rule 12b-1 under the 1940 Act.
Section 1. The Fund shall pay to the Distributor for
advertising, marketing and distributing a monthly fee in respect
of each Class at the annual rate set forth on Schedule 2 hereto. The
Distributor may pay certain financial institutions, securities dealers and other
industry professionals ("Service Organizations") in respect of these services
pursuant to an agreement between the Distributor and the Service Organization
("Plan Agreement"). The Fund's administrator and the Portfolios' investment
adviser or sub-investment adviser and their affiliates are eligible to become
Service Organizations and to receive fees under this Plan. As to each Class, all
expenses incurred by the Class in connection with this Plan shall be borne
entirely by the holders of such Class's shares.
Section 2. Payments to Service Organizations under paragraph 1
hereof shall be subject to compliance by the Service Organizations with the
terms of their respective Plan Agreement with the Distributor.
Section 3. As to each Class, this Plan shall not take effect
with respect to the Class unless it first has been approved by a vote of the
then sole holder of such Class's shares.
Section 4. As to each Class, this Plan shall become effective
with respect to the Class on the date the public offering of such Class's shares
commences, and shall continue for a period of one year from such effective date,
unless earlier terminated in accordance with the terms hereof. Thereafter, this
Plan shall continue automatically for successive annual periods, provided such
continuance is approved annually by the Board, including a majority of the
Directors who are not "interested persons" (as defined in the 1940 Act) of the
Fund and who have no direct or indirect financial interest in the operation of
this Plan or in any Plan Agreement (the "Independent Directors"), pursuant to a
vote cast in person at a meeting called for the purpose of voting on the
continuance of this Plan.
Section 5. The Board shall be provided with and shall review,
at least quarterly, a written report of the amounts expended with respect to
each Class under this Plan and the purposes for which such expenditures were
made. Such report shall include any amounts paid to Service Organizations and
the purposes for which such payments were made.
Section 6. As to each Class, this Plan may be terminated at
any time by vote of the Board, by vote of a majority of the Independent
Directors, or by vote of the holders of a majority (as defined in the 1940 Act)
of the outstanding shares of such Class.
Section 7. As to any Class, this Plan may not be amended to
increase materially the payments provided for in paragraph 1 hereof unless such
amendment is approved by vote of the holders of a majority (as defined in the
1940 Act) of such Class's shares, and no material amendment to this Plan
affecting a Class shall be made unless approved in the manner provided for
approval and annual renewal in Section 4 hereof.
Section 8. While this Plan is in effect, the selection and
nomination of those Directors who are not "interested persons" (as defined in
the 1940 Act) of the Fund shall be committed to the discretion of the Directors
who are not interested persons of the Fund.
Section 9. The Fund shall preserve copies of this Plan
(including any amendments thereto) and any related agreements and all reports
made pursuant to Section 5 hereof for a period of not less than six years from
the date of this Plan, the first two years in an easily accessible place.
Dated: February 15, 1994
Revised: August 12, 1998
<PAGE>
SCHEDULE 1
NAME OF PORTFOLIO AND CLASSES DATE ESTABLISHED
- ----------------------------- -----------------
ISG Aggressive Growth Portfolio August 12, 1998
Class A Shares
Class B Shares
ISG Capital Growth Portfolio February 15, 1994
Class A Shares
Class B Shares
ISG Core Income Portfolio February 15, 1994
Class A Shares
Class B Shares
ISG Current Income Portfolio August 12, 1998
Class A Shares
Class B Shares
ISG Dividend Growth Portfolio February 15, 1994
Class A Shares
Class B Shares
ISG Equity Value Portfolio May 14, 1998
Class A Shares
Class B Shares
ISG Government Income Portfolio May 14, 1998
Class A Shares
Class B Shares
ISG Growth Portfolio August 12, 1998
Class A Shares
Class B Shares
ISG Growth and Income Portfolio August 12, 1998
Class A Shares
Class B Shares
ISG International Equity May 14, 1998
Portfolio
Class A Shares
Class B Shares
ISG Large Cap Equity Portfolio August 12, 1998
Class A Shares
Class B Shares
ISG Limited Duration Income February 15, 1994
Portfolio
Class A Shares
Class B Shares
ISG Limited Duration Tennessee February 11, 1997
Tax Free Portfolio
Class A Shares
Class B Shares
ISG Limited Duration U.S. February 11, 1997
Government Portfolio
Class A Shares
Class B Shares
ISG Mid Cap Portfolio May 14, 1998
Class A Shares
Class B Shares
ISG Moderate Growth and August 12, 1998
Income Portfolio
Class A Shares
Class B Shares
ISG Municipal Income Portfolio May 14, 1988
Class A Shares
Class B Shares
ISG Small Cap Opportunity Portfolio May 14, 1998
Class A Shares
Class B Shares
ISG Tennessee Tax Exempt February 15, 1994
Bond Portfolio
Class A Shares
Class B Shares
ISG Tax Free Money Market May 14, 1998
Portfolio
Class B Shares
ISG Government Money Market May 14, 1998
Portfolio
Class B Shares
ISG Prime Money Market Portfolio February 15, 1994
Class B Shares
<PAGE>
SCHEDULE 2
ANNUAL FEE AS A
PERCENTAGE OF AVERAGE
NAME OF PORTFOLIO AND CLASSES DAILY NET ASSETS
- ----------------------------- ----------------------
ISG Aggressive Growth Portfolio
Class A Shares .25%
Class B Shares .75%
ISG Capital Growth Portfolio
Class A Shares .25%
Class B Shares .75%
ISG Core Income Portfolio
Class A Shares .25%
Class B Shares .75%
ISG Current Income Portfolio
Class A Shares .25%
Class B Shares .75%
ISG Dividend Growth Portfolio
Class A Shares .25%
Class B Shares .75%
ISG Equity Value Portfolio
Class A Shares .25%
Class B Shares .75%
ISG Government Income Portfolio
Class A Shares .25%
Class B Shares .75%
ISG Growth Portfolio
Class A Shares .25%
Class B Shares .75%
ISG Growth and Income Portfolio
Class A Shares .25%
Class B Shares .75%
ISG International Equity Portfolio
Class A Shares .25%
Class B Shares .75%
ISG Large Cap Equity Portfolio
Class A Shares .25%
Class B Shares .75%
ISG Limited Duration Income
Portfolio
Class A Shares .25%
Class B Shares .75%
ISG Limited Duration
Tennessee Tax Free Portfolio
Class A Shares .25%
Class B Shares .75%
ISG Limited Duration
U.S. Government Portfolio
Class A Shares .25%
Class B Shares .75%
ISG Mid Cap Portfolio
Class A Shares .25%
Class B Shares .75%
ISG Moderate Growth
and Income Portfolio
Class A Shares .25%
Class B Shares .75%
ISG Municipal Income Portfolio
Class A Shares .25%
Class B Shares .75%
ISG Small Cap Opportunity Portfolio
Class A Shares .25%
Class B Shares .75%
ISG Tennessee Tax Exempt
Bond Portfolio
Class A Shares .25%
Class B Shares .75%
ISG Tax Free Money Market
Portfolio
Class B Shares .75%
ISG Government Money Market
Portfolio
Class B Shares .75%
ISG Prime Money Market Portfolio
Class B Shares .75%
EXHIBIT 12
September __, 1998
DG Investor Series
5800 Corporate Drive
Pittsburgh, PA 15237-7010
The Infinity Mutual Funds, Inc.
3435 Stelzer Road
Columbus, OH 43219-3035
Ladies and Gentlemen:
You have requested our opinion as to certain Federal income tax consequences of
the reorganization contemplated by each Agreement and Plan of Reorganization,
substantially in the form included as Appendix C to the Registration Statement
on Form N-14 of The Infinity Mutuals Funds, Inc. (Reg. No. 333-___) (the
"Registration Statement"), between DG Investor Series, on behalf of each of DG
Equity Fund, DG Government Income Fund, DG International Equity Fund, DG Limited
Term Government Income Fund, DG Municipal Income Fund, DG Opportunity Fund, DG
Prime Money Market Fund and DG Treasury Money Market Fund (each, an "Acquired
Fund"), and The Infinity Mutual Funds, Inc., on behalf of each of ISG Large Cap
Equity Portfolio, ISG Government Income Portfolio, ISG International Equity
Portfolio, ISG Limited Duration U.S. Government Portfolio, ISG Municipal Income
Portfolio, ISG Small Cap Opportunity Portfolio, ISG Prime Money Market Portfolio
and ISG U.S. Treasury Money Market Portfolio (each, an "Acquiring Fund").
DG Investor Series is a Massachusetts business trust and is registered with the
Securities and Exchange Commission ("SEC") as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
Each Acquired Fund is a series (within the meaning of Section 851(g) of the
Internal Revenue Code of 1986, as amended (the "Code")) of DG Investor Series.
The Infinity Mutual Funds, Inc. is a corporation organized under the laws of the
State of Maryland and is registered with the SEC as an open-end management
investment company under the 1940 Act. Each Acquiring Fund is a series (within
the meaning of Section 851(g) of the Code) of The Infinity Mutual Funds, Inc.
In rendering this opinion, we have examined each Agreement and Plan of
Reorganization, the Registration Statement, the Prospectuses and Statements of
Additional Information of each Fund, incorporated by reference into the
Registration Statement, and such other documents as we have deemed necessary or
relevant for the purpose of this opinion. As to various questions of fact
material to this opinion, where relevant facts were not independently
established by us, we have relied upon statements of, and written information
provided by, representatives of each Fund. We also have examined such matters of
law as we have deemed necessary or appropriate for the purpose of this opinion.
We note that our opinion is based on our examination of such law, our review of
the documents described above, the statements and representations referred to
above and in the Registration Statement and the Agreements and Plans of
Reorganization, the provisions of the Code, the regulations, published rulings
and announcements thereunder, and the judicial interpretations thereof currently
in effect. Any change in applicable law or any of the facts and circumstances
described in the Registration Statement, or inaccuracy of any statements or
representations on which we have relied, may affect the continuing validity of
our opinion.
Capitalized terms not defined herein have the respective meanings given such
terms in the Agreement and Plan of Reorganization.
Based on the foregoing, it is our opinion that for Federal income tax purposes:
(a) The transfer of all of the respective Acquired Fund's assets in
exchange solely for the corresponding Acquiring Fund Shares and the assumption
by the Acquiring Fund of certain identified liabilities of the Acquired Fund,
followed by the Acquired Fund's distribution of those shares to the Acquired
Fund Shareholders constructively in exchange for their Acquired Fund shares,
will constitute a "reorganization" within the meaning of Section 368(a)(1)(D) of
the Code with respect to DG Limited Term Government Income Fund, DG Prime Money
Market Fund and DG Treasury Money Market Fund, and Section 368(a)(1)(F) of the
Code with respect to DG Equity Fund, DG Government Income Fund, DG International
Equity Fund, DG Municipal Income Fund and DG Opportunity Fund;
(b) No gain or loss will be recognized by the Acquiring Fund upon the
receipt of the assets of the Acquired Fund in exchange solely for the Acquiring
Fund Shares and the assumption by the Acquiring Fund of certain identified
liabilities of the Acquired Fund;
(c) No gain or loss will be recognized by the Acquired Fund upon the
transfer of the Acquired Fund's assets to the Acquiring Fund in exchange solely
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain identified liabilities of the Acquired Fund or upon the subsequent
distribution (whether actual or constructive) of the Acquiring Fund Shares to
Acquired Fund Shareholders in constructive exchange for their shares of the
Acquired Fund;
(d) No gain or loss will be recognized by Acquired Fund Shareholders
upon the exchange of their Acquired Fund shares for the Acquiring Fund Shares;
(e) The aggregate tax basis for the Acquiring Fund Shares received by
an Acquired Fund Shareholder pursuant to the reorganization will be the same as
the aggregate tax basis of the Acquired Fund shares held by such shareholder
immediately prior to the reorganization, and the holding period of the Acquiring
Fund Shares to be received by the Acquired Fund Shareholder will include the
period during which the Acquired Fund shares exchanged therefor were held by
such Shareholder (provided the Acquired Fund shares were held as capital assets
on the date of the reorganization); and
(f) The tax basis of the Acquired Fund's assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Acquired
Fund immediately prior to the reorganization, and the holding period of the
assets of the Acquired Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Acquired Fund.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us in the Prospectus/Proxy
Statement included in the Registration Statement, and to the filing of this
opinion as an exhibit to any application made by or on behalf of the Acquiring
Fund or any distributor or dealer in connection with the registration and
qualification of the Acquiring Fund or the Acquiring Fund Shares under the
securities laws of any state or jurisdiction. In giving such permission, we do
not admit hereby that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933 or the rules and
regulations of the SEC thereunder.
Very truly yours,
STROOCK & STROOCK & LAVAN LLP
EXHIBIT (13)(a)
ADMINISTRATION AGREEMENT
Administration Agreement made as of April 25, 1996, and
revised as of August 12, 1998, between certain portfolios of THE INFINITY MUTUAL
FUNDS, INC., a Maryland corporation having its principal office and place of
business at 3435 Stelzer Road, Columbus, Ohio 43219-3035 (herein called the
"Fund"), and BISYS FUND SERVICES LIMITED PARTNERSHIP, an Ohio limited
partnership having its principal office and place of business at 3435 Stelzer
Road, Columbus, Ohio 43219-3035 (herein called "BISYS").
WHEREAS, the Fund is an open-end, management investment
company, registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), and consisting of, among others, the portfolios set forth on
Schedule 1 hereto, as such Schedule may be revised from time to time (each, a
"Series");
WHEREAS, the Fund intends from time to time to employ certain
entities (in addition to those named below), some of which may be affiliated
with BISYS, to provide services to one or more Series (each, a "Service
Provider");
WHEREAS, the Fund employs BISYS to act as distributor for each
Series' shares of common stock, par value $.001 per share (the "Shares");
WHEREAS, the Fund, in respect of the Series, previously had
employed an affiliate of BISYS as its administrator; and
WHEREAS, the Fund desires to retain BISYS as its Administrator
to provide it with administrative services with respect to each Series, and
BISYS is willing to render such services;
NOW, THEREFORE, in consideration of the premises and mutual
covenants set forth herein, the parties hereto agree as follows:
I. DELIVERY OF DOCUMENTS
The Fund has delivered to BISYS copies of each of the
following documents and will deliver to it all future amendments and supplements
thereto, if any:
(a) The Fund's Articles of Incorporation and all
amendments and supplements thereto (as presently in effect and as from time to
time amended or supplemented, herein called the "Charter");
(b) The Fund's By-laws (as presently in effect and as
from time to time amended, herein called the "By-laws");
(c) Resolutions of the Board of Directors of the Fund
authorizing the execution and delivery of this Agreement;
(d) The Fund's Registration Statement under the
Securities Act of 1933, as amended (the "1933 Act"), and the 1940 Act on Form
N-1A most recently filed with the Securities and Exchange Commission (the
"Commission") relating to the Shares, and all subsequent amendments or
supplements thereto (the "Registration Statement");
(e) The Fund's Notification of Registration under the
1940 Act on Form N-8A as filed with the Commission; and
(f) The Fund's current Prospectuses and Statements of
Additional Information pertaining to the Series (as presently in effect and as
from time to time amended and supplemented, herein called the "Prospectus").
II. ADMINISTRATION
1. APPOINTMENT OF ADMINISTRATOR. The Fund hereby appoints BISYS
as its Administrator for each of the Series on the terms and for the period set
forth in this Agreement and BISYS hereby accepts such appointment and agrees to
perform the services and duties set forth in this Section II for the
compensation provided in this Section. The Fund understands that BISYS now acts,
and that from time to time hereafter BISYS may act, as administrator of various
investment companies or fiduciary for other managed accounts, and the Fund has
no objection to BISYS' so acting. In addition, it is understood that the persons
employed by BISYS to assist in the performance of its duties hereunder will not
devote their full time to such services and nothing herein contained shall be
deemed to limit or restrict the right of BISYS or any affiliate of BISYS to
engage in and devote time and attention to other businesses or to render
services of whatever kind or nature.
2. SERVICES AND DUTIES.
(a) As Administrator, and subject to the supervision and
control of the Fund's Board of Directors, BISYS will provide office facilities,
equipment, statistical and research data, clerical, accounting and bookkeeping
services, internal compliance services relating to accounting and legal matters,
and personnel to carry out all administrative services required for operation of
the business and affairs of the Series, other than those management, investment
advisory and sub-advisory functions which are to be performed by certain Service
Providers pursuant to their respective agreements with the Fund, the services
BISYS performs as distributor, those services to be performed by the Fund's
custodian and transfer agent, and those services normally performed by the
Fund's legal counsel and independent auditors. BISYS' responsibilities include
without limitation the following services:
(1) Providing a facility to receive purchase and
redemption orders via toll-free IN-WATTS telephone lines;
(2) Providing for the preparing, supervision and
mailing of confirmations for all purchase and redemption
orders;
(3) Providing and supervising the operation of an
automated data processing system to process purchase and
redemption orders received by BISYS as distributor (BISYS
assumes responsibility for the accuracy of the data
transmitted for processing or storage);
(4) Overseeing the performance of the Fund's
custodian and transfer agent;
(5) Making available information concerning each
Series to its shareholders; distributing written
communications to each Series' shareholders such as periodic
listings of each Series' securities, annual and semi-annual
reports, and the Prospectus and supplements thereto; and
handling shareholder problems and calls relating to
administrative matters; and
(6) Providing and supervising the services of
employees ("relationship coordinators") whose principal
responsibility and function shall be to preserve and
strengthen each Series' relationships with its shareholders.
(b) BISYS shall assure that persons are available to
receive redemption requests to the Fund's transfer agent as promptly as
practicable.
(c) BISYS shall assure that persons are available to
receive orders accepted for the purchase of Shares to the transfer agent as
promptly as practicable.
(d) BISYS shall participate in the periodic updating of
the Prospectus and shall accumulate information for and, subject to approval by
the Fund's Treasurer and legal counsel, coordinate the preparation, filing,
printing and dissemination of reports to the Series' shareholders and the
Commission, including but not limited to annual reports and semi-annual reports
on Form N-SAR, notices pursuant to Rule 24f-2 and proxy materials.
(e) BISYS shall pay all costs and expenses of maintaining
the offices of the Fund, wherever located, and shall arrange for payment by the
Series of all expenses payable by the Series.
(f) BISYS, after consultation with legal counsel for the
Fund, shall determine the jurisdictions in which the Shares shall be registered
or qualified for sale and, in connection therewith, shall be responsible for the
maintenance of the registration or qualification of the Shares for sale under
the securities laws of any state. Payment of share registration fees and any
fees for qualifying or continuing the qualification of the Series shall be made
by the Series.
(g) BISYS shall provide the services of certain persons
who may be appointed as officers of the Fund by the Fund's Board of Directors.
(h) BISYS shall oversee the maintenance by the Fund's
custodian and transfer agent of the books and records of the Fund required under
the 1940 Act in connection with the performance of the Fund's agreements with
such entities, and shall maintain, or provide for the maintenance of, such other
books and records (other than those required to be maintained by the Service
Providers) as may be required by law or may be required for the proper operation
of the business and affairs of the Series. In compliance with the requirements
of Rule 31a-3 under the 1940 Act, BISYS agrees that all such books and records
which it maintains, or is responsible for maintaining, for the Series are the
property of the Fund and further agrees to surrender promptly to the Fund any of
such books and records upon the Fund's request. BISYS further agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act said books and
records required to be maintained by Rule 31a-1 under said Act.
(i) BISYS shall prepare the Series' federal, state and
local income tax returns.
(j) BISYS shall prepare and, subject to approval of the
Fund's Treasurer, disseminate to the Fund's Directors the Fund's and each
Series' quarterly financial statements and schedules of investments, and shall
prepare such other reports relating to the business and affairs of the Fund and
each Series (not otherwise appropriately prepared by the Service Providers, the
Fund's legal counsel or its independent auditors) as the officers and Directors
of the Fund may from time to time reasonably request in connection with the
performance of their duties.
(k) BISYS shall assist with the coordination of the
provision of investment management, advisory and sub-advisory services by the
Service Providers to the Series, and shall provide other administration
assistance to said entities as required to carry out the business and operations
of the Series.
(l) BISYS shall recommend, implement and monitor all
specialized services and programs that are necessary or appropriate in order for
the Series to serve properly the investment needs of the fiduciary accounts
investing in their Shares.
(m) In performing its duties as Administrator for the
Series, BISYS will act in conformity with the Charter, By-laws and Prospectus
and with the instructions and directions of the Board of Directors of the Fund
and will conform to and comply with the requirements of the 1940 Act and all
other applicable federal or state laws and regulations.
3. SUBCONTRACTORS. It is understood that BISYS may from time
to time employ or associate with itself such person or persons as
BISYS may believe to be particularly fitted to assist in the performance of
this Agreement; provided, however, that the compensation of such person or
persons shall be paid by BISYS and that BISYS shall be as fully responsible to
the Fund for the acts and omissions of any subcontractor as it is for its own
acts and omissions.
4. EXPENSES ASSUMED AS ADMINISTRATOR. Except as otherwise
stated in this subsection 4, BISYS shall pay all expenses incurred by it in
performing its services and duties as Administrator. All other expenses
incurred in the operation of the Fund will be borne by the
Fund, except to the extent specifically assumed by others. The expenses to be
borne by the Fund include, without limitation, the following: organizational
costs, taxes, interest, brokerage fees and commissions, if any, fees of
Directors who are not officers, directors, employees or holders of 5% or more of
the outstanding voting securities of any Service Provider or BISYS, or any of
their affiliates, Commission fees, state Blue Sky qualification fees,
management, advisory, sub-advisory, administration and other shareholder
services fees, charges of custodians, transfer and dividend disbursing agents'
fees, certain insurance premiums, industry association fees, auditing and legal
expenses, costs of maintaining corporate existence, costs of independent pricing
services, costs attributable to investor services (including, without
limitation, telephone and personnel expenses), costs of calculating the net
asset value of the Series' shares, costs of shareholders' reports and corporate
meetings, costs of preparing and printing prospectuses and statements of
additional information for regulatory purposes and for distribution to existing
shareholders (unless otherwise provided pursuant to a plan adopted in accordance
with Rule 12b-1 under the 1940 Act), and any extraordinary expenses.
5. COMPENSATION. In consideration of services rendered
pursuant to this Agreement, the Fund will pay BISYS on the first business day of
each month the fee at the annual rate set forth opposite each Series' name on
Schedule 1 hereto, based upon the value of each Series' average daily net assets
for the previous month. Net asset value shall be computed on such days and at
such time or times as described in the Prospectus. The fee for the period from
the date of the commencement of the initial public sale of each Series' shares
to the end of the month during which such sale shall have been commenced shall
be pro-rated according to the proportion which such period bears to the full
monthly period, and upon any termination of this Agreement before the end of any
month, the fee for such part of a month shall be pro-rated according to the
proportion which such period bears to the full monthly period and shall be
payable upon the date of termination of this Agreement.
For the purpose of determining fees payable to BISYS, the
value of each Series' net assets shall be computed in the manner specified in
the Charter for the computation of the value of each Series' net assets.
Notwithstanding anything to the contrary herein, if in any
fiscal year the aggregate expenses of any Series, exclusive of taxes, brokerage,
interest on borrowings and (with the prior written consent of the necessary
state securities commissions) extraordinary expenses, but including the
management, investment advisory, sub-advisory and administration fees, exceed
the expense limitation of any such state having jurisdiction over the Series,
the Fund may deduct from the fees to be paid hereunder, or BISYS will bear, to
the extent required by state law, that portion of such excess which bears the
same relation to the total of such excess as BISYS' fee hereunder bears to the
total fee otherwise payable for the fiscal year by the Series pursuant to this
Agreement and the Fund's management, investment advisory and sub-advisory or
similar agreements. BISYS' obligation is limited to the amount of its fees
hereunder. Such deduction or payment, if any, will be estimated daily, and
reconciled and effected or paid, as the case may be, on a monthly basis.
6. CONFIDENTIALITY. BISYS will treat confidentially and as
proprietary information of the Fund all records and other information relative
to the Fund and each Series' prior or present shareholders or those persons or
entities who respond to inquiries concerning investment in a Series and, except
as provided below, will not use such records or information for any other
purpose other than for the performance of its responsibilities and duties with
regard to the Series which now exist or which may be added in the future. Any
other use by BISYS of the records and information referred to above may be made
only after prior notification to and approval in writing by the Fund. Such
approval shall not be unreasonably withheld and may not be withheld where (i)
BISYS may be exposed to civil or criminal contempt proceedings for failure to
divulge such information; (ii) BISYS is requested to divulge such information by
duly constituted authorities; or (iii) BISYS is so requested by the Fund.
III. LIMITATION OF LIABILITY
BISYS shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Fund in connection with the matters to
which this Agreement relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on its part in the performance of BISYS' duties or
from its reckless disregard of its obligations and duties under this Agreement.
Any person, even though also an officer, director, partner, employee or agent of
BISYS, who may be or become an officer, Director, employee or agent of the Fund,
shall be deemed, when rendering services to the Fund or to any Series, or acting
on any business of the Fund or of any Series (other than services or business in
connection with BISYS' duties as Administrator hereunder) to be rendering such
services to or acting solely for the Fund or Series and not as an officer,
director, partner, employee or agent or one under the control or direction of
BISYS even though paid by BISYS.
IV. TERM
As to each Series, this Agreement shall continue until the
date set forth opposite such Series' name on Schedule 1 hereto (the "Reapproval
Date"), and thereafter shall continue automatically for successive annual
periods ending on the day of each year set forth opposite the Series' name on
Schedule 1 hereto (the "Reapproval Day"), provided such continuance is
specifically approved as to the Series at least annually by (a) the Fund's Board
of Directors or (b) vote of a majority (as defined in the 1940 Act) of such
Series' outstanding voting securities, provided that in either event its
continuance also is approved by a majority of the Fund's Directors who are not
"interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval. As to each Series, this Agreement is terminable without
penalty, at any time if for "cause," by the Fund's Directors or by vote of
holders of a majority of such Series' shares or, upon not less than 90 days'
written notice to the Fund, by BISYS. This Agreement also will terminate
automatically, as to the relevant Series, in the event of its assignment (as
defined in the 1940 Act). "Cause" shall mean a material breach by BISYS of its
obligations under this Agreement which shall not have been cured within 30 days
after the date on which BISYS shall have received written notice setting forth
in detail the facts alleged to give rise to the breach.
V. MISCELLANEOUS
1. AMENDMENTS. No provision of this Agreement may be changed,
waived, discharged or terminated, except by an instrument in writing signed by
the party against whom an enforcement of the change, waiver, discharge or
termination is sought.
2. CONSTRUCTION. The captions in this Agreement are included
for convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. Subject to the provisions of Article IV hereof, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and shall be governed by New York law; PROVIDED,
HOWEVER, that nothing herein shall be construed in a manner inconsistent with
the 1940 Act or any rule or regulation of the Commission thereunder.
3. NOTICE. Any notice or other instrument in writing,
authorized or required by this Agreement to be given to the Fund shall be
sufficiently given if addressed to the Fund and mailed or delivered to it at its
office at the address first above written, or at such other place as the Fund
may from time to time designate in writing. Any notice or other instrument in
writing, authorized or required by this Agreement to be given to BISYS shall be
sufficiently given if addressed to BISYS and mailed or delivered to it at its
office at the address first above written, or at such other place as BISYS may
from time to time designate in writing.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their officers designated below as of the day and
year first above written.
THE INFINITY MUTUAL FUNDS, INC.
By:______________________________
William B. Blundin,
President and Chairman of
the Board
Attest:________________________
BISYS FUND SERVICES LIMITED
PARTNERSHIP
By: BISYS Fund Services, Inc.,
General Partner
By:___________________________
Attest: ________________________
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
NAME OF SERIES ANNUAL FEE AS REAPPROVAL DATE REAPPROVAL DAY
A PERCENTAGE OF
AVERAGE DAILY
NET ASSETS
<S> <C> <C> <C>
ISG Aggressive .15 of 1% April 25, 2001 April 25
Growth Portfolio
ISG Capital .15 of 1% April 25, 2001 April 25
Growth Portfolio
ISG Core Income
Portfolio .15 of 1% April 25, 2001 April 25
ISG Current .15 of 1% April 25, 2001 April 25
Income Portfolio
ISG Equity
Value Portfolio .15 of 1% April 25, 2001 April 25
ISG Government
Income Portfolio .15 of 1% April 25, 2001 April 25
ISG Government
Money Market
Portfolio .10 of 1% April 25, 2001 April 25
ISG Growth .15 of 1% April 25, 2001 April 25
Portfolio
ISG Growth and .15 of 1% April 25, 2001 April 25
Income Portfolio
ISG Inter-
national Equity
Portfolio .15 of 1% April 25, 2001 April 25
ISG Large Cap .15 of 1% April 25, 2001 April 25
Equity Portfolio
ISG Limited
Duration Income
Portfolio .15 of 1% April 25, 2001 April 25
ISG Limited
Duration
Tennessee
Tax Free
Portfolio .15 of 1% April 25, 2001 April 25
ISG Limited
Duration U.S.
Government
Portfolio .15 of 1% April 25, 2001 April 25
ISG Mid Cap
Portfolio .15 of 1% April 25, 2001 April 25
ISG Moderate Growth
and Income .15 of 1% April 25, 2001
Portfolio April 25
ISG Municipal
Income Portfolio .15 of 1% April 25, 2001 April 25
ISG Prime
Money Market
Portfolio .10 of 1% April 25, 2001 April 25
ISG Small Cap
Opportunity
Portfolio .15 of 1% April 25, 2001 April 25
ISG Tax Free
Money Market
Portfolio .10 of 1% April 25, 2001 April 25
ISG Tennessee
Tax Exempt Bond
Portfolio .15 of 1% April 25, 2001 April 25
ISG U.S. Treasury
Money Market
Portfolio .10 of 1% April 25, 2001 April 25
Correspondent Cash
Reserves Money
Market Portfolio .10 of 1% December 31, 1999 December 31
Correspondent Cash
Reserves Tax Free
Money Market
Portfolio .10 of 1% December 31, 1999 December 31
</TABLE>
As Revised: August 12, 1998
EXHIBIT (13)(b)
THE INFINITY MUTUAL FUNDS, INC.
SHAREHOLDER SERVICES PLAN
FOR THE
ISG PORTFOLIOS
WHEREAS, The Infinity Mutual Funds, Inc. (the "Fund") is registered
under the Investment Company Act of 1940, as amended ("1940 Act"), as an
open-end, management investment company, and offers for public sale distinct
series of shares of common stock, each corresponding to a distinct portfolio;
and
WHEREAS, the Fund's Board of Directors (the "Board") has established as
separate portfolios of the Fund the ISG Portfolios set forth on Schedule 1
hereto, as such Schedule may be revised from time to time (each, a "Portfolio");
and
WHEREAS, the Fund desires to adopt a Shareholder Services Plan ("Plan")
with respect to certain classes of shares of each Portfolio
set forth on Schedule 1 hereto (each, a "Class"); and
WHEREAS, the Fund intends to enter into agreements ("Plan Agreements")
with certain financial institutions, securities dealers and other industry
professionals ("Service Organizations") pursuant to which the Service
Organizations have agreed to perform certain services for the beneficial owners
of shares of each Class;
NOW, THEREFORE, the Fund hereby adopts this Plan with respect to each
Class.
Section 1. Pursuant to Plan Agreements, Service Organizations will
provide certain services as set forth therein to holders of shares of a Class in
consideration of a fee, computed monthly in the manner set forth in the Plan
Agreements, up to the annual rate set forth on Schedule 2 hereto. The services
provided by Service Organizations under their Plan Agreements may include
providing personal services relating to shareholder accounts, such as answering
shareholder inquiries regarding the Portfolios and providing reports and other
information, and providing services related to the maintenance of shareholder
accounts. The Fund's administrator or distributor and the Portfolios' investment
adviser or sub-investment adviser and their affiliates are eligible to become
Service Organizations and to receive fees under this Plan. As to each Class, all
expenses incurred by such Class in connection with the Plan Agreements and the
implementation of this Plan shall be borne entirely by the holders of such
Class's shares.
Section 2. As to each Class, this Plan shall not take effect unless it
first has been approved, together with any related agreements, by votes of a
majority of both (a) the Board and (b) those Directors who are not "interested
persons" (as defined in the 1940 Act) of the Fund and have no direct or indirect
financial interest in the operation of this Plan or any Plan Agreement
("Independent Directors"), cast in person at a meeting (or meetings)
called for the purpose of voting on such approval; and until the Directors who
approve the Plan's taking effect have reached the conclusion that there is a
reasonable likelihood that the Plan will benefit such Class and the holders of
its shares.
Section 3. As to each Class, this Plan shall continue for a period of
one year from its effective date, unless earlier terminated in accordance with
its terms, and thereafter shall continue automatically for successive annual
periods, provided such continuance is approved at least annually in the manner
provided in Section 2 hereof.
Section 4. The Board shall be provided with and shall review, at least
quarterly, a written report of the amounts expended with respect to each Class
under this Plan and the purposes for which such expenditures were made. Such
report shall include any amounts paid to Service Organizations and the purposes
for which such payments were made.
Section 5. As to each Class, this Plan may be amended at any
time by the Board, provided that any material amendment of the terms
of this Plan shall become effective only upon the approvals set forth in
Section 2.
Section 6. As to each Class, this Plan is terminable at any time by
vote of a majority of the Independent Directors.
Section 7. While this Plan is in effect, the selection and nomination
of those Directors who are not "interested persons" (as defined in the 1940 Act)
of the Fund shall be committed to the discretion of the Directors who are not
interested persons of the Fund.
Section 8. The Fund shall preserve copies of this Plan (including any
amendments thereto) and any related agreements and all reports made pursuant to
Section 4 hereof for a period of not less than six years from the date of this
Plan, the first two years in an easily accessible place.
Dated: February 15, 1994
Amended: August 12, 1998
<PAGE>
SCHEDULE 1
NAME OF PORTFOLIO AND CLASS DATE ESTABLISHED
- ---------------------------- -----------------
ISG Aggressive Growth Portfolio August 12, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Capital Growth Portfolio February 15, 1994
Class A Shares
Class B Shares
Trust Shares
ISG Core Income Portfolio February 15, 1994
Class A Shares
Class B Shares
Trust Shares
ISG Current Income Portfolio August 12, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Dividend Growth Portfolio February 15, 1994
Class A Shares
Class B Shares
Trust Shares
ISG Equity Value Portfolio May 14, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Government Income Portfolio May 14, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Growth Portfolio August 12, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Growth and Income Portfolio August 12, 1998
Class A Shares
Class B Shares
Trust Shares
ISG International Equity Portfolio May 14, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Large Cap Equity Portfolio August 12, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Limited Duration Income February 15, 1994
Portfolio
Class A Shares
Class B Shares
Trust Shares
ISG Limited Duration Tennessee February 15, 1994
Tax Free Portfolio
Class A Shares
Class B Shares
Trust Shares
ISG Limited Duration U.S. February 11, 1997
Government Portfolio
Class A Shares
Class B Shares
Trust Shares
ISG Mid Cap Portfolio May 14, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Moderate Growth and
Income Portfolio August 12, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Municipal Income Portfolio May 14, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Small Cap Opportunity Portfolio May 14, 1998
Class A Shares
Class B Shares
Trust Shares
ISG Tennessee Tax Exempt Bond Portfolio February 11, 1997
Class A Shares
Class B Shares
Trust Shares
ISG Government Money Market Portfolio May 14, 1998
Class A Shares
Class B Shares
ISG Prime Money Market Portfolio February 15, 1994
Class A Shares
Class B Shares
ISG Tax Free Money Market Portfolio May 14, 1998
Class A Shares
Class B Shares
ISG U.S. Treasury Money Market Portfolio February 15, 1994
Class A Shares
<PAGE>
SCHEDULE 2
ANNUAL FEE AS A
PERCENTAGE OF AVERAGE
NAME OF PORTFOLIO AND CLASSES DAILY NET ASSETS
- ------------------------------ ------------------------
ISG Aggressive Growth Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Capital Growth Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Core Income Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Current Income Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Dividend Growth Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Equity Value Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Government Income Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Growth Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Growth and Income Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG International Equity
Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Large Cap Equity Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Limited
Duration Income Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Limited Duration
Tennessee Tax Free Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Limited Duration
U.S. Government Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Mid Cap Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Moderate Growth and Income Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Municipal Income Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Small Cap Opportunity Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Tennessee Tax Exempt Bond Portfolio
Class A Shares .15%
Class B Shares .25%
Trust Shares .15%
ISG Tax Free Money Market Portfolio
Class A Shares .25%
Class B Shares .25%
ISG Government Money Market Portfolio
Class A Shares .25%
Class B Shares .25%
ISG Prime Money Market Portfolio
Class A Shares .25%
Class B Shares .25%
EXHIBIT (13)(c)
THE INFINITY MUTUAL FUNDS, INC.
ISG NON-MONEY MARKET FUNDS
RULE 18F-3 PLAN
Rule 18f-3 under the Investment Company Act of 1940, as
amended (the "1940 Act"), requires that the Board of an investment company
desiring to offer multiple classes pursuant to said Rule adopt a plan setting
forth the separate arrangement and expense allocation of each class, and any
related conversion features or exchange privileges.
The Board, including a majority of the non-interested Board
members, of The Infinity Mutual Funds, Inc. (the "Fund"), on behalf of each
series of the Fund listed on Schedule A attached hereto (each, a "Portfolio")
which offers multiple classes, has determined that the following plan is in the
best interests of each class individually and each Portfolio as a whole:
1. CLASS DESIGNATION: Portfolio shares shall be divided into
Class A Shares, Class B Shares and Trust Shares.
2. DIFFERENCES IN SERVICES: The services offered to
shareholders of each Class shall be substantially the same, except that
TELETRADE, Automatic Investment Plan, Directed Distribution Plan, Automatic
Withdrawal Plan and Reinstatement Privilege shall be available only to holders
of Class A Shares or Class B Shares, and Right of Accumulation and Letter of
Intent shall be available only to holders of Class A Shares.
3. DIFFERENCES IN DISTRIBUTION ARRANGEMENTS: Class A Shares of
each Portfolio shall be offered with a front-end sales charge, as such term is
defined in the Conduct Rules of the National Association of Securities Dealers,
Inc. ("NASD"), and a contingent deferred sales charge (a "CDSC"), as such term
is defined in the Conduct Rules of the NASD, 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. Class A Shares also shall be charged an
annual distribution fee under a Distribution Plan adopted pursuant to Rule 12b-1
under the 1940 Act and an annual service fee under a Shareholder Services Plan.
The amount of the sales charge, the amount of and provisions relating to the
CDSC, and the amount of the fees under the Distribution Plan and Shareholder
Services Plan pertaining to the Class A Shares are set forth on Schedule B
hereto.
Class B Shares shall not be subject to a front-end sales
charge, but shall be subject to a CDSC, and shall be charged an annual
distribution fee under a Distribution Plan adopted pursuant to Rule 12b-1 under
the 1940 Act and an annual service fee under a Shareholder Services Plan. The
amount of and provisions relating to the CDSC, and the amount of the fees under
the Distribution Plan and Shareholder Services Plan pertaining to the Class B
Shares, are set forth on Schedule C hereto.
Trust Shares shall be offered at net asset value with no
front-end sales charge or CDSC, and shall be charged an annual service fee of up
to .15% of the value of the average daily net assets attributed to the Trust
Shares pursuant to a Shareholder Services Plan. Trust Shares shall be offered
exclusively to clients of First American National Bank for their qualified
trust, custody and/or agency accounts and to clients of affiliated and
correspondent banks of First American National Bank or certain other
institutions for their similar accounts maintained at such affiliates or
institutions.
4. EXPENSE ALLOCATION: The following expenses shall be
allocated, to the extent practicable, on a Class-by-Class basis: (a) fees under
the Distribution Plan and Shareholder Services Plan; (b) printing and postage
expenses related to preparing and distributing materials, such as shareholder
reports, prospectuses and proxies, to current shareholders of a specific Class;
(c) Securities and Exchange Commission and Blue Sky registration fees incurred
by a specific Class; (d) the expense of administrative personnel and services as
required to support the shareholders of a specific Class; (e) litigation or
other legal expenses relating solely to a specific Class; (f) transfer agent
fees identified by the Fund's transfer agent as being attributable to a specific
Class; and (g) Board members' fees incurred as a result of issues relating to a
specific Class.
5. CONVERSION FEATURES: Class B Shares shall automatically
convert to Class A Shares after a specified period of time after the date of
purchase, based on the relative net asset value of each such Class without the
imposition of any sales charge, fee or other charge, as set forth on Schedule D
hereto. No other Class shall be subject to any automatic conversion feature.
6. EXCHANGE PRIVILEGES: Portfolio shares of a Class
shall be exchangeable only for (a) shares of the same Class of
another Portfolio and (b) shares of certain other investment companies specified
from time to time.
Dated: April 26, 1995
Amended: May 14, 1998
Revised: August 12, 1998
<PAGE>
SCHEDULE A
ISG Aggressive Growth Portfolio
ISG Capital Growth Portfolio
ISG Core Income Portfolio
ISG Current Income Portfolio
ISG Dividend Growth Portfolio
ISG Equity Value Portfolio
ISG Government Income Portfolio
ISG Growth Portfolio
ISG Growth and Income Portfolio
ISG International Equity Portfolio
ISG Large Cap Equity Portfolio
ISG Limited Duration Income Portfolio
ISG Limited Duration Tennessee Tax Free Portfolio
ISG Limited Duration U.S. Government Portfolio
ISG Mid Cap Portfolio
ISG Moderate Growth and Income Portfolio
ISG Municipal Income Portfolio
ISG Small Cap Opportunity Portfolio
ISG Tennessee Tax Exempt Bond Portfolio
<PAGE>
SCHEDULE B
FRONT-END SALES CHARGE--CLASS A SHARES OF ISG CORE INCOME PORTFOLIO, ISG CURRENT
INCOME PORTFOLIO, ISG GOVERNMENT INCOME PORTFOLIO, ISG LIMITED DURATION INCOME
PORTFOLIO, ISG LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO, ISG LIMITED
DURATION U.S. GOVERNMENT PORTFOLIO, ISG MUNICIPAL INCOME PORTFOLIO AND ISG
TENNESSEE TAX EXEMPT BOND PORTFOLIO--The public offering price for Class A
Shares of such Portfolios shall be the net asset value per share of that Class
plus, except for shareholders beneficially owning Class A Shares of ISG
Government Income Portfolio and ISG Municipal Income Portfolio on _____________,
1998, a sales load as shown below:
<TABLE>
<CAPTION>
Total Sales Load
-----------------------------------------------------------
As a % of As a % of
offering net asset
price per value per
share share
Amount of Transaction
------------------------ -------------------------
<S> <C> <C>
Less than $50,000............................................... 3.00 3.09
$50,000 to less than $100,000................................... 2.50 2.56
$100,000 to less than $250,000.................................. 2.00 2.04
$250,000 to less than $500,000.................................. 1.50 1.52
$500,000 to less than $1,000,000................................ 1.00 1.01
$1,000,000 or more.............................................. -0- -0-
</TABLE>
FRONT-END SALES CHARGE--CLASS A SHARES OF ISG GOVERNMENT INCOME PORTFOLIO AND
ISG MUNICIPAL INCOME PORTFOLIO--SHAREHOLDERS BENEFICIALLY OWNING CLASS A SHARES
ON ____________, 1998--For shareholders beneficially owning Class A Shares of
ISG Government Income Portfolio and ISG Municipal Income Portfolio on
___________, 1998, the public offering price of Class A Shares of such
Portfolios (until May 1, 2000) shall be the net asset value per share of that
Class, plus a sales load as shown below:
<TABLE>
<CAPTION>
Total Sales Load
-----------------------------------------------------------
As a % of As a % of
offering net asset
price per value per
Amount of Transaction share share
------------------------ -------------------------
<S> <C> <C>
Less than $100,000.............................................. 2.00 2.04
$100,000 to less than $250,000.................................. 1.75 1.78
$250,000 to less than $500,000.................................. 1.50 1.52
$500,000 to less than $1,000,000................................ 1.00 1.01
$1,000,000 or more.............................................. -0- -0-
</TABLE>
FRONT-END SALES CHARGE--CLASS A SHARES OF ISG AGGRESSIVE GROWTH PORTFOLIO, ISG
CAPITAL GROWTH PORTFOLIO, ISG DIVIDEND GROWTH PORTFOLIO, ISG LARGE CAP EQUITY
PORTFOLIO, ISG EQUITY VALUE PORTFOLIO, ISG GROWTH PORTFOLIO, ISG GROWTH AND
INCOME PORTFOLIO, ISG MODERATE GROWTH AND INCOME PORTFOLIO, ISG INTERNATIONAL
EQUITY PORTFOLIO, ISG MID CAP PORTFOLIO AND ISG SMALL CAP OPPORTUNITY
PORTFOLIO--The public offering price for Class A Shares of such Portfolios shall
be the net asset value per share of that Class plus, except for shareholders
beneficially owning Class A Shares of ISG Capital Growth Portfolio and ISG
Dividend Growth Portfolio on September 30, 1997 and shareholders beneficially
owning Class A Shares of ISG Large Cap Equity Portfolio, ISG International
Equity Portfolio, ISG Mid Cap Portfolio and ISG Small Cap Opportunity Portfolio
on _______________, 1998, a sales load as shown below:
<TABLE>
<CAPTION>
Total Sales Load
-----------------------------------------------------------
As a % of As a % of
offering net asset
price per value per
share share
Amount of Transaction
------------------------ -------------------------
<S> <C> <C>
Less than $50,000............................................... 4.75 4.99
$50,000 to less than $100,000................................... 4.00 4.17
$100,000 to less than $250,000.................................. 3.25 3.36
$250,000 to less than $500,000.................................. 2.50 2.56
$500,000 to less than $1,000,000................................ 1.75 1.78
$1,000,000 or more.............................................. -0- -0-
</TABLE>
<PAGE>
FRONT-END SALES CHARGE--CLASS A SHARES OF ISG CAPITAL GROWTH PORTFOLIO AND ISG
DIVIDEND GROWTH PORTFOLIO--SHAREHOLDERS BENEFICIALLY OWNING CLASS A SHARES ON
SEPTEMBER 30, 1997--For shareholders beneficially owning Class A Shares of ISG
Capital Growth Portfolio and ISG Dividend Growth Portfolio on September 30,
1997, the public offering price for Class A Shares of such Portfolio shall be
the net asset value per share of that Class plus a sales load as shown below:
<TABLE>
<CAPTION>
Total Sales Load
-----------------------------------------------------------
As a % of As a % of
offering net asset
price per value per
share share
Amount of Transaction
------------------------ -------------------------
<S> <C> <C>
Less than $100,000.............................................. 3.00 3.09
$100,000 to less than $250,000.................................. 2.50 2.56
$250,000 to less than $500,000.................................. 2.00 2.04
$500,000 to less than $750,000.................................. 1.50 1.52
$750,000 to less than $1,000,000................................ 1.00 1.01
$1,000,000 or more.............................................. -0- -0-
</TABLE>
FRONT-END SALES CHARGE--CLASS A SHARES OF ISG LARGE CAP EQUITY PORTFOLIO AND ISG
SMALL CAP OPPORTUNITY PORTFOLIO--SHAREHOLDERS BENEFICIALLY OWNING CLASS A SHARES
ON ___________, 1998--For shareholders beneficially owning Class A Shares of ISG
Large Cap Equity Portfolio and ISG Small Cap Opportunity Portfolio on ________,
1998, the public offering price of Class A Shares of such Portfolios (until May
1, 2000) shall be the net asset value per share of that Class, plus a sales load
as shown below:
<TABLE>
<CAPTION>
Total Sales Load
----------------------------------------------------
As a % of As a % of
offering net asset
price per value per
AMOUNT OF TRANSACTION share share
------------------------ -------------------------
<S> <C> <C>
Less than $100,000 3.50 3.63
$100,000 to less than $250,000 3.00 3.09
$250,000 to less than $500,000 2.50 2.56
$500,000 to less than $1,000,000 1.00 1.01
$1,000,000 or more -0- -0-
</TABLE>
CLASS A SHARES OF ISG MID CAP PORTFOLIO AND ISG INTERNATIONAL EQUITY
PORTFOLIO--SHAREHOLDERS BENEFICIALLY OWNING CLASS A SHARES ON _____________,
1998--For shareholders beneficially owning Class A Shares of ISG Mid Cap
Portfolio and ISG International Equity Portfolio on ______________, 1998, the
public offering price for Class A Shares of such Portfolios (until May 1, 2000)
shall be the net asset value per share of that Class. Until May 1, 2000, no
initial sales charge shall be imposed at the time of purchase of Class A Shares
of ISG Mid Cap Portfolio or ISG International Equity Portfolio by such
shareholders.
CONTINGENT DEFERRED SALES CHARGE--CLASS A SHARES--Except for shareholders
beneficially owning Class A Shares of ISG Large Cap Equity Portfolio, ISG
Government Income Portfolio, ISG International Equity Portfolio, ISG Mid Cap
Portfolio, ISG Municipal Income Portfolio and ISG Small Cap Opportunity
Portfolio on _____________, 1998, a CDSC of 1% shall be assessed at the time of
redemption of Class A Shares purchased on or after May 14, 1998 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 beneficially owning
Class A Shares of such Portfolios on ____________, 1998 that charge such
shareholders an initial sales charge, a CDSC of .50% shall 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% shall be assessed on
purchases over $2,000,000) and redeemed within one year after purchase. The
terms contained on Schedule C pertaining to the CDSC assessed on redemptions of
Class B Shares (other than the amount of the CDSC and time periods), including
the provisions for waiving the CDSC, shall be applicable to the Class A Shares
subject to a CDSC. Letter of Intent and Right of Accumulation shall apply to
such purchases of Class A Shares.
AMOUNT OF DISTRIBUTION PLAN FEES--CLASS A SHARES--.25 of 1% of the value of the
average daily net assets of Class A.
AMOUNT OF SHAREHOLDER SERVICES PLAN FEES--CLASS A SHARES--.15 of 1% of the value
of the average daily net assets of Class A.
<PAGE>
SCHEDULE C
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES--A CDSC payable to the Fund's
Distributor shall be imposed on any redemption of Class B Shares which reduces
the current net asset value of such Class B Shares to an amount which is lower
than the dollar amount of all payments by the redeeming shareholder for the
purchase of Class B Shares of the Portfolio held by such shareholder at the time
of redemption. No CDSC shall 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 shareholder's
Class B Shares above the dollar amount of all payments for the purchase of Class
B Shares of the Portfolio held by such shareholder 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 shall depend on the number of years from the time the shareholder
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 shall 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:
YEAR SINCE PURCHASE PAYMENT CDSC AS A % OF AMOUNT
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*
- --------------------
* Approximately seven years after the date of purchase, Class B Shares
automatically shall convert to Class A Shares.
<PAGE>
In determining whether a CDSC is applicable to a redemption,
the calculation shall be made in a manner that results in the lowest possible
rate. Therefore, it shall 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.
WAIVER OF CDSC--The CDSC shall 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 Internal Revenue Code of 1986, as amended (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 Portfolio's Adviser, the Distributor 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 any systematic withdrawal plan as described in the Portfolio's
prospectus. Any Portfolio shares subject to a CDSC which were purchased prior to
the termination of such waiver shall have the CDSC waived as provided in the
Portfolio's prospectus at the time of the purchase of such shares.
AMOUNT OF DISTRIBUTION PLAN FEES--CLASS B SHARES--.75 of 1% of the value of the
average daily net assets of Class B.
AMOUNT OF SHAREHOLDER SERVICES PLAN FEES--CLASS B SHARES--.25 of 1% of the value
of the average daily net assets of Class B.
<PAGE>
SCHEDULE D
CONVERSION OF CLASS B SHARES--Approximately seven years after the date of
purchase, Class B Shares automatically shall convert to Class A Shares, based on
the relative net asset values for shares of each such Class, and shall no longer
be subject to the distribution fee and shareholder services fee charged Class B
Shares, but shall 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") shall 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.
EXHIBIT (13)(d)
THE INFINITY MUTUAL FUNDS, INC.
ISG MONEY MARKET FUNDS
RULE 18F-3 PLAN
Rule 18f-3 under the Investment Company Act of 1940, as
amended (the "1940 Act"), requires that the Board of an investment company
desiring to offer multiple classes pursuant to said Rule adopt a plan setting
forth the separate arrangement and expense allocation of each class, and any
related conversion features or exchange privileges.
The Board, including a majority of the non-interested Board
members, of The Infinity Mutual Funds, Inc. (the "Fund"), on behalf of each
series of the Fund listed on Schedule A attached hereto (each, a "Portfolio")
which offers multiple classes, has determined that the following plan is in the
best interests of each class individually and the Portfolio as a whole:
1. CLASS DESIGNATION: Portfolio shares shall be divided into
Class A Shares, Class B Shares and Trust Shares, except as otherwise indicated
on Schedule A.
2. DIFFERENCES IN SERVICES: The services offered to
shareholders of each Class shall be substantially the same, except that
TELETRADE, Automatic Investment Plan and Automatic Withdrawal Plan shall be
available only to holders of Class A Shares or Class B Shares, and Auto-Exchange
Plan and Reinstatement Privilege shall be available only to holders of Class B
Shares. In addition, holders of Class A Shares or Class B Shares shall be
provided certain services pursuant to a Shareholder Services Plan.
3. DIFFERENCES IN DISTRIBUTION ARRANGEMENTS: Class A Shares of
each Portfolio shall be charged an annual shareholder services fee of .25% of
the value of the average daily net assets of such Class under the Shareholder
Services Plan. The fee payable pursuant to such plan is intended to be a
"service fee" as defined under the Conduct Rules of the National Association of
Securities Dealers, Inc. (the "NASD").
Class B Shares shall be subject to a contingent deferred sales
charge (a "CDSC"), as such term is defined under the Conduct Rules of the NASD,
and shall be charged an annual distribution fee under a Distribution Plan
adopted pursuant to Rule 12b-1 under the 1940 Act and an annual service fee
under the Shareholder Services Plan. The amount of and provisions relating to
the CDSC, and the amount of the fees under the Distribution Plan and Shareholder
Services Plan pertaining to Class B Shares, are set forth on Schedule B hereto.
Trust Shares shall not be subject to a CDSC, shareholder
services fees or distribution fees. Trust Shares shall be offered exclusively to
clients of First American National Bank for their qualified trust, custody
and/or agency accounts and to clients of affiliated or correspondent banks of
First American National Bank or certain other institutions for their similar
accounts maintained at such affiliates or institutions.
4. EXPENSE ALLOCATION. The following expenses shall be
allocated, to the extent practicable, on a Class-by-Class basis: (a) fees under
the Shareholder Services Plan and Distribution Plan; (b) printing and postage
expenses related to preparing and distributing materials, such as shareholder
reports, prospectuses and proxies, to current shareholders of a specific Class;
(c) Securities and Exchange Commission and Blue Sky registration fees incurred
by a specific Class; (d) the expense of administrative personnel and services as
required to support the shareholders of a specific Class; (e) litigation or
other legal expenses relating solely to a specific Class; (f) transfer agent
fees identified by the Fund's transfer agent as being attributable to a specific
Class; and (g) Board members' fees incurred as a result of issues relating to a
specific Class.
5. CONVERSION FEATURES: Class B Shares shall automatically
convert to Class A Shares after a specified period of time after the date of
purchase, based on the relative net asset value of each such Class without the
imposition of any sales charge, fee or other charge, as set forth on Schedule C
hereto. No other Class shall be subject to any automatic conversion feature.
6. EXCHANGE PRIVILEGES: Portfolio shares of a Class shall be
exchangeable only for (a) shares of the same Class of another Portfolio and (b)
shares of certain other investment companies specified from time to time.
Dated: April 26, 1995
Amended: May 14, 1998
<PAGE>
SCHEDULE A
ISG Government Money Market Portfolio
Class A Shares, Class B Shares and Trust Shares
ISG Prime Money Market Portfolio
Class A Shares, Class B Shares and Trust Shares
ISG Tax Free Money Market Portfolio
Class A Shares, Class B Shares and Trust Shares
ISG U.S. Treasury Money Market Portfolio
Class A Shares and Trust Shares
<PAGE>
SCHEDULE B
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES--A CDSC payable to the Fund's
Distributor shall be imposed on any redemption of Class B Shares which reduces
the current net asset value of such Class B Shares to an amount which is lower
than the dollar amount of all payments by the redeeming shareholder for the
purchase of Class B Shares of the Portfolio held by such shareholder at the time
of redemption. No CDSC shall 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 shareholder's
Class B Shares above the dollar amount of all payments for the purchase of Class
B Shares of the Portfolio held by such shareholder 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 shall depend on the number of years from the time the shareholder
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 shall 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
YEAR SINCE AMOUNT INVESTED
PURCHASE PAYMENT OR REDEMPTION
WAS MADE PROCEEDS
- ----------------- ---------------
First................................................ 4.00
Second............................................... 3.00
Third................................................ 3.00
Fourth............................................... 2.00
Fifth................................................ 2.00
Sixth................................................ 1.00
Seventh.............................................. 0.00*
- ----------------------
* Approximately seven years after the date of purchase, Class B Shares
automatically shall convert to Class A Shares.
<PAGE>
In determining whether a CDSC is applicable to a redemption,
the calculation shall be made in a manner that results in the lowest possible
rate. Therefore, it shall 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.
WAIVER OF CDSC--The CDSC shall 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 Internal Revenue Code of 1986, as amended (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 Portfolio's Adviser, the Distributor 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 any systematic withdrawal plan as described in the Portfolio's
prospectus. Any Portfolio shares subject to a CDSC which were purchased prior to
the termination of such waiver shall have the CDSC waived as provided in the
Portfolio's prospectus at the time of the purchase of such shares.
AMOUNT OF DISTRIBUTION PLAN FEES--CLASS B SHARES--.75 of 1% of the value of the
average daily net assets of Class B.
AMOUNT OF SHAREHOLDER SERVICES PLAN FEES--CLASS B SHARES--.25 of 1% of the value
of the average daily net assets of Class B.
<PAGE>
SCHEDULE C
CONVERSION OF CLASS B SHARES--Approximately seven years after the date of
purchase, Class B Shares automatically shall convert to Class A Shares, based on
the relative net asset values for shares of each such Class, and shall no longer
be subject to the distribution fee and shareholder services fee charged Class B
Shares, but shall be subject to the shareholder services fee charged Class A
Shares. At that time, Class B Shares that have been acquired through the
reinvestment of dividends and distributions ("Dividend Shares") shall 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.
EXHIBIT 14
INDEPENDENT AUDITORS' CONSENT
The Board of directors of
The Infinity Mutual Funds, Inc.- The AmeriStar Mutual Funds
The Board of Trustee of
The DG Investor Series:
We consent to the references to our firm under the headings "Independent
Auditors" and "Financial Statements and Experts" in the Prospectus/Proxy
Statement included herein. We also consent to the use of our report dated
February 20, 1998 for The Infinity Mutual Funds, Inc. - The AmeriStar Mutual
Funds included in its Annual Report and our report dated April 10, 1998 for The
DG Investor Series included in its Annual Report, both incorporated by reference
in the Statement of Additional Information.
/s/ KPMG Peat Marwick LLP
Columbus, Ohio
September 18, 1998
EXHIBIT 17(b)(i)
PROSPECTUS April 24, 1998
AMERISTAR MUTUAL FUNDS
The AmeriStar 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 nine Portfolios, each with a
different investment policy:
The CAPITAL GROWTH PORTFOLIO seeks to provide investors with capital growth.
This Portfolio will invest primarily in the equity securities of domestic
issuers.
The DIVIDEND GROWTH PORTFOLIO seeks to provide investors with current
income and capital appreciation. This Portfolio will invest primarily in
dividend-paying equity securities of domestic issuers which are expected to
provide reasonable income and may have capital appreciation potential.
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.
The LIMITED DURATION INCOME PORTFOLIO seeks to provide investors
with current income without assuming undue risk. This Portfolio will invest
primarily in investment grade, U.S. dollar denominated fixed-income
securities of domestic and foreign issuers. Under normal market conditions,
the Limited Duration Income Portfolio will invest in a portfolio of
securities that has a duration of under four years.
The LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO seeks to provide investors
with current income exempt from Federal and Tennessee income taxes without
assuming undue risk. This Portfolio will invest primarily in a portfolio of
investment grade Tennessee Municipal Obligations that, under normal market
conditions, has a duration of under five years and an effective average
portfolio maturity ranging between three and five years.
The CORE INCOME PORTFOLIO seeks to provide investors with current
income without assuming undue risk. This Portfolio will invest primarily in
investment grade, U.S. dollar denominated fixed-income securities of
domestic and foreign issuers. Under normal market conditions, the Core Income
Portfolio will invest in a portfolio of securities, except when
maintaining a temporary defensive position, that has an effective duration of
50% to 150% of that of the Merrill Lynch Corporate Government Master Index.
The TENNESSEE TAX EXEMPT BOND PORTFOLIO seeks to provide investors with
current income exempt from Federal and Tennessee income taxes without
assuming undue risk. This Portfolio will invest primarily in investment
grade Tennessee Municipal Obligations without regard to maturity.
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.
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.
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.
By this Prospectus, Trust Shares and Class A Shares of each Portfolio and
Class B Shares of each Portfolio, other than the U.S. Treasury Money Market
Portfolio, are being offered.
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. For each Portfolio, other than the Money Market
Portfolios, 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 April 24, 1998 which may
be revised from time to time, provides a further discussion of certain areas in
this Prospectus and other matters which may be of interest to some investors. It
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. The Securities and Exchange Commission maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding the Fund and
Portfolios. For a free copy of the Statement of Additional Information, write to
the Fund at 3435 Stelzer Road, Columbus, Ohio 43219-3035, or call
1-800-852-0045.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
-----------
Fee Table.............................................
Financial Highlights..................................
Description of the Portfolios.........................
Management of the Portfolios..........................
How to Buy Shares.....................................
How to Redeem Shares..................................
Shareholder Privileges................................
Dividends, Distributions and Taxes....................
Performance Information...............................
General Information...................................
Appendix.............................................. A-1
Distributed by: Investment Adviser:
BISYS Fund Services Limited First American National Bank
Partnership 315 Deaderick Street
3435 Stelzer Road Nashville, Tennessee 37237
Columbus, Ohio 43219-3035
For information about opening an account and other Fund services call:
(800) 824-3741. For voice recorded price and yield information call: (800)
852-0045. To execute purchases, redemptions and exchanges and for information
about the status of your account call: (800) 852-0045
<PAGE>
FEE TABLE
<TABLE>
<CAPTION>
Capital Dividend Limited
Growth Growth Duration Income Core Income
Portfolio Portfolio Portfolio Portfolio
------------------------- ------------------------ ----------------------- ----------------------
Trust Class A Class B Trust Class A Class B Trust Class A Class B Trust Claas A Class B
Shares Shares Shares Shares Shares Shares Shares Shares Shares Shares Shares Shares
------- ------- ------- ------ ------- ------- ------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <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 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% None None+ 4.00%
Annual Operating Expenses
(as a percentage of
average daily net
assets)
Management Fees............ .65% .65% .65% .65% .65% .65% .50% .50% .50% .50% .50% .50%
12b-1 Fees ................ None .25% .75% None .25% .75% None .25% .75% None .25% .75%
Other Expenses ............ .34% .28% .56% .44% .41% .71% .37% .34% .60% .42% .37% .68%
Total Portfolio Operating
Expenses................ .99% 1.18% 1.96% 1.09% 1.31% 2.11% .87% 1.09% 1.85% .92% 1.12% 1.93%
Example:
An investor would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return and (2) redemption
at the end of each time
period:
1 Year................. $ 10 $ 59 $ 60 $ 11 $ 60 $ 61 $ 9 $ 41 $ 59 $ 9 $ 41 $ 60
3 Years.................. $ 32 $ 83 $ 92 $ 35 $ 87 $ 96 $ 28 $ 64 $ 88 $ 29 $ 65 $ 91
5 Years.................. $ 55 $109 $126 $ 60 $116 $133 $ 48 $ 88 $120 $ 51 $ 90 $124
10 Years................. $121 $184 $199* $133 $198 $214* $107 $159 $188* $113 $162 $194*
An investor would pay
the following expenses
on the same investment,
assuming no redemption:
1 Year................... $ 10 $ 59 $ 20 $ 11 $ 60 $ 21 $ 9 $ 41 $ 19 $ 9 $ 41 $ 20
3 Years.................. $ 32 $ 83 $ 62 $ 35 $ 87 $ 66 $ 28 $ 64 $ 58 $ 29 $ 65 $ 61
5 Years.................. $ 55 $109 $106 $ 60 $116 $113 $ 48 $ 88 $100 $ 51 $ 90 $104
10 Years................. $121 $184 $199* $133 $198 $214* $107 $159 $188* $113 $162 $194*
- -----------------
+ 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 conversion of Class B Shares to Class A Shares at
the end of the seventh year following the date of purchase.
</TABLE>
<TABLE>
<CAPTION>
Tennessee Limited Duration Limited Duration Prime
Tax Exempt Tennessee Tax Free U.S. Government Money Market
Bond Portfolio Portfolio Portfolio Portfolio
------------------------- ------------------------ ----------------------- ----------------------
Trust Class A Class B Trust Class A Class B Trust Class A Class B Trust Class A Class B
Shares Shares Shares Shares Shares Shares Shares Shares Shares Shares Shares Shares
------- ------- ------- ------ ------- ------- ------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <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 3.00% None None 3.00% None None 3.00% None None None 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% None None 4.00%
Annual Operating Expenses
(as a percentage of average
daily net assets)
Management Fees.............. .50% .50% .50% .39%* .39%* .39%* .34%* .34%* .34%* .25% .25% .25%
12b-1 Fees .................. None .25% .75% None .25% .75% None .25% .75% None None .75%
Other Expenses............... .37% .34% .60% .41% .34% .87% .41% .41% .92% .37% .62% .61%
Total Portfolio Operating
Expenses................... .87% 1.09% 1.85% .80%* .98%* 2.01%* .75%* 1.00%* 2.01%* .62% .87% 1.61%
Example:
An investor would pay the
following expenses on
a $1,000 investment,
assuming (1) 5% annual
return and (2) redemption
at the end of each time
period:
1 Year.................. $ 9 $ 41 $ 59 $ 8 $ 40 $ 60 $ 8 $ 40 $ 60 $ 6 $ 9 $ 56
3 Years................. $ 28 $ 64 $ 88 $ 26 $ 60 $ 93 $ 24 $ 61 $ 93 $ 20 $ 28 $ 81
5 Years................. $ 48 $ 88 $120 $ 44 $ 83 $128 $ 42 $ 84 $128 $ 35 $ 48 $108
10 Years................ $107 $159 $188** $ 99 $147 $195** $ 93 $149 $195** $ 77 $107 $162**
An investor would pay
the following expenses
on the same investment,
assuming no redemption:
1 Year.................. $ 9 $ 41 $ 19 $ 8 $ 40 $ 20 $ 8 $ 40 $ 20 $ 6 $ 9 $ 16
3 Years................. $ 28 $ 64 $ 58 $ 26 $ 60 $ 63 $ 24 $ 61 $ 63 $ 20 $ 28 $ 51
5 Years................. $ 48 $ 88 $100 $ 44 $ 83 $108 $ 42 $ 84 $108 $ 35 $ 48 $ 88
10 Years................ $107 $159 $188** $ 99 $147 $195** $ 93 $149 $195** $ 77 $107 $162**
- ---------------
+ 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.
U.S. Treasury
Money Market
Portfolio
---------------------
Trust Class A
Shares Shares
------ -------
<S> <C> <C>
Shareholder Transaction
Expenses
Maximum Sales Load Imposed
on Purchases (as a
percentage of
offering price)....... None None
Maximum Deferred Sales
Load (as a percentage
of the amount
<S>
subject to charge)........ None None
Annual Operating Expenses
(as a percentage of average
daily net assets)
Management Fees.............. .25% .25%
12b-1 Fees .................. None None
Other Expenses............... .25% .50%
Total Portfolio Operating
Expenses................... .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.................. $ 5 $ 8
3 Years................. $16 $24
5 Years................. $28 $42
10 Years................ $63 $93
An investor would pay
the following expenses
on the same investment,
assuming no redemption:
1 Year.................. $ 5 $ 8
3 Years................. $16 $24
5 Years................. $28 $42
10 Years................ $63 $93
</TABLE>
The amounts listed in the example should not be considered as
representative of past or future expenses and actual expenses may be greater or
less than those indicated. Moreover, while the example assumes a 5% annual
return, each Portfolio's actual performance will vary and may result in an
actual return greater or less than 5%.
The purpose of the foregoing table is to assist investors in understanding
the costs and expenses borne by the Portfolios and investors, the payment of
which will reduce investors' annual return. Other Expenses for Class B Shares
are estimated based on amounts for Class A Shares for the current fiscal year.
Other Expenses for Class A Shares and Trust Shares are based on amounts for the
fiscal year ended December 31, 1997. The fees noted above for the Limited
Duration Tennessee Tax Free Portfolio and Limited Duration U.S. Government
Portfolio, without fee waivers, would be Management Fees, .50% for each such
Portfolio, and Total Portfolio Operating Expenses, .91%, 1.09% and 2.12% for
Trust Shares, Class A Shares and Class B Shares, respectively, of Limited
Duration Tennessee Tax Free Portfolio, and 1.16%, 2.17% for Trust Shares, Class
A Shares and Class B Shares, respectrively, of Limited Duration U.S. Government
Portfolio. Long-term investors in Class A Shares 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 expenses noted above do not reflect any other fee
waiver or expense reimbursement arrangement 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 each Portfolio 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 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 accompany the Statement of Additional Information, which is available
upon request. No financial information is available for Class B Shares which had
not been offered as of December 31, 1997. The shareholder services plan fees and
higher distribution plan fees payable by Class B Shares will cause such shares
to have a higher expense ratio, to pay lower dividends, and to have a lower
total investment return than Class A Shares; and Class A Shares and Class B
Shares will have a higher expenses ratio, pay lower dividends, and have a lower
investment return than Trust Shares.
<PAGE>
<TABLE>
<CAPTION>
AMERISTAR CAPITAL GROWTH PORTFOLIO
TRUST SHARES CLASS A SHARES
---------------------- -----------------------------------------------
Period Ended Year Ended Period Ended
December 31, 1997* December 31, 1997 December 31, 1996**
-------------------- --------------------- ------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.................. $14.51 $ 11.32 $ 10.00
------- ------- -------
Income from investment operations:
Net investment income............................... 0.02 0.06 ` --
Net realized and unrealized gains on
securities transactions........................... 0.10 3.40 1.32
------- ---- ----
Net income from investment operations............... 0.12 3.46 1.32
------- ---- ----
Less distributions:
Net investment income.............................. (0.02) (0.06) --
Net realized gains................................. (1.92) (1.92) --
------- ---- ----
Net change in net asset value......................... (1.82) 1.48 1.32
------- ---- ----
Net Asset Value, End of Period........................ $12.69 $ 12.80 $11.32
======== ======= =======
Total Return (excluding sales charge)................. 0.88%(a) 30.79% 13.20%(a)
Ratios/Supplemental Data:
Net assets, end of period (000's)................... $141,761 $ 858 $49,008
Ratio of expenses to average net assets............. 0.58%(b) 0.93% 1.20%(b)
Ratio of net investment income to average
net assets....................................... 0.80%(b) 0.42% (0.02)%(b)
Ratio of expenses to average net assets***.......... 0.99%(b) 1.18% 1.39%(b)
Ratio of net investment income to average
net assets***.................................... 0.39%(b) 0.17% (0.21)%(b)
Portfolio Turnover.................................. 116% 116% 69%
Average commission rate paid(c)..................... $0.0800 $0.0800 $0.0838
- -----------------------
* For the period from October 3, 1997 (commencement of initial offering)
through December 31, 1997.
** For the period from April 1, 1996 (commencement of operations) through
December 31, 1996.
*** 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) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of shares purchased and sold for which
commissions were charged.
</TABLE>
<TABLE>
<CAPTION>
AMERISTAR LIMITED DURATION INCOME PORTFOLIO
TRUST SHARES CLASS A SHARES
------------ -----------------------------------------------------
Period Ended Year Ended Year Ended Year Ended Period Ended
December 31, December December December 31, December 31,
1997* 31, 1997 31, 1996 1995 1994**
------------ ---------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period......................... $ 10.00 $ 9.96 $ 10.13 $ 9.66 $ 10.00
-------- ------- ----------- ---------- ----------
Income from investment operations:
Net investment income..................................... 0.15 0.59 0.58 0.59 0.38
Net realized and unrealized gains (losses) on securities
transactions........................................... (0.01) 0.04 (0.16) 0.47 (0.34)
--------- -------- ----------- ---------- ----------
Net income from investment operations...................... 0.14 0.63 0.42 1.06 0.04
--------- -------- ----------- ---------- ----------
Less distributions:
Net investment income...................................... (0.15) (0.59) (0.58) (0.59) (0.38)
Net realized gains .......................................
(0.01) (0.01) (0.01) - -
-------- --------- ---------- ---------- ---------
Net change in net asset value................................ (0.02) 0.03 (0.17) 0.47 (0.34)
-------- --------- ---------- ---------- ---------
Net Asset Value, End of Period................................ $ 9.98 $9.99 $9.96 $ 10.13 $ 9.66
======= ======== ========= ========= ========
Total Return (excluding sales charge)........................ 1.36%(a) 6.47% 4.28% 11.20% 0.42%(a)
Ratios/Supplemental Data:
Net assets, end of period (000's).......................... $84,886 $5,894 $ 98,197 $ 103,382 $ 93,189
Ratio of expenses to average net assets.................... 0.56%(b) 0.83% 0.83% 0.87% 0.83%(b)
Ratio of net investment income to average net assets....... 6.08%(b) 5.92% 5.84% 5.89% 5.27%(b)
Ratio of expenses to average net assets***................. 0.87%(b) 1.09% 1.08% 1.12% 1.28%(b)
Ratio of net investment income to average net assets***.... 5.77%(b) 5.66% 5.59% 5.64% 4.82%(b)
Portfolio Turnover......................................... 45% 45% 51% 28% 6%
- ---------------
* For the period from October 3, 1997 (commencement of initial offering)
through December 31, 1997.
** For the period from March 28, 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.
</TABLE>
<TABLE>
<CAPTION>
AMERISTAR CORE INCOME PORTFOLIO
TRUST SHARES CLASS A SHARES
------------ ---------------------------------------------
Period Ended Year Ended Period Ended
December 31, 1997* December 31, 1997 December 31, 1996**
------------------ ----------------- -------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.................. $10.16 $10.00 $ 10.00
------ ------ -------
Income from investment operations:
Net investment income............................... 0.16 0.58 0.40
Net realized and unrealized gains on
securities transactions............................ 0.09 0.26 --
------ ------- --------
Net income from investment operations............... 0.25 0.84 0.40
------ -------- --------
Less distributions:
Net investment income............................... (0.16) (0.59) (0.40)
------- -------- --------
Net change in net asset value......................... 0.09 0.25 0.00
------- -------- --------
Net Asset Value, End of Period........................ $10.25 $10.25 $ 10.00
======= ======== ========
Total Return (excluding sales charge)................. 2.45%(a) 8.66% 4.12%(a)
Ratios/Supplemental Data:
Net assets, end of period (000's)................... $71,991 $95 $38,815
Ratio of expenses to average net assets............. 0.60%(b) 0.87% 1.13%(b)
Ratio of net investment income to average
net assets....................................... 6.28%(b) 5.74% 5.37%(b)
Ratio of expenses to average net assets***.......... 0.92%(b) 1.12% 1.32%(b)
Ratio of net investment income to average
net assets***.................................... 5.96%(b) 5.49% 5.18%(b)
Portfolio Turnover.................................. 56% 56% 65%
- -----------------------
* For the period from October 3, 1997 (commencement of initial offering)
through December 31, 1997.
** For the period from April 1, 1996 (commencement of operations) through
December 31, 1996.
*** 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.
</TABLE>
AMERISTAR TENNESSEE TAX EXEMPT BOND PORTFOLIO
<TABLE>
<CAPTION>
TRUST SHARES CLASS A SHARES
------------ -------------------------------------------------------------
Year
Ended Year Ended Period Ended
Period Ended Year Ended December December 31, December 31,
December 31, 1997* December 31, 1997 31, 1996 1995 1994**
----------------- ------------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................. $10.05 $ 9.90 $ 10.19 $ 9.40 $ 10.00
--------- ---------- ------------- ------------ ---------
Income from investment operations:
Net investment income............................... 0.10 0.44 0.42 0.45 0.34
Net realized and unrealized gains (losses)
on securities transactions.......................... 0.13 0.25 (0.29) 0.79 (0.60)
----- --------- ---------- ------------- -------------
Net income (loss) from investment operations......... 0.23 0.69 0.13 1.24 (0.26)
----- --------- ---------- ------------- -------------
Less distributions:
Net investment income................................. (0.10) (0.41) (0.42) (0.45) (0.34)
------ --------- ----------- ------------- -------------
Net change in net asset value......................... 0.13 0.28 (0.29) 0.79 (0.60)
------ --------- ----------- ------------- -------------
Net Asset Value, End of Period........................ $10.18 $ 10.18 $ 9.90 $ 10.19 $ 9.40
======== ========= ========== ============ =========
Total Return (excluding sales charge).................. 2.35%(a) 7.13% 1.39% 13.40% (2.63)%(a)
Ratios/Supplemental Data:
Net assets, end of period (000's).................. $100,742 $1,669 $ 88,044 $ 94,143 $ 86,127
Ratio of expenses to average net assets............ 0.56%(b) 0.84% 0.86% 0.87% 0.82%(b)
Ratio of net investment income to average net assets. 4.22%(b) 4.13% 4.29% 4.52% 4.61%(b)
Ratio of expenses to average net assets***........... 0.87%(b) 1.09% 1.11% 1.12% 1.18%(b)
Ratio of net investment income to average net assets*** 3.91%(b) 3.88% 4.04% 4.27% 4.25%(b)
Portfolio Turnover................................... 253% 253% 219% 188% 0.41%
- ---------------
* For the period from October 3, 1997 (commencement of initial offering)
through December 31, 1997.
** For the period from March 28, 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.
</TABLE>
AMERISTAR LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO
CLASS A SHARES
--------------
Period Ended
December 31, 1997*
------------------
Net Asset Value, Beginning of Period........................ $10.00
------
Income from investment operations:
Net investment income..................................... 0.29
Net realized and unrealized gains on
securities transactions................................. 0.13
------
Net income from investment
operations............................................. 0.42
----
Less distributions:
Net investment income..................................... (0.29)
------
Net change in net asset value............................... 0.13
------
Net Asset Value, End of Period.............................. $ 10.13
======
Total Return (excluding sales charge) ...................... 4.26%(a)
Ratios/Supplemental Data:
Net assets, end of period (000's) ........................ $22,893
Ratio of expenses to average net assets................... 0.98%(b)
Ratio of net investment income to average
net assets.............................................. 3.48%(b)
Ratio of expenses to average net
assets**................................................ 1.52%(b)
Ratio of net investment income to average
net assets**............................................ 2.94%(b)
Portfolio Turnover........................................ 179%
- -------------
* For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
** 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.
AMERISTAR DIVIDEND GROWTH PORTFOLIO
<TABLE>
<CAPTION>
TRUST SHARES CLASS A SHARES
------------ ---------------
Period Ended Period Ended
December 31, 1997* December 31, 1997**
------------------ -------------------
<S> <C> <C>
Net Asset Value, Beginning of Period ...................... $11.73 $10.00
-------- ------
Income from investment operations:
Net investment income.................................... 0.06 0.65
Net realized and unrealized gains on
securities transactions............................... 0.44 1.71
-------- ----
Net income from investment
operations............................................ 0.50 2.36
-------- ----
Less distributions:
Net investment income................................... (0.06) (0.19)
------- ------
Net realized gains........................................ (1.80) (1.80)
Net change in net asset value.............................. (1.36) (0.37)
------- ----
Net Asset Value, End of Period............................. $10.37 $10.37
======= ======
Total Return (excluding sales charge) ..................... 4.62%(a) 24.20%(a)
Ratios/Supplemental Data:
Net assets, end of period (000's) ....................... $67,949 $388
Ratio of expenses to average net assets.................. 0.68%(b) 1.06%(b)
Ratio of net investment income to average
net assets.............................................. 2.15%(b) 2.11%(b)
Ratio of expenses to average net
assets***............................................... 1.09%(b) 1.31%(b)
Ratio of net investment income to average
net assets***........................................... 1.74%(b) 1.86%(b)
Portfolio Turnover........................................ 86% 86%
Average commission rate paid (c) ........................ $0.0934 $0.0934
- -------------
* For the period from October 3, 1997 (commencement of initial offering)
through December 31, 1997.
** For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
*** 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) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and
sold for which commissions were charged.
</TABLE>
AMERISTAR LIMITED DURATION U.S. GOVERNMENT PORTFOLIO
CLASS A SHARES
--------------
Period Ended
December 31, 1997*
------------------
Net Asset Value, Beginning of Period........................ $10.00
------
Income from investment operations:
Net investment income..................................... 0.42
Net realized and unrealized gains on
securities transactions................................. 0.12
-----
Net income from investment
operations............................................. 0.54
----
Less distributions:
Net investment income..................................... (0.42)
------
Net change in net asset value............................... 0.12
----
Net Asset Value, End of Period.............................. $10.12
======
Total Return (excluding sales charge)....................... 5.54%(a)
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $20,103
Ratio of expenses to average net assets................... 1.00%(b)
Ratio of net investment income to average
net assets.............................................. 5.34%(b)
Ratio of expenses to average net
assets**............................................... 1.62%(b)
Ratio of net investment income to average
net assets**............................................ 4.72%(b)
Portfolio Turnover........................................ 52%
- -------------
* For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
** 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.
AMERISTAR PRIME MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
TRUST SHARES CLASS A SHARES
------------------------------ -------------------------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996* 1997 1996 1995 1994**
------------ ------------- --------------- ------------- ------------ ------------
<S>
Net Asset Value, <C> <C> <C> <C> <C> <C>
Beginning of Period.............. $1.00 $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment operations: ----- ------ ---------- ---------- --------- ----------
Net investment income............ 0.051 0.024 0.048 0.048 0.054 0.031
------ ------ ---------- ---------- ---------- ----------
Less distributions:
Net investment income........... (0.051) (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
=========== ======== =========== ========== ============ ============
Total Return..................... 5.17% 2.46%(a) 4.90% 4.88% 5.51% 3.13%(a)
Ratios/Supplemental Data:
Net assets, end of
period (000's)................ $26,389 $48,101 $ 56,163 $ 22,836 $ 63,919 $ 82,351
Ratio of expenses to
average net assets......... 0.62% 0.65%(b) 0.87% 0.68% 0.65% 0.63%(b)
Ratio of net investment income to
average net assets......... 5.05% 4.86%(b) 4.82% 4.83% 5.37% 4.00%(b)
Ratio of expenses to
average net assets***........ 0.62%(c) 0.65%(b) 0.87%(c) 0.86% 0.90% 0.93%(b)
Ratio of net investment income to
average net assets***..... 5.05%(c) 4.86%(b) 4.82% (c) 4.65% 5.12% 3.76%(b)
- ------------
* 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>
AMERISTAR U.S. TREASURY MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
TRUST SHARES CLASS A SHARES
----------------------------- -----------------------------------------------------------
Year Ended Period Ended Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31, December 31,
1997 1996* 1997 1996 1995 1994**
------------ ------------ ------------ ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period........ $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
------ ------ ------ ----- ------ ------
Income from investment
operations:
Net investment income..... 0.049 0.024 0.047 0.047 0.053 0.030
------ ------ ------ ----- ------ ------
Less distributions:
Net investment income..... (0.049) (0.024) (0.047) (0.047) (0.053) (0.030)
------ ------ ------ ----- ------ -------
Net Asset Value,
End of Period............. $ 1.00 $1.00 $ 1.00 $1.00 $1.00 $1.00
======== ======= ======== ======= ======== =======
Total Return................ 5.05% 2.43%(a) 4.78% 4.78% 5.41% 3.01%(a)
Ratios/Supplemental Data:
Net assets,
end of period (000's).... $114,175 $109,698 $77,065 $78,308 $168,430 $139,715
Ratio of expenses
to average net assets.... 0.50% 0.52%(b) 0.75% 0.56% 0.50% 0.54%(b)
Ratio of net investment income
to average net assets.... 4.94% 4.78%(b) 4.68% 4.72% 5.28% 4.02%(b)
Ratio of expenses
to average net assets***.. 0.50%(c) 0.52%(b) 0.75%(c) 0.74% 0.75% 0.83%(b)
Ratio of net investment income
to average net assets***.. 4.94%(c) 4.78%(b) 4.68%(c) 4.54% 5.03% 3.73%(b)
- ---------------
* 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 for this fund during
this period.
</TABLE>
Further information about performance for Trust Shares and Class A Shares
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 each Portfolio,
other than the U.S. Treasury Money Market Portfolio, offers 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
CAPITAL GROWTH PORTFOLIO--The Capital Growth Portfolio will invest
primarily in the equity securities of domestic issuers. The Capital Growth
Portfolio, under normal circumstances, will invest primarily in securities of
companies with relatively large capitalizations (generally greater than $500
million) that the Adviser believes offer opportunities for capital appreciation
and growth of earnings. The equity securities in which the Portfolio may invest
consist of common stocks, preferred stocks and convertible securities, including
those in the form of American Depositary Receipts and Standard & Poor's
Depositary Receipts, as well as warrants to purchase such securities. The
Portfolio also may invest in debt securities of domestic and foreign issuers
when the Adviser believes that such securities offer opportunities on capital
growth. The Portfolio may invest up to 10% of the value of its total assets in
foreign securities which are not publicly traded in the United States. See
"Appendix--Portfolio Securities."
At least 65% of the value of the Capital Growth Portfolio's total assets
invested in debt securities must consist of debt securities which are rated no
lower than Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard
& Poor's Ratings Group ("S&P"), Fitch IBCA, Inc. ("Fitch") or Duff
& Phelps Credit Rating Co. ("Duff") or, if unrated, deemed to be of comparable
quality by the Adviser. The remainder of such assets may be invested in debt
securities which are rated no lower than Ba by Moody's and BB by S&P, Fitch and
Duff or, if unrated, deemed to be of comparable quality by the Adviser. Debt
securities rated Ba by Moody's and BB by S&P, Fitch and Duff are considered
speculative grade debt and the payment of principal and interest may be affected
at any time by adverse economic changes. See "Investment Considerations and Risk
Factors--Lower Rated Securities" below, and "Appendix" in the Statement of
Additional Information.
The Capital Growth Portfolio may invest, in anticipation of otherwise
investing cash positions, in money market instruments of the type in which the
Prime Money Market Portfolio invests (collectively, "Money Market Instruments"),
as described below. Under normal market conditions, the Portfolio does not
expect to have a substantial portion of its assets invested in Money Market
Instruments. However, when the Adviser determines that adverse market conditions
exist, the Portfolio may adopt a temporary defensive posture and invest entirely
in Money Market Instruments.
The Capital Growth Portfolio also may engage in various investment
techniques such as options and futures transactions and lending portfolio
securities, each of which involves risk. For a discussion of these investment
techniques and their related risks, see "Investment Considerations and Risk
Factors" below, and "Appendix--Investment Techniques." The Portfolio also may
invest, to a limited extent, in securities issued by other investment companies
which principally invest in securities of the type in which the Portfolio
invests.
DIVIDEND GROWTH PORTFOLIO--The Dividend Growth Portfolio will invest
primarily in the equity securities of domestic issuers which are expected to
provide reasonable income and which may have capital appreciation potential. The
Dividend Growth Portfolio will invest at least 65% of the value of its total
assets (except when maintaining a temporary defensive position) in
dividend-paying equity securities of issuers that the Adviser believes have the
capacity to increase dividend payments in the future. Equity securities include
common stocks, preferred stocks and securities that are convertible into common
stocks. The Portfolio will invest in the equity securities of issuers believed
by the Adviser to be financially sound and which pay above-average dividends.
The Adviser intends to take into account factors, including price-earnings
ratios, cash flow and relationship of asset value to market price of the
securities. Investments may be made in securities of companies of any size
depending on the relative attractiveness of the company and the economic sector
in which it operates. The Adviser anticipates investing approximately 25% of the
Dividend Growth Portfolio's total assets in convertible securities and preferred
stock. In all other respects, the Dividend Growth Portfolio's management
policies are identical to those of the Capital Growth Portfolio.
LIMITED DURATION INCOME PORTFOLIO--The Limited Duration Income Portfolio
invests at least 65% of the value of its total assets (except when maintaining a
temporary defensive position) in bonds, debentures and other debt instruments.
The Portfolio invests in a broad range of investment grade, U.S. dollar
denominated fixed-income securities of domestic and foreign issuers. These debt
securities include bonds, debentures, notes, money market instruments (including
foreign bank obligations, such as time deposits, certificates of deposit and
bankers' acceptances, commercial paper and other short-term corporate debt
obligations, and repurchase agreements), mortgage-related securities (including
interest-only and principal-only stripped mortgage-backed securities),
asset-backed securities, municipal obligations and convertible debt obligations.
The issuers may include foreign corporations, partnerships, trusts or similar
entities, and governments or their political subdivisions, agencies or
instrumentalities. Under normal market conditions, the Limited Duration Income
Portfolio will invest in a portfolio of securities that has a duration of under
four years.
The maturity of any single instrument held by the Limited Duration Income
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 Income Portfolio, the Adviser
will estimate the duration of obligations that are subject to prepayment or
redemption by the issuer, taking into account the influence of interest rates on
prepayments and coupon flows. This method of computing duration is known as
option-adjusted duration.
The securities in which the Limited Duration Income Portfolio will invest
will consist only of those which, at the time of purchase, are rated no lower
than Baa by Moody's or BBB by S&P, Fitch or Duff, or, if unrated, deemed to be
of comparable quality by the Adviser. Obligations rated BBB by S&P and Fitch and
Baa by Moody's are considered investment grade obligations; those rated BBB by
S&P and Fitch are regarded as having an adequate capacity to pay principal and
interest, while those rated Baa by Moody's are considered medium grade
obligations which lack outstanding investment characteristics and have
speculative characteristics. See "Investment Considerations and Risk
Factors--Fixed-Income Securities" below, and "Appendix" in the Statement of
Additional Information.
When management believes it advisable for temporary defensive purposes, the
Portfolio may invest in Money Market Instruments.
The Limited Duration Income Portfolio also may lend securities from its
portfolio as described under "Appendix--Investment Techniques--Lending Portfolio
Securities." The Limited Duration Income 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.
CORE INCOME PORTFOLIO--The Core Income Portfolio's management policies are
identical to those of the Limited Duration Income Portfolio, except that, under
normal market conditions, the Core Income Portfolio will invest in a portfolio
of securities that has an effective duration of 50% to 150% of that of the
Merrill Lynch Corporate Government Master Index. For a discussion of duration,
see "Limited Duration Income Portfolio" above.
The Merrill Lynch Corporate Government Master Index is comprised of
government and investment grade corporate fixed-rate couponbearing securities
with an outstanding par value of $25 million or more, with maturities equal to
or greater than one year. As of December 31, 1997, the securities comprising the
Merrill Lynch Corporate Government Master Index had an effective duration of
approximately 5.246 years.
TENNESSEE TAX EXEMPT BOND PORTFOLIO--The Tennessee Tax Exempt Bond
Portfolio will invest, as a fundamental policy, at least 80% of the value of its
net assets (except when maintaining a temporary defensive position) in Municipal
Obligations. Under normal circumstances, at least 65% of the value of the
Portfolio's total assets will be invested in bonds, debentures, and other debt
securities of the State of Tennessee, its political subdivisions, authorities
and corporations, the interest from which is, in the opinion of bond counsel to
the issuer, exempt from Federal and Tennessee personal income taxes
(collectively, "Tennessee Municipal Obligations"). The remainder of the
Portfolio's assets may be invested in securities that are not Tennessee
Municipal Obligations and therefore may be subject to Tennessee income tax. See
"Investment Considerations and Risk Factors--Investing in Tennessee Municipal
Obligations" below, and "Dividends, Distributions and Taxes." The Portfolio
intends to invest in such securities when their return to investors, taking into
account applicable Tennessee income taxes, would be greater than comparably
rated Tennessee Municipal Obligations. In addition, to the extent acceptable
Tennessee Municipal Obligations are at any time unavailable for investment by
the Portfolio, the Portfolio will invest temporarily in other debt securities
the interest from which is, in the opinion of bond counsel to the issuer, exempt
from Federal income tax ("Municipal Obligations"). See "Investment
Considerations and Risk Factors--Investing in Municipal Obligations" below, and
"Appendix--Portfolio Securities--Municipal Obligations."
The average dollar-weighted credit rating of the Municipal Obligations held
by the Tennessee Tax Exempt Bond Portfolio will be at least A- by Moody's, S&P
or Fitch. To further limit risk, each Municipal Obligation in which the
Portfolio may invest must be rated, in the case of bonds, at least Baa by
Moody's or at least BBB by S&P or Fitch. The Portfolio may invest in short-term
Municipal Obligations which are rated in the two highest rating categories by
Moody's, S&P or Fitch. Municipal Obligations rated Baa by Moody's or BBB by S&P
or Fitch are considered investment grade obligations which lack outstanding
investment characteristics and may have speculative characteristics as well. The
average dollar-weighted portfolio credit rating will be measured on the basis of
the dollar value of the Municipal Obligations purchased and their credit rating
without reference to rating subcategories. The Tennessee Tax Exempt Bond
Portfolio 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 Considerations and Risk
Factors--Fixed-Income Securities" below, and "Appendix" in the Statement of
Additional Information.
The Portfolio may invest no more than 10% of the value of its total assets
in industrial development bonds which, although issued by industrial development
authorities, may be backed only by the assets and revenues of the
non-governmental users. Interest on Municipal Obligations (including certain
industrial development bonds) which are specified private activity bonds, as
defined in the Internal Revenue Code of 1986, as amended (the "Code"), issued
after August 7, 1986, while exempt from Federal income tax, is a preference item
for the purpose of the alternative minimum tax. Where a regulated investment
company receives such interest, a proportionate share of any exempt-interest
dividend paid by the investment company may be treated as such a preference item
to shareholders. The Tennessee Tax Exempt Bond Portfolio will invest no more
than 10% of the value of its net assets in Municipal Obligations the interest
from which gives rise to a preference item for the purpose of the alternative
minimum tax. The Tennessee Tax Exempt Bond Portfolio will invest in the
aggregate, except for temporary defensive purposes, no more than 20% of the
value of its net assets in securities subject to Federal income tax.
The Tennessee Tax Exempt Bond Portfolio may purchase tender option bonds
and similar securities. A tender option bond is a Municipal Obligation
(generally held pursuant to a custodial arrangement) having a relatively long
maturity and bearing interest at a fixed rate, that has been coupled with the
agreement of a third party which grants the security holder the option, at
periodic intervals, to tender the Municipal Obligation to the third party and
receive the face value thereof. See "Appendix--Portfolio Securities--Tender
Option Bonds."
From time to time, on a temporary basis other than for temporary defensive
purposes (but not to exceed 20% of the value of the Portfolio's net assets) or
for temporary defensive purposes, the Portfolio may invest in taxable Money
Market Instruments having, at the time of purchase, a quality rating in the two
highest grades of Moody's, S&P or Fitch or, if unrated, deemed to be of
comparable quality by the Adviser. Dividends paid by the Portfolio that are
attributable to income earned by it from these securities will be taxable to
investors. See "Dividends, Distributions and Taxes." Except for temporary
defensive purposes, at no time will more than 20% of the value of the
Portfolio's net assets be invested in taxable Money Market Instruments and
Municipal Obligations the interest from which gives rise to a preference for the
purpose of the alternative minimum tax. When the Portfolio has adopted a
temporary defensive position, including when acceptable Tennessee Municipal
Obligations are unavailable for investment by the Portfolio, in excess of 35% of
the Portfolio's total assets may be invested in securities that are not exempt
from Tennessee State income tax. Under normal market conditions, the Fund
anticipates that not more than 5% of the value of the Portfolio's total assets
will be invested in any one category of these securities.
The Tennessee Tax Exempt Bond Portfolio also may engage in various
investment techniques such as options and futures transactions and lending
portfolio securities, each of which involves risk and may give rise to taxable
income. For a discussion of these investment techniques and their related risks,
see "Investment Considerations and Risk Factors" below, and
"Appendix--Investment Techniques." The Tennessee Tax Exempt Bond Portfolio also
may invest, to a limited extent, in securities issued by other investment
companies which principally invest in securities of the type in which the
Tennessee Tax Exempt Bond Portfolio invests.
LIMITED DURATION TENNESSEE TAX FREE PORTFOLIO--The Limited Duration
Tennessee Tax Free Portfolio's management policies are identical to those of the
Tennessee Tax Exempt Bond Portfolio, except that, under normal market
conditions, the Limited Duration Tennessee Tax Free Portfolio will invest
primarily in a portfolio of investment grade Tennessee Municipal Obligations
that has a duration of under five years and an effective average portfolio
maturity ranging between three and five years. For a discussion of duration, see
"Limited Duration Income Portfolio" above.
For purposes of calculating average effective portfolio maturity, a
security that is subject to redemption at the option of the issuer on a
particular date (the "call date") which is prior to the security's stated
maturity may be deemed to mature on the call date rather than on its stated
maturity date. The call date of a security will be used to calculate average
effective portfolio maturity when the Adviser reasonably anticipates, based upon
information available to it, that the issuer will exercise its right to redeem
the security. The Adviser may base its conclusion on such factors as the
interest rate paid on the security compared to prevailing market rates, the
amount of cash available to the issuer of the security, events affecting the
issuer of the security, and other factors that may compel or make it
advantageous for the issuer to redeem a security prior to its stated maturity.
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. For a discussion of duration, see
"Limited Duration Income Portfolio" above.
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 Practices." 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" 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 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 Practices."
Instruments which are issues 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 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--Since each Portfolio will pursue different types of investments,
the risks of investing will vary depending on the Portfolio selected for
investment. Before selecting a Portfolio in which to invest, the investor should
assess the risks associated with the types of investments made by the Portfolio.
The net asset value per share of each Portfolio, other than the Money Market
Portfolios, is not fixed and should be expected to fluctuate. Investors should
consider each Portfolio as a supplement to an overall investment program and
should invest only if they are willing to undertake the risks involved.
Investment Techniques and Portfolio Turnover Rates--Each Portfolio may
engage in various investment techniques the use of which involves risk.
Investors in the Tennessee Tax Exempt Bond Portfolio and Limited Duration
Tennessee Tax Free Portfolio should be aware that the use of these techniques
may give rise to taxable income. See "Appendix--Investment Techniques." Using
these techniques may produce higher than normal portfolio turnover for a
Portfolio and may affect the degree to which its net asset value fluctuates.
Portfolio turnover may vary from year to year, as well as within a year. 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 exceed 100% for the Capital
Growth Portfolio, Tennessee Tax Exempt Bond Portfolio and Limited Duration
Tennessee Tax Free Portfolio, and is anticipated to be less than 100% for the
Dividend Growth Portfolio, Limited Duration Income Portfolio, Core Income
Portfolio and Limited Duration U.S. Government Portfolio. A 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.
Equity Securities--(Capital Growth Portfolio and Dividend Growth Portfolio)
Equity securities fluctuate in value, often based on factors unrelated to the
value of the issuer of the securities, and such fluctuations can be pronounced.
Changes in the value of investment securities will result in changes in the
value of the Portfolio's shares and thus its total return to investors.
Fixed-Income Securities--(All Portfolios) Even though interest-bearing
securities are investments which promise a stable stream of income, the prices
of such securities are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations.
The values of fixed-income securities also may be affected by changes in
the credit rating or financial condition of the issuing entities. Once the
rating of a security purchased by a Portfolio has been adversely changed, such
Portfolio will consider all circumstances deemed relevant in determining whether
to continue to hold the security. With respect to the Limited Duration Income
Portfolio and Core Income Portfolio, not more than 10% of the value of either
Portfolio's total assets may consist of securities which have been downgraded
below investment grade by Moody's, S&P and Fitch. Certain securities purchased
by a Portfolio, such as those rated Baa by Moody's and BBB by S&P, Fitch and
Duff, may be subject to such risk with respect to the issuing entity and to
greater market fluctuations than certain lower yielding, higher rated
fixed-income securities. See "Appendix--Portfolio Securities--Ratings" below,
and "Appendix" in the Statement of Additional Information.
Mortgage-related securities in which the Capital Growth Portfolio, Dividend
Growth Portfolio, Limited Duration Income Portfolio and Core 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.
Investing in Municipal Obligations--(Tennessee Tax Exempt Bond Portfolio
and Limited Duration Tennessee Tax Free Portfolio) Each of these Portfolios may
invest more than 25% of the value of its total assets in Municipal Obligations
which are related in such a way that an economic, business or political
development or change affecting one such security also would affect the other
securities; for example, securities the interest upon which is paid from
revenues of similar types of projects. As a result, each of these Portfolios may
be subject to greater risk as compared to a fund that does not follow this
practice.
Certain provisions in the Code relating to the issuance of Municipal
Obligations may reduce the volume of Municipal Obligations qualifying for
Federal tax exemption. One effect of these provisions could be to increase the
cost of the Municipal Obligations available for purchase by the Tennessee Tax
Exempt Bond Portfolio and Limited Duration Tennessee Tax Free Portfolio and thus
reduce their available yield. Investors should consult their tax advisers
concerning the effect of these provisions on an investment in the Tennessee Tax
Exempt Bond Portfolio and Limited Duration Tennessee Tax Free Portfolio.
Proposals that may restrict or eliminate the income tax exemption for interest
on Municipal Obligations may be introduced in the future. If any such proposal
were enacted that would reduce the availability of Municipal Obligations for
investment by the Tennessee Tax Exempt Bond Portfolio and Limited Duration
Tennessee Tax Free Portfolio so as to adversely affect their shareholders, the
Fund would reevaluate such Portfolios' investment objective and policies and
submit possible changes in the Portfolios' structure to shareholders for their
consideration. If legislation were enacted that would treat a type of Municipal
Obligation as taxable, the Tennessee Tax Exempt Bond Portfolio and Limited
Duration Tennessee Tax Free Portfolio would treat such security as a permissible
taxable investment within the applicable limits set forth herein.
Investing in Tennessee Municipal Obligations--(Tennessee Tax Exempt Bond
Portfolio and Limited Duration Tennessee Tax Free Portfolio) Investors in the
Tennessee Tax Exempt Bond Portfolio and Limited Duration Tennessee Tax Free
Portfolio should consider carefully the special risks inherent in the
Portfolios' investment in Tennessee Municipal Obligations. These risks result
from the financial condition of the State of Tennessee. Tennessee has
historically had a sound financial position. The State, however, encountered
budgetary problems during the 1995 fiscal year requiring supplemental
appropriations and the use of one-time reserves to close an estimated $250
million deficit caused by cost overruns in several major programs. Due
principally to inaccurate funding assumptions with respect to the TennCare
program, the State's program to replace Medicaid, the State completed its fiscal
year ended June 30, 1995 with an estimated budget deficit of $125 million.
Investors in the Tennessee Tax Exempt Bond Portfolio or Limited Duration
Tennessee Tax Free Portfolio should obtain and review a copy of the Portfolios'
Statement of Additional Information which sets forth other considerations.
Investing in Foreign Securities--(Capital Growth Portfolio, Dividend Growth
Portfolio, Limited Duration Income Portfolio, Core Income Portfolio and, to a
limited extent, Prime Money Market Portfolio) Foreign securities markets
generally are not as developed or efficient as those in the United States.
Securities of some foreign issuers are less liquid and more volatile than
securities of comparable U.S. issuers. Similarly, volume and liquidity in most
foreign securities markets are less than in the United States and, at times,
volatility of price can be greater than in the United States.
Because evidences of ownership of such securities usually are held outside
the United States, a Portfolio's investment in foreign securities will be
subject to additional risks which include possible adverse political and
economic developments, seizure or nationalization of foreign deposits and
adoption of governmental restrictions that might adversely affect 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.
Since foreign securities may be purchased by the Capital Growth Portfolio
and Dividend Growth Portfolio with and be payable in currencies of foreign
countries, the value of these assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and exchange control
regulations. Some currency exchange costs may be incurred when the Portfolio
changes investments from one country to another.
Use of Derivatives--Each Portfolio, other than the 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 Capital Growth Portfolio,
Dividend Growth Portfolio, Tennessee Tax Exempt Bond Portfolio and Limited
Duration Tennessee Tax Free Portfolio, options and futures, and, with respect to
the Capital Growth Portfolio, Dividend Growth Portfolio, Limited Duration Income
Portfolio and Core Income Portfolio, mortgage-related securities and
asset-backed securities. While Derivatives can be used effectively in
furtherance of the Portfolio's investment objective, under certain market
conditions, they can increase the volatility of the Portfolio's net asset value,
decrease the liquidity of the Portfolio's investments and make more difficult
the accurate pricing of the Portfolio's investments.
Lower Rated Securities--(Capital Growth Portfolio and Dividend Growth
Portfolio) The Capital Growth Portfolio and Dividend Growth Portfolio may
invest, to a limited extent, in higher yielding (and, therefore, higher risk)
debt securities rated Ba by Moody's or BB by S&P, Fitch or Duff (commonly known
as junk bonds). They may be subject to certain risks with respect to the issuing
entity and to greater market fluctuations than certain lower yielding, higher
rated fixed-income securities. The retail secondary market for these securities
may be less liquid than that of higher rated securities; adverse conditions
could make it difficult at times for the Portfolio to sell certain securities or
could result in lower prices than those used in calculating the Portfolio's net
asset value. See "Appendix--Portfolio Securities--Ratings."
Bank Securities--(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--Each Portfolio, other than the Money Market
Portfolios, 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 non-diversified
Portfolio's assets may be invested in the securities of a limited number of
issuers, some of which may be within the same industry, such Portfolio's
investments may be more sensitive to changes in the market value of a single
issuer or industry. However, to meet Federal tax requirements, at the close of
each quarter no Portfolio may have more than 25% of its total assets invested in
any one issuer and, with respect to 50% of total assets, more than 5% of its
total assets invested in any one issuer. These limitations do not apply to U.S.
Government securities or the securities of other regulated investment companies.
Simultaneous Investments--Investment decisions for each Portfolio are made
independently from those of the other investment companies, investment advisory
accounts, custodial accounts, individual trust accounts and commingled funds
that may be advised by the Adviser. However, if such other investment companies
or managed accounts desire to invest in, or dispose of, the same securities as
the Portfolio, available investments or opportunities for sales will be
allocated equitably to each of them. In some cases, this procedure may adversely
affect the size of the position obtained for or disposed of by a Portfolio or
the price paid or received by a Portfolio.
MANAGEMENT OF THE PORTFOLIOS
Board of Directors
The business affairs of the Fund are managed under the general supervision
of its Board of Directors. The Statement of Additional Information contains the
name and general business experience of each Director.
Investment Adviser
First American National Bank, located at First American Center, 315
Deaderick Street, Nashville, Tennessee 37237, serves as each Portfolio's
investment adviser. The Adviser is a wholly-owned subsidiary of First American
Corporation, a registered bank holding company having assets as of December 31,
1997 of approximately $10.8 billion. First American National Bank provides
personal trust, estate, employee benefit trust, corporate trust and custody
services to over 3,000 individual and business clients and investment advisory
services. The Adviser, and its affiliates, as of December 31, 1997, had
approximately $6.0 billion under trust and approximately $3.1 billion under
management.
The Adviser and its affiliates deal, trade and invest for their own
accounts and for the accounts of clients which they manage in the types of
securities in which the Portfolios may invest and may have deposit, loan and
commercial banking relationships with the issuers of securities purchased by a
Portfolio. The Adviser has informed the Fund that in making its investment
decisions it does not obtain or use material inside information in its or its
affiliates' possession.
The Adviser supervises and assists in the overall management of each
Portfolio's affairs under an Investment Advisory Agreement between the Adviser
and the Fund, subject to the authority of the Fund's Board of Directors in
accordance with Maryland law. The primary portfolio manager for each Portfolio
is as follows: for the Capital Growth Portfolio, Charles E. Winger, Jr., who has
been a Trust Officer of the Adviser since 1988; for the Dividend Growth
Portfolio, Jay D. Baumgardner, who has been a portfolio manager with the Adviser
since April 1995, and Robert A. Rinner, who has been a portfolio manager with
the Adviser since April 1996. Prior thereto, Mr. Baumgardner was a financial
consultant with Smith Barney, Inc. and Mr. Rinner was a portfolio manager with
Royal Insurance Co.; for the Limited Duration U.S. Government Portfolio, Limited
Duration Income Portfolio and Core Income Portfolio, Donald F. Turk, who has
been a Trust Officer of the Adviser since 1980; and for the Tennessee Tax Exempt
Bond Portfolio and Limited Duration Tennessee Tax Free Portfolio, Sharon S.
Brown, who has been a Trust Officer of the Adviser since 1988. The Adviser also
provides research services for the Portfolios through a professional staff of
portfolio managers and securities analysts. All activities of the Adviser are
conducted by persons who are also officers of one or more of the Adviser's
affiliates.
Under the terms of the Investment Advisory Agreement, the Fund has agreed
to pay the Adviser a monthly fee at the annual rate set forth below as a
percentage of the relevant Portfolio's average daily net assets. For the fiscal
year ended December 31, 1997, the Adviser waived a portion of its advisory fees
with respect to certain Portfolios which resulted in the Portfolios paying the
Adviser an advisory fee at the effective annual rate set forth below as a
percentage of the relevant Portfolio's average daily net assets.
Effective Annual
Name of Portfolio Annual Rate of Investment Rate of Investment
Advisory Fee Payable Advisory Fee Paid
- ----------------- ------------------------- ------------------
Capital Growth .65% .53%
Dividend Growth .65% .52%
Limited Duration U.S.
Government .50% .24%
Limited Duration Income .50% .43%
Limited Duration Tennessee
Tax Free .50% .31%
Core Income .50% .41%
Tennessee Tax Exempt Bond .50% .42%
Prime Money Market .25%* .25%*
U.S. Treasury Money
Market .25% .25%
- ------------
* 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.
From time to time, the Adviser may waive receipt of its fees and/or
voluntarily assume certain expenses of a Portfolio, which would have the effect
of lowering the overall expense ratio of that Portfolio and increasing yield to
its investors. The Portfolio will not pay the Adviser at a later time for any
amounts it may waive, nor will the Portfolio reimburse the Adviser for any
amounts it may assume.
Administrator 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 $180 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, each Portfolio, other than the
Limited Duration Tennessee Tax Free Portfolio and Limited Duration U.S.
Government Portfolio, paid BISYS an administration fee at said applicable annual
rate. For the fiscal year ended December 31, 1997, BISYS waived a portion of its
administration fees with respect to Limited Duration Tennessee Tax Free
Portfolio and Limited Duration U.S. Government Portfolio, resulting in each such
Portfolio paying BISYS an administration fee at the effective annual rate of
.03%.
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 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 Money Market Portfolio pays BISYS for
the provision of certain services to the holders of Class A Shares and each
Portfolio (other than the U.S. Treasury Money Market Portfolio) pays BISYS for
the provision of certain services to the holders of Class B Shares at an annual
rate of .25% of the value of the average daily net assets represented by such
Class of 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
in 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 or BISYS, 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 and Class B 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 A Shares of each Portfolio, other than the
Money Market Portfolios, are subject to an annual distribution fee, and Class A
Shares of each Money Market Portfolio are subject to an annual service fee, each
at the rate of .25% of the value of the average daily net assets of Class A.
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. Class B Shares are subject to
an annual service fee and distribution fee. 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
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." Trust Shares are not
subject to an annual service fee or distribution fee.
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 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 Tennessee Tax
Exempt Bond Portfolio or Limited Duration Tennessee Tax Free 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 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 AmeriStar Fund account, 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 Privileges."
You may purchase Class A 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 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 AmeriStar Funds
(Portfolio Name), to The AmeriStar 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 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 Fund's Account Application. The
proceeds will be transferred between the bank account designated on the Account
Application and your Fund account. Only a bank account maintained in a domestic
financial institution which is an Automated Clearing House member may be so
designated. TeleTrade purchases are effected at the net asset value (plus the
applicable sales load) next determined after receipt of an order in proper form
by the Transfer Agent. 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 or Class B Shares of either 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 Limited
Duration Tennessee Tax Free Portfolio, Limited Duration Income Portfolio,
Limited Duration U.S. Government Portfolio, Core Income Portfolio and Tennessee
Tax Exempt Bond Portfolio is the net asset value per share of that class, plus a
sales load shown below:
<TABLE>
<CAPTION>
TOTAL SALES LOAD DEALERS'
---------------- REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET ASSET OFFERING
TRANSACTION PRICE VALUE 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>
The public offering price of Class A Shares of the Capital Growth Portfolio and
Dividend Growth Portfolio is the net asset value per share of that class, plus,
except for shareholders beneficially owning Class A Shares of such Portfolios
on September 30, 1997, a sales load as shown below:
<TABLE>
<CAPTION>
TOTAL SALES LOAD DEALERS'
---------------- REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET ASSET OFFERING
TRANSACTION PRICE VALUE 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 beneficially owning Class A Shares of the Capital Growth
Portfolio and Dividend Growth Portfolio on September 30, 1997, the public
offering price of Class A Shares of such Portfolios is the net asset value of
that class, plus a sales load as shown below:
Total Sales Load Dealers'
------------------------- Reallowance
As a % of As a % of As a % of
Amount of Offering Net Asset Offering
Transaction Price Value Price
- ------------------ ----------- ----------- ------------
Less than
$100,000........... 3.00% 3.09% 2.70%
$100,000 to less
than $250,000..... 2.50% 2.56% 2.25%
$250,000 to less
than $500,000...... 2.00% 2.04% 1.80%
$500,000 to less
than $750,000...... 1.50% 1.52% 1.35%
$750,000 to less
than $1,000,000.... 1.00% 1.01% 0.90%
$1,000,000
or more............ -0- -0- -0-
A CDSC of 1% will be assessed at the time of redemption of Class A
Shares purchased on or after May 14, 1998 without an initial sales charge as
part of an investment of at least $1,000,000 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: (1) travel and lodging at vacation locations; (2) tickets
for entertainment events; and (3) 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, 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 it may request from time to time in
order to verify eligibility for this privilege. This privilege also applies to
the Fund's Directors, fee-based financial planners and registered investment
advisers not affiliated with or clearing purchases through full service
broker/dealers, investment advisers regulated by Federal or state governmental
authority when such investment advisers purchase shares for their own accounts
or for accounts for which they are authorized to make investment decisions
(i.e., discretionary accounts), asset allocation programs offered by the Adviser
for its clients, and corporate/business retirement plans (such as 401(k),
403(b)(7), 457 and Keogh plans) sponsored by the Adviser, 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 Limited Duration Income Portfolio, with an
aggregate current market value of $40,000 and subsequently purchase Class A
Shares of the Limited Duration 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 Capital Growth Portfolio and Dividend Growth Portfolio are 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, 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,
however, are subject to a maximum 4% CDSC, which is assessed only if you redeem
Class B Shares within six years of purchase as described below. The Adviser, its
affiliates, Service Organizations and Institutions may charge their clients a
nominal fee for effecting redemptions of Portfolio shares. The value of
Portfolio shares redeemed may be more or less than their original cost,
depending upon the Portfolio's then-current net asset value.
The Fund reserves the right to redeem 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 your Class B Shares to an amount which is lower than the dollar amount
of all payments by you for the purchase of Class B Shares of the relevant
Portfolio held by you 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 your Class B Shares above the dollar amount of all your payments for
the purchase of Class B Shares of the Portfolio held by you 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 you 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
YEAR SINCE AMOUNT INVESTED
PURCHASE PAYMENT OR REDEMPTION
WAS MADE 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 AmeriStar 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 __.
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 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 one of the other Portfolios, 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. 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. 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 exchaged 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 AmeriStar 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 AmeriStar 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
Capital Growth Portfolio--Declares and pays dividends from net investment
income quarterly and distributes any net capital gain annually.
Dividend Growth Portfolio--Declares and pays dividends from net investment
income monthly and distributes any net capital gain annually.
Limited Duration Income, Core Income, Tennessee Tax Exempt Bond, Limited
Duration Tennessee Tax Free, 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.
The Fund anticipates that individual shareholders will not be subject to
Tennessee personal income tax on dividends paid by the Tennessee Tax Exempt Bond
Portfolio and Limited Duration Tennessee Tax Free Portfolio to the extent such
dividends are attributable to interest from securities of the U.S. Government or
any of its agencies or instrumentalities or from bonds of the State of Tennessee
or any county, municipality or political subdivision thereof, including any
agency, board, authority or commission. To the extent that an investor is
obligated to pay state or local taxes outside of the State of Tennessee,
dividends earned by an investment in these Portfolios may represent taxable
income. Dividends and distributions of the Tennessee Tax Exempt Bond Portfolio
and Limited Duration Tennessee Tax Free Portfolio derived from taxable
investments and from income or gain derived from securities transactions and
from the use of the investment techniques described under "Appendix--Investment
Techniques" will be subject to Federal and Tennessee income tax. Dividends paid
by the Capital Growth Portfolio, Dividend Growth Portfolio, Limited Duration
Income Portfolio, Limited Duration U.S. Government Portfolio, Core Income
Portfolio, Prime Money Market Portfolio and U.S. Treasury Money Market 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 28% with respect to capital gain from
securities held for more than one year but not more than 18 months and at a
maximum rate of 20% with respect to capital gain from securities held for more
than 18 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 U.S. Treasury Money Market 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
Tennessee Tax Exempt Bond Portfolio and Limited Duration Tennessee Tax Free
Portfolio may be excluded by shareholders of such Portfolios from their gross
income for Federal income tax purposes, each of these Portfolios 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 Tennessee Tax Exempt Bond Portfolio or Limited Duration
Tennessee Tax Free 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 Portfolio has qualified for the fiscal year
ended December 31, 1997 as a "regulated investment company" under the Code. Each
Portfolio intends to continue to so qualify if such qualification is in the best
interests of its shareholders. Qualification as a regulated investment company
relieves the Portfolio of any liability for Federal income tax to the extent its
earnings are distributed in accordance with applicable provisions of the Code.
Each Portfolio is subject to a non-deductible 4% excise tax, measured with
respect to certain undistributed amounts of taxable investment income and
capital gains.
You should consult your tax adviser regarding specific questions as to
Federal, state or local taxes.
PERFORMANCE INFORMATION
Capital Growth Portfolio--For purposes of advertising, performance will be
calculated on the bases of average annual total return and/or total return.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in the Capital Growth Portfolio was purchased
with an initial payment of $1,000 and that the investment was redeemed at the
end of a stated period of time, after giving effect to the reinvestment of
dividends and distributions during the period. The return is expressed as a
percentage rate which, if applied on a compounded annual basis, would result in
the redeemable value of the investment at the end of the period. Advertisements
of the Portfolio's performance will include the Portfolio's average annual total
return for one, five and ten year periods, or for shorter time periods depending
upon the length of time during which the Portfolio has operated.
Total return is computed on a per share basis and assumes the reinvestment
of dividends and distributions. Total return generally is expressed as a
percentage rate which is calculated by combining the income and principal
changes for a specified period and dividing by the 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.
Dividend Growth, Limited Duration Income, Core Income, Tennessee Tax
Exempt Bond, Limited Duration Tennessee Tax Free Portfolio 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 Tennessee Tax Exempt Bond Portfolio and Limited Duration Tennessee
Tax Free Portfolio may advertise tax equivalent yield, which is calculated by
determining the pre-tax yield which, after being taxed at a certain rate, would
be equivalent to a stated current yield calculated as described above.
Average annual total return and total return will be calculated as
described above for the Capital Growth Portfolio.
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 pursuant to the
Distribution Plan and Shareholder Services Plan are higher than those payable by
Class A Shares pursuant to the Distribution Plan. Trust Shares are not subject
to Distribution Plan or Shareholder Services Plan fees. 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, N. Palm Beach, Fla. 33408, Bond Buyer's 20-Bond Index,
Moody's Bond Survey Bond Index, Lehman Brothers Aggregate Bond Index and
components thereof, Standard & Poor's 500 Composite Stock Price Index, the Dow
Jones Industrial Average, CDA/Wiesenberger Investment Companies Service, Mutual
Fund Values; Mutual Fund Forecaster, Mutual Fund Investing and other industry
publications.
Historical Performance Information--(Capital Growth Portfolio, Dividend
Growth Portfolio, Core Income Portfolio, Limited Duration Tennessee Tax Free
Portfolio and Limited Duration U.S. Government Portfolio only) The Capital
Growth Portfolio and Core Income Portfolio commenced operations on April 1,
1996, and the Dividend Growth Portfolio, Limited Duration Tennessee Tax Free
Portfolio and Limited Duration U.S. Government Portfolio commenced operations on
February 28, 1997, through a transfer of assets from common trust funds managed
by the Adviser, using materially equivalent investment objectives, policies,
restrictions and methodologies as the corresponding Portfolio. Set forth below
is historical performance information for each of these Portfolios which
includes performance of the Portfolio's predecessor common trust fund for
various periods ended December 31, 1997. At the time of transfer, the common
trust fund performance was adjusted to reflect the maximum operating expenses of
Class A Shares; with respect to Class B Shares and Trust Shares, the performance
information for the period prior to commencement of operations of each such
Class presents the performance of Class A Shares adjusted to reflect the maximum
applicable sales charges. The common trust funds did not charge any expenses.
This performance information is not necessarily indicative of the future
performance of a Portfolio. Because each Portfolio is actively managed, its
investments will vary from time to time and will not be identical to the past
portfolio investments of the predecessor. Moreover, the predecessor common trust
funds were not registered under the 1940 Act and therefore were not subject to
certain investment restrictions that are imposed by the 1940 Act, which, if
imposed, could have adversely affected the common trust funds' performance. Each
Portfolio's performance will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
<TABLE>
<CAPTION>
Average Annual Total Return
-----------------------------------
1 Year 5 Years 10 Years
----------- ----------- -----------
<S> <C> <C> <C>
Capital Growth Portfolio
Maximum Offering Price
(Class A Shares)............. 24.62% 15.41% 13.43%
Maximum CDSC Imposed
(Class B Shares)............. 26.68% 16.22% 13.88%
Net Asset Value
(Trust Shares).............. 29.68% 16.33% 13.90%
Dividend Growth Portfolio
Maximum Offering Price
(Class A Shares)............. 26.22% 14.36% 13.44%
Maximum CDSC Imposed
(Class B Shares)............. 29.57% 15.36% 14.00%
Net Asset Value
(Trust Shares)............... 32.60% 15.46% 14.00%
Core Income Portfolio
Maximum Offering Price
(Class A Shares)............. 5.40% 5.69% 7.36%
Maximum CDSC Imposed
(Class B Shares)............. 5.60% 6.17% 7.69%
Net Asset Value
(Trust Shares)............... 8.60% 6.32% 7.69%
Limited Duration Tennessee
Tax Free Bond Portfolio
Maximum Offering Price
(Class A Shares)............. 2.22% 3.24% 4.73%
Maximum CDSC Imposed
(Class B Shares)............. 2.42% 3.71% 5.05%
Net Asset Value
(Trust Shares)............... N/A N/A N/A
Limited Duration U.S.
Government Portfolio
Maximum Offering Price
(Class A Shares)............. 2.97% 4.45% 6.50%
Maximum CDSC Imposed
(Class B Shares)............. 3.18% 4.91% 6.83%
Net Asset Value
(Trust Shares)............... N/A N/A N/A
</TABLE>
GENERAL INFORMATION
The Fund was incorporated under Maryland law on March 6, 1990, and
commenced operations on August 28, 1990.
The Fund is authorized to issue 14 billion 500 million 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 the Money Market Portfolios), Class B Shares
(250 million) and Trust Shares (250 million, 500 million in the case of the
Money Market Portfolios). 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. Prior to January 1, 1997, the AmeriStar
Portfolios were named ValueStar Portfolios, and the Limited Duration Income
Portfolio and Core Income Portfolio were named Short-Intermediate Duration Bond
Portfolio and Investment Grade Bond Portfolio, respectively.
To date, 11 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--Investing in Foreign Securities."
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits which may be held by a Portfolio will not benefit from insurance from
the Bank Insurance Fund or the Savings Association Insurance Fund administered
by the Federal Deposit Insurance Corporation.
Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include unin-
sured, 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. The Tennessee Tax Exempt Bond Portfolio will
invest no more than 25% of the value of its net assets in zero coupon and
stripped securities.
Foreign Government Obligations; Securities of Supranational Entities--Each
Portfolio, 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. No Portfolio will invest
more than 10% of the value of its net assets in participation interests and
trust receipts that do not have this demand feature, and in other illiquid
securities.
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 Brothers CD Index), but is guaranteed not to be less than a certain
minimum rate. No Portfolio will invest more than 10% of the value of its net
assets in GICs and in other illiquid securities. 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 10% of the value of
its net assets in securities as to which a liquid trading market does not exist,
provided such investments are consistent with its investment objective. Such
securities may include securities that are not readily marketable, such as
certain securities that are subject to legal or contractual restrictions on
resale, certain privately negotiated, non-exchange traded options and securities
used to cover such options, certain mortgage-backed securities, floating and
variable rate demand obligations as to which the Portfolio cannot exercise the
related demand feature described above on not more than seven days' notice and
as to which there is no secondary market and repurchase agreements providing for
settlement in more than seven days after notice. As to these securities, the
Portfolio is subject to a risk that should the Portfolio desire to sell them
when a ready buyer is not available at a price the Portfolio deems
representative of their value, the value of the Portfolio's net assets could be
adversely affected.
Mortgage-Related Securities--(Capital Growth Portfolio, Dividend Growth
Portfolio, Limited Duration Income Portfolio and Core 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 these
Portfolios 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 these Portfolios, 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" and "Illiquid Securities" above and
"Investment Objectives and Management Policies--Portfolio
Securities--Mortgage-Related Securities" in the Statement of Additional
Information.
Asset-Backed Securities--(Capital Growth Portfolio, Dividend Growth
Portfolio, Limited Duration Income Portfolio, Core 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--(Capital Growth Portfolio and Dividend
Growth 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--(Capital Growth Portfolio, Dividend Growth
Portfolio, Limited Duration Income Portfolio and Core Income Portfolio)
Convertible securities may be converted at a stated price within a specified
period of time into a specified number of shares of common stock of the same or
a different issuer. Convertible securities are senior to common stock in a
corporation's capital structure, but usually are subordinated to non-convertible
debt securities. While providing a fixed-income stream (generally higher in
yield than the income derivable from a common stock but lower than that afforded
by a non-convertible debt security), a convertible security also affords an
investor the opportunity, through its conversion feature, to participate in the
capital appreciation of the common stock into which it is convertible.
Warrants--(Capital Growth Portfolio and Dividend Growth 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--(Limited Duration Income Portfolio, Core Income
Portfolio, Tennessee Tax Exempt Bond Portfolio, Limited Duration Tennessee Tax
Free Portfolio and, to a limited extent, Prime Money Market Portfolio) Municipal
Obligations are debt obligations issued by states, territories and possessions
of the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities, or multistate agencies or
authorities. While in general, Municipal Obligations are tax exempt securities
having relatively low yields as compared to taxable, non-municipal obligations
of similar quality, certain issues of Municipal Obligations, both taxable and
non-taxable, offer yields comparable and in some cases greater than the yields
available on other permissible investments. Municipal Obligations generally
include debt obligations issued to obtain funds for various public purposes as
well as certain industrial development bonds issued by or on behalf of public
authorities. Municipal Obligations are classified as general obligation bonds,
revenue bonds and notes. General obligation bonds are secured by the issuer's
pledge of its faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable from the revenue derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source, but not from the general taxing
power. Industrial development bonds, in most cases, are revenue bonds and
generally do not carry the pledge of the credit of the issuing municipality, but
generally are guaranteed by the corporate entity on whose behalf they are
issued. Notes are short-term instruments which are obligations of the issuing
municipalities or agencies and are sold in anticipation of a bond sale,
collection of taxes or receipt of other revenues. Municipal Obligations include
municipal lease/purchase agreements which are similar to installment purchase
contracts for property or equipment issued by municipalities. Municipal
Obligations bear fixed, floating or variable rates of interest, which are
determined in some instances by formulas under which the Municipal Obligation's
interest rate will change directly or inversely to changes in interest rates or
an index, or multiples thereof, in many cases subject to a maximum and minimum.
Certain Municipal Obligations are subject to redemption at a date earlier than
their stated maturity pursuant to call options, which may be separated from the
related Municipal Obligation and purchased and sold separately. Dividends
received by shareholders of the Limited Duration Income Portfolio, Core Income
Portfolio or 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 Limited Duration Income Portfolio and Core Income
Portfolio currently intend to invest no more than 25% and the Prime Money Market
Portfolio currently intends to invest no more than 5% of their respective assets
in Municipal Obligations. However, these percentages may be varied from time to
time without shareholder approval.
Tender Option Bonds--(Tennessee Tax Exempt Bond Portfolio and Limited
Duration Tennessee Tax Free 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. Neither of these Portfolios will invest more than 10% of the value of
its net assets in securities that are illiquid, which would include tender
option bonds as to which it cannot exercise the tender feature on not more than
seven days' notice if there is no secondary market available for these
obligations.
Ratings--Debt securities which are rated Baa by Moody's are considered
medium grade obligations; they are neither highly protected nor poorly secured,
and are considered by Moody's to have speculative characteristics. Debt
securities rated BBB by S&P are regarded as having adequate capacity to pay
interest and repay principal, and while such debt securities ordinarily exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt securities in this category than in higher rated
categories. Fitch considers the obligor's ability to pay interest and repay
principal on debt securities rated BBB to be adequate; adverse changes in
economic conditions and circumstances, however, are more likely to have an
adverse impact on these debt securities and, therefore, impair timely payment.
Debt securities rated BBB by Duff are considered to have below average
protection factors but still considered sufficient for prudent investment.
Securities rated Ba by Moody's are judged to have speculative elements;
their future cannot be considered as well assured and often the protection of
interest and principal payments may be very moderate. Securities rated BB by
S&P, Fitch or Duff are regarded as having predominantly speculative
characteristics and, while such obligations have less near-term vulnerability to
default than other speculative grade debt, they face major ongoing uncertainties
or exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The ratings of Moody's, S&P, Fitch and Duff represent their opinions as to
the quality of the obligations which they undertake to rate. Ratings are
relative and subjective and, although ratings may be useful in evaluating the
safety of interest and principal payments, they do not evaluate the market value
risk of such obligations. Although these ratings may be an initial criterion for
selection of portfolio investments, the Adviser also will evaluate such
obligations and the ability of their issuers to pay interest and principal. The
Portfolios will rely on the Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the Adviser
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, the quality of the
issuer's management and regulatory matters.
Investment Company Securities--Each Portfolio may invest in securities
issued by other investment companies which principally invest in securities of
the type in which such Portfolio invests. Under the 1940 Act, a Portfolio's
investment in such securities currently is limited to, subject to certain
exceptions, (i) 3% of the total voting stock of any one investment company, (ii)
5% of such Portfolio's total assets with respect to any one investment company
and (iii) 10% of such Portfolio's total assets in the aggregate. Investments in
the securities of other investment companies will involve duplication of
advisory fees and certain other expenses.
Investment Techniques
Short-Selling--(All Portfolios, except the Money Market Portfolios) Each
Portfolio, other than the Prime Money Market Portfolio and U.S. Treasury Money
Market Portfolio, may make short sales "against the box," a transaction in which
the Portfolio enters into a short sale of a security which it owns. The proceeds
of the short sale will be held by a broker until the settlement date at which
time the Portfolio delivers the security to close the short position. The
Portfolio receives the net proceeds from the short sale. At no time will any of
these Portfolios have more than 15% of the value of its net assets in deposits
on short sales against the box. It currently is anticipated that each of these
Portfolios will make short sales against the box for purposes of protecting the
value of its respective net assets.
Call and Put Options on Specified Securities--(Capital Growth Portfolio
and Dividend Growth Portfolio) Each of these Portfolios may invest up to 5% of
its total assets, represented by the premium paid, in the purchase of call and
put options in respect of specific securities in which the Portfolio may invest.
Each of these Portfolios may write covered call and put option contracts to the
extent of 15% of the value of its net assets at the time such option contracts
are written. A call option gives the purchaser of the option the right to buy,
and obligates the writer to sell, the underlying security at the exercise price
at any time during the option period. Conversely, a put option gives the
purchaser of the option the right to sell, and obligates the writer to buy, the
underlying security at the exercise price at any time during the option period.
A covered call option sold by the 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--(Capital Growth Portfolio and Dividend Growth
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--(Capital Growth Portfolio, Dividend
Growth Portfolio, Tennessee Tax Exempt Bond Portfolio and Limited Duration
Tennessee Tax Free 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--(Capital
Growth Portfolio and Dividend Growth 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.
Interest Rate Futures Contracts and Options on Interest Rate Futures
Contracts--(Tennessee Tax Exempt Bond Portfolio and Limited Duration Tennessee
Tax Free Portfolio) Each of these Portfolios may invest in interest rate futures
contracts and options on interest rate futures contracts as a substitute for a
comparable market position and to hedge against adverse movements in interest
rates to the extent of 15% of the value of its net assets.
To the extent the Portfolio has invested in interest rate futures contracts
or options on interest rate futures contracts as a substitute for a comparable
market position, the Portfolio will be subject to the same investment risks had
it purchased the securities underlying the contract.
Each of these Portfolios may purchase call options on interest rate
futures contracts to hedge against a decline in interest rates and may purchase
put options on interest rate futures contracts to hedge its portfolio securities
against the risk of rising interest rates. The Portfolio may sell call options
on interest rate futures contracts to partially hedge against declining prices
of portfolio securities. The Portfolio may sell put options on interest rate
futures contracts to hedge against increasing prices of the securities which are
deliverable upon exercise of the futures contracts.
Each of these Portfolios also may sell options on interest rate
futures contracts as part of closing purchase transactions to terminate its
options positions. No assurance can be given that such closing transactions can
be effected or the degree of correlation between price movements in the options
on interest rate futures and price movements in the Portfolio's investment
securities which are the subject of the hedge.
Lending Portfolio Securities--(All Portfolios) From time to time, each
Portfolio may lend securities from its investment portfolio to brokers, dealers
and other financial institutions needing to borrow securities to complete
certain transactions. Such loans may not exceed 33-1/3% of the value of the
relevant Portfolio's total assets. In connection with such loans, each Portfolio
will receive collateral consisting of cash or U.S. Government securities which
will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. Each Portfolio can increase its
income through the investment of such collateral. Each Portfolio continues to be
entitled to payments in amounts equal to the dividends, interest and other
distributions payable on the loaned security and receives interest on the amount
of the loan. Such loans will be terminable at any time upon specified notice. A
Portfolio might experience risk of loss if the institution with which it has
engaged in a portfolio loan transaction breaches its agreement with such
Portfolio.
Forward Commitments--(All Portfolios) Each Portfolio may purchase
securities on a when-issued or forward commitment basis, which means that the
price is fixed at the time of commitment, but delivery and payment ordinarily
take place a number of days after the date of the commitment to purchase. Each
Portfolio will make commitments to purchase such securities only with the
intention of actually acquiring the securities, but the Portfolio may sell these
securities before the settlement date if it is deemed advisable. The Portfolio
will not accrue income in respect of a security purchased on a forward
commitment basis prior to its stated delivery date.
Borrowing Money--(All Portfolios) As a fundamental policy, each Portfolio
is permitted to borrow money in an amount up to 33-1/3% of the value of its
total assets. However, each Portfolio currently intends to borrow money only for
temporary or emergency (not leveraging) purposes, in an amount up to 33-1/3% of
the value of its total assets (including the amount borrowed) valued at the
lesser of cost or market, less liabilities (not including the amount borrowed)
at the time the borrowing is made. While borrowings exceed 5% of a Portfolio's
total assets, such Portfolio will not make any investments. 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.
EXHIBIT 17(b)(ii)
PROSPECTUS
SUBJECT TO COMPLETION
DATED JULY 28, 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 nine 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 MID CAP PORTFOLIO seeks to provide investors with capital appreciation.
This Portfolio will invest primarily in equity securities of medium-size
capitalization ($500 million to $5 billion) domestic issuers.
o The EQUITY VALUE PORTFOLIO seeks to provide investors with capital
appreciation and above average income yield relative to the broad stock
market. This Portfolio will invest primarily in equity securities of large
capitalization domestic issuers which are characterized as "value"
companies.
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 TAX FREE MONEY MARKET PORTFOLIO seeks to provide investors with as high
a level of current income exempt from Federal income tax as is consistent
with the preservation of capital and the maintenance of liquidity. This
Portfolio will invest in short-term Municipal Obligations and will seek a
stable net asset value of $1.00 per share.
o The GOVERNMENT 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
primarily in securities guaranteed as to payment of principal and interest
by the U.S. Government, its agencies or instrumentalities and will seek a
stable net asset value of $1.00 per share.
Each Portfolio's investment adviser is First American National Bank (the
"Adviser").
BISYS Fund Services Limited Partnership ("BISYS") serves as each
Portfolio's administrator and distributor.
By this Prospectus, Trust Shares, Class A Shares and Class B Shares of each
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. FOR EACH PORTFOLIO, OTHER THAN THE MONEY MARKET
PORTFOLIOS, 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 ________ __, 1998 which may
be revised from time to time, provides a further discussion of certain areas in
this Prospectus and other matters which may be of interest to some investors. It
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. The Securities and Exchange Commission maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding the Fund and
Portfolios. For a free copy of the 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..................................................................
Description of the Portfolios..............................................
Management of the Portfolios...............................................
How to Buy Shares..........................................................
How to Redeem Shares.......................................................
Shareholder Privileges.....................................................
Dividends, Distributions and Taxes.........................................
Performance Information....................................................
General Information........................................................
Appendix................................................................... 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
o For information about opening an account and other Fund services call:
(800) ___________. For voice recorded price and yield information call:
(800) 852-0045.
o To execute purchases, redemptions and exchanges and for
information about the status of your account call: (800)
852-0045.
- -------------------------------------------------------------------------------
<PAGE>
FEE TABLE
<TABLE>
<CAPTION>
LARGE CAP EQUITY SMALL CAP OPPORTUNITY
PORTFOLIO PORTFOLIO MID CAP 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
Maximum Sales Load Imposed
on Purchases (as a percentage
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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% .__% .__% .__%
Total Portfolio Operating
Expenses..................... 1.04% 1.29% 1.89% 1.33% 1.58% 2.18% __% __% __%
EXAMPLE:
An investor would pay the
following expenses on a $1,000
investment, assuming (1) 5%
annual return and (2)
redemption at the end of each
time period:
1 Year....................... $ $ $ $ $ $ $ $ $
3 Years...................... $ $ $ $ $ $ $ $ $
An investor would pay the
following expenses on the same
investment, assuming no
redemption:
1 Year....................... $ $ $ $ $ $ $ $ $
3 Years...................... $ $ $ $ $ $ $ $ $
- -----------------
+ 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.
</TABLE>
<PAGE>
FEE TABLE
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY
EQUITY VALUE PORTFOLIO PORTFOLIO MUNICIPAL INCOME 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>
Maximum Sales Load Imposed
SHAREHOLDER TRANSACTION
EXPENSES
on Purchases (as a percentage
of offering price)............ None 4.75% None None 4.75% 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................. .75% .75% .75% 1.00% 1.00% 1.00% .60% .60% .60%
12b-1 Fees...................... None .25% .75% None .25% .75% None .25% .75%
Other Expenses.................. .45% .45% .55% 1.53% 1.53% 1.63% .61% .61% .71%
Total Portfolio Operating
Expenses..................... 1.20% 1.45% 2.05% 2.53% 2.78% 3.13% 1.21% 1.46% 2.06%
EXAMPLE:
An investor would pay the
following expenses on a $1,000
investment, assuming (1) 5%
annual return and (2)
redemption at the end of each
time period:
1 Year....................... $ $ $ $ $ $ $ $ $
3 Years...................... $ $ $ $ $ $ $ $ $
An investor would pay the
following expenses on the same
investment, assuming no
redemption:
1 Year....................... $ $ $ $ $ $ $ $ $
3 Years...................... $ $ $ $ $ $ $ $ $
- -----------------
+ 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GOVERNMENT INCOME TAX FREE MONEY GOVERNMENT MONEY MARKET
PORTFOLIO MARKET 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 3.00% None None None None None None 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% .35% .35% .35% .25% .25% .25%
12b-1 Fees...................... None .25% .75% None None .75% None None .75%
Other Expenses.................. .31% .31% .41% .__% 1.53% .__% .__% .__% .__%
Total Portfolio Operating
Expenses..................... .91% 1.16% 1.76% ___% ___% ___% ___% ___% ___%
EXAMPLE:
An investor would pay the
following expenses on a $1,000
investment, assuming (1) 5%
annual return and (2)
redemption at the end of each
time period:
1 Year....................... $ $ $ $ $ $ $ $ $
3 Years...................... $ $ $ $ $ $ $ $ $
An investor would pay the
following expenses on the same
investment, assuming no
redemption:
1 Year....................... $ $ $ $ $ $ $ $ $
3 Years...................... $ $ $ $ $ $ $ $ $
- ---------------
+ 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.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
The amounts listed in the example should not be considered as
representative of future expenses and actual expenses may be greater or less
than those indicated. Moreover, while the example assumes a 5% annual return,
each Portfolio's actual performance will vary and may result in an actual return
greater or less than 5%.
- --------------------------------------------------------------------------------
The purpose of the foregoing table is to assist investors in understanding
the costs and expenses borne by the Portfolios and investors, the payment of
which will reduce investors' annual return. Other Expenses are estimated based
on amounts for the current fiscal year. Long-term investors in Class A Shares
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 expenses noted above do not
reflect any 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."
DESCRIPTION OF THE PORTFOLIOS
GENERAL
Each Portfolio offers Trust Shares and Class A Shares and 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.
MID CAP PORTFOLIO--The Mid Cap Portfolio will invest at least 65% of the
value of its total assets in equity securities of companies with market
capitalizations ranging from $500 million to $5 billion. The Portfolio will
invest primarily in companies that the Adviser and Bennett Lawrence Management,
LLC ("Bennett Lawrence"), the Mid Cap Portfolio's sub-investment adviser,
believe have above average earnings growth prospects or in companies where
significant fundamental changes are taking place. These changes might include
new or innovative products, services or methods of distribution; corporate
restructurings, mergers or acquisitions; or significant share price
appreciation. The Portfolio also may invest up to 20% of the value of it total
assets in securities of foreign issuers traded on the New York or American Stock
Exchange or in the over-the-counter market in the form of depositary receipts.
In all other respects, the Mid Cap Portfolio's management policies are identical
to those of the Large Cap Equity Portfolio.
EQUITY VALUE PORTFOLIO--The Equity Value Portfolio will invest at least 65%
of the value of its total assets in equity securities of domestic issuers which
are characterized by the Adviser as "value" companies. The Adviser characterizes
value companies as those with relatively low price to book ratios, low price to
earnings ratios or higher than average dividend payments in relation to price.
The Portfolio's benchmark is the S&P/BARRA Value Index, an index which includes
approximately 330 of the stocks in the Standard & Poor's 500 Composite Stock
Price Index ("S&P 500 Index") with lower than average ratios of market price to
book value. In all other respects, the Equity Value 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."
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--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 Considerations and Risk Factors--Fixed-Income
Securities" 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 engage in various investment
techniques such as lending portfolio securities, which involves risk and may
give rise to taxable income. For a discussion of these investment techniques and
their related risks, see "Investment Considerations and Risk Factors" below, and
"Appendix--Investment Techniques." The 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.
TAX FREE MONEY MARKET PORTFOLIO--The Tax Free Money Market Portfolio will
invest at least 80% of the value of its total assets in short-term Municipal
Obligations. See "Municipal Income Portfolio" above. Unlike the Municipal Income
Portfolio, the Tax Free Money Market Portfolio will invest no more than 20% of
the value of its net assets in Municipal Obligations the interest from which
gives rise to a preference item for the purpose of the alternative minimum tax
and, except for temporary defensive purposes, in other investments subject to
Federal income tax. The 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 Tax Free 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 Tax Free 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 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.
GOVERNMENT MONEY MARKET PORTFOLIO--The Government Money Market Portfolio
will invest at least 65% of the value of its total assets in securities issued
or guaranteed as to principal and interest by the U.S. Government or it agencies
or instrumentalities 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 1933, as amended.
See "Appendix--Investment Practices."
The Government 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 "Tax Free Money Market Portfolio" above, and "Determination of
Net Asset Value" in the 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--Since each Portfolio will pursue different types of investments,
the risks of investing will vary depending on the Portfolio selected for
investment. Before selecting a Portfolio in which to invest, the investor should
assess the risks associated with the types of investments made by the Portfolio.
The net asset value per share of each Portfolio, other than the Money Market
Portfolios, is not fixed and should be expected to fluctuate. Investors should
consider each Portfolio as a supplement to an overall investment program and
should invest only if they are willing to undertake the risks involved.
INVESTMENT TECHNIQUES AND PORTFOLIO TURNOVER RATES--Each Portfolio may
engage in various investment techniques the use of which involves risk.
Investors in the Municipal Income Portfolio and Tax Free Money Market Portfolio
should be aware that the use of these techniques may give rise to taxable
income. See "Appendix--Investment Techniques." Using these techniques may
produce higher than normal portfolio turnover for a Portfolio and may affect the
degree to which its net asset value fluctuates.
Portfolio turnover may vary from year to year, as well as within a year. 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 exceed 100% for the Small Cap
Opportunity Portfolio, Mid Cap Portfolio and International Equity Portfolio, and
is anticipated to be less than 100% for the Large Cap Equity Portfolio, Equity
Value Portfolio, Municipal Income Portfolio and Government Income 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.
EQUITY SECURITIES--(Large Cap Equity Portfolio, Small Cap Opportunity
Portfolio, Mid Cap Portfolio, Equity Value Portfolio and International Equity
Portfolio) Equity securities fluctuate in value, often based on factors
unrelated to the value of the issuer of the securities, and such fluctuations
can be pronounced. Changes in the value of investment securities will result in
changes in the value of the Portfolio's shares and thus its total return to
investors.
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.
The securities of smaller capitalization companies may be more volatile
than, and may fluctuate independently of, broad stock market indexes such as the
S&P 500. Smaller capitalization companies often have limited product lines,
markets or financial resources. 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, securities of the small capitalization sector may be
thinly traded (and therefore have to be sold at a discount from current market
prices or sold in small lots over an extended period of time), may be followed
by fewer investment research analysts and may be subject to wider price swings,
and thus may create a greater chance of loss than by investing in securities of
larger capitalization companies.
FIXED-INCOME SECURITIES--(All Portfolios) Even though interest-bearing
securities are investments which promise a stable stream of income, the prices
of such securities are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations.
The values of fixed-income securities also may be affected by changes in
the credit rating or financial condition of the issuing entities. Once the
rating of a security purchased by a Portfolio has been adversely changed, such
Portfolio will consider all circumstances deemed relevant in determining whether
to continue to hold the security. Certain securities purchased by a Portfolio,
such as those rated Baa by Moody's and BBB by S&P, Fitch and Duff, may be
subject to such risk with respect to the issuing entity and to greater market
fluctuations than certain lower yielding, higher rated fixed-income securities.
See "Appendix--Portfolio Securities--Ratings" below, and "Appendix" in the
Statement of Additional Information.
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.
INVESTING IN MUNICIPAL OBLIGATIONS--(Municipal Income Portfolio and Tax
Free Money Market Portfolio) Each of these Portfolios 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,
each of these Portfolios 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 Tax Free Money Market Portfolio and thus reduce their available
yield. Investors should consult their tax advisers concerning the effect of
these provisions on an investment in the Municipal Income Portfolio and Tax Free
Money Market Portfolio. Proposals that may restrict or eliminate the income tax
exemption for interest on Municipal Obligations may be introduced in the future.
If any such proposal were enacted that would reduce the availability of
Municipal Obligations for investment by the Municipal Income Portfolio and Tax
Free Money Market Portfolio so as to adversely affect their shareholders, the
Fund would reevaluate such Portfolios' investment objective and policies and
submit possible changes in the Portfolios' structure to shareholders for their
consideration. If legislation were enacted that would treat a type of Municipal
Obligation as taxable, the Municipal Income Portfolio and Tax Free Money Market
Portfolio would treat such security as a permissible taxable investment within
the applicable limits set forth herein.
INVESTING IN FOREIGN SECURITIES--(International Equity Portfolio, and, to a
limited extent, Large Cap Equity Portfolio, Mid Cap Portfolio and Equity Value
Portfolio) Foreign securities markets generally are not as developed or
efficient as those in the United States. Securities of some foreign issuers are
less liquid and more volatile than securities of comparable U.S. issuers.
Similarly, volume and liquidity in most foreign securities markets are less than
in the United States and, at times, volatility of price can be greater than in
the United States.
Because evidences of ownership of such securities usually are held outside
the United States, a Portfolio's investment in foreign securities will be
subject to additional risks which include possible adverse political and
economic developments, seizure or nationalization of foreign deposits and
adoption of governmental restrictions that might adversely affect 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.
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 and Mid Cap Portfolio with and be payable in currencies of foreign
countries, the value of these assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and exchange control
regulations.
USE OF DERIVATIVES--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, Mid Cap Portfolio,
International Equity Portfolio and Equity Value 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.
NON-DIVERSIFIED STATUS--(International Equity Portfolio only) The
International Equity 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 the
International Equity Portfolio's assets may be invested in the securities of a
limited number of issuers, some of which may be within the same industry, the
Portfolio's investments may be more sensitive to changes in the market value of
a single issuer or industry. However, to meet Federal tax requirements, at the
close of each quarter no Portfolio may have more than 25% of its total assets
invested in any one issuer and, with respect to 50% of total assets, more than
5% of its total assets invested in any one issuer. These limitations do not
apply to U.S. Government securities or the securities of other regulated
investment companies.
SIMULTANEOUS INVESTMENTS--Investment decisions for each Portfolio are made
independently from those of the other investment companies, investment advisory
accounts, custodial accounts, individual trust accounts and commingled funds
that may be advised by the Adviser 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 April 30, 1998, Deposit Guaranty Corp., located
in Jackson, Mississippi, merged with 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 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.
MID CAP PORTFOLIO--S. Van Zandt Schreiber and Robert W. Deaton. Messrs.
Schreiber and Deaton have been the Mid Cap Portfolio's primary portfolio
managers since its inception. Mr. Schreiber has been the Chief Portfolio Manager
at Bennett Lawrence since its inception in August 1995. For more than five years
prior thereto, Mr. Schreiber was Managing Director and Senior Growth Portfolio
Manager with Deutsche Morgan Grenfell/C.J. Lawrence, Inc. Mr. Deaton has been an
Associate Portfolio Manager at Bennett Lawrence since its inception in August
1995. From 1994 to August 1995, Mr. Deaton was a portfolio manager and research
analyst with Deutsche Morgan Grenfell/C.J. Lawrence, Inc. Prior thereto, Mr.
Deaton managed the Long-Term Growth Fund for the Tennessee Consolidated
Retirement System.
EQUITY VALUE PORTFOLIO--Investment decisions are made by a team of the Adviser's
portfolio managers, and no person is primarily responsible for making
recommendations to the team.
INTERNATIONAL EQUITY PORTFOLIO--Herbert W. Gullquist and John R. Reinsberg.
Messers. Gullquist and Reinsberg have been the International Equity Portfolio's
primary portfolio managers since its inception, and have been Managing Directors
of LAM for over five years.
MUNICIPAL INCOME PORTFOLIO--Sharon S. Brown. She has been the Municipal Income
Portfolio's primary portfolio manager since its inception and has been a Trust
Officer of the Adviser since 1988.
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.
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%
Mid Cap Portfolio 1.00%
Equity Value Portfolio .75%
International Equity Portfolio 1.00%
Municipal Income Portfolio .60%
Government Income Portfolio .60%
Tax Free Money Market Portfolio .35%
Government Money Market Portfolio .25%
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 $__________ billion as of ________, 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 average
daily net assets of the International Equity Portfolio.
Womack Asset Management, Inc., located at 2120 DG Plaza, Jackson,
Mississippi 39201, serves as the sub-investment adviser to the Small Cap
Opportunity Portfolio. [Description of Womack Management to be Provided.] 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
the sum of .32% of the value of the Small Cap Opportunity Portfolio's average
daily net assets up to $50 million, .075% of the value of such assets from $50
million to $70 million and .25% of the value of such assets in excess of $70
million.
Bennett Lawrence Management, LLC, located at 757 Third Avenue, New York,
New York 10017, serves as the sub-investment adviser to the Mid Cap Portfolio.
Bennett Lawrence provides discretionary investment management services to client
discretionary accounts with assets totaling approximately $_______ million as of
________, 1998. Under the terms of the sub-investment advisory agreement with
Bennett Lawrence, the Adviser has agreed to pay Bennett Lawrence a monthly fee
at the annual rate set forth below as a percentage of the average daily net
assets of the Mid Cap Portfolio:
Average Aggregate Annual Rate of Sub-Advisory
DAILY NET ASSETS OF PORTFOLIO FEE PAYABLE BY ADVISER
on the first $5 million .75%
on the next $5 million .65%
on assets in excess of $10 million .55%
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 Government
Money Market Portfolio's and Tax Free Money Market Portfolio's average daily net
assets and .15% of the value of each other 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
Government Money Market and Tax Free Money Market Portfolios) and 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 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
First American National Bank, 315 Deaderick Street, Nashville, Tennessee
37237, is the Portfolios' Custodian. The Bank of New York, 90 Washington Street,
New York, New York 10286, is the Portfolio's Sub-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. 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 a Money Market Portfolio, as opposed to obtaining
such shares through an exchange, will be required to participate in the Money
Market Portfolios' 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 such 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 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, 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 or Tax Free Money Market 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 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 SHARES 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 or Class B Shares of either 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 and Municipal Income Portfolio is the net asset
value per share of that Class, plus, except for shareholders beneficially owning
Class A Shares of such Portfolios on __________, 1998, a sales load shown below:
<TABLE>
<CAPTION>
TOTAL SALES LOAD
AS A % OF AS A % OF DEALERS' REALLOWANCE
AMOUNT OF TRANSACTION OFFERING PRICE NET 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.................. 2.50% 2.56% 2.25%
$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 beneficially owning Class A Shares of the Government Income
Portfolio and Municipal Income Portfolio on ________, 1998, 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 DEALERS' REALLOWANCE
AMOUNT OF TRANSACTION OFFERING PRICE NET 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
$250,000................. 1.75% 1.78% 1.58%
$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>
The public offering price of Class A Shares of the Large Cap Equity Portfolio,
Small Cap Opportunity Portfolio, Equity Value Portfolio, Mid Cap Portfolio and
International Equity Portfolio is the net asset value per share of that Class,
plus, except for shareholders beneficially owning Class A Shares of such
Portfolios (other than Equity Value Portfolio) on __________, 1998, a sales load
as shown below:
<TABLE>
<CAPTION>
TOTAL SALES LOAD
AS A % OF AS A % OF DEALERS' REALLOWANCE
AMOUNT OF TRANSACTION OFFERING PRICE NET 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 beneficially owning Class A Shares of the Mid Cap Portfolio and
International Equity Portfolio on __________, 1998, the public offering price
for Class A Share of such Portfolios (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 Mid Cap
Portfolio or International Equity Portfolio by such shareholders.
For shareholders beneficially owning Class A Shares of the Large Cap Equity
Portfolio and Small Cap Opportunity Portfolio on ________, 1998, 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 DEALERS' REALLOWANCE
AMOUNT OF TRANSACTION OFFERING PRICE NET ASSET VALUE AS A % OF OFFERING PRICE
<S> <C> <C> <C>
Less than $100,000........... 3.50% 3.63% ____%
$100,000 to less than
$250,000................. 3.00% 3.09% 2.70%
$250,000 to less than
$500,000................. 2.50% 2.56% 2.35%
$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 beneficially owning Class A Shares of a Portfolio
on ________, 1998, 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 beneficially owning Class A Shares of a Portfolio on
__________, 1998 that 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:
(1) travel and lodging at vacation locations; (2) tickets for entertainment
events; and (3) 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
YEAR SINCE AMOUNT INVESTED
PURCHASE PAYMENT OR REDEMPTION
WAS MADE 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 __.
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 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 one of the other Portfolios, 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--MONEY MARKET PORTFOLIOS ONLY
The Auto-Exchange Plan enables holders of Class B Shares of a 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 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 a 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 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, SMALL CAP OPPORTUNITY, MID CAP AND EQUITY VALUE
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.
TAX FREE MONEY MARKET AND GOVERNMENT 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 and Tax Free
Money Market 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 gain from
securities held for more than 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 and Tax Free Money Market Portfolio may be excluded
by shareholders of such Portfolios from their gross income for Federal income
tax purposes, each of these Portfolios 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 or Tax Free Money Market 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 expects that each 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, MID CAP, EQUITY VALUE 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 AND GOVERNMENT INCOME 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.
TAX FREE MONEY MARKET AND GOVERNMENT 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. The Tax Free Money Market
Portfolio may advertise tax equivalent yield as described above.
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 pursuant to the
Distribution Plan and Shareholder Services Plan are higher than those payable by
Class A Shares pursuant to the Distribution Plan. Trust Shares are not subject
to Distribution Plan or Shareholder Services Plan fees. 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 __ billion shares of Common Stock (with 750
million shares allocated to each Portfolio), par value $.001 per share. Each
Portfolio's shares are classified into Class A Shares (250 million), Class B
Shares (250 million) and Trust Shares (250 million). Each share has one vote and
shareholders will vote in the aggregate and not by Class except as otherwise
required by law.
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, 20 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.
<PAGE>
APPENDIX
PORTFOLIO SECURITIES
To the extent set forth in this Prospectus, each Portfolio may invest in
the securities described below.
MONEY MARKET INSTRUMENTS
U.S. TREASURY SECURITIES--Each Portfolio may invest in U.S. Treasury
securities which include Treasury Bills, Treasury Notes and Treasury Bonds that
differ in their interest rates, maturities and times of issuance. Treasury Bills
have initial maturities of one year or less; Treasury Notes have initial
maturities of one to ten years; and Treasury Bonds generally have initial
maturities of greater than ten years.
U.S. GOVERNMENT SECURITIES--In addition to U.S. Treasury securities, each
Portfolio may invest in securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities. Some obligations issued or guaranteed by
U.S. Government agencies and instrumentalities, for example, Government National
Mortgage Association pass-through certificates, are supported by the full faith
and credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
These securities bear fixed, floating or variable rates of interest. Principal
and interest may fluctuate based on generally recognized reference rates or the
relationship of rates. While the U.S. Government provides financial support to
such U.S. Government-sponsored agencies or instrumentalities, no assurance can
be given that it will always do so, since it is not so obligated by law. Each
Portfolio will invest in such securities only when it is satisfied that the
credit risk with respect to the issuer is minimal.
BANK OBLIGATIONS--Each Portfolio may invest in bank obligations (other than
those issued by the Adviser or its affiliates), including certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations of
domestic banks, foreign subsidiaries or foreign branches of domestic banks, and
domestic branches of foreign banks, domestic savings and loan associations and
other banking institutions. With respect to such securities issued by foreign
subsidiaries or foreign branches of domestic banks, and domestic branches of
foreign banks, a Portfolio may be subject to additional investment risks that
are different in some respects from those incurred by a fund which invests only
in debt obligations of U.S. domestic issuers. Such risks include possible future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on the securities, the possible
establishment of exchange controls or the adoption of other foreign governmental
restrictions which might adversely affect the payment of principal and interest
on these securities, the possible seizure or nationalization of foreign deposits
and the possible subordination of deposits in foreign branches to receivership
expenses and U.S. office deposits in the event of insolvency. See "Description
of the Portfolios--Investment Considerations and Risk Factors--Investing in
Foreign Securities."
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits which may be held by a Portfolio will not benefit from insurance from
the Bank Insurance Fund or the Savings Association Insurance Fund administered
by the Federal Deposit Insurance Corporation.
Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations, bearing fixed, floating or variable interest
rates.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE Obligations--Each
Portfolio, except the Government 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 Tax Free Money Market
Portfolio and Government 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.
FLOATING AND VARIABLE RATE OBLIGATIONS--Each Portfolio may purchase
floating and variable rate demand notes and bonds, which are obligations
ordinarily having stated maturities in excess of 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 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 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 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.
ILLIQUID SECURITIES--Each Portfolio may invest up to 15% (10% in the case of
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 these Portfolios, 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" and "Illiquid Securities" above and
"Investment Objectives and Management Policies--Portfolio
Securities--Mortgage-Related Securities" in the Statement of Additional
Information.
ASSET-BACKED SECURITIES--(Government Income 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. The Portfolio may invest in these and other types of
asset-backed securities that may be developed in the future.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may provide the
Portfolio with a less effective security interest in the related collateral than
do mortgage-backed securities. Therefore, there is the possibility that
recoveries on 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, Mid Cap Portfolio, Equity Value 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, Mid Cap Portfolio, Equity Value 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, Mid Cap
Portfolio, Equity Value 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 Tax Free 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.
TENDER OPTION BONDS--(Municipal Income Portfolio and Tax Free Money Market
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
CALL AND PUT OPTIONS ON SPECIFIED SECURITIES--(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 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, 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 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, Mid Cap Portfolio, Equity Value 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--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 33-1/3% of the value of the relevant
Portfolio's total assets. In connection with such loans, each Portfolio will
receive collateral consisting of cash or U.S. Government securities which will
be maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. Each Portfolio can increase its income
through the investment of such collateral. Each Portfolio continues to be
entitled to payments in amounts equal to the dividends, interest and other
distributions payable on the loaned security and receives interest on the amount
of the loan. Such loans will be terminable at any time upon specified notice. A
Portfolio might experience risk of loss if the institution with which it has
engaged in a portfolio loan transaction breaches its agreement with such
Portfolio.
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 LAM's
ability to predict accurately the future exchange rates between foreign
currencies and the U.S. dollar.
SHORT-SELLING--(International Equity Portfolio) The Portfolio may engage in
short sales of securities. 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. The Portfolio also may make short sales "against the box," in
which the Portfolio enters into a short sale of a security it owns. 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.
FORWARD COMMITMENTS--(All Portfolios) Each Portfolio may purchase securities on
a when-issued or forward commitment basis, which means that the price is fixed
at the time of commitment, but delivery and payment ordinarily take place a
number of days after the date of the commitment to purchase. Each Portfolio will
make commitments to purchase such securities only with the intention of actually
acquiring the securities, but the Portfolio may sell these securities before the
settlement date if it is deemed advisable. The Portfolio will not accrue income
in respect of a security purchased on a forward commitment basis prior to its
stated delivery date.
BORROWING MONEY--(All Portfolios) As a fundamental policy, each Portfolio is
permitted to borrow money in an amount up to 33-1/3% of the value of its total
assets. However, each Portfolio currently intends to borrow money only for
temporary or emergency (not leveraging) purposes, in an amount up to 33-1/3% of
the value of its total assets (including the amount borrowed) valued at the
lesser of cost or market, less liabilities (not including the amount borrowed)
at the time the borrowing is made. While borrowings exceed 5% of a Portfolio's
total assets, such Portfolio will not make any investments. In addition, the
Government Money Market Portfolio may borrow for investment purposes on a
secured basis through entering into reverse repurchase agreements as described
below.
REVERSE REPURCHASE AGREEMENTS--(Government Money Market Portfolio) The
Government 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 the
Government 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 the 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.
EXHIBIT 17(c)(i)
DG INVESTOR SERIES
STOCK AND BOND FUNDS
PROSPECTUS
DG Investor Series (the "Trust") is an open-end, management investment company
(a mutual fund). This combined prospectus offers investors interests in the
following six separate investment portfolios (individually or collectively
referred to as the "Fund" or "Funds" as the context requires), each having a
distinct investment objective and policies:
- DG Equity Fund;
- DG Opportunity Fund;
- DG International Equity Fund;
- DG Limited Term Government Income Fund;
- DG Government Income Fund; and
- DG Municipal Income Fund.
This combined prospectus contains the information you should read and know
before you invest in any of the Funds. Keep this prospectus for future
reference.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF DEPOSIT
GUARANTY NATIONAL BANK, ARE NOT ENDORSED OR GUARANTEED BY DEPOSIT GUARANTY
NATIONAL BANK, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE
SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
The Funds have also filed a Statement of Additional Information dated June 30,
1998 with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus, if you have received
your prospectus electronically, free of charge by calling 1-800-530-7377. To
obtain other information, or make inquiries about any of the Funds, contact the
Trust at the address listed on the back of this prospectus, or you can visit the
DG Investor Series' Internet site on the World Wide Web at (www.dgb.com). The
Statement of Additional Information, material incorporated by reference into
this document, and other information regarding the Funds is maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated June 30, 1998
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SYNOPSIS 1
Year 2000 Statement 2
Risk Factors 2
SUMMARY OF FUND EXPENSES 3
FINANCIAL HIGHLIGHTS 4
OBJECTIVE AND POLICIES OF EACH FUND 6
Equity Fund 6
Opportunity Fund 7
International Equity Fund 8
Limited Term Fund 15
Government Income Fund 17
Municipal Income Fund 17
PORTFOLIO INVESTMENTS AND STRATEGIES 20
Put and Call Options 20
Futures Contracts and Options
on Futures 20
Repurchase Agreements 21
When-Issued and Delayed
Delivery Transactions 22
Lending of Portfolio Securities 22
Temporary Investments 22
Investing in Securities of
Other Investment Companies 22
Restricted and Illiquid Securities 22
Fixed Income Securities 23
INVESTMENT LIMITATIONS 23
DG INVESTOR SERIES INFORMATION 23
Management of the Trust 23
Distribution of Fund Shares 26
ADMINISTRATION OF THE FUNDS 27
Brokerage Transactions 27
Expenses of the Funds 27
NET ASSET VALUE 28
INVESTING IN THE FUNDS 28
Share Purchases 28
Minimum Investment Required 28
What Shares Cost 29
Reducing the Sales Charge 30
Systematic Investment Program 31
Certificates and Confirmations 31
Dividends and Distributions 32
EXCHANGE PRIVILEGE 32
Exchanging Shares 32
REDEEMING SHARES 33
Through the Bank 33
Systematic Withdrawal Program 34
Accounts With Low Balances 34
SHAREHOLDER INFORMATION 35
Voting Rights 35
EFFECT OF BANKING LAWS 36
TAX INFORMATION 36
Federal Income Tax 36
Additional Tax Information for
Municipal Income Fund 37
Other State and Local Taxes 37
PERFORMANCE INFORMATION 37
ADDRESSES 39
SYNOPSIS
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated February 7, 1992. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. Shares of the Funds are designed for retail and
trust customers of Deposit Guaranty National Bank and its affiliates as a
convenient means of participating in professionally managed, diversified
portfolios.
As of the date of this prospectus, the Trust is composed of nine portfolios. The
following six portfolios are offered in this prospectus:
- DG Equity Fund ("Equity Fund")--seeks to provide long-term capital
appreciation (and current income as a secondary objective) by investing
at least 70% of its assets in equity securities including large
capitalization stocks that, in the opinion of the adviser, have potential
to provide for capital appreciation and current income;
- DG Opportunity Fund ("Opportunity Fund")--seeks to provide capital
appreciation by investing primarily in a portfolio of equity securities
comprising the small capitalization sector of the United States equity
market;
- DG International Equity Fund ("International Equity Fund")--seeks to
provide capital appreciation by investing primarily in a portfolio of
non-U.S. securities, of which a substantial portion will be equity
securities of companies in economically developed countries that Lazard
Asset Management ("Lazard" or the "Sub-Adviser") considers inexpensively
priced relative to the return on total capital or equity;
- DG Limited Term Government Income Fund ("Limited Term Fund")--seeks to
provide current income, while maintaining a weighted-average duration
which will at all times be limited to between one and three years;
- DG Government Income Fund ("Government Income Fund")--seeks to provide
current income by investing primarily in securities which are guaranteed
as to payment of principal and interest by the U.S. government or U.S.
government agencies or instrumentalities; and
- DG Municipal Income Fund ("Municipal Income Fund")--seeks to provide
dividend income that is exempt from federal regular income tax by
investing primarily in municipal securities.
For information on how to purchase shares of any of the Funds, please refer to
"Investing in the Funds." A minimum initial investment of $1,000 is required for
each Fund. Subsequent investments must be in amounts of at least $100. Shares of
each Fund are sold at net asset value plus any applicable sales charge, and are
redeemed at net asset value. Information on redeeming shares may be found under
"Redeeming Shares." The Funds are advised by ParkSouth Corporation (the
"Adviser"). International Equity Fund is sub-advised by Lazard and Opportunity
Fund is sub-advised by Womack Asset Management, Inc. ("Womack" or the
"Sub-Adviser").
YEAR 2000 STATEMENT
Like other mutual funds and business organizations worldwide, the Funds' service
providers (among them, the Adviser, Sub-Adviser, distributor, administrator and
transfer agent) must ensure that their computer systems are adjusted to properly
process and calculate date-related information from and after January 1, 2000.
Many software programs and, to the lesser extent, the computer hardware in use
today cannot distinguish the year 2000 from the year 1900. Such a design flaw
could have a negative impact in the handling of securities trades, pricing and
accounting services. The Funds and their service providers are actively working
on necessary changes to computer systems to deal with the year 2000 issue and
believe that systems will be year 2000 compliant when required. Analysis
continues regarding the financial impact of instituting a year 2000 compliant
program on the Funds' operations.
RISK FACTORS
Investors should be aware of the following general considerations: market values
of fixed income securities, which constitute a major part of the investments of
some Funds, may vary inversely in response to changes in prevailing interest
rates. The foreign securities in which some Funds may invest may be subject to
certain risks in addition to those inherent in U.S. investments. Shareholders of
Municipal Income Fund may be subject to the federal alternative minimum tax on
that part of its dividends derived from interest on certain municipal
securities. One or more Funds may make certain investments and employ certain
investment techniques that involve other risks, including entering into
repurchase agreements, lending portfolio securities and entering into financial
futures contracts and related options as hedges. These risks and those
associated with investing in mortgage-backed securities, when-issued securities,
options, and variable rate securities are described under "Objective and
Policies of Each Fund" and "Portfolio Investments and Strategies."
<PAGE>
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
DG DG DG
DG DG DG LIMITED TERM GOVERNMENT MUNICIPAL
EQUITY INTERNATIONAL OPPORTUNITY GOVERNMENT INCOME INCOME INCOME
FUND EQUITY FUND FUND FUND FUND FUND
------ ------------- ----------- ----------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price)................. 3.50% None 3.50% 2.00% 2.00% 2.00%
Maximum Sales Charge Imposed on
Reinvested Dividends (as a
percentage of offering price)... None None None None None None
Contingent Deferred Sales Charge
(as a percentage of original
purchase price or redemption
proceeds, as applicable)........ None None None None None None
Redemption Fee (as a percentage of
amount redeemed, if
applicable)..................... None None None None None None
Exchange Fee...................... None None None None None None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after
waiver)(1)...................... 0.75% 0.50% 0.84% 0.44% 0.54% 0.29%
12b-1 Fees(2)..................... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Other Expenses (after
waiver)(3)...................... 0.24% 1.27% 0.36% 0.36% 0.26% 0.47%
Shareholder Services Fees....... 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
Total Fund Operating
Expenses(4)................. 0.99% 1.77% 1.20% 0.80% 0.80% 0.76%
(1) The management fees of DG International Equity Fund, DG Opportunity Fund, DG
Limited Term Government Income Fund, DG Government Income Fund, and DG Municipal
Income Fund have been reduced to reflect the voluntary waivers by the Adviser.
The Adviser can terminate these voluntary waivers at any time at its sole
discretion. The maximum management fees for these Funds are 1.00%, 0.95%, 0.60%,
0.60%, and 0.60%.
(2) As of the date of this prospectus, the Funds are not paying or accruing
12b-1 fees. The Funds will not accrue or pay 12b-1 fees until a separate class
of shares has been created for certain institutional investors. DG Equity Fund,
DG Opportunity Fund, DG Limited Term Government Income Fund, DG Government
Income Fund, and DG Municipal Income Fund could each pay 0.35% as a 12b-1 fee to
the distributor. DG International Equity Fund could pay 0.25% as a 12b-1 fee to
the distributor.
(3) Other expenses for DG Municipal Income Fund have been reduced to reflect the
voluntary waiver of a portion of the administration fee. The administrator can
terminate this voluntary waiver at any time at its sole discretion. The maximum
Total Other Expenses for DG Municipal Income Fund was 0.54%.
(4) Total Fund Operating Expenses above for the DG International Equity Fund, DG
Opportunity Fund, DG Limited Term Government Income Fund, and DG Government
Income Fund would have been 2.27%, 1.31%, 0.96%, and 0.86%, respectively absent
the voluntary waiver described in note (1) above. Total Fund Operating Expenses
above for DG Municipal Income Fund would have been 1.14% absent the voluntary
waivers described in note (1) and note (3) above.
</TABLE>
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUNDS WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "DG INVESTOR SERIES INFORMATION" AND "INVESTING IN THE FUNDS."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<TABLE>
<CAPTION>
EXAMPLE 1 Year 3 Years 5 Years 10 Years
------- -------- --------- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return, (2) redemption at the end
of each time period, and (3) payment of the maximum sales
charge. The Funds charge no contingent deferred sales
charges.
DG Equity Fund............................................ $45 $65 $88 $152
DG International Equity Fund.............................. $18 $56 $96 $208
DG Opportunity Fund....................................... $47 $72 $99 $175
DG Limited Term Government Income Fund.................... $28 $45 $64 $117
DG Government Income Fund................................. $28 $45 $64 $117
DG Municipal Income Fund.................................. $28 $44 $61 $112
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
The following table has been audited by KPMG Peat Marwick LLP, the Funds'
independent auditors. Their report dated April 10, 1998 on the Funds' financial
statements and financial highlights is included in the Annual Report dated
February 28, 1998. This table should be read in conjunction with the Funds'
financial statements and notes thereto, which may be obtained from the Funds.
<TABLE>
<CAPTION>
NET REALIZED
AND UNREALIZED DISTRIBUTIONS
NET ASSET NET GAIN/(LOSS) TOTAL TO SHAREHOLDERS DISTRIBUTIONS
VALUE, INVESTMENT ON INVESTMENTS FROM FROM NET TO SHAREHOLDERS
YEAR ENDED BEGINNING INCOME AND FOREIGN INVESTMENT INVESTMENT IN EXCESS OF NET
FEBRUARY 28 OR 29, OF PERIOD (LOSS) CURRENCIES OPERATIONS INCOME INVESTMENT LOSS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DG EQUITY FUND
1993(a) $10.00 0.12 0.52 0.64 (0.10) --
1994 $10.54 0.14 0.38 0.52 (0.14) --
1995 $10.87 0.16 0.71 0.87 (0.16) --
1996 $11.41 0.16 3.63 3.79 (0.17) --
1997 $14.49 0.14 2.54 2.68 (0.14) --
1998 $16.68 0.11 6.48 6.59 (0.11) --
DG INTERNATIONAL EQUITY FUND
1998(c) $10.00 (0.02)* 0.49 0.47 -- (0.01)
DG OPPORTUNITY FUND
1995(b) $10.00 0.02 1.17 1.19 (0.02) --
1996 $11.15 -- 3.30 3.30 -- --
1997 $12.79 (0.03) 1.60 1.57 -- --
1998 $13.53 (0.05) 4.90 4.85 -- --
DG LIMITED TERM GOVERNMENT INCOME
FUND
1993(a) $10.00 0.36 0.07 0.43 (0.36) --
1994 $10.07 0.52 (0.17) 0.35 (0.52) --
1995 $ 9.87 0.49 (0.23) 0.26 (0.48) --
1996 $ 9.65 0.54 0.15 0.69 (0.54) --
1997 $ 9.80 0.52 (0.08) 0.44 (0.53) --
1998 $ 9.71 0.51 0.07 0.58 (0.51) --
DG GOVERNMENT INCOME FUND
1993(a) $10.00 0.37 0.25 0.62 (0.37) --
1994 $10.25 0.55 (0.09) 0.46 (0.55) --
1995 $ 9.90 0.54 (0.44) 0.10 (0.53) --
1996 $ 9.47 0.58 0.41 0.99 (0.59) --
1997 $ 9.87 0.57 (0.18) 0.39 (0.57) --
1998 $ 9.69 0.55 0.38 0.93 (0.55) --
DG MUNICIPAL INCOME FUND
1993(d) $10.00 0.07 0.49 0.56 (0.05) --
1994 $10.51 0.48 0.08 0.56 (0.49) --
1995 $10.57 0.49 (0.43) 0.06 (0.48) --
1996 $10.15 0.49 0.50 0.99 (0.48) --
1997 $10.66 0.49 (0.07) 0.42 (0.48) --
1998 $10.59 0.47 0.32 0.79 (0.47) --
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
DISTRIBUTIONS
TO SHAREHOLDERS
FROM NET
REALIZED GAIN
ON INVESTMENT
TRANSACTIONS
YEAR ENDED AND FOREIGN
FEBRUARY 28 OR 29, CURRENCIES
- -------------------------- ---------------
<S> <C>
DG EQUITY FUND
1993(a) --
1994 (0.05)
1995 (0.17)
1996 (0.54)
1997 (0.35)
1998 (0.15)
DG INTERNATIONAL EQUITY FU
1998(c) --
DG OPPORTUNITY FUND
1995(b) (0.02)
1996 (1.66)
1997 (0.83)
1998 (2.54)
DG LIMITED TERM GOVERNMENT
FUND
1993(a) --
1994 (0.03)
1995 --
1996 --
1997 --
1998 --
DG GOVERNMENT INCOME FUND
1993(a) --
1994 (0.25)
1995 --
1996 --
1997 --
1998 --
DG MUNICIPAL INCOME FUND
1993(d) --
1994 (0.01)
1995 --
1996 --
1997 (0.01)
1998 (0.02)
- --------------------------
* Per share information presented is based upon the monthly average number of
shares outstanding.
(a) Reflects operations for the period from August 3, 1992 (date of initial
public investment) to February 28, 1993.
(b) Reflects operations for the period from August 1, 1994 (date of initial
public investment) to February 28, 1995.
(c) Reflects operations for the period from August 15, 1997 (date of initial
public investment) to February 28, 1998.
(d) Reflects operations for the period from December 29, 1992 (date of initial
public investment) to February 28, 1993.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DISTRIBUTIONS
TO SHAREHOLDERS RATIOS TO AVERAGE NET ASSETS
IN EXCESS -----------------------------------------------------
OF NET NET ASSET NET NET ASSETS, PORTFOLIO
REALIZED GAIN TOTAL VALUE, END TOTAL INVESTMENT EXPENSE END OF PERIOD TURNOVER
ON INVESTMENTS DISTRIBUTIONS OF PERIOD RETURN(e) EXPENSES INCOME/(LOSS) WAIVER(g) (000 OMITTED) RATE
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-- (0.10) $10.54 6.40% 0.51%(f) 2.15%(f) 0.53%(f) $181,239 28%
-- (0.19) $10.87 4.99% 0.96% 1.38% 0.01% $284,203 7%
-- (0.33) $11.41 8.23% 0.95% 1.54% -- $259,998 1%
-- (0.71) $14.49 33.73% 0.94% 1.24% -- $385,145 15%
-- (0.49) $16.68 18.79% 0.92% 0.95% -- $490,392 7%
-- (0.26) $23.01 39.74% 0.99% 0.54% -- $715,631 6%
-- (0.01) $10.46 4.71% 1.77%(f) (0.48)%(f) 0.50%(f) $ 26,533 21%
-- (0.04) $11.15 11.84% 0.79%(f) 0.06%(f) 1.34%(f) $ 36,664 45%
-- (1.66) $12.79 31.42% 1.17% -- 0.35% $ 53,477 154%
-- (0.83) $13.53 12.08% 1.14% (0.24)% 0.16% $ 80,527 116%
-- (2.54) $15.84 37.81% 1.20% (0.39)% 0.11% $122,872 180%
-- (0.36) $10.07 4.43% 0.50%(f) 6.25%(f) 0.42%(f) $ 99,921 18%
-- (0.55) $ 9.87 3.52% 0.59% 5.21% 0.29% $116,600 76%
-- (0.48) $ 9.65 2.72% 0.63% 5.00% 0.25% $ 96,216 14%
-- (0.54) $ 9.80 7.34% 0.69% 5.49% 0.20% $ 93,276 56%
-- (0.53) $ 9.71 4.66% 0.68% 5.39% 0.20% $ 84,385 28%
-- (0.51) $ 9.78 6.16% 0.80% 5.21% 0.16% $ 59,137 42%
-- (0.37) $10.25 6.40% 0.50%(f) 6.45%(f) 0.41%(f) $111,435 78%
(0.01)(h) (0.81) $ 9.90 4.55% 0.70% 5.34% 0.19% $118,695 49%
-- (0.53) $ 9.47 1.20% 0.68% 5.79% 0.15% $168,313 31%
-- (0.59) $ 9.87 10.70% 0.72% 5.96% 0.10% $184,226 87%
-- (0.57) $ 9.69 4.07% 0.70% 5.82% 0.10% $249,618 7%
-- (0.55) $10.07 9.90% 0.80% 5.62% 0.06% $270,404 25%
-- (0.05) $10.51 5.65% 0.48%(f) 4.11%(f) 1.02%(f) $ 15,644 93%
-- (0.50) $10.57 5.34% 0.74% 4.60% 0.67% $ 34,435 9%
-- (0.48) $10.15 0.81% 0.75% 4.93% 0.41% $ 41,542 9%
-- (0.48) $10.66 9.96% 0.70% 4.65% 0.47% $ 44,578 20%
-- (0.49) $10.59 4.12% 0.70% 4.69% 0.46% $ 46,928 9%
-- (0.49) $10.89 7.70% 0.76% 4.40% 0.38% $ 48,579 6%
<CAPTION>
DISTRIBUTIONS
TO SHAREHOLDERS
IN EXCESS
OF NET AVERAGE
REALIZED GAIN COMMISSION
ON INVESTMENTS PAID(I)
--------------- ----------
<S> <C>
-- --
-- --
-- $0.0653
-- $0.0761
-- $0.0627
-- $0.0273
-- --
-- $0.0098
-- $0.0568
-- $0.0630
-- --
-- --
-- --
(0.01)(h) --
-- --
-- --
-- --
-- --
-- --
- --------------------------------------------------------------------------------
(e) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(f) Computed on an annualized basis.
(g) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(h) This distribution does not represent a return of capital for federal tax
purposes.
(i) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
</TABLE>
<PAGE>
OBJECTIVE AND POLICIES OF EACH FUND
- --------------------------------------------------------------------------------
The investment objective and policies of each Fund appear below. The investment
objective of a Fund cannot be changed without the approval of holders of a
majority of that Fund's shares. While there is no assurance that a Fund will
achieve its investment objective, it endeavors to do so by following the
investment policies described in this prospectus.
Unless indicated otherwise, the investment policies and limitations of a Fund
may be changed by the Board of Trustees ("Trustees") without approval of
shareholders. Shareholders will be notified before any material change in these
policies becomes effective.
Additional information about investment limitations, strategies that one or more
Funds may employ, and certain investment policies mentioned below, appears in
the "Portfolio Investments and Strategies" section of this Prospectus and in the
Statement of Additional Information.
EQUITY FUND
The primary investment objective of Equity Fund is to provide long-term capital
appreciation. Current income is a secondary objective. Equity Fund pursues its
investment objectives by investing at least 70% of its assets in equity
securities. The equity securities in which the Equity Fund may invest include,
but are not limited to, large capitalization stocks which, in the opinion of the
Adviser, have potential to provide for capital appreciation and current income.
Issuers of large capitalization stocks have equity market valuation in excess of
$1 billion.
ACCEPTABLE INVESTMENTS. Consistent with the above, Equity Fund may invest in:
- common stock of U.S. companies which are either listed on the New York or
American Stock Exchange or traded in over-the-counter markets, preferred
stock of such companies, warrants, and preferred stock convertible into
common stock of such companies;
- investments in American Depositary Receipts ("ADRs") of foreign companies
traded on the New York Stock Exchange or in the over-the-counter market.
(For a description of certain risks associated with investing in foreign
companies, see "International Equity Fund-Risks Associated with Investing
in Foreign Companies.");
- convertible bonds rated at least BBB by Standard & Poor's ("S&P") or
Fitch IBCA, Inc. ("Fitch"), or at least Baa by Moody's Investors Service,
Inc. ("Moody's"), or, if not rated, are determined by the Adviser to be
of comparable quality;
- money market instruments rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by
Moody's, or F-1 or F-2 by Fitch;
- fixed rate notes and bonds and adjustable and variable rate notes of
companies whose common stock it may acquire rated BBB or better by S&P or
Baa or better by Moody's;
- zero coupon convertible securities; and
- obligations, including certificates of deposit and bankers' acceptances,
of banks or savings associations having at least $1 billion in deposits
as of the date of their most recently published financial statements and
which are insured by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"), both of which are administered by
the Federal Deposit Insurance Corporation ("FDIC"), including U.S.
branches of foreign banks and foreign branches of U.S. banks.
CONVERTIBLE SECURITIES. Convertible securities are fixed income securities which
may be exchanged or converted into a predetermined number of the issuer's
underlying common stock at the option of the holder during a specified time
period. Convertible securities may take the form of convertible preferred stock,
convertible bonds or debentures, units consisting of "usable" bonds and
warrants, or a combination of the features of several of these securities. The
investment characteristics of each convertible security vary widely, which
allows convertible securities to be employed for different investment
objectives.
Equity Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which, in
the Adviser's opinion, the investment characteristics of the underlying common
shares will assist Equity Fund in achieving its investment objective. Otherwise,
Equity Fund may hold or trade convertible securities. In selecting convertible
securities for Equity Fund, the Adviser evaluates the investment characteristics
of the convertible security as a fixed income instrument and the investment
potential of the underlying equity security for capital appreciation. In
evaluating these matters with respect to a particular convertible security, the
Adviser considers numerous factors, including the economic and political
outlook, the value of the security relative to other investment alternatives,
trends in the determinants of the issuer's profits, and the issuer's management
capability and practices.
CERTAIN OTHER PORTFOLIO STRATEGIES. Equity Fund may also invest or engage in
repurchase agreements, securities of foreign issuers, put and call options,
futures contracts and options on futures, lending of portfolio securities,
when-issued and delayed delivery transactions, temporary investments and
securities of other investment companies. See "Portfolio Investments and
Strategies."
OPPORTUNITY FUND
The investment objective of Opportunity Fund is to provide capital appreciation.
Opportunity Fund pursues its investment objective by investing primarily in a
portfolio of equity securities comprising the small capitalization sector of the
United States equity market. In the Adviser's opinion, small capitalization
stocks have special value in the marketplace and can provide greater growth of
principal than large capitalization stocks, but will not necessarily do so.
Opportunity Fund attempts to select companies whose potential for capital
appreciation exceeds that of larger capitalization stocks commensurate with
increased risk. Under normal market conditions, Opportunity Fund intends to
invest at least 65% of its total assets in equity securities of companies that
have a market value capitalization of less than $1 billion.
In pursuing its investment objective, Opportunity Fund will employ investment
strategies that utilize a fundamental growth-oriented approach along with
technical analysis and valuation relative to the S&P 500 and the stock market to
select the small capitalization stocks which will comprise Opportunity Fund's
investment portfolio.
ACCEPTABLE INVESTMENTS. Opportunity Fund may invest in common stocks,
convertible bonds, ADRs, money market instruments, fixed rate notes and bonds
and adjustable and variable rate notes, and obligations of banks or savings
associations of the kind that are described under "Equity Fund-Acceptable
Investments." (For a description of certain risks associated with investing in
foreign companies, see "International Equity Fund-Risks Associated with
Investing in Foreign Companies.")
INVESTMENT RISKS. As with other mutual funds that invest primarily in equity
securities, Opportunity Fund is subject to market risks. That is, the
possibility exists that common stocks will decline over short or even extended
periods of time. The United States equity market tends to be cyclical,
experiencing both periods when stock prices generally increase and periods when
stock prices generally decrease. However, because Opportunity Fund invests
primarily in small capitalization stocks, there are some additional risk factors
associated with investments in Opportunity Fund. In particular, stocks in the
small capitalization sector of the United States equity market have historically
been more volatile in price than larger capitalization stocks, such as those
included in the S&P 500 Composite Stock Price Index ("S&P 500 Index"). This is
because, among other things, small companies have less certain growth prospects
than larger companies; have a lower degree of liquidity in the equity market;
and tend to have a greater sensitivity to changing economic conditions. Further,
in addition to exhibiting greater volatility, the stocks of small companies may,
to some degree, fluctuate independently of the stocks of large companies. That
is, the stocks of small companies may decline in price as the prices of large
company stocks rise or vice versa. Therefore, investors should expect that
Opportunity Fund will be more volatile than, and may fluctuate independently of,
broad stock market indices such as the S&P 500 Index.
PORTFOLIO TURNOVER. Although Opportunity Fund does not intend to invest for the
purpose of seeking short-term profits, securities in the portfolio will be sold
whenever the Adviser or Sub-Adviser believes it is appropriate to do so in light
of Opportunity Fund's investment objective, without regard to the length of time
a particular security may have been held. A high portfolio turnover rate may
lead to increased costs and may also result in higher taxes paid by Opportunity
Fund's shareholders. During the fiscal years ended February 28, 1998 and
February 28, 1997, Opportunity Fund's portfolio turnover rates were 180% and
116%, respectively.
CERTAIN PORTFOLIO STRATEGIES. Opportunity Fund may also invest or engage in
repurchase agreements, securities of foreign issuers, put and call options,
futures contracts and options on futures, when-issued and delayed delivery
transactions, lending of portfolio securities, temporary investments and
securities of other investment companies. See "Portfolio Investments and
Strategies."
INTERNATIONAL EQUITY FUND
The investment objective of International Equity Fund is to seek capital
appreciation. International Equity pursues its investment objective by investing
primarily in non-U.S. securities. A substantial portion of these will be equity
securities of companies in economically developed countries that Lazard
considers inexpensively priced relative to the return on total capital or
equity.
ACCEPTABLE INVESTMENTS. The International Equity Fund will normally invest at
least 65%, and under normal market conditions substantially all, of its total
assets in equity securities denominated in foreign currencies, including
European Currency Units, of issuers located in at least three countries outside
of the United States and sponsored or unsponsored ADRs, Global Depositary
Receipts ("GDRs"), and European Depositary Receipts ("EDRs"). In addition,
International Equity Fund may invest up to 40% of its total assets in equity
securities of companies located in countries having emerging markets.
International Equity Fund may also purchase corporate and government fixed
income securities denominated in currencies other than U.S. dollars; enter into
forward commitments, repurchase agreements, and foreign currency transactions;
maintain reserves in foreign or U.S. money market instruments; and purchase
options and financial futures contracts.
EQUITY SECURITIES. International Equity Fund will commit its assets primarily to
equity securities. In selecting investments for International Equity Fund,
Lazard Asset Management attempts to identify inexpensive markets worldwide
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. In addition, the Sub-Adviser seeks to
identify companies that it believes are financially productive and undervalued
in those markets. The Sub-Adviser focuses on individual stock selection (a
"bottom-up" approach) rather than on forecasting stock market trends (a
"top-down" approach).
The Sub-Adviser recognizes that some of the best opportunities are in securities
not generally followed by investment professionals. Thus, the Sub-Adviser relies
on its research capabilities and also 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, the Sub-Adviser communicates with its affiliates, Lazard & Cie. in
Paris, Lazard Brothers & Co. 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
information supplied by these affiliates of the Sub-Adviser will be limited to
statistical and factual information, advice regarding economic factors and
trends or advice as to occasional transactions in specific securities.
FIXED INCOME AND OTHER SECURITIES. As a temporary defensive position,
International Equity Fund may invest up to 100% of its total assets in fixed
income securities, warrants, or other obligations of foreign companies or
governments, if they appear to offer potential higher return. Fixed income
securities include preferred stock, convertible securities, bonds, notes, or
other debt securities which are investment grade or higher. However, in no event
will International Equity Fund invest more than 25% of its total assets in the
debt securities of any one foreign country.
The high-quality debt securities in which International Equity Fund will invest
will possess a minimum credit rating of A as assigned by S&P or A by Moody's,
or, if unrated, will be judged by the Adviser or Sub-Adviser to be of comparable
quality. Because the average quality of International Equity Fund's debt
securities should remain constantly between A and AAA, International Equity Fund
will seek to avoid the adverse consequences that may arise for some debt
securities in difficult economic circumstances. Downgraded securities will be
evaluated on a case by case basis by the Sub-Adviser. The Sub-Adviser will
determine whether or not the security continues to be an acceptable investment.
If not, the security will be sold.
The prices of fixed income securities generally fluctuate inversely to the
direction of interest rates.
DEPOSITARY RECEIPTS. International Equity Fund may invest in foreign issuers by
purchasing sponsored or unsponsored ADRs, GDRs, and EDRs. ADRs are depositary
receipts typically issued by a United States bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs and GDRs are typically issued by foreign banks or trust companies, although
they also may be issued by United States banks or trust companies, and evidence
ownership of underlying securities issued by either a foreign or a United States
corporation. Generally, depositary receipts in registered form are designed for
use in the United States securities market and depositary receipts in bearer
form are designed for use in securities markets outside the United States.
Depositary receipts may not necessarily be denominated in the same currency as
the underlying securities into which they may be converted. Ownership of
unsponsored depositary receipts may not entitle International Equity Fund to
financial or other reports from the issuer of the underlying security, to which
it would be entitled as the owner of sponsored depositary receipts.
FORWARD COMMITMENTS. Forward commitments are contracts to purchase securities
for a fixed price at a date beyond customary settlement time. International
Equity Fund may enter into these contracts if liquid securities in amounts
sufficient to meet the purchase price are segregated on International Equity
Fund's records at the trade date and maintained until the transaction has been
settled. Risk is involved if the value of the security declines before
settlement. Although International Equity Fund enters into forward commitments
with the intention of acquiring the security, it may dispose of the commitment
prior to settlement and realize short-term profit or loss.
MONEY MARKET INSTRUMENTS. International Equity Fund may invest in U.S. and
foreign short-term money market instruments, including interest-bearing call
deposits with banks, government obligations, certificates of deposit, bankers'
acceptances, commercial paper, short-term corporate debt securities, and
repurchase agreements. The commercial paper in which International Equity Fund
invests will be rated A-1 by S&P or P-1 by Moody's. These investments may be
used to temporarily invest cash received from the sale of International Equity
Fund shares, to establish and maintain reserves (up to 100% of International
Equity Fund's assets) for temporary defensive purposes, or to take advantage of
market opportunities. Investments in the World Bank, Asian Development Bank, or
Inter-American Development Bank are not anticipated.
FOREIGN CURRENCY TRANSACTIONS. International Equity Fund will enter into foreign
currency transactions to obtain the necessary currencies to settle securities
transactions. Currency transactions may be conducted either on a spot or cash
basis at prevailing rates or through forward foreign currency exchange
contracts.
International Equity Fund may also enter into foreign currency transactions to
protect Fund assets against adverse changes in foreign currency exchange rates
or exchange control regulations. Such changes could unfavorably affect the value
of Fund assets which are denominated in foreign currencies, such as foreign
securities or funds deposited in foreign banks, as measured in U.S. dollars.
Although foreign currency exchanges may be used by International Equity Fund to
protect against a decline in the value of one or more currencies, such efforts
may also limit any potential gain that might result from a relative increase in
the value of such currencies and might, in certain cases, result in losses to
International Equity Fund.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency exchange
contract ("forward contract") is an obligation to purchase or sell an amount of
a particular currency at a specific price and on a future date agreed upon by
the parties.
Generally, no commission charges or deposits are involved. At the time
International Equity Fund enters into a forward contract, Fund assets with a
value equal to the Fund's obligation under the forward contract are segregated
on the Fund's records and are maintained until the contract has been settled.
International Equity Fund will not enter into a forward contract with a term of
more than one year. International Equity Fund will generally enter into a
forward contract to provide the proper currency to settle a securities
transaction at the time the transaction occurs ("trade date"). The period
between the trade date and settlement date will vary between 24 hours and 30
days, depending upon local custom.
International Equity Fund may also protect against the decline of a particular
foreign currency by entering into a forward contract to sell an amount of that
currency approximating the value of all or a portion of International Equity
Fund's assets denominated in that currency ("hedging"). The success of this type
of short-term hedging strategy is highly uncertain due to the difficulties of
predicting short-term currency market movements and of precisely matching
forward contract amounts and the constantly changing value of the securities
involved. Although the Adviser will consider the likelihood of changes in
currency values when making investment decisions, the Adviser believes that it
is important to be able to enter into forward contracts when it believes the
interests of International Equity Fund will be served. International Equity Fund
will not enter into forward contracts for hedging purposes in a particular
currency in an amount in excess of the Fund's assets denominated in that
currency.
SHORT SALES. International Equity Fund intends to sell securities it owns or has
a right to acquire short from time to time, subject to certain restrictions. A
short sale occurs when a borrowed security is sold in anticipation of a decline
in its price. If the decline occurs, shares equal in number to those sold short
can be purchased at the lower price. If the price increases, the higher price
must be paid. The purchased shares are then returned to the original lender.
Risk arises because no loss limit can be placed on the transaction. When
International Equity Fund enters into a short sale, assets, equal to the market
price of the securities sold short or any lesser price at which the Fund can
obtain such securities, are segregated on the Fund's records and maintained
until the Fund meets its obligations under the short sale.
EMERGING MARKET SECURITIES. International Equity Fund may invest up to 40% of
its total assets in equity securities of companies located in countries having
emerging markets. International Equity Fund's Sub-Adviser considers countries
having emerging markets to be all countries that are generally considered to
have developing or emerging markets or economies. Furthermore, the Sub-Adviser
considers emerging market countries to be all countries considered by the
International Bank for Reconstruction and Development (more commonly known as
the World Bank) and the International Finance Corporation, as well as countries
that are classified by the United Nations or otherwise regarded by their
authorities, as developing.
Generally included in emerging markets are all countries in the world except
Australia, Canada, Japan, New Zealand, the United States, and most western
European countries. The International Equity Fund will focus on countries which
the Sub-Adviser believes to have strongly developing economies and markets
including, among others, the following countries: Argentina, Bolivia, Botswana,
Brazil, Chile, China, Colombia, Cyprus, Czech Republic, Ecuador, Egypt, Ghana,
Greece, Hong Kong, Hungary, India, Indonesia, Jamaica, Jordan, Kenya, Korea,
Malaysia, Mauritius, Mexico, Morocco, Nigeria, Oman, Pakistan, Peru,
Philippines, Poland, Russia, Singapore, Slovakia, South Africa, Sri Lanka,
Swaziland, Taiwan, Thailand, Tunisia, Turkey, Uruguay, Venezuela, and Zimbabwe.
International Equity Fund may invest in countries other than those defined
above, if , in the opinion of the Sub-Adviser, they are considered to have
emerging markets. While the Sub-Adviser considers the above-mentioned countries
eligible for investment, International Equity Fund will not be invested in all
such markets at all times.
Furthermore, International Equity Fund may not pursue investment in such
countries if, in the opinion of the Sub-Adviser, any of the following conditions
prevail: lack of adequate custody of the Fund's assets, overly burdensome
restrictions and repatriation, lack of an organized and liquid market, or
unacceptable political or other risks.
Emerging markets companies are defined as (i) those for which the principal
securities trading market is an emerging market country, as described above;
(ii) those which are organized under the laws of, or with a principal office in,
an emerging market country; or (iii) those, wherever organized or traded, who
derive (directly or indirectly through subsidiaries) at least 50% of their total
assets, capitalization, gross revenue or profit from its most current year from
goods produced, services performed, or sales made in such emerging market
countries.
RISKS ASSOCIATED WITH INVESTING IN FOREIGN COMPANIES. Investing in non-U.S.
securities carries substantial risks in addition to those associated with
domestic investments. In an attempt to reduce some of these risks, International
Equity Fund diversifies its investments among foreign countries. At least three
different countries will always be represented.
The economies of foreign countries may differ from the U.S. economy in such
respects as growth of gross domestic product, rate of inflation, currency
depreciation, capital reinvestment, resource self-sufficiency, and balance of
payments position. Further, the economies of emerging market countries generally
are heavily dependent on international trade and, accordingly, have been, and
may continue to be, adversely affected by trade barriers, exchange controls,
managed adjustments in relative currency values, and other protectionist
measures imposed or negotiated by the countries with which they trade. These
economies also have been, and may continue to be, adversely affected by economic
conditions in the countries with which they trade.
Prior governmental approval for foreign investments may be required under
certain circumstances in some countries, and the extent of foreign investment in
certain debt securities and domestic companies may be subject to limitation.
Foreign ownership limitations also may be imposed by the charters of individual
companies to prevent, among other concerns, violation of foreign investment
limitations.
Repatriation of investment income, capital, and the proceeds of sales by foreign
investors may require governmental registration and/or approval in some
countries. International Equity Fund could be adversely affected by delays in,
or a refusal to grant, any required governmental registration or approval for
such repatriation. Any investment subject to such repatriation controls will be
considered illiquid if it appears reasonably likely that this process will take
more than seven days.
With respect to any foreign country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
governmental regulation, social instability or diplomatic developments
(including war) which could affect adversely the economies of such countries or
the value of International Equity Fund's investments in those countries. In
addition, it may be difficult to obtain and enforce a judgment in a court
outside of the United States.
Brokerage commissions, custodial services, and other costs relating to
investment may be more expensive than in the United States. Foreign markets may
have different clearance and settlement procedures and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
The inability of International Equity Fund to make intended security purchases
due to settlement problems could cause International Equity Fund to miss
attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could result either in losses to
International Equity Fund due to subsequent declines in value of the portfolio
security or, if International Equity Fund has entered into a contract to sell
the security, could result in possible liability to the purchaser.
Other differences between investing in foreign and U.S. companies include:
- less publicly available information about foreign companies;
- the lack of uniform accounting, auditing, and financial reporting
standards and practices or regulatory requirements comparable to those
applicable to U.S. companies;
- less readily available market quotations on foreign companies;
- differences in government regulation and supervision of foreign stock
exchanges, brokers, listed companies, and banks;
- differences in legal systems which may affect the ability to enforce
contractual obligations or obtain court judgments;
- the limited size of many foreign securities markets and limited trading
volume in issuers compared to the volume of trading in U.S. securities,
which could cause prices to be erratic for reasons apart from factors
that affect the quality of securities;
- the likelihood that foreign securities may be less liquid or more
volatile;
- higher foreign brokerage commissions;
- unreliable mail service between countries;
- political or financial changes which adversely affect investments in some
countries;
- increased risk of delayed settlements of portfolio transactions or loss
of certificates for portfolio securities;
- requirements of certain markets that payment for securities be made
before delivery;
- religious and ethnic instability; and
- certain national policies which may restrict the Fund's investment
opportunities, including those restricting investment in issuers or
industries deemed sensitive to national interests.
ADDITIONAL RISKS ASSOCIATED WITH INVESTING IN EMERGING MARKETS. Investing in
securities of issuers in emerging market countries involves exposure to
significantly higher risk than investing in countries with developed markets.
Emerging market countries may have economic structures that are generally less
diverse and mature and political systems that can be expected to be less stable
than those of developed countries.
Securities prices in emerging market countries can be significantly more
volatile than in developed countries, reflecting the greater uncertainties of
investing in lesser developed markets and economies. In particular, emerging
market countries may have relatively unstable governments, and may present a
greater risk of nationalization of businesses, expropriation, confiscatory
taxation or, in certain instances, reversion to closed market, centrally planned
economies. Such countries may also have greater restrictions on foreign
ownership or prohibitions on the repatriation of assets, and may have less
protection of property rights, than developed countries.
The economies of emerging market countries may be predominantly based on only a
few industries or dependent on revenues from particular commodities or on
international aid or development assistance, may be highly vulnerable to changes
in local or global trade conditions, and may suffer from extreme and volatile
debt burdens or inflation rates. In addition, securities markets in emerging
market countries may trade a small number of securities and may be unable to
respond effectively to increases in trading volume, potentially resulting in a
lack of liquidity and in volatility in the price of securities traded on those
markets. Also, securities markets in emerging market countries typically offer
less regulatory protection for investors.
U.S. GOVERNMENT POLICIES. In the past, U.S. government policies have
discouraged or restricted certain investments abroad by investors such as
International Equity Fund. Investors are advised that when such policies are
instituted, International Equity Fund will abide by them.
CURRENCY RISKS. Because the majority of the securities purchased by
International Equity Fund are denominated in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will affect International
Equity Fund's net asset value; the value of interest earned; gains and losses
realized on the sales of securities; and net investment income and capital gain,
if any, to be distributed to shareholders by International Equity Fund. If the
value of a foreign currency rises against the U.S. dollar, the value of
International Equity Fund's assets denominated in that currency will increase;
correspondingly, if the value of a foreign currency declines against the U.S.
dollar, the value of International Equity Fund's assets denominated in that
currency will decrease.
The exchange rates between the U.S. dollar and foreign currencies are a function
of such factors as supply and demand in the currency exchange markets,
international balances of payments, governmental interpretation, speculation and
other economic and political conditions. Although International Equity Fund
values its assets daily in U.S. dollars, International Equity Fund will not
convert its holdings of foreign currencies to U.S. dollars daily. When
International Equity Fund converts its holdings to another currency, it may
incur conversion costs. Foreign exchange dealers may realize a profit on the
difference between the price at which they buy and sell currencies.
NON-DIVERSIFICATION. International Equity Fund is a non-diversified investment
portfolio. As such, there is no limit on the percentage of assets which can be
invested in any single issuer. An investment in International Equity Fund,
therefore, will entail greater risk than would exist in a diversified portfolio
of securities because the higher percentage of investments among fewer issuers
may result in greater fluctuation in the total market value of International
Equity Fund's portfolio. Any economic, political, or regulatory developments
affecting the value of the securities in International Equity Fund's portfolio
will have a greater impact on the total value of the portfolio than would be the
case if the portfolio was diversified among more issuers.
International Equity Fund intends to comply with Subchapter M of the Internal
Revenue Code, as amended. This undertaking requires that at the end of each
quarter of the taxable year, with regard to at least 50% of International Equity
Fund's total assets, no more than 5% of its total assets are invested in the
securities of a single issuer; and beyond that, that no more than 25% of its
total assets are invested in the securities of a single issuer.
CERTAIN PORTFOLIO STRATEGIES. International Equity Fund may also invest or
engage in put and call options, futures contracts and options on futures,
repurchase agreements, lending of portfolio securities, when-issued and
delayed delivery transactions and securities of other investment companies. See
"Portfolio Investments and Strategies."
LIMITED TERM FUND
The investment objective of Limited Term Fund is current income, while
maintaining a weighted-average duration which will at all times be limited to
between one and three years. Limited Term Fund pursues its investment objective
by investing primarily in securities which are guaranteed as to payment of
principal and interest by the U.S. government or U.S. government agencies or
instrumentalities. Limited Term Fund may also invest in corporate bonds,
asset-backed securities and bank instruments. Under normal circumstances,
Limited Term Fund will invest at least 65% of the value of its total assets in
U.S. government securities.
The net asset value of Limited Term Fund is expected to fluctuate with changes
in interest rates and bond market conditions, although this fluctuation should
be more moderate than that of a fund with a longer average portfolio maturity.
The Adviser, however, will attempt to minimize principal fluctuation through,
among other things, diversification, careful credit analysis and security
selection, and adjustments of Limited Term Fund's average portfolio maturity. In
periods of rising interest rates and falling bond prices, the Adviser may
shorten Limited Term Fund's average duration to minimize the effect of declining
bond values on its net asset value.
ACCEPTABLE INVESTMENTS. The U.S. government securities in which Limited Term
Fund will invest include:
- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds;
- notes, bonds, and discount notes issued or guaranteed by U.S. government
agencies and instrumentalities supported by the full faith and credit of
the United States;
- notes, bonds, and discount notes of U.S. government agencies or
instrumentalities which receive or have access to federal funding; and
- notes, bonds, and discount notes of other U.S. government
instrumentalities supported only by the credit of the instrumentalities.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government are backed by the full faith and credit of the U.S. Treasury. No
assurances can be given that the U.S. government will provide financial support
to other agencies or instrumentalities, since it is not obligated to do so.
These instrumentalities are supported by:
- the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
- the discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
- the credit of the agency or instrumentality.
CORPORATE BONDS. Limited Term Fund may invest in issues of corporate debt
obligations which are rated in one of the three highest categories by a
nationally recognized statistical rating organization (rated Aaa, Aa, or A by
Moody's; AAA, AA, or A by S&P or by Fitch, or which are of comparable quality in
the judgment of the Adviser).
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans on real property. There are currently three basic
types of mortgage-backed securities: (i) those issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities, such as the Government
National Mortgage Association ("Ginnie Mae"), the Federal National Mortgage
Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation
("Freddie Mac"); (ii) those issued by private issuers that represent an interest
in or are collateralized by mortgage-backed securities issued or guaranteed by
the U.S. government or one of its agencies or instrumentalities; and (iii) those
issued by private issuers that represent an interest in or are collateralized by
whole loans or mortgage-backed securities without a government guarantee but
usually having some form of private credit enhancement.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by Ginnie Mae,
Fannie Mae or Freddie Mac Certificates, but may be collateralized by whole
loans or private pass-through securities.
Limited Term Fund and Government Income Fund will only invest in CMOs which
are rated AAA by a nationally recognized rating agency, and which may be:
(a) collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (b) collateralized by pools of
mortgages in which payment of principal and interest is guaranteed by the
issuer and such guarantee is collateralized by U.S. government securities;
or (c) securities in which the proceeds of the issuance are invested in
mortgage securities and payment of the principal and interest are supported
by the credit of an agency or instrumentality of the U.S. government.
ASSET-BACKED SECURITIES. Asset-backed securities have structural characteristics
similar to mortgage-backed securities but have underlying assets that are not
mortgage loans or interests in mortgage loans. Limited Term Fund may invest in
asset-backed securities rated A or higher by a nationally recognized rating
agency. The collateral for such securities will consist of motor vehicle
installment purchase obligations and credit card receivables. These securities
may be in the form of pass-through instruments or asset-backed bonds. The
securities are issued by non-governmental entities and carry no direct or
indirect government guarantee.
BANK INSTRUMENTS. Limited Term Fund only invests in bank instruments issued by
an institution having capital, surplus and undivided profits over $100 million,
or insured by BIF or SAIF.
AVERAGE PORTFOLIO DURATION. Although Limited Term Fund will not maintain a
stable net asset value, the Adviser will seek to limit, to the extent consistent
with its investment objective of current income, the magnitude of fluctuations
in Limited Term Fund's net asset value by limiting the dollar-weighted average
duration of the portfolio. Although the dollar-weighted average duration will
not exceed three years, the weighted average maturity of Limited Term Fund's
portfolio could be longer than three years. Generally, the duration of a
security is shorter than the maturity of a security. A typical security makes
coupon payments prior to its maturity date and duration takes into account the
timing of a security's cash flow. Duration is a commonly used measure of the
potential volatility of the price of a debt security, or the aggregate market
value of a portfolio of debt securities, prior to maturity.
Securities with shorter durations generally have less volatile prices than
securities of comparable quality with longer durations. Limited Term Fund should
be expected to maintain a higher average duration during periods of falling
interest rates, and a lower average duration during periods of rising interest
rates.
CERTAIN OTHER PORTFOLIO STRATEGIES. Limited Term Fund may also invest or engage
in put and call options, temporary investments, repurchase agreements, lending
of portfolio securities, when-issued and delayed delivery transactions and
securities of other investment companies. See "Portfolio Investments and
Strategies."
GOVERNMENT INCOME FUND
The investment objective of Government Income Fund is current income. Government
Income Fund pursues its investment objective by investing primarily in
securities which are guaranteed as to payment of principal and interest by the
U.S. government or U.S. government agencies or instrumentalities. Government
Income Fund may also invest in corporate bonds, asset-backed securities and bank
instruments. Under normal circumstances, Government Income Fund will invest at
least 65% of the value of its total assets in U.S. government securities.
ACCEPTABLE INVESTMENTS. Government Income Fund may invest in U.S. government
securities, corporate bonds, mortgage-backed securities (including
collateralized mortgage obligations), asset-backed securities and bank
instruments of the kind described under "Limited Term Fund-Acceptable
Investments."
CERTAIN OTHER PORTFOLIO STRATEGIES. Government Income Fund may also invest or
engage in put and call options, temporary investments, repurchase agreements,
lending of portfolio securities, when-issued and delayed delivery transactions
and securities of other investment companies. See "Portfolio Investments and
Strategies."
MUNICIPAL INCOME FUND
The investment objective of Municipal Income Fund is to provide dividend income
that is exempt from federal regular income tax. Interest income of Municipal
Income Fund that is exempt from federal regular income tax retains its tax-free
status when distributed to Municipal Income Fund's shareholders. Municipal
Income Fund pursues its investment objective by investing in municipal
securities. As a matter of investment policy, which may not be changed without
shareholder approval, under normal circumstances, Municipal Income Fund will be
invested so that at least 80% of the income from investments will be exempt from
federal regular income tax or that at least 80% of its net assets are invested
in obligations, the interest from which is exempt from federal regular income
tax.
ACCEPTABLE INVESTMENTS. The municipal securities in which Municipal Income Fund
invests are:
- debt obligations and municipal leases issued by or on behalf of any
state, territory, or possession of the United States, including the
District of Columbia, or any political subdivision of any of them; and
- participation interests, as described below, in any of the above
obligations, the interest from which is, in the opinion of bond counsel
for the issuers or in the opinion of officers of Municipal Income Fund
and/or the Adviser, exempt from federal regular income tax.
CHARACTERISTICS. The municipal securities in which Municipal Income Fund
invests are:
- rated "investment grade," i.e., Baa or better by Moody's, or BBB or
better by S&P or Fitch;
- guaranteed at the time of purchase by the U.S. government, its agencies
or instrumentalities, as to the payment of principal and interest;
- fully collateralized by an escrow of U.S. government or other securities
acceptable to the Adviser;
- rated at the time of purchase within Moody's highest short-term municipal
obligation rating (MIG1/VMIG1) or Moody's highest municipal commercial
paper rating (P-1) or S&P's highest short-term municipal commercial paper
rating (SP-1) or Fitch's highest tax-exempt municipal obligation rating
(FIN-1);
- unrated if, at the time of purchase, longer term municipal securities of
the issuer are rated Baa or better by Moody's or BBB or better by S&P or
Fitch (however, investments in unrated securities will not exceed 20% of
Municipal Income Fund's total assets); or
- determined by the Adviser to be equivalent to municipal securities which
are rated Baa or better by Moody's or BBB or better by S&P or Fitch.
It should be noted that securities rated BBB by S&P or Baa by Moody's are
considered to have speculative characteristics. Changes in economic conditions
or other circumstances are more likely to lead to weakened capacity to make
principal and interest payments than higher rated bonds. A description of the
rating categories is contained in the Appendix to the Statement of Additional
Information. The prices of fixed income securities fluctuate inversely to the
direction of interest rates.
PARTICIPATION INTERESTS. Municipal Income Fund may purchase participation
interests from financial institutions such as commercial banks, savings
associations, and insurance companies. These participation interests give
Municipal Income Fund an undivided interest in municipal securities. The
financial institutions from which Municipal Income Fund purchases participation
interests frequently provide or secure irrevocable letters of credit or
guarantees to assure that the participation interests are of high quality. The
Trustees will determine that participation interests meet the prescribed quality
standards for Municipal Income Fund.
VARIABLE RATE MUNICIPAL SECURITIES. Municipal Income Fund may purchase municipal
securities that have variable interest rates. Variable interest rates are
ordinarily stated as a percentage of a published interest rate, interest rate
index, or some similar standard, such as the 91-day U.S. Treasury bill rate.
Many variable rate municipal securities are subject to payment of principal on
demand by Municipal Income Fund, usually in not more than seven days. All
variable rate municipal securities will meet the quality standards for Municipal
Income Fund.
MUNICIPAL LEASES. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities and may be considered to be illiquid. They may take the form of a
lease, an installment purchase contract, or a conditional sales contract.
TEMPORARY INVESTMENTS. From time to time, on a temporary basis, or when the
Adviser determines that market conditions call for a temporary defensive
posture, Municipal Income Fund may invest in short-term tax-exempt or taxable
temporary investments. These temporary investments include: fixed or variable
rate notes issued by or on behalf of municipal or corporate issuers; obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities;
other debt securities; securities of other investment companies; commercial
paper; certificates of deposit, demand and time deposits, bankers' acceptances,
deposit notes, and other instruments of domestic and foreign banks and other
deposit institutions ("Bank Instruments"); and repurchase agreements
(arrangements in which the institution selling Municipal Income Fund a bond or
temporary investment agrees at the time of sale to repurchase it at a mutually
agreed upon time and price). There are no rating requirements applicable to
temporary investments.
Although Municipal Income Fund is permitted to make taxable, temporary
investments, there is no current intention of generating income subject to
federal regular income tax.
OTHER INVESTMENT TECHNIQUES. Municipal Income Fund may purchase a right to sell
a security held by it back to the issuer or to another party at an agreed upon
price at any time during a stated period or on a certain date. These rights may
be referred to as "liquidity puts" or "standby commitments."
MUNICIPAL SECURITIES. Municipal securities are generally issued to finance
public works such as airports, bridges, highways, housing, hospitals, mass
transportation projects, schools, streets, and water and sewer works. They are
also issued to repay outstanding obligations, to raise funds for general
operating expenses, and to make loans to other public institutions and
facilities.
Municipal securities include industrial development bonds issued by or on behalf
of public authorities to provide financing aid to acquire sites or construct and
equip facilities for privately or publicly owned corporations. The availability
of this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue bonds, however, are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
INVESTMENT RISKS. Yields on municipal securities depend on a variety of factors,
including: the general conditions of the money market and the taxable and
municipal bond markets; the size of the particular offering; the maturity of the
obligations; and the rating of the issue. The ability of Municipal Income Fund
to achieve its investment objective also depends on the continuing ability of
the issuers of municipal securities and participation interests, or the
guarantors of either, to meet their obligations for the payment of interest and
principal when due.
CERTAIN OTHER PORTFOLIO STRATEGIES. Municipal Income Fund may also invest or
engage in when-issued and delayed delivery transactions, lending of portfolio
securities and securities of other investment companies. See "Portfolio
Investments and Strategies."
PORTFOLIO INVESTMENTS AND STRATEGIES
- --------------------------------------------------------------------------------
PUT AND CALL OPTIONS
Equity Fund, Opportunity Fund, International Equity Fund, Limited Term Fund and
Government Income Fund may purchase and sell (write) put and call options on
their portfolio of securities either as a hedge to attempt to protect securities
which the Funds hold, or will be purchasing, against decreases or increases in
value, or to generate income for the Fund. The Funds may write call options on
securities either held in their portfolio or which they have the right to obtain
without payment of further consideration or for which they have segregated cash
in the amount of any additional consideration. In the case of put options
written by the Funds, the Trust's custodian will segregate cash, U.S. Treasury
obligations, or highly liquid debt securities with a value equal to or greater
than the exercise price of the underlying securities.
The Funds are authorized to invest in put and call options that are traded on
securities exchanges. The Funds may also purchase and write over-the-counter
options ("OTC options") on portfolio securities in negotiated transactions with
the buyers or writers of the options when options on some of the portfolio
securities held by the Funds are not traded on an exchange. The Funds will
purchase and write OTC options only with investment dealers and other financial
institutions (such as commercial banks or savings associations) deemed
creditworthy by the Adviser or Sub-Adviser.
OTC options are two-party contracts with price and terms negotiated between
buyer and seller. In contrast, exchange-traded options are third-party contracts
with standardized strike prices and expiration dates and are purchased from a
clearing corporation. Exchange-traded options have a continuous liquid market
while OTC options may not.
Opportunity Fund will not buy call options or write put options without further
notification to shareholders. Although Limited Term Fund and Government Income
Fund reserve the right to write covered call options on their entire portfolios,
they will not write options on more than 25% of their respective total assets
unless a higher limit is authorized by the Trustees.
FUTURES CONTRACTS AND OPTIONS ON FUTURES
Equity Fund, Opportunity Fund and International Equity Fund may purchase and
sell financial futures contracts and stock index futures contracts to hedge all
or a portion of their respective portfolio securities against changes in
interest rates or securities prices. Financial futures contracts on securities
call for the delivery of particular securities at a certain time in the future.
The seller of the contract agrees to make delivery of the type of instrument
called for in the contract, and the buyer agrees to take delivery of the
instrument at the specified future time. A financial futures contract on a
securities index does not involve the actual delivery of securities, but merely
requires the payment of a cash settlement based on changes in the securities
index. Limited Term Fund and Government Income Fund may also attempt to hedge
their portfolios by entering into financial futures contracts, but will notify
shareholders before they begin engaging in these transactions.
Equity Fund, Opportunity Fund, International Equity Fund, Limited Term Fund and
Government Income Fund may also write call options and purchase put options on
financial futures contracts as a hedge to attempt to protect securities in their
respective portfolio against decreases in value resulting from anticipated
increases in market interest rates or broad declines in securities prices. When
a Fund writes a call option on a financial futures contract, it is undertaking
the obligation of selling the financial futures contract at a fixed price at any
time during a specified period if the option is exercised. Conversely, as a
purchaser of a put option on a financial futures contract, a Fund is entitled
(but not obligated) to sell a financial futures contract at the fixed price
during the life of the option.
Equity Fund, Opportunity Fund, International Equity Fund, Limited Term Fund and
Government Income Fund Fund may also write put options and purchase call options
on financial futures contracts as a hedge against rising purchase prices of
securities eligible for purchase by a Fund. A Fund will use these transactions
to attempt to protect its ability to purchase securities in the future at price
levels existing at the time it enters into the transactions. When a Fund writes
a put option on a futures contract, it is undertaking to buy a particular
futures contract at a fixed price at any time during a specified period if the
option is exercised. As a purchaser of a call option on a futures contract, a
Fund is entitled (but not obligated) to purchase a futures contract at a fixed
price at any time during the life of the option.
A Fund may not purchase or sell financial futures contracts or options on
financial futures contracts if, immediately thereafter, the sum of the amount of
initial margin deposits on a Fund's existing financial futures positions and
premiums paid for related options would exceed 5% of the fair market value of a
Fund's total assets, after taking into account the unrealized profits and losses
on those contracts it has entered into. When a Fund purchases financial futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the financial futures contracts (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
to collateralize the position and, thereby, insure that the use of such
financial futures contracts is unleveraged.
RISKS. When the Funds use futures and options on futures as hedging devices,
there is a risk that the prices of the securities subject to the futures
contracts may not correlate perfectly with the prices of the securities in the
Funds' portfolios. This may cause the futures contract and any related options
to react differently than the portfolio securities to market changes. In
addition, the Adviser could be incorrect in its expectations about the direction
or extent of market factors, such as interest rate and stock price movements. In
these events, the Funds may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures contracts or
options will exist at all times. Although the Adviser will consider liquidity
before entering into options transactions, there is no assurance that a liquid
secondary market will exist for any particular futures contract or option at any
particular time. The Funds' ability to establish and close out futures and
options positions depends on this secondary market.
REPURCHASE AGREEMENTS
With the exception of Municipal Income Fund, certain securities in which the
Funds invest may be purchased pursuant to repurchase agreements. Repurchase
agreements are arrangements in which banks, broker/dealers, and other recognized
financial institutions sell U.S. government securities to the Funds and agree at
the time of sale to repurchase them at a mutually agreed upon time and price. To
the extent that the seller does not repurchase the securities from the Funds,
the Funds could receive less than the repurchase price on any sale of such
securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Funds purchase securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Funds to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
The Funds may dispose of a commitment prior to settlement if the Adviser deems
it appropriate to do so. In addition, the Funds may enter into transactions to
sell their purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Funds may realize short-term profits or losses upon the sale of such
commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Funds may lend portfolio securities
on a short-term or long-term basis, or both, to broker/dealers, banks, or other
institutional borrowers of securities. The Funds will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the Adviser
or Sub-Adviser has determined are creditworthy under guidelines established by
the Trustees, and will receive collateral in the form of cash or U.S. government
securities equal to at least 100% of the value of the securities loaned at all
times.
TEMPORARY INVESTMENTS
For defensive purposes only, the Funds (with the exception of Municipal Income
Fund, which may invest in temporary investments described under "Municipal
Income Fund-Temporary Investments" and International Equity Fund, which may
invest in temporary investments described under "International Equity Fund-Money
Market Instruments" and "Fixed Income and Other Securities") may invest
temporarily in cash and cash items during times of unusual market conditions and
to maintain liquidity. Cash items may include short-term obligations such as:
- commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's,
or F-1 or F-2 by Fitch;
- obligations of the U.S. government or its agencies or instrumentalities;
and
- repurchase agreements.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Funds may invest their assets in securities of other investment companies as
an efficient means of carrying out their investment policies. It should be noted
that investment companies incur certain expenses, such as management fees, and,
therefore, any investment by the Funds in shares of other investment companies
may be subject to such duplicate expenses.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may invest in restricted securities. Restricted securities are any
securities in which a Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restrictions on resale under
federal securities law. However, the Funds will not invest more than 15% of
their respective net assets in illiquid securities, including certain restricted
securities not determined by the Trustees to be liquid; over-the-counter options
(for those Funds which are permitted to invest in options); and repurchase
agreements providing for settlement in more than seven days after notice.
FIXED INCOME SECURITIES
The Funds may invest in fixed income securities. The prices of fixed income
securities fluctuate inversely in relation to the direction of interest rates.
The prices of longer-term fixed income securities fluctuate more widely in
response to market interest rate changes. Bonds rated "BBB" by S&P or "Baa" by
Moody's have speculative characteristics. Changes in economic conditions or
other circumstances are more likely to lead to weakened capacity to make
principal and interest payments than higher rated bonds. Downgraded securities
will be evaluated on a case by case basis by the Adviser. The Adviser will
determine whether or not the security continues to be an acceptable investment.
If not, the security may be sold.
INVESTMENT LIMITATIONS
- --------------------------------------------------------------------------------
Equity Fund, Opportunity Fund, Limited Term Fund, Government Income Fund and
Municipal Income Fund will not:
- borrow money directly or through reverse repurchase agreements
(arrangements in which a Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Funds
may borrow money and engage in reverse repurchase agreements in amounts
up to one-third of the value of their respective total assets and pledge
up to 15% of the value of their respective total assets to secure such
borrowings.
International Equity Fund will not:
- borrow money or pledge securities except, under certain circumstances,
the Fund may borrow up to one-third of the value of its total assets and
pledge up to 15% of the value of those assets to secure such borrowings;
or
- permit margin deposits for financial futures contracts held by the Fund,
plus premiums paid by it for open options on financial futures contracts,
to exceed 5% of the fair market value of the Fund's total assets, after
taking into account the unrealized profits and losses on those contracts.
The above limitations cannot be changed without shareholder approval.
DG INVESTOR SERIES INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are
responsible for managing the Trust's business affairs and for exercising all of
the powers of the Trust except those reserved for the shareholders. The
Executive Committee of the Board of Trustees handles the Trustees'
responsibilities between meetings of the Trustees.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Funds are made by the Funds' investment adviser,
ParkSouth Corporation, subject to direction by the Trustees. The Adviser (in
consultation with Lazard Asset Management, the Sub-Adviser with respect to
International Equity Fund and Womack Asset Management, Inc., the Sub-Adviser
with respect to Opportunity Fund), continually conducts investment research and
supervision for the Funds and is responsible for the purchase and sale of
portfolio instruments.
ADVISORY FEES. The Funds' Adviser receives an annual investment advisory fee at
annual rates equal to percentages of the relevant Fund's average net assets as
follows: Equity Fund--0.75%; Opportunity Fund--0.95%; International Equity
Fund--1.00%; and Limited Term Fund, Government Income Fund and Municipal Income
Fund--0.60%. The Adviser may voluntarily choose to waive a portion of its fee or
reimburse the Funds for certain operating expenses. The Adviser can terminate
this voluntary waiver of its advisory fees at any time at its sole discretion.
ADVISER'S BACKGROUND. ParkSouth Corporation is a registered investment adviser
providing investment management services to individuals and institutional
clients. ParkSouth Corporation is a subsidiary of Deposit Guaranty National Bank
(the "Bank"), a national banking association founded in 1925 which, in turn, is
a subsidiary of Deposit Guaranty Corp. ("DGC"). Through its subsidiaries and
affiliates, DGC offers a full range of financial services to the public,
including commercial lending, depository services, cash management, brokerage
services, retail banking, mortgage banking, investment advisory services and
trust services.
On or about May 1, 1998, DGC merged with First American Corporation, another
bank holding company. Under the Investment Company Act of 1940 (the "Act"), this
merger resulted in the assignment and termination of the Funds' investment
advisory contract with ParkSouth and each of the sub-advisory agreements
described below. Pursuant to an exemptive order granted to the Funds by the SEC,
the Funds entered into a new investment advisory contract with ParkSouth and
sub-advisory agreements with each of the Sub-Advisers, without the approval of
shareholders. The new contracts are substantially identical to the old
investment advisory and sub-advisory contracts. The Funds have undertaken to
seek shareholder approval of the new contracts prior to September 30, 1998.
The Adviser manages, in addition to the Funds in the DG Investor Series, $320
million in common trust fund assets as of December 31, 1997. The Adviser (which
succeeded to the investment advisory business of the Bank in 1997), or the Bank,
have served as the adviser to the Trust since May 5, 1992.
As part of its regular banking operations, the Bank may make loans to public
companies. Thus, it may be possible, from time to time, for the Funds to hold or
acquire the securities of issuers which are also lending clients of the Bank.
The lending relationships will not be a factor in the selection of securities.
John Mark McKenzie has been with the Bank since 1984 and is a Senior Vice
President with the Adviser. Previously, Mr. McKenzie was associated with a
Jackson bank as a trust officer. He received a B.B.A. in Banking and Finance and
a J.D. from the University of Mississippi. He is a member of the Mississippi
Chapter of the Memphis Society of Financial Analysts, and is a member of the
Mississippi State and Hinds County Bar Associations. Mr. McKenzie has managed
Limited Term Fund and Government Income Fund since August 1, 1992, and has
managed the Municipal Income Fund since February, 1997.
Ronald E. Lindquist has been with the Bank since 1978 and is a Senior Vice
President with the Adviser. Mr. Lindquist's primary area of responsibility is
the management of the Equity Fund. He received his B.S. in Finance from Florida
State University and a M.S.M. in Finance from Florida International University.
Mr. Lindquist has managed the Equity Fund since its inception on August 1, 1992.
LAZARD. With respect to International Equity Fund, under the terms of a
sub-advisory agreement between the Adviser and Lazard, Lazard will make all
determinations with respect to the investment of assets of International Equity
Fund, and shall take such steps as may be necessary to implement the same,
including the placement of purchase and sale orders on behalf of International
Equity Fund.
LAZARD FEES. For its services under the sub-advisory agreement, Lazard receives
an annual fee from the Adviser equal to 0.50% of the average daily net assets of
International Equity Fund. The sub-advisory fee is accrued daily and paid
monthly.
LAZARD'S BACKGROUND. Lazard Asset Management is a division of Lazard & Co. LLC,
a New York limited liability company, which is registered as an investment
adviser with the SEC and is a member of the New York, American and Midwest Stock
Exchanges. The Sub-Adviser provides investment management services to client
discretionary accounts with assets totaling approximately $60 billion as of
December 31, 1997. Its clients are both individuals and institutions.
Herbert W. Gullquist is a Managing Director of the Sub-Adviser and has been with
the Sub-Adviser since 1982, during which time he has managed various client
discretionary accounts. Mr. Gullquist has co-managed International Equity Fund
since March 31, 1997 (the Fund's inception date).
John R. Reinsberg is a Managing Director of the Sub-Adviser and has been with
the Sub-Adviser since 1992, during which time he has managed various client
discretionary accounts. Prior thereto, Mr. Reinsberg was Executive Vice
President of General Electric Investment Company. Mr. Reinsberg has co-managed
International Equity Fund since March 31, 1997.
WOMACK. With respect to Opportunity Fund, under the terms of a Sub-Advisory
Agreement between the Adviser and Womack, Womack will determine whether to
purchase or sell securities for Opportunity Fund, and upon making any purchase
or sale decision for Opportunity Fund, will place orders for the execution of
such portfolio transactions.
WOMACK FEES. For its services under the Sub-Advisory Agreement, Womack receives
a monthly fee based on the average daily net assets of Opportunity Fund under
management by the Sub-Adviser during the preceding month, as described below.
The sub-advisory fee shall be the sum of: 0.32% of the average daily net assets
up to $50 million; 0.075% of the average daily net assets in excess of $50
million and up to $70 million; and 0.25% of the average daily net assets in
excess of $70 million. The sub-advisory fee will be accrued daily, and for any
period in which Womack provides portfolio management services for less than one
full month, the sub-advisory fee will be prorated by the number of days of the
month during which the services were rendered.
WOMACK'S BACKGROUND. Womack Asset Management, Inc., based in Jackson,
Mississippi, is a registered investment adviser formed in 1997 by William A.
Womack, who also became the portfolio manager for Opportunity Fund on July 21,
1997. Mr. Womack, until February 1997, had been Senior Vice President and Trust
Investment Officer of the Bank, which is the parent corporation of the Adviser
and which, prior to March 1, 1997, was the adviser to the Funds. From March 1984
to August 1994, Mr. Womack served as portfolio manager of Opportunity Fund's
predecessor, a common trust fund, formerly managed by the Bank. Mr. Womack was
Opportunity Fund's portfolio manager from August 1994 to February 1997, and DG
Municipal Income Fund's portfolio manager from December 1992 to February 1997.
In February 1997, Mr. Womack left the Bank in order to establish and operate the
Sub-Adviser.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the Funds.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors, Inc.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Funds
may pay to the distributor an amount computed at an annual rate of 0.35% (0.25%
in the case of International Equity Fund) of the average daily net asset value
of the Funds to finance any activity which is principally intended to result in
the sale of shares subject to the Plan. The distributor may select financial
institutions such as banks, fiduciaries, custodians for public funds, investment
advisers, and broker/dealers ("brokers") to provide distribution and/or
administrative services as agents for their clients or customers. The Funds,
with the exception of International Equity Fund, will not accrue or pay 12b-1
fees until a separate class of shares has been created for certain institutional
investors.
The distributor may from time to time and for such periods as it deems
appropriate, voluntarily reduce its compensation under the Plan to the extent
the expenses attributable to the shares exceed such lower expense limitations as
the distributor may, by notice to the Trust, voluntarily declare to be
effective.
The distributor will pay financial institutions a fee based upon shares subject
to the Plan and owned by their clients or customers. The schedules of such fees
and the basis upon which such fees will be paid will be determined from time to
time by the distributor.
The Funds' Plan is a compensation type plan. As such, the Funds make no payments
to the distributor except as described above. Therefore, the Funds do not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Funds, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Funds
under the Plan.
In addition, the Funds have adopted a Shareholder Services Plan (the "Services
Plan") with respect to its shares. Under the Services Plan, financial
institutions will enter into shareholder service agreements with the Funds to
provide administrative support services to their customers who from time to time
may be owners of record or beneficial owners of the shares. In return for
providing these support services, a financial institution may receive payments
from each Fund at a rate not exceeding 0.15% of the average daily net assets of
the shares beneficially owned by the financial institution's customers for whom
it is holder of record or with whom it has a servicing relationship. These
administrative services may include, but are not limited to, the provision of
personal services and maintenance of shareholder accounts.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings association) from being an underwriter or distributor of most
securities. In the event the Glass-Steagall Act is deemed to prohibit depository
institutions from acting in the administrative capacities described above or
should Congress relax current restrictions on depository institutions, the
Trustees will consider appropriate changes in the services.
ADMINISTRATIVE ARRANGEMENTS. The distributor may pay financial institutions a
fee with respect to the average net asset value of shares held by their
customers for providing administrative services. This fee, if paid, will be
reimbursed by the Adviser and not the Funds.
ADMINISTRATION OF THE FUNDS
- --------------------------------------------------------------------------------
ADMINISTRATIVE SERVICES. Federated Administrative Services, which is a
subsidiary of Federated Investors, provides the Funds with the administrative
personnel and services necessary to operate the Funds. Such services include
shareholder servicing and certain legal and accounting services. Federated
Administrative Services provides these at an annual rate as specified below:
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
- ------------------ -----------------------------------
0.15% on the first $250 million
0.125% on the next $250 million
0.10% on the next $250 million
0.075% on assets in excess of $750 million
The administrative fee received during any fiscal year shall aggregate at least
$100,000 per Fund. Federated Administrative Services may choose voluntarily to
waive a portion of its fee at any time.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser and, if applicable, Sub-Adviser look for prompt
execution of the order at a favorable price. In working with dealers, the
Adviser and Sub-Adviser will generally utilize those who are recognized dealers
in specific portfolio instruments, except when a better price and execution of
the order can be obtained elsewhere. In selecting among firms believed to meet
these criteria, the Adviser and Sub-Adviser may give consideration to those
firms which have sold or are selling shares of the Funds and other funds
distributed by Federated Securities Corp. The Adviser and Sub-Adviser make
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees.
EXPENSES OF THE FUNDS
Each Fund pays all of its own expenses and its allocable share of Trust
expenses. These expenses include, but are not limited to the cost of: organizing
the Trust and continuing its existence; registering the Trust and its shares;
Trustees' fees; meetings of Trustees and shareholders and proxy solicitations
therefor; auditing, accounting, and legal services; investment advisory and
administrative services; custodians, transfer agents, dividend disbursing
agents, shareholder servicing agents, and registrars; issuing, purchasing,
repurchasing, and redeeming shares; reports to government agencies; preparing,
printing and mailing documents to shareholders such as financial statements,
prospectuses and proxies; taxes and commissions; insurance premiums; association
membership dues; and such non-recurring and extraordinary items as may arise.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Funds' net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and other assets, less
liabilities, by the number of shares outstanding.
The net asset value for the Funds is determined as of the close of trading
(normally 4:00 p.m., Eastern time), on the New York Stock Exchange, Monday
through Friday, except on: (i) days on which there are not sufficient changes in
the value of the Funds' portfolio securities that their net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; or (iii) the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day and Christmas Day.
INVESTING IN THE FUNDS
- --------------------------------------------------------------------------------
SHARE PURCHASES
Fund shares are sold on days on which the New York Stock Exchange and the
Federal Reserve Wire System are open for business. Fund shares may be ordered by
telephone through procedures established with the Bank in connection with
qualified account relationships. Such procedures may include arrangements under
which certain accounts are swept periodically and amounts exceeding an agreed
upon minimum are invested automatically in Fund shares. The Funds reserve the
right to reject any purchase request.
THROUGH THE BANKS. To place an order to purchase shares of the Funds, open an
account by calling Deposit Guaranty National Bank at (800) 748-8500. Information
needed to establish the account will be taken over the telephone.
Payment may be made by either check, federal funds or by debiting a customer's
account at the Bank.
Purchase orders must be received by 4:00 p.m. (Eastern time). Payment is
required before 4:00 p.m. (Eastern time) on the next business day in order to
earn dividends for that day.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Funds is $1,000. Subsequent investments
may be in amounts of $100 or more. The Funds may waive the initial minimum
investment for employees of Deposit Guaranty Corp. and its affiliates from time
to time.
WHAT SHARES COST
Shares of Equity Fund and Opportunity Fund are sold at their net asset value
next determined after an order is received, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING NET AMOUNT INVESTED
--------------------- --------------- -------------------
<S> <C> <C>
Less than $100,000........................ 3.50% 3.63%
$100,000 but less than $250,000........... 3.00% 3.09%
$250,000 but less than $500,000........... 2.50% 2.56%
$500,000 but less than $750,000........... 2.00% 2.04%
$750,000 but less than $1 million......... 1.50% 1.52%
$1 million but less than $2 million....... 0.50% 0.50%
$2 million or more........................ 0.25% 0.25%
</TABLE>
Shares of Limited Term Fund, Government Income Fund and Municipal Income Fund
are sold at their net asset value next determined after an order is received,
plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING NET AMOUNT INVESTED
--------------------- --------------- -------------------
<S> <C> <C>
Less than $100,000........................ 2.00% 2.04%
$100,000 but less than $250,000........... 1.75% 1.78%
$250,000 but less than $500,000........... 1.50% 1.52%
$500,000 but less than $750,000........... 1.25% 1.27%
$750,000 but less than $1 million......... 1.00% 1.01%
$1 million but less than $2 million....... 0.50% 0.50%
$2 million or more........................ 0.25% 0.25%
</TABLE>
Shares of International Equity Fund are sold at their net asset value, without a
sales charge, next determined after an order is received.
PURCHASES AT NET ASSET VALUE. Shares of Equity Fund, Opportunity Fund, Limited
Term Fund, Government Income Fund and Municipal Income Fund may be purchased at
net asset value, without a sales charge by: the Trust Division of the Bank for
funds which are held in a fiduciary, agency, custodial or similar capacity;
non-trust customers of financial advisers; Trustees and employees of the Funds,
the Bank or Federated Securities Corp. or their affiliates and their spouses and
children under 21; current and retired directors of the Bank; or any bank or
investment dealer who has a sales agreement with Federated Securities Corp. with
regard to the Funds.
In addition, no sales charge is imposed for Fund shares purchased through
financial intermediaries that do not receive a reallowance of a sales charge.
However, investors who purchase Fund shares through a trust department,
investment adviser, or other financial intermediary may be charged a service or
other fee by the financial intermediary. Furthermore, no sales charge is imposed
on Fund shares purchased through "wrap accounts" or similar programs under which
clients pay a fee for services.
SALES CHARGE REALLOWANCE. For sales of shares of Equity Fund, Opportunity Fund,
Limited Term Fund, Government Income Fund and Municipal Income Fund, the Bank or
any authorized dealer will normally receive up to 100% of the applicable sales
charge. Any portion of the sales charge which is not paid to the Bank or
authorized dealers will be retained by the distributor. The distributor will,
periodically, uniformly offer to pay additional amounts in the form of cash or
promotional incentives consisting of trips to sales seminars at luxury resorts,
tickets or other such items, to all dealers selling shares of the Funds. Such
payments, all or a portion of which may be paid from the sales charge it
normally retains or any other source available to it, will be predicated upon
the amount of shares of the Fund that are sold by the dealer.
The sales charge for shares sold other than through the Bank or authorized
dealers will be retained by the distributor. The distributor may pay fees to the
Banks out of the sales charge in exchange for sales and/or administrative
services performed on behalf of the Banks' customers in connection with the
initiation of customer accounts and purchases of Fund shares.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Equity Fund, Opportunity
Fund, Limited Term Fund, Government Income Fund and Municipal Income Fund shares
through:
- quantity discounts and accumulated purchases;
- signing a 13-month letter of intent;
- using the reinvestment privilege;
- purchases with proceeds from redemptions of unaffiliated investment
companies; or
- concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the previous table,
larger purchases reduce the sales charge paid. Each Fund will combine purchases
made on the same day by the investor, his spouse, and his children under age 21
when it calculates the sales charge. In addition, the sales charge, if
applicable, is reduced for purchases made at one time by a trustee or fiduciary
for a single trust estate or a single fiduciary account.
If an additional purchase of Fund shares is made, each Fund will consider the
previous purchase still invested in that Fund. For example, if a shareholder
already owns shares having a current value at the public offering price of
$90,000 and he purchases $10,000 more at the current public offering price, the
sales charge on the additional purchase according to the schedule now in effect
would be 3.00%, not 3.50% with respect to Equity Fund and Opportunity Fund and
1.75% not 2.00% with respect to Limited Term Fund, Government Income Fund, and
Municipal Income Fund.
To receive the sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by the Bank at the time the purchase
is made that Fund shares are already owned or that purchases are being combined.
Each Fund will reduce the sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
shares in the Funds in the Trust over the next 13 months, the sales charge may
be reduced by signing a letter of intent to that effect. This letter includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to hold
3.50% with respect to Equity Fund and Opportunity Fund and 2.00% with respect to
Limited Term Fund, Government Income Fund, and Municipal Income Fund, of the
total amount intended to be purchased in escrow (in shares) until such purchase
is completed.
The 3.50% held in escrow with respect to Equity Fund and Opportunity Fund and
2.00% held in escrow with respect to Limited Term Fund, Government Income Fund,
and Municipal Income Fund will be applied to the shareholder's account at the
end of the 13-month period unless the amount specified in the letter of intent
is not purchased. In this event, an appropriate number of escrowed shares may be
redeemed in order to realize the difference in the sales charge.
This letter of intent will not obligate the shareholder to purchase shares, but
if he does, each purchase during the period will be at the sales charge
applicable to the total amount intended to be purchased. The current balance in
the shareholder's account will provide a purchase credit towards fulfillment of
the letter of intent.
REINVESTMENT PRIVILEGE. If shares in a Fund have been redeemed, the shareholder
has a one-time right, within 30 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales charge. Federated Securities
Corp. must be notified by the shareholder in writing or by the Bank of the
reinvestment in order to eliminate a sales charge. If the shareholder redeems
his shares in a Fund, there may be tax consequences.
PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT COMPANIES.
Investors may purchase shares at net asset value, without a sales charge, with
the proceeds from the redemption of shares of an investment company which was
sold with a sales charge or commission and was not distributed by Federated
Securities Corp. The purchase must be made within 60 days of the redemption, and
Federated Securities Corp. must be notified by the investor in writing, or by
his financial institution, at the time the purchase is made.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge reduction, a
shareholder has the privilege of combining concurrent purchases of two or more
Funds in the Trust, the purchase price of which includes a sales charge. For
example, if a shareholder concurrently invested $30,000 in one of the other
Funds in the Trust with a sales charge and $70,000 in another Fund, the sales
charge would be reduced.
To receive this sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by the Bank at the time the concurrent
purchases are made. The Fund will reduce the sales charge after it confirms the
purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once an account has been opened, shareholders may add to their investment on a
regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Fund shares. A shareholder may apply for participation in this
program through the Bank.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Funds, Federated Shareholder Services Company
maintains a share account for each shareholder. Share certificates are not
issued.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. With respect to Equity Fund and Opportunity Fund, quarterly
confirmations are sent to report dividends paid during the quarter.
With respect to Limited Term Fund, Government Income Fund and Municipal Income
Fund, monthly confirmations are sent to report dividends paid during the month.
With respect to International Equity Fund, annual confirmations are sent to
report dividends paid during the year.
DIVIDENDS AND DISTRIBUTIONS
With respect to Equity Fund and Opportunity Fund, dividends are declared
quarterly and paid quarterly. With respect to Limited Term Fund, Government
Income Fund and Municipal Income Fund, dividends are declared and paid monthly.
With respect to International Equity Fund dividends are declared and paid
annually. All shareholders on the record date are entitled to the dividend. If
shares are redeemed or exchanged prior to the record date, or purchased after
the record date, those shares are not entitled to that year's dividend.
Distribution of any realized net long-term capital gains will be made at least
once every twelve months. Dividends are automatically reinvested in additional
shares of the corresponding Fund on payment dates at the ex-dividend date's net
asset value without a sales charge, unless cash payments are requested by
writing to the applicable Fund or the Bank, as appropriate.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
All shareholders of the Funds are shareholders of DG Investor Series, which, in
addition to the Funds, is composed of the following portfolios: DG Mid Cap Fund,
DG Prime Money Market Fund and DG U.S. Government Money Market Fund.
Shareholders in any of the Funds have easy access to all of the other Funds.
EXCHANGING SHARES
Shareholders of any Fund in DG Investor Series may exchange shares for the
shares of any other Fund in DG Investor Series. Prior to any exchange, the
shareholder must receive a copy of the current prospectus of the fund into which
an exchange is to be effected. Shares may be exchanged at net asset value, plus
the difference between the sales charge (if any) already paid and any sales
charge of the Fund into which shares are to be exchanged, if higher.
When an exchange is made from a Fund with a sales charge to a Fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a Fund with a sales charge would be at net asset
value.
Upon receipt of proper instructions and all necessary supporting documents,
shares submitted for exchange will be redeemed at the next-determined net asset
value. Written exchange instructions may require a signature guarantee. Exercise
of this privilege is treated as a sale for federal income tax purposes and,
depending on the circumstances, a short or long-term capital gain or loss may be
realized. The exchange privilege may be terminated at any time. Shareholders
will be notified of the termination of the exchange privilege. A shareholder may
obtain further information on the exchange privilege by calling the Bank.
Telephone exchange instructions may be recorded. If reasonable procedures are
not followed by the Funds, they may be liable for losses due to unauthorized or
fraudulent telephone instructions.
REDEEMING SHARES
- --------------------------------------------------------------------------------
Shares are redeemed at their net asset value next determined after the Bank
receives the redemption request. Redemptions will be made on days on which the
Funds compute their net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays when
wire transfers are restricted. Requests for redemption can be made by telephone
or by mail.
THROUGH THE BANK
BY TELEPHONE. A shareholder who is a customer of the Bank may redeem shares of
a Fund by calling Deposit Guaranty National Bank at (800) 748-8500.
For orders received before 4:00 p.m. (Eastern time), proceeds will normally be
wired the next day to the shareholder's account at the Bank or a check will be
sent to the address of record.
Proceeds from redemption requests received on holidays when wire transfers are
restricted will be wired the following business day. In no event will proceeds
be sent more than seven days after a proper request for redemption has been
received. An authorization form permitting the Funds to accept telephone
requests must first be completed. Authorization forms and information on this
service are available from the Bank. Telephone redemption instructions may be
recorded. If reasonable procedures are not followed by the Funds, they may be
liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption should be utilized, such as a written request to Federated
Shareholder Services Company or the Bank.
If at any time the Funds determine it necessary to terminate or modify this
method of redemption, shareholders would be promptly notified.
BY MAIL. Any shareholder may redeem Fund shares by sending a written request to
the Bank. The written request should include the shareholder's name, the Fund
name, the account number, and the share or dollar amount requested, and should
be signed exactly as the shares are registered. If share certificates have been
issued, they must be properly endorsed and should be sent by registered or
certified mail with the written request. Shareholders should call the Bank for
assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of any amount to be sent to an
address other than on record with the Funds, or a redemption payable other than
to the shareholder of record must have signatures on written redemption requests
guaranteed by:
- a trust company or commercial bank whose deposits are insured by the BIF,
which is administered by the Federal Deposit Insurance Corporation
("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings association whose deposits are insured by the
SAIF, which is administered by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds and Federated Shareholder Services Company have adopted standards for
accepting signature guarantees from the above institutions. The Funds may elect
in the future to limit eligible signature guarantors to institutions that are
members of a signature guarantee program. The Funds and Federated Shareholder
Services Company reserve the right to amend these standards at any time without
notice.
Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount may take
advantage of the Systematic Withdrawal Program. Under this program, Fund shares
are redeemed to provide for periodic withdrawal payments in an amount directed
by the shareholder. Depending upon the amount of the withdrawal payments and the
amount of dividends paid with respect to Fund shares, redemptions may reduce,
and eventually deplete, the shareholder's investment in the Funds. For this
reason, payments under this program should not be considered as yield or income
on the shareholders' investment in the Funds. To be eligible to participate in
this program, a shareholder must have an account value of at least $10,000. A
shareholder may apply for participation in this program through the Bank. Due to
the fact that some of the Funds' shares are sold with a sales charge, it is not
advisable for shareholders to be purchasing shares of those Funds while
participating in this program.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Funds may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $1,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $1,000 because of changes in the Funds' net asset value.
Before shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of each Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders of the Funds for vote. All shares of all
classes of each Fund in the Trust have equal voting rights, except that in
matters affecting only a particular Fund or class, only shareholders of that
Fund or class are entitled to vote. As a Massachusetts business trust, the Trust
is not required to hold annual shareholder meetings. Shareholder approval will
be sought only for certain changes in the Trust or Funds' operation and for the
election of Trustees under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders for this purpose shall be called by the
Trustees upon the written request of shareholders owning at least 10% of all
shares of the Trust entitled to vote.
As of June 1, 1998, Deposit Guaranty National Bank, Jackson, MS, acting in
various capacities for numerous accounts, was the owner of record of
approximately 20,088,725 shares (62.71%) of Equity Fund, and therefore, may for
certain purposes be deemed to control the Fund and be able to affect the outcome
of certain matters presented for a vote of shareholders.
As of June 1, 1998, Deposit Guaranty National Bank, Jackson, MS, acting in
various capacities for numerous accounts, was the owner of record of
approximately 6,014,608 shares (74.64%) of Opportunity Fund, and therefore, may
for certain purposes be deemed to control the Fund and be able to affect the
outcome of certain matters presented for a vote of shareholders.
As of June 1, 1998, Deposit Guaranty National Bank, Jackson, MS, acting in
various capacities for numerous accounts, was the owner of record of
approximately 2,499,678 shares (86.58%) of International Equity Fund, and
therefore, may for certain purposes be deemed to control the Fund and be able to
affect the outcome of certain matters presented for a vote of shareholders.
As of June 1, 1998, Deposit Guaranty National Bank, Jackson, MS, acting in
various capacities for numerous accounts, was the owner of record of
approximately 3,363,751 shares (75.64%) of Limited Term Fund, and therefore, may
for certain purposes be deemed to control the Fund and be able to affect the
outcome of certain matters presented for a vote of shareholders.
As of June 1, 1998, Deposit Guaranty National Bank, Jackson, MS, acting in
various capacities for numerous accounts, was the owner of record of
approximately 18,121,490 shares (64.36%) of Government Income Fund, and
therefore, may for certain purposes be deemed to control the Fund and be able to
affect the outcome of certain matters presented for a vote of shareholders.
As of June 1, 1998, Deposit Guaranty National Bank, Jackson, MS, acting in
various capacities for numerous accounts, was the owner of record of
approximately 4,632,278 shares (92.72%) of Municipal Income Fund, and therefore,
may for certain purposes be deemed to control the Fund and be able to affect the
outcome of certain matters presented for a vote of shareholders.
<PAGE>
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any bank or non-bank affiliate thereof from sponsoring, organizing or
controlling a registered, open-end investment company continuously engaged in
the issuance of its shares, and from issuing, underwriting, selling or
distributing securities in general. Such laws and regulations do not prohibit
such a holding company or bank or non-bank affiliate from acting as investment
adviser, transfer agent or custodian to such an investment company or from
purchasing shares of such a company as agent for and upon the order of their
customer.
Some entities providing services to the Funds are subject to such banking laws
and regulations. They believe, based on the advice of counsel, that they may
perform those services for the Funds contemplated by any agreement entered into
with the Trust without violating the Glass-Steagall Act or other applicable
banking laws or regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of present or future statutes and regulations,
could prevent these entities from continuing to perform all or a part of the
above services. If this happens, the Trustees would consider alternative means
of continuing available investment services. It is not expected that Fund
shareholders would suffer any adverse financial consequences as a result of any
of these occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Funds will pay no federal income tax because they expect to meet
requirements, of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies.
The Funds will be treated as single, separate entities for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's portfolios will not be combined for tax purposes with those realized by
the individual Funds.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
are received in cash or as additional shares. The Funds will provide detailed
tax information for reporting purposes. With respect to Municipal Income Fund,
information on the tax status of dividends and distributions is provided
annually.
Shareholders are urged to consult their own tax advisers regarding the status of
their account under state and local tax laws.
<PAGE>
ADDITIONAL TAX INFORMATION FOR MUNICIPAL INCOME FUND
With respect to Municipal Income Fund, shareholders are not required to pay the
federal regular income tax on any dividends received from Municipal Income Fund
that represent net interest on tax-exempt municipal securities. However, under
the Tax Reform Act of 1986, dividends representing net interest earned on
certain "private activity" bonds issued after August 7, 1986, may be included in
calculating the federal individual alternative minimum tax or the federal
alternative minimum tax for corporations. Municipal Income Fund may purchase all
types of municipal bonds, including private activity bonds.
The alternative minimum tax applies when it exceeds the regular tax for the
taxable year. Alternative minimum taxable income is equal to the regular taxable
income of the taxpayer increased by certain "tax preference" items not included
in regular taxable income and reduced by only a portion of the deductions
allowed in the calculation of the regular tax.
Dividends of Municipal Income Fund representing net interest income earned on
some temporary investments and any realized net short-term gains are taxed as
ordinary income. Distributions representing net long-term capital gains realized
by Municipal Income Fund, if any, will be taxable as long-term capital gains
regardless of the length of time shareholders have held their shares.
With respect to Municipal Income Fund, shareholders should consult their tax
adviser to determine whether they are subject to the alternative minimum tax or
the corporate alternative minimum tax and, if so, the tax treatment of dividends
paid by Municipal Income Fund.
OTHER STATE AND LOCAL TAXES
With respect to Municipal Income Fund, because interest received may not be
exempt from all state and local income taxes, shareholders may be required to
pay state and local taxes on dividends received from Municipal Income Fund.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Funds advertise one or more of the following performance
numbers: total return, yield and tax-equivalent yield.
Total return represents the change over a specified period of time in the value
of an investment in the Funds after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Funds is calculated by dividing the net investment income per
share (as defined by the SEC) earned by each Fund over a thirty-day period by
the maximum offering price per share of each Fund on the last day of the period.
This number is then annualized using semi-annual compounding.
The tax-equivalent yield of Municipal Income Fund is calculated similarly to the
yield, but is adjusted to reflect the taxable yield that Municipal Income Fund
would have had to earn to equal its actual yield, assuming a specific tax rate.
<PAGE>
The yield and tax-equivalent yield do not necessarily reflect income actually
earned by the Funds and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of the maximum sales charge
which, if excluded, would increase the total return, yield, and tax-equivalent
yield.
From time to time, advertisements for the Funds may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Funds' performance to certain indices.
Opportunity Fund is the successor to the portfolio of a collective trust fund
formerly managed by the Adviser. On August 1, 1994 (the date of the Opportunity
Fund's commencement of operations), the assets of the collective trust fund were
transferred to the Opportunity Fund in exchange for Opportunity Fund shares. The
Adviser has represented that the Opportunity Fund's investment objective,
policies and limitations are in all material respects identical to those of the
collective trust fund.
The Opportunity Fund's average annual compounded total returns for the one-,
five- and ten-year periods ended February 28, 1998, and since inception (January
1, 1982), on a loaded basis, were 32.99%, 19.87%, 19.76%, and 15.13%,
respectively. The Opportunity Fund's average annual compounded total returns for
the one-, five- and ten-year periods ended February 28, 1998, and since
inception, on a no-load basis, were 37.81%, 20.72%, 20.19%, and 15.39%,
respectively. The quoted performance data includes the performance of the
collective trust fund for the period before the date on which the Opportunity
Fund commenced operations (August 1, 1994), as adjusted to reflect the
Opportunity Fund's then anticipated expenses as set forth in the "Expenses of
the Fund" section of the Opportunity Fund's initial prospectus. The past
performance data shown above is not necessarily indicative of the Opportunity
Fund's future performance. The collective trust fund was not registered under
the Act, and therefore was not subject to certain investment restrictions that
are imposed by the Act. If the collective trust fund had been registered under
the Act, the performance may have been adversely affected.
<PAGE>
ADDRESSES
- --------------------------------------------------------------------------------
DG Investor Series
DG Equity Fund 5800 Corporate Drive
DG Opportunity Fund Pittsburgh, PA 15237-7010
DG International Equity Fund
DG Limited Term Government Income Fund
DG Government Income Fund
DG Municipal Income Fund
- -------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
- -------------------------------------------------------------------------------
Investment Adviser
ParkSouth Corporation P.O. Box 1200
Jackson, MS 39215-1200
- -------------------------------------------------------------------------------
Sub-Adviser for DG International Equity Fund
Lazard Asset Management 30 Rockefeller Plaza
New York, NY 10020
- -------------------------------------------------------------------------------
Sub-Adviser for DG Opportunity Fund
Womack Asset Management, Inc. 2120 Deposit Guaranty Plaza
Jackson, MS 39201
- -------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company P.O. Box 1713
Boston, MA 02105
- -------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Services Company Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
- -------------------------------------------------------------------------------
Independent Public Accountants
KPMG Peat Marwick LLP One Mellon Bank Center
Pittsburgh, PA 15219
- -------------------------------------------------------------------------------
Deposit Guaranty National Bank DGB-14
Mutual Funds Services P.O. Box 1200
Jackson, MS 39215-1200
- -------------------------------------------------------------------------------
EXHIBIT (17)(c)(ii)
DG INVESTOR SERIES
MONEY MARKET FUNDS
PROSPECTUS
DG Investor Series (the "Trust") is an open-end, management investment company
(a mutual fund). This combined prospectus offers investors interests in the
following two separate investment portfolios (individually or collectively
referred to as the "Fund" or "Funds" as the context requires), each having a
distinct investment objective and policies:
- DG Prime Money Market Fund; and
- DG Treasury Money Market Fund (formerly, DG U.S. Government Money Market
Fund).
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF DEPOSIT
GUARANTY NATIONAL BANK, ARE NOT ENDORSED OR GUARANTEED BY DEPOSIT GUARANTY
NATIONAL BANK, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE
SHARES INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THE
FUNDS ATTEMPT TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE; THERE CAN
BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO DO SO.
This prospectus contains the information you should read and know before you
invest in the Funds. Keep this prospectus for future reference.
The Funds have also filed a Statement of Additional Information dated June 30,
1998 with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus, if you have received
your prospectus electronically, free of charge by calling 1-800-530-7377. To
obtain other information, or make inquiries about the Funds, contact the Trust
at the address listed in the back of this prospectus, or you can visit the DG
Investor Series' Internet site on the World Wide Web at (www.dgb.com). The
Statement of Additional Information, material incorporated by reference into
this document, and other information regarding the Funds is maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated June 30, 1998
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SYNOPSIS 1
Year 2000 Statement 1
SUMMARY OF FUND EXPENSES 2
FINANCIAL HIGHLIGHTS 4
OBJECTIVE AND POLICIES OF EACH FUND 6
Prime Money Market Fund 6
Investment Risks 8
Treasury Money Market Fund 9
PORTFOLIO INVESTMENT AND STRATEGIES 9
Repurchase Agreements 9
When-Issued and Delayed
Delivery Transactions 9
Lending of Portfolio Securities 10
Investing in Securities of Other Investment Companies 10
INVESTMENT LIMITATIONS 10
TRUST INFORMATION 11
Management of the Trust 11
Distribution of Fund Shares 11
ADMINISTRATION OF THE FUNDS 13
Expenses of the Funds 13
NET ASSET VALUE 13
INVESTING IN THE FUNDS 14
Share Purchases 14
Minimum Investment Required 14
Systematic Investment Program 14
EXCHANGE PRIVILEGE 14
Exchanging Shares 15
REDEEMING SHARES 15
Through the Bank 15
Systematic Withdrawal Program 16
ACCOUNT AND SHARE INFORMATION 17
EFFECT OF BANKING LAWS 18
TAX INFORMATION 18
Federal Income Tax 18
State and Local Taxes 18
PERFORMANCE INFORMATION 19
ADDRESSES 20
SYNOPSIS
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated February 7, 1992. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. Shares of the Funds are designed for retail and
trust customers of Deposit Guaranty National Bank and its affiliates as a
convenient means of participating in professionally managed portfolios.
As of the date of this prospectus, the Trust is composed of nine portfolios. The
following two portfolios are offered in this prospectus:
- DG Prime Money Market Fund ("Prime Money Market Fund")--seeks to provide
current income consistent with stability of principal; and
- DG Treasury Money Market Fund ("Treasury Money Market Fund")--seeks to
provide current income consistent with stability of principal and
liquidity by investing only in a portfolio of short-term U.S. government
securities.
For information on how to purchase shares of either of the Funds, please refer
to "Investing in the Funds." A minimum initial investment of $1,000 is required
for each Fund. Subsequent investments must be in amounts of at least $50 with
regard to Prime Money Market Fund, and $100 with regard to Treasury Money Market
Fund.
The Funds attempt to stabilize the value of a share at $1.00. Shares are
currently sold and redeemed at that price.
YEAR 2000 STATEMENT
Like other mutual funds and business organizations worldwide, the Funds' service
providers (among them, the adviser, distributor, administrator and transfer
agent) must ensure that their computer systems are adjusted to properly process
and calculate date-related information from and after January 1, 2000. Many
software programs and, to a lesser extent, the computer hardware in use today
cannot distinguish the year 2000 from the year 1900. Such a design flaw could
have a negative impact in the handling of securities trades, pricing and
accounting services. The Funds and their service providers are actively working
on necessary changes to computer systems to deal with the year 2000 issue and
believe that systems will be year 2000 compliant when required. Analysis
continues regarding the financial impact of instituting a year 2000 compliant
program on the Funds' operations.
<PAGE>
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
DG TREASURY MONEY MARKET FUND
(FORMERLY, DG U.S. DG PRIME MONEY GOVERNMENT
MARKET FUND MONEY MARKET FUND)
-------------- ------------------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage
of offering price)........................................ None None
Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price)............................. None None
Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as
applicable)............................................... None None
Redemption Fee (as a percentage of amount redeemed, if
applicable)............................................... None None
Exchange Fee................................................ None None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1)............................ 0.30% 0.30%
12b-1 Fee(2)................................................ 0.25% 0.00%
Total Other Expenses (after waiver)(3)...................... 0.13% 0.27%
Shareholder Services Fee(4)............................... 0.00% 0.15%
Total Fund Operating Expenses(5)........................ 0.68% 0.57%
(1) The management fees of DG Prime Money Market Fund and DG Treasury Money
Market Fund have been reduced to reflect the voluntary waivers by the adviser.
The adviser can terminate these voluntary waivers at any time at its sole
discretion. The maximum management fee for these Funds is 0.50%.
(2) As of the date of this prospectus DG Treasury Money Market Fund is not
paying or accruing 12b-1 fees. The Fund will not accrue or pay 12b-1 fees until
a separate class of shares has been created for certain institutional investors.
DG Treasury Money Market Fund could pay 0.25% as a 12b-1 fee to the distributor.
(3) Other expenses for DG Prime Money Market Fund have been reduced to reflect
the voluntary waiver of a portion of the administration fee. The administrator
can terminate this voluntary waiver at any time at it sole discretion. The
maximum Total Other Expenses for DG Prime Money Market Fund was 0.19%.
(4) As of the date of this prospectus, DG Prime Money Market Fund is not paying
or accruing a shareholder services fee. If the Fund were paying or accruing the
shareholder services fee, the Fund would be able to pay up to 0.15% of its
average daily net assets for the shareholder services fee.
(5) Total Fund Operating Expenses would have been 0.94% for the DG Prime Money
Market Fund and 0.77% for the DG Treasury Money Market Fund absent the voluntary
waivers described above in note (1) and note (3) above.
</TABLE>
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUNDS WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "TRUST INFORMATION" AND "INVESTING IN THE FUNDS." Wire-transferred
redemptions of less than $5,000 may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 Year 3 Years 5 Years 10 Years
------- -------- --------- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, (2) redemption at the end
of each time period, and (3) payment of the maximum sales
charge. The Funds charge no contingent deferred sales
charges.
DG Prime Money Market Fund................................ $ 7 $22 $38 $85
DG Treasury Money Market Fund............................. $ 6 $18 $32 $71
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
<PAGE>
NOTES
- --------------------------------------------------------------------------------
DG INVESTOR SERIES MONEY MARKET FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following table has been audited by KPMG Peat Marwick LLP, the Funds'
independent auditors. Their report dated April 10, 1998 on the Funds' financial
statements and financial highlights is included in the Annual Report dated
February 28, 1998. This table should be read in conjunction with the Funds'
financial statements and notes thereto, which may be obtained from the Funds.
<TABLE>
<CAPTION>
NET ASSET DISTRIBUTIONS
VALUE, NET FROM NET
BEGINNING INVESTMENT INVESTMENT
YEAR ENDED FEBRUARY 28 OR 29, OF PERIOD INCOME INCOME
----------------------------- --------- ------ ------
<S> <C> <C> <C>
DG PRIME MONEY MARKET FUND
1998(a)............................................... $1.00 0.05 (0.05)
DG TREASURY MONEY MARKET FUND
(FORMERLY, DG U.S. GOVERNMENT
MONEY MARKET FUND)
1993(b)............................................... $1.00 0.02 (0.02)
1994.................................................. $1.00 0.03 (0.03)
1995.................................................. $1.00 0.04 (0.04)
1996.................................................. $1.00 0.05 (0.05)
1997.................................................. $1.00 0.05 (0.05)
1998.................................................. $1.00 0.05 (0.05)
(a) For the period from March 10, 1997 (date of initial public investment), to
February 28, 1998.
(b) Reflects operations for the period from July 1, 1992 (date of initial public
investment) to February 28, 1993. For the period from March 31, 1992 (start
of business) to June 30, 1992, all income was distributed to the
administrator.
(c) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(d) Computed on an annualized basis.
(e) This voluntary expense decrease is reflected in both the expense and net
investment income ratios.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RETURN TO AVERAGE NET ASSETS
--------------------------------- NET ASSETS,
NET ASSET NET END OF
VALUE, END TOTAL INVESTMENT EXPENSE PERIOD
OF PERIOD RETURN(C) EXPENSES INCOME WAIVER(E) (000 OMITTED)
- --------- --------- -------- ------ --------- -------------
<S> <C> <C> <C> <C> <C>
$1.00 4.93% 0.68%(d) 4.98%(d) 0.26%(d) $195,041
$1.00 1.97% 0.41%(d) 2.88%(d) 0.38%(d) $189,024
$1.00 2.74% 0.54% 2.70% 0.20% $189,315
$1.00 4.06% 0.53% 3.96% 0.20% $162,515
$1.00 5.48% 0.51% 5.33% 0.20% $245,647
$1.00 4.83% 0.50% 4.74% 0.20% $273,453
$1.00 4.90% 0.57% 4.81% 0.20% $349,051
</TABLE>
<PAGE>
OBJECTIVE AND POLICIES OF EACH FUND
- --------------------------------------------------------------------------------
PRIME MONEY MARKET FUND
The investment objective of Prime Money Market Fund is current income consistent
with stability of principal. This investment objective cannot be changed without
shareholder approval. While there is no assurance that Prime Money Market Fund
will achieve its investment objective, it endeavors to do so by complying with
the diversification and other requirements of Rule 2a-7 under the Investment
Company Act of 1940 which regulates money market mutual funds and by following
the investment policies described in this prospectus.
Prime Money Market Fund pursues its investment objective by investing in a
portfolio of money market securities maturing in 13 months or less. The average
maturity of the securities in Prime Money Market Fund's portfolio, computed on a
dollar-weighted basis, will be 90 days or less. Unless indicated otherwise, the
investment policies may be changed by the Board of Trustees ("Trustees") without
shareholder approval. Shareholders will be notified before any material change
in these policies becomes effective.
ACCEPTABLE INVESTMENTS. Prime Money Market Fund invests in high quality money
market instruments that are either rated in the highest short-term rating
category by one or more nationally recognized statistical rating organizations
("NRSROs") or are of comparable quality to securities having such ratings.
Examples of these instruments include, but are not limited to:
- domestic issues of corporate debt obligations, including variable rate
demand notes;
- commercial paper (including Canadian Commercial Paper and Europaper);
- certificates of deposit, demand and time deposits, bankers' acceptances
and other instruments of domestic and foreign banks and other deposit
institutions ("Bank Instruments");
- short-term credit facilities;
- asset-backed securities;
- obligations issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies or instrumentalities; and
- other money market instruments.
The Fund invests only in instruments denominated and payable in U.S. dollars.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term debt
instruments that have variable or floating interest rates and provide Prime
Money Market Fund with the right to tender the security for repurchase at
its stated principal amount plus accrued interest. Such securities
typically bear interest at a rate that is intended to cause the securities
to trade at par. The interest rate may float or be adjusted at regular
intervals (ranging from daily to annually), and is normally based on a
published interest rate or interest rate index. Most variable rate demand
notes allow Prime Money Market Fund to demand the repurchase of the
security on not more than seven days prior notice. Other notes only permit
Prime Money Market Fund to tender the security at the time of each interest
rate adjustment or at other fixed intervals. See "Demand Features." Prime
Money Market Fund treats variable rate demand notes as maturing on the
later of the date of the next interest rate adjustment or the date on which
the Fund may next tender the security for repurchase.
BANK INSTRUMENTS. Prime Money Market Fund only invests in Bank Instruments
either issued by an institution having capital, surplus and undivided
profits over $100 million, or insured by the Bank Insurance Fund ("BIF") or
the Savings Association Insurance Fund ("SAIF"). Bank Instruments may
include Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of
Deposit ("Yankee CDs") and Eurodollar Time Deposits ("ETDs"). Prime Money
Market Fund will treat securities credit-enhanced with a bank's letter of
credit as Bank Instruments.
ASSET-BACKED SECURITIES. Asset-backed securities are securities issued by
special purpose entities whose primary assets consist of a pool of loans or
accounts receivable. The securities may take the form of beneficial
interests in special purpose trusts, limited partnership interests, or
commercial paper or other debt securities issued by a special purpose
corporation. Although the securities often have some form of credit or
liquidity enhancement, payments on the securities depend predominantly upon
collections of the loans and receivables held by the issuer.
SHORT-TERM CREDIT FACILITIES. Prime Money Market Fund may enter into, or
acquire participations in, short-term borrowing arrangements with
corporations, consisting of either a short-term revolving credit facility
or a master note agreement payable upon demand. Under these arrangements,
the borrower may reborrow funds during the term of the facility. Prime
Money Market Fund treats any commitments to provide such advances as a
standby commitment to purchase the borrower's notes.
CREDIT ENHANCEMENT. Certain of Prime Money Market Fund's acceptable investments
may be credit-enhanced by a guaranty, letter of credit, or insurance. Any
bankruptcy, receivership, default, or change in the credit quality of the party
providing the credit enhancement will adversely affect the quality and
marketability of the underlying security and could cause losses to Prime Money
Market Fund and affect its share price.
DEMAND FEATURES. Prime Money Market Fund may acquire securities that are subject
to puts and standby commitments ("demand features") to purchase the securities
at their principal amount (usually with accrued interest) within a fixed period
(usually seven days) following a demand by Prime Money Market Fund. The demand
feature may be issued by the issuer of the underlying securities, a dealer in
the securities, or by another third party, and may not be transferred separately
from the underlying security. Prime Money Market Fund uses these arrangements to
provide Prime Money Market Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership, or default by the issuer of the demand feature, or a default on
the underlying security or other event that terminates the demand feature before
its exercise, will adversely affect the liquidity of the underlying security.
Demand features that are exercisable even after a payment default on the
underlying security may be treated as a form of credit enhancement.
RESTRICTED AND ILLIQUID SECURITIES. Prime Money Market Fund may invest in
restricted securities. Restricted securities are any securities in which Prime
Money Market Fund may invest pursuant to its investment objective and policies
but which are subject to restrictions on resale under federal securities law.
Under criteria established by the Trustees, certain restricted securities are
determined to be liquid. To the extent that restricted securities are not
determined to be liquid, Prime Money Market Fund will limit their purchase,
together with other illiquid securities including non-negotiable time deposits,
and repurchase agreements providing for settlement in more than seven days after
notice, to 10% of its net assets.
Prime Money Market Fund may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933. Section 4(2) commercial paper is restricted as to disposition under
federal securities law, and is generally sold to institutional investors, such
as Prime Money Market Fund, who agree that they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) commercial paper is
normally resold to other institutional investors like Prime Money Market Fund
through or with the assistance of the issuer or investment dealers who make a
market in Section 4(2) commercial paper, thus providing liquidity. Prime Money
Market Fund believes that Section 4(2) commercial paper and possibly certain
other restricted securities which meet the criteria for liquidity established by
the Trustees of Prime Money Market Fund are quite liquid. Prime Money Market
Fund intends, therefore, to treat the restricted securities which meet the
criteria for liquidity established by the Trustees, including Section 4(2)
commercial paper, as determined by Prime Money Market Fund's adviser, as liquid
and not subject to the investment limitation applicable to illiquid securities.
CONCENTRATION OF INVESTMENTS. As a matter of policy which cannot be changed
without shareholder approval, Prime Money Market Fund may invest 25% or more of
its total assets in commercial paper issued by finance companies. The finance
companies in which Prime Money Market Fund intends to invest can be divided into
two categories, commercial finance companies and consumer finance companies.
Commercial finance companies are principally engaged in lending to corporations
or other businesses. Consumer finance companies are primarily engaged in lending
to individuals. Captive finance companies or finance subsidiaries which exist to
facilitate the marketing and financial activities of their parent will, for
purposes of industry concentration, be classified in the industry of their
parent's corporation. In addition, Prime Money Market Fund may invest 25% or
more of the value of its total assets in instruments issued by a U.S. branch of
a domestic bank or savings association having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment. Concentrating
investments in one industry may subject Prime Money Market Fund to more risk
than if it did not concentrate.
INVESTMENT RISKS
ECDs, ETDs, Yankee CDs, Canadian Commercial Paper, and Europaper are subject to
different risks than domestic obligations of domestic banks or corporations.
Examples of these risks include international economic and political
developments, foreign governmental restrictions that may adversely affect the
payment of principal or interest, foreign withholding or other taxes on interest
income, difficulties in obtaining or enforcing a judgment against the issuing
entity, and the possible impact of interruptions in the flow of international
currency transactions. Risks may also exist for ECDs, ETDs, and Yankee CDs
because the banks issuing these instruments, or their domestic or foreign
branches, are not necessarily subject to the same regulatory requirements that
apply to domestic banks, such as reserve requirements, loan limitations,
examinations, accounting, auditing, recordkeeping, and the public availability
of information. These factors will be carefully considered by Prime Money Market
Fund's adviser in selecting investments for the Fund.
CERTAIN OTHER PORTFOLIO STRATEGIES. Prime Money Market Fund may also invest or
engage in repurchase agreements, lending of portfolio securities and when-issued
and delayed delivery transactions. See "Portfolio Investments and Strategies."
TREASURY MONEY MARKET FUND
The investment objective of Treasury Money Market Fund is current income
consistent with stability of principal and liquidity. This investment objective
cannot be changed without shareholder approval. While there is no assurance that
Treasury Money Market Fund will achieve its investment objective, it endeavors
to do so by complying with the diversification and other requirements of Rule
2a-7 under the Investment Company Act of 1940 (the "Act") which regulates money
market mutual funds and by following the investment policies described in this
prospectus.
Treasury Money Market Fund pursues its investment objective by investing only in
a portfolio of short-term U.S. Treasury securities. The average maturity of U.S.
Treasury securities in its portfolio, computed on a dollar-weighted basis, will
be 90 days or less, and the Treasury Money Market Fund will invest only in
securities with remaining maturities of 13 months or less at the time of
purchase. Unless indicated otherwise, the investment policies may be changed by
the Trustees without shareholder approval. Shareholders will be notified before
any material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. Treasury Money Market Fund invests only in short-term
U.S. Treasury securities which are issued by the U.S. government and are fully
guaranteed as to principal and interest by the United States.
CERTAIN OTHER PORTFOLIO STRATEGIES. Treasury Money Market Fund may also invest
or engage in repurchase agreements, lending of portfolio securities and
when-issued and delayed delivery transactions. See "Portfolio Investments and
Strategies."
PORTFOLIO INVESTMENTS AND STRATEGIES
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Certain securities in which the Funds invest may be purchased pursuant to
repurchase agreements. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell securities to
the Funds and agree at the time of sale to repurchase them at a mutually agreed
upon time and price. To the extent that the seller does not repurchase the
securities from the Funds, the Funds could receive less than the repurchase
price on any sale of such securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Funds purchase securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Funds to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. Accordingly, the Funds may pay more
or less than the market value of the securities on the settlement date.
<PAGE>
The Funds may dispose of a commitment prior to settlement if the adviser deems
it appropriate to do so. In addition, the Funds may enter into transactions to
sell their purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Funds may realize short-term profits or losses upon the sale of such
commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Funds may lend portfolio securities
on a short-term or long-term basis, or both, to broker/dealers, banks, or other
institutional borrowers of securities. The Funds will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the adviser
has determined are creditworthy under guidelines established by the Trustees,
and will receive collateral at all times equal to at least 100% of the value of
the securities loaned.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Funds may invest their assets in securities of other investment companies as
an efficient means of carrying out their investment policies. It should be noted
that investment companies incur certain expenses, such as management fees, and,
therefore, any investment by the Funds in shares of other investment companies
may be subject to such duplicate expenses.
INVESTMENT LIMITATIONS
- --------------------------------------------------------------------------------
The Funds will not:
- borrow money directly or through reverse repurchase agreements
(arrangements in which a Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under the following certain
circumstances: Treasury Money Market Fund may borrow money and engage in
reverse repurchase agreements in amounts up to one-third of the value of
its total assets and pledge up to 15% of the value of its total assets to
secure such borrowings; and Prime Money Market Fund may borrow up to
one-third of the value of its total assets and pledge assets to secure
such borrowings.
The above limitation cannot be changed without shareholder approval. The
following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
Treasury Money Market Fund will not:
- invest more than 10% of its respective net assets in illiquid securities,
including repurchase agreements providing for settlement more than seven
days after notice and certain restricted securities not determined by the
Trustees to be liquid.
<PAGE>
TRUST INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are
responsible for managing the Funds' business affairs and for exercising all the
Trust's powers except those reserved for the shareholders. An Executive
Committee of the Board of Trustees handles the Board's responsibilities between
meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Funds are made by ParkSouth Corporation, (the
"Adviser"), subject to direction by the Trustees. The Adviser continually
conducts investment research and supervision for the Funds and is responsible
for the purchase and sale of portfolio instruments.
ADVISORY FEES. The Adviser receives an annual investment advisory fee equal to
0.50% of the Funds' average daily net assets. The Adviser may voluntarily choose
to waive a portion of its fee or reimburse the Funds for certain operating
expenses. The Adviser can terminate this voluntary waiver of its advisory fees
at any time at its sole discretion.
ADVISER'S BACKGROUND. ParkSouth Corporation is a registered investment adviser
providing investment management services to individuals and institutional
clients. ParkSouth is a subsidiary of Deposit Guaranty National Bank (the
"Bank"), a national banking association founded in 1925 which, in turn, is a
subsidiary of Deposit Guaranty Corp. ("DGC"). Through its subsidiaries and
affiliates, DGC offers a full range of financial services to the public,
including commercial lending, depository services, cash management, brokerage
services, retail banking, mortgage banking, investment advisory services and
trust services.
On or about May 1, 1998, DGC merged with First American Corporation, another
bank holding company. Under the Act, this merger resulted in the assignment and
termination of the Funds' investment advisory contract with ParkSouth. Pursuant
to an exemptive order granted to the Funds by the SEC, the Funds entered into a
new investment advisory contract with ParkSouth without the approval of
shareholders. The new contract is substantially identical to the old investment
advisory contract. The Funds have undertaken to seek shareholder approval of the
new contract prior to September 30, 1998.
ParkSouth manages, in addition to the Funds in the DG Investor Series, $320
million in common trust fund assets as of December 31, 1997. ParkSouth (which
succeeded to the investment advisory business of the Bank in 1997), or the Bank,
have served as the adviser to the Trust since May 5, 1992.
As part of its regular banking operations, the Bank may make loans to public
companies. Thus, it may be possible, from time to time, for the Funds to hold or
acquire the securities of issuers which are also lending clients of the Bank.
The lending relationships will not be a factor in the selection of securities.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for the Funds. It is a
Pennsylvania corporation organized on November 14, 1969, and is the principal
distributor for a number of investment companies. Federated Securities Corp. is
a subsidiary of Federated Investors, Inc.
<PAGE>
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Funds
may pay to the distributor an amount computed at an annual rate of 0.25% of the
average daily net asset value of the Funds to finance any activity which is
principally intended to result in the sale of shares subject to the Plan. The
distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers ("brokers")
to provide distribution and/or administrative services as agents for their
clients or customers. Treasury Money Market Fund will not accrue or pay 12b-1
fees until a separate class of shares has been created for certain institutional
investors.
The distributor may from time to time and for such periods as it deems
appropriate, voluntarily reduce its compensation under the Plan to the extent
the expenses attributable to the shares exceed such lower expense limitations as
the distributor may, by notice to the Trust, voluntarily declare to be
effective.
The distributor will pay financial institutions a fee based upon shares subject
to the Plan and owned by their clients or customers. The schedules of such fees
and the basis upon which such fees will be paid will be determined from time to
time by the distributor.
The Funds' Plan is a compensation type plan. As such, the Funds make no payments
to the distributor except as described above. Therefore, the Funds do not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Funds, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Funds
under the Plan.
In addition, the Funds have adopted a Shareholder Services Plan (the "Services
Plan") with respect to its shares. Under the Services Plan, financial
institutions will enter into shareholder service agreements with the Funds to
provide administrative support services to their customers who from time to time
may be owners of record or beneficial owners of the shares. In return for
providing these support services, a financial institution may receive payments
from each Fund at a rate not exceeding 0.15% of the average daily net assets of
the shares beneficially owned by the financial institution's customers for whom
it is holder of record or with whom it has a servicing relationship. These
administrative services may include, but are not limited to, the provision of
personal services and maintenance of shareholder accounts.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Trustees will consider appropriate changes in the services.
ADMINISTRATIVE ARRANGEMENTS. The distributor may pay financial institutions a
fee with respect to the average net asset value of shares held by their
customers for providing administrative services. This fee, if paid, will be
reimbursed by the Adviser and not the Funds.
<PAGE>
ADMINISTRATION OF THE FUNDS
- --------------------------------------------------------------------------------
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Funds.
Such services include shareholder servicing and certain legal and accounting
services. Federated Administrative Services provides these at an annual rate as
specified below:
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE FEE DAILY NET ASSETS OF THE TRUST
- ------------------ -----------------------------------
0.15% on the first $250 million
0.125% on the next $250 million
0.10% on the next $250 million
0.075% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$100,000 per portfolio. Federated Administrative Services may choose voluntarily
to waive a portion of its fee at any time.
EXPENSES OF THE FUNDS
Each Fund pays all of its own expenses and its allocable share of Trust
expenses.
These expenses include, but are not limited to the cost of: organizing the Trust
and continuing its existence; registering the Fund and its shares; Trustees
fees; meetings of Trustees and shareholders and proxy solicitations therefor;
auditing, accounting, and legal services; investment advisory and administrative
services; custodians, transfer agents, dividend disbursing agents, shareholder
servicing agents, and registrars; issuing, purchasing, repurchasing, and
redeeming shares; reports to government agencies; preparing, printing and
mailing documents to shareholders such as financial statements, prospectuses and
proxies; taxes and commissions; insurance premiums; association membership dues;
and such non-recurring and extraordinary items as may arise.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Funds attempt to stabilize the net asset value of shares at $1.00 by valuing
their portfolio securities using the amortized cost method. The net asset value
per share is determined by subtracting total liabilities from total assets and
dividing the remainder by the number of shares outstanding. The Funds cannot
guarantee that its net asset value will always remain at $1.00 per share.
The net asset value is determined at 12:00 noon, 3:00 p.m. (Eastern time), and
as of the close of trading (normally 4:00 p.m., Eastern time) on the New York
Stock Exchange, Monday through Friday, except on New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day and Christmas Day.
<PAGE>
INVESTING IN THE FUNDS
- --------------------------------------------------------------------------------
SHARE PURCHASES
Fund shares are sold on days on which the New York Stock Exchange and the
Federal Reserve Wire System are open for business. Fund shares may be ordered by
telephone through procedures established with the Bank in connection with
qualified account relationships. Such procedures may include arrangements under
which certain accounts are swept periodically and amounts exceeding an agreed
upon minimum are invested automatically in Fund shares. The Fund reserves the
right to reject any purchase request.
THROUGH THE BANKS. To place an order to purchase shares of the Funds, open an
account by calling Deposit Guaranty National Bank at (800) 748-8500. Information
needed to establish the account will be taken over the telephone.
Payment may be made by either check, federal funds or by debiting a customer's
account at the Banks.
Purchase orders must be received by 11:00 a.m. (Eastern time). Payment is
required before 3:00 p.m. (Eastern time) on the same business day in order to
earn dividends for that day.
CASH SWEEP PROGRAM. Shareholders of the Funds can have cash accumulations in
demand deposit accounts with subsidiaries or affiliates of the Bank
automatically invested in Prime Money Market Fund or Treasury Money Market Fund
on a day selected by the institution and its customer or when the demand deposit
account reaches a predetermined dollar amount. Participating financial
institutions are responsible for prompt transmission of orders relating to the
program, and they may charge for their services. Investors should read this
prospectus along with the financial institution's agreement or literature
describing these services and fees.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Funds is $1,000. Subsequent investments
may be in amounts of $50 or more with regard to the Prime Money Market Fund, and
$100 or more with regard to the Treasury Money Market Fund. The Funds may waive
the initial minimum investment for employees of Deposit Guaranty Corp. and its
affiliates from time to time.
SYSTEMATIC INVESTMENT PROGRAM
Once an account has been opened, shareholders may add to their investment on a
regular basis in a minimum amount of $50. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Fund shares. A shareholder may apply for participation in this
program through the Bank.
EXCHANGE PRIVILEGE
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All shareholders of the Funds are shareholders of DG Investor Series, which, in
addition to the Funds, is composed of the following seven portfolios: DG Equity
Fund, DG Opportunity Fund, DG International Equity Fund, DG Mid Cap Fund, DG
Limited Term Government Income Fund, DG Government Income Fund, and DG Municipal
Income Fund.
Shareholders in any of the Funds have easy access to all of the other Funds.
EXCHANGING SHARES
Shareholders of any Fund in DG Investor Series may exchange shares for the
shares of any other Fund in DG Investor Series. Prior to any exchange, the
shareholder must receive a copy of the current prospectus of the Fund into which
an exchange is to be effected. Shares may be exchanged at net asset value, plus
the difference between the sales charge (if any) already paid and any sales
charge of the Fund into which shares are to be exchanged, if higher.
When an exchange is made from a Fund with a sales charge to a Fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends on such shares retain the character of the exchanged
shares for purposes of exercising further exchange privileges; thus, an exchange
of such shares for shares of a Fund with a sales charge would be at net asset
value.
Upon receipt of proper instructions and all necessary supporting documents,
shares submitted for exchange will be redeemed at the next-determined net asset
value. Written exchange instructions may require a signature guarantee. Exercise
of this privilege is treated as a sale for federal income tax purposes and,
depending on the circumstances, a short or long-term capital gain or loss may be
realized. The exchange privilege may be terminated at any time. Shareholders
will be notified of the termination of the exchange privilege. A shareholder may
obtain further information on the exchange privilege by calling the Bank.
Telephone exchange instructions may be recorded. If reasonable procedures are
not followed by the Funds, they may be liable for losses due to unauthorized or
fraudulent telephone instructions.
REDEEMING SHARES
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Shares are redeemed at their net asset value next determined after the Bank
receives the redemption request. Redemptions will be made on days on which the
Funds computes their net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on Federal holidays when
wire transfers are restricted. Requests for redemption can be made by telephone
or by mail.
THROUGH THE BANK
BY TELEPHONE. A shareholder who is a customer of the Bank may redeem shares of
a Fund by calling Deposit Guaranty National Bank at (800) 748-8500.
For orders received before 11:00 a.m. (Eastern time), proceeds will normally be
wired the same day to the shareholder's account at the Bank or a check will be
sent to the address of record. Those shares will not be entitled to the dividend
declared on the day the redemption request was received.
Proceeds from redemption requests received on holidays when wire transfers are
restricted will be wired the following business day. In no event will proceeds
be sent more than seven days after a proper request for redemption has been
received. An authorization form permitting the Funds to accept
telephone requests must first be completed. Authorization forms and information
on this service are available from the Bank. Telephone redemption instructions
may be recorded. If reasonable procedures are not followed by the Funds, they
may be liable for losses due to unauthorized or fraudulent telephone
instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption should be utilized, such as a written request to Federated
Shareholder Services Company or the Bank.
If at any time the Funds determine it necessary to terminate or modify this
method of redemption, shareholders would be promptly notified.
BY MAIL. Any shareholder may redeem Fund shares by sending a written request to
the Bank. The written request should include the shareholder's name, the Fund
name, the account number, and the share or dollar amount requested, and should
be signed exactly as the shares are registered. If share certificates have been
issued, they should be sent unendorsed with the written request by registered or
certified mail. Shareholders should call the Bank for assistance in redeeming by
mail.
SIGNATURES. Shareholders requesting a redemption of any amount to be sent to an
address other than on record with the Funds, or a redemption payable other than
to the shareholder of record must have signatures on written redemption requests
guaranteed by:
- a trust company or commercial bank whose deposits are insured by the BIF,
which is administered by the Federal Deposit Insurance Corporation
("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings association whose deposits are insured by the
SAIF, which is administered by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds and Federated Shareholder Services Company have adopted standards for
accepting signature guarantees from the above institutions. The Funds may elect
in the future to limit eligible signature guarantors to institutions that are
members of a signature guarantee program. The Funds and Federated Shareholder
Services Company reserve the right to amend these standards at any time without
notice.
Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount may take
advantage of the Systematic Withdrawal Program. Under this program, Fund shares
are redeemed to provide for periodic withdrawal payments in an amount directed
by the shareholder. Depending upon the amount of the withdrawal payments and the
amount of dividends paid with respect to Fund shares, redemptions may reduce,
and eventually deplete, the shareholder's investment in the Fund. For this
reason, payments under this program should not be considered as yield or income
on the shareholder's investment in the Fund. To be eligible to participate in
this program, a shareholder must have an account value of at least $10,000. A
shareholder may apply for participation in this program through the Bank.
ACCOUNT AND SHARE INFORMATION
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DIVIDENDS. Dividends are declared daily and paid monthly. Dividends are
automatically reinvested on payment dates in additional shares of the Funds
unless cash payments are requested by writing to the Funds or the Bank as
appropriate. Purchase orders must be received by the Bank before 11:00 a.m.
(Eastern time). Payment is required before 3:00 p.m. (Eastern time) on the same
business day in order to earn dividends for that day.
CAPITAL GAINS. The Funds do not expect to realize any capital gains or losses.
If capital gains or losses were to occur, they could result in an increase or
decrease in dividends. The Funds will distribute in cash or additional shares
any realized net long-term capital gains at least once every 12 months.
CERTIFICATES AND CONFIRMATIONS. As transfer agent for the Funds, Federated
Shareholder Services Company maintains a share account for each shareholder.
Share certificates are not issued. Monthly confirmations are sent to report all
transactions as well as dividends paid during the month.
ACCOUNTS WITH LOW BALANCES. Due to the high cost of maintaining accounts with
low balances, the Funds may redeem shares in any account, and pay the proceeds
to the shareholder if the account balance falls below a required minimum value
of $1,000 due to shareholder redemptions.
Before shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional shares to meet the minimum
requirement.
VOTING RIGHTS. Each share of each Fund gives that shareholder one vote in
Trustee elections and other matters submitted to shareholders for vote. All
shares of each portfolio in the Trust have equal voting rights, except that in
matters affecting only a particular portfolio, only shareholders of that
portfolio are entitled to vote. The Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Funds' operation and for election of Trustees
under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting shall be called by the Trustees upon the written request of
shareholders owning at least 10% of the outstanding shares of the Trust entitled
to vote.
As of June 1, 1998, National Financial Services Corp., New York, NY, for the
exclusive benefit of its customers, was the owner of record of approximately
213,481,023 shares (99.59%) of Prime Money Market Fund, and therefore, may for
certain purposes be deemed to control the Fund and be able to affect the outcome
of certain matters presented for a vote of shareholders.
As of June 1, 1998, Deposit Guaranty National Bank, Jackson, MS, acting in
various capacities for numerous accounts, was the owner of record of
approximately 197,002,462 shares (65.04%) of Treasury Money Market Fund, and
therefore, may for certain purposes be deemed to control the Fund and be able to
affect the outcome of certain matters presented for a vote of shareholders.
EFFECT OF BANKING LAWS
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The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any bank or non-bank affiliate thereof from sponsoring, organizing or
controlling a registered, open-end investment company continuously engaged in
the issuance of its shares, and from issuing, underwriting, selling or
distributing securities in general. Such laws and regulations do not prohibit
such a holding company or bank or non-bank affiliate from acting as investment
adviser, transfer agent or custodian to such an investment company or from
purchasing shares of such a company as agent for and upon the order of their
customer.
Some entities providing services to the Funds are subject to such banking laws
and regulations. They believe, based on the advice of counsel, that they may
perform those services for the Funds contemplated by any agreement entered into
with the Trust without violating the Glass-Steagall Act or other applicable
banking laws or regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of present or future statutes and regulations,
could prevent these entities from continuing to perform all or a part of the
above services. If this happens, the Trustees would consider alternative means
of continuing available investment services. It is not expected that Fund
shareholders would suffer any adverse financial consequences as a result of any
of these occurrences.
TAX INFORMATION
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FEDERAL INCOME TAX
Each Fund will pay no federal income tax because it expects to meet requirements
of Subchapter M of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
Each Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the individual Funds.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional shares. The Funds will
provide detailed tax information for reporting purposes.
STATE AND LOCAL TAXES
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
<PAGE>
PERFORMANCE INFORMATION
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From time to time, the Funds advertise their yield, effective yield and total
return.
Yield represents the annualized rate of income earned on an investment over a
seven-day period. It is the annualized dividends earned during the period on an
investment shown as a percentage of the investment. The effective yield is
calculated similarly to the yield, but when annualized, the income earned by an
investment is assumed to be reinvested daily. The effective yield will be
slightly higher than the yield because of the compounding effect of this assumed
reinvestment.
Advertisements and sales literature may also refer to total return. Total return
represents the change, over a specified period of time, in the value of an
investment in the shares after reinvesting all income distributions. It is
calculated by dividing that change by the initial investment and is expressed as
a percentage.
From time to time, advertisements for the Funds may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Funds' performance to certain indices.
<PAGE>
ADDRESSES
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DG Investor Series
DG Prime Money Market Fund 5800 Corporate Drive
DG Treasury Money Market Fund Pittsburgh, PA 15237-7010
(formerly, DG U.S. Government
Money Market Fund)
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Distributor
Federated Securities Corp. Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
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Investment Adviser
ParkSouth Corporation P.O. Box 1200
Jackson, MS 39215-1200
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Custodian
State Street Bank and Trust Company P.O. Box 1713
Boston, MA 02266-8600
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Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Services Company Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
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Independent Accountants
KPMG Peat Marwick LLP One Mellon Bank Center
Pittsburgh, PA 15219
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Deposit Guaranty National Bank DGB-14
Mutual Funds Services P.O. Box 1200
Jackson, MS 39215-1200
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