Securities Act File No. 33-34080
Investment Company Act File No. 811-6076
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. ____ / /
Post-Effective Amendment No. 41 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 41 /X/
(Check appropriate box or boxes)
THE INFINITY MUTUAL FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, Ohio 43219
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (614) 470-8000
Robert L. Tuch, Esq.
3435 Stelzer Road
Columbus, Ohio 43219
(Name and Address of Agent for Service)
copy to:
Stuart H. Coleman, Esq.
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038-4982
It is proposed that this filing will become effective (check appropriate
box)
___ immediately upon filing pursuant to paragraph (b)
___ on (date) pursuant to paragraph (b)
X 60 days after filing pursuant to paragraph (a)(i)
___ on (date) pursuant to paragraph (a)(i)
___ 75 days after filing pursuant to paragraph (a)(ii)
___ on (date) pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
___ this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
ISG Portfolios
Cross-Reference Sheet Pursuant to Rule 495(a)
Items in
Part A of
Form N-1A Caption
Large Cap Equity, Small
Cap Opportunity, Mid Cap,
Equity Value, International
Equity, Municipal Income,
Government Income, Tax Free
Money Market, Government
Money Market Portfolios
1 Cover Page 1
2 Synopsis 3
3 Condensed Financial Information 5
4 General Description of Registrant 7
5 Management of the Fund 14
5(a) Management Discussion of Fund's *
Performance
6 Capital Stock and Other Securities 29
7 Purchase of Securities Being Offered 17
8 Redemption or Repurchase
9 Pending Legal Proceedings *
Items in
Part B of
Form N-1A
20 Cover Page B-1
11 Table of Contents B-1
12 General Information and History *
13 Investment Objectives and Policies B-2
14 Management of the Fund B-18
15 Control Persons and Principal Holders B-21, B-35
of Securities
16 Investment Advisory and Other Services B-21
17 Brokerage Allocation B-33
18 Capital Stock and Other Securities B-34
19 Purchase, Redemption and Pricing B-25
of Securities Being Offered
20 Tax Status B-31
21 Underwriters *
22 Calculations of Performance Data B-29
23 Financial Statements B-43
Items in
Part C of
Form N-1A
24 Financial Statements and Exhibits C-1
25 Persons Controlled by or Under C-5
Common Control with Registrant
26 Number of Holders of Securities C-5
27 Indemnification C-5
28 Business and Other Connections C-6
of Investment Adviser
29 Principal Underwriters C-10
30 Location of Accounts and Records C-10
31 Management Services C-11
32 Undertakings C-11
<PAGE>
PROSPECTUS October __, 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 October __, 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>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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TABLE OF CONTENTS
Page
Fee Table.....................................................
Description of the Portfolios.................................
Management of the Portfolios..................................
How to Buy Shares.............................................
How to Redeem Shares..........................................
Shareholder Services and Privileges...........................
Dividends, Distributions and Taxes............................
Performance Information.......................................
General Information...........................................
Appendix...................................................... A-1
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DISTRIBUTED BY: INVESTMENT ADVISER:
BISYS Fund Services Limited Partnership First American National
3435 Stelzer Road Bank
Columbus, Ohio 43219-3035 315 Deaderick Street
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.
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<PAGE>
FEE TABLE
<TABLE>
<CAPTION>
Large Cap Equity Portfolio Small Cap Opportunity 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
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price).......... None 4.75% None None 4.75% None None 4.75% None
Maximum Deferred Sales
Load (as a percentage
of the amount subject
to charge)............... None None+ 4.00% None None+ 4.00% None None+ 4.00%
Annual Operating Expenses
(as a percentage of
average daily net assets)
Management Fees............ .75% .75% .75% .95% .95% .95% 1.00% 1.00% 1.00%
12b-1 Fees................. None .25% .75% None .25% .75% None .25% .75%
Other Expenses............. .29% .29% .39% .38% .38% .48% 1.04% 1.04% 1.14%
Total Portfolio Operating
Expenses................ 1.04% 1.29% 1.89% 1.33% 1.58% 2.18% 2.04% 2.29% 2.89%
Example:
An investor would pay the
following expenses on a
$1,000 investment,
assuming (1) 5% annual
return and (2) redemption
at the end of each time
period:
1 Year.................... $ 11 $ 60 $ 59 $ 14 $ 63 $ 62 $ 21 $ 70 $ 69
3 Years................... $ 33 $ 86 $ 89 $ 42 $ 95 $ 98 $ 64 $116 $119
An investor would pay the
following expenses on the
same investment, assuming
no redemption:
1 Year..................... $ 11 $ 60 $ 19 $ 14 $ 63 $ 22 $ 21 $ 70 $ 29
3 Years.................... $ 33 $ 86 $ 59 $ 42 $ 95 $ 68 $ 64 $116 $ 89
- -----------------
+ 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>
Equity Value Portfolio International Equity 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>
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
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% 1.27% 1.27% 1.37% .60% .60% .70%
Total Portfolio Operating
Expenses.................. 1.20% 1.45% 2.05% 2.27% 2.52% 2.87% 1.20% 1.45% 2.05%
Example:
An investor would pay the
following expenses on a
$1,000 investment,
assuming (1) 5% annual
return and (2) redemption
at the end of each time
period:
1 Year...................... $ 12 $ 62 $ 61 $ 23 $ 71 $ 69 $ 12 $ 44 $ 61
3 Years..................... $ 38 $ 91 $ 94 $ 71 $126 $130 $ 38 $ 75 $ 94
An investor would pay the
following expenses on the
same investment, assuming
no redemption:
1 Year...................... $ 12 $ 62 $ 21 $ 23 $ 71 $ 29 $ 12 $ 44 $ 21
3 Years..................... $ 38 $ 91 $ 64 $ 71 $126 $100 $ 38 $ 75 $ 64
- -----------------
+ 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>
Tax Free Money Government Money Market
Government Income 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% .40% .50% .35% .40% .50% .35%
Total Portfolio Operating
Expenses.................. .91% 1.16% 1.76% .75% .85% 1.45% .65% .75% 1.35%
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 $ 58 $ 8 $ 9 $ 55 $ 7 $ 8 $ 54
3 Years..................... $ 29 $ 66 $ 85 $ 24 $ 27 $ 76 $ 21 $ 24 $ 73
An investor would pay the
following expenses on the
same investment, assuming
no redemption:
1 Year...................... $ 9 $ 41 $ 18 $ 8 $ 9 $ 15 $ 7 $ 8 $ 14
3 Years..................... $ 29 $ 66 $ 55 $ 24 $ 27 $ 46 $ 21 $ 24 $ 43
- ---------------
+ 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>
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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 Risk."
Lazard recognizes that some of the best opportunities are in securities not
generally followed by investment professionals. Thus, Lazard relies on its
research capability and maintains a dialogue with foreign brokers and with the
management of foreign companies in an effort to gather the type of "local
knowledge" that it believes is critical to successful investment abroad. To this
end, Lazard communicates with its affiliates, Lazard Freres Gestion Banque in
Paris, Lazard Asset Management Ltd. in London and Lazard Japan Asset Management
K.K. in Tokyo, for information concerning current business trends, as well as
for a better understanding of the management of local businesses.
The International Equity Portfolio is not required to invest exclusively in
common stocks or other equity securities, and, if deemed advisable, the
Portfolio may invest in fixed-income securities and Money Market Instruments.
The Portfolio will not invest in fixed-income securities rated lower than A by
Moody's, S&P, Fitch or Duff, or, if unrated, deemed to be of comparable quality
by the Adviser. In addition, the Portfolio may have substantial investments in
American and Global Depositary Receipts and in convertible bonds and other
convertible securities.
When, in the Adviser's or Lazard's judgment, business or financial
conditions warrant, the Portfolio may assume a temporary defensive position and
invest without limit in the equity securities of U.S. companies or Money Market
Instruments of the types described in "Appendix--Certain Portfolio
Securities--Money Market Instruments" or hold its assets in cash.
MUNICIPAL INCOME PORTFOLIO--The Municipal Income Portfolio will invest, as
a fundamental policy, at least 80% of the value of its net assets (except when
maintaining a temporary defensive position) in debt securities the interest from
which is, in the opinion of bond counsel to the issuer, exempt from Federal
income tax ("Municipal Obligations"). Municipal Obligations are debt obligations
issued by states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies and
instrumentalities, or multistate agencies or authorities. Municipal Obligations
generally include debt obligations issued to obtain funds for various public
purposes as well as certain industrial development bonds issued by or on behalf
of public authorities. Municipal Obligations include municipal lease/purchase
agreements which are similar to installment purchase contracts for property or
equipment issued by municipalities. Municipal Obligations bear fixed, floating
or variable rates of interest, which are determined in some instances by
formulas under which the Municipal Obligation's interest rate will change
directly or inversely to changes in interest rates or an index, or multiples
thereof, in many cases subject to a maximum and minimum. Certain Municipal
Obligations are subject to redemption at a date earlier than their stated
maturity pursuant to call options, which may be separated from the related
Municipal Obligations and purchased and sold separately. See "Investment
Considerations and Risk Factors--Risk of Investing in Municipal Obligations"
below, and "Appendix--Portfolio Securities--Municipal Obligations."
The Municipal Income Portfolio will invest in Municipal Obligation rated,
in the case of bonds, at least Baa by Moody's or at least BBB by S&P or Fitch.
The Portfolio may invest in short-term Municipal Obligations which are rated in
the two highest rating categories by Moody's, S&P or Fitch. Municipal
Obligations rated Baa by Moody's or BBB by S&P or Fitch are considered
investment grade obligations which lack outstanding investment characteristics
and may have speculative characteristics as well. The Portfolio also may invest
in Municipal Obligations which, while not rated, are determined by the Adviser
to be of comparable quality to the rated securities in which the Portfolio may
invest. See "Investment Considerations and Risk Factors--Fixed-Income Securities
Risk" below, and "Appendix" in the Statement of Additional Information.
The Municipal Income Portfolio may invest in industrial development bonds
which, although issued by industrial development authorities, may be backed only
by the assets and revenues of the non-governmental users. Interest on Municipal
Obligations (including certain industrial development bonds) which are specified
private activity bonds, as defined in the Internal Revenue Code of 1986, as
amended (the "Code"), issued after August 7, 1986, while exempt from Federal
income tax, is a preference item for the purpose of the alternative minimum tax.
Where a regulated investment company receives such interest, a proportionate
share of any exempt-interest dividend paid by the investment company may be
treated as such a preference item to shareholders. The Portfolio may invest
without limitation in such Municipal Obligations if the Adviser determines that
their purchase is consistent with the Portfolio's investment objective.
The Municipal Income Portfolio may purchase tender option bonds and similar
securities. A tender option bond is a Municipal Obligation (generally held
pursuant to a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate, that has been coupled with the agreement of a
third party which grants the security holder the option, at periodic intervals,
to tender the Municipal Obligation to the third party and receive the face value
thereof. See "Appendix--Portfolio Securities--Tender Option Bonds."
From time to time, on a temporary basis other than for temporary defensive
purposes (but not to exceed 20% of the value of the Portfolio's net assets) or
for temporary defensive purposes, the Municipal Income Portfolio may invest in
taxable Money Market Instruments having, at the time of purchase, a quality
rating in the two highest grades of Moody's, S&P or Fitch or, if unrated, deemed
to be of comparable quality by the Adviser. Dividends paid by the Portfolio that
are attributable to income earned by it from these securities will be taxable to
investors. See "Dividends, Distributions and Taxes." Except for temporary
defensive purposes, at no time will more than 20% of the value of the
Portfolio's net assets be invested in taxable Money Market Instruments. Under
normal market conditions, the Adviser anticipates that not more than 5% of the
value of the Portfolio's total assets will be invested in any one category of
these securities.
The Municipal Income Portfolio also may lend securities from its portfolio
as described under "Appendix--Investment Techniques--Lending Portfolio
Securities," which may give rise to taxable income. The Portfolio also may
invest, to a limited extent, in securities issued by other investment companies
which principally invest in securities of the type in which the Portfolio
invests.
GOVERNMENT INCOME PORTFOLIO--The Government Income Portfolio will invest at
least 65% of the value of its total assets in securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities and repurchase
agreements in respect of such securities. The Portfolio also may invest in
corporate bonds, mortgage-related securities, including collateralized mortgage
obligations, asset-backed securities and bank obligations. See
"Appendix--Portfolio Securities." A security guaranteed by the U.S. Government
is guaranteed only as to principal and interest, and there is no guarantee as to
the security's market value.
The Government Income Portfolio may lend securities from its portfolio as
described under "Appendix--Investment Techniques--Lending Portfolio Securities."
The Portfolio also may invest, to a limited extent, in securities issued by
other investment companies which principally invest in securities of the type in
which the Portfolio invests.
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 Techniques."
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 RISK--Since each Portfolio will pursue different types of
investments, the risks of investing will vary depending on the Portfolio
selected for investment. Before selecting a Portfolio in which to invest, the
investor should assess the risks associated with the types of investments made
by the Portfolio. Generally, if the securities owned by a Portfolio increase in
value, the value of the shares of the Portfolio will increase. Similarly, if the
securities owned by the Portfolio decrease in value, the value of the
Portfolio's shares also will decline. In this way, investors participate in any
change in the value of the securities owned by their Portfolio. Investors could
lose money by investing in a Portfolio. Investors should consider each Portfolio
as a supplement to an overall investment program and should invest only if they
are willing to undertake the risks involved. See also "Appendix--Investment
Techniques."
EQUITY SECURITIES RISK--(Large Cap Equity Portfolio, Small Cap Opportunity
Portfolio, Mid Cap Portfolio, Equity Value Portfolio and International Equity
Portfolio) While stocks and other equity securities have historically been a
leading choice of long-term investors, they do fluctuate in value, often based
on factors unrelated to the value of the issuer of the securities, and such
fluctuations can be pronounced. Changes in the value of investment securities
will result in changes in the value of the Portfolio's shares and thus its total
return to investors.
Because different types of stocks tend to shift in and out of favor
depending on market and economic conditions, the performance of a Portfolio
investing primarily in large capitalization stocks (such as the Large Cap Equity
Portfolio) may be lower or higher than that of a Portfolio investing primarily
in smaller capitalization stocks (such as Small Cap Opportunity Portfolio).
Moreover, the investment returns of a Portfolio investing in stocks that
emphasize particular investment characteristics, such as "value" or "growth,"
may fluctuate independently from the broad stock market as represented by the
S&P 500 Index, and may demonstrate greater volatility over short or extended
periods relative to the broad market.
The Small Cap Opportunity Portfolio and MidCap Portfolio invest primarily
in small and mid cap companies, respectively, which carry additional risks
because their earnings tend to be less predictable, their share prices more
volatile and their securities less liquid than larger, more established
companies. They may be dependent on management for one or a few key persons, and
can be more susceptible to losses and the risk of bankruptcy. In addition, some
of these investments will rise and fall based on investor perception rather than
economics.
FOREIGN SECURITIES RISK--(International Equity Portfolio, and, to a limited
extent, Large Cap Equity Portfolio, Mid Cap Portfolio and Equity Value
Portfolio) The value of foreign securities also is affected by general economic
conditions and individual company and industry earnings prospects. While foreign
securities may offer opportunities for gain, they also involve additional risks
that can increase the potential for losses in the Portfolio. These risks can be
significantly greater for investments in emerging markets.
Foreign securities markets generally are not as developed or efficient as
those in the United States. Securities of some foreign issuers are less liquid
and more volatile than securities of comparable U.S. issuers. Similarly, volume
and liquidity in most foreign securities markets are less than in the United
States and, at times, volatility of price can be greater than in the United
States. In some foreign countries, there is also less information available
about foreign issues and markets because of less rigorous accounting and
regulatory standards than in the United States.
Because evidences of ownership of such securities usually are held outside
the United States, a Portfolio's investment in foreign securities will be
subject to additional risks which include possible adverse political and
economic developments, seizure or nationalization of foreign deposits and
adoption of governmental restrictions that might adversely affect or restrict
the payment of principal, interest and dividends on the foreign securities to
investors located outside the country of the issuers, whether from currency
blockage or otherwise. The Portfolio may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies and obtaining judgments
with respect to foreign investments in foreign courts than with respect to
domestic issuers in U.S. courts.
Emerging market countries have economic structures that generally are less
diverse and mature, and political systems that are less stable, than those of
developed countries. Emerging markets may be more volatile than the markets of
more mature economies; however, such markets may provide higher rates of return
to investors. Many emerging market countries providing investment opportunities
for the International Equity Portfolio have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain of these countries.
Since foreign securities may be purchased by the International Equity
Portfolio and Mid Cap Portfolio with and be payable in currencies of foreign
countries, the value of these assets as measured in U.S. dollars, and thus the
price of the Portfolio's shares, may be affected favorably or unfavorably by
changes in currency rates and exchange control regulations.
FIXED-INCOME SECURITIES RISK--(All Portfolios) A Portfolio's investments in
fixed-income securities will be subject primarily to interest rate and credit
risk. Interest rate risk is the potential for a decline in bond prices due to
rising interest rates. In general, even though interest-bearing securities are
investments which promise a stable stream of income, the prices of such
securities are inversely affected by changes in interest rates and, therefore,
are subject to the risk of market price fluctuations. The change in price
depends on several factors, including the security's maturity date; generally,
bonds with longer maturities are more sensitive to changes in interest rates
than bonds with shorter maturities. These principles of interest rate risk also
apply to U.S. Treasury and U.S. Government agency securities. A security backed
by the U.S. Treasury or the full faith and credit of the United States is
guaranteed only as to timely payment of interest and principal when held to
maturity. The current market prices for such securities are not guaranteed and
will fluctuate.
Each Portfolio's investment in fixed-income securities also is subject to
credit risk, which is the possibility that the issuer of the security will fail
to make timely payments of interest or principal to the Portfolio. The credit
risk of a Portfolio depends on the quality of its investments. Certain
securities purchased by a Portfolio, such as those rated Baa by Moody's and BBB
by S&P, Fitch and Duff, may be subject to such risk with respect to the issuing
entity and to greater market fluctuations than certain lower yielding, higher
rated fixed-income securities. Once the rating of a security purchased by a
Portfolio has been adversely changed, such Portfolio will consider all
circumstances deemed relevant in determining whether to continue to hold the
security. See "Appendix--Portfolio Securities--Ratings" below, and "Appendix" in
the Statement of Additional Information.
Mortgage-related securities in which the Government Income Portfolio may
invest are complex derivative instruments, subject to both credit and prepayment
risk, and may be more volatile and less liquid than more traditional debt
securities. Some mortgage-related securities have structures that make their
reactions to interest rate changes and other factors difficult to predict,
making their value highly volatile. No assurance can be given as to the
liquidity of the market for certain mortgage-backed securities, such as
collateralized mortgage obligations and stripped mortgage-backed securities.
Determination as to the liquidity of interest-only and principal-only fixed
mortgage-backed securities issued by the U.S. Government or its agencies and
instrumentalities will be made in accordance with guidelines established by the
Fund's Board of Directors. In accordance with such guidelines, the Adviser will
monitor investments in such securities with particular regard to trading
activity, availability of reliable price information and other relevant
information. The Fund intends to treat other stripped mortgage-backed securities
as illiquid securities. See "Appendix--Portfolio Securities--Mortgage-Related
Securities" and "--Illiquid Securities."
Federal income tax law requires the holder of a zero coupon security or of
certain pay-in-kind bonds to accrue income with respect to these securities
prior to the receipt of cash payments. A Portfolio investing in such securities
may be required to distribute such income accrued with respect to these
securities and may have to dispose of portfolio securities under disadvantageous
circumstances in order to generate cash to satisfy these distribution
requirements.
RISK OF INVESTING IN MUNICIPAL OBLIGATIONS--(Municipal Income Portfolio and
Tax Free Money Market Portfolio) The Municipal Income Portfolio and Tax Free
Money Market Portfolio may invest more than 25% of the value of its total assets
in Municipal Obligations which are related in such a way that an economic,
business or political development or change affecting one such security also
would affect the other securities; for example, securities the interest upon
which is paid from revenues of similar types of projects or securities whose
issuers are located in the same state. As a result, 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. 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.
DERIVATIVE SECURITIES RISK--Each Portfolio, other than the Municipal Income
Portfolio and Money Market Portfolios, may invest in, or enter into, derivatives
("Derivatives"). These are financial instruments which derive their performance,
at least in part, from the performance of an underlying asset, index or interest
rate. The Derivatives a Portfolio may use include, with respect to the Large Cap
Equity Portfolio, Small Cap Opportunity Portfolio, 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, and its investment return, may be more sensitive to
changes in the market value of a single issuer or industry. However, to meet
Federal tax requirements, at the close of each quarter no Portfolio may have
more than 25% of its total assets invested in any one issuer and, with respect
to 50% of total assets, more than 5% of its total assets invested in any one
issuer. These limitations do not apply to U.S. Government securities or the
securities of other regulated investment companies.
SIMULTANEOUS INVESTMENTS--Investment decisions for each Portfolio are made
independently from those of the other investment companies, investment advisory
accounts, custodial accounts, individual trust accounts and commingled funds
that may be advised by the Adviser or, if applicable, sub-investment adviser.
However, if such other investment companies or managed accounts desire to invest
in, or dispose of, the same securities as the Portfolio, available investments
or opportunities for sales will be allocated equitably to each of them. In some
cases, this procedure may adversely affect the size of the position obtained for
or disposed of by a Portfolio or the price paid or received by a Portfolio.
MANAGEMENT OF THE PORTFOLIOS
BOARD OF DIRECTORS
The business affairs of the Fund are managed under the general supervision
of its Board of Directors. The Statement of Additional Information contains the
name and general business experience of each Director.
INVESTMENT ADVISER
First American National Bank, located at First American Center, 315
Deaderick Street, Nashville, Tennessee 37237, serves as each Portfolio's
investment adviser. The Adviser is a wholly-owned subsidiary of First American
Corporation, a registered bank holding company having assets as of May 1, 1998
of approximately $18 billion. On 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 Lazard for over five years.
MUNICIPAL INCOME PORTFOLIO--John Mark McKenzie and Sharon S. Brown. Mr. McKenzie
and Ms. Brown have been the Municipal Income Portfolio's primary portfolio
managers since its inception. Mr. McKenzie has been employed by the Adviser
since May 1998 and by Deposit Guaranty National Bank since 1984. Ms. Brown 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.
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 $67 billion as of June 30, 1998. Under the terms of the
sub-investment advisory agreement with Lazard, the Adviser has agreed to pay
Lazard a monthly fee at the annual rate of .50% of the value of the
International Equity Portfolio's average daily net assets.
Womack Asset Management, Inc., located at 2120 DG Plaza, Jackson,
Mississippi 39201, serves as the sub-investment adviser to the Small Cap
Opportunity Portfolio. Womack Management provides investment management services
to client discretionary accounts totaling approximately $300 million as of June
30, 1998. Under the terms of the sub-investment advisory agreement with Womack
Management, the Adviser has agreed to pay Womack Management a monthly fee at the
annual rate of .35% of the value of the Small Cap Opportunity Portfolio's
average daily net assets.
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 $950 million as of
June 30, 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 A Shares or Class B Shares owned by
their clients. From time to time, BISYS may defer or waive receipt of fees under
the Distribution Plan while retaining the ability to be paid by the Fund under
the Distribution Plan thereafter. The fees payable to BISYS under the
Distribution Plan for advertising, marketing and distributing are payable
without regard to actual expenses incurred.
SHAREHOLDER SERVICES PLAN
Under a shareholder services plan adopted by the Fund's Board of Directors
(the "Shareholder Services Plan"), each Portfolio pays BISYS for the provision
of certain services at an annual rate of .15% of the value of the average daily
net assets represented by Trust Shares and Class A Shares (.25% in the case of
Class A Shares of the Money Market Portfolios) and at an annual rate of .25% of
the value of the average daily net assets represented by Class B Shares. The
services provided may include personal services relating to shareholder
accounts, such as answering shareholder inquiries regarding a Portfolio and
providing reports and other information, and services related to the maintenance
of such shareholder accounts. The fee payable for such services is intended to
be a "service fee" as defined in the NASD Conduct Rules. Under the Shareholder
Services Plan, BISYS may make payments to certain Service Organizations in
respect of these services. BISYS determines the amounts to be paid to Service
Organizations. Service Organizations receive such fees in respect of the average
daily value of the relevant Class of shares owned by their clients. From time to
time, BISYS may defer or waive receipt of fees under the Shareholder Services
Plan while retaining the ability to be paid by the Fund under the Plan
thereafter. The fees payable to BISYS under the Shareholder Services Plan are
payable without regard to actual expenses incurred.
CUSTODIAN AND TRANSFER AGENT
The Bank of New York, 90 Washington Street, New York, New York 10286, is
the Portfolio's Custodian. BISYS Fund Services Ohio, Inc., an affiliate of
BISYS, located at 3435 Stelzer Road, Columbus, Ohio 43219-3035, is the Fund's
Transfer and Dividend Disbursing Agent (the "Transfer Agent").
EXPENSES
All expenses incurred in the operation of the Fund are borne by the Fund,
except to the extent specifically assumed by others. The expenses borne by the
Fund include: organizational costs, taxes, interest, brokerage fees and
commissions, if any, fees of Directors who are not officers, directors,
employees or holders of 5% or more of the outstanding voting securities of the
Adviser, BISYS, any sub-investment adviser, or any of their affiliates,
Securities and Exchange Commission fees, state Blue Sky qualification fees,
advisory and administration fees, charges of custodians, transfer and dividend
disbursing agents' fees, certain insurance premiums, industry association fees,
auditing and legal expenses, costs of maintaining corporate existence, costs of
independent pricing services, costs of calculating the net asset value of each
Portfolio's shares, costs of shareholders' reports and corporate meetings, costs
of preparing and printing certain prospectuses and statements of additional
information, and any extraordinary expenses. Expenses attributable to a
particular Portfolio are charged against the assets of that Portfolio; other
expenses of the Fund are allocated among the Portfolios on the basis determined
by the Board of Directors, including, but not limited to, proportionately in
relation to the net assets of each Portfolio.
HOW TO BUY SHARES
ALTERNATIVE PURCHASE METHODS
This Prospectus offers investors three methods of purchasing Portfolio
shares. Orders for purchases of Trust Shares, however, may be placed only for
certain eligible investors as described below. An investor who is not eligible
to purchase Trust Shares may choose from Class A Shares and Class B Shares the
Class of shares that best suits the investor's needs, given the amount of
purchase, the length of time the investor expects to hold the shares and any
other relevant circumstances. 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 Services and
Privileges--Auto-Exchange Plan." Approximately seven years after the date of
purchase, Class B Shares automatically will convert to Class A Shares, based on
the relative net asset values for shares of each such Class. See "How to Redeem
Shares--Class B Shares."
Trust Shares are sold at net asset value with no sales charge. Trust Shares
are sold exclusively to clients of the Adviser for their qualified trust,
custody and/or agency accounts and to clients of the Adviser's affiliated and
correspondent banks and certain other affiliated and non-affiliated institutions
for their similar accounts maintained at such affiliates or institutions. These
accounts are referred to herein as "Fiduciary Accounts."
Class B Shares will receive lower per share dividends and at any given time
the performance of Class B should be expected to be lower than for shares of
each other Class because of the higher expenses borne by Class B. Similarly,
Class A Shares will receive lower per share dividends and the performance of
Class A should be expected to be lower than Trust Shares because of the higher
expenses borne by Class A. See "Fee Table."
An investor who is not eligible to purchase Trust Shares should consider
whether, during the anticipated life of the investor's investment in the
Portfolio, the accumulated distribution and service fees and CDSC on Class B
Shares prior to conversion would be less than the initial sales charge, if any,
on Class A Shares purchased at the same time, and to what extent, if any, such
differential would be offset by the return of Class A. Additionally, investors
qualifying for reduced initial sales charges who expect to maintain their
investment for an extended period of time might consider purchasing Class A
Shares because the accumulated continuing distribution fees on Class B Shares
may exceed the initial sales charge on Class A Shares during the life of the
investment.
GENERAL PURCHASE INFORMATION
Class A Shares and Class B Shares may be purchased through a number of
institutions, including the Adviser and its affiliates such as AmeriStar Capital
Markets Inc., Service Organizations, and directly from BISYS. Orders for
purchases of Trust Shares may be placed only for clients of the Adviser, its
affiliated and correspondent banks and other affiliated and non-affiliated
institutions (collectively, "Institutions") for their Fiduciary Accounts
maintained at such Institutions. When purchasing Portfolio shares, you must
specify the Portfolio and Class of shares being purchased. The Adviser, its
affiliates and Service Organizations may receive different levels of
compensation for selling different Classes of Portfolio shares. Stock
certificates will not be issued. It is not recommended that the Municipal Income
Portfolio 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 Services and
Privileges."
You may purchase Class A Shares or Class B Shares by check or wire, or
through TeleTrade or, for the Money Market Portfolios only, a sweep program as
described below. Investors purchasing shares through the Adviser, its affiliates
or Service Organizations should contact such entity directly for appropriate
instructions, as well as for information about conditions pertaining to the
account and any related fees.
For written orders for Class A Shares or Class B Shares, you may send your
initial or subsequent purchase order, together with the Fund's Account
Application for initial orders and your check or money order payable to: The ISG
Funds (Portfolio Name), to The ISG Funds, c/o BISYS Fund Services, Inc.,
Department L-1686, Columbus, Ohio 43260-1686. For subsequent investments, your
Fund account number should appear on the check or money order. All payments
should be made in U.S. dollars and, to avoid fees and delays, should be drawn
only on U.S. banks. A charge will be imposed if a check used for investment in
your account does not clear.
For wire orders for Class A Shares or Class B Shares, you must call the
Transfer Agent at 1-800-852-0045. If a subsequent payment is being made, your
Fund account number should be included. Information on remitting funds in this
manner, including any related fees, may be obtained from your bank.
Subsequent investments also may be made by electronic transfer of funds
from an account maintained in a bank or other domestic financial institution
that is an Automated Clearing House member. For information on purchasing shares
through the Automated Clearing House, you must call the Transfer Agent at
1-800-852-0045.
Management understands that the Adviser, its affiliates and some Service
Organizations may impose certain conditions on their clients which are different
from those described in this Prospectus, and, to the extent permitted by
applicable regulatory authority, may charge their clients a direct fee for
effecting transactions in Portfolio shares. You should consult the Adviser, its
affiliates or your Service Organization in this regard.
The Fund determines net asset value per share for each Money Market
Portfolio as of 2:00 p.m., Eastern time, and for each other Portfolio as of the
close of trading on the floor of the New York Stock Exchange (currently 4:00
p.m., Eastern time), on each business day (which, as used herein, shall include
each day the New York Stock Exchange is open for business, except Columbus Day
and Veterans' Day), except on days where there are not sufficient changes in the
value of a Portfolio's investment securities to materially affect the
Portfolio's net asset value and no purchase orders or redemption requests have
been received. The New York Stock Exchange currently is closed on the following
holidays: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Net asset value per share of each class is computed by dividing
the value of the Portfolio's net assets attributable to such class (i.e., the
value of its assets less liabilities) by the total number of Portfolio shares of
such class outstanding. Each Money Market Portfolio uses the amortized cost
method of valuing its investments. Each other Portfolio's investments are valued
each business day generally by using available market quotations or at fair
value which may be determined by one or more pricing services approved by the
Board of Directors. Each pricing service's procedures are reviewed under the
general supervision of the Board of Directors. For further information regarding
the methods employed in valuing the Portfolios' investments, see "Determination
of Net Asset Value" in the Statement of Additional Information.
Federal regulations require that an investor provide a certified Tax
Identification Number ("TIN") upon opening or reopening an account. See
"Dividends, Distributions and Taxes" and the Fund's Account Application for
further information concerning this requirement. Failure to furnish a certified
TIN to the Fund could subject the investor to a $50 penalty imposed by the
Internal Revenue Service ("IRS").
TERMS OF PURCHASE
ALL PORTFOLIOS, EXCEPT THE MONEY MARKET PORTFOLIOS--Portfolio shares are
sold on a continuous basis at the public offering price (i.e., net asset value
plus the applicable sales load, if any, set forth below) per share next
determined after an order in proper form is received by the Transfer Agent or
other entity authorized to receive orders on behalf of the Fund. Orders for the
purchase of Class A or Class B Shares received by dealers by the close of
trading on the floor of the New York Stock Exchange on any business day and
transmitted to the Transfer Agent by the close of its business day (normally
5:15 p.m., Eastern time) will be based on the public offering price per share
determined as of the close of trading on the floor of the New York Stock
Exchange on that day. Otherwise, the orders will be based on the next determined
public offering price. It is the dealer's responsibility to transmit orders so
that they will be received by the Transfer Agent before the close of its
business day.
MONEY MARKET PORTFOLIOS ONLY--Portfolio shares of each Money Market
Portfolio are sold on a continuous basis at the net asset value per share next
determined after an order in proper form and Federal Funds (monies of member
banks within the Federal Reserve System which are held on deposit at a Federal
Reserve Bank) are received by the Transfer Agent. If you do not remit Federal
Funds, your payment must be converted into Federal Funds. This usually occurs
within one business day of receipt of a bank wire or within two business days of
receipt of a check drawn on a member bank of the Federal Reserve System. Checks
drawn on banks which are not members of the Federal Reserve System may take
considerably longer to convert into Federal Funds. Prior to receipt of Federal
Funds, your money will not be invested.
If your purchase order for shares of a Money Market Portfolio is received
by the Transfer Agent by 2:00 p.m., Eastern time, on a business day, shares will
be purchased as of 2:00 p.m., Eastern time, on such business day if payment is
received in, or is converted into, Federal Funds by 4:00 p.m., Eastern time, by
the Transfer Agent on that day. If your purchase order is received after 2:00
p.m., Eastern time, or if payment in Federal Funds is not received by 4:00 p.m.,
Eastern time, shares will be purchased as of 2:00 p.m., Eastern time, on the
business day on which Federal Funds are available. If you request transactions
through the Adviser, its affiliates or a Service Organization or Institution, it
is such entity's responsibility to transmit orders so that they will be received
by the Transfer Agent in time to receive the next determined net asset value as
described above.
TELETRADE--CLASS A AND CLASS B SHARES ONLY--You may purchase Class A or Class B
Shares (minimum purchase $500, maximum $50,000 per transaction) by telephone for
an existing Fund account if you have checked the appropriate box and supplied
the necessary information on the Account Application. The proceeds will be
transferred between the bank account designated on the Account Application and
your Fund account. Only a bank account maintained in a domestic financial
institution which is an Automated Clearing House member may be so designated.
TeleTrade purchases are effected at the net asset value (plus the applicable
sales load) next determined after receipt of an order in proper form by the
Transfer Agent. TeleTrade may not be available to certain clients of the
Adviser, its affiliates and certain Service Organizations. The Fund may modify
or terminate TeleTrade at any time or charge a service fee upon notice to
shareholders. No such fee currently is contemplated. If you have selected
TeleTrade, you may request such a purchase of shares by telephoning the Transfer
Agent at 1-800-852-0045.
AUTOMATICALLY THROUGH "SWEEP" PROGRAMS--Class A and Class B Shares of the Money
Market Portfolios only--Certain investor accounts with the Adviser, its
affiliates and certain Service Organizations may be eligible for an automatic
investment privilege, commonly called a "sweep," under which amounts in excess
of a certain minimum held in these accounts will be invested automatically in
Class A 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 December 11, 1998, a sales load as shown
below:
<TABLE>
<CAPTION>
Total Sales Load
As a % of As a % of Net Dealers' Reallowance
Amount of Transaction Offering Price Asset Value As a % of Offering Price
<S> <C> <C> <C>
Less than $50,000........ 3.00% 3.09% 2.70%
$50,000 to less than
$100,000.............. 2.50% 2.56% 2.25%
$100,000 to less than
$250,000.............. 2.00% 2.04% 1.80%
$250,000 to less than
$500,000.............. 1.50% 1.52% 1.35%
$500,000 to less than
$1,000,000............ 1.00% 1.01% 0.90%
$1,000,000 or more....... -0- -0- -0-
</TABLE>
For shareholders beneficially owning Class A Shares of the Government Income
Portfolio and Municipal Income Portfolio on December 11, 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 Net Dealers' Reallowance
Amount of Transaction Offering Price Asset Value As a % of Offering Price
<S> <C> <C> <C>
Less than $100,000......... 2.00% 2.04% 1.80%
$100,000 to less than
$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 December 11, 1998, a sales
load as shown below:
<TABLE>
<CAPTION>
Total Sales Load
As a % of As a % of Net Dealers' Reallowance
Amount of Transaction Offering Price Asset Value As a % of Offering Price
<S> <C> <C> <C>
Less than $50,000......... 4.75% 4.99% 4.28%
$50,000 to less than
$100,000............... 4.00% 4.17% 3.60%
$100,000 to less than
$250,000............... 3.25% 3.36% 2.93%
$250,000 to less than
$500,000............... 2.50% 2.56% 2.25%
$500,000 to less than
$1,000,000............. 1.75% 1.78% 1.58%
$1,000,000
$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 December 11, 1998, the public offering price
for Class A Shares 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 December 11, 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 Net Dealers' Reallowance
Amount of Transaction Offering Price Asset Value As a % of Offering Price
<S> <C> <C> <C>
Less than $100,000......... 3.50% 3.63% 3.15%
$100,000 to less than
$250,000................ 3.00% 3.09% 2.70%
$250,000 to less than
$500,000................ 2.50% 2.56% 2.25%
$500,000 to less than
$1,000,000.............. 1.00% 1.01% 0.90%
$1,000,000 or more......... -0- -0- -0-
</TABLE>
Except for shareholders beneficially owning Class A Shares of a Portfolio
on December 11, 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 December
11, 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 SERVICES AND PRIVILEGES
The services and privileges described under this heading may not be
available to certain clients of the Adviser, its affiliates, certain Service
Organizations and Institutions, and the Adviser, its affiliates, some Service
Organizations and Institutions may impose certain conditions on their clients
which are different from those described in this Prospectus. Such investors
should consult the Adviser, its affiliates, their Service Organization or
Institution in this regard.
EXCHANGE PRIVILEGE
The Exchange Privilege enables you to purchase, in exchange for shares of a
Portfolio, shares of the same Class of another Portfolio in the ISG Family of
Funds, to the extent such shares are offered for sale in your state of
residence. If you desire to use this Privilege, you should consult the Adviser,
its affiliate or Institution where you maintain your account, your Service
Organization or BISYS to determine if it is available and whether any conditions
are imposed on its use.
To use the Exchange Privilege, you or your Service Organization or
Institution acting on your behalf must give exchange instructions to the
Transfer Agent in writing or by telephone, or in accordance with the
instructions pertaining to your account at the Adviser or its affiliates. If you
previously established the Telephone Exchange Privilege, you may telephone
exchange instructions by calling 1-800-852-0045. See "How to Redeem
Shares--Redemption Requirements." Before any exchange into a Portfolio offered
by another prospectus, you must obtain and should review a copy of the current
prospectus of the Portfolio into which the exchange is being made. Prospectuses
may be obtained from the Adviser, its affiliates, certain Service Organizations,
the investor's Institution or BISYS. The shares being exchanged must have a
current value of at least $500; furthermore, when establishing a new account by
exchange, the shares being exchanged must have a value of at least the minimum
initial investment required for the Portfolio into which the exchange is being
made.
Shares will be exchanged at the next determined net asset value; however, a
sales load, which may be waived or reduced as described below, may be charged
with respect to exchanges of Class A Shares. No CDSC will be imposed on Class B
Shares at the time of an exchange; however, shares acquired through an exchange
will be subject to the CDSC applicable to the exchanged or acquired shares. The
CDSC applicable on redemption of the acquired shares will be calculated from the
date of the initial purchase of the Class B Shares exchanged. If you are
exchanging Class A Shares into a Portfolio that charges a sales load, you may
qualify for share prices which do not include the sales load or which reflect a
reduced sales load, if the shares you are exchanging were: (a) purchased with a
sales load, (b) acquired by a previous exchange from shares purchased with a
sales load, or (c) acquired through reinvestment of dividends or distributions
paid with respect to the foregoing categories of shares. No fees currently are
charged shareholders directly in connection with exchanges although the Fund
reserves the right, upon not less than 60 days' written notice, to charge
shareholders a nominal administrative fee in accordance with rules promulgated
by the Securities and Exchange Commission. The Fund reserves the right to reject
any exchange request in whole or in part. The Exchange Privilege may be modified
or terminated at any time upon notice to shareholders.
The exchange of shares of one Portfolio for shares of another is treated
for Federal income tax purposes as a sale of the shares given in exchange by the
shareholder and, therefore, an exchanging shareholder may realize a taxable gain
or loss.
AUTO-EXCHANGE PLAN--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 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 25 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, 25 portfolios have been authorized. The other portfolios are not
being offered by this Prospectus. All consideration received by the Fund for
shares of one of the portfolios, and all assets in which such consideration is
invested, belong to that portfolio (subject only to the rights of creditors of
the Fund) and will be subject to the liabilities related thereto. The income
attributable to, and expenses of, one portfolio are treated separately from
those of the other portfolios.
The Transfer Agent maintains a record of each investor's ownership and
sends confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at 3435 Stelzer
Road, Columbus, Ohio 43219-3035.
<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--Foreign
Securities Risk."
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits which may be held by a Portfolio will not benefit from insurance from
the Bank Insurance Fund or the Savings Association Insurance Fund administered
by the Federal Deposit Insurance Corporation.
Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations, bearing fixed, floating or variable interest
rates.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS--Each
Portfolio, except the 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 Risk" 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
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. Using these
techniques may produce higher than normal portfolio turnover for a Portfolio and
may affect the degree to which its net asset value fluctuates.
Portfolio turnover may vary from year to year, as well as within a year. No
Portfolio will consider portfolio turnover to be a limiting factor in making
investment decisions. Under normal market conditions, the portfolio turnover
rate for the current fiscal year is anticipated to be less than 200% for the
Small Cap Opportunity Portfolio, 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.
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 Lazard'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.
<PAGE>
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THE INFINITY MUTUAL FUNDS, INC.
ISG Funds
LARGE CAP EQUITY PORTFOLIO
SMALL CAP OPPORTUNITY PORTFOLIO
MID CAP PORTFOLIO
EQUITY VALUE PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
MUNICIPAL INCOME PORTFOLIO
GOVERNMENT INCOME PORTFOLIO
TAX FREE MONEY MARKET PORTFOLIO
GOVERNMENT MONEY MARKET PORTFOLIO
CLASS A SHARES, CLASS B SHARES AND TRUST SHARES
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER __, 1998
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This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current Prospectus for
the ISG Funds listed above (each, a "Portfolio" and collectively, the
"Portfolios") of The Infinity Mutual Funds, Inc. (the "Fund"), dated October __,
1998, as each may be revised from time to time. To obtain a copy of the relevant
Prospectus, please write to the Fund at 3435 Stelzer Road, Columbus, Ohio
43219-3035. This Statement of Additional Information relates only to the
Portfolios and not to any of the Fund's other portfolios.
First American National Bank (the "Adviser") serves as each Portfolio's
investment adviser.
BISYS Fund Services Limited Partnership ("BISYS") serves as each
Portfolio's administrator and distributor.
<PAGE>
TABLE OF CONTENTS
Page
Investment Objectives and Management Policies............ B-3
Management of the Fund................................... B-22
Management Arrangements.................................. B-24
Purchase and Redemption of Shares........................ B-29
Determination of Net Asset Value......................... B-31
Performance Information.................................. B-34
Dividends, Distributions and Taxes....................... B-36
Portfolio Transactions................................... B-40
Information About the Portfolios......................... B-41
Custodian, Transfer and Dividend Disbursing
Agent, Counsel and Independent Auditors................ B-42
Financial Statements..................................... B-42
Appendix................................................. B-43
<PAGE>
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN CONJUNCTION
WITH THE SECTIONS IN THE PROSPECTUS ENTITLED "DESCRIPTION OF THE PORTFOLIOS" AND
"APPENDIX."
PORTFOLIO SECURITIES
BANK OBLIGATIONS. (All Portfolios) Domestic commercial banks organized
under Federal law are supervised and examined by the Comptroller of the Currency
and are required to be members of the Federal Reserve System and to have their
deposits insured by the Federal Deposit Insurance Corporation (the "FDIC").
Domestic banks organized under state law are supervised and examined by state
banking authorities but are members of the Federal Reserve System only if they
elect to join. In addition, state banks whose certificates of deposit ("CDs")
may be purchased by the Portfolio are insured by the Bank Insurance Fund
administered by the FDIC (although such insurance may not be of material benefit
to the Portfolio, depending upon the principal amount of the CDs of each bank
held by the Portfolio) and are subject to Federal examination and to a
substantial body of Federal law and regulation. As a result of Federal and state
laws and regulations, domestic branches of domestic banks, among other things,
are generally required to maintain specified levels of reserves, and are subject
to other supervision and regulation designed to promote financial soundness.
Obligations of foreign branches of domestic banks, foreign
subsidiaries of domestic banks and domestic branches of foreign banks, such as
CDs and time deposits ("TDs"), may be general obligations of the parent banks in
addition to the issuing branch, or may be limited by the terms of a specific
obligation or governmental regulation. Such obligations are subject to different
risks than are those of domestic banks. These risks include foreign economic and
political developments, foreign governmental restrictions that may adversely
affect payment of principal and interest on the obligations, foreign exchange
controls and foreign withholding and other taxes on interest income. Foreign
branches and subsidiaries are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks, such as mandatory reserve
requirements, loan limitations, and accounting, auditing and financial
recordkeeping requirements. In addition, less information may be publicly
available about a foreign branch of a domestic bank or about a foreign bank than
about a domestic bank. If a domestic bank with deposits insured by the FDIC
becomes insolvent, unsecured deposits and other general obligations of such
bank's foreign branches will be subordinated to the receivership expenses of the
FDIC and such bank's domestic deposits and would be subject to the loss of
principal to a greater extent than such bank's domestic branch deposits.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by Federal and state
regulation as well as governmental action in the country in which the foreign
bank has its head office. In addition, Federal branches licensed by the
Comptroller of the Currency and branches licensed by certain states ("State
Branches") may be required to: (1) pledge to the regulator, by depositing assets
with a designated bank within the state, a certain percentage of their assets as
fixed from time to time by the appropriate regulatory authority; and (2)
maintain assets within the state in an amount equal to a specified percentage of
the aggregate amount of liabilities of the foreign bank payable at or through
all of its agencies or branches within the state. The deposits of Federal and
State Branches generally must be insured by the FDIC if such branches take
deposits of less than $100,000.
In view of the foregoing factors associated with the purchase of CDs
and TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, or by domestic branches of foreign banks, the Adviser carefully
evaluates such investments on a case-by-case basis.
Each Portfolio may purchase CDs issued by banks, savings and loan
associations and similar thrift institutions with less than $1 billion in
assets, which are members of the FDIC, provided the Portfolio purchases any such
CD in a principal amount of not more than $100,000, which amount would be fully
insured by the Bank Insurance Fund or the Savings Association Insurance Fund
administered by the FDIC. Interest payments on such a CD are not insured by the
FDIC. No Portfolio will own more than one such CD per such issuer.
Each Portfolio may invest in short-term U.S. dollar denominated
corporate obligations that are originated, negotiated and structured by a
syndicate of lenders ("Co-Lenders") consisting of commercial banks, thrift
institutions, insurance companies, finance companies or other financial
institutions one or more of which administers the security on behalf of the
syndicate (the "Agent Bank"). Co-Lenders may sell such securities to third
parties called "Participants." The Portfolio may invest in such securities
either by participating as a Co-Lender at origination or by acquiring an
interest in the security from a Co-Lender or a Participant (collectively,
"participation interests"). Co-Lenders and Participants interposed between the
Fund and the corporate borrower (the "Borrower"), together with Agent Banks, are
referred herein as "Intermediate Participants." The Portfolio also may purchase
a participation interest in a portion of the rights of an Intermediate
Participant, which would not establish any direct relationship between the
Portfolio and the Borrower. In such cases, the Portfolio would be required to
rely on the Intermediate Participant that sold the participation interest not
only for the enforcement of the Portfolio's rights against the Borrower but also
for the receipt and processing of payments due to the Portfolio under the
security. Because it may be necessary to assert through an Intermediate
Participant such rights as may exist against the Borrower, in the event the
Borrower fails to pay principal and interest when due, the Portfolio may be
subject to delays, expenses and risks that are greater than those that would be
involved if the Portfolio could enforce its rights directly against the
Borrower. Moreover, under the terms of a participation interest, the Portfolio
may be regarded as a creditor of the Intermediate Participant (rather than of
the Borrower), so that the Portfolio also may be subject to the risk that the
Intermediate Participant may become insolvent. Similar risks may arise with
respect to the Agent Bank if, for example, assets held by the Agent Bank for the
benefit of the Portfolio were determined by the appropriate regulatory authority
or court to be subject to the claims of the Agent Bank's creditors. In such
cases, the Portfolio might incur certain costs and delays in realizing payment
in connection with the participation interest or suffer a loss of principal
and/or interest. Further, in the event of the bankruptcy or insolvency of the
Borrower, the obligation of the Borrower to repay the loan may be subject to
certain defenses that can be asserted by such Borrower as a result of improper
conduct by the Agent Bank or Intermediate Participant.
REPURCHASE AGREEMENTS. (All Portfolios) Each Portfolio may enter into
repurchase agreements. The Fund's custodian or sub-custodian employed in
connection with third-party repurchase transactions will have custody of, and
will hold in a segregated account, securities acquired by a Portfolio under a
repurchase agreement. In connection with its third-party repurchase
transactions, the Fund will employ only eligible sub-custodians that meet the
requirements set forth in Section 17(f) of the Investment Company Act of 1940,
as amended (the "1940 Act"). Repurchase agreements are considered by the staff
of the Securities and Exchange Commission to be loans by the Portfolio entering
into them. In an attempt to reduce the risk of incurring a loss on a repurchase
agreement, each Portfolio will enter into repurchase agreements only with
registered or unregistered securities dealers or banks with total assets in
excess of one billion dollars or primary government securities dealers reporting
to the Federal Reserve Bank of New York, with respect to securities of the type
in which such Portfolio may invest or government securities regardless of their
remaining maturities, and will require that additional securities be deposited
with it if the value of the securities purchased should decrease below resale
price. The Adviser will monitor on an ongoing basis the value of the collateral
to assure that it always equals or exceeds the repurchase price. Each Portfolio
will consider on an ongoing basis the creditworthiness of the institutions with
which it enters into repurchase agreements.
ILLIQUID SECURITIES. (All Portfolios) Each Portfolio may invest up to
10% of the value of its net assets in illiquid securities. The term "illiquid
securities" for this purpose means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which the Portfolio has valued the securities and includes, among other things,
restricted securities other than those the Adviser has determined to be liquid
pursuant to guidelines established by the Fund's Board and repurchase agreements
maturing in more than seven days. Commercial paper issues include securities
issued by major corporations without registration under the Securities Act of
1933, as amended ("1933 Act"), in reliance on the exemption from such
registration afforded by Section 3(a)(3) thereof and commercial paper and medium
term notes issued in reliance on the so-called "private placement" exemption
from registration which is afforded by Section 4(2) of the 1933 Act ("Section
4(2) paper"). Section 4(2) paper is restricted as to disposition under the
Federal securities laws in that any resale must similarly be made in an exempt
transaction. Section 4(2) paper ordinarily is resold to other institutional
investors through or with the assistance of investment dealers who make a market
in Section 4(2) paper, thus providing liquidity.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are sold in transactions not requiring registration.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.
To facilitate the increased size and liquidity of the institutional
markets for unregistered securities, the Securities and Exchange Commission
adopted Rule 144A under the 1933 Act. Rule 144A establishes a "safe harbor" from
the registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Section 4(2) paper that is issued by a
company that files reports under the Securities Exchange Act of 1934, as
amended, generally is eligible to be sold in reliance on the safe harbor of Rule
144A. Pursuant to Rule 144A, the institutional restricted securities markets may
provide both readily ascertainable values for restricted securities and the
ability to liquidate an investment in order to satisfy share redemption orders
on a timely basis. Where a substantial market of qualified institutional buyers
has developed for certain restricted securities purchased by the Fund pursuant
to Rule 144A under the Securities Act of 1933, as amended, the Fund intends to
treat such securities as liquid securities in accordance with procedures
approved by the Fund's Board. Because it is not possible to predict with
assurance how the market for specific restricted securities sold pursuant to
Rule 144A will develop, the Fund's Board has directed the Adviser to monitor
carefully each Portfolio's investments in such securities with particular regard
to trading activity, availability of reliable price information and other
relevant information. To the extent that, for a period of time, qualified
institutional buyers cease purchasing restricted securities pursuant to Rule
144A, a Portfolio's investing in such securities may have the effect of
increasing the level of illiquidity in its investment portfolio during such
period.
FORWARD COMMITMENTS. (All Portfolios) Securities purchased on a
forward commitment or when-issued basis are subject to changes in value
(generally changing in the same way, i.e., appreciating when interest rates
decline and depreciating when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Securities purchased on a forward
commitment or when-issued basis may expose the Portfolio to risks because they
may experience such fluctuations prior to their actual delivery. Purchasing
securities on a when-issued basis can involve the additional risk that the yield
available in the market when the delivery takes place actually may be higher
than that obtained in the transaction itself. Purchasing securities on a forward
commitment or when-issued basis when the Portfolio is fully or almost fully
invested may result in greater potential fluctuation in the value of the
Portfolio's net assets and its net asset value per share.
MORTGAGE-RELATED SECURITIES. (Government Income Portfolio)
Mortgage-related securities are a form of Derivative collateralized by pools of
commercial or residential mortgages. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related and
private organizations. These securities may include complex instruments such as
collateralized mortgage obligations and stripped mortgage-backed securities,
mortgage pass-through securities, interests in REMICs or other kinds of
mortgage-backed securities, including those with fixed, floating and variable
interest rates, those with interest rates that change based on multiples of
changes in a specified index of interest rates and those with interest rates
that change inversely to changes in interest rates.
GOVERNMENT AGENCY SECURITIES--Mortgage-related securities issued by the
Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the department of Housing and Urban
Development. GNMA certificates also are supported by the authority of GNMA to
borrow funds from the U.S. Treasury to make payments under its guarantee.
GOVERNMENT RELATED SECURITIES--Mortgage-related securities issued by the Federal
National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the Untied States. The FNMA is a government-sponsored organization
owned entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of principal and interest by FNMA.
Mortgage-related securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "PCs"). The FHLMC is a corporate instrumentality of
the United States created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Bank and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by the
FHLMC. The FHLMC guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. When the FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
PRIVATE ENTITY SECURITIES--These mortgage-related securities are issued by
commercial banks, savings and loan institutions, mortgage bankers, private
mortgage insurance companies and other non-governmental issuers. Timely payment
of principal and interest on mortgage-related securities backed by pools created
by non-governmental issuers often is supported partially by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance. The insurance and guarantees are issued by government entities,
private insurers and the mortgage poolers. There can be no assurance that the
private insurers or mortgage poolers can meet their obligations under the
policies, so that if the issuers default on their obligations the holders of the
security could sustain a loss. No insurance or guarantee covers the Portfolio or
the price of the Portfolio's shares. Mortgage-related securities issued by
non-governmental issuers generally offer a higher rate of interest than
government-agency and government-related securities because there are no direct
or indirect government guarantees of payment.
COMMERCIAL MORTGAGE-RELATED SECURITIES--Commercial mortgage-related securities
generally are multi-class debt or pass-through certificates secured by mortgage
loans on commercial properties. These mortgage-related securities generally are
structured to provide protection to the senior classes investors against
potential losses on the underlying mortgage loans. This protection generally is
provided by having the holders of subordinated classes of securities
("Subordinated Securities") take the first loss if there are defaults on the
underlying commercial mortgage loans. Other protection, which may benefit all of
the classes or particular classes, may include issuer guarantees, reserve funds,
additional Subordinated Securities, cross-collateralization and
over-collateralization.
Each of these Portfolios may invest in Subordinated Securities issued
or sponsored by commercial banks, savings and loan institutions, mortgage
bankers, private mortgage insurance companies and other non-governmental
issuers. Subordinated Securities have no governmental guarantee, and are
subordinated in some manner as to the payment of principal and/or interest to
the holders of more senior mortgage-related securities arising out of the same
pool of mortgages. The holders of Subordinated Securities typically are
compensated with a higher stated yield than are the holders of more senior
mortgage-related securities. On the other hand, Subordinated Securities
typically subject the holder to greater risk than senior mortgage-related
securities and tend to be rated in a lower rating category, and frequently a
substantially lower rating category, than the senior mortgage-related securities
issued in respect of the same pool of mortgage. Subordinated Securities
generally are likely to be more sensitive to changes in prepayment and interest
rates and the market for such securities may be less liquid than is the case for
traditional fixed-income securities and senior mortgage-related securities.
The market for commercial mortgage-related securities developed more
recently and in terms of total outstanding principal amount of issues is
relatively small compared to the market for residential single-family
mortgage-related securities. In addition, commercial lending generally is viewed
as exposing the lender to a greater risk of loss than one- to four-family
residential lending. Commercial lending, for example, typically involves larger
loans to single borrowers or groups of related borrowers than residential one-
to four-family mortgage loans. In addition, the repayment of loans secured by
income producing properties typically is dependent upon the successful operation
of the related real estate project and the cash flow generated therefrom.
Consequently, adverse changes in economic conditions and circumstances are more
likely to have an adverse impact on mortgage-related securities secured by loans
on commercial properties than on those secured by loans on residential
properties.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs")--A CMO is a multiclass bond backed
by a pool of mortgage pass-through certificates or mortgage loans. CMOs may be
collateralized by (a) Ginnie Mae, Fannie Mae, or Freddie Mac pass-through
certificates, (b) unsecuritized mortgage loans insured by the Federal Housing
Administration or guaranteed by the Department of Veterans' Affairs, (c)
unsecuritized conventional mortgages, (d) other mortgage-related securities, or
(e) any combination thereof. Each class of CMOs, often referred to as a
"tranche," is issued at a specific coupon rate and has a stated maturity or
final distribution date. Principal prepayments on collateral underlying a CMO
may cause it to be retired substantially earlier than the stated maturities or
final distribution dates. The principal and interest on the underlying mortgages
may be allocated among the several classes of a series of a CMO in many ways.
One or more tranches of a CMO may have coupon rates which reset periodically at
a specified increment over an index, such as the London Interbank Offered Rate
("LIBOR") (or sometimes more than one index). These floating rate CMOs typically
are issued with lifetime caps on the coupon rate thereon. Each of these
Portfolios also may invest in inverse floating rate CMOs. Inverse floating rate
CMOs constitute a tranche of a CMO with a coupon rate that moves in the reverse
direction to an applicable index such a LIBOR. Accordingly, the coupon rate
thereon will increase as interest rates decrease. Inverse floating rate CMOs are
typically more volatile than fixed or floating rate tranches of CMOs.
Many inverse floating rate CMOs have coupons that move inversely to a
multiple of the applicable indexes. The effect of the coupon varying inversely
to a multiple of an applicable index creates a leverage factor. Inverse floaters
based on multiples of a stated index are designed to be highly sensitive to
changes in interest rates and can subject the holders thereof to extreme
reductions of yield and loss of principal. The markets for inverse floating rate
CMOs with highly leveraged characteristics at times may be very thin. The
Portfolio's ability to dispose of its positions in such securities will depend
on the degree of liquidity in the markets for such securities. It is impossible
to predict the amount of trading interest that may exist in such securities, and
therefore the future degree of liquidity.
STRIPPED MORTGAGE-BACKED SECURITIES--The Portfolio also may invest in stripped
mortgage-backed securities. Stripped mortgage-backed securities are created by
segregating the cash flows from underlying mortgage loans or mortgage securities
to create two or more new securities, each with a specified percentage of the
underlying security's principal or interest payments. Mortgage securities may be
partially stripped so that each investor class receives some interest and some
principal. When securities are completely stripped, however, all of the interest
is distributed to holders of one type of security, known as an interest-only
security, or IO, and all of the principal is distributed to holders of another
type of security known as a principal-only security, or PO. Strips can be
created in a pass-through structure or as tranches of a CMO. The yields to
maturity on IOs and POs are very sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, the Portfolio may not fully recoup its initial investment in IOs.
Conversely, if the underlying mortgage assets experience less than anticipated
prepayments of principal, the yield on POs could be materially and adversely
affected.
REAL ESTATE INVESTMENT TRUSTS--A REIT is a corporation, or a business trust that
would otherwise be taxed as a corporation, which meets the definitional
requirements of the Internal Revenue Code of 1986, as amended (the "Code"). The
Code permits a qualifying REIT to deduct dividends paid, thereby effectively
eliminating corporate level Federal income tax and making the REIT a
pass-through vehicle for Federal income tax purposes. To meet the definitional
requirements of the Code, a REIT must, among other things, invest substantially
all of its assets in interests in real estate (including mortgages and other
REITs) or cash and government securities, derive most of its income from rents
from real property or interest on loans secured by mortgages on real property,
and distribute to shareholders annually a substantial portion of its otherwise
taxable income.
REITs are characterized as equity REITs, mortgage REITs and hybrid
REITs. Equity REITs, which may include operating or finance companies, own real
estate directly and the value of, and income earned by, the REITs depends upon
the income of the underlying properties and the rental income they earn. Equity
REITs also can realize capital gains (or losses) by selling properties that have
appreciated (or depreciated) in value. Mortgage REITs can make construction,
development or long-term mortgage loans and are sensitive to the credit quality
of the borrower. Mortgage REITs derive their income from interest payments on
such loans. Hybrid REITs combine the characteristics of both equity and mortgage
REITs, generally by holding both ownership interests and mortgage interests in
real estate. The value of securities issued by REITs are affected by tax and
regulatory requirements and by perceptions of management skill. They also are
subject to heavy cash flow dependency, defaults by borrowers or tenants,
self-liquidation and the possibility of failing to qualify for tax-free status
under the Code or to maintain exemption from the 1940 Act.
ADJUSTABLE-RATE MORTGAGE LOANS ("ARMs")--ARMs eligible for inclusion in a
mortgage pool will generally provide for a fixed initial mortgage interest rate
for a specified period of time, generally for either the first three, six,
twelve, thirteen, thirty-six, or sixty scheduled monthly payments. Thereafter,
the interest rates are subject to periodic adjustment based on changes in an
index. ARMs typically have minimum and maximum rates beyond which the mortgage
interest rate may not vary over the lifetime of the loans. Certain ARMs provide
for additional limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. Negatively amortizing ARMs may
provide limitations on changes in the required monthly payment. Limitations on
monthly payments can result in monthly payments that are greater or less than
the amount necessary to amortize a negatively amortizing ARM by its maturity at
the interest rate in effect during any particular month.
OTHER MORTGAGE-RELATED SECURITIES--Other mortgage-related securities include
securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals. Other mortgage-related securities may
be equity or debt securities issued by agencies or instrumentalities of the U.S.
Government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.
American and Global Depositary Receipts. (Large Cap Equity Portfolio,
Small Cap Opportunity Portfolio, Mid Cap Portfolio, Equity Value Portfolio and
International Equity Portfolio) Each of these Portfolios may invest in the
securities of foreign issuers in the form of American Depositary Receipts
("ADRs") and, with respect to the International Equity Portfolio, Global
Depositary Receipts ("GDRs") and other forms of depositary receipts. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by a United States bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. GDRs are receipts issued outside the
United States typically by non-United States banks and trust companies that
evidence ownership of either foreign or domestic securities. Generally, ADRs in
registered form are designed for use in the United States securities markets and
GDRs in bearer form are designed for use outside the United States.
STANDARD & POOR'S DEPOSITARY RECEIPTS. (Large Cap Equity Portfolio,
Small Cap Opportunity Portfolio, Mid Cap Portfolio and Equity Value Portfolio)
These securities, commonly referred to as "spiders," represent an interest in a
fixed portfolio of common stocks designed to track the price and dividend yield
performance of the Standard & Poor's 500 Index or the Standard & Poor's MidCap
400 Index, as the case may be.
MUNICIPAL OBLIGATIONS. (Municipal Income Portfolio and Tax Free Money
Market Portfolio) The term "Municipal Obligations" generally includes debt
obligations issued to obtain funds for various public purposes, including the
construction of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets and water
and sewer works. Other public purposes for which Municipal Obligations may be
issued include refunding outstanding obligations, obtaining funds for general
operating expenses and lending such funds to other public institutions and
facilities. In addition, certain types of industrial development bonds are
issued by or on behalf of public authorities to obtain funds to provide for the
construction, equipment, repair or improvement of privately operated housing
facilities, sports facilities, convention or trade show facilities, airport,
mass transit, industrial, port or parking facilities, air or water pollution
control facilities and certain local facilities for water supply, gas,
electricity, or sewage or solid waste disposal; the interest paid on such
obligations may be exempt from Federal income tax, although current tax laws
place substantial limitations on the size of such issues. There are, of course,
variations in the security of Municipal Obligations, both within a particular
classification and between classifications.
Floating and variable rate demand notes and bonds are tax exempt
obligations ordinarily having stated maturities in excess of one year, but which
permit the holder to demand payment of principal at any time, or at specified
intervals. The issuer of such obligations ordinarily has a corresponding right,
after a given period, to prepay in its discretion the outstanding principal
amount of the obligations plus accrued interest upon a specified number of days'
notice to the holders thereof. The interest rate on a floating rate demand
obligation is based on a known lending rate, such as a bank's prime rate, and is
adjusted automatically each time such rate is adjusted. The interest rate on a
variable rate demand obligation is adjusted automatically at specified
intervals.
The yields on Municipal Obligations are dependent on a variety of
factors, including general economic and monetary conditions, money market
factors, conditions in the Municipal Obligations market, size of a particular
offering, maturity of the obligation and rating of the issue. The imposition of
the advisory and administration fees, as well as other operating expenses, will
have the effect of reducing the yield to investors.
Each of these Portfolios may invest up to 5% of the value of its total
assets in municipal lease obligations or installment purchase contract
obligations (collectively, "lease obligations"). Lease obligations have special
risks not ordinarily associated with Municipal Obligations. Although lease
obligations do not constitute general obligations of the municipality for which
the municipality's taxing power is pledged, a lease obligation ordinarily is
backed by the municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. Certain lease obligations in which
these Portfolios may invest may contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease payments in future
years unless money is appropriated for such purpose on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the leased property in the event of foreclosure might prove
difficult. In addition, no assurance can be given as to the liquidity of certain
lease obligations. The staff of the Securities and Exchange Commission currently
considers certain lease obligations to be illiquid. The Fund's Board of
Directors has established guidelines for the Adviser to determine the liquidity
and appropriate valuation of lease obligations based on factors which include:
(1) the frequency of trades and quotes for the lease obligation or similar
securities; (2) the number of dealers willing to purchase or sell the lease
obligation or similar securities and the number of other potential buyers; (3)
the willingness of dealers to undertake to make a market in the security or
similar securities; and (4) the nature of the marketplace trades, including the
time needed to dispose of the security, the method of soliciting offers, and the
mechanics of transfer.
Each of these Portfolios will purchase tender option bonds only when
the Adviser is satisfied that the custodial and tender option arrangements,
including the fee payment arrangements, will not adversely affect the tax exempt
status of the underlying Municipal Obligations and that payment of any tender
fees will not have the effect of creating taxable income for the Portfolio.
Based on the tender option bond agreement, each of these Portfolios expects to
be able to value the tender option bond at par; however, the value of the
instrument will be monitored to assure that is valued at fair value.
RATINGS OF MUNICIPAL OBLIGATIONS. Subsequent to its purchase by a
Portfolio, an issue of rated Municipal Obligations may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Portfolio.
Neither event will require the sale of such Municipal Obligations by the
Portfolio, but the Adviser will consider such event in determining whether the
Portfolio should continue to hold the Municipal Obligations. To the extent that
the ratings given by Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Ratings Group ("S&P") or Fitch IBCA, Inc. ("Fitch") for Municipal
Obligations may change as a result of changes in such organizations or their
rating systems, the Portfolio will attempt to use comparable ratings as
standards for its investments in accordance with the investment policies
contained in the relevant Portfolio's Prospectus and this Statement of
Additional Information. The ratings of Moody's, S&P and Fitch represent their
opinions as to the quality of the Municipal Obligations which they undertake to
rate. It should be emphasized, however, that ratings are relative and subjective
and are not absolute standards of quality. Although these ratings may be an
initial criterion for selection of portfolio investments, the Adviser also will
evaluate these securities and the creditworthiness of the issuers of such
securities based upon financial and other available information.
MANAGEMENT POLICIES
OPTIONS TRANSACTIONS. (Large Cap Equity Portfolio, Small Cap
Opportunity Portfolio, Mid Cap Portfolio, Equity Value Portfolio, Government
Income Portfolio and International Equity Portfolio) Each of these Portfolios
may engage in options transactions, such as purchasing or writing covered call
or put options. The principal reason for the Portfolio writing covered call
options is to realize, through the receipt of premiums, a greater return than
would be realized on its portfolio securities alone. In return for a premium,
the writer of a covered call option forfeits the right to any appreciation in
the value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). Nevertheless,
the call writer retains the risk of a decline in the price of the underlying
security. Similarly, the principal reason for writing covered put options is to
realize income in the form of premiums. The writer of a covered put option
accepts the risk of a decline in the price of the underlying security. The size
of the premiums that the Portfolio may receive may be adversely affected as new
or existing institutions, including other investment companies, engage in or
increase their option-writing activities.
Options written ordinarily will have expiration dates between one and
nine months from the date written. The exercise price of the options may be
below, equal to or above the market values of the underlying securities at the
time the options are written. In the case of call options, these exercise prices
are referred to as "in-the-money," "at-the-money" and "out-of-the-money,"
respectively. The Portfolio may write (a) in-the-money call options when the
Adviser expects that the price of the underlying security will remain stable or
decline moderately during the option period, (b) at-the-money call options when
the Adviser expects that the price of the underlying security will remain stable
or advance moderately during the option period and (c) out-of-the-money call
options when the Adviser expects that the premiums received from writing the
call option plus the appreciation in market price of the underlying security up
to the exercise price will be greater than the appreciation in the price of the
underlying security alone. In these circumstances, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the-money, at-the-money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be utilized in the same market environments that such call options are used
in equivalent transactions.
So long as the Portfolio's obligation as the writer of an option
continues, it may be assigned an exercise notice by the broker-dealer through
which the option was sold, requiring it to deliver, in the case of a call, or
take delivery of, in the case of a put, the underlying security against payment
of the exercise price. This obligation terminates when the option expires or the
Portfolio effects a closing purchase transaction. The Portfolio can no longer
effect a closing purchase transaction with respect to an option once it has been
assigned an exercise notice.
While it may choose to do otherwise, the Portfolio generally will
purchase or write only those options for which the Adviser believes there is an
active secondary market so as to facilitate closing transactions. There is no
assurance that sufficient trading interest to create a liquid secondary market
on a securities exchange will exist for any particular option or at any
particular time, and for some options no such secondary market may exist. A
liquid secondary market in an option may cease to exist for a variety of
reasons. In the past, for example, higher than anticipated trading activity or
order flow, or other unforeseen events, at times have rendered certain clearing
facilities inadequate and resulted in the institution of special procedures,
such as trading rotations, restrictions on certain types of orders or trading
halts or suspensions in one or more options. There can be no assurance that
similar events, or events that otherwise may interfere with the timely execution
of customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. If, as a covered call option
writer, the Portfolio is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise or it
otherwise covers its position.
The Portfolio intends to treat options in respect of specific
securities that are not traded on a national securities exchange and the
securities underlying covered call options written by the Portfolio as illiquid
securities.
Each of these Portfolios will purchase options only to the extent
permitted by the policies of state securities authorities in states where shares
of the Portfolio are qualified for offer and sale.
STOCK INDEX OPTIONS. (Large Cap Equity Portfolio, Small Cap
Opportunity Portfolio, Mid Cap Portfolio, Equity Value Portfolio and
International Equity Portfolio) Each of these Portfolios may purchase and write
put and call options on stock indexes to the extent of 15% of the value of its
net assets. Options on stock indexes are similar to options on stock except that
(a) the expiration cycles of stock index options are monthly, while those of
stock options are currently quarterly, and (b) the delivery requirements are
different. Instead of giving the right to take or make delivery of a stock at a
specified price, an option on a stock index gives the holder the right to
receive a cash "exercise settlement amount" equal to (i) the amount, if any, by
which the fixed exercise price of the option exceeds (in the case of a put) or
is less than (in the case of a call) the closing value of the underlying index
on the date of exercise, multiplied by (ii) a fixed "index multiplier." Receipt
of this cash amount will depend upon the closing level of the stock index upon
which the option is based being greater than, in the case of a call, or less
than, in the case of a put, the exercise price of the option. The amount of cash
received will be equal to such difference between the closing price of the index
and the exercise price of the option expressed in dollars times a specified
multiple. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. The writer may offset its position in
stock index options prior to expiration by entering into a closing transaction
on an exchange or it may let the option expire unexercised.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. (Large Cap Equity
Portfolio, Small Cap Opportunity Portfolio, Mid Cap Portfolio, Equity Value
Portfolio and International Equity Portfolio) Upon exercise of an option, the
writer of the option delivers to the holder of the option the futures position
and the accumulated balance in the writer's futures margin account, which
represents the amount by which the market price of the futures contract exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. The potential loss related to the
purchase of options on futures contracts is limited to the premium paid for the
option (plus transaction costs). Because the value of the option is fixed at the
time of sale, there are no daily cash payments to reflect changes in the value
of the underlying contract; however, the value of the option does change daily
and that change would be reflected in the net asset value of the Portfolio.
FUTURE DEVELOPMENTS. Each Portfolio may take advantage of
opportunities in the area of options and futures contracts and options on
futures contracts and any other derivative investments which are not presently
contemplated for use by such Portfolio or which are not currently available but
which may be developed, to the extent such opportunities are both consistent
with its investment objective and legally permissible for the Portfolio. Before
entering into such transactions or making any such investment, the Portfolio
will provide appropriate disclosure in its prospectus.
LENDING PORTFOLIO SECURITIES. To a limited extent, each Portfolio may
lend its portfolio securities to brokers, dealers and other financial
institutions, provided it receives cash collateral which at all times is
maintained in an amount equal to at least 100% of the current market value of
the securities loaned. By lending its portfolio securities, a Portfolio can
increase its income through the investment of the cash collateral. For purposes
of this policy, each Portfolio considers collateral consisting of U.S.
Government securities to be the equivalent of cash. From time to time, a
Portfolio may return to the borrower or a third party which is unaffiliated with
the Fund, and which is acting as a "placing broker," a part of the interest
earned from the investment of collateral received for securities loaned.
The Securities and Exchange Commission currently requires that the
following conditions must be met whenever portfolio securities are loaned: (1)
the Portfolio must receive at least 100% cash collateral from the borrower; (2)
the borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) the Portfolio must be
able to terminate the loan at any time; (4) the Portfolio must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions payable on the loaned securities, and any increase in market
value; (5) the Portfolio may pay only reasonable custodian fees in connection
with the loan; and (6) while voting rights on the loaned securities may pass to
the borrower, the Fund's Board of Directors must terminate the loan and regain
the right to vote the securities if a material event adversely affecting the
investment occurs. These conditions may be subject to future modification.
REVERSE REPURCHASE AGREEMENTS. (Government Money Market Portfolio) The
Portfolio may enter into reverse repurchase agreements. The Portfolio will
maintain in a segregated account permissible liquid assets equal to the
aggregate amount of its reverse repurchase obligations, plus accrued interest,
in certain cases, in accordance with releases promulgated by the Securities and
Exchange Commission.
INVESTMENT RESTRICTIONS
Each Portfolio has adopted investment restrictions numbered 1 through
8 as fundamental policies and each Portfolio, other than International Equity
Portfolio, has adopted investment restrictions numbered 13 and 14 as additional
fundamental policies. These restrictions cannot be changed, as to a Portfolio,
without approval by the holders of a majority (as defined in the 1940 Act) of
such Portfolio's outstanding voting securities. Investment restrictions numbered
9 through 12 are not fundamental policies and may be changed by vote of a
majority of the Fund's Directors at any time. No Portfolio may:
1. Invest in commodities, except that each Portfolio may purchase and
sell options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
2. Purchase, hold or deal in real estate, or oil, gas or other mineral
leases or exploration or development programs, but each Portfolio may purchase
and sell securities that are secured by real estate or issued by companies that
invest or deal in real estate.
3. Borrow money, except that each Portfolio may borrow up to 33-1/3%
of the value of its total assets. For purposes of this investment restriction, a
Portfolio's entry into options, forward contracts, futures contracts, including
those relating to indexes, and options on futures contracts or indexes shall not
constitute borrowing.
4. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, each Portfolio
may lend its portfolio securities in an amount not to exceed 33-1/3% of the
value of its total assets. Any loans of portfolio securities will be made
according to guidelines established by the Securities and Exchange Commission
and the Fund's Board of Directors.
5. Act as an underwriter of securities of other issuers, except to the
extent the Portfolio may be deemed an underwriter under the 1933 Act by virtue
of disposing of portfolio securities, and except that the Municipal Income
Portfolio and Tax Free Money Market Portfolio each may bid separately or as part
of a group for the purchase of Municipal Obligations directly from an issuer for
its own portfolio to take advantage of the lower purchase price available.
6. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act). A Portfolio's investments permitted under Investment
Restriction Nos. 1, 3 and 10 are not considered senior securities for purposes
of this Investment Restriction.
7. Purchase securities on margin, but each Portfolio may make margin
deposits in connection with transactions in options, forward contracts, futures
contracts, including those relating to indexes, and options on futures contracts
or indexes.
8. Invest more than 25% of its assets in the securities of issuers in
any single industry, provided that, in the case of the Municipal Income
Portfolio and Tax Free Money Market Portfolio, there shall be no such limitation
on the purchase of tax exempt municipal obligations and, in the case of each
Portfolio, there shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
9. Invest in the securities of a company for the purpose of exercising
management or control, but each Portfolio will vote the securities it owns as a
shareholder in accordance with its views.
10. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
purchase of securities on a when-issued or forward commitment basis and the
deposit of assets in escrow in connection with writing covered put and call
options and collateral and initial or variation margin arrangements with respect
to options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
11. Enter into repurchase agreements providing for settlement in more
than seven days after notice or purchase securities which are illiquid, if, in
the aggregate, more than 10% of the value of the Portfolio's net assets would be
so invested.
12. Purchase securities of other investment companies, except to the
extent permitted under the 1940 Act.
The following investment restrictions numbered 13 and 14 are
fundamental policies which apply to each Portfolio, except the International
Equity Portfolio. None of these Portfolios may:
13. With respect to 75% of its total assets, invest more than 5% of
its assets in the obligations of any single issuer. This investment restriction
does not apply to the purchase of U.S. Government securities.
14. Hold more than 10% of the outstanding voting securities of any
single issuer. This investment restriction applies only with respect to 75% of
the Portfolio's total assets.
For purposes of Investment Restriction No. 8, industrial development
bonds, where the payment of principal and interest is the ultimate
responsibility of companies within the same industry, are grouped together as an
"industry."
If a percentage restriction is adhered to at the time of investment, a
later change in percentage resulting from a change in values or assets will not
constitute a violation of such restriction.
The Fund may make commitments more restrictive than the restrictions
listed above so as to permit the sale of shares of a Portfolio in certain
states. Should the Fund determine that a commitment is no longer in the best
interest of the Portfolio, and its shareholders, the Fund reserves the right to
revoke the commitment by terminating the sale of such Portfolio's shares in the
state involved.
MANAGEMENT OF THE FUND
Directors and officers of the Fund, together with information as to
their principal business occupations during at least the last five years, are
shown below. Each Director who is an "interested person" of the Fund, as defined
in the 1940 Act, is indicated by an asterisk.
DIRECTORS OF THE FUND
*WILLIAM B. BLUNDIN, PRESIDENT AND CHAIRMAN OF THE BOARD OF DIRECTORS. An
employee of BISYS Fund Services, Inc., BISYS' general partner. Mr.
Blundin also is an officer of other investment companies administered
by BISYS or its affiliates. He is 60 years old and his address is 90
Park Avenue, New York, New York 10016.
NORMA A. COLDWELL, DIRECTOR. International Economist and Consultant;
Executive Vice President of Coldwell Financial Consultants; Trustee
and Treasurer of Meridian House International (International Education
and Cultural Group); Member of the Board of Advisors of Meridian
International Center and Emerging Capital Markets, S.A. (Montevideo,
Uruguay); formerly, Chief International Economist of Riggs National
Bank, Washington, D.C. She is 72 years old and her address is 3330
Southwestern Boulevard, Dallas, Texas 75225.
RICHARD H. FRANCIS, DIRECTOR. Former Executive Vice President and Chief
Financial Officer of Pan American World Airways, Inc. (currently,
debtor-in-possession under the U.S. Bankruptcy Code), March 1988 to
October 1991; Senior Vice President and Chief Financial Officer of
American Standard Inc., 1960 to March 1988. Mr. Francis is a director
of Allendale Mutual Insurance and The Indonesia Fund, Inc. He is 66
years old and his address is 40 Grosvenor Road, Short Hills, New
Jersey 07078.
WILLIAM W. McINNES, DIRECTOR. Private investor. From July 1978 to February
1993, he was Vice-President--Finance and Treasurer of Hospital Corp.
of America. He is also a director of Gulf South Medical Supply and
Diversified Trust Co. He is 48 years old and his address is 116 30th
Avenue South, Nashville, Tennessee 37212.
ROBERT A. ROBINSON, DIRECTOR. Private investor. Since 1991, President
Emeritus, and from 1968 to 1991, President of The Church Pension
Group, NYC. From 1956 to 1966, Senior Vice President of Colonial Bank
& Trust Co. He is also a director of Mariner Institutional Funds,
Inc., Mariner Tax-Free Institutional Funds, Inc., UST Master Funds,
UST Master Tax Exempt Funds, H.B. and F.H. Bugher Foundation,
Morehouse-Barlow Co. Publishers, The Canterbury Cathedral Trust in
America, The Living Church Foundation and Hoosac School. He is 71
years old and his address is 2 Hathaway Common, New Canaan,
Connecticut 06840.
OFFICERS OF THE FUND
JEFFREY C. CUSICK, VICE PRESIDENT AND ASSISTANT SECRETARY. An employee of
BISYS Fund Services, Inc. since July 1995, and an officer of other
investment companies administered by BISYS or its affiliates. From
September 1993 to July 1995, he was Assistant Vice President and, from
1989 to September 1993, he was Manager--Client Services, of Federated
Administrative Services. He is 38 years old and his address is 3435
Stelzer Road, Columbus, Ohio 43219.
WILLIAM TOMKO, VICE PRESIDENT. An employee of BISYS Fund Services, Inc. and an
officer of other investment companies administered by BISYS or its
affiliates. He is 38 years old and his address is 3435 Stelzer Road,
Columbus, Ohio 43219.
GARY R. TENKMAN, TREASURER. An employee of BISYS Fund Services, Inc. since
April 1998, and an officer of other investment companies administered
by BISYS or its affiliates. For more than five years prior thereto, he
was an audit manager with Ernst & Young LLP. He is 34 years old and
his address is 3435 Stelzer Road, Columbus, Ohio 43219.
ROBERT L. TUCH, ASSISTANT SECRETARY. An employee of BISYS Fund Services, Inc.
since June 1991, and an officer of other investment companies
administered by BISYS or its affiliates. From July 1990 to June 1991,
he was Vice President and Associate General Counsel with National
Securities Research Corp. Prior thereto, he was an Attorney with the
Securities and Exchange Commission. He is 45 years old and his address
is 3435 Stelzer Road, Columbus, Ohio 43219.
ALAINA METZ, ASSISTANT SECRETARY. An employee of BISYS Fund Services, Inc.
and an officer of other investment companies administered by BISYS or
its affiliates. She is 29 years old and her address is 3435 Stelzer
Road, Columbus, Ohio 43219.
For so long as the Distribution Plan described in the section
captioned "Management Arrangements--Distribution Plan" remains in effect, the
Directors of the Fund who are not "interested persons" of the Fund, as defined
in the 1940 Act, will be selected and nominated by the Directors who are not
"interested persons" of the Fund.
Directors and officers of the Fund, as a group, owned less than 1% of
any Portfolio's shares of common stock outstanding on October 12, 1998.
The Fund does not pay any remuneration to its officers and Directors
other than fees and expenses to those Directors who are not directors, officers
or employees of the Adviser or BISYS or any of their affiliates. The aggregate
amount of compensation paid to each such Director by the Fund for year ended
December 31, 1997 was as follows:
Total Compensation
Aggregate from Fund
Name of Board Compensation from and Fund Complex Paid
Member Fund* to Board Member
- -------------------- ------------------ ---------------------
Norma A. Coldwell $18,000 $18,000
Richard H. Francis $18,000 $18,000
William W. McInnes $18,000 $18,000
Robert A. Robinson $18,000 $18,000
- -------------
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to $13,422 for all Directors as a group.
MANAGEMENT ARRANGEMENTS
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTION IN THE PROSPECTUS ENTITLED "MANAGEMENT OF THE
PORTFOLIOS."
INVESTMENT ADVISORY AGREEMENT. The Adviser provides investment
advisory services pursuant to the Investment Advisory Agreement (the
"Agreement") dated February 15, 1994 with the Fund. As to each Portfolio, the
Agreement is subject to annual approval by (i) the Fund's Board of Directors or
(ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting
securities of such Portfolio, provided that in either event the continuance also
is approved by a majority of the Directors who are not "interested persons" (as
defined in the 1940 Act) of the Fund or the Adviser, by vote cast in person at a
meeting called for the purpose of voting on such approval. The Agreement was
last approved by the Fund's Board of Directors, including a majority of the
Directors who are not "interested persons" of any party to the Agreement, at a
meeting held on May 14, 1998. As to each Portfolio, the Agreement is terminable
without penalty, on 60 days' notice, by the Fund's Board of Directors or by vote
of the holders of a majority of such Portfolio's shares, or, on not less than 90
days' notice, by the Adviser. The Agreement will terminate automatically, as to
the relevant Portfolio, in the event of its assignment (as defined in the 1940
Act).
As compensation for the Adviser's services, the Fund has agreed to pay
the Adviser a monthly investment advisory fee at the annual rate set forth in
the Portfolios' Prospectus.
With respect to Small Cap Opportunity Portfolio, the Adviser has
entered into a Sub-Investment Advisory Agreement (the "Womack Sub-Advisory
Agreement") with Womack Asset Management, Inc. ("Womack") dated May 14, 1998. As
to such Portfolio, the Womack Sub-Advisory Agreement is subject to annual
approval by (i) the Board or (ii) vote of a majority (as defined in the 1940
Act) of the Portfolio's outstanding voting securities, provided that in either
event the continuance also is approved by a majority of the Board members who
are not "interested persons" (as defined in the 1940 Act) of the Fund or Womack,
by vote cast in person at a meeting called for the purpose of voting on such
approval. The Womack Sub-Advisory Agreement is terminable without penalty, (i)
by the Adviser on 60 days' notice, (ii) by the Fund's Board or by vote of the
holders of a majority of the Portfolio's outstanding voting securities on 60
days' notice, or (iii) upon not less than 90 days' notice, by Womack. The Womack
Sub-Advisory Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
With respect to International Equity Portfolio, the Adviser has
entered into a Sub-Investment Advisory Agreement (the "Lazard Sub-Advisory
Agreement") with Lazard Asset Management ("Lazard") dated May 14, 1998. As to
such Portfolio, the Lazard Sub-Advisory Agreement is subject to annual approval
by (i) the Board or (ii) vote of a majority (as defined in the 1940 Act) of the
Portfolio's outstanding voting securities, provided that in either event the
continuance also is approved by a majority of the Board members who are not
"interested persons" (as defined in the 1940 Act) of the Fund or Lazard, by vote
cast in person at a meeting called for the purpose of voting on such approval.
The Lazard Sub-Advisory Agreement is terminable without penalty, (i) by the
Adviser on 60 days' notice, (ii) by the Fund's Board or by vote of the holders
of a majority of the Portfolio's outstanding voting securities on 60 days'
notice, or (iii) upon not less than 90 days' notice, by Lazard. The Lazard
Sub-Advisory Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
With respect to Mid Cap Portfolio, the Adviser has entered into a
Sub-Investment Advisory Agreement (the "Bennett Lawrence Sub-Advisory
Agreement") with Bennett Lawrence Management, LLC ("Bennett Lawrence") dated
August 12, 1998. As to such Portfolio, the Bennett Lawrence Sub-Advisory
Agreement is subject to annual approval by (i) the Board or (ii) vote of a
majority (as defined in the 1940 Act) of the Portfolio's outstanding voting
securities, provided that in either event the continuance also is approved by a
majority of the Board members who are not "interested persons" (as defined in
the 1940 Act) of the Fund or Bennett Lawrence, by vote cast in person at a
meeting called for the purpose of voting on such approval. The Bennett Lawrence
Sub-Advisory Agreement is terminable without penalty, (i) by the Adviser on 60
days' notice, (ii) by the Fund's Board or by vote of the holders of a majority
of the Portfolio's outstanding voting securities on 60 days' notice, or (iii)
upon not less than 90 days' notice, by Bennett Lawrence. The Bennett Lawrence
Sub-Advisory Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
ADMINISTRATION AGREEMENT. BISYS provides certain administrative
services pursuant to the Administration Agreement (the "Administration
Agreement") dated April 25, 1996 with the Fund. As to each Portfolio, the
Administration Agreement will continue until April 25, 2001 and thereafter is
subject to annual approval by (i) the Fund's Board of Directors or (ii) vote of
a majority (as defined in the 1940 Act) of the outstanding voting securities of
such Portfolio, provided that in either event the continuance also is approved
by a majority of the Directors who are not "interested persons" (as defined in
the 1940 Act) of the Fund or BISYS, by vote cast in person at a meeting called
for the purpose of voting such approval. The Administration Agreement was last
approved by the Fund's Board of Directors, including a majority of the Directors
who are not "interested persons" of any party to the Administration Agreement,
at a meeting held on May 14, 1998. As to each Portfolio, the Administration
Agreement is terminable without penalty, at any time if for cause, by the Fund's
Board of Directors or by vote of the holders of a majority of such Portfolio's
outstanding voting securities, or, on not less than 90 days' notice, by BISYS.
The Administration Agreement will terminate automatically, as to the relevant
Portfolio, in the event of its assignment (as defined in the 1940 Act).
As compensation for BISYS' services, the Fund has agreed to pay BISYS
a monthly administration fee at the annual rate set forth in the Portfolios'
Prospectus.
DISTRIBUTION AGREEMENT. BISYS acts as the exclusive distributor of
each Portfolio's shares on a best efforts basis pursuant to a Distribution
Agreement (the "Distribution Agreement") dated November 11, 1997, with the Fund.
Shares are sold on a continuous basis by BISYS as agent, although BISYS is not
obliged to sell any particular amount of shares. No compensation is payable by
the Fund to BISYS for its distribution services.
DISTRIBUTION PLAN. (Applicable to Class A Shares of each Portfolio
other than the Tax Free Money Market Portfolio and Government Money Market
Portfolio and Class B Shares of each Portfolio) Rule 12b-1 (the "Rule") adopted
by the Securities and Exchange Commission under the 1940 Act provides, among
other things, that an investment company may bear expenses of distributing its
shares only pursuant to a plan adopted in accordance with the Rule. The Fund's
Directors have adopted such a plan (the "Distribution Plan") with respect to
Class A Shares of each Portfolio other than the Tax Free Money Market Portfolio
and Government Money Market Portfolio and Class B Shares of each Portfolio
pursuant to which each such Portfolio pays BISYS for advertising, marketing and
distributing Class A Shares and Class B Shares. The Fund's Directors believe
that there is a reasonable likelihood that the Distribution Plan will benefit
each such Portfolio and the holders of its Class A Shares and Class B Shares.
A quarterly report of the amounts expended under the Distribution
Plan, and the purposes for which such expenditures were incurred, must be made
to the Directors for their review. In addition, the Distribution Plan provides
that it may not be amended to increase materially the costs which holders of the
Class A Shares and Class B Shares may bear for distribution pursuant to the
Distribution Plan without approval of such shareholders and that other material
amendments of the Distribution Plan must be approved by the Board of Directors,
and by the Directors who are neither "interested persons" (as defined in the
1940 Act) of the Fund nor have any direct or indirect financial interest in the
operation of the Distribution Plan or in the related Distribution Plan
agreements, by vote cast in person at a meeting called for the purpose of
considering such amendments. The Distribution Plan and related agreements are
subject to annual approval by such vote of the Directors cast in person at a
meeting called for the purpose of voting on the Distribution Plan. The
Distribution Plan was last so approved on May 14, 1998. As to each Class, the
Distribution Plan is terminable at any time by vote of a majority of the
Directors who are not "interested persons" and who have no direct or indirect
financial interest in the operation of the Distribution Plan or in the
Distribution Plan agreements or by vote of the holders of a majority of Class A
Shares or Class B Shares, as the case may be, voting separately as a Class. A
Distribution Plan agreement is terminable without penalty, at any time, by such
vote of the Directors, upon not more than 60 days' written notice to the parties
to such agreement or by vote of the holders of a majority of the Portfolio's
Class A Shares or Class B Shares, as the case may be, voting separately as a
Class. A Distribution Plan agreement will terminate automatically, as to the
relevant Class, in the event of its assignment (as defined in the 1940 Act).
SHAREHOLDER SERVICES PLAN. (Applicable to each Class of each
Portfolio) The Fund's Directors have adopted a shareholder services plan (the
"Shareholder Services Plan") with respect to each Class of each Portfolio
pursuant to which each Portfolio pays BISYS for the provision of certain
services to the holders of such shares. The Fund's Directors believe that there
is a reasonable likelihood that the Shareholder Services Plan will benefit each
such Portfolio and the holders of its Class A or Class B Shares, as the case may
be.
A quarterly report of the amounts expended under the Shareholder
Services Plan, and the purposes for which such expenditures were incurred, must
be made to the Directors for their review. In addition, the Shareholder Services
Plan provides that material amendments of the Plan must be approved by the Board
of Directors, and by the Directors who are neither "interested persons" (as
defined in the 1940 Act) of the Fund nor have any direct or indirect financial
interest in the operation of the Shareholder Services Plan or in the related
Shareholder Services Plan agreements, by vote cast in person at a meeting called
for the purpose of considering such amendments. The Shareholder Services Plan
and related agreements are subject to annual approval by such vote of the
Directors cast in person at a meeting called for the purpose of voting on the
Shareholder Services Plan. The Shareholder Services Plan was last so approved on
May 14, 1998. The Shareholder Services Plan is terminable at any time by vote of
a majority of the Directors who are not "interested persons" and who have no
direct or indirect financial interest in the operation of the Shareholder
Services Plan or in the Shareholder Services Plan agreements. A Shareholder
Services Plan agreement is terminable without penalty, at any time, by such vote
of the Directors. A Shareholder Services Plan agreement will terminate
automatically in the event of its assignment (as defined in the 1940 Act).
EXPENSES. All expenses incurred in the operation of the Fund are borne
by the Fund, except to the extent specifically assumed by others. The expenses
borne by the Fund include: organizational costs, taxes, interest, brokerage fees
and commissions, if any, fees of Directors who are not officers, directors,
employees or holders of 5% or more of the outstanding voting securities of the
Adviser, BISYS, any sub-investment adviser, or any of their affiliates,
Securities and Exchange Commission fees, state Blue Sky qualification fees,
advisory and administration fees, charges of custodians, transfer and dividend
disbursing agents' fees, certain insurance premiums, industry association fees,
auditing and legal expenses, costs of maintaining corporate existence, costs of
independent pricing services, costs attributable to investor services
(including, without limitation, telephone and personnel expenses), costs of
calculating the net asset value of each Portfolio's shares, costs of
shareholders' reports and corporate meetings, costs of preparing and printing
certain prospectuses and statements of additional information, and any
extraordinary expenses. Expenses attributable to a Portfolio are charged against
the assets of that Portfolio; other expenses of the Fund are allocated among the
Portfolios on the basis determined by the Board of Directors, including, but not
limited to, proportionately in relation to the net assets of each Portfolio.
PURCHASE AND REDEMPTION OF SHARES
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTIONS IN THE PROSPECTUS ENTITLED "HOW TO BUY SHARES" AND
"HOW TO REDEEM SHARES."
TERMS OF PURCHASE. The Fund reserves the right to reject any purchase
order and to change the amount of the minimum investment and subsequent
purchases in the Portfolios.
SALES LOADS. (Applicable to Class A Shares of each Portfolio other
than the Tax Free Money Market Portfolio and Government Money Market Portfolio)
The scale of sales loads applies to purchases of Class A Shares of each
Portfolio other than the Tax Free Money Market Portfolio and Government Money
Market Portfolio made by any "purchaser," which term includes an individual
and/or spouse purchasing securities for his, her or their own account or for the
account of any minor children, or a trustee or other fiduciary purchasing
securities for a single trust estate or a single fiduciary account trust estate
or a single fiduciary account (including a pension, profit-sharing or other
employee benefit trust created pursuant to a plan qualified under Section 401 of
the Internal Revenue Code of 1986, as amended (the "Code")) although more than
one beneficiary is involved; or a group of accounts established by or on behalf
of the employees of an employer or affiliated employers pursuant to an employee
benefit plan or other program (including accounts established pursuant to
Sections 403(b), 408(k) and 457 of the Code); or an organized group which has
been in existence for more than six months, provided that it is not organized
for the purpose of buying redeemable securities of a registered investment
company and provided that the purchases are made through a central
administration or a single dealer, or by other means which result in economy of
sales effort or expense.
"SWEEP" PROGRAM. (Applicable to the Tax Free Money Market Portfolio
and Government Money Market Portfolio Only) Shares of the Tax Free Money Market
Portfolio and Government Money Market Portfolio may be purchased through the
"sweep" program established by certain financial institutions under which a
portion of their customers' accounts may be automatically invested in the
Portfolio. The customer becomes the beneficial owner of specific shares of the
Portfolio which may be purchased, redeemed and held by the financial institution
in accordance with the customer's instructions and may fully exercise all rights
as a shareholder. The shares will be held by BISYS Fund Services Ohio, Inc. (the
"Transfer Agent") in book-entry form. A statement with regard to the customer's
shares is generally supplied to the customer monthly, and confirmations of all
transactions for the account of the customer ordinarily are available to the
customer promptly on request. In addition, each customer is sent proxies,
periodic reports and other information from the Fund with regard to shares of
the Portfolios. The customer's shares are fully assignable and may be encumbered
by the customer. The "sweep" agreement can be terminated by the customer at any
time, without affecting its beneficial ownership of the shares.
To obtain the benefits of this service, a customer typically is
required to maintain a minimum balance subject to a monthly maintenance fee, or
a higher minimum balance for which no monthly fee would be imposed. In either
case, a penalty fee is imposed if the minimum should not be maintained. In
general, the automatic investment in the Portfolio's shares occurs on the same
day that withdrawals are made by the financial institution, at the next
determined net asset value after the order is received.
All agreements which relate to the service are with the financial
institution. Neither BISYS nor the Fund is a party to any of those agreements
and no part of the compensation received by the financial institution flows to
the Fund or to BISYS or to any of their affiliates, either directly or
indirectly. Further information concerning this program and any related charges
or fees is provided by the financial institution prior to any purchase of the
Portfolio's shares. Any fees charged by the financial institution effectively
reduces the Portfolio's yield for those customers.
REOPENING AN ACCOUNT. An investor may reopen an account with a minimum
investment of $100 without filing a new Account Application during the calendar
year the account is closed or during the following calendar year, provided the
information on the old Account Application is still applicable.
STOCK CERTIFICATES; SIGNATURES. Any certificate representing Portfolio
shares to be redeemed must be submitted with the redemption request. Written
redemption requests must be signed by each shareholder, including each holder of
a joint account, and each signature must be guaranteed. Signatures on endorsed
certificates submitted for redemption also must be guaranteed. The Fund's
Transfer Agent has adopted standards and procedures pursuant to which
signature-guarantees in proper form generally will be accepted from domestic
banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations,
as well as from participants in the New York Stock Exchange Medallion Signature
Program, the Securities Transfer Agents Medallion Program ("STAMP") and the
Stock Exchanges Medallion Program. Signature-guaranties may not be provided by
notaries public. If the signature is guaranteed by a broker or dealer, such
broker or dealer must be a member of a clearing corporation and maintain net
capital of at least $100,000. Guarantees must be signed by an authorized
signatory of the guarantor and "Signature-Guaranteed" must appear with the
signature.
REDEMPTION COMMITMENT. Each Portfolio has committed itself to pay in
cash all redemption requests by any shareholder of record, limited in amount
during any 90-day period to the lesser of $250,000 or 1% of the value of such
Portfolio's net assets at the beginning of such period. Such commitment is
irrevocable without the prior approval of the Securities and Exchange
Commission. In the case of requests for redemption in excess of such amount, the
Board of Directors reserves the right to make payments in whole or in part in
securities or other assets in case of an emergency or any time a cash
distribution would impair the liquidity of the Portfolio to the detriment of the
existing shareholders. In this event, the securities would be valued in the same
manner as the Portfolio is valued. If the recipient sold such securities,
brokerage charges might be incurred.
SUSPENSION OF REDEMPTIONS. The right of redemption may be suspended or
the date of payment postponed (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closing), (b) when
trading in the markets the Portfolio normally utilizes is restricted, or when an
emergency exists as determined by the Securities and Exchange Commission so that
disposal of the Portfolio's investments or determination of its net asset value
is not reasonably practicable, or (c) for such other periods as the Securities
and Exchange Commission by order may permit to protect the Portfolio's
shareholders.
DETERMINATION OF NET ASSET VALUE
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTION IN THE PROSPECTUS ENTITLED "HOW TO BUY SHARES."
GENERAL. Expenses and fees, including the advisory fee and fees paid
pursuant to the Distribution Plan or Shareholder Services Plan, are accrued
daily and taken into account for the purpose of determining the net asset value
of the relevant Class of Portfolio shares.
LARGE CAP EQUITY PORTFOLIO, SMALL CAP OPPORTUNITY PORTFOLIO, MID CAP
PORTFOLIO, EQUITY VALUE PORTFOLIO AND INTERNATIONAL EQUITY PORTFOLIO. Each of
these Portfolios' securities, including covered call options written by the
Portfolio, are valued at the last sale price on the securities exchange or
national securities market on which such securities primarily are traded.
Securities not listed on an exchange or national securities market, or
securities in which there were no transactions, are valued at the average of the
most recent bid and asked prices, except in the case of open short positions
where the asked price is used for valuation purposes. Bid price is used when no
asked price is available. Any assets or liabilities initially expressed in terms
of foreign currency will be translated into dollars at the midpoint of the New
York interbank market spot exchange rate as quoted on the day of such
translation by the Federal Reserve Bank of New York or if no such rate is quoted
on such date, at the exchange rate previously quoted by the Federal Reserve Bank
of New York or at such other quoted market exchange rate as may be determined to
be appropriate by the Adviser. Forward currency contracts will be valued at the
current cost of offsetting the contract. Since the International Equity
Portfolio has to obtain prices as of the close of trading on various exchanges
throughout the world, the calculation of net asset value may not take place
contemporaneously with the determination of prices of certain of the Portfolio's
securities. Debt securities maturing in 60 days or less are carried at amortized
cost, which approximates value, except where to do so would not reflect
accurately their fair value, in which case such securities would be valued at
their fair value as determined under the supervision of the Board of Directors.
Any securities or other assets for which recent market quotations are not
readily available are valued at fair value as determined in good faith by the
Fund's Board of Directors.
Restricted securities, as well as securities or other assets for which
market quotations are not readily available, or are not valued by a pricing
service approved by the Board of Directors, are valued at fair value as
determined in good faith by the Board of Directors. The Board of Directors will
review the method of valuation on a current basis. In making their good faith
valuation of restricted securities, the Directors generally will take the
following factors into consideration: restricted securities which are, or are
convertible into, securities of the same class of securities for which a public
market exists usually will be valued at market value less the same percentage
discount at which purchased. This discount will be revised periodically by the
Board of Directors if the Directors believe that it no longer reflects the value
of the restricted securities. Restricted securities not of the same class as
securities for which a public market exists usually will be valued initially at
cost. Any subsequent adjustment from cost will be based upon considerations
deemed relevant by the Board of Directors.
GOVERNMENT INCOME PORTFOLIO. The Portfolio's investments are valued
each business day using available market quotations or at fair value as
determined by one or more independent pricing services (collectively, the
"Service") approved by the Board of Directors. The Service may use available
market quotations, employ electronic data processing techniques and/or a matrix
system to determine valuations. The Service's procedures are reviewed by the
Fund's officers under the general supervision of the Board of Directors.
MUNICIPAL INCOME PORTFOLIO. The Portfolio's investments are valued by
the Service. When, in the judgment of the Service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted bid prices
(as obtained by the Service from dealers in such securities) and asked prices
(as calculated by the Service based upon its evaluation of the market for such
securities). Other investments (which constitute a majority of the Portfolio's
securities) are carried at fair value as determined by the Service, based on
methods which include consideration of: yields or prices of municipal bonds of
comparable quality, coupon, maturity and type; indications as to values from
dealers; and general market conditions. The Service may employ electronic data
processing techniques and/or a matrix system to determine valuations. The
Service's procedures are reviewed by the Fund's officers under the general
supervision of the Board of Directors.
TAX FREE MONEY MARKET PORTFOLIO AND GOVERNMENT MONEY MARKET PORTFOLIO.
The valuation of each of these Portfolios' investment securities is based upon
their amortized cost which does not take into account unrealized capital gains
or losses. This involves valuing an instrument at its cost and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price the Portfolio would receive if it sold the instrument.
The Board of Directors has agreed, as a particular responsibility
within the overall duty of care owed to each of these Portfolios' investors, to
establish procedures reasonably designed to stabilize each such Portfolio's
price per share as computed for the purpose of purchases and redemptions at
$1.00. Such procedures include review of the Portfolio's investment holdings by
the Board of Directors, at such intervals as it deems appropriate, to determine
whether such Portfolio's net asset value calculated by using available market
quotations or market equivalents deviates from $1.00 per share based on
amortized cost. In such review, investments for which market quotations are
readily available will be valued at the most recent bid price or yield data for
such securities or for securities of comparable maturity, quality and type, as
obtained from one or more of the major market makers for the securities to be
valued. Other investments and assets will be valued at fair value as determined
in good faith by the Board of Directors.
The extent of any deviation between a Portfolio's net asset value
based upon available market quotations or market equivalents and $1.00 per share
based on amortized cost will be examined by the Board of Directors. If such
deviation exceeds 1/2 of 1%, the Board of Directors promptly will consider what
action, if any, will be initiated. In the event the Board of Directors
determines that a deviation exists which may result in material dilution or
other unfair results to investors or existing shareholders, it has agreed to
take such corrective action as it regards as necessary and appropriate,
including: selling portfolio instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity; withholding dividends
or paying distributions from capital or capital gains; redeeming shares in kind;
or establishing a net asset value per share by using available market quotations
or market equivalents.
PERFORMANCE INFORMATION
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTION IN THE RELEVANT PROSPECTUS ENTITLED "PERFORMANCE
INFORMATION OR "YIELD INFORMATION."
Current yield is computed pursuant to a formula which operates as
follows: The amount of the Portfolio's expenses accrued for the 30-day period
(net of reimbursements) is subtracted from the amount of the dividends and
interest earned by the Portfolio during the period. That result is then divided
by the product of: (a) the average daily number of shares outstanding during the
period that were entitled to receive dividends, and (b) the maximum offering
price per share on the last day of the period less any undistributed earned
income per share reasonably expected to be declared as a dividend shortly
thereafter. The quotient is then added to 1, and that sum is raised to the 6th
power, after which 1 is subtracted. The current yield is then arrived at by
multiplying the result by 2.
Tax equivalent yield is computed by dividing that portion of the
current yield (calculated as described above) which is tax exempt by 1 minus a
stated tax rate and adding the quotient to that portion, if any, of the yield of
the Portfolio that is not tax exempt. The tax equivalent figure, however, does
not include the potential effect of any state or local (including, but not
limited to, county, district or city) taxes, including applicable surcharges. In
addition, there may be pending legislation which could affect such stated tax
rates or yield. Each investor should consult its tax adviser, and consider its
own factual circumstances and applicable tax laws, in order to ascertain the
relevant tax equivalent yield.
Average annual total return is calculated by determining the ending
redeemable value of an investment purchased with a hypothetical $1,000 payment
made at the beginning of the period (assuming the reinvestment of dividends and
distributions), dividing by the amount of the initial investment, taking the
"n"th root of the quotient (where "n" is the number of years in the period) and
subtracting 1 from the result. A Class's average annual total return figures
calculated in accordance with such formula assume that in the case of Class A
the maximum sales load has been deducted from the hypothetical initial
investment at the time of purchase or, in the case of Class B, the maximum
applicable contingent deferred sales charge ("CDSC") has been paid upon
redemption at the end of the period.
Total return is calculated by subtracting the amount of the maximum
offering price per share at the beginning of a stated period from the net asset
value per share at the end of the period (after giving effect to the
reinvestment of dividends and distributions during the period and any applicable
CDSC), and dividing the result by the maximum offering price per share at the
beginning of the period. Total return also may be calculated based on the net
asset value per share at the beginning of the period for Class A Shares or
without giving effect to any applicable CDSC at the end of the period for Class
B Shares. In such cases, the calculation would not reflect the deduction of the
sales load with respect to Class A Shares or any applicable CDSC with respect to
Class B Shares, which, if reflected, would reduce the performance quoted.
Seven-day yield will be computed in accordance with a standardized
method which involves determining the net change in the value of a hypothetical
pre-existing Portfolio account having a balance of one share at the beginning of
a seven calendar day period for which yield is to be quoted, dividing the net
change by the value of the account at the beginning of the period to obtain the
base period return, and annualizing the results (i.e., multiplying the base
period return by 365/7). The net change in the value of the account reflects the
value of additional shares purchased with dividends declared on the original
share and any such additional shares and fees that may be charged to shareholder
accounts, in proportion to the length of the base period and the Portfolio's
average account size, but does not include realized gains and losses or
unrealized appreciation and depreciation. Effective annualized yield is computed
by adding 1 to the base period return (calculated as described above), raising
that sum to a power equal to 365 divided by 7, and subtracting 1 from the
result.
Yields will fluctuate and are not necessarily representative of future
results. The investor should remember that yield is a function of the type and
quality of the instruments held, their maturity and operating expenses. An
investor's principal in the Portfolio is not guaranteed. See "Determination of
Net Asset Value" for a discussion of the manner in which each Portfolio's price
per share is determined.
From time to time, advertising materials for a Portfolio may refer to
or discuss current or past business, political, economic or financial
conditions, such as U.S. monetary or fiscal policies and actual or proposed tax
legislation. In addition, from time to time, advertising materials for a
Portfolio may include information concerning retirement and investing for
retirement, average life expectancy and pension and social security benefits.
DIVIDENDS, DISTRIBUTION AND TAXES
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTION IN EACH PROSPECTUS ENTITLED "DIVIDENDS,
DISTRIBUTIONS AND TAXES."
Each Portfolio intends to qualify as a "regulated investment company"
under the Code if such qualification is in the best interests of its
shareholders. To qualify as a regulated investment company, the Portfolio must
pay out to its shareholders at least 90% of its net income (consisting of net
investment income from tax exempt obligations and net short-term capital gain),
and must meet certain asset diversification and other requirements.
Qualification as a regulated investment company relieves the Portfolio from any
liability for Federal income taxes to the extent its earnings are distributed in
accordance with the applicable provisions of the Code. The term "regulated
investment company" does not imply the supervision of management or investment
practices or policies by any government agency.
Any dividend or distribution paid shortly after an investor's purchase
may have the effect of reducing the aggregate net asset value of his shares
below the cost of his investment. Such a distribution would be a return on
investment in an economic sense although taxable as stated in "Dividends,
Distributions and Taxes" in the Prospectus. In addition, the Code provides that
if a shareholder holds shares for six months or less and has received a capital
gain dividend with respect to such shares, any loss incurred on the sale of such
shares will be treated as a long-term capital loss to the extent of the capital
gain dividend received.
Depending upon the composition of a Portfolio's income, the entire
amount or a portion of the dividends paid by the Portfolio from net investment
income may qualify for the dividends received deduction allowable to qualifying
U.S. corporate shareholders ("dividends received deduction"). In general,
dividend income from a Portfolio distributed to qualifying corporate
shareholders will be eligible for the dividends received deduction only to the
extent that such Portfolio's income consists of dividends paid by U.S.
corporations. However, Section 246(c) of the Code generally provides that if a
qualifying corporate shareholder has disposed of Portfolio shares held for less
than 46 days, which 46 days generally must be during the 90-day period
commencing 45 days before the shares become ex-dividend, and has received a
dividend from net investment income with respect to such shares, the portion
designated by the Portfolio as qualifying for the dividends received deduction
will not be eligible for such shareholder's dividends received deduction. In
addition, the Code provides other limitations with respect to the ability of a
qualifying corporate shareholder to claim the dividends received deduction in
connection with holding Portfolio shares.
Ordinarily, gains and losses realized from portfolio transactions will
be treated as capital gains and losses. However, a portion of the gain or loss
realized from the disposition of non-U.S. dollar denominated securities
(including debt instruments, certain financial futures and options, and certain
preferred stock) may be treated as ordinary income or loss under Section 988 of
the Code. In addition, all or a portion of the gain realized from the
disposition of market discount bonds will be treated as ordinary income under
Section 1276 of the Code. A market discount bond is defined as any bond
purchased by a Portfolio after April 30, 1993, and after its original issuance,
at a price below its face or accredited value. Finally, all or a portion of the
gain realized from engaging in "conversion transactions" may be treated as
ordinary income under Section 1258. "Conversion transactions" are defined to
include certain forward, futures, option and "straddle" transactions,
transactions marketed or sold to produce capital gains, or transactions
described in Treasury regulations to be issued in the future.
Under Section 1256 of the Code, any gain or loss realized by the
Portfolio from certain financial futures and options transactions (other than
those taxed under Section 988 of the Code) will be treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. Gain or loss will
arise upon the exercise or lapse of such futures and options as well as from
closing transactions. In addition, any such futures or options remaining
unexercised at the end of the Portfolio's taxable year will be treated as sold
for their then fair market value, resulting in additional gain or loss to the
Portfolio characterized in the manner described above.
Offsetting positions held by a Portfolio involving financial futures
and options may constitute "straddles." Straddles are defined to include
"offsetting positions" in actively traded personal property. The tax treatment
of straddles is governed by Sections 1092 and 1258 of the Code, which, in
certain circumstances, override or modify the provisions of Sections 988 and
1256 of the Code. If the Portfolio was treated as entering into straddles by
reason of its futures or options transactions, such straddles could be
characterized as "mixed straddles" if the futures or options transactions
comprising such straddles were governed by Section 1256. The Portfolio may make
one or more elections with respect to "mixed straddles." Depending upon which
election is made, if any, the results to the Portfolio may differ. If no
election is made, to the extent the straddle rules apply to positions
established by the Portfolio, losses realized by the Portfolio will be deferred
to the extent of unrealized gain in any offsetting positions. Moreover, as a
result of the straddle rules, short-term capital loss on straddle positions may
be recharacterized as long-term capital loss, and long-term capital gain on
straddle positions may be treated as short-term capital gain or ordinary income.
The Taxpayer Relief Act of 1997 included constructive sale provisions
that generally apply if a Portfolio either (1) holds an appreciated financial
position with respect to stock, certain debt obligations, or partnership
interests ("appreciated financial position") and then enters into a short sale,
futures, forward, or offsetting notional principal contract (collectively, a
"Contract") respecting the same or substantially identical property or (2) holds
an appreciated financial position that is a Contract and then acquires property
that is the same as or substantially identical to the underlying property. In
each instance, with certain exceptions, the Portfolio generally will be taxed as
if the appreciated financial position were sold at its fair market value on the
date the Portfolio enters into the financial position or acquires the property,
respectively. Transactions that are identified hedging or straddle transactions
under other provisions of the Code can be subject to the constructive sale
provisions.
Investment by a Portfolio in securities issued or acquired at a
discount, or providing for deferred interest or for payment of interest in the
form of additional obligations could under special tax rules affect the amount,
timing and character of distributions to shareholders by causing such Portfolio
to recognize income prior to the receipt of cash payments. For example, the
Portfolio could be required to accrue a portion of the discount (or deemed
discount) at which the securities were issued each year and to distribute such
income in order to maintain its qualification as a regulated investment company.
In such case, the Portfolio may have to dispose of securities which it might
otherwise have continued to hold in order to generate cash to satisfy these
distribution requirements.
The International Equity Portfolio may qualify for and may make an
election permitted under Section 853 of the Code so that shareholders may be
eligible to claim a credit or deduction on their Federal income tax returns for,
and will be required to treat as part of the amounts distributed to them, their
pro rata portion of qualified taxes paid or incurred by the Portfolio to foreign
countries (which taxes relate primarily to investment income). The International
Equity Portfolio may make an election under Section 853 of the Code, provided
more than 50% of the value of the Portfolio's total assets at the close of the
taxable year consists of securities in foreign corporations, and the Portfolio
satisfies the applicable distribution provisions of the Code. The foreign tax
credit available to shareholders is subject to certain limitations imposed by
the Code.
If the International Equity Portfolio invests in an entity that is
classified as a "passive foreign investment company" ("PFIC") for federal income
tax purposes, the operation of certain provisions of the Code applying to PFICs
could result in the imposition of certain federal income taxes on the Fund. In
addition, gain realized from the sale or other disposition of PFIC securities
may be treated as ordinary income under Section 1291 of the Code and gain
realized with respect to PFIC securities that are marked-to-market will be
treated as ordinary income under Section 1296 of the Code.
PORTFOLIO TRANSACTIONS
GENERAL. Transactions are allocated to various dealers by the
Portfolios' investment personnel in their best judgment. The primary
consideration is prompt and effective execution of orders at the most favorable
price. Subject to that primary consideration, dealers may be selected to act on
an agency basis for research, statistical or other services to enable the
Adviser to supplement its own research and analysis with the views and
information of other securities firms. No brokerage commissions have been paid
to date, except as noted below.
To the extent research services are furnished by brokers through which
the Portfolio effects securities transactions, the Adviser may use such
information in advising other funds or accounts it advises and, conversely, to
the extent research services are furnished to the Adviser by brokers in
connection with other funds or accounts the Adviser advises, the Adviser also
may use such information in advising the Portfolios. Although it is not possible
to place a dollar value on these services, if they are provided, it is the
opinion of the Adviser that the receipt and study of any such services should
not reduce the overall expenses of its research department.
LARGE CAP EQUITY PORTFOLIO, SMALL CAP OPPORTUNITY PORTFOLIO, MID CAP
PORTFOLIO, EQUITY VALUE PORTFOLIO AND INTERNATIONAL EQUITY PORTFOLIO. Brokers
also are selected because of their ability to handle special executions such as
are involved in large block trades or broad distributions, provided the primary
consideration is met. Large block trades may, in certain cases, result from two
or more clients the Adviser might advise being engaged simultaneously in the
purchase or sale of the same security. Portfolio turnover may vary from year to
year, as well as within a year. It is anticipated that in any fiscal year, the
turnover rate for each of these Portfolios generally should be less than 100%.
Higher turnover rates are likely to result in comparatively greater brokerage
expenses. The overall reasonableness of brokerage commissions paid is evaluated
by the Adviser based upon its knowledge of available information as to the
general level of commissions paid by other institutional investors for
comparable services.
When transactions are executed in the over-the-counter market, the
Adviser will deal with the primary market makers unless a more favorable price
or execution otherwise is obtainable.
The Fund's Board of Directors has determined, in accordance with
Section 17(e) of the 1940 Act and Rule 17e-1 thereunder, that any portfolio
transaction for the Portfolio may be executed by certain brokers that are
affiliates of the Adviser when such broker's charge for the transaction does not
exceed the usual and customary level.
MUNICIPAL INCOME PORTFOLIO, GOVERNMENT INCOME PORTFOLIO, TAX FREE
MONEY MARKET PORTFOLIO AND GOVERNMENT MONEY MARKET PORTFOLIO. Purchases and
sales of portfolio securities usually are principal transactions. Portfolio
securities ordinarily are purchased directly from the issuer or from an
underwriter or market maker. Usually no brokerage commissions are paid by the
Portfolio for such purchases and sales. The prices paid to underwriters of
newly-issued securities usually include a concession paid by the issuer to the
underwriter, and purchases of securities from market makers may include the
spread between the bid and asked price.
INFORMATION ABOUT THE PORTFOLIOS
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTION IN THE PORTFOLIOS' PROSPECTUS ENTITLED "GENERAL
INFORMATION."
Each Portfolio share has one vote and, when issued and paid for in
accordance with the terms of the offering, is fully paid and non-assessable.
Shares have no preemptive or subscription rights and are freely transferable.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted under the provisions of the 1940 Act or applicable state law or
otherwise, to the holders of the outstanding voting securities of an investment
company, such as the Fund, will not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by such matter. Rule 18f-2 further provides that a
portfolio shall be deemed to be affected by a matter unless it is clear that the
interests of each portfolio in the matter are identical or that the matter does
not affect any interest of such portfolio. However, the Rule exempts the
election of directors from the separate voting requirements of the Rule.
Each Portfolio will send annual and semi-annual financial statements
to all its shareholders.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
AND INDEPENDENT AUDITORS
The Bank of New York, 90 Washington Street, New York, New York 10286,
acts as custodian of each Portfolio's investments. The Bank of New York has no
part in determining the investment policies of any Portfolio or which securities
are to be purchased or sold by a Portfolio.
BISYS Fund Services Ohio, Inc., an affiliate of BISYS, 3435 Stelzer
Road, Columbus, Ohio 43219, acts as the Fund's transfer and dividend disbursing
agent. Under the transfer agency agreement with the Fund, the Transfer Agent
maintains shareholder account records for the Fund, handles certain
communications between shareholders and the Fund and pays dividends and
distributions payable by the Fund. For these services, the Transfer Agent
receives a monthly fee compiled on the basis of the number of shareholder
accounts it maintains for the Fund during the month, and is reimbursed for
certain out-of-pocket expenses.
Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York
10038-4982, as counsel for the Fund, has rendered its opinion as to certain
legal matters regarding the due authorization and valid issuance of the shares
of Common Stock being sold pursuant to each Prospectus.
KPMG Peat Marwick LLP, Two Nationwide Plaza, Columbus, Ohio 43215,
independent auditors, have been selected as each Portfolio's auditors.
FINANCIAL STATEMENTS
The Portfolios' Annual Report to Shareholders for the fiscal year
ending December 31, 1998 will be supplied with this Statement of Additional
Information when it is available in February 1999.
<PAGE>
APPENDIX
Description of certain ratings assigned by Standard & Poor's Ratings
Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch IBCA, Inc.
("Fitch"), Duff & Phelps Credit Rating Co. ("Duff") and Thomson BankWatch,
Inc.("BankWatch"):
S&P
BOND RATINGS
AAA
Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA
Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A
Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB
Bonds rated BB have less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payment.
S&P's letter ratings may be modified by the addition of a plus (+) or
minus (-) sign designation, which is used to show relative standing within the
major rating categories, except in the AAA (Prime Grade) category.
COMMERCIAL PAPER RATING
The designation A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus sign (+) designation. Capacity for timely payment on issues with an A-2
designation is strong. However, the relative degree of safety is not as high as
for issues designated A-1.
Moody's
BOND RATINGS
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category. The
modifier 1 indicates a ranking for the security in the higher end of a rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of a rating category.
COMMERCIAL PAPER RATING
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity for
repayment of short-term promissory obligations, and ordinarily will be evidenced
by leading market positions in well established industries, high rates of return
on funds employed, conservative capitalization structures with moderate reliance
on debt and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers (or relating supporting institutions) rated Prime-2 (P-2) have
a strong capacity for repayment of short-term promissory obligations. This
ordinarily will be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Fitch
BOND RATINGS
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings take
into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA
Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA
Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A
Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB
Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB
Bonds rated BB are considered speculative. The obligor's ability to
pay interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category.
SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+
Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1
Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2
Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
Duff
BOND RATINGS
AAA
Bonds rated AAA are considered highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA
Bonds rated AA are considered high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
A
Bonds rated A have protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
BBB
Bonds rated BBB are considered to have below average protection
factors but still considered sufficient for prudent investment. Considerable
variability in risk exists during economic cycles.
BB
Bonds rated BB are below investment grade but are deemed by Duff as
likely to meet obligations when due. Present or prospective financial protection
factors fluctuate according to industry conditions or company fortunes. Overall
quality may move up or down frequently within the category.
Plus (+) and minus (-) signs are used with a rating symbol (except
AAA) to indicate the relative position of a credit within the rating category.
COMMERCIAL PAPER RATING
The rating Duff-1 is the highest commercial paper rating assigned by
Duff. Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are small.
BankWatch
COMMERCIAL PAPER AND SHORT-TERM OBLIGATIONS RATINGS
The rating TBW-1 is the highest short-term obligation rating assigned
by BankWatch. Obligations rated TBW-1 are regarded as having the strongest
capacity for timely repayment. Obligations rated TBW-2 are supported by a strong
capacity for timely repayment, although the degree of safety is not as high as
for issues rated TBW-1.
INTERNATIONAL AND U.S. BANK RATINGS
In addition to its ratings of short-term obligations, BankWatch
assigns a rating to each issuer it rates, in gradations of A through E.
BankWatch examines all segments of the organization, including, where
applicable, the holding company, member banks or associations, and other
subsidiaries. In those instances where financial disclosure is incomplete or
untimely, a qualified rating (QR) is assigned to the institution. BankWatch also
assigns, in the case of foreign banks, a country rating which represents an
assessment of the overall political and economic stability of the country in
which the bank is domiciled.
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Not Applicable.
(b) Exhibits:
(1) (a) Articles of Incorporation are incorporated by
reference to Exhibit (1) of the Registration
Statement on Form N-1A, filed on March 29,
1990.
(b) Articles of Amendment are incorporated by
reference to Exhibit (1)(b) of Pre-Effective
Amendment No. 3 to the Registration
Statement on Form N-1A, filed on June 22,
1990.
(c) Articles Supplementary dated October 16,
1990 are incorporated by reference to
Exhibit(1)(c) of Post-Effective Amendment
No. 3 to the Registration Statement on Form
N-1A, filed on October 25, 1990.
(d) Articles Supplementary dated January 9, 1992
are incorporated by reference to Exhibit
(1)(d) of Post-Effective Amendment No. 10 to
the Registration Statement on Form N-1A,
filed on January 17, 1992.
(e) Articles Supplementary dated February 15,
1994 are incorporated by reference to Exhibit
(1)(e) of Post-Effective Amendment No. 22 to
the Registration Statement on Form N-1A,
filed on February 10, 1994.
(f) Articles of Amendment are incorporated by
reference to Exhibit (1)(f) of Post-
Effective Amendment No. 26 to the
Registration Statement on Form N-1A,
filed on April 30, 1996.
(g) Articles Supplementary dated February 24,
1997 are incorporated by reference to
Exhibit (1)(g) of Post-Effective Amendment
No. 31 to the Registration Statement on
Form N-1A, filed on February 27, 1997.
(h) Articles of Amendment are incorporated by
reference to Post-Effective Amendment No.
36 to the Registration Statement on
Form N-1A, filed March 31, 1998.
(i) Articles Supplementary are incorporated by
reference to Post-Effective Amendment No.
36 to the Registration Statement on
Form N-1A, filed March 31, 1998.
(2) By-Laws are incorporated by reference to Exhibit
(2) of Pre-Effective Amendment No. 3 to the
Registration Statement on Form N-1A, filed on June
22, 1990.
(4) Specimen copies of stock certificates are
incorporated by reference to Exhibit (4) of Post-
Effective Amendment No. 6 to the Registration
Statement on Form N-1A, filed on June 7, 1991.
(5) (a)(i) Investment Advisory Agreement between
the Registrant and Mitchell Hutchins
Asset Management Inc. is incorporated by
reference to Exhibit (5)(b)(iii) of
Post-Effective Amendment No. 6 to the
Registration Statement on Form N-1A,
filed on June 7, 1991.
(a)(ii) Investment Advisory Agreement
between Registrant and First
American National Bank is incorporated
by reference to Post-Effective Amendment
No. 40 to the Registration Statement on
Form N-1A, filed on September 23, 1998.
(b)(i) Sub-Investment Advisory Agreement between
First American National Bank and Lazard
Asset Management is incorporated by
reference to Post-Effective Amendment No.
40 to the Registration Statement on Form
N-1A, filed on September 23, 1998.
(b)(ii) Sub-Investment Advisory Agreement between
First American National Bank and Womack
Asset Management, Inc. is incorporated by
reference to Post-Effective Amendment No.
40 to the Registration Statement on Form
N-1A, filed on September 23, 1998.
(b)(iii) Sub-Investment Advisory Agreement between
First American National Bank and Bennett
Lawrence Management, LLC.
(c) Administration Agreement between
Registrant and BISYS Fund Services
Limited Partnership dated April 25,
1996, as revised August 12, 1998,
is incorporated by reference to
Post-Effective Amendment No. 40 to the
Registration Statement on Form N-1A, filed
on September 23, 1998.
(6)(a) Distribution Agreement between
Registrant and BISYS Fund Services
Limited Partnership dated February 11,
1997, as revised August 12, 1998, is
incorporated by reference to Post-
Effective Amendment No. 40 to the
Registration Statement on Form N-1A, filed
on September 23, 1998.
(b)(i) Form of Plan Agreement, with respect to
Registrant's Correspondent Cash Reserves
Money Market Portfolio and Correspondent
Cash Reserves Tax Free Money Market
Portfolio, is incorporated by
reference to Exhibit (6)(b) of Post-
Effective Amendment No. 6 to the
Registration Statement on Form N-1A,
filed on June 7, 1991.
(b)(ii) Distribution Plan Agreement, with respect
to Registrant's AmeriStar (a/k/a ISG)
Portfolios, is incorporated by reference
to Post-Effective Amendment No. 40 to the
Registration Statement on Form N-1A, filed
on September 23, 1998.
(8)(a) Custody and Fund Accounting Agreement
with The Bank of New York is
incorporated by reference to
Exhibit (8)(a) of Pre-Effective
Amendment No. 3 to the Registration
Statement on Form N-1A, filed on June
22, 1990.
(b) Form of Foreign Sub-Custodian
Agreement is incorporated by
reference to Post-Effective
Amendment No. 22 to the Registration
Statement on Form N-1A, filed on
February 10, 1994.
(9)(a) Special Management Services Agreement
among the Registrant, Mitchell Hutchins
Asset Management Inc. and Concord
Holding Corporation is incorporated by
reference to Exhibit (9) of Post-
Effective Amendment No. 6 to the
Registration Statement on Form N-1A,
filed on June 7, 1991.
(b) Form of Shareholder Services Agreement
is incorporated by reference to
Exhibit (5)(e) of Pre-Effective
Amendment No. 3 to the Registration
Statement on Form N-1A, filed on
June 22, 1990.
(c) Shareholder Services Plan, with respect
to Registrant's AmeriStar (a/k/a ISG)
Portfolios, is incorporated by reference
to Exhibit(9)(c) of Post-Effective
Amendment No. 40 to the Registration
Statement on Form N-1A, filed on
September 23, 1998.
(11) Consent of Independent Auditors.
(15)(a) Plan of Distribution pursuant to Rule
12b-1, with respect to Registrant's
Correspondent Cash Reserves Money Market
Portfolio and Correspondent Cash
Reserves Tax Free Money Market Portfolio,
is incorporated by reference to Exhibit
(15) of Post-Effective Amendment No. 6
to the Registration Statement on Form
N-1A, filed on June 7, 1991.
(b) Distribution Plan pursuant to Rule
12b-1, with respect to Registrant's
AmeriStar (a/k/a ISG) Portfolios, is
incorporated by reference to Exhibit
(15)(b) of Post-Effective Amendment No. 40
to the Registration Statement on Form
N-1A, filed on September 23, 1998.
(16) Computations of Performance Information
are incorporated by reference to Post-
Effective Amendment No. 25 to the
Registration Statement on Form N-1A,
filed on May 1, 1995.
(17) Financial Data Schedules are
incorporated by reference to
Registrant's Annual Report on Form N-SAR
filed on or about February 27, 1998 and
Semi-Annual Report on Form N-SAR filed on
or about August 28, 1998.
(18)(a) Rule 18f-3 Plan for Registrant's
CCR Portfolios is incorporated by
reference to Post-Effective Amendment
No. 25 to the Registration Statement on
Form N-1A, filed on May 1, 1995.
(b) Rule 18f-3 Plan for Registrant's AmeriStar
(a/k/a ISG) Non-Money Market Portfolios is
incorporated by reference to Post-
Effective Amendment No. 40 to the
Registration Statement on Form N-1A, filed
on September 23, 1998.
(c) Rule 18f-3 Plan for Registrant's AmeriStar
(a/k/a ISG) Money Market Portfolios, is
incorporated by reference to Exhibit (18)
(c) of Post-Effective Amendment No. 40 to
the Registration Statement on Form N-1A,
filed on September 23, 1998.
Other Exhibit: (i) Certificate of Corporate Secretary is
incorporated by reference to Other
Exhibit of Pre-Effective Amendment
No. 3 to the Registration Statement
on Form N-1A, filed on June 22, 1990.
(ii) Powers of Attorney are incorporated by
reference to Pre-Effective Amendment No.
1 and Post-Effective Amendment No. 8 to
the Registration Statement on Form
N-1A, filed on May 23, 1990 and November
15, 1991, respectively.
_______________________
Item 25. Persons Controlled By or Under Common Control
with Registrant
Not applicable.
Item 26. Number of Holders of Securities
(1) (2)
Number of Record
Holders as of
Title of Class July 27, 1998
Common Stock, par value
$.001 per share
Correspondent Cash Reserves
Money Market Portfolio 50,148
Correspondent Cash Reserves Tax
Free Money Market Portfolio 1,826
AmeriStar (a/k/a ISG) Prime Money Market Portfolio
--Trust Shares 2
--Class A Shares 18
--Class B Shares 0
AmeriStar (a/k/a ISG) Capital Growth Portfolio
--Trust Shares 7
--Class A Shares 6
--Class B Shares -
AmeriStar (a/k/a ISG) Core Income
Portfolio
--Trust Shares 4
--Class A Shares 3
--Class B Shares -
AmeriStar (a/k/a ISG) Limited
Duration Income Portfolio
--Trust Shares 4
--Class A Shares 13
--Class B Shares --
AmeriStar (a/k/a ISG) Tennessee Tax Exempt
Bond Portfolio
--Trust Shares 4
--Class A Shares 24
--Class B Shares --
AmeriStar (a/k/a ISG) U.S. Treasury Money
Market Portfolio
--Trust Shares 2
--Class A Shares 11
AmeriStar (a/k/a ISG) Dividend Growth Portfolio
--Trust Shares 4
--Class A Shares 29
--Class B Shares --
AmeriStar (a/k/a ISG) Limited Duration U.S.
Government Portfolio
--Trust Shares 0
--Class A Shares 4
--Class B Shares --
AmeriStar (a/k/a ISG) Limited Duration Tennessee
Tax Free Portfolio
--Trust Shares 0
--Class A Shares 4
--Class B Shares --
Item 27. Indemnification
Reference is made to Article SEVENTH of the Registrant's Articles
of Incorporation filed as Exhibit 1 to the Registration Statement, filed on
March 29, 1990, and to Section 2-418 of the Maryland General Corporation Law.
The application of these provisions is limited by Article VIII of the
Registrant's By-Laws filed as Exhibit 2 to Pre-Effective Amendment No. 3 to the
Registration Statement, filed on June 22, 1990, and by the following undertaking
set forth in the rules promulgated by the Securities and Exchange Commission:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in such Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in such Act and will
be governed by the final adjudication of such issue.
Reference also is made to the Distribution Agreement filed as
Exhibit 6(a).
Item 28(a). Business and Other Connections of Investment Adviser
(i) Registrant is fulfilling the requirement of this Item 28(a)
to provide a list of the officers and directors of Mitchell Hutchins Asset
Management Inc., the investment adviser of the Registrant's Correspondent Cash
Reserves Money Market Portfolio, together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in
by Mitchell Hutchins Asset Management Inc. or those of its officers and
directors during the past two years, by incorporating by reference the
information contained in the Form ADV filed with the SEC pursuant to the
Investment Advisers Act of 1940 by the Mitchell Hutchins Asset Management Inc.
(SEC File No. 801-13219).
(ii) First American National Bank, the investment adviser of the
Registrant's AmeriStar Portfolios, is a wholly-owned subsidiary of First
American Corporation, a registered bank holding company. To the knowledge of the
Registrant, none of the directors or executive officers of First American
National Bank, except those described below, are or have been, at any time
during the past two years, engaged in any other business, profession, vocation
or employment of a substantial nature, except that certain directors and
executive officers of First American National Bank also hold or have held
various positions with bank and non-bank affiliates of First American National
Bank, including First American Corporation.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR
OTHER EMPLOYMENT OF A
POSITION WITH SUBSTANTIAL
NAME ADVISER NATURE
<S> <C> <C>
Dennis C. Bottorff Chairman and Chairman and Chief Executive
Chief Executive Officer of First American
Officer Corporation
Earnest W. Deavenport, Jr. Director Chairman and Chief Executive
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, Jr. Director Chairman of Deposit Guaranty
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, Sr. Director Chairman and Chief Executive
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.
</TABLE>
(iii) Registrant is fulfilling the requirement of this Item 28(a)
to provide a list of the officers and directors of Lazard Asset Management, the
investment adviser of the Registrant's ISG International Equity Portfolio,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by Lazard Asset Management or
those of its officers and directors during the past two years, by incorporating
by reference the information contained in the Form ADV filed with the SEC
pursuant to the Investment Advisers Act of 1940 by the Lazard Asset Management
(SEC File No. 801-50349).
(iv) Registrant is fulfilling the requirement of this Item 28(a)
to provide a list of the officers and directors of Womack Asset Management,
Inc., the investment adviser of the Registrant's ISG Small Cap Opportunity
Portfolio, together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by Womack Asset
Management, Inc. or those of its officers and directors during the past two
years, by incorporating by reference the information contained in the Form ADV
filed with the SEC pursuant to the Investment Advisers Act of 1940 by the Womack
Asset Management, Inc. (SEC File No. 801-54327).
(v) Registrant is fulfilling the requirement of this Item 28(a)
to provide a list of the officers and directors of Bennett Lawrence Management
LLC, the investment adviser of the Registrant's ISG Mid Cap Portfolio, together
with information as to any other business, profession, vocation or employment of
a substantial nature engaged in by Bennett Lawrence Management, LLC or those of
its officers and directors during the past two years, by incorporating by
reference the information contained in the Form ADV filed with the SEC pursuant
to the Investment Advisers Act of 1940 by the Bennett Lawrence Management, LLC
(SEC File No. 801-49805).
Item 29. Principal Underwriters
(a) Other investment companies for which Registrant's principal
underwriter (exclusive distributor) acts as principal underwriter or exclusive
distributor:
American Performance Funds
AmSouth Mutual Funds
The ARCH Fund, Inc.
The BB&T Mutual Funds Group
The Coventry Group
The Empire Builder Tax Free Bond Fund
ESC Strategic Funds, Inc.
The Eureka Funds
Fountain Square Funds
Hirtle Callaghan Trust
HSBC Family of Funds
The Infinity Mutual Funds, Inc.
INTRUST Funds Trust
The Kent Funds
Magna Funds
Meyers Investment Trust
MMA Praxis Mutual Funds
M.S.D.&T. Funds
Pacific Capital Funds
Parkstone Group of Funds
The Parkstone Advantage Fund
Pegasus Funds
The Republic Funds Trust
The Republic Advisors Funds Trust
The Riverfront Funds, Inc.
SBSF Funds, Inc. dba Key Mutual Funds
Sefton Funds
The Sessions Group
Summit Investment Trust
Variable Insurance Funds
The Victory Portfolios
The Victory Variable Funds
Vintage Mutual Funds, Inc.
(b) The information required by this Item 29(b) regarding each director or
officer of BISYS Fund Services Limited Partnership is incorporated by reference
to Schedule A of Form BD filed pursuant to the Securities Exchange Act of 1934
(SEC File No. 8-32480).
Item 30. Location of Accounts and Records
1. BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, Ohio 43219-3035
2. The Bank of New York
90 Washington Street
New York, New York 10015
3. First American National Bank
315 Deaderick Street
Nashville, Tennessee 37238
4. Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(b) Registrant hereby undertakes
(1) to call a meeting of shareholders for the purpose of voting
upon the question of removal of a Director or Directors when requested in
writing to do so by the holders of at least 10% of the Registrant's outstanding
Common Stock and in connection with such meeting to comply with the provisions
of Section 16(c) of the Investment Company Act of 1940 relating to shareholders
communications;
(2) to furnish each person to whom a prospectus is delivered with
a copy of its most current annual report to shareholders, upon request and
without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, and State of New York, on the 12th day
of October, 1998.
THE INFINITY MUTUAL FUNDS, INC.
(Registrant)
By: /s/ William B. Blundin*
WILLIAM B. BLUNDIN President
Pursuant to the requirements of the Securities Act of 1933,
this Amendment to Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
/s/William B. Blundin* President (Principal
WILLIAM B. BLUNDIN Executive Officer) and
Chairman of the
Board of Directors
/s/Gary R. Tenkman* Treasurer (Chief
GARY R. TENKMAN Financial and
Accounting Officer)
/s/Richard H. Francis* Director
RICHARD H. FRANCIS
/s/Norma A. Coldwell* Director
NORMA A. COLDWELL
/s/William W. McInnes* Director
WILLIAM W. McINNES
/s/Robert A. Robinson* Director
ROBERT A. ROBINSON
*By:/s/Robert L. Tuch October 12, 1998
Robert L. Tuch
Attorney-in-fact
<PAGE>
THE INFINITY MUTUAL FUNDS, INC.
Post-Effective Amendment No. 41
Registration Statement on Form N-1A under
the Securities Act of 1933 and
the Investment Company Act of 1940
--------------------------------
EXHIBITS
--------------------------------
<PAGE>
INDEX TO EXHIBITS
PAGE
----
(5)(b)(iii) Sub-Investment Advisory Agreement between First
American National Bank and Bennett
Lawrence Management, LLC......................
(11) Consent of Independent Auditors....................
EXHIBIT (5)(b)(iii)
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 BENNETT LAWRENCE MANAGEMENT, LLC, having its principal office and place of
business at 757 Third Avenue, New York, New York 10017 (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; provided, however, that any assets of the Series that the
Sub-Adviser has determined are to be held in cash and cash equivalents shall be
managed by the Adviser. 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.
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: __________________________
BENNETT LAWRENCE MANAGEMENT, LLC
By: _________________________________
Attest: ________________________
<PAGE>
SCHEDULE 1
Annual Fee As
a Percentage
of Average
Name of Daily Net
Series Assets Reapproval Date Reapproval Day
- ---------------- -------------- ----------------- ---------------
ISG Mid Cap
Portfolio * December 31, 1999 December 31
- --------
* .75% on the first $5 million of average aggregate daily net assets; .65% on
the next $5 million of such assets; and .55% on assets in excess of $10
million.
EXHIBIT 11
Independent Auditors' Consent
The Board of Directors
The Infinity Mutual Funds, Inc. -- The AmeriStar Mutual Funds:
---------------------------
We consent to the reference to our firm under the heading "Custodian,
Transfer and Dividend Disbursing Agent, Counsel and Independent Auditors" in the
Statement of Additional Information.
KPMG Peat Marwick LLP
Columbus, Ohio
