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[ISG FUNDS LOGO]
[ISG PICTURES]
ANNUAL REPORT December 31, 1998
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[ISG FUNDS LOGO]
The ISG Funds provide shareholders with a variety of features to make investing
in the Funds easy, covenient and manageable.
<TABLE>
ISG FUND FACTS
ISG FUND FEATURES ISG FUND BENEFITS
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PROFESSIONAL INVESTMENT The investment managers at First American National Bank are experienced
MANAGEMENT investment professionals who oversee the investments in each mutual fund.
LOW MINIMUM INVESTMENT Initial investments in the Funds can be as low as $1,000.
DEDICATED CUSTOMER Account information is available from helpful representatives.
SERVICE Just call 1-800-852-0045.
AUTOMATIC INVESTMENTS Investments can be made once or twice a month with automatic transfers
from your checking account to your Fund account.
DOLLAR COST AVERAGING Dollar Cost Averaging is a means of investing by which you invest a fixed
dollar amount on a consistent basis. You invest whether the financial
markets are high or low. As a result, you buy more shares when prices
are low and fewer when prices are high. In this way, you can achieve
a lower average cost per share.*
AUTOMATIC WITHDRAWALS Automatic withdrawals from your Fund account can be made and credited
to any account you designate.
FREE EXCHANGE PRIVILEGES Shares of a Fund can be exchanged into shares of other ISG Funds at
no cost.**
REGULAR INFORMATIVE You will receive account statements after each transaction, plus regular
STATEMENTS AND REPORTS financial reports highlighting performance and investment strategies.
DIVIDEND REINVESTMENT Dividend income and capital gains can be reinvested automatically in
additional shares of a Fund.
DAILY REDEMPTIONS Shares are redeemable each business day (at the net asset value per
share, which may be worth more or less than your original cost,
next determined after receipt of your redemption request) by mail,
telephone or bank wire.
</TABLE>
*Dollar Cost Averaging does not assure a profit and does not protect against
loss in declining markets. You should consider your financial ability to
continue your investment program during periods of extreme share price
fluctuations.
**Exchange privileges may be modified or discontinued by the Funds at any time.
Upon redemption, shares may be worth more or less than their original cost.
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TABLE OF CONTENTS
Letter from the Chief Investment Officer
Page 1
Treasury Money Market Fund
Prime Money Market Fund
Page 3
Limited Term U.S. Government Fund
Page 13
Government Income Fund
Page 21
Municipal Income Fund
Page 29
Limited Term Tennessee Tax-Exempt Fund
Page 39
Tennessee Tax-Exempt Fund
Page 47
Limited Term Income Fund
Page 57
Income Fund
Page 67
Equity Income Fund
Page 77
Large-Cap Equity Fund
Page 87
Capital Growth Fund
Page 97
Small-Cap Opportunity Fund
Page 107
International Equity Fund
Page 117
Notes to Financial Statements
Page 127
Independent Auditors' Report
Page 147
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LETTER FROM THE CHIEF INVESTMENT OFFICER
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To Our Shareholders:
I am pleased to send you the ISG Funds' annual report for the 12 months ended
December 31, 1998, a truly historic year for the markets and our fund families.
The most notable event, among many of significant happenings, was the merger
between our AmeriStar Portfolios and DG Investor Series, creating the ISG Funds
on December 14, 1998. With the reorganization complete, we now manage more than
$2.8 billion in mutual fund assets.
Aside from giving us a considerably larger presence in the mutual fund industry,
the consolidation enables us to offer you 19 separate mutual funds--including
five exceptionally diversified "strategic portfolios" that cut across the entire
risk/reward spectrum--with which to build your portfolio. The merger between two
experienced investment advisers also has enhanced our management expertise and
research capabilities. Also, we anticipate that operating efficiencies resulting
from the merger will lead to lower administration costs and will improve the
service we provide to you, our shareholders.
Finally, amidst all the organizational changes that have taken place, I
certainly do not want to overlook the outstanding performance turned in by many
of our funds. Three of our stock funds--the Large-Cap Equity Fund, the Capital
Growth Fund and the Equity Income Fund--surpassed their benchmarks, as did our
Government Income Fund. The Large-Cap Equity Fund further enjoyed the
distinction of being awarded five stars, the highest possible rating, from
Morningstar, for the three- and five-year periods ended December 31, 1998.
Morningstar is an independent rating agency recognized for its risk-adjusted
performance ratings.(1)
STOCKS DEFIED THE LAW OF GRAVITY
The Dow Jones Industrial Average added 18.15%; the Standard & Poor's 500 Stock
Index(2) rose 28.74%; and the Nasdaq Composite Index(3) posted a blistering
39.63% gain. Among the major equity averages, only the Russell 2000 Stock
Index(4) lost ground, falling 2.6% for the year. But such eye-catching results
did not come without profound anxiety. The first half of the year proceeded
smoothly enough, with large-cap stocks garnering much of the attention and
attracting the lion's share of fresh capital into the market. Although
continuing concerns about the crises still swirling throughout Asia began to
chip away at investors' confidence, the Dow managed to set a new high in
mid-July. But when the full glare of summer arrived, it brought along a double
dose of trouble. First, Russia's economy imploded, with Yeltsin's government
devaluing the ruble and defaulting on $40 billion of debt, most of it held by
Western banks. Then the international credit crunch that followed sparked a new
crisis: the near-collapse of Long-Term Capital Management, a highly leverage
hedge fund with billions of dollars of paper losses in its portfolio. The
possibility that the hedge fund's troubles could damage the world's fixed-income
markets so rattled investors that the Federal Reserve Board (Fed) took the
remarkable step of engineering a bailout.
It did not help matters that the Clinton Administration was embroiled in
scandal. The gloom was thick in just about every market in the world, and most
investments lost considerable value--except for U.S. Treasury bonds, whose
quality attracted a flood of cash. As stocks hit bottom in August, the Dow and
the S&P 500 were down nearly 20% from their earlier peaks, and the Russell 2000
had lost 36% from its high.
But then the stock market, as it has done so many times in the last 15 years,
reversed course, dug itself out of its hole and proceeded to set new highs.
Aided in no small measure by the Federal Reserve's decision to cut interest
rates not once, but three times in four months, stocks ended the year on a
cheery note. And as I write this letter in the middle of January, the market has
continued its upward move, with the tech-laden Nasdaq sector surging into record
territory.
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(1) Morningstar proprietary ratings reflect risk-adjusted performance through
12/31/98. The ratings are subject to change every month. Past performance is
no guarantee of future results. Morningstar ratings are calculated from a
fund's three-, five- and ten-year returns (with fee adjustments) in excess
of 90-day Treasury Bill returns, and a risk factor that reflects fund
performance below 90-day Treasury bill returns. The Fund received 5 stars
for the three-and-five year periods. It was rated among 2,802 and 1,702
domestic equity funds for the three- and five-year periods, respectively.
Ten percent of the funds in a rating category receive 5 stars; 22.5% receive
4 stars; 35% receive 3 stars; 22.5% receive 2 stars; and 10% receive 1 star.
(2) The Standard & Poor's 500 Stock Index is an unmanaged index generally
representative of the stock market as a whole. The index does not reflect
expenses associated with a mutual fund, such as investment management and
fund accounting fees. The Fund's performance reflects the deduction of fees
for these value-added services.
(3) The Nasdaq Composite Index is a market capitalization price only index that
tracks the performance of domestic common stocks traded on the regular
Nasdaq market as well as National Market System traded foreign common stocks
and American Depository Receipts.
(4) The Russell 2000 Stock Index is an unmanaged index generally representative
of the performance of small-capitalization stocks. The index is unmanaged
and does not reflect the deduction of expenses associated with a mutual
fund, such as investment management and fund accounting fees. The Fund's
performance reflects the deduction of fees for these value-added services.
1
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LETTER FROM THE CHIEF INVESTMENT OFFICER -- (continued)
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BONDS OFFERED A WELCOME REFUGE
There were times this year when, to hold a portfolio of bonds--especially
long-term Treasuries--was to feel like a winner. Throughout 1998, declining
interest rates and low inflation provided fixed-income investors with
historically handsome returns, on an inflation-adjusted basis. And when stock
markets around the world began to fall apart, the stability and interest-bearing
benefits of bonds were never more apparent.
When all was said and done, both long-term and short-term interest rates fell
significantly, which is always good news for bondholders. Fixed-income
securities may not always look as "attractive" as stocks, but their value as an
effective diversification tool continues to be proven again and again.
THE YEAR AHEAD IS FULL OF "INSURMOUNTABLE OPPORTUNITIES"
So what now? In 1999, will stocks rise yet again, continuing to redefine
time-honored concepts of fundamental valuation analysis? Or will they sink
beneath the weight of declining corporate earnings, political unrest and a
financial maelstrom that seems to have leaped across the oceans, from Asia and
Russia to Latin America? We would not be surprised to find it tougher to make
money over the next 12 months.
At the same time, we feel it would be foolish to be overly cautious;
indiscriminate caution has not been rewarded in recent years. Also, our
valuation model is fairly neutral, meaning we feel no panic about the coming
months. Despite the fact that many large-cap growth stocks are valued at levels
we suspect may be insupportable in the long run, we continue to find attractive
buying opportunities. And we are still positive about many factors that are
positively impacting financial assets, including a steady flow of cash into
stocks and bonds.
In the words of that sporting sage, Yogi Berra, "we are faced with
insurmountable opportunities." Risk is part of the landscape. So is the chance
to achieve a stable and secure future, through prudent investments in stocks and
bonds. That is our mission, and our responsibility to you, our shareholders.
We thank you for your support.
Sincerely,
/s/ Frederick S. Crown Jr.
Frederick S. Crown Jr., CFA
Chief Investment Officer
2
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<TABLE>
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JOHN MARK MCKENZIE, CFA
Fund Manager
ISG Treasury Money Market Fund
[McKenzie Photo] ISG Prime Money Market Fund
</TABLE>
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INVESTMENT GOAL
The ISG money market funds seek to provide as high a level of current income
as is consistent with the preservation of capital and the maintenance of
liquidity. Each fund seeks its objective by investing in:
PRIME MONEY MARKET FUND -- A broad range of U.S. Government, bank and
corporate short-term, money market obligations.
U.S. TREASURY MONEY MARKET FUND -- U.S. Treasury securities and other
obligations that are guaranteed as to principal and interest by the U.S.
Government, and related repurchase agreements.
- ---------------------------------------------------------------
Q. WHAT FACTORS AFFECTED THE PERFORMANCE OF THE MONEY MARKET FUNDS?
A. Actions taken by the Federal Reserve were the driving force behind the
gradual decline in yields among all money market funds. For quite some time, the
Fed had kept the fed funds rate (the rate banks charge one another for overnight
loans) artificially high. As late as last August, the rate was 5.50%, which kept
debt instruments on the short end of the yield curve--where our Funds operate -
in a fairly tight range, despite significant volatility among longer-term notes
and bonds.
Then, beginning in September, the Fed initiated a concerted effort to ease
credit, and lowered the fed funds rate three times, down to its present level of
4.75%. Consequently, yields declined on the short-term paper we favor.
As of December 31, 1998, the average maturity of the Prime Money Market Fund was
24 days; for the U.S. Treasury Money Market Fund, it was 55 days.
Q. WHAT IS YOUR OUTLOOK FOR THE NEXT 12 MONTHS?
A. We believe the Fed will be very cautious when it comes to lowering short-term
rates further. The U.S. economy is still strong, and easier credit could pump
too much cash into the monetary system, sparking inflation. As always, we will
continue to pursue the highest possible yields consistent with relative safety
of principal.
- ---------------
An investment in the Fund is not insured or guaranteed by the FDIC or any other
government agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Fund.
3
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ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
TREASURY MONEY MARKET FUND DECEMBER 31, 1998
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U.S. TREASURY BILLS* (29.0%)
AMORTIZED
SECURITY PRINCIPAL COST
DESCRIPTION AMOUNT (NOTE 4)
- -------------------------------- ----------- ------------
4.45%, 1/21/99.................. $15,000,000 $ 14,963,458
4.56%, 2/4/99................... 20,000,000 19,915,047
4.48%, 2/25/99.................. 15,000,000 14,898,708
4.50%, 3/4/99................... 20,000,000 19,847,239
4.48%, 3/18/99.................. 25,000,000 24,766,723
4.44%, 4/22/99.................. 20,000,000 19,729,900
4.56%, 5/20/99.................. 25,000,000 24,565,625
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TOTAL U.S. TREASURY BILLS
(Cost $138,686,700)........... 138,686,700
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U.S. TREASURY NOTES (32.6%)
6.38%, 1/15/99.................. 15,000,000 15,005,444
5.00%, 1/31/99.................. 5,000,000 4,999,653
5.88%, 1/31/99.................. 5,000,000 5,001,449
5.00%, 2/15/99.................. 25,000,000 24,991,461
8.88%, 2/15/99.................. 5,000,000 5,023,116
5.88%, 3/31/99.................. 25,000,000 25,051,269
7.00%, 4/15/99.................. 20,000,000 20,130,330
6.38%, 4/30/99.................. 10,000,000 10,033,064
6.50%, 4/30/99.................. 15,000,000 15,109,518
6.75%, 5/31/99.................. 5,000,000 5,031,636
6.38%, 7/15/99.................. 25,000,000 25,216,364
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TOTAL U.S. TREASURY NOTES
(Cost $155,593,304)............. 155,593,304
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REPURCHASE AGREEMENTS (38.0%)
AMORTIZED
SECURITY PRINCIPAL COST
DESCRIPTION AMOUNT (NOTE 4)
- -------------------------------- ----------- ------------
Merrill Lynch, 4.70%, 1/4/99,
dated 12/31/98, with a
maturity value of $86,418,424
(Collateralized by $76,335,000
U.S. Treasury Bonds/ Notes,
5.25%-11.75%, 3/31/02-
11/15/20, fair value --
$88,105,635).................. $86,373,318 $ 86,373,318
Prudential, 5.10%, 1/4/99, dated
12/31/98, with a maturity
value of $95,053,833
(Collateralized by $47,811,000
U.S. Treasury Notes, 5.63%,
11/30/99, fair value --
$48,458,386; $49,430,034
Government National Mortgage
Assoc., 5.00%-10.00%,
12/15/01-12/15/28, fair
value -- $48,442,534)......... 95,000,000 95,000,000
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TOTAL REPURCHASE AGREEMENTS
(Cost $181,373,318) .......... 181,373,318
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CASH EQUIVALENTS (0.0%)
Bank of New York Cash Reserve
Money Market Fund............. 1,002 1,002
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TOTAL CASH EQUIVALENTS
(Cost $1,002)................... 1,002
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TOTAL INVESTMENTS
(Cost $475,654,324)
(a) -- (99.6%)................ 475,654,324
Other assets in excess of
liabilities -- (0.4%)......... 1,799,784
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TOTAL NET ASSETS -- (100.0%).... $477,454,108
============
</TABLE>
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(a) Cost for federal income tax and financial reporting purposes are the same.
* Yield effective at purchase.
See notes to financial statements
4
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ISG FUNDS
TREASURY MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
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ASSETS:
Investments, at amortized
cost.......................... $ 294,281,006
Repurchase agreements, at
cost.......................... 181,373,318
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Total Investments............... 475,654,324
Interest and dividends
receivable.................... 3,195,106
Receivable for capital shares
issued........................ 6,854
Receivable from advisor......... 8,913
Deferred organization costs..... 3,486
Prepaid expenses and other
assets........................ 29,719
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TOTAL ASSETS.................. 478,898,402
LIABILITIES:
Distributions payable........... $1,305,511
Custody payable................. 701
Accrued expenses and other
payables:
Advisory fees................. 75,835
Administration fees........... 5,185
Shareholder servicing fees --
Class A Shares................ 4,526
Other......................... 52,536
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TOTAL LIABILITIES............. 1,444,294
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NET ASSETS:
Capital......................... 477,473,085
Undistributed (distributions in
excess of) net investment
income........................ 3,539
Accumulated net realized losses
from investment
transactions.................. (22,516)
--------------
NET ASSETS...................... $ 477,454,108
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Class A Shares
Net Assets.................... $ 167,475,382
Shares outstanding............ 167,482,870
Offering and redemption price
per share................... $ 1.00
==============
Institutional Shares
Net Assets.................... $ 309,978,726
Shares outstanding............ 309,993,754
Offering and redemption price
per share................... $ 1.00
==============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
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INVESTMENT INCOME:
Interest income................... $10,222,725
Income from securities lending.... 4,424
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TOTAL INVESTMENT INCOME....... 10,227,149
EXPENSES:
Investment advisory fees.......... $480,809
Administration fees............... 192,322
Shareholder servicing fees --
Class A Shares.................. 230,368
Accounting fees................... 63,874
Transfer agent fees............... 49,000
Directors' fees................... 12,808
Other fees........................ 216,927
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Total expenses before
voluntary fee
reimbursements.............. 1,246,108
Expenses voluntarily
reimbursed.................. (8,913)
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Net Expenses.................. 1,237,195
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NET INVESTMENT INCOME............. 8,989,954
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REALIZED GAINS (LOSSES) FROM
INVESTMENTS:
Net realized gains (losses) from
investment transactions......... (22,516)
-----------
Change in net assets resulting
from operations................. $ 8,967,438
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</TABLE>
See notes to financial statements
5
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ISG FUNDS
TREASURY MONEY MARKET FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
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FROM INVESTMENT ACTIVITIES:
Operations:
Net investment income..................................... $ 8,989,954 $ 9,157,705
Net realized gains (losses) from investment
transactions............................................ (22,516) --
------------- -------------
Change in net assets resulting from operations.............. 8,967,438 9,157,705
DISTRIBUTIONS TO CLASS A SHAREHOLDERS:
From net investment income................................ (4,199,074) (3,780,942)
DISTRIBUTIONS TO INSTITUTIONAL SHAREHOLDERS:
From net investment income................................ (4,790,880) (5,376,763)
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Change in net assets from shareholder distributions......... (8,989,954) (9,157,705)
------------- -------------
Change in net assets from capital transactions.............. 286,236,862 3,233,359
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Change in net assets........................................ 286,214,346 3,233,359
NET ASSETS:
Beginning of period....................................... 191,239,762 188,006,403
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End of period............................................. $ 477,454,108 $ 191,239,762
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</TABLE>
See notes to financial statements
6
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ISG FUNDS
TREASURY MONEY MARKET FUND
FINANCIAL HIGHLIGHTS, CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995 1994(a)
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Net Asset Value, Beginning of Period............... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- ---------
Investment Activities
Net investment income............................ 0.046 0.047 0.047 0.053 0.030
-------- -------- -------- -------- ---------
Total from Investment Activities................. 0.046 0.047 0.047 0.053 0.030
-------- -------- -------- -------- ---------
Distributions
Net investment income............................ (0.046) (0.047) (0.047) (0.053) (0.030)
-------- -------- -------- -------- ---------
Total Distributions.............................. (0.046) (0.047) (0.047) (0.053) (0.030)
-------- -------- -------- -------- ---------
Net change in asset value.......................... -- -- -- -- --
-------- -------- -------- -------- ---------
Net Asset Value, End of Period..................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== =========
TOTAL RETURN....................................... 4.68% 4.78% 4.78% 5.41% 3.01%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000).................. $167,475 $ 77,065 $ 78,308 $168,430 $ 139,715
Ratio of expenses to average net assets............ 0.77% 0.75% 0.56% 0.50% 0.54%(c)
Ratio of net investment income to average net
assets........................................... 4.56% 4.68% 4.72% 5.28% 4.02%(c)
Ratio of expenses to average net assets*........... 0.78% (d) 0.74% 0.75% 0.83%(c)
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If such
voluntary fee reductions/reimbursements had not occurred, the ratio would
have been as indicated.
(a) For the period from March 29, 1994 (commencement of operations) through
December 31, 1994.
(b) Not annualized.
(c) Annualized.
(d) There were no fee reductions in this period.
FINANCIAL HIGHLIGHTS, INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996(a)
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $ 1.000 $ 1.000 $ 1.000
-------- -------- --------
Investment Activities
Net investment income..................................... 0.048 0.049 0.024
-------- -------- --------
Total from Investment Activities.......................... 0.048 0.049 0.024
-------- -------- --------
Distributions
Net investment income..................................... (0.048) (0.049) (0.024)
-------- -------- --------
Total Distributions....................................... (0.048) (0.049) (0.024)
-------- -------- --------
Net change in asset value................................... -- -- --
-------- -------- --------
Net Asset Value, End of Period.............................. $ 1.000 $ 1.000 $ 1.000
======== ======== ========
TOTAL RETURN................................................ 4.93% 5.05% 2.43%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $309,979 $114,175 $109,698
Ratio of expenses to average net assets..................... 0.53% 0.50% 0.52%(c)
Ratio of net investment income to average net assets........ 4.78% 4.94% 4.78%(c)
</TABLE>
(a) For the period from July 1, 1996 (commencement of operations) through
December 31, 1996.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
7
<PAGE> 11
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
PRIME MONEY MARKET FUND DECEMBER 31, 1998
<TABLE>
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COMMERCIAL PAPER** (92.6%)
AMORTIZED
SECURITY PRINCIPAL COST
DESCRIPTION AMOUNT (NOTE 4)
- ------------------------------- ----------- --------------
Allied Signal, 5.60%,
1/15/99...................... $ 6,000,000 $ 5,986,933
American General Finance Corp.,
5.47%, 1/8/99................ 10,000,000 9,989,364
American General Finance Corp.,
5.30%, 11/6/99............... 7,500,000 7,479,021
Amoco Co., 5.00%, 10/28/99..... 7,500,000 7,479,167
Atlantis Funding, 5.55%,
1/14/99...................... 6,000,000 5,987,975
Austra Corp., 5.51%, 1/11/99... 6,500,000 6,490,051
Banca Credit Financial Corp.,
5.50%, 2/1/99................ 5,000,000 4,976,319
Banca Credit Financial Corp.,
5.13%, 3/8/99................ 10,000,000 9,905,950
Banco Nacional de Comercio,
5.40%, 1/20/99............... 12,000,000 11,965,801
Bancque Generale du Luxembourg,
S.A., 5.35%, 1/15/99......... 12,000,000 11,975,034
Bankers Trust Corp., 5.41%,
4/14/99...................... 6,000,000 5,907,128
Banque Nationale de Paris,
5.30%, 2/18/99............... 9,783,000 9,713,867
Barclays PLC, 5.35%, 2/5/99.... 10,000,000 9,947,986
BellSouth Capital Funding
Corp., 4.90%, 1/14/99........ 7,500,000 7,486,729
CIT Group, 5.31%, 1/5/99....... 7,000,000 6,995,870
Coca-Cola Co., 5.00%,
11/2/99...................... 7,500,000 7,485,417
Commercial Credit Co., 5.08%,
1/11/99...................... 7,000,000 6,990,122
Commerzbank, 5.23%, 1/4/99..... 6,000,000 5,997,385
Commerzbank, 5.47%, 1/22/99.... 10,000,000 9,968,092
Commonwealth Bank of Australia,
5.14%, 1/29/99............... 5,000,000 4,980,011
Deere & Co., 5.22%, 2/4/99..... 7,500,000 7,463,025
Duff & Phelps, 5.42%, 1/7/99... 6,000,000 5,994,580
Emerson Electric, 5.07%,
2/11/99...................... 4,410,000 4,384,536
Ford Motor Credit Co., 5.00%,
1/8/99....................... 7,500,000 7,492,708
General Motors Acceptance
Corp., 5.06%, 1/27/99........ 7,000,000 6,974,419
Gillette Co., 4.97%, 1/6/99.... 7,000,000 6,995,168
Goldman Sachs Group, 5.27%,
2/5/99....................... 7,500,000 7,461,573
Great West Life & Annuity
Insurance, 5.10%, 2/25/99.... 6,764,000 6,711,297
H.J. Heinz, 5.23%, 1/13/99..... 7,500,000 7,486,925
Household Finance Corp., 5.25%,
11/9/99...................... 7,000,000 6,996,938
IBM Credit Corp., 5.07%,
11/20/99..................... 7,500,000 7,465,144
Kzh-Ing-2 Corp., 5.51%,
1/29/99...................... 2,300,000 2,290,143
Lexington Parker Capital,
5.50%, 1/19/99............... 6,000,000 5,983,500
Marketstreet, 5.55%, 1/8/99.... 6,000,000 5,993,525
Merita N.A., 5.18%, 1/7/99..... 6,000,000 5,994,820
Merrill Lynch & Co., 5.33%,
11/13/99..................... 7,500,000 7,473,350
Minnesota Mining &
Manufacturing Co., 5.00%,
11/17/99..................... 7,500,000 7,459,375
COMMERCIAL PAPER**, CONTINUED
AMORTIZED
SECURITY PRINCIPAL COST
DESCRIPTION AMOUNT (NOTE 4)
- ------------------------------- ----------- --------------
National Australia Funding,
5.15%, 2/2/99................ $10,000,000 $ 9,954,222
National Rural Utilities Corp.,
5.00%, 1/19/99............... 7,500,000 7,481,250
Nordbanken, 5.39%, 1/7/99...... 10,000,000 9,991,018
Nordbanken, 5.17%, 1/19/99..... 6,000,000 5,984,490
Quincy, 5.36%, 1/12/99......... 6,000,000 5,990,173
Sigma, 5.52%, 1/15/99.......... 6,000,000 5,987,120
Sunbelt Dx, 5.30%, 2/23/99..... 6,000,000 5,953,183
Texaco, 5.22%, 1/7/99.......... 7,000,000 6,993,910
Thunder Bay, 5.44%, 1/15/99.... 8,000,000 7,983,083
USAA Capital Corp., 4.98%,
1/29/99...................... 7,500,000 7,470,950
Walt Disney Co., 4.99%,
2/1/99....................... 7,000,000 6,969,921
--------------
TOTAL COMMERCIAL PAPER
(Cost $349,088,568)............ 349,088,568
--------------
U.S. GOVERNMENT AGENCY SECURITIES (7.7%)
FEDERAL HOME LOAN BANK (3.2%)
4.90%**, 2/23/99............... 7,000,000 6,949,502
4.93%*, 4/1/99................. 5,000,000 4,999,451
--------------
11,948,953
--------------
FANNIE MAE (3.2%)
4.94%**, 3/8/99................ 7,000,000 6,936,603
5.11%*, 4/9/99................. 5,000,000 4,999,832
--------------
11,936,435
--------------
STUDENT LOAN MARKETING ASSOC.
(1.3%) 4.85%*, 2/8/99.......... 5,000,000 4,999,015
--------------
TOTAL U.S. GOVERNMENT AGENCY
SECURITIES (Cost
$28,884,403)................. 28,884,403
--------------
CASH EQUIVALENTS (0.0%)
Bank of New York Cash Reserve
Money Market Fund............ 97,036 97,036
--------------
TOTAL CASH EQUIVALENTS
(Cost $97,036)............... 97,036
--------------
TOTAL INVESTMENTS
(Cost $378,070,007) (a) -- (100.3%) 378,070,007
Liabilities in excess of other
assets -- (-0.3)% (967,685)
--------------
TOTAL NET ASSETS -- (100.0%) $ 377,102,322
==============
</TABLE>
- ---------------
(a) Cost for federal income tax and financial reporting purposes are the same.
* Variable rate security. Rate represents rate in effect at December 31, 1998.
Maturity date reflects the next rate change date.
** Yield effective at purchase.
PLC -- Public Limited Company
Commercial Paper Industry Classifications
Banking/Finance -- 74.6%
Consumer Products -- 10.5%
Industrial -- 7.5%
See notes to financial statements
8
<PAGE> 12
ISG FUNDS
PRIME MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at amortized cost... $378,070,007
Interest and dividends
receivable..................... 182,192
Receivable for capital shares
issued......................... 69,338
Receivable from advisor.......... 5,675
Deferred organization costs...... 3,287
Prepaid expenses and other
assets......................... 25,848
------------
TOTAL ASSETS................... 378,356,347
LIABILITIES:
Distributions payable............ $1,126,345
Accrued expenses and other
payables:
Advisory fees.................. 60,490
Administration fees............ 4,188
Shareholder servicing fees --
Class A Shares............... 8,531
Shareholder servicing fees --
Class B Shares............... 5
Distribution fees -- Class B
Shares....................... 15
Other.......................... 54,451
----------
TOTAL LIABILITIES.............. 1,254,025
------------
NET ASSETS:
Capital.......................... 377,103,481
Undistributed (distributions in
excess of) net investment
income......................... 3,563
Accumulated net realized losses
from investment transactions... (4,722)
------------
NET ASSETS....................... $377,102,322
============
Class A Shares
Net Assets..................... $310,200,952
Shares outstanding............. 310,203,922
Offering and redemption price
per share.................... $ 1.00
============
Class B Shares
Net Assets..................... $ 186,805
Shares outstanding............. 186,805
Offering price per share*...... $ 1.00
============
Institutional Shares
Net Assets..................... $ 66,714,565
Shares outstanding............. 66,716,317
Offering and redemption price
per share.................... $ 1.00
============
</TABLE>
- ---------------
* Redemption price per share varies by length of time shares are held.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income................... $ 7,549,606
EXPENSES:
Investment advisory fees.......... $ 328,794
Investment sub-advisory fees...... 11,578
Administration fees............... 136,147
Shareholder servicing fees --
Class A Shares.................. 200,958
Shareholder servicing fees --
Class B Shares.................. 159
Distribution fees -- Class B
Shares.......................... 476
Accounting fees................... 68,460
Transfer agent fees............... 56,319
Directors' fees................... 7,787
Other fees........................ 168,495
----------
Total expenses before voluntary
fee reimbursements............ 979,173
Expenses voluntarily
reimbursed.................... (5,675)
-----------
Net expenses...................... 973,498
-----------
NET INVESTMENT INCOME............. 6,576,108
-----------
REALIZED GAINS (LOSSES) FROM
INVESTMENTS:
Net realized gains (losses) from
investment transactions......... (2,924)
-----------
Change in net assets resulting
from operations................. $ 6,573,184
===========
</TABLE>
See notes to financial statements
9
<PAGE> 13
ISG FUNDS
PRIME MONEY MARKET FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net investment income..................................... $ 6,576,108 $ 3,956,447
Net realized gains (losses) from investment
transactions............................................ (2,924) (760)
-------------- --------------
Change in net assets resulting from operations.............. 6,573,184 3,955,687
-------------- --------------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS:
From net investment income................................ (3,802,606) (1,794,260)
DISTRIBUTIONS TO CLASS B SHAREHOLDERS:
From net investment income................................ (2,455)(a) --
DISTRIBUTIONS TO INSTITUTIONAL SHAREHOLDERS:
From net investment income................................ (2,771,047) (2,162,187)
-------------- --------------
Change in net assets from shareholder distributions......... (6,576,108) (3,956,447)
-------------- --------------
Change in net assets from capital transactions.............. 294,554,899 11,614,664
-------------- --------------
Change in net assets........................................ 294,551,975 11,613,904
NET ASSETS:
Beginning of period....................................... 82,550,347 70,936,443
-------------- --------------
End of period............................................. $ 377,102,322 $ 82,550,347
============== ==============
</TABLE>
- ---------------
(a) For the period from July 23, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
10
<PAGE> 14
ISG FUNDS
PRIME MONEY MARKET FUND
FINANCIAL HIGHLIGHTS, CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995 1994(a)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- ------- ------- ------- -------
Investment Activities
Net investment income............................. 0.047 0.048 0.048 0.054 0.031
-------- ------- ------- ------- -------
Total from Investment Activities.................. 0.047 0.048 0.048 0.054 0.031
-------- ------- ------- ------- -------
Distributions
Net investment income............................. (0.047) (0.048) (0.048) (0.054) (0.031)
-------- ------- ------- ------- -------
Total Distributions............................... (0.047) (0.048) (0.048) (0.054) (0.031)
-------- ------- ------- ------- -------
Net change in asset value........................... -- -- -- -- --
-------- ------- ------- ------- -------
Net Asset Value, End of Period...................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- ------- ------- ------- -------
TOTAL RETURN........................................ 4.85% 4.90% 4.88% 5.51% 3.13%(b)
======== ======= ======= ======= =======
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)................... $310,201 $56,163 $22,836 $63,919 $82,351
Ratio of expenses to average net assets............. 0.81% 0.87% 0.68% 0.65% 0.63%(c)
Ratio of net investment income to average net
assets............................................ 4.73% 4.82% 4.83% 5.37% 4.00%(c)
Ratio of expenses to average net assets*............ 0.82% (d) 0.86% 0.90% 0.93%(c)
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If such
voluntary fee reductions/reimbursements had not occurred, the ratio would
have been as indicated.
(a) For the period March 29, 1994 (commencement of operations) through December
31, 1994.
(b) Not annualized.
(c) Annualized.
(d) There were no fee reductions in this period.
FINANCIAL HIGHLIGHTS, CLASS B SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1998(a)
------------
<S> <C>
Net Asset Value, Beginning of Period........................ $ 1.000
--------
Investment Activities
Net investment income..................................... 0.021
--------
Total from Investment Activities.......................... 0.021
--------
Distributions
Net investment income..................................... (0.021)
--------
Total Distributions....................................... (0.021)
--------
Net change in asset value................................... --
--------
Net Asset Value, End of Period.............................. $ 1.000
========
TOTAL RETURN (EXCLUDES REDEMPTION CHARGE)................... 2.07%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $ 187
Ratio of expenses to average net assets..................... 1.55%(c)
Ratio of net investment income to average net assets........ 3.77%(c)
</TABLE>
(a) For the period from July 23, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
11
<PAGE> 15
ISG FUNDS
PRIME MONEY MARKET FUND
FINANCIAL HIGHLIGHTS, INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996(a)
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $ 1.000 $ 1.000 $ 1.000
------- ------- -------
Investment Activities
Net investment income..................................... 0.050 0.051 0.024
------- ------- -------
Total from Investment Activities.......................... 0.050 0.051 0.024
------- ------- -------
Distributions
Net investment income..................................... (0.050) (0.051) (0.024)
------- ------- -------
Total Distributions....................................... (0.050) (0.051) (0.024)
------- ------- -------
Net change in net asset value............................... -- -- --
------- ------- -------
Net Asset Value, End of Period.............................. $ 1.000 $ 1.000 $ 1.000
======= ======= =======
TOTAL RETURN................................................ 5.11% 5.17% 2.46%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $66,715 $26,389 $48,101
Ratio of expenses to average net assets..................... 0.58% 0.62% 0.65%(c)
Ratio of net investment income to average net assets........ 4.97% 5.05% 4.86%(c)
</TABLE>
(a) For the period from July 1, 1996 (commencement of operations) through
December 31, 1996.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
12
<PAGE> 16
<TABLE>
<S> <C>
JOHN MARK MCKENZIE
Portfolio Manager
ISG Limited Term U.S. Government
[McKenzie Photo] Fund
</TABLE>
- ---------------------------------------------------------------
- ---------------------------------------------------------------
INVESTMENT GOAL
The Fund seeks to provide investors with high current income without assuming
undue risk. The Fund will invest primarily in a portfolio of U.S. Government
securities that, under normal market conditions, has a duration that
approximates that of the Merrill Lynch 1-5-Year Government Bond Index. This
Fund is suitable for investors seeking regular monthly income without undue
risk to principal.
- ---------------------------------------------------------------
Q. HOW DID THE FUND PERFORM DURING 1998?
A. Despite some volatility in the market throughout the year, the Fund delivered
solid returns. For the 12 months ended December 31, 1998, the Fund produced a
total return of 6.69% (Class A shares at NAV).(1) In comparison, the Merrill
Lynch 1-5-Year Government Bond Index, produced a total return of 7.67%.
It is also important to recognize income yield to shareholders. As of December
31, 1998, the Fund's 30-day SEC yield was 4.32% (Class A shares at NAV),
compared to 5.46% at the end of 1997. The yield percentages are annualized. We
achieved our objectives while maintaining an average credit quality of AAA (as
rated by Standard & Poor's). As of December 31, 1998, the Fund's average
maturity was 2.6 years.
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. The two most important factors were our maturity structure and the
international crises that afflicted Russia, Asia and South America.
With the Fund having a maturity structure longer than our benchmark, the Merrill
Lynch 1-5-Year Government Bond Index, it was reasonable to expect that the
year's overall decline in interest rates would be more productive to our total
return. But markets do not always behave as investors believe they will. When
troubles abroad threatened the safety of foreign bonds, the result was a
stampeding "flight to quality," with U.S. Treasury bonds almost exclusively
being the securities of choice. Consequently, there was a broad sell-off of all
other types of bonds, including U.S. agency securities. Because we held more
government agency securities, and fewer Treasuries, than our benchmark, we
underperformed.
Fortunately, we believe a reversal of this unusual situation should occur, which
would boost the Fund's performance relative to our benchmark.
Q. WITH ALL THIS MOVEMENT IN THE MARKET, WHAT STEPS DID YOU TAKE TO HELP
INCREASE CURRENT INCOME?
A. Our key strategy was to sell Treasury notes and buy government agency notes,
which yielded considerably more income. For example, we sold Treasuries and
bought Tennessee Valley Authority notes (5.3% of the Fund's net assets), which
offered an additional .65% in yield. We also sold Treasury notes and bought
notes issued by the Federal Farm Credit Bank (12.8%), which netted an additional
.34% in yield.*
As of December 31, 1998, 47.2% of the Fund's portfolio was invested in Treasury
securities, with 49.0% invested in government agencies and 3.8% in cash and cash
equivalents.*
Q. WHAT IS YOUR OUTLOOK FOR 1999?
A. We are essentially positive on the bond market. In our opinion, it is
unlikely that we will have another dramatic decline in interest rates, as we did
in 1998. We see many factors that are positive for bonds: the continuing secular
trend in disinflation, the very low levels of commodity prices, excessive global
production capacity, technological efficiencies and demographic trends. All of
these circumstances favor low inflation, which is good for fixed-income
investors.
This is not to say that there are not negative factors that pose risks to the
bond market. The most prominent of these are shortages in the domestic labor
force, which can run up costs and spark inflation; the introduction of the new
euro currency in Europe, which could make U.S. debt less desirable; and the
possibility of an overheating U.S. economy.
But in general, we feel that bonds should remain stable, with the yields of
long-term Treasuries remaining in the range of 4.5% to 5.5%.
- ---------------
(1)Including the 3.00% sales load, the Fund's return was 3.52% for the period.
* The Fund's portfolio composition is subject to change.
13
<PAGE> 17
- --------------------------------------------------------------------------------
ISG LIMITED TERM U.S. GOVERNMENT FUND
PERFORMANCE (AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIMITED TERM U.S. LIMITED TERM U.S.
GOVERNMENT FUND WITH GOVERNMENT FUND WITHOUT MERRILL LYNCH 1-5-YEAR
CLASS A SHARES SALES CHARGE SALES CHARGE GOVERNMENT BOND INDEX
--------------------- ------------------------ ----------------------
<S> <C> <C> <C>
'88' 9700 10000 10000
'89' 10776 11109 11164
'90' 11650 12010 12260
'91' 13130 13536 13839
'92' 13852 14281 14770
'93' 14827 15286 15794
'94' 14676 15130 15873
'95' 16273 16776 17900
'96' 16710 17227 18713
'97' 17743 18291 20043
'98' 18929 19515 21580
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT SALES WITH SALES
CHARGE CHARGE*
CLASS A SHARES ------------- ----------
<S> <C> <C>
1-Year........................ 6.69% 3.52%
5-Year........................ 5.01% 4.37%
10-Year....................... 6.91% 6.59%
*Reflects the maximum sales charge of 3.00%.
</TABLE>
<TABLE>
<CAPTION>
LIMITED TERM U.S. GOVERNMENT MERRILL LYNCH 1-5-YEAR
CLASS B SHARES FUND GOVERNMENT BOND INDEX
---------------------------- ----------------------
<S> <C> <C>
'88' 10000 10000
'89' 11109 11164
'90' 12010 12260
'91' 13536 13839
'92' 14281 14770
'93' 15286 15794
'94' 15130 15873
'95' 16776 17900
'96' 17227 18713
'97' 18291 20043
'98' 19376 21580
</TABLE>
The Class B contingent deferred sales charge (CDSC) is not included in the
above graph, since the performance is for more than 6 years and the CDSC
would no longer apply.
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT CDSC WITH CDSC**
CLASS B SHARES ------------ -----------
<S> <C> <C>
1-Year..................... 5.93% 2.93%
5-Year..................... 4.86% 4.69%
10-Year.................... 6.84% 6.84%
**Reflects the applicable contingent deferred sales
charge (maximum 4.00%).
THE DATA FOR CLASS B SHARES PRIMARILY PRESENTS THE
RESULTS OF THE CLASS A SHARES. ACTUAL CLASS B SHARES
AVERAGE ANNUAL TOTAL RETURN AND HYPOTHETICAL GROWTH
RESULTS WOULD HAVE BEEN LOWER. SEE NOTES BELOW.
</TABLE>
<TABLE>
<CAPTION>
LIMITED TERM U.S. GOVERNMENT MERRILL LYNCH 1-5-YEAR
INSTITUTIONAL SHARES FUND GOVERNMENT
---------------------------- ----------------------
<S> <C> <C>
'88' 10000 10000
'89' 11109 11164
'90' 12010 12260
'91' 13536 13839
'92' 14281 14770
'93' 15286 15794
'94' 15130 15873
'95' 16776 17900
'96' 17227 18713
'97' 18291 20043
'98' 19505 21580
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
INSTITUTIONAL SHARES --------------
<S> <C>
1-Year................................. 6.64%
5-Year................................. 5.00%
10-Year................................ 6.91%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment in
the indicated share class versus a similar investment in the Fund's benchmark.
PERFORMANCE FOR THE CLASS B SHARES, WHICH COMMENCED OPERATIONS ON 3/3/98, IS
BASED ON THE HISTORICAL PERFORMANCE OF THE CLASS A SHARES (WITHOUT SALES CHARGE)
PRIOR TO THAT DATE. CLASS A SHARES PERFORMANCE DOES NOT REFLECT THE HIGHER 12b-1
FEES OR THE CONTINGENT DEFERRED SALES CHARGE (CDSC). HAD THE CDSC AND HIGHER
12b-1 FEES BEEN INCORPORATED, TOTAL RETURN AND HYPOTHETICAL GROWTH FIGURES WOULD
HAVE BEEN LOWER.
The Institutional Share class was initially offered on 12/14/98 and reflects the
historical performance of the Class A Shares (without sales charge) prior to
that date.
The ISG Limited Term U.S. Government Fund commenced operations on 2/28/97
through a transfer of assets from certain collective trust fund ("commingled")
accounts managed by First American National Bank, using materially equivalent
investment objectives, policies and methodologies as the Fund. The quoted
performance of the Fund includes performance of the commingled accounts for
periods prior to the Fund's commencement of operations, as adjusted to reflect
the expenses associated with the Fund. The commingled accounts were not
registered with the Securities and Exchange Commission and, therefore, were not
subject to the investment restrictions imposed by law on registered mutual
funds. If the commingled accounts had been registered, the commingled accounts'
performance may have been adversely affected. The performance also reflects
reinvestment of dividends and capital gain distributions.
The Fund's performance is compared to the Merrill Lynch 1-5-Year Government Bond
Index, which is generally representative of the performance of government bonds
in that maturity range with a rating of at least Baa. The Index is unmanaged and
does not reflect the expenses associated with a mutual fund, such as investment
management and fund accounting fees. The Fund's performance reflects the
deduction of fees for these value-added services.
PAST PERFORMANCE IS NOT A PREDICTION OF FUTURE RESULTS. THE FUND'S INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL PURCHASE PRICE.
14
<PAGE> 18
- --------------------------------------------------------------------------------
ISG LIMITED TERM U.S. GOVERNMENT FUND
(AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
[SECTOR PROFILE PIE CHART]
<TABLE>
<CAPTION>
<S> <C>
U.S. Government Agencies 49.0%
Cash and Cash Equivalents 3.8%
U.S. Treasuries 47.2%
</TABLE>
The Limited Term U.S. Government Fund will invest in securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities and repurchase agreements in respect of such
securities. The Fund is designed to provide high current income
without assuming undue risk.
[MATURITY PROFILE PIE CHART]
<TABLE>
<CAPTION>
<S> <C>
0-1 Years 34.2%
1-5 Years 60.3%
6-10 Years 5.5%
</TABLE>
By design, the Fund attempts to generate current income without
undue risk to principal. The chart above shows that the Fund is
primarily focused on bonds with maturities of 1 to 5 years.
[QUALITY PROFILE PIE CHART]
<TABLE>
<CAPTION>
<S> <C>
AAA 100.0%
</TABLE>
The Fund's research team and the Fund Manager continuously monitor
debt instruments and issuer quality to identify fixed-income
securities for the Fund.
* The Fund's portfolio composition is subject to change.
15
<PAGE> 19
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
LIMITED TERM U.S. GOVERNMENT FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
U.S. GOVERNMENT AGENCIES (48.6%)
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ---------------------------------- ---------- -----------
FEDERAL FARM CREDIT BANK (12.8%)
5.48%, 3/1/99..................... $1,000,000 $ 1,000,757
5.76%, 7/7/03..................... 750,000 770,310
5.07%, 12/15/03................... 3,500,000 3,471,229
6.15%, 3/23/05.................... 1,000,000 1,017,940
-----------
6,260,236
-----------
FEDERAL HOME LOAN BANK (5.9%)
6.28%, 8/13/01.................... 1,000,000 1,006,700
6.00%, 8/28/01.................... 750,000 750,398
6.00%, 9/15/04.................... 400,000 401,336
6.10%*, 12/24/07.................. 750,000 753,210
-----------
2,911,644
-----------
FREDDIE MAC (6.0%)
6.79%, 5/24/01.................... 1,000,000 1,006,870
6.16%, 9/25/02.................... 500,000 519,205
5.89%, 7/17/03.................... 400,000 407,512
6.53%, 3/3/08..................... 1,000,000 1,009,000
-----------
2,942,587
-----------
FANNIE MAE (9.8%)
5.08%, 1/14/99.................... 2,000,000 1,996,064
6.05%, 10/20/00................... 1,000,000 1,008,370
5.98%, 11/12/02................... 500,000 516,775
5.75%, 6/15/05.................... 250,000 259,240
6.44%, 8/14/07.................... 500,000 538,250
6.65%, 11/14/07................... 500,000 523,070
-----------
4,841,769
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOC. (7.1%)
9.00%, 12/15/01, Pool # 152718.... 27,660 29,129
9.00%, 2/15/03, Pool # 248038..... 125,597 132,268
7.50%, 5/15/10, Pool # 407408..... 586,350 606,685
7.00%, 8/15/11, Pool # 423984..... 750,349 771,921
7.50%, 8/15/11, Pool # 423914..... 792,846 820,343
7.00%, 9/15/11, Pool # 423923..... 629,106 647,193
7.50%, 10/15/11, Pool # 431451.... 474,883 491,352
-----------
3,498,891
-----------
STUDENT LOAN MARKETING ASSOC. (1.7%)
5.81%, 1/23/01.................... 850,000 850,434
-----------
U.S. GOVERNMENT AGENCIES, CONTINUED
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ---------------------------------- ---------- -----------
TENNESSEE VALLEY AUTHORITY (5.3%)
5.28%, 9/14/01.................... $1,000,000 $ 1,010,000
5.28%, 9/14/01.................... 1,000,000 1,010,000
5.38%, 11/13/08................... 600,000 602,004
-----------
2,622,004
-----------
TOTAL U.S. GOVERNMENT AGENCIES
(Cost $23,683,775).............. 23,927,565
-----------
U.S. TREASURY NOTES (46.8%)
6.00%, 6/30/99.................... 3,500,000 3,525,725
7.50%, 10/31/99................... 2,000,000 2,045,640
6.38%, 5/15/00.................... 2,000,000 2,045,660
6.63%, 7/31/01.................... 4,000,000 4,195,280
7.50%, 11/15/01................... 2,500,000 2,691,425
7.50%, 11/15/01................... 4,000,000 4,306,280
7.50%, 5/15/02.................... 1,000,000 1,087,020
6.25%, 6/30/02.................... 750,000 787,740
5.63%, 12/31/02................... 2,000,000 2,068,020
6.50%, 10/15/06................... 250,000 278,148
-----------
TOTAL U.S. TREASURY NOTES
(Cost $22,328,176).............. 23,030,938
-----------
INVESTMENT COMPANIES (3.8%)
AIM Treasury Money Market Fund.... 1,867,667 1,867,667
-----------
TOTAL INVESTMENT COMPANIES
(Cost $1,867,667)............... 1,867,667
-----------
TOTAL INVESTMENTS
(Cost $47,879,618)
(a) -- (99.2%).................. 48,826,170
Other assets in excess of
liabilities -- (0.8%)........... 385,221
-----------
TOTAL NET ASSETS -- (100.0%)...... $49,211,391
===========
</TABLE>
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting in excess of federal income tax reporting of $1,796.
Cost for federal income tax purposes differs from value by net unrealized
appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation................. $ 955,655
Unrealized depreciation................. (10,899)
------------
Net unrealized appreciation............. $ 944,756
============
</TABLE>
* Variable rate security. Rate represents rate in effect at
December 31, 1998.
See notes to financial statements
16
<PAGE> 20
ISG FUNDS
LIMITED TERM U.S. GOVERNMENT FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (cost
$47,879,618)...................... $48,826,170
Interest and dividends receivable... 556,208
Deferred organization costs......... 1,165
Prepaid expenses and other assets... 18,627
-----------
TOTAL ASSETS...................... 49,402,170
LIABILITIES:
Distributions payable............... $164,347
Accrued expenses and other payables:
Advisory fees..................... 10,531
Administration fees............... 216
Shareholder servicing fees --
Class B Shares.................. 12
Distribution fees -- Class B
Shares.......................... 35
Other............................. 15,638
--------
TOTAL LIABILITIES................. 190,779
-----------
NET ASSETS:
Capital............................. 51,633,366
Undistributed (distributions in
excess of) net investment
income............................ (751)
Undistributed (distributions in
excess of) net realized gains..... (3,367,776)
Net unrealized appreciation
(depreciation) from investments... 946,552
-----------
NET ASSETS.......................... $49,211,391
===========
Class A Shares
Net Assets........................ $ 2,436,655
Shares outstanding................ 237,619
Redemption price per share........ $ 10.25
===========
Class A Shares -- Maximum Sales
Charge............................ 3.00%
-----------
Maximum Offering Price Per Share
(100% -- Maximum Sales Charge) of
net asset value adjusted to the
nearest cent)..................... $ 10.57
===========
Class B Shares
Net Assets........................ $ 430,363
Shares outstanding................ 41,933
Offering price per share *........ $ 10.26
===========
Institutional Shares
Net Assets........................ $46,344,373
Shares outstanding................ 4,519,839
Offering and redemption price per
share........................... $ 10.25
===========
</TABLE>
- ---------------
* Redemption price per share varies by length of time shares are held.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income...................... $1,300,994
Dividend income...................... 35,669
----------
TOTAL INVESTMENT INCOME............ 1,336,663
EXPENSES:
Investment advisory fees............. $108,195
Administration fees.................. 32,459
Shareholder servicing fees -- Class B
Shares............................. 466
Distribution fees -- Class A
Shares............................. 48,533
Distribution fees -- Class B
Shares............................. 1,398
Accounting fees...................... 60,449
Transfer agent fees.................. 37,167
Directors' fees...................... 1,079
Other fees........................... 34,480
--------
Total expenses before voluntary fee
reductions....................... 324,226
Expenses voluntarily reduced....... (107,908)
----------
Net Expenses....................... 216,318
----------
NET INVESTMENT INCOME................ 1,120,345
----------
REALIZED/UNREALIZED GAINS (LOSSES)
FROM INVESTMENTS:
Net realized gains (losses) from
investment transactions............ 148,381
Net change in unrealized appreciation
(depreciation) from investment
transactions....................... 699,001
----------
Net realized/unrealized gains
(losses) from investments.......... 847,382
----------
Change in net assets resulting from
operations......................... $1,967,727
==========
</TABLE>
See notes to financial statements
17
<PAGE> 21
ISG FUNDS
LIMITED TERM U.S. GOVERNMENT FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1998 1997(a)
------------ ------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net investment income..................................... $ 1,120,345 $ 865,919
Net realized gains (losses) from investment
transactions............................................ 148,381 (2,339)
Net change in unrealized appreciation (depreciation) from
investments............................................. 699,001 220,368
------------ -----------
Change in net assets resulting from operations.............. 1,967,727 1,083,948
------------ -----------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS:
From net investment income................................ (1,001,210) (865,919)
From net realized gains on investment transactions........ (10,045) --
DISTRIBUTIONS TO CLASS B SHAREHOLDERS:
From net investment income................................ (7,517)(b) --
From net realized gains on investment transactions........ (189)(b) --
DISTRIBUTIONS TO INSTITUTIONAL SHAREHOLDERS:
From net investment income................................ (111,618)(c) --
------------ -----------
Change in net assets from shareholder distributions......... (1,130,579) (865,919)
------------ -----------
Change in net assets from capital transactions.............. 28,270,892 19,885,322
------------ -----------
Change in net assets........................................ 29,108,040 20,103,351
NET ASSETS:
Beginning of period....................................... 20,103,351 --
------------ -----------
End of period............................................. $ 49,211,391 $20,103,351
============ ===========
</TABLE>
- ---------------
(a) For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
(b) For the period from March 3, 1998 (commencement of operations) through
December 31, 1998.
(c) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
18
<PAGE> 22
ISG FUNDS
LIMITED TERM U.S. GOVERNMENT FUND
FINANCIAL HIGHLIGHTS, CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1998 1997(a)
----------------- --------------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................ $10.12 $ 10.00
------ -------
Investment Activities
Net investment income..................................... 0.53 0.42
Net realized and unrealized gains (losses) from
investments............................................. 0.14 0.12
------ -------
Total from Investment Activities.......................... 0.67 0.54
------ -------
Distributions
Net investment income..................................... (0.53) (0.42)
Net realized gains........................................ (0.01) --
------ -------
Total Distributions....................................... (0.54) (0.42)
------ -------
Net change in asset value................................... 0.13 0.12
------ -------
Net Asset Value, End of Period.............................. $10.25 $ 10.12
====== =======
TOTAL RETURN (EXCLUDES SALES CHARGE)........................ 6.69% 5.54%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $2,437 $20,103
Ratio of expenses to average net assets..................... 1.02% 1.00%(c)
Ratio of net investment income to average net assets........ 5.16% 5.34%(c)
Ratio of expenses to average net assets*.................... 1.54% 1.62%(c)
Portfolio turnover**........................................ 86% 52%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS, CLASS B SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1998(a)
--------------------
<S> <C>
Net Asset Value, Beginning of Period........................ $10.12
------
Investment Activities
Net investment income..................................... 0.35
Net realized and unrealized gains (losses) from
investments............................................. 0.15
------
Total from Investment Activities.......................... 0.50
------
Distributions
Net investment income..................................... (0.35)
Net realized gains........................................ (0.01)
------
Total Distributions....................................... (0.36)
------
Net change in net asset value............................... 0.14
------
Net Asset Value, End of Period.............................. $10.26
======
TOTAL RETURN (EXCLUDES REDEMPTION CHARGE)................... 4.98%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $ 430
Ratio of expenses to average net assets..................... 1.97%(c)
Ratio of net investment income to average net assets........ 4.01%(c)
Ratio of expenses to average net assets*.................... 2.24%(c)
Portfolio turnover**........................................ 86%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from March 3, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
19
<PAGE> 23
ISG FUNDS
LIMITED TERM U.S. GOVERNMENT FUND
FINANCIAL HIGHLIGHTS, INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1998(a)
--------------
<S> <C>
Net Asset Value, Beginning of Period........................ $ 10.29
-------
Investment Activities
Net investment income..................................... 0.03
Net realized and unrealized gains (losses) from
investments............................................. (0.04)
-------
Total from Investment Activities.......................... (0.01)
-------
Distributions
Net investment income..................................... (0.03)
-------
Total Distributions....................................... (0.03)
-------
Net change in asset value................................... (0.04)
-------
Net Asset Value, End of Period.............................. $ 10.25
=======
TOTAL RETURN................................................ (0.14)%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $46,344
Ratio of expenses to average net assets..................... 0.69%(c)
Ratio of net investment income to average net assets........ 5.29%(c)
Ratio of expenses to average net assets*.................... 0.96%(c)
Portfolio turnover**........................................ 86%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
20
<PAGE> 24
<TABLE>
<S> <C>
JOHN MARK MCKENZIE
Portfolio Manager
[McKenzie Photo] ISG Government Income Fund
</TABLE>
- ---------------------------------------------------------------
- ---------------------------------------------------------------
INVESTMENT GOAL
The Fund seeks to provide investors with current income without assuming undue
risk. It invests primarily in securities guaranteed as to payment of principal
and interest by the U.S. Government, its agencies or instrumentalities. This
Fund is suitable for investors seeking regular monthly income without undue
risk to principal.
- ---------------------------------------------------------------
Q. HOW DID THE FUND PERFORM DURING 1998?
A. Despite all the turmoil we saw in the credit markets during the period, and
perhaps because of it, the Fund turned in a very satisfactory performance. For
the 12 months ended December 31, 1998, the Fund produced a total return of 8.95%
(Class A shares at NAV).(1) In comparison, the Merrill Lynch
Government/Corporate Master Index, produced a total return of 9.53%. We achieved
our objectives while maintaining an average credit quality of AAA. As of
December 31, 1998, the Fund's average maturity was 8.6 years.
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. A number of significant events had an impact on interest rates and bond
prices. First there was a series of international crises--particularly the
economic meltdown last summer in Russia, which resulted in that country
defaulting on its debt. Then came the collapse of the huge hedge fund, Long-Term
Capital Management, which threatened to throw the world's markets into chaos.
These events frightened a lot of investors into selling every type of debt
security except U.S. Treasury securities, and pouring cash into Treasuries.
Funds overweighted in Treasuries, such as ours, profited from this set of
circumstances.
We also benefited from favorable interest-rate moves. Over the course of the
year, the long-term Treasury yields fell more than one percent, a substantial
change, with most of that coming in the last six months. Additionally, the
Federal Reserve cut short-term interest rates three times in the last four
months of the year. As rates fall, bond prices generally rise, and this also
helped the Fund's performance.
Q. WHAT STRATEGIES DID YOU EMPLOY?
A. We extended our maturity and duration slightly during the year. Normally, we
are not comfortable making big interest-rate bets, but we anticipated that
interest rates could remain stable or fall, and we wanted to be in the position
to profit from such a move. When rates did fall, investors focused on the types
of Treasury securities we owned, and therefore the Fund's NAV rose.
Because many of our shareholders are seeking high current income, we also took
steps to lock in better yields. We bought noncallable government agency
bonds--such as those offered by Fannie Mae--which provided significantly higher
income than similar Treasury issues.
During much of the year, roughly 20% to 25% of the Fund's assets were invested
in corporate bonds. As of December 31, 1998, 83.2% of the Fund's portfolio was
invested in U.S. Treasury, government agency and mortgage pass-through
securities, with 13.9% invested in corporate debt and 2.9% in cash equivalents.*
Q. WHAT IS YOUR OUTLOOK?
A. We continue to be positive on the bond market. In our opinion, it is unlikely
that we will have another dramatic decline in interest rates as we did in 1998.
We see many factors that are positive for bonds: the continuing secular trend in
disinflation, the very low levels of commodity prices, excessive global
production capacity, technological efficiencies and demographic trends. All of
these circumstances favor low inflation, which is good for fixed-income
investors.
This is not to say that there are not negative factors that pose risks to the
bond market. The most prominent of these are shortages in the domestic labor
force, which can run up costs and spark inflation; the introduction of the new
euro currency in Europe, which could make U.S. debt less desirable; and the
possibility of an overheating U.S. economy.
But, in general, we feel that bonds should remain stable, with yields on
long-term Treasuries remaining in the range of 4.5% to 5.5%.
- ---------------
(1) Including the 3.00% sales load, the Fund's return was 5.69% for the period.
* The Fund's portfolio composition is subject to change.
21
<PAGE> 25
- --------------------------------------------------------------------------------
ISG GOVERNMENT INCOME FUND
PERFORMANCE (AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MERRILL LYNCH
GOVERNMENT INCOME FUND GOVERNMENT INCOME FUND CORPORATE/GOVERNMENT
CLASS A SHARES WITH SALES CHARGE WITHOUT SALES CHARGE MASTER INDEX
---------------------- ---------------------- --------------------
<S> <C> <C> <C>
Aug. 92 9700 10107 10000
Dec. 92 9821 10233 10144
'93' 10765 11217 11266
'94' 10395 10831 10898
'95' 12134 12643 12966
'96' 12431 12953 13352
'97' 13521 14088 14658
'98' 14731 15349 16054
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT SALES WITH SALES
CHARGE CHARGE*
CLASS A SHARES ------------- ----------
<S> <C> <C>
1-Year........................ 8.95% 5.69%
5-Year........................ 6.47% 5.83%
Since Inception 8/3/92........ 6.91% 6.40%
*Reflects the maximum sales charge of 3.00%.
</TABLE>
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES GOVERNMENT INCOME FUND MERRILL LYNCH
---------------------- CORPORATE/GOVERNMENT MASTER
INDEX
---------------------------
<S> <C> <C>
Aug. 92 10107 10000
Dec. 92 10233 10144
'93' 11217 11266
'94' 10831 10898
'95' 12643 12966
'96' 12953 13352
'97' 14088 14658
'98' 15332 16054
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
INSTITUTIONAL SHARES --------------
<S> <C>
1-Year................................. 8.83%
5-Year................................. 6.45%
Since Inception 8/3/92................. 6.89%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment in
the indicated share class versus a similar investment in the Fund's benchmark.
The quoted returns reflect the performance from 8/3/92 to 12/14/98 of the DG
Government Income Fund, an open-end investment company that was the predecessor
fund to the ISG Government Income Fund.
The Institutional Share class was initially offered on 12/14/98 and reflects the
historical performance of the Class A Shares (without sales charge) prior to
that date.
The Fund's performance is compared to the Merrill Lynch Corporate/Government
Master Index, which is generally representative of the performance of corporate
and U.S. Government bonds. The index is unmanaged and does not reflect the
expenses associated with a mutual fund, such as investment management and fund
accounting fees. The Fund's performance reflects the deduction of fees for these
value-added services.
PAST PERFORMANCE IS NOT A PREDICTION OF FUTURE RESULTS. THE FUND'S INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL PURCHASE PRICE.
22
<PAGE> 26
- --------------------------------------------------------------------------------
ISG GOVERNMENT INCOME FUND
(AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
[SECTOR PROFILE* PIE CHART]
<TABLE>
<S> <C>
U.S. Government Agencies......................... 22.9%
Corporate Bonds.................................. 13.9%
Cash and Cash Equivalents........................ 2.9%
U.S. Treasuries.................................. 60.3%
</TABLE>
The Government Income Fund invests primarily in securities issued or
guaranteed by the U.S. Government, its agencies and
instrumentalities, and also may invest in investment-grade U.S.
dollar-denominated, fixed income securities of other issuers. The
Fund is designed to provide current income without assuming undue
risk. The Fund's adviser has latitude in deciding how assets are
invested among corporate and government obligations. As a result,
the Fund enjoys flexibility to make the most of changing market
conditions.
[MATURITY PROFILE* PIE CHART]
<TABLE>
<S> <C>
0-1 Years......................................... 12.1%
Over 20 Years..................................... 15.9%
11-20 Years....................................... 2.6%
1-5 Years......................................... 42.2%
6-10 Years........................................ 27.2%
</TABLE>
By design, the Fund attempts to generate current income without
undue risk to principal. The chart shows that the Fund is currently
focused on bonds with maturities of 1 to 10 years and those with
maturities greater that 20 years.
[QUALITY PROFILE* PIE CHART]
<TABLE>
<S> <C>
AAA............................................... 100%
</TABLE>
The Fund's research team and the Fund Manager continuously monitor
debt instruments and issuer quality to identify fixed-income
securities for the Fund.
* The Fund's portfolio composition is subject to change.
23
<PAGE> 27
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
GOVERNMENT INCOME FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
CORPORATE BONDS (13.7%)
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ------------------------------ ---------- -----------
AUTOMOTIVE (0.7%)
General Motors, 6.25%,
5/1/05...................... $2,000,000 $ 2,060,000
-----------
BANKING (0.3%)
NationsBank Corp., 5.38%,
4/15/00..................... 1,000,000 1,000,000
-----------
BEVERAGES (0.3%)
Anheuser-Busch Cos., 6.90%,
10/1/02, Callable 10/1/99 @
100......................... 889,000 897,890
-----------
CHEMICALS (0.5%)
Du Pont (E.I.) de Nemours &
Co., 9.15%, 4/15/00......... 437,000 458,850
Du Pont (E.I.) de Nemours &
Co., 6.75%, 10/15/02........ 889,000 939,006
-----------
1,397,856
-----------
ENTERTAINMENT (1.0%)
The Walt Disney Co., 5.62%,
12/1/08..................... 3,000,000 3,026,250
-----------
FINANCIAL SERVICES (4.3%)
Associates Corp N.A., 5.75%,
11/1/03..................... 2,000,000 2,007,500
Chubb Corp., 6.15%, 8/15/05... 2,250,000 2,331,563
General Electric Capital
Corp., 5.92%, 4/3/01........ 2,000,000 2,035,000
General Motors Acceptance
Corp., 5.75%, 11/10/03...... 1,000,000 1,006,250
International Lease Finance
Corp., 6.00%, 6/15/03....... 2,500,000 2,531,249
Merrill Lynch & Co., 6.00%,
7/15/05..................... 2,500,000 2,528,125
-----------
12,439,687
-----------
FOOD & RELATED (2.2%)
Campbell Soup Co., 4.75%,
10/1/03..................... 2,500,000 2,465,625
H.J. Heinz Co., 6.75%,
10/15/99.................... 1,000,000 1,011,250
Kellogg Co., 4.88%,
10/15/05.................... 3,000,000 2,947,500
-----------
6,424,375
-----------
INDUSTRIAL GOODS & SERVICES (0.3%)
Upjohn Co., 5.88%, 4/15/00.... 1,000,000 1,010,000
-----------
PHARMACEUTICALS (0.5%)
American Home Products, 7.70%,
2/15/00..................... 1,400,000 1,436,750
-----------
TECHNOLOGY (0.2%)
Texas Instruments, 9.25%,
6/15/03..................... 437,000 510,198
-----------
CORPORATE BONDS, CONTINUED
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ------------------------------ ---------- -----------
TELECOMMUNICATIONS (0.7%)
GTE South Inc., 6.13%,
6/15/07..................... $2,000,000 $ 2,077,500
-----------
UTILITIES (2.7%)
Alabama Power Co., 6.75%,
2/1/03, Callable 2/1/99 @
100.8....................... 1,000,000 1,008,750
National Rural Utilities,
5.75%, 12/1/08, MTN......... 3,500,000 3,517,500
Northern State Power
Minnesota, 5.50%, 2/1/99.... 1,500,000 1,500,000
Pacific Gas & Electric, 6.25%,
3/1/04...................... 1,000,000 1,031,250
Southern California Edison,
5.63%, 10/1/02.............. 1,000,000 1,012,500
-----------
8,070,000
-----------
TOTAL CORPORATE BONDS (Cost
$39,724,097)................ 40,350,506
-----------
U.S. GOVERNMENT AGENCIES (22.6%)
FEDERAL FARM CREDIT BANK (10.1%)
5.54%, 1/4/99................. 4,000,000 4,000,000
5.48%, 3/1/99................. 4,000,000 4,003,000
5.07%, 12/15/03............... 15,000,000 14,876,700
5.70%, 9/3/08................. 7,000,000 7,182,420
-----------
30,062,120
-----------
FEDERAL HOME LOAN BANK (5.2%)
6.28%, 8/13/01................ 2,000,000 2,013,400
5.35%, 12/1/03................ 3,000,000 2,947,860
5.80%, 9/2/08................. 10,000,000 10,335,200
-----------
15,296,460
-----------
FANNIE MAE (5.3%)
6.46%, 5/9/05, Callable 5/9/01
@ 100....................... 5,000,000 5,124,900
6.82%, 12/13/06............... 1,000,000 1,010,070
6.94%, 9/5/07, Callable 9/5/02
@ 100....................... 2,000,000 2,113,460
6.00%, 5/15/08................ 7,000,000 7,405,090
-----------
15,653,520
-----------
PRIVATE EXPORT FUNDING (1.5%)
6.31%, 9/30/04, Series C...... 2,000,000 2,135,000
6.49%, 7/15/07, Series B...... 2,000,000 2,182,500
-----------
4,317,500
-----------
TENNESSEE VALLEY AUTHORITY (0.5%)
5.38%, 11/13/08............... 1,500,000 1,505,010
-----------
TOTAL U.S. GOVERNMENT AGENCIES
(Cost $65,659,489).......... 66,834,610
-----------
</TABLE>
Continued
24
<PAGE> 28
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
GOVERNMENT INCOME FUND DECEMBER 31, 1998
U.S. TREASURY NOTES (38.6%)
<TABLE>
<CAPTION>
<S> <C> <C>
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ------------------------------ ---------- -----------
7.50%, 10/31/99............... $10,000,000 $10,228,200
7.75%, 1/31/00................ 10,000,000 10,321,400
6.13%, 7/31/00................ 10,000,000 10,225,400
5.75%, 10/31/00............... 8,000,000 8,158,320
7.75%, 2/15/01................ 9,000,000 9,560,520
8.00%, 5/15/01................ 9,000,000 9,674,550
7.88%, 8/15/01................ 7,000,000 7,556,290
7.50%, 5/15/02................ 10,000,000 10,870,200
5.75%, 8/15/03................ 10,000,000 10,447,300
6.50%, 8/15/05................ 9,000,000 9,900,450
7.00%, 7/15/06................ 15,000,000 17,125,501
-----------
TOTAL U.S. TREASURY NOTES
(Cost $110,712,944)......... 114,068,131
-----------
U.S. TREASURY BONDS (20.9%)
7.50%, 11/15/16............... 7,000,000 8,698,270
7.25%, 8/15/22................ 7,000,000 8,705,200
7.63%, 11/15/22............... 7,000,000 9,097,340
7.13%, 2/15/23................ 9,000,000 11,078,730
6.88%, 8/15/25................ 10,000,000 12,150,300
6.75%, 8/15/26................ 10,000,000 11,990,600
-----------
TOTAL U.S. TREASURY BONDS
(Cost $50,085,959).......... 61,720,440
-----------
CASH EQUIVALENTS (0.0%)
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ------------------------------ ---------- -----------
Bank of New York Cash Reserve
Money Market Fund........... $ 15,703 $ 15,703
-----------
TOTAL CASH EQUIVALENTS (Cost
$15,703).................... 15,703
-----------
INVESTMENT COMPANIES (2.8%)
AIM Treasury Money Market
Fund........................ 8,405,074 8,405,074
-----------
TOTAL INVESTMENT COMPANIES
(Cost $8,405,074)........... 8,405,074
-----------
TOTAL INVESTMENTS (Cost
$274,603,266)
(a) -- (98.6%).............. 291,394,464
Other Assets in Excess of
Liabilities -- (1.4%)....... 4,035,090
-----------
TOTAL NET ASSETS --(100.0%)... $295,429,554
===========
</TABLE>
- ---------------
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.................. $17,898,915
Unrealized depreciation.................. (1,107,717)
-----------
Net unrealized appreciation.............. $16,791,198
===========
</TABLE>
MTN -- Medium Term Note
See notes to financial statements
25
<PAGE> 29
ISG FUNDS
GOVERNMENT INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (cost
$274,603,266).................... $291,394,464
Interest and dividends
receivable....................... 4,863,183
------------
TOTAL ASSETS..................... 296,257,647
LIABILITIES:
Distributions payable.............. $735,274
Accrued expenses and other
payables:
Advisory fees.................. 72,520
Administration fees............ 4,855
Shareholder servicing fees --
Class A Shares............... 31
Shareholder servicing fees --
Institutional Shares......... 4,824
Directors' fees................ 368
Other.......................... 10,221
--------
TOTAL LIABILITIES.............. 828,093
------------
NET ASSETS:
Capital............................ 280,693,735
Undistributed (distributions in
excess of) net investment
income........................... 6,765
Accumulated net realized gains
(losses)......................... (2,062,144)
Net unrealized appreciation
(depreciation) from
investments...................... 16,791,198
------------
NET ASSETS......................... $295,429,554
============
Class A Shares
Net Assets....................... $ 1,485,913
Shares outstanding............... 143,213
Redemption price per share....... $ 10.38
============
Class A Shares -- Maximum Sales
Charge........................... 3.00%
------------
Maximum Offering Price Per Share
(100%/(100% -- Maximum Sales
Charge) of net asset value
adjusted to the nearest
cent).......................... $ 10.70
============
Institutional Shares
Net Assets....................... $293,943,641
Shares outstanding............... 28,361,198
Offering and redemption price per
share.......................... $ 10.36
============
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28,
1998(a) 1998
------------ ------------
<S> <C> <C>
INVESTMENT INCOME:
Interest income............... $14,211,872 $16,893,631
Dividend income............... 47,537 --
----------- -----------
TOTAL INVESTMENT INCOME..... 14,259,409 16,893,631
EXPENSES:
Investment advisory fees...... 1,364,121 1,580,350
Administration fees........... 227,828 261,726
Shareholder servicing fees --
Class A Shares.............. 319,247 232,460
Shareholder servicing fees --
Institutional Shares........ 20,409 --
Accounting fees............... 52,169 68,285
Transfer agent fees........... 39,868 52,296
Directors' fees............... 3,420 3,875
Other fees.................... 70,172 67,058
----------- -----------
Total expenses before
voluntary fee
reductions................ 2,097,234 2,266,050
Expenses voluntarily
reduced................... -- (163,534)
----------- -----------
Net Expenses................ 2,097,234 2,102,516
----------- -----------
NET INVESTMENT INCOME......... 12,162,175 14,791,115
----------- -----------
REALIZED/UNREALIZED GAINS
(LOSSES) FROM INVESTMENTS:
Net realized gains (losses)
from investment
transactions................ (151,172) 151,276
Net change in unrealized
appreciation (depreciation)
from investments............ 8,210,092 9,924,175
----------- -----------
Net realized/unrealized gains
(losses) from investments... 8,058,920 10,075,451
----------- -----------
Change in net assets resulting
from operations............. $20,221,095 $24,866,566
=========== ===========
</TABLE>
- ---------------
(a) For the period from March 1, 1998 through
December 31, 1998.
See notes to financial statements
26
<PAGE> 30
ISG FUNDS
GOVERNMENT INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 28,
1998(a) 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net investment income..................................... $ 12,162,175 $ 14,791,115 $ 13,271,431
Net realized gains (losses) from investment
transactions............................................ (151,172) 151,276 (1,412,964)
Net change in unrealized appreciation (depreciation) from
investments............................................. 8,210,092 9,924,175 (2,801,515)
------------ ------------ ------------
Change in net assets resulting from operations.............. 20,221,095 24,866,566 9,056,952
------------ ------------ ------------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS:
From net investment income................................ (11,516,524) (14,742,578) (13,349,136)
DISTRIBUTIONS TO INSTITUTIONAL SHAREHOLDERS:
From net investment income................................ (732,820)(b) -- --
------------ ------------ ------------
Change in net assets from shareholder distributions......... (12,249,344) (14,742,578) (13,349,136)
------------ ------------ ------------
Change in net assets from capital transactions.............. 17,054,239 10,661,134 69,684,520
------------ ------------ ------------
Change in net assets........................................ 25,025,990 20,785,122 65,392,336
NET ASSETS:
Beginning of period....................................... 270,403,564 249,618,442 184,226,106
------------ ------------ ------------
End of period............................................. $295,429,554 $270,403,564 $249,618,442
============ ============ ============
</TABLE>
- ---------------
(a) For the period from March 1, 1998 through December 31, 1998.
(b) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
27
<PAGE> 31
ISG FUNDS
GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS, CLASS A SHARES
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1998(a) 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period... $ 10.07 $ 9.69 $ 9.87 $ 9.47 $ 9.90 $ 10.25
-------- -------- -------- -------- -------- --------
Investment Activities
Net investment income................ 0.45 0.55 0.57 0.58 0.54 0.55
Net realized and unrealized gains
(losses) from investments.......... 0.31 0.38 (0.18) 0.41 (0.44) (0.09)
-------- -------- -------- -------- -------- --------
Total from Investment Activities..... 0.76 0.93 0.39 0.99 0.10 0.46
-------- -------- -------- -------- -------- --------
Distributions
Net investment income................ (0.45) (0.55) (0.57) (0.59) (0.53) (0.55)
Net realized gains................... -- -- -- -- -- (0.25)
In excess of net realized gains...... -- -- -- -- -- (0.01)
-------- -------- -------- -------- -------- --------
Total Distributions.................. (0.45) (0.55) (0.57) (0.59) (0.53) (0.81)
-------- -------- -------- -------- -------- --------
Net change in asset value.............. 0.31 0.38 (0.18) 0.40 (0.43) (0.35)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period......... $ 10.38 $ 10.07 $ 9.69 $ 9.87 $ 9.47 $ 9.90
======== ======== ======== ======== ======== ========
TOTAL RETURN (EXCLUDES SALES CHARGE)... 7.69%(b) 9.90% 4.07% 10.70% 1.20% 4.55%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)...... $ 1,486 $270,404 $249,618 $184,226 $168,313 $118,695
Ratio of expenses to average net
assets............................... 0.91%(c) 0.80% 0.70% 0.72% 0.68% 0.70%
Ratio of net investment income to
average net assets................... 5.28%(c) 5.62% 5.82% 5.96% 5.79% 5.34%
Ratio of expenses to average net
assets*.............................. (d) 0.86% 0.80% 0.82% 0.83% 0.89%
Portfolio turnover**................... 20% 25% 7% 87% 31% 49%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from March 1, 1998 through December 31, 1998. In conjunction
with the reorganization of the ISG Funds, the Fund changed its fiscal year
end to December 31.
(b) Not annualized.
(c) Annualized.
(d) There were no fee reductions in this period.
FINANCIAL HIGHLIGHTS, INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1998(a)
-------------
<S> <C>
Net Asset Value, Beginning of Period........................ $ 10.42
--------
Investment Activities
Net investment income..................................... 0.03
Net realized and unrealized gains (losses) from
investments............................................. (0.06)
--------
Total from Investment Activities.......................... (0.03)
--------
Distributions
Net investment income..................................... (0.03)
--------
Total Distributions....................................... (0.03)
--------
Net change in asset value................................... (0.06)
--------
Net Asset Value, End of Period.............................. $ 10.36
========
TOTAL RETURN................................................ (0.33)%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $293,944
Ratio of expenses to average net assets..................... 0.88%(c)
Ratio of net investment income to average net assets........ 5.07%(c)
Portfolio turnover**........................................ 20%
</TABLE>
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
(b) Not Annualized.
(c) Annualized.
See notes to financial statements
28
<PAGE> 32
<TABLE>
<S> <C>
SHARON BROWN
Portfolio Manager
[Brown Photo] ISG Municipal Income Fund
</TABLE>
- ---------------------------------------------------------------
- ---------------------------------------------------------------
INVESTMENT GOAL
The Fund seeks to provide investors with current income exempt from federal
income tax. The Fund invests primarily in investment-grade municipal
obligations issued by state and local entities across the United States.
- ---------------------------------------------------------------
Q. HOW DID THE FUND PERFORM DURING THE PERIOD?
A. For the 12 months ended December 31, 1998, the Fund produced a total return
of 5.33% (Class A Shares at NAV).(1) In comparison, the Fund's benchmarks, the
Lipper Municipal General Bond Index(2) and the Lehman Brothers Municipal Bond
Index, produced a total return of 5.62% and 5.84%, respectively.
We achieved our objectives while maintaining an average credit quality of AA1
(as rated by Moody's) and AA+ (Standard & Poor's). As of December 31, 1998, the
Fund's average maturity was 5.7 years.
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. Bonds, in general, performed well in 1998, and it was a pretty strong year
for municipal bonds, as well. Our Fund benefited from this positive environment
for fixed-income securities.
A succession of near-calamitous events throughout the world--including the
economic crisis in Russia and the near collapse of the Long-Term Capital
Management hedge fund--had a major impact on fixed-income securities, and the
resulting volatility trickled down to the municipal bond market. But we profited
from the fact that the structure of our Fund performed particularly well in this
climate of uncertainty. We held a number of higher-coupon, noncallable bonds,
and some longer term, discounted issues that reacted positively and rose in
price. We took advantage of the circumstances and sold a number of our holdings
for prices well in excess of what we paid for them.
Q. WHAT ARE A FEW OF YOUR FAVORITE BONDS IN THE FUND?
A. We like the Seattle, Washington, 6.25%, due 2010 (1.0% of the Fund's net
assets). The bond has a good coupon and is noncallable; the issuer cannot call
the bond back before maturity. And it is not a run-of-the-mill variety of
bond--it is something of a specialty issue--and, in our opinion, would easily
sell if we chose to do so. Another favorite is the Massachusetts Bay Transit,
4.75%, due 2017 (1.7%). This bond is trading at a discount, due to the length of
the bond and the lower coupon, and it fits very nicely in our Fund.*
Q. WHAT IS YOUR OUTLOOK FOR 1999?
A. We believe we should have a good year in the municipal markets. It is
possible that we could see some volatility, just as we did in 1998; many
economic questions throughout the world have not been answered, and uncertainty
leads to fluctuations in rates and prices.
We have begun 1999 in a positive direction, but we would not be surprised to see
a pullback sometime in the near future. But the trend for interest rates is
down, which will help all fixed-income securities, including municipal bonds.
Our diversification across regional lines should help to provide additional
stability.
- ---------------
(1) Including the 3.00% sales load, the Fund's return was 2.14% for the period.
(2) The Lipper Municipal General Bond Fund Index is comprised of managed funds
that invest at least 65% of their assets in municipal debt issues in the
top four credit ratings.
* The Fund's portfolio composition is subject to change.
29
<PAGE> 33
- --------------------------------------------------------------------------------
ISG MUNICIPAL INCOME FUND
PERFORMANCE (AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNICIPAL INCOME FUND MUNICIPAL INCOME FUND LEHMAN BROTHERS
CLASS A SHARES WITH SALES CHARGE WITHOUT SALES CHARGE MUNICIPAL BOND INDEX
--------------------- --------------------- --------------------
<S> <C> <C> <C>
'92' 9700 10010 10000
'93' 10936 11286 11228
'94' 10189 10514 10647
'95' 11900 12281 12506
'96' 12331 12725 13060
'97' 13289 13714 14263
'98' 13997 14444 15188
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT SALES WITH SALES
CHARGE CHARGE*
CLASS A SHARES ------------- ----------
<S> <C> <C>
1-Year........................ 5.33% 2.14%
5-Year........................ 5.06% 4.43%
Since Inception 12/29/92...... 6.29% 5.75%
</TABLE>
*Reflects the maximum sales charge of 3.00%.
<TABLE>
<CAPTION>
LEHMAN BROTHERS MUNICIPAL BOND
INSTITUTIONAL SHARES MUNICIPAL INCOME FUND INDEX
--------------------- ------------------------------
<S> <C> <C>
'92' 10010 10000
'93' 11286 11228
'94' 10514 10647
'95' 12281 12506
'96' 12725 13060
'97' 13714 14263
'98' 14446 15188
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
INSTITUTIONAL SHARES --------------
<S> <C>
1-Year................................. 5.34%
5-Year................................. 5.06%
Since Inception 12/29/92............... 6.29%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment in
the indicated share class versus a similar investment in the Fund's benchmark.
The quoted returns reflect the performance from 12/29/92 to 12/14/98 of the DG
Municipal Income Fund, an open-end investment company that was the predecessor
fund to the ISG Municipal Income Fund.
The Institutional Share class was initially offered on 12/14/98 and reflects the
historical performance of the Class A Shares (without sales charge) prior to
that date.
The Fund's performance is compared to the Lehman Brothers Municipal Bond Index,
which is generally representative of the performance of investment-grade,
fixed-rate, long-term municipal bonds. The index is unmanaged and does not
reflect the expenses associated with a mutual fund, such as investment
management and fund accounting fees. The Fund's performance reflects the
deduction of fees for these value-added services.
PAST PERFORMANCE IS NOT A PREDICTION OF FUTURE RESULTS. THE FUND'S INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL PURCHASE PRICE.
30
<PAGE> 34
- --------------------------------------------------------------------------------
ISG MUNICIPAL INCOME FUND
(AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
[Municipal Income Sector Profile Pie Chart]*
<TABLE>
<S> <C>
Cash and Cash Equivalents 2.5%
Municipal Bonds 97.5%
</TABLE>
The ISG Municipal Income Fund invests primarily in investment-grade
municipal obligations issued by state and local entities across the
United States. The Fund seeks to provide investors with current
income exempt from federal income tax.
[Municipal Income Maturity Profile Pie Chart]*
<TABLE>
<S> <C>
0-1 Years 2.7%
1-5 Years 47.5%
6-10 Years 45.1%
11-20 Years 4.7%
</TABLE>
By design, the Fund attempts to provide current income without undue
risk to principal. The chart shows that the Fund is focused on bonds
primarily with maturities of 1 to 10 years.
[Municipal Income Quality Profile Pie Chart]*
<TABLE>
<S> <C>
A 4.6%
AA 47.4%
AAA 48.0%
</TABLE>
By focusing on more general obligations and school and "essential
services" bonds, the Fund Manager and the research team provided an
additional measure of security to the Fund.
* The Fund's portfolio composition is subject to change.
31
<PAGE> 35
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
MUNICIPAL INCOME FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
MUNICIPAL BONDS (96.4%)
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ------------------------------- ----------- --------------
ALABAMA (2.9%)
Huntsville, Warrants, Series A,
6.00%, 11/1/12, Prerefunded
11/1/02 @ 102, GO............ $ 500,000 $ 541,250
Jefferson County, Sewer Revenue
Bonds, 6.00%, 9/1/13,
Callable 9/1/02 @ 102........ 1,000,000 1,096,250
--------------
1,637,500
--------------
ARIZONA (1.8%)
Phoenix Refunding Bonds, Series
C, 4.90%, 7/1/08, Callable
7/1/03 @ 102, GO............. 1,000,000 1,043,750
--------------
CALIFORNIA (2.0%)
California State Public
Improvement Bonds, 5.75%,
5/1/07, Callable 5/1/04 @
102, GO...................... 1,000,000 1,106,250
--------------
CONNECTICUT (1.9%)
Connecticut State Public
Improvement Bonds, Series C,
5.80%, 8/15/08, Callable
8/15/04 @ 101, GO............ 1,000,000 1,093,750
--------------
FLORIDA (7.4%)
Broward County School District
Refunding Bonds, 5.60%,
2/15/07, Callable 2/15/03 @
102, GO...................... 1,000,000 1,072,500
Florida Board of Education
Administration, Refunding
Bonds, Series D, 5.00%,
6/1/15, Callable 6/1/05 @
101, GO...................... 1,000,000 1,012,500
Jacksonville Electric
Authority, Refunding Revenue
Bonds, Issue 2, Series 8, St.
John's River, 5.50%, 10/1/13,
Callable 10/1/02 @ 101....... 1,000,000 1,050,000
St. Petersburg Public Utility,
Water & Sewer Revenue Bonds,
5.50%, 10/1/09, Callable
10/1/03 @ 102................ 1,000,000 1,063,750
--------------
4,198,750
--------------
HAWAII (2.9%)
Hawaii State Refunding Bonds,
Series CB, 5.75%, 1/1/08,
GO........................... 500,000 551,875
Honolulu City & County
Improvement Refunding Bonds,
Series B, 5.50%, 10/1/11,
GO........................... 1,000,000 1,092,500
--------------
1,644,375
--------------
MUNICIPAL BONDS, CONTINUED
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ------------------------------- ----------- --------------
ILLINOIS (2.9%)
Illinois State Highway
Improvements, 5.60%, 4/1/08,
Callable 4/1/04 @ 102, GO.... $ 1,000,000 $ 1,082,500
Illinois State Refunding Bonds,
5.88%, 6/1/11, Callable
6/1/02 @ 102, GO............. 500,000 537,500
--------------
1,620,000
--------------
INDIANA (1.0%)
Indianapolis Local Public
Improvement Revenue Bonds,
6.00%, 7/1/10, Callable
7/1/03 @ 102................. 500,000 543,125
--------------
LOUISIANA (1.0%)
Louisiana Public Facilities
Authority, Hospital Refunding
Revenue Bonds, Series C, Our
Lady of Lake Regional, 6.05%,
12/1/08, Prerefunded 12/1/01
@ 102, MBIA.................. 500,000 541,250
--------------
MARYLAND (1.9%)
Maryland State, Series BB,
5.50%, 6/1/09, Callable
6/1/04 @ 102, GO............. 1,000,000 1,083,750
--------------
MASSACHUSETTS (4.5%)
Commonwealth of Massachusetts
Refunding Revenue Bonds,
Series A, 6.25%, 7/1/03,
GO........................... 1,000,000 1,098,750
Commonwealth of Massachusetts,
Series A, 6.00%, 6/1/11,
Prerefunded 6/1/01 @ 100, GO,
FSA.......................... 450,000 474,750
Massachusetts Bay Transit
Authority, Series A, 4.75%,
3/1/17, Callable 3/1/08 @
101, GO, MBIA................ 1,000,000 985,000
--------------
2,558,500
--------------
MINNESOTA (1.9%)
Minnesota State, 5.00%,
11/1/08, Callable 11/1/06 @
100, GO...................... 1,000,000 1,061,250
--------------
MISSISSIPPI (15.9%)
Harrison County School District
Revenue Bonds, 4.90%, 8/1/13,
Callable 8/1/08 @ 100, FSA... 1,000,000 1,010,000
Hinds County Refunding Bonds,
5.50%, 3/1/08, GO, MBIA...... 1,000,000 1,095,000
Jackson Refunding Bonds, Series
A, 5.85%, 5/1/06, Callable
5/1/02 @ 100, GO, MBIA....... 1,125,000 1,185,468
Lincoln County Hospital Revenue
Bonds, Series B, Kings
Daughters Hospital, 5.50%,
4/1/18, Callable 4/1/08 @
102, FSA-CR.................. 500,000 524,375
</TABLE>
Continued
32
<PAGE> 36
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
MUNICIPAL INCOME FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
MUNICIPAL BONDS, CONTINUED
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ------------------------------- ----------- --------------
MISSISSIPPI, CONTINUED
Madison County School District
Refunding Bonds, 5.10%,
6/1/08, Callable 6/1/04 @
100, GO, AMBAC............... $ 1,000,000 $ 1,041,250
Medical Center Refunding
Revenue Bonds, Series A,
University of Mississippi
Medical Center, 4.60%,
8/1/10, Callable 8/1/06 @
102, AMBAC................... 955,000 966,938
Mississippi Hospital Equipment
& Facilities Authority,
Refunding Revenue Bonds,
North Mississippi Health
Services-1, 5.50%, 5/15/09,
Callable 5/15/03 @ 102,
AMBAC........................ 1,000,000 1,060,000
Mississippi State Refunding
Bonds, 5.13%, 12/1/11,
Callable 12/1/06 @ 100, GO... 1,000,000 1,045,000
Tupelo Public School District
Refunding Bonds, 5.00%,
12/1/07, Callable 6/1/04 @
100, GO, AMBAC............... 1,000,000 1,038,750
--------------
8,966,781
--------------
MISSOURI (1.8%)
Missouri State Water Pollution
Control Refunding Bonds,
Series B, 5.00%, 8/1/10,
Callable 8/1/02 @ 100, GO.... 1,000,000 1,023,750
--------------
MONTANA (1.8%)
Montana State, Series A, Long
Range Building Program,
4.88%, 8/1/09, Callable
2/1/04 @ 100, GO............. 1,000,000 1,026,250
--------------
NEVADA (2.8%)
Las Vegas Valley Water
District, Refunding &
Improvement Revenue Bonds,
5.75%, 9/1/08, Prerefunded
9/1/02 @ 100, GO, MBIA....... 500,000 533,750
Nevada State, Project R-5,
Series A, 4.90%, 11/1/07,
Callable 11/1/03 @ 101, GO... 1,000,000 1,038,750
--------------
1,572,500
--------------
NEW JERSEY (1.0%)
New Jersey State Refunding
Bonds, Series D, 5.90%,
2/15/08, Callable 2/15/03 @
102, GO...................... 500,000 542,500
--------------
NORTH CAROLINA (2.8%)
North Carolina State, Series A,
5.10%, 3/1/03, GO............ 1,000,000 1,052,500
Wake County, 4.90%, 3/1/05,
GO........................... 500,000 528,750
--------------
1,581,250
--------------
MUNICIPAL BONDS, CONTINUED
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ------------------------------- ----------- --------------
NORTH DAKOTA (1.0%)
North Dakota State Building
Authority, Lease Revenue
Refunding Bonds, Series A,
6.00%, 6/1/10, Callable
6/1/03 @ 101, AMBAC.......... $ 500,000 $ 538,125
--------------
OKLAHOMA (0.9%)
Oklahoma State Health
Facilities Revenue Refunding
Bonds, Series A, Sisters of
Mercy, 5.00%, 6/1/13,
Callable 6/1/03 @ 102........ 500,000 503,125
--------------
OREGON (1.8%)
Portland Refunding Bonds,
4.90%, 10/1/07, Callable
4/1/03 @ 100, GO............. 1,000,000 1,035,000
--------------
RHODE ISLAND (0.9%)
Providence, 5.90%, 1/15/09,
Callable 1/15/02 @ 102, GO,
MBIA......................... 500,000 534,375
--------------
TENNESSEE (5.4%)
Chattanooga Sewer Improvements,
5.00%, 9/1/15, Callable
9/1/06 @ 101, GO, FGIC....... 1,000,000 1,006,250
Memphis General Improvements
Refunding Bonds, Series A,
4.90%, 8/1/06, Callable
8/1/02 @ 101, GO............. 1,000,000 1,037,500
Shelby County Refunding Bonds,
Series A, 5.00%, 3/1/18,
Callable 3/1/08 @ 100, GO.... 1,000,000 1,006,250
--------------
3,050,000
--------------
TEXAS (8.4%)
Corpus Christi Refunding Bonds,
6.00%, 3/1/10, Callable
3/1/03 @ 100, GO, FGIC....... 500,000 532,500
El Paso Independent School
District Refunding Bonds,
Series A, 5.75%, 7/1/07,
Callable 7/1/02 @ 100, GO,
PSFG......................... 500,000 525,000
Harris County Flood Control
District, Series B, 6.20%,
10/1/11, Prerefunded 10/1/02
@ 100, GO.................... 500,000 541,250
Houston Independent School
District Refunding Bonds,
5.50%, 8/15/08, Callable
8/15/03 @ 100, GO, PSFG...... 1,000,000 1,052,500
</TABLE>
Continued
33
<PAGE> 37
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
MUNICIPAL INCOME FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
MUNICIPAL BONDS, CONTINUED
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ------------------------------- ----------- --------------
TEXAS, CONTINUED
Texas State Public Finance
Authority Refunding Bonds,
Series A, 5.90%, 10/1/11,
Prerefunded 4/1/05 @ 100,
GO........................... $ 500,000 $ 548,750
Texas State Water Development
Bonds, 5.20%, 8/1/10,
Callable 8/1/06 @ 100, GO.... 1,000,000 1,052,500
Travis County Health Board,
Series B, Charity Obligation
Group, 5.00%, 11/1/12,
Callable 11/1/08 @ 101....... 500,000 510,000
--------------
4,762,500
--------------
UTAH (1.8%)
Murray City Hospital Refunding
Revenue Bonds, IHC Health
Services Inc., 4.75%,
5/15/20, Callable 5/15/06 @
100, MBIA.................... 500,000 475,000
Utah State Building Refunding
Revenue Bonds, Series C,
State Facilities Master Lease
Program, 5.50%, 5/15/13,
FSA.......................... 500,000 545,000
--------------
1,020,000
--------------
VIRGINIA (4.6%)
Fairfax County Public
Improvements, Series A,
5.50%, 6/1/08, Callable
6/1/02 @ 102, GO............. 1,000,000 1,065,000
Newport News Refunding Bonds,
5.00%, 3/1/13, Callable
3/1/08 @ 102, GO............. 500,000 518,125
Virginia Commonwealth
Transportation Board
Refunding Revenue Bonds,
Series B, Northern Virginia
Transportation District,
5.13%, 5/15/17, Callable
5/15/07 @ 101................ 500,000 506,875
Virginia State Transportation
Board Refunding Revenue
Bonds, Route 28, 6.00%,
4/1/10, Callable 4/1/02 @
102.......................... 500,000 536,875
--------------
2,626,875
--------------
WASHINGTON (9.7%)
Grant County Public Utility
District #2, Refunding
Revenue Bonds, Series A,
5.00%, 1/1/16, Callable
1/1/09 @ 101, MBIA........... 1,000,000 1,001,250
King County Library System,
6.15%, 12/1/10, Callable
12/1/06 @ 100, GO............ 1,000,000 1,120,000
King County Refunding Bonds,
Series A, 6.00%, 12/1/10,
Prerefunded 12/1/03 @ 100,
GO........................... 145,000 158,413
King County Unrefunded Balance,
Series A, 6.00%, 12/1/10,
Callable 12/1/03 @ 100, GO... 355,000 383,400
Port of Seattle Revenue Bonds,
Series A, 6.25%, 11/1/10,
Prerefunded 11/1/02 @ 102.... 500,000 551,875
MUNICIPAL BONDS, CONTINUED
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ------------------------------- ----------- --------------
WASHINGTON, CONTINUED
Tacoma Electric System
Refunding Revenue Bonds,
6.25%, 1/1/11, Callable
1/1/02 @ 102, AMBAC.......... $ 650,000 $ 698,750
Washington State Refunding
Bonds, Series R-96B, 5.00%,
7/1/10, Callable 7/1/06 @
100, GO...................... 1,000,000 1,040,000
Washington State Refunding
Revenue Bonds, Series R92-B,
6.25%, 9/1/09, Callable
9/1/01 @ 100................. 500,000 528,125
--------------
5,481,813
--------------
WISCONSIN (3.7%)
Green Bay Area Public School
District, Series F, 6.00%,
4/1/10, Prerefunded 4/1/01 @
100, GO...................... 500,000 524,375
Wisconsin State, Series A,
6.30%, 5/1/12, Prerefunded
5/1/02 @ 100, GO............. 500,000 539,375
Wisconsin State, Series C,
5.25%, 5/1/11, Callable
5/1/06 @ 100, GO............. 1,000,000 1,048,750
--------------
2,112,500
--------------
TOTAL MUNICIPAL BONDS
(Cost $51,393,061)........... 54,509,594
--------------
INVESTMENT COMPANIES (2.5%)
AIM Tax Free Money Market
Fund......................... 562,950 562,950
Dreyfus Tax Free Money Market
Fund......................... 847,752 847,752
--------------
TOTAL INVESTMENT COMPANIES
(Cost $1,410,702)............ 1,410,702
--------------
TOTAL INVESTMENTS
(Cost $52,803,763)(a) --
(98.9%)...................... 55,920,296
Other assets in excess of
liabilities -- (1.1%)........ 638,397
--------------
TOTAL NET ASSETS -- (100.0%)... $ 56,558,693
==============
</TABLE>
- ---------------
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation............. $3,118,892
Unrealized depreciation............. (2,359)
----------
Net unrealized appreciation......... $3,116,533
==========
</TABLE>
AMBAC -- Insured by AMBAC Indemnity Corp.
FGIC -- Insured by Financial Guaranty Insurance Corp.
FSA -- Insured by Financial Security Assurance Inc.
FSA-CR -- FSA Custodial Receipts
GO -- General Obligation
MBIA -- Insured by Municipal Bond Insurance Assoc.
PSFG -- Permanent School Fund Guarantee
See notes to financial statements
34
<PAGE> 38
ISG FUNDS
MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (cost
$52,803,763)...................... $55,920,296
Interest and dividends receivable... 771,679
Receivable from investment
advisor........................... 1,152
-----------
TOTAL ASSETS...................... 56,693,127
-----------
LIABILITIES:
Distributions payable............... $116,550
Accrued expenses and other payables:
Advisory fees..................... 8,339
Administration fees............... 926
Shareholder servicing fees --
Class A Shares.................. 33
Shareholder servicing fees --
Institutional Shares............ 893
Directors' fees................... 220
Other............................. 7,473
--------
TOTAL LIABILITIES................. 134,434
-----------
NET ASSETS:
Capital............................. 53,380,992
Undistributed (distributions in
excess of) net investment
income............................ 61,004
Undistributed (distributions in
excess of) net realized gains..... 164
Net unrealized appreciation
(depreciation) from investments... 3,116,533
-----------
NET ASSETS.......................... $56,558,693
===========
Class A Shares
Net Assets........................ $ 1,980,335
Shares outstanding................ 180,702
Redemption price per share........ 10.96
===========
Class A Shares -- Maximum Sales
Charge............................ 3.00%
-----------
Maximum Offering Price Per Share
(100% -- Maximum Sales Charge) of
net asset value adjusted to the
nearest cent)..................... $ 11.30
===========
Institutional Shares
Net Assets........................ $54,578,259
Shares outstanding................ 4,980,090
Offering and redemption price per
share........................... $ 10.96
===========
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28,
1998 (a) 1998
------------ ------------
<S> <C> <C>
INVESTMENT INCOME:
Interest income................. $ 2,295,080 $ 2,492,223
Dividend income................. 1,755 --
------------ -----------
TOTAL INVESTMENT INCOME....... 2,296,835 2,492,223
------------ -----------
EXPENSES:
Investment advisory fees........ 273,164 289,417
Administration fees............. 83,073 100,000
Shareholder servicing
fees -- Class A Shares........ 64,495 42,564
Shareholder servicing fees --
Institutional Shares.......... 3,797 --
Accounting fees................. 53,557 48,359
Transfer agent fees............. 27,217 26,461
Directors' fees................. 1,844 2,500
Other fees...................... 50,215 43,853
------------ -----------
Total expenses before
voluntary fee
reductions/reimbursements... 557,362 553,154
Expenses voluntarily
reduced/reimbursed.......... (137,734) (185,047)
------------ -----------
Net Expenses.................. 419,628 368,107
------------ -----------
NET INVESTMENT INCOME........... 1,877,207 2,124,116
------------ -----------
REALIZED/UNREALIZED GAINS
(LOSSES) FROM INVESTMENTS:
Net realized gains (losses) from
investment transactions....... 15,192 72,332
Net change in unrealized
appreciation (depreciation)
from investments.............. 517,234 1,412,573
------------ -----------
Net realized/unrealized gains
(losses) from investments..... 532,426 1,484,905
------------ -----------
Change in net assets resulting
from operations............... $ 2,409,633 $ 3,609,021
============ ===========
</TABLE>
- ---------------
(a) For the period from March 1, 1998 through December 31, 1998.
See notes to financial statements
35
<PAGE> 39
ISG FUNDS
MUNICIPAL INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 28,
1998(a) 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net investment income..................................... $ 1,877,207 $ 2,124,116 $ 2,183,126
Net realized gains (losses) from investment
transactions............................................ 15,192 72,332 116,120
Net change in unrealized appreciation (depreciation) from
investments............................................. 517,234 1,412,573 (430,649)
------------ ----------- -----------
Change in net assets resulting from operations.............. 2,409,633 3,609,021 1,868,597
------------ ----------- -----------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS:
From net investment income................................ (1,816,513) (2,122,421) (2,140,424)
From net realized gain on investment transactions......... (87,360) (104,785) (47,122)
DISTRIBUTIONS TO INSTITUTIONAL SHAREHOLDERS:
From net investment income................................ (112,697)(b) -- --
------------ ----------- -----------
Change in net assets from shareholder distributions......... (2,016,570) (2,227,206) (2,187,546)
------------ ----------- -----------
Change in net assets from capital transactions.............. 7,587,023 268,866 2,668,551
------------ ----------- -----------
Change in net assets........................................ 7,980,086 1,650,681 2,349,602
NET ASSETS:
Beginning of period....................................... 48,578,607 46,927,926 44,578,324
------------ ----------- -----------
End of period............................................. $56,558,693 $48,578,607 $46,927,926
============ =========== ===========
</TABLE>
- ---------------
(a) For the period from March 1, 1998 through December 31, 1998.
(b) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
36
<PAGE> 40
ISG FUNDS
MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS, CLASS A SHARES
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1998 (a) 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.... $ 10.89 $ 10.59 $ 10.66 $ 10.15 $ 10.57 $ 10.51
------- ------- ------- ------- ------- -------
Investment Activities
Net investment income................. 0.34 0.47 0.49 0.49 0.49 0.48
Net realized and unrealized gains
(losses) from investments........... 0.14 0.32 (0.07) 0.50 (0.43) 0.08
------- ------- ------- ------- ------- -------
Total from Investment Activities...... 0.48 0.79 0.42 0.99 0.06 0.56
------- ------- ------- ------- ------- -------
Distributions
Net investment income................. (0.39) (0.47) (0.48) (0.48) (0.48) (0.49)
Net realized gains.................... (0.02) (0.02) (0.01) -- -- (0.01)
------- ------- ------- ------- ------- -------
Total Distributions................... (0.41) (0.49) (0.49) (0.48) (0.48) (0.50)
------- ------- ------- ------- ------- -------
Net change in asset value............... 0.07 0.30 (0.07) 0.51 (0.42) 0.06
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period.......... $ 10.96 $ 10.89 $ 10.59 $ 10.66 $ 10.15 $ 10.57
======= ======= ======= ======= ======= =======
TOTAL RETURN (EXCLUDES SALES CHARGE).... 4.41%(b) 7.70% 4.12% 9.96% 0.81% 5.34%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $ 1,980 $48,579 $46,928 $44,578 $41,542 $34,435
Ratio of expenses to average net
assets................................ 0.91%(c) 0.76% 0.70% 0.70% 0.75% 0.74%
Ratio of net investment income to
average net assets.................... 4.08%(c) 4.40% 4.69% 4.65% 4.93% 4.60%
Ratio of expenses to average net
assets*............................... 1.21%(c) 1.07% 1.16% 1.17% 1.16% 1.41%
Portfolio turnover**.................... 3% 6% 9% 20% 9% 9%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from March 1, 1998 through December 31, 1998. In conjunction
with the reorganization of the ISG Funds, the Fund changed its fiscal year
end to December 31.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS, INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1998(a)
------------
<S> <C>
Net Asset Value, Beginning of Period........................ $ 11.01
-------
Investment Activities
Net investment income..................................... 0.02
Net realized and unrealized gains (losses) from
investments............................................. (0.05)
-------
Total from Investment Activities.......................... (0.03)
-------
Distributions
Net investment income..................................... (0.02)
-------
Total Distributions....................................... (0.02)
-------
Net change in asset value................................... (0.05)
-------
Net Asset Value, End of Period.............................. $ 10.96
=======
TOTAL RETURN................................................ (0.25)%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $54,578
Ratio of expenses to average net assets..................... 0.90%(c)
Ratio of net investment income to average net assets........ 4.12%(c)
Ratio of expenses to average net assets*.................... 1.24%(c)
Portfolio turnover**........................................ 3%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
37
<PAGE> 41
[THIS PAGE INTENTIONALLY LEFT BLANK]
38
<PAGE> 42
<TABLE>
<S> <C>
SHARON BROWN
Portfolio Manager
ISG Limited Term
[Brown Photo] Tennessee Tax-Exempt Fund
</TABLE>
- ---------------------------------------------------------------
- ---------------------------------------------------------------
INVESTMENT GOAL
The Fund seeks to provide investors with current income exempt from federal
and Tennessee state income taxes without assuming undue risk. The Fund
invests primarily in investment-grade Tennessee municipal obligations that
generally have a duration of under five years, producing an effective
average Fund maturity ranging between three and five years.
- ---------------------------------------------------------------
Q. HOW DID THE FUND PERFORM DURING THE PERIOD?
A. For the 12 months ended December 31, 1998, the Fund produced a total return
of 3.76% (Class A shares at NAV).(1) In comparison, the Lehman Brothers
Municipal 1-5-Year Index produced a total return of 5.84%.
It is also important to recognize income yield to shareholders. As of December
31, 1998, the Fund's 30-day SEC yield was 2.53% (Class Shares A at NAV). For
investors in the 36% federal income tax bracket, that is equivalent to a taxable
yield of 3.83%. The yield percentages are annualized.
We achieved our objectives while maintaining an average credit quality of AA1
(as rated by Moody's) and AA+ (Standard & Poor's). As of December 31, 1998, the
Fund's average maturity was 4.0 years.
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. A succession of near-calamitous events throughout the world--including the
economic crisis in Russia and the collapse of the Long-Term Capital Management
hedge fund--had a major impact on fixed-income securities, and the resulting
volatility trickled down to the municipal bond market.
Bonds, in general, performed well in 1998, and it was a pretty strong year for
municipal bonds, as well. Our Fund benefited from this positive environment for
fixed-income securities.
Closer to home, Tennessee's economy remained fairly strong, although it slowed
down a bit from its previously torrid pace. Supply was kind of a nonevent for
the year as a whole; generally, the supply of new muni issues in the state
remained at comfortable levels throughout 1998.
Q. WHAT ARE A FEW OF YOUR FAVORITE BONDS IN THE FUND?
A. We like the Rutherford County, 6.00%, due in 2004 (7.4% of the Fund's net
assets). This bond is on the longer end of our spectrum. It offers a good coupon
and is noncallable; the issuer cannot call it back before maturity. Also, there
are not a lot of Rutherford County bonds in the market, which, in our opinion,
would make this paper easy to sell if we chose to do so. Another favorite is
Montgomery County, 5.10%, due 2011 (3.7%). This bond is not callable until 2008
and has performed well for us.*
Q. WHAT IS YOUR OUTLOOK FOR THE REMAINDER OF 1999?
A. We believe we should have a good year in the municipal markets, including
Tennessee. It is possible that we could see some volatility, just as we did in
1998; many economic questions throughout the world have not been answered, and
uncertainty leads to fluctuations in rates and prices.
We have begun 1999 in a positive direction, but we would not be surprised to see
a pullback sometime in the near future. But the trend for interest rates is
down, which will help all fixed-income securities, including munis.
- ---------------
(1) Including the 3.00% sales load, the Fund's return was 0.68% for the period.
* The Fund's portfolio composition is subject to change.
Regional funds may be subject to additional risk, since the companies they
invest in are located in one geographical location.
The Fund's income may be subject to certain state and local taxes and, depending
on your tax status, the federal alternative minimum tax.
39
<PAGE> 43
- --------------------------------------------------------------------------------
ISG LIMITED TERM TENNESSEE TAX-EXEMPT FUND
PERFORMANCE (AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
LIMITED TERM TENNESSE LIMITED TERM TENNESSEE
TAX-EXEMPT FUND WITH TAX-EXEMPT FUND WITHOUT LEHMAN BROTHERS
CLASS A SHARES SALES CHARGE SALES CHARGE MUNICIPAL 1-5-YEAR INDEX
--------------------- ----------------------- ------------------------
<S> <C> <C> <C>
'88' 9700 10000 10000
'89' 10395 10716 10907
'90' 11032 11373 11747
'91' 11930 12299 13087
'92' 12480 12866 14084
'93' 13276 13687 15314
'94' 12929 13328 15114
'95' 14014 14448 16883
'96' 14318 14761 17592
'97' 15105 15562 18718
'98' 15662 16147 19811
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT SALES WITH SALES
CHARGE CHARGE*
CLASS A SHARES ------------- ----------
<S> <C> <C>
1-Year........................ 3.76% 0.68%
5-Year........................ 3.36% 2.74%
10-Year....................... 4.91% 4.58%
</TABLE>
*Reflects the maximum sales charge of 3.00%.
[GRAPH]
<TABLE>
<CAPTION>
LIMITED TERM TENNESSEE TAX- LEHMAN BROTHERS MUNICIPAL 1-5-
CLASS B SHARES EXEMPT FUND YEAR INDEX
--------------------------- ------------------------------
<S> <C> <C>
'88' 10000 10000
'89' 10716 10907
'90' 11373 11747
'91' 12299 13087
'92' 12866 14084
'93' 13687 15314
'94' 13328 15114
'95' 14448 16883
'96' 14761 17592
'97' 15562 18718
'98' 15991 19811
</TABLE>
The Class B contingent deferred sales charge (CDSC) is not included in the
above graph, since the performance is for more than 6 years and the CDSC
would no longer apply.
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT CDSC WITH CDSC**
CLASS B SHARES ------------ -----------
<S> <C> <C>
1-Year..................... 2.76% -0.23%
5-Year..................... 3.16% 2.98%
10-Year.................... 4.81% 4.81%
</TABLE>
**Reflects the applicable contingent deferred sales
charge (maximum 4.00%).
THE DATA FOR CLASS B SHARES PRIMARILY PRESENTS THE
RESULTS OF THE CLASS A SHARES. ACTUAL CLASS B SHARES
AVERAGE ANNUAL TOTAL RETURN AND HYPOTHETICAL GROWTH
RESULTS WOULD HAVE BEEN LOWER. SEE NOTES BELOW.
The charts above represent a comparison of a hypothetical $10,000 investment in
the indicated share class versus a similar investment in the Fund's benchmark.
PERFORMANCE FOR THE CLASS B SHARES, WHICH COMMENCED OPERATIONS ON 2/3/98, IS
BASED ON THE HISTORICAL PERFORMANCE OF THE CLASS A SHARES (WITHOUT SALES CHARGE)
PRIOR TO THAT DATE. CLASS A SHARES PERFORMANCE DOES NOT REFLECT THE HIGHER 12b-1
FEES OR THE CONTINGENT DEFERRED SALES CHARGE (CDSC). HAD THE CDSC AND HIGHER
12b-1 FEES BEEN INCORPORATED, TOTAL RETURN AND HYPOTHETICAL GROWTH FIGURES WOULD
HAVE BEEN LOWER.
The ISG Limited Term Tennessee Tax-Exempt Fund commenced operations on 2/28/97
through a transfer of assets from certain collective trust fund ("commingled")
accounts managed by First American National Bank, using materially equivalent
investment objectives, policies and methodologies as the Fund. The quoted
performance of the Fund includes performance of the commingled accounts for
periods prior to the Fund's commencement of operations, as adjusted to reflect
the expenses associated with the Fund. The commingled accounts were not
registered with the Securities and Exchange Commission and, therefore, were not
subject to the investment restrictions imposed by law on registered mutual
funds. If the commingled accounts had been registered, the commingled accounts'
performance may have been adversely affected. The performance also reflects
reinvestment of dividends and capital gain distributions.
The Fund's performance is compared to the Lehman Brothers Municipal 1-5-Year
Index, an unmanaged index that is generally representative of municipal bonds
with maturities between 1 and 5 years. The index is unmanaged and does not
reflect the expenses associated with a mutual fund, such as investment
management and fund accounting fees. The Fund's performance reflects the
deduction of fees for these value-added services.
PAST PERFORMANCE IS NOT A PREDICTION OF FUTURE RESULTS. THE FUND'S INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL PURCHASE PRICE.
40
<PAGE> 44
- --------------------------------------------------------------------------------
ISG LIMITED TERM TENNESSEE TAX-EXEMPT FUND
(AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
[Limited Term Tennessee Tax-Exempt Sector Profile Pie Chart]*
<TABLE>
<S> <C>
Municipal Bonds 89.1%
U.S. Treasury Bills 1.0%
Cash and Cash Equivalents 9.9%
</TABLE>
The Limited Term Tennessee Tax-Exempt Fund invests primarily in a
portfolio of investment-grade Tennessee municipal obligations that,
under normal market conditions, have a duration of under five years
and an effective average portfolio maturity ranging between 3 and 5
years. With an emphasis on quality, the Fund seeks to generate
current income that is exempt from federal and Tennessee state
income taxes without undue risk to principal.
[Limited Term Tennessee Tax-Exempt Maturity Profile Pie Chart]*
<TABLE>
<S> <C>
0-1 Years 27.7%
1-5 Years 40.2%
6-10 Years 28.1%
11-20 Years 4.0%
</TABLE>
By design, the Fund focuses on achieving an average maturity of 3 to
5 years. By emphasizing overall average maturity, the Fund attempts
to provide high current tax-free yield while controlling principal
value.
[Limited Term Tennessee Tax-Exempt Quality Profile Pie Chart]*
<TABLE>
<S> <C>
A 15.1%
AA 55.6%
AAA 25.5%
BBB 3.8%
</TABLE>
By focusing on more general obligations and school and "essential
service" bonds, the Fund Manager and the research team provide an
additional measure of security to the Fund.
* The Fund's portfolio composition is subject to change.
41
<PAGE> 45
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
LIMITED TERM TENNESSEE TAX-EXEMPT FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
MUNICIPAL BONDS (87.8%)
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ---------------------------------- ---------- -----------
TENNESSEE (87.8%)
Chattanooga, Health Education &
Housing, Facilities Board
Revenue, Series A, 5.25%,
12/1/02......................... $ 900,000 $ 947,250
Knox County Refunding, 6.50%,
4/1/04, Callable 4/1/03 @ 102,
GO.............................. 750,000 840,000
Knox County, Health Education &
Housing, Facilities Board
Hospital Revenue Refunding,
7.25%, 1/1/08, MBIA............. 750,000 915,938
Memphis, 5.25%, 7/1/02, GO........ 1,200,000 1,258,499
Memphis, 6.00%, 7/1/03, GO........ 500,000 543,750
Memphis, 6.00%, 11/01/03, GO...... 500,000 547,500
Memphis, 6.00%, 7/1/04, GO........ 1,000,000 1,100,000
Memphis Electrical System Revenue
Refunding, Revenue Bond, 5.80%,
1/1/03.......................... 900,000 964,125
Metropolitan Government, Nashville
& Davidson County, Electric
Revenue, 5.63%, 5/15/03,
Callable 5/15/02 @ 102.......... 900,000 964,125
Metropolitan Government, Nashville
& Davidson County, Health &
Education Facilities Board
Revenue, The Vanderbilt
University, Series A, 6.00%,
7/1/07.......................... 625,000 705,469
Montgomery County, Tennessee
Health Reference & Improvement,
Clarksville Regional Health
System, 5.10%, 1/1/11, Callable
1/1/08 @ 101.................... 750,000 760,313
Rutherford County Capital Outlay
Notes, 6.00%, 4/1/04, GO........ 1,370,000 1,508,712
Shelby County Refunding Bond,
Series B, 5.50%, 8/1/10, GO..... 750,000 830,625
Shelby County, Series B, 6.00%,
12/1/05, GO..................... 750,000 842,813
Sullivan County Health, Education
& Housing, Holston Valley
Hospital, 7.25%, 2/15/00,
Prerefunded 2/15/00 @ 102,
MBIA............................ 1,110,000 1,179,375
Sumner County Capital Outlay
Notes, Series A, 3.90%,
6/15/99......................... 3,000,000 3,009,899
Tennessee State, Series B, 6.50%,
6/1/03, Prerefunded 6/1/01 @
102, GO......................... 750,000 810,000
-----------
17,728,393
-----------
TOTAL MUNICIPAL BONDS (Cost $17,481,356) 17,728,393
-----------
U.S. TREASURY BILLS (1.0%)
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ---------------------------------- ---------- -----------
4.45%*, 1/21/99................... $ 200,000 $ 199,508
-----------
TOTAL U.S. TREASURY BILLS (Cost 199,508
$199,531)
-----------
INVESTMENT COMPANIES (9.8%)
AIM Tax Free Money Market Fund.... 1,000,220 1,000,220
Dreyfus Tax Free Money Market
Fund............................ 966,804 966,804
-----------
TOTAL INVESTMENT COMPANIES (Cost
$1,967,024)..................... 1,967,024
-----------
TOTAL INVESTMENTS
(Cost $19,647,911) (a) -- (98.6%) 19,894,925
Other assets in excess of
liabilities -- (1.4%) 276,390
-----------
TOTAL NET ASSETS -- (100.0%) $20,171,315
===========
</TABLE>
- ---------------
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.................... $270,765
Unrealized depreciation.................... (23,751)
--------
Net unrealized appreciation................ $247,014
========
</TABLE>
* Yield effective at purchase.
GO -- General Obligation
MBIA -- Insured by Municipal Bond Insurance Assoc.
See notes to financial statements
42
<PAGE> 46
ISG FUNDS
LIMITED TERM TENNESSEE TAX-EXEMPT FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (cost
$19,647,911).................. $19,894,925
Interest and dividends
receivable.................... 328,703
Deferred organization costs..... 1,332
Prepaid expenses and other
assets........................ 19,220
-----------
TOTAL ASSETS.................. 20,244,180
LIABILITIES:
Distributions payable........... $ 48,769
Accrued expenses and other
payables:
Advisory fees................. 6,662
Administration fees........... 88
Shareholder servicing fees --
Class B Shares.............. 20
Distribution fees -- Class B
Shares...................... 60
Other......................... 17,266
-----------
TOTAL LIABILITIES............. 72,865
-----------
NET ASSETS:
Capital......................... 19,921,843
Undistributed (distributions in
excess of) net realized
gains......................... 2,458
Net unrealized appreciation
(depreciation) from
investments................... 247,014
-----------
NET ASSETS...................... $20,171,315
===========
Class A Shares
Net Assets.................... $19,439,076
Shares outstanding............ 1,923,580
Redemption price per share.... $ 10.11
===========
Class A Shares -- Maximum Sales
Charge........................ 3.00%
-----------
Maximum Offering Price Per
Share (100%/(100% -- Maximum
Sales Charge) of net asset
value adjusted to the
nearest cent)............... $ 10.42
===========
Class B Shares
Net Assets.................... $ 732,239
Shares outstanding............ 72,470
Offering price per share*..... $ 10.10
===========
</TABLE>
- ---------------
* Redemption price per share varies by length of time shares are held.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income................. $ 898,554
Dividend income................. 39,572
-----------
TOTAL INVESTMENT INCOME....... 938,126
EXPENSES:
Investment advisory fees........ $ 112,873
Administration fees............. 33,862
Shareholder servicing
fees -- Class B Shares........ 1,110
Distribution fees -- Class A
Shares........................ 55,168
Distribution fees -- Class B
Shares........................ 3,332
Accounting fees................. 60,259
Transfer agent fees............. 42,052
Directors' fees................. 1,598
Other fees...................... 36,592
-----------
Total expenses before
voluntary fee reductions.... 346,846
Expenses voluntarily
reduced..................... (105,811)
-----------
Net Expenses.................. 241,035
-----------
NET INVESTMENT INCOME........... 697,091
-----------
REALIZED/UNREALIZED GAINS
(LOSSES) FROM INVESTMENTS:
Net realized gains (losses) from
investment transactions....... 155,050
Net change in unrealized
appreciation (depreciation)
from investments.............. (54,273)
-----------
Net realized/unrealized gains
(losses) from investments..... 100,777
-----------
Change in net assets resulting
from operations............... $ 797,868
===========
</TABLE>
See notes to financial statements
43
<PAGE> 47
ISG FUNDS
LIMITED TERM TENNESSEE TAX-EXEMPT FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1998 1997(a)
------------ ------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net investment income..................................... $ 697,091 $ 651,831
Net realized gains (losses) from investment
transactions.......................................... 155,050 5,206
Net change in unrealized appreciation (depreciation) from
investments............................................. (54,273) 174,157
----------- -----------
Change in net assets resulting from operations............. 797,868 831,194
----------- -----------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS:
From net investment income................................ (688,069) (651,831)
From net realized gains on investment transactions........ (152,027) --
DISTRIBUTIONS TO CLASS B SHAREHOLDERS:
From net investment income................................ (9,022)(b) --
From net realized gains on investment transactions........ (5,771)(b) --
----------- -----------
Change in net assets from shareholder distributions......... (854,889) (651,831)
----------- -----------
Change in net assets from capital transactions.............. (2,664,724) 22,713,697
----------- -----------
Change in net assets........................................ (2,721,745) 22,893,060
----------- -----------
NET ASSETS:
Beginning of period....................................... 22,893,060 --
----------- -----------
End of period............................................. $20,171,315 $22,893,060
=========== ===========
</TABLE>
- ---------------
(a) For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
(b) For the period from February 3, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
44
<PAGE> 48
ISG FUNDS
LIMITED TERM TENNESSEE TAX-EXEMPT FUND
FINANCIAL HIGHLIGHTS, CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1998 1997(a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................ $ 10.13 $ 10.00
------- -------
Investment Activities
Net investment income..................................... 0.32 0.29
Net realized and unrealized gains (losses) from
investments............................................. 0.06 0.13
------- -------
Total from Investment Activities.......................... 0.38 0.42
------- -------
Distributions
Net investment income..................................... (0.32) (0.29)
Net realized gains........................................ (0.08) --
------- -------
Total Distributions....................................... (0.40) (0.29)
------- -------
Net change in asset value................................... (0.02) 0.13
------- -------
Net Asset Value, End of Period.............................. $ 10.11 $ 10.13
======= =======
TOTAL RETURN (EXCLUDES SALES CHARGE)........................ 3.76% 4.26%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $19,439 $22,893
Ratio of expenses to average net assets..................... 1.05% 0.98%(c)
Ratio of net investment income to average net assets........ 3.11% 3.48%(c)
Ratio of expenses to average net assets*.................... 1.52% 1.52%(c)
Portfolio turnover**........................................ 189% 179%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS, CLASS B SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1998(a)
------------
<S> <C>
Net Asset Value, Beginning of Period........................ $10.18
------
Investment Activities
Net investment income..................................... 0.20
------
Total from Investment Activities.......................... 0.20
------
Distributions
Net investment income..................................... (0.20)
Net realized gains........................................ (0.08)
------
Total Distributions....................................... (0.28)
------
Net change in net asset value............................... (0.08)
------
Net Asset Value, End of Period.............................. $10.10
======
TOTAL RETURN (EXCLUDES REDEMPTION CHARGE)................... 1.94%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $ 732
Ratio of expenses to average net assets..................... 2.05%(c)
Ratio of net investment income to average net assets........ 2.02%(c)
Ratio of expenses to average net assets*.................... 2.27%(c)
Portfolio turnover**........................................ 189%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from February 3, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
45
<PAGE> 49
[THIS PAGE INTENTIONALLY LEFT BLANK]
46
<PAGE> 50
<TABLE>
<S> <C>
SHARON BROWN
Portfolio Manager
ISG Tennessee
[Brown Photo] Tax-Exempt Fund
</TABLE>
- ---------------------------------------------------------------
- ---------------------------------------------------------------
INVESTMENT GOAL
The Fund seeks to provide investors with current income exempt from federal
and Tennessee state income taxes without assuming undue risk. The Fund invests
primarily in investment-grade Tennessee municipal obligations and is suitable
for Tennessee residents seeking monthly state income exempt from both federal
and Tennessee personal income taxes. The Fund affords greater diversification
and liquidity than most investors would achieve by purchasing municipal
securities directly.
- ---------------------------------------------------------------
Q. HOW DID THE FUND PERFORM DURING THE PERIOD?
A. For the 12 months ended December 31, 1998, the Fund produced a total return
of 4.25% (Class A shares at NAV).(1) In comparison, the Fund's benchmarks, the
Lipper States Intermediate Municipal Average(2) and the Lehman Brothers
Municipal 10-Year Index, produced a total return of 5.08% and 6.11%,
respectively.
It is also important to recognize income yield to shareholders. As of December
31, 1998, the Fund's 30-day SEC yield was 2.82% (Class A Shares at NAV). For
investors in the 36% federal income tax bracket, that is equivalent to a taxable
yield of 4.41%. The yield percentages are annualized.
We achieved our objectives while maintaining an average credit quality of AA1
(as rated by Moody's) and AA+ (Standard & Poor's). As of December 31, 1998, the
Fund's average maturity was 8.4 years.
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. Bonds, in general, performed well in 1998, and it was a pretty strong year
for municipal bonds, as well. Our Fund benefited from this positive environment
for fixed-income securities.
We switched gears late in the first quarter and early in the second quarter.
Seeking more tax-exempt income for our shareholders, we emphasized buying
noncallable bonds, or longer-term callable bonds with higher coupons (interest
payments). The driving force behind this mild shift in our strategy was our
understanding that the majority of our shareholders are most interested in
tax-free income.
A succession of near-calamitous events throughout the world--including the
economic crisis in Russia and the near-collapse of the Long-Term Capital
Management hedge fund--had a major impact on fixed-income securities, and the
resulting volatility trickled down to the municipal bond market. It was our
belief that the type of higher-coupon bonds we were buying were more likely to
hold up better in a volatile environment, and indeed, our increased yields
served us well during market fluctuations.
Closer to home, Tennessee's economy remained fairly strong, although it slowed
down a bit from its previously torrid pace. Supply was kind of a nonevent for
the year as a whole; generally, the supply of new muni issues in the state
remained at comfortable levels throughout 1998.
We also took steps to make this an all-Tennessee fund; we sold most of our
out-of-state holdings and used the proceeds to buy Tennessee municipal bonds.
The vast majority of our shareholders are residents of Tennessee, and we wanted
to give them the greatest possible tax advantage.
Q. WHAT ARE A FEW OF YOUR FAVORITE BONDS IN THE FUND?
A. Among our favorite bonds is the Dickson County, 6.25%, due 2008 (1.4% of the
Fund's net assets). The bond provides a nice amount of income, and it is
noncallable, so the issuer cannot take it back before it matures. Also, there
are not many Dickson County bonds in the market. If the time came and we wanted
to make a change, in our opinion, this bond would be easy to sell. At the longer
end of the market, we like the Blount County, 5.00%, due 2019 (1.0%). For most
of the year, it was trading at a discount. As interest rates moved lower, we
picked up some price appreciation. It is a callable bond, but the bond is not
callable until 2008, so we have some call protection.*
Q. WHAT IS YOUR OUTLOOK FOR 1999?
A. We believe we should have a good year in the municipal markets, including
Tennessee. It is possible that we could see some volatility, just as we did in
1998; many economic questions throughout the world have not been answered, and
uncertainty leads to fluctuations in rates and prices.
We have begun 1999 in a positive direction, but we would not be surprised to see
a pullback sometime in the near future. But the trend for interest rates is
down, which will help all fixed-income securities, including municipal bonds.
- ---------------
(1) Including the 3.00% sales load, the Fund's return was 1.18% for the period.
(2) The Lipper States Intermediate Municipal Average is comprised of managed
funds that invest in municipal debt issues that have dollar-weighted average
maturities of five to ten years and are exempt from taxation on a specified
city or state basis.
* The Fund's portfolio composition is subject to change.
Regional funds may be subject to additional risk, since the companies they
invest in are located in one geographical location.
The Fund's income may be subject to certain state and local taxes and, depending
on your tax status, the federal alternative minimum tax.
47
<PAGE> 51
- --------------------------------------------------------------------------------
ISG TENNESSEE TAX-EXEMPT FUND
PERFORMANCE (AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TENNESSEE TAX-EXEMPT TENNESSEE TAX-EXEMPT LEHMAN BROTHERS
CLASS A SHARES FUND WITH SALES CHARGE FUND WITHOUT SALES CHARGE MUNICIPAL 10-YEAR INDEX
---------------------- ------------------------- -----------------------
<S> <C> <C> <C>
'88' 9700 10000 10000
'89' 10451 10775 11068
'90' 11044 11386 11881
'91' 12072 12446 13320
'92' 12731 13125 14508
'93' 14036 14470 16359
'94' 12833 13230 15578
'95' 14552 15002 18252
'96' 14754 15210 19081
'97' 15805 16294 20843
'98' 16473 16982 22116
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT SALES WITH SALES
CHARGE CHARGE*
CLASS A SHARES ------------- ----------
<S> <C> <C>
1-Year........................ 4.25% 1.18%
5-Year........................ 3.25% 2.63%
10-Year....................... 5.44% 5.11%
*Reflects the maximum sales charge of 3.00%.
</TABLE>
<TABLE>
<CAPTION>
LEHMAN BROTHERS MUNICIPAL 10-
CLASS B SHARES TENNESSEE TAX-EXEMPT FUND YEAR INDEX
------------------------- -----------------------------
<S> <C> <C>
'88' 10000 10000
'89' 10775 11068
'90' 11386 11881
'91' 12446 13320
'92' 13125 14508
'93' 14470 16359
'94' 13230 15578
'95' 15002 18252
'96' 15210 19081
'97' 16295 20843
'98' 16933 22116
</TABLE>
The Class B contingent deferred sales charge (CDSC) is not included in the
above graph, since the performance is for more than 6 years and the CDSC
would no longer apply.
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT CDSC WITH CDSC**
CLASS B SHARES ------------ -----------
<S> <C> <C>
1-Year..................... 3.91% 0.91%
5-Year..................... 3.19% 3.02%
10-Year.................... 5.41% 5.41%
**Reflects the applicable contingent deferred sales
charge (maximum 4.00%).
THE DATA FOR CLASS B SHARES PRIMARILY PRESENTS THE
RESULTS OF THE CLASS A SHARES. ACTUAL CLASS B SHARES
AVERAGE ANNUAL TOTAL RETURN AND HYPOTHETICAL GROWTH
RESULTS WOULD HAVE BEEN LOWER. SEE NOTES BELOW.
</TABLE>
<TABLE>
<CAPTION>
LEHMAN BROTHERS MUNICIPAL 10-
INSTITUTIONAL SHARES TENNESSEE TAX-EXEMPT FUND YEAR INDEX
------------------------- -----------------------------
<S> <C> <C>
'88' 10000 10000
'89' 10775 11068
'90' 11386 11881
'91' 12446 13320
'92' 13125 14508
'93' 14470 16359
'94' 13230 15578
'95' 15002 18252
'96' 15210 19081
'97' 16299 20843
'98' 17035 22116
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
INSTITUTIONAL SHARES --------------
<S> <C>
1-Year................................. 4.52%
5-Year................................. 3.32%
10-Year................................ 5.47%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment in
the indicated share class versus a similar investment in the Fund's benchmark.
PERFORMANCE FOR THE CLASS B SHARES, WHICH COMMENCED OPERATIONS ON 2/24/98, IS
BASED ON THE HISTORICAL PERFORMANCE OF THE CLASS A SHARES (WITHOUT SALES CHARGE)
PRIOR TO THAT DATE. CLASS A SHARES PERFORMANCE DOES NOT REFLECT THE HIGHER 12B-1
FEES OR THE CONTINGENT DEFERRED SALES CHARGE (CDSC). HAD THE CDSC AND HIGHER
12B-1 FEES BEEN INCORPORATED, TOTAL RETURN AND HYPOTHETICAL GROWTH FIGURES WOULD
HAVE BEEN LOWER.
The Institutional Share class was initially offered on 10/3/97 and reflects the
historical performance of the Class A Shares (without sales charge) prior to
that date.
The ISG Tennessee Tax-Exempt Fund commenced operations on 3/28/94 through a
transfer of assets from certain collective trust fund ("commingled") accounts
managed by First American National Bank, using materially equivalent investment
objectives, policies and methodologies as the Fund. The quoted performance of
the Fund includes performance of the commingled accounts for periods prior to
the Fund's commencement of operations, as adjusted to reflect the expenses
associated with the Fund. The commingled accounts were not registered with the
Securities and Exchange Commission and, therefore, were not subject to the
investment restrictions imposed by law on registered mutual funds. If the
commingled accounts had been registered, the commingled accounts' performance
may have been adversely affected. The performance also reflects reinvestment of
dividends and capital gain distributions.
The Fund's performance is compared to the Lehman Brothers Municipal 10-Year
Index, an unmanaged index that includes municipal bonds issued within the last
five years by municipalities throughout the United States, with maturities of at
least one year, but no more than 12 years, and a credit quality of at least Baa.
The Index is unmanaged and does not reflect the expenses associated with a
mutual fund, such as investment management and fund accounting fees. The Fund's
performance reflects the deduction of fees for these value-added services.
PAST PERFORMANCE IS NOT A PREDICTION OF FUTURE RESULTS. THE FUND'S INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL PURCHASE PRICE.
48
<PAGE> 52
- --------------------------------------------------------------------------------
ISG TENNESSEE TAX-EXEMPT FUND
(AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
[TENNESSEE TAX EXEMPT SECTOR PROFILE PIE CHART]
<TABLE>
<CAPTION>
Sector Profile*
<S> <C>
Cash and cash Equivalents............ 0.9%
Municipal Bonds...................... 99.1%
</TABLE>
The Tennessee Tax-Exempt Fund invests primarily in investment-grade
Tennessee municipal obligations. The Fund is designed to provide
investors with current income exempt from federal and Tennessee
state income taxes, without assuming undue risks.
[TENNESSEE TAX EXEMPT MATURITY PROFILE PIE CHART]
<TABLE>
<CAPTION>
Maturity Profile*
<S> <C>
0-1 Years............................ 1.0%
1-5 Years............................ 9.7%
6-10 Years........................... 65.0%
11-20 Years.......................... 24.3%
</TABLE>
By design, the Fund attempts to generate current income without
undue risk to principal. The chart shows that the Fund is focused on
bonds primarily with maturities of 6 to 10 years.
[TENNESSEE TAX EXEMPT QUALITY PROFILE PIE CHART]
<TABLE>
<CAPTION>
Quality Profile*
<S> <C>
AA................................... 31.5%
A.................................... 2.6%
AAA.................................. 65.9%
</TABLE>
By focusing on more general obligations and school and "essential
services" bonds, the Fund Manager and the research team provide an
additional measure of security to the Fund.
* The Fund's portfolio composition is subject to change.
49
<PAGE> 53
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
TENNESSEE TAX-EXEMPT FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
MUNICIPAL BONDS (99.6%)
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- -------------------------------- ---------- -----------
ALABAMA (2.2%)
Jefferson County Sewer Revenue
Refunded Warrants, Series A,
5.63%, 2/1/22, Callable 2/1/07
@ 101, FGIC................... $1,995,000 $ 2,132,156
-----------
ARIZONA (1.3%)
Maricopa County School District
No 008 Refunding, 7.50%,
7/1/07, GO, MBIA.............. 1,000,000 1,233,750
-----------
ARKANSAS (1.3%)
North Little Rock Electric Power
and Light Refunding, Series A,
6.50%, 7/1/15, MBIA........... 1,000,000 1,205,000
-----------
COLORADO (1.2%)
Denver Airport Revenue
Refunding, Series A, 7.25%,
11/15/25, Prerefunded 11/15/02
@ 102......................... 1,000,000 1,142,500
-----------
FLORIDA (2.4%)
Hillsborough County Industrial
Development Authority, PCR,
Tampa Electric Project, 8.00%,
5/1/22, Callable 5/1/02 @
103........................... 2,000,000 2,297,500
-----------
GEORGIA (5.6%)
Fulton County School District
Refunded, 6.38%, 5/1/11, GO... 1,480,000 1,766,750
Georgia State School
Improvements, Series C, 7.25%,
7/1/06, GO.................... 2,000,000 2,420,000
Georgia State School
Improvements, Series D, 6.50%,
8/1/05, GO.................... 1,000,000 1,151,250
-----------
5,338,000
-----------
HAWAII (1.8%)
Hawaii State School
Improvements, Series CL,
6.00%, 3/1/08, GO, MBIA-IBC... 1,550,000 1,755,375
-----------
MISSISSIPPI (1.1%)
Mississippi Development Bank,
Natural Gas Utility
Improvements, Municipal
Facility Authority,
Mississippi Natural Gas
Project, 5.00%, 1/1/08,
MBIA.......................... 1,000,000 1,053,750
-----------
OHIO (2.5%)
Moraine Solid Waste Disposal
Revenue, Resource Recovery
Improvements, General Motors
Corp. Project, 6.75%,
7/1/14........................ 2,000,000 2,402,500
-----------
MUNICIPAL BONDS, CONTINUED
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- -------------------------------- ---------- -----------
TENNESSEE (80.2%)
Blount County Public Building
Authority School Improvements,
5.00%, 4/1/19, Callable 4/1/08
@ 101, FGIC................... $1,000,000 $ 996,250
Bristol Health & Educational
Facilities Revenue, Bristol
Memorial Hospital, Revenue
Bond, 6.75%, 9/1/07, FGIC..... 3,340,000 3,949,549
Chattanooga-Hamilton County
Hospital Authority, Hospital
Revenue, 5.63%, 10/1/09,
FSA........................... 1,000,000 1,108,750
Dickson County School
Improvements, 6.25%, 4/1/08,
GO, FGIC...................... 1,220,000 1,406,050
Hamilton County Industrial
Development Board Lease, Rent
Revenue, 5.75%, 9/1/05,
FGIC.......................... 1,000,000 1,101,250
Humphreys County Industrial
Development Board, Solid Waste
Disposal Revenue,
E.I. Dupont de Nemours & Co.
Project, 6.70%, 5/1/24,
Callable 5/1/04 @ 102......... 1,455,000 1,620,506
Jackson Hospital Revenue
Refunding and Improvement,
6.00%, 4/1/05, AMBAC.......... 1,150,000 1,272,188
Johnson City Health & Education
Revenue Refunding and
Improvement, Medical Center
Hospital, 5.13%, 7/1/10,
MBIA.......................... 1,000,000 1,061,250
Johnson City Refunded, 5.25%,
6/1/10, GO, FGIC.............. 1,260,000 1,352,925
Johnson City Refunded Water &
Sewer, 5.25%, 6/1/10, GO...... 1,270,000 1,363,663
Kingsport Refunding, 5.00%,
9/1/06, GO, MBIA.............. 1,000,000 1,056,250
Knox County Health, Education &
Housing Facilities Board,
Hospital Facilities Revenue,
Fort Sanders Alliance, 6.25%,
1/1/13, MBIA.................. 1,000,000 1,157,500
Knox County Refunding, 6.50%,
4/1/04, Callable 4/1/03 @ 102,
GO............................ 1,965,000 2,200,800
Knoxville Electric Light & Power
Improvements, Refunding,
Series S, 5.00%, 7/1/18,
Callable 7/1/05 @ 101......... 1,000,000 992,500
Lawrenceburg Electric, Revenue
Bond, 6.63%, 7/1/18, MBIA..... 1,250,000 1,518,750
Madison County Capital Outlay
Notes, 5.00%, 5/1/06, GO, MBIA
(b)........................... 1,000,000 1,053,750
Memphis, 6.25%, 7/1/04, GO...... 1,500,000 1,668,750
Memphis, 6.00%, 11/1/06, GO..... 1,000,000 1,130,000
</TABLE>
Continued
50
<PAGE> 54
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
TENNESSEE TAX-EXEMPT FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
MUNICIPAL BONDS, CONTINUED
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- -------------------------------- ---------- -----------
TENNESSEE, CONTINUED
Memphis Refunding General
Improvement, Series B,
5.25%,10/1/10, GO (b)......... $1,000,000 $ 1,078,750
Memphis Refunding General
Improvement, Series B, 5.25%,
10/1/11, GO (b)............... 1,000,000 1,078,750
Memphis Water Division Revenue
Refunding, 5.00%, 1/1/07...... 1,285,000 1,371,738
Memphis-Shelby County Airport
Authority, Revenue Bonds,
Series A, 5.50%, 2/15/04,
MBIA.......................... 1,395,000 1,487,419
Memphis-Shelby County Airport
Authority, Revenue Bonds,
Series A, 6.25%, 2/15/09,
MBIA.......................... 1,790,000 2,051,788
Metropolitan Government,
Nashville & Davidson County,
5.60%, 5/15/07, Callable
5/15/06 @ 101, GO............. 1,045,000 1,153,419
Metropolitan Government,
Nashville & Davidson County
Energy Project, Series B,
Revenue Bond, 6.00%, 7/1/10,
AMBAC......................... 1,335,000 1,526,906
Metropolitan Government,
Nashville & Davidson County
Health & Educational
Facilities Board, McKendree
Villiage Inc., 5.13%, 1/1/20,
Callable 1/1/06 @ 102......... 1,000,000 991,250
Metropolitan Government,
Nashville & Davidson County
Health & Educational
Facilities Board, Refunding &
Improvements, Meharry Medical
College, 6.00%, 12/1/09,
AMBAC......................... 1,000,000 1,142,500
Metropolitan Government,
Nashville & Davidson County
Health & Educational
Facilities Board, Refunding &
Improvements, Meharry Medical
College, 6.00%, 12/1/13,
AMBAC......................... 2,030,000 2,309,125
Metropolitan Government,
Nashville & Davidson County
Refunding, 6.25%, 12/1/01,
GO............................ 1,000,000 1,072,500
Metropolitan Government,
Nashville & Davidson County
Water & Sewer Revenue, 6.50%,
4/1/03, Callable 4/1/99 @ 102
(c)........................... 1,000,000 1,105,000
Metropolitan Government,
Nashville & Davidson County,
Meharry Medical College
Project, 6.88%, 12/1/24,
Prerefunded 12/1/04 @ 102,
AMBAC (c)..................... 4,750,000 5,563,437
MUNICIPAL BONDS, CONTINUED
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- -------------------------------- ---------- -----------
TENNESSEE, CONTINUED
Metropolitan Government,
Nashville & Davidson County,
Vanderbilt University, Series
A, 5.75%, 1/1/07.............. $1,035,000 $ 1,143,675
Monroe County High School
Refunding, 5.25%, 5/1/06, GO,
FSA........................... 1,580,000 1,690,600
Montgomery County Refunding,
5.25%, 5/1/06, GO, FSA........ 1,000,000 1,070,000
Rutherford County, Capital
Outlay, Series A, 6.25%,
5/1/04, GO (c)................ 2,000,000 2,230,000
Rutherford County, Capital
Outlay, Series A, 6.25%,
5/1/05, GO.................... 2,500,000 2,821,875
Shelby County Health, Education
& Housing Facilities Board,
Hospital Revenue, Methodist
Health Systems, Inc., 6.25%,
8/1/07, MBIA.................. 3,500,000 3,972,499
Shelby County Health, Education
& Housing Facilities Board,
Hospital Revenue, Methodist
Health Systems, Inc., 6.25%,
8/1/08, MBIA.................. 2,000,000 2,282,500
Shelby County, Refunded, Series
B, 5.00%, 8/1/11, Callable
8/1/07 @ 101, GO.............. 1,500,000 1,576,875
Shelby County, Series A, 6.75%,
4/1/05, GO (c)................ 1,000,000 1,155,000
Shelby County, Series A, 5.63%,
6/1/05, GO.................... 1,000,000 1,095,000
Shelby County, Series B, 6.00%,
12/1/05, GO................... 1,250,000 1,404,688
Tennessee State, Refunded,
Series B, 6.00%, 5/1/05, GO... 3,000,000 3,352,500
Tennessee State, Refunded,
Series B, 6.00%, 5/1/06, GO... 1,000,000 1,126,250
Tennessee State, Series B,
6.85%, 6/1/11, GO............. 1,350,000 1,468,125
Williamson County Public
Improvement, 6.25%, 4/1/06,
GO............................ 1,000,000 1,136,250
Wilson County Certificate of
Participation Refunding,
5.25%, 6/30/15, Callable
6/30/09 @ 101, FSA (b)........ 1,500,000 1,567,290
-----------
77,036,390
-----------
TOTAL MUNICIPAL BONDS (Cost
$93,229,766).................. 95,596,921
-----------
</TABLE>
Continued
51
<PAGE> 55
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
TENNESSEE TAX-EXEMPT FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT COMPANIES (0.9%)
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- -------------------------------- ---------- -----------
AIM Tax-Free Money Market Fund.. 859,570 $ 859,570
Dreyfus Tax-Free Money Market
Fund.......................... 1,000 1,000
-----------
TOTAL INVESTMENT COMPANIES (Cost
$860,570)..................... 860,570
-----------
TOTAL INVESTMENTS (Cost
$94,090,336)(a) -- (100.5%)... 96,457,491
Liabilities in excess of other
assets -- (-0.5)%............. (455,038)
-----------
TOTAL NET ASSETS -- (100.0%).... $96,002,453
===========
</TABLE>
- ---------------
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation................. $2,397,636
Unrealized depreciation................. (30,481)
----------
Net unrealized appreciation............. $2,367,155
==========
</TABLE>
(b) Represents security purchased on a when-issued basis. At December 31, 1998,
total cost of investments purchased on a when-issued basis was $4,785,300.
(c) At December 31, 1998, the security was pledged as collateral for securities
purchased on a when-issued basis.
AMBAC -- Insured by AMBAC Indemnity Corp.
FGIC -- Insured by Financial Guaranty Insurance Corp.
FSA -- Insured by Financial Security Assurance Inc.
GO -- General Obligation
MBIA -- Insured by Municipal Bond Insurance Assoc.
MBIA-IBC -- MBIA Insured Bond Certificates
PCR -- Pollution Control Revenue
See notes to financial statements
52
<PAGE> 56
ISG FUNDS
TENNESSEE TAX-EXEMPT FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (cost
$94,090,336)................... $ 96,457,491
Interest and dividends
receivable..................... 1,386,579
Receivable for capital shares
issued......................... 97,087
Receivable for investments
sold........................... 3,209,850
Deferred organization costs...... 3,037
Prepaid expenses and other
assets......................... 22,599
------------
TOTAL ASSETS................... 101,176,643
LIABILITIES:
Distributions payable............ $ 276,602
Custody payable.................. 32,995
Payable for investments
purchased...................... 4,785,300
Accrued expenses and other
payables:
Advisory fees.................. 41,188
Administration fees............ 1,575
Shareholder servicing
fees -- Class B Shares....... 37
Distribution fees -- Class A
Shares....................... 79
Distribution fees -- Class B
Shares....................... 111
Other.......................... 36,303
----------
TOTAL LIABILITIES.............. 5,174,190
------------
NET ASSETS:
Capital.......................... 93,600,092
Undistributed (distributions in
excess of) net investment
income......................... 5,860
Undistributed (distributions in
excess of) net realized
gains.......................... 29,346
Net unrealized appreciation
(depreciation) from
investments.................... 2,367,155
------------
NET ASSETS....................... $ 96,002,453
============
Class A Shares
Net Assets..................... $ 2,918,845
Shares outstanding............. 286,402
Redemption price per share..... $ 10.19
============
Class A Shares -- Maximum Sales
Charge......................... 3.00%
------------
Maximum Offering Price Per
Share (100%/(100% -- Maximum
Sales Charge) of net asset
value adjusted to the nearest
cent)........................ $ 10.51
============
Class B Shares
Net Assets..................... $ 1,396,740
Shares outstanding............. 136,765
Offering price per share*...... $ 10.21
============
Institutional Shares
Net Assets..................... $ 91,686,868
Shares outstanding............. 8,997,982
Offering and redemption price
per share.................... $ 10.19
============
</TABLE>
- ---------------
* Redemption price per share varies by length of time shares are held.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income.................... $4,448,524
Dividend income.................... 117,783
----------
TOTAL INVESTMENT INCOME.......... 4,566,307
EXPENSES:
Investment advisory fees........... $ 497,352
Administration fees................ 149,206
Shareholder servicing fees -- Class
B Shares......................... 1,710
Distribution fees -- Class A
Shares........................... 6,387
Distribution fees -- Class B
Shares........................... 5,131
Accounting fees.................... 77,477
Transfer agent fees................ 76,159
Directors' fees.................... 6,986
Other fees......................... 138,724
----------
Total expenses before voluntary
fee reductions................. 959,132
Expenses voluntarily reduced..... (5,617)
----------
Net Expenses..................... 953,515
----------
NET INVESTMENT INCOME.............. 3,612,792
----------
REALIZED/UNREALIZED GAINS (LOSSES)
FROM INVESTMENTS:
Net realized gains (losses) from
investment transactions.......... 1,356,524
Net change in unrealized
appreciation (depreciation) from
investment transactions.......... (524,589)
----------
Net realized/unrealized gains
(losses) from investments........ 831,935
----------
Change in net assets resulting from
operations....................... $4,444,727
==========
</TABLE>
See notes to financial statements
53
<PAGE> 57
ISG FUNDS
TENNESSEE TAX-EXEMPT FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net investment income..................................... $ 3,612,792 $ 4,158,493
Net realized gains (losses) from investment
transactions............................................ 1,356,524 495,596
Net change in unrealized appreciation (depreciation) from
investments............................................. (524,589) 2,311,170
------------ ------------
Change in net assets resulting from operations.............. 4,444,727 6,965,259
------------ ------------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS:
From net investment income................................ (86,286) (3,124,095)
From net realized gains on investment transactions........ (19,251) --
DISTRIBUTIONS TO CLASS B SHAREHOLDERS:
From net investment income................................ (17,207)(b) --
From net realized gains on investment transactions........ (9,170)(b) --
DISTRIBUTIONS TO INSTITUTIONAL SHAREHOLDERS:
From net investment income................................ (3,509,299) (1,034,398)(a)
From net realized gains on investment transactions........ (638,254) --
------------ ------------
Change in net assets from shareholder distributions......... (4,279,467) (4,158,493)
------------ ------------
Change in net assets from capital transactions.............. (6,573,702) 11,520,334
------------ ------------
Change in net assets........................................ (6,408,442) 14,327,100
------------ ------------
NET ASSETS:
Beginning of period....................................... 102,410,895 88,083,795
------------ ------------
End of period............................................. $ 96,002,453 $102,410,895
============ ============
</TABLE>
- ---------------
(a) For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
(b) For the period from February 24, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
54
<PAGE> 58
ISG FUNDS
TENNESSEE TAX-EXEMPT FUND
FINANCIAL HIGHLIGHTS, CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995 1994(a)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.......... $ 10.18 $ 9.90 $ 10.19 $ 9.40 $ 10.00
-------- -------- -------- -------- --------
Investment Activities
Net investment income....................... 0.35 0.44 0.42 0.45 0.34
Net realized and unrealized gains (losses)
from investments.......................... 0.08 0.25 (0.29) 0.79 (0.60)
-------- -------- -------- -------- --------
Total from Investment Activities............ 0.43 0.69 0.13 1.24 (0.26)
-------- -------- -------- -------- --------
Distributions
Net investment income....................... (0.35) (0.41) (0.42) (0.45) (0.34)
Net realized gains.......................... (0.07) -- -- -- --
-------- -------- -------- -------- --------
Total Distributions......................... (0.42) (0.41) (0.42) (0.45) (0.34)
-------- -------- -------- -------- --------
Net change in asset value..................... 0.01 0.28 (0.29) 0.79 (0.60)
-------- -------- -------- -------- --------
Net Asset Value, End of Period................ $ 10.19 $ 10.18 $ 9.90 $ 10.19 $ 9.40
======== ======== ======== ======== ========
TOTAL RETURN (EXCLUDES SALES CHARGE).......... 4.25% 7.13% 1.39% 13.40% 2.63%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)............. $ 2,919 $ 1,669 $ 88,084 $ 94,143 $ 86,127
Ratio of expenses to average net assets....... 1.20% 0.84% 0.86% 0.87% 0.82%(c)
Ratio of net investment income to average net
assets...................................... 3.37% 4.13% 4.29% 4.52% 4.61%(c)
Ratio of expenses to average net assets*...... 1.20% 1.09% 1.11% 1.12% 1.18%(c)
Portfolio turnover**.......................... 155% 253% 219% 188% 0.41%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from March 28, 1994 (commencement of operations) through
December 31, 1994.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS, CLASS B SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1998(a)
------------
<S> <C>
Net Asset Value, Beginning of Period........................ $10.22
------
Investment Activities
Net investment income..................................... 0.26
Net realized and unrealized gains (losses) from
investments............................................. 0.06
------
Total from Investment Activities.......................... 0.32
------
Distributions
Net investment income..................................... (0.26)
Net realized gains........................................ (0.07)
------
Total Distributions......................................... (0.33)
------
Net change in net asset value............................... (0.01)
------
Net Asset Value, End of Period.............................. $10.21
======
TOTAL RETURN (EXCLUDES REDEMPTION CHARGE)................... 3.17%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $1,397
Ratio of expenses to average net assets..................... 1.95%(c)
Ratio of net investment income to average net assets........ 2.50%(c)
Portfolio turnover**........................................ 155%
</TABLE>
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from February 24, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
55
<PAGE> 59
ISG FUNDS
TENNESSEE TAX-EXEMPT FUND
FINANCIAL HIGHLIGHTS, INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1998 1997(a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................ $ 10.18 $ 10.05
-------- --------
Investment Activities
Net investment income..................................... 0.37 0.10
Net realized and unrealized gains (losses) from
investments............................................. 0.08 0.13
-------- --------
Total from Investment Activities.......................... 0.45 0.23
-------- --------
Distributions
Net investment income..................................... (0.37) (0.10)
Net realized gains........................................ (0.07) --
-------- --------
Total Distributions....................................... (0.44) (0.10)
-------- --------
Net change in asset value................................... 0.01 0.13
-------- --------
Net Asset Value, End of Period.............................. $ 10.19 $ 10.18
======== ========
TOTAL RETURN................................................ 4.52% 2.35%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $ 91,687 $100,742
Ratio of expenses to average net assets..................... 0.95% 0.56%(c)
Ratio of net investment income to average net assets........ 3.65% 4.22%(c)
Ratio of expenses to average net assets*.................... 0.95% 0.87%(c)
Portfolio turnover**........................................ 155% 253%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
56
<PAGE> 60
<TABLE>
<S> <C>
DONALD F. TURK, CFA
Portfolio Manager
[Turk Photo] ISG Limited Term Income Fund
</TABLE>
- ---------------------------------------------------------------
- ---------------------------------------------------------------
INVESTMENT GOAL
The Fund seeks to provide investors with current income without assuming undue
risk. It invests primarily in investment-grade, U.S. dollar-denominated,
fixed-income securities of domestic and foreign issuers that generally have a
duration of less than four years. This Fund is suitable for investors seeking
regular monthly income without undue risk to principal.
- ---------------------------------------------------------------
Q. HOW DID THE FUND PERFORM DURING 1998?
A. Despite some volatility in the market throughout the year, the Fund delivered
solid returns. For the 12 months ended December 31, 1998, the Fund produced a
total return of 6.48% (Class A shares at NAV).(1) In comparison, the Merrill
Lynch 1-5-Year Government/Corporate Bond Index produced a total return of 9.53%.
It is also important to recognize income yield to shareholders. As of December
31, 1998, the Fund's 30-day SEC yield was 4.06% (Class A shares at NAV),
compared to 5.92% at the end of 1997. The yield percentages are annualized. We
achieved our objectives while maintaining an average credit quality of AA-(rated
by Standard & Poor's). As of December 31, 1998, the Fund's average maturity was
3.1 years.
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. The two most important factors were our maturity structure and the
international crises that afflicted Russia, Asia and South America.
With the Fund having a maturity structure longer than our benchmark, the Merrill
Lynch 1-5-Year Government/Corporate Bond Index, it was reasonable to expect that
the year's overall decline in interest rates would be more productive to our
total return. But markets do not always behave as investors believe they will.
When troubles abroad threatened the safety of foreign bonds, the result was a
stampeding "flight to quality," with U.S. Treasury bonds almost exclusively
being the securities of choice. Consequently, there was a broad sell-off of all
other types of bonds, including U.S. government agency securities. Because we
held more corporate bonds and government agencies bonds, and fewer Treasuries,
than our benchmark (which held approximately 85% Treasuries), we underperformed
the benchmark.
Fortunately, we believe a reversal of this unusual situation should occur, which
would boost the Fund's performance relative to our benchmark.
Q. WITH ALL THIS MOVEMENT IN THE MARKET, WHAT STEPS DID YOU TAKE TO HELP
INCREASE CURRENT INCOME?
A. Our key strategy was to sell Treasury notes and buy higher-yielding corporate
securities, which yielded considerably more income. For example, we sold
Treasuries and bought bonds issued by AutoZone (2.2% of the Fund's net assets),
and Anheuser-Busch notes (1.4%). AutoZone offered more than 1% in additional
yield, and Anheuser-Busch netted an additional 1.73% yield.
As of December 31, 1998, 72.3% of the Fund's portfolio was invested in corporate
bonds, with a total of 25.8% invested in Treasury, government agency and
mortgage pass-through securities, and 1.9% in cash equivalents.*
Q. WHAT IS YOUR OUTLOOK FOR 1999?
A. We are essentially positive on the bond market. In our opinion, it is
unlikely that we will have another dramatic decline in interest rates as we did
in 1998. We see many factors that are positive for bonds: the continuing secular
trend in disinflation, the very low levels of commodity prices, excessive global
production capacity, technological efficiencies and demographic trends. All of
these circumstances favor low inflation, which is good for fixed-income
investors.
This is not to say that there are not negative factors that pose risks to the
bond market. The most prominent of these are shortages in the domestic labor
force, which can run up costs and spark inflation; the introduction of the new
euro currency in Europe, which could make U.S. debt less desirable; and the
possibility of an overheating U.S. economy.
But in general, we feel that bonds could remain stable, with yields on long-term
Treasuries remaining in the range of 4.5% to 5.5%. If anything, we believe there
is a greater probability that yields could fall to the lower end of this range
than rise.
- ---------------
(1) Including the 3.00% sales load, the Fund's return was 3.28% for the period.
(*) The Fund's portfolio composition is subject to change.
57
<PAGE> 61
- --------------------------------------------------------------------------------
ISG LIMITED TERM INCOME FUND
PERFORMANCE (AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIMITED TERM INCOME FUND LIMITED TERM INCOME FUND MERRILL LYNCH 1-5-YEAR-
CLASS A SHARES WITH SALES CHARGE WITHOUT SALES CHARGE GOV'T/CORP. BOND INDEX
------------------------ ------------------------ -----------------------
<S> <C> <C> <C>
'88' 9700 10000 10000
'89' 10663 10993 11164
'90' 11525 11882 12260
'91' 13048 13452 13839
'92' 13681 14104 14770
'93' 14528 14978 15794
'94' 14430 14877 15873
'95' 16047 16543 17900
'96' 16733 17250 18713
'97' 17817 18367 20043
'98' 18968 19555 21953
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT SALES WITH SALES
CHARGE CHARGE*
CLASS A SHARES ------------- ----------
<S> <C> <C>
1-Year........................ 6.48% 3.28%
5-Year........................ 5.48% 4.84%
10-Year....................... 6.94% 6.61%
*Reflects the maximum sales charge of 3.00%.
</TABLE>
<TABLE>
<CAPTION>
MERRILL LYNCH 1-5-YEAR GOV'T/CORP.
CLASS B SHARES LIMITED TERM INCOME FUND BOND INDEX
------------------------ ----------------------------------
<S> <C> <C>
'88' 10000 10000
'89' 10993 11164
'90' 11882 12260
'91' 13452 13839
'92' 14104 14770
'93' 14978 15794
'94' 14877 15873
'95' 16543 17900
'96' 17250 18713
'97' 18345 20043
'98' 19420 21953
</TABLE>
The Class B contingent deferred sales charge (CDSC) is not included in the above
graph, since the performance is for more than 6 years and the CDSC would no
longer apply.
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT CDSC WITH CDSC**
CLASS B SHARES ------------ -----------
<S> <C> <C>
1-Year..................... 5.86% 2.86%
5-Year..................... 5.33% 5.17%
10-Year.................... 6.86% 6.86%
**Reflects applicable contingent deferred sales charge
(maximum 4.00%).
THE DATA FOR CLASS B SHARES PRIMARILY PRESENTS THE
RESULTS OF THE CLASS A SHARES. ACTUAL CLASS B SHARES
AVERAGE ANNUAL TOTAL RETURN AND HYPOTHETICAL GROWTH
RESULTS WOULD HAVE BEEN LOWER. SEE NOTES BELOW.
</TABLE>
<TABLE>
<CAPTION>
MERRILL LYNCH 1-5-YEAR
INSTITUTIONAL SHARES LIMITED TERM INCOME FUND GOV'T./CORP. BOND INDEX
------------------------ -----------------------
<S> <C> <C>
'88' 10000 10000
'89' 10993 11164
'90' 11882 12260
'91' 13452 13839
'92' 14104 14770
'93' 14978 15794
'94' 14877 15873
'95' 16543 17900
'96' 17250 18713
'97' 18351 20043
'98' 19610 21953
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
INSTITUTIONAL SHARES --------------
<S> <C>
1-Year................................. 6.86%
5-Year................................. 5.54%
10-Year................................ 6.97%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment in
the indicated share class versus a similar investment in the Fund's benchmark.
PERFORMANCE FOR THE CLASS B SHARES, WHICH COMMENCED OPERATIONS ON 2/4/98, IS
BASED ON THE HISTORICAL PERFORMANCE OF THE CLASS A SHARES (WITHOUT SALES CHARGE)
PRIOR TO THAT DATE. CLASS A SHARES PERFORMANCE DOES NOT REFLECT THE HIGHER 12B-1
FEES OR THE CONTINGENT DEFERRED SALES CHARGE (CDSC). HAD THE CDSC AND HIGHER
12B-1 FEES BEEN INCORPORATED, TOTAL RETURN AND HYPOTHETICAL GROWTH FIGURES WOULD
HAVE BEEN LOWER.
The Institutional Share class was initially offered on 10/3/97 and reflects the
historical performance of the Class A Shares (without sales charge) prior to
that date.
The ISG Limited Term Income Fund commenced operations on 3/28/94 through a
transfer of assets from certain collective trust fund ("commingled") accounts
managed by First American National Bank, using materially equivalent investment
objectives, policies and methodologies as the Fund. The quoted performance of
the Fund includes performance of the commingled accounts for periods prior to
the Fund's commencement of operations, as adjusted to reflect the expenses
associated with the Fund. The commingled accounts were not registered with the
Securities and Exchange Commission and, therefore, were not subject to the
investment restrictions imposed by law on registered mutual funds. If the
commingled accounts had been registered, the commingled accounts' performance
may have been adversely affected. The performance also reflects reinvestment of
dividends and capital gain distributions.
The Fund's performance is compared to the Merrill Lynch 1-5-Year
Government/Corporate Bond Index, which is generally representative of the
performance of government and corporate bonds in that maturity range with a
rating of at least Baa. The index is unmanaged and does not reflect the expenses
associated with a mutual fund, such as investment management and fund accounting
fees. The Fund's performance reflects the deduction of fees for these
value-added services.
PAST PERFORMANCE IS NOT A PREDICTION OF FUTURE RESULTS. THE FUND'S INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL PURCHASE PRICE.
58
<PAGE> 62
- --------------------------------------------------------------------------------
ISG LIMITED TERM INCOME FUND
(AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
[Limited Term Income Sector Profile Pie Chart]
<TABLE>
<CAPTION>
Sector Profile*
<S> <C>
Cash and cash Equivalents............ 1.9%
Corporate Bonds...................... 72.3%
U.S. Government Agencies............. 21.2%
U.S. Treasury Notes.................. 4.6%
</TABLE>
The Limited Term Income Fund invests primarily in investment-grade,
U.S. dollar-denominated, fixed-income securities of domestic and
foreign issuers. The Fund is designed to provide investors with
current income without assuming undue risk. The Fund's adviser has
latitude in deciding how assets are invested among corporate and
government obligations. As a result, the Fund enjoys flexibility to
make the most of changing market conditions.
[Limited Term Income Maturity Profile Pie Chart]
<TABLE>
<CAPTION>
Maturity Profile*
<S> <C>
0-1 Years............................ 17.6%
1-5 Years............................ 72.8%
6-10 Years........................... 9.6%
</TABLE>
By design, the Fund attempts to generate current income without
undue risk to principal. The chart shows that the Fund is primarily
focused on bonds with maturities of 1 to 5 years.
[Limited Term Income Quality Profile Pie Chart]
<TABLE>
<CAPTION>
Quality Profile*
<S> <C>
A.................................... 45.9%
BBB.................................. 8.9%
AA................................... 15.9%
AAA.................................. 29.3%
</TABLE>
The Fund's research team and the Fund Manager continuously monitor
debt instruments and issuer quality to identify fixed-income
securities for the Fund.
* The Fund's portfolio composition is subject to change.
59
<PAGE> 63
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
LIMITED TERM INCOME FUND DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
CORPORATE BONDS (71.3%)
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ---------------------------------- ---------- -----------
BANKING (7.7%)
ABN AMRO Bank, 6.63%, 10/31/01.... $2,000,000 $ 2,062,500
Bankers Trust, 6.75%, 10/3/01..... 1,500,000 1,526,250
First Union National, 5.80%,
12/1/08......................... 1,500,000 1,518,750
NationsBank Corp., 7.00%,
9/15/01......................... 2,000,000 2,082,500
-----------
7,190,000
-----------
BEVERAGES (1.4%)
Anheuser-Busch Cos., 7.13%,
7/1/17.......................... 1,250,000 1,314,063
-----------
ENTERTAINMENT (2.7%)
The Walt Disney Co., 6.38%,
3/30/01......................... 1,500,000 1,543,125
The Walt Disney Co., 5.62%,
12/1/08......................... 1,000,000 1,008,750
-----------
2,551,875
-----------
FINANCIAL SERVICES (10.6%)
Associates Corp. N.A., 7.68%,
3/3/00.......................... 1,500,000 1,539,375
Ford Motor Credit Co., 6.50%,
2/28/02......................... 2,500,000 2,574,999
John Deere Capital Corp., 5.90%,
4/8/03.......................... 2,000,000 2,020,000
Merrill Lynch & Co., Inc., 6.00%,
1/15/01......................... 1,750,000 1,769,688
Salomon Smith Barney Holdings,
6.13%, 1/15/03.................. 2,000,000 2,027,500
-----------
9,931,562
-----------
INDUSTRIAL GOODS & SERVICES (10.1%)
Archer Daniels Midland, 6.25%,
5/15/03......................... 1,500,000 1,556,250
IBM Corp., 6.25%, 2/24/00......... 1,036,000 1,044,910
IBM Corp., 6.04%, 8/7/00, MTN..... 1,000,000 1,013,750
Imperial Oil Ltd., 8.75%,
10/15/19........................ 3,000,000 3,187,500
Martin Marietta, 6.50%, 4/15/03... 2,500,000 2,603,125
-----------
9,405,535
-----------
INSURANCE -- PROPERTY & CASUALTY (2.2%)
Travelers/Aetna Property &
Casualty, 6.75%, 4/15/01........ 2,000,000 2,060,000
-----------
PAPER PRODUCTS (2.2%)
International Paper Co., 6.88%,
7/10/00......................... 2,000,000 2,030,000
-----------
RETAIL -- STORES (9.9%)
AutoZone, Inc., 6.50%, 7/15/08.... 2,000,000 2,050,000
Dayton Hudson Co., 6.40%,
2/15/03......................... 2,500,000 2,581,250
J.C. Penney & Co., 7.25%,
4/1/02.......................... 2,000,000 2,097,500
Wal-Mart Stores, 5.85%, 6/1/18.... 2,500,000 2,525,000
-----------
9,253,750
-----------
TELECOMMUNICATIONS (3.3%)
MCI Communication Corp., 7.13%,
1/20/00......................... 1,500,000 1,524,375
WorldCom, Inc., 6.13%, 8/15/01.... 1,500,000 1,524,375
-----------
3,048,750
-----------
UTILITIES -- ELECTRIC (18.6%)
Alabama Power Co., 5.35%,
11/15/03........................ $2,000,000 $ 2,000,000
Baltimore Gas & Electric, 6.50%,
2/15/03......................... 2,500,000 2,628,124
Central Power & Light Co., 6.00%,
4/1/00.......................... 2,000,000 2,022,500
Florida Power Corp., 6.54%,
7/1/02, MTN..................... 2,000,000 2,085,000
MidAmerican Energy, 6.50%,
12/15/01........................ 2,500,000 2,590,625
National Rural Utilities Corp.,
Series C, 6.49%, 7/10/02, MTN... 2,000,000 2,090,000
Puget Sound Power & Light, 6.61%,
2/9/00, MTN..................... 2,000,000 2,030,000
SCANA Corp., Series B, 6.25%,
7/8/03, MTN..................... 2,000,000 2,062,500
-----------
17,508,749
-----------
UTILITIES -- GAS (2.6%)
ENSERCH Corp., 7.00%, 8/15/99..... 1,000,000 1,010,000
Smith Enron, 5.97%, 12/15/06...... 1,391,000 1,427,514
-----------
2,437,514
-----------
TOTAL CORPORATE BONDS (Cost $65,354,834) 66,731,798
-----------
U.S. GOVERNMENT AGENCIES (20.9%)
FEDERAL HOME LOAN BANK (4.8%)
6.00%, 8/28/01 (b)................ 2,500,000 2,501,325
6.10%*, 12/24/07 (b).............. 2,000,000 2,008,560
-----------
4,509,885
-----------
FREDDIE MAC (2.1%)
6.75%, 4/1/08 (b)................. 2,000,000 2,003,460
-----------
FANNIE MAE (1.6%)
6.35%, 11/23/01................... 1,500,000 1,517,100
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOC. (10.8%)
8.00%, 12/15/07, Pool # 339455.... 522,933 541,722
8.00%, 8/15/08, Pool # 358725..... 953,381 987,635
7.50%, 4/15/09, Pool # 392085..... 630,207 652,062
7.50%, 4/15/09, Pool # 368641..... 456,444 472,273
7.50%, 6/15/09, Pool # 345752..... 504,437 521,931
8.50%, 9/15/09, Pool # 376589..... 585,311 612,013
8.00%, 11/15/09, Pool # 380660.... 1,146,608 1,187,805
8.50%, 12/15/09, Pool # 392814.... 621,817 650,185
8.50%, 12/15/09, Pool # 392770.... 425,283 444,684
8.00%, 4/15/10, Pool # 407337..... 1,021,773 1,058,486
8.00%, 4/15/10, Pool # 405445..... 1,224,936 1,268,949
7.50%, 8/15/11, Pool # 423983..... 1,574,300 1,628,898
-----------
10,026,643
-----------
STUDENT LOAN MARKETING ASSOC. (1.6%)
5.81%, 1/23/01.................... 1,500,000 1,500,765
-----------
TOTAL U.S. GOVERNMENT AGENCIES
(Cost $19,181,221).............. 19,557,853
-----------
</TABLE>
Continued
60
<PAGE> 64
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
LIMITED TERM INCOME FUND DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
U.S. TREASURY NOTES (4.6%)
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ---------------------------------- ---------- -----------
7.75%, 1/31/00 (b)................ $1,500,000 $ 1,548,210
6.25%, 6/30/02.................... 1,000,000 1,050,320
6.50%, 10/15/06................... 1,500,000 1,668,885
-----------
TOTAL U.S. TREASURY NOTES (Cost $4,166,125) 4,267,415
-----------
INVESTMENT COMPANIES (1.9%)
AIM Liquid Assets Money Market
Fund............................ 901,357 901,358
AIM Prime Money Market Fund....... 833,853 833,853
-----------
TOTAL INVESTMENT COMPANIES (Cost $1,735,211) 1,735,211
-----------
SHORT-TERM SECURITIES HELD AS COLLATERAL (8.9%)
COMMERCIAL PAPER (7.5%)
PS Colorado Credit Corp., 5.45%,
1/4/99.......................... 2,000,000 1,998,789
Working Capital II, 7.00%,
1/8/99.......................... 5,000,000 4,993,000
-----------
6,991,789
-----------
REPURCHASE AGREEMENTS (1.4%)
Lehman Brothers, 4.70%, 1/4/99,
dated 12/31/98, with a maturity
value of $1,330,031
(Collateralized by $499,734
Capstead Mortgage, 10/25/24,
fair value -- $214,457; $510,000
Collateralized Mortgage
Securities Corp. Private
Placement, 2/1/15, fair
value -- $25,500; $151,647
Fannie Mae Grantor Trust,
10/1/36, fair value -- $146,870;
$458,269 Residential Accredited
Loans, Inc., 6.50%, 11/25/13,
fair value -- $462,637;
$1,131,981 Saxon Mortgage,
6.25%-7.50%, 5/25/09-7/25/24,
fair value -- $514,988)......... 1,329,337 1,329,337
-----------
TOTAL SHORT-TERM SECURITIES HELD AS COLLATERAL
(Cost $8,321,126) $ 8,321,126
-----------
TOTAL INVESTMENTS
(Cost $98,758,517) (a) -- (107.6%).......... 100,613,403
Liabilities in excess of other
assets -- (-7.6%)........................... (7,103,462)
-----------
TOTAL NET ASSETS -- (100.0%).................. $93,509,941
===========
</TABLE>
- ---------------
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<CAPTION>
<S> <C>
Unrealized appreciation....................... $1,859,892
Unrealized depreciation....................... (5,006)
----------
Net unrealized appreciation................... $1,854,886
==========
</TABLE>
(b) All or a portion of this security has been loaned at December 31, 1998.
* Variable rate security. Rate represents rate in effect at December 31, 1998.
MTN -- Medium Term Note
See notes to financial statements
61
<PAGE> 65
ISG FUNDS
LIMITED TERM INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Investments, at value (cost
$97,429,180).................... $99,284,066
Repurchase agreements, at cost.... 1,329,337
-----------
Total Investments............... 100,613,403
Interest and dividends
receivable...................... 1,558,713
Receivable for capital shares
issued.......................... 119,892
Deferred organization costs....... 3,071
Prepaid expenses and other
assets.......................... 22,900
-----------
TOTAL ASSETS.................... 102,317,979
LIABILITIES:
Payable for return of collateral
held for securities on loan..... $8,321,126
Distributions payable............. 410,703
Payable for capital shares
redeemed........................ 136
Accrued expenses and other
payables:
Advisory fees................... 39,611
Administration fees............. 1,532
Shareholder servicing fees --
Class B Shares................ 16
Distribution fees -- Class A
Shares........................ 201
Distribution fees -- Class B
Shares........................ 49
Other........................... 34,664
----------
TOTAL LIABILITIES............... 8,808,038
-----------
NET ASSETS:
Capital........................... 91,734,104
Undistributed (distributions in
excess of) net investment
income.......................... (79,049)
Net unrealized appreciation
(depreciation) from
investments..................... 1,854,886
-----------
NET ASSETS........................ $93,509,941
===========
Class A Shares
Net Assets...................... $ 7,483,841
Shares outstanding.............. 744,608
Redemption price per share...... $ 10.05
===========
Class A Shares -- Maximum Sales
Charge.......................... 3.00%
-----------
Maximum Offering Price Per Share
(100%/(100% -- Maximum Sales
Charge) of net asset value
adjusted to the nearest
cent)......................... $ 10.36
===========
Class B Shares
Net Assets...................... $ 600,721
Shares outstanding.............. 59,859
Offering price per share*....... $ 10.04
===========
Institutional Shares
Net Assets...................... $85,425,379
Shares outstanding.............. 8,499,868
Offering and redemption price
per share..................... $ 10.05
===========
</TABLE>
- ---------------
* Redemption price per share varies by length of time shares are held.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Interest income...................... $5,698,885
Dividend income...................... 167,747
Income from securities lending....... 5,038
----------
TOTAL INVESTMENT INCOME............ 5,871,670
EXPENSES:
Investment advisory fees............. $461,085
Administration fees.................. 138,326
Shareholder servicing fees -- Class B
Shares............................. 871
Distribution fees -- Class A
Shares............................. 16,575
Distribution fees -- Class B
Shares............................. 2,615
Accounting fees...................... 76,426
Transfer agent fees.................. 71,485
Directors' fees...................... 6,486
Other fees........................... 118,107
--------
Total expenses before voluntary fee
reductions....................... 891,976
Expenses voluntarily reduced....... (4,977)
----------
Net Expenses....................... 886,999
----------
NET INVESTMENT INCOME................ 4,984,671
----------
REALIZED/UNREALIZED GAINS (LOSSES)
FROM INVESTMENTS:
Net realized gains (losses) from
investment transactions............ 394,336
Net change in unrealized appreciation
(depreciation) from investment
transactions....................... 697,321
----------
Net realized/unrealized gains
(losses) from investments.......... 1,091,657
----------
Change in net assets resulting from
operations......................... $6,076,328
==========
</TABLE>
See notes to financial statements
62
<PAGE> 66
ISG FUNDS
LIMITED TERM INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net investment income..................................... $ 4,984,671 $ 5,905,203
Net realized gains (losses) from investment
transactions............................................ 394,336 87,039
Net change in unrealized appreciation (depreciation) from
investments............................................. 697,321 185,389
-------------- --------------
Change in net assets resulting from operations.............. 6,076,328 6,177,631
-------------- --------------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS:
From net investment income................................ (343,556) (4,572,712)
In excess of net investment income........................ (100) --
From net realized gain on investment transactions......... (33,464) (3,598)
In excess of net realized gain on investment
transactions............................................ (6,420) --
DISTRIBUTIONS TO CLASS B SHAREHOLDERS:
From net investment income................................ (15,167)(b) --
In excess of net investment income........................ (5)(b) --
From net realized gain on investment transactions......... (2,607)(b) --
In excess of net realized gain on investment
transactions............................................ (500)(b) --
DISTRIBUTIONS TO INSTITUTIONAL SHAREHOLDERS:
From net investment income................................ (4,626,791) (1,330,194)(a)
In excess of net investment income........................ (1,350) --
From net realized gain on investment transactions......... (368,402) (49,934)(a)
In excess of net realized gain on investment
transactions............................................ (70,674) --
-------------- --------------
Change in net assets from shareholder distributions......... (5,469,036) (5,956,438)
-------------- --------------
Change in net assets from capital transactions.............. 2,123,138 (7,638,726)
-------------- --------------
Change in net assets........................................ 2,730,430 (7,417,533)
-------------- --------------
NET ASSETS:
Beginning of period....................................... 90,779,511 98,197,044
-------------- --------------
End of period............................................. $ 93,509,941 $ 90,779,511
============== ==============
</TABLE>
- ---------------
(a) For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
(b) For the period from February 4, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
63
<PAGE> 67
ISG FUNDS
LIMITED TERM INCOME FUND
FINANCIAL HIGHLIGHTS, CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995 1994(a)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.99 $ 9.96 $ 10.13 $ 9.66 $ 10.00
------ ------ ------- -------- -------
Investment Activities
Net investment income............................. 0.52 0.59 0.58 0.59 0.38
Net realized and unrealized gains (losses) from
investments..................................... 0.11 0.04 (0.16) 0.47 (0.34)
------ ------ ------- -------- -------
Total from Investment Activities.................. 0.63 0.63 0.42 1.06 0.04
------ ------ ------- -------- -------
Distributions
Net investment income............................. (0.52) (0.59) (0.58) (0.59) (0.38)
Net realized gains................................ (0.04) (0.01) (0.01) -- --
In excess of net realized gains................... (0.01) -- -- -- --
------ ------ ------- -------- -------
Total Distributions............................... (0.57) (0.60) (0.59) (0.59) (0.38)
------ ------ ------- -------- -------
Net change in asset value........................... 0.06 0.03 (0.17) 0.47 (0.34)
------ ------ ------- -------- -------
Net Asset Value, End of Period...................... $10.05 $ 9.99 $ 9.96 $ 10.13 $ 9.66
====== ====== ======= ======== =======
TOTAL RETURN (EXCLUDES SALES CHARGE)................ 6.48% 6.47% 4.28% 11.20% 0.42%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)................... $7,484 $5,894 $98,197 $103,382 $93,189
Ratio of expenses to average net assets............. 1.19% 0.83% 0.83% 0.87% 0.83%(c)
Ratio of net investment income to average net
assets............................................ 5.17% 5.92% 5.84% 5.89% 5.27%(c)
Ratio of expenses to average net assets*............ 1.20% 1.09% 1.08% 1.12% 1.28%(c)
Portfolio turnover**................................ 41% 45% 51% 28% 6%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from March 28, 1994 (commencement of operations) through
December 31, 1994.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS, CLASS B SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1998 (a)
------------
<S> <C>
Net Asset Value, Beginning of Period $10.03
------
Investment Activities
Net investment income..................................... 0.41
Net realized and unrealized gains (losses) from
investments............................................. 0.06
------
Total from Investment Activities.......................... 0.47
------
Distributions
Net investment income..................................... (0.41)
Net realized gains........................................ (0.04)
In excess of net realized gains........................... (0.01)
------
Total Distributions....................................... (0.46)
------
Net change in net asset value............................... 0.01
------
Net Asset Value, End of Period.............................. $10.04
======
TOTAL RETURN (EXCLUDES REDEMPTION CHARGE)................... 4.76%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $ 601
Ratio of expenses to average net assets..................... 1.94%(c)
Ratio of net investment income to average net assets........ 4.33%(c)
Portfolio turnover*......................................... 41%
</TABLE>
* Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from February 4, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
64
<PAGE> 68
ISG FUNDS
LIMITED TERM INCOME FUND
FINANCIAL HIGHLIGHTS, INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1998 1997(a)
-------------- --------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................ $ 9.98 $ 10.00
-------------- --------------
Investment Activities
Net investment income..................................... 0.54 0.15
Net realized and unrealized gains (losses) from
investments............................................. 0.13 (0.01)
-------------- --------------
Total from Investment Activities.......................... 0.67 0.14
-------------- --------------
Distributions
Net investment income..................................... (0.55) (0.15)
Net realized gains........................................ (0.04) (0.01)
In excess of net realized gains........................... (0.01) --
-------------- --------------
Total Distributions....................................... (0.60) (0.16)
-------------- --------------
Net change in asset value................................... 0.07 (0.02)
-------------- --------------
Net Asset Value, End of Period.............................. $ 10.05 $ 9.98
============== ==============
TOTAL RETURN................................................ 6.86% 1.36%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $ 85,425 $ 84,886
Ratio of expenses to average net assets..................... 0.94% 0.56%(c)
Ratio of net investment income to average net assets........ 5.43% 6.08%(c)
Ratio of expenses to average net assets*.................... 0.95% 0.87%(c)
Portfolio turnover**........................................ 41% 45%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
65
<PAGE> 69
[THIS PAGE INTENTIONALLY LEFT BLANK]
66
<PAGE> 70
<TABLE>
<S> <C>
DONALD F. TURK, CFA
Portfolio Manager
[Donalf F. Turk Photo] ISG Income Fund
</TABLE>
- ---------------------------------------------------------------
- ---------------------------------------------------------------
INVESTMENT GOAL
The Fund seeks to provide investors with current income without assuming
undue risk. It invests primarily in investment-grade, U.S.
dollar-denominated, fixed-income securities of domestic and foreign issuers
with average maturities of 8 to 13 years. This Fund is suitable for
investors seeking regular monthly income without undue risk to principal.
- ---------------------------------------------------------------
Q. HOW DID THE FUND PERFORM DURING THE PERIOD?
A. Despite some volatility in the market throughout the year, the Fund delivered
historically solid returns. For the 12 months ended December 31, 1998, the Fund
produced a total return of 8.28% (Class A shares at NAV).(1) In comparison, the
Merrill Lynch Corporate/Government Master Index, produced a total return of
9.53%.
It is also important to recognize income yield to shareholders. As of December
31, 1998, the Fund's 30-day SEC yield was 4.11% (Class A shares at NAV),
compared to 5.89% at the end of 1997. The yield percentages are annualized. We
achieved our objectives while maintaining an average credit quality of A+ (rated
by Standard & Poor's). As of December 31, 1998, the Fund's average maturity was
11.8 years.
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. The two most important factors were our maturity structure and the
international crises that afflicted Russia, Asia and South America.
With the Fund having a maturity structure longer than our benchmark, the Merrill
Lynch Corporate/Government Master Index, it was reasonable to expect that the
year's overall decline in interest rates would be more productive to our total
return. But markets do not always behave as investors believe they will. When
troubles abroad threatened the safety of foreign bonds, the result was a
stampeding "flight to quality", with U.S. Treasury bonds almost exclusively
being the securities of choice. Consequently, there was a broad sell-off of all
other types of bonds, including U.S. government agency securities. Because we
held more corporates and government agency bonds, and fewer Treasuries, than our
benchmark (which held 68% Treasuries), we underperformed the benchmark.
Fortunately, we believe a reversal of this unusual situation should occur, which
would boost the Fund's performance relative to Treasuries and our benchmark.
Q. WITH ALL THIS MOVEMENT IN THE MARKET, WHAT STRATEGIES DID YOU EMPLOY TO HELP
INCREASE CURRENT INCOME?
A. First, we sold Treasuries and bought corporate bonds, which yielded
considerably more income. One example was Caterpillar Tractor bonds (3.1% of the
Fund's net assets), which yielded nearly one percent more than the Treasuries we
sold. We also liquidated Freddie Mac notes and bought corporate notes issued by
AutoZone (2.5%), which offered an additional .63% more than the Freddie Mac
securities.*
Second, we swapped one corporate note for another when the yields between them
got out of line. For example, we sold BancOne notes and bought securities issued
by Anheuser-Busch (2.9%). This particular trade netted an additional .50% in
yield, for what we believe to be no additional credit risk.*
As of December 31, 1998, 87.2% of the Fund's portfolio was invested in corporate
bonds, with a total of 10.5% invested in U.S. Treasury, government agency and
mortgage pass-through securities, 1.1% in taxable municipal bonds and 1.2% in
cash equivalents.*
Q. WHAT IS YOUR OUTLOOK FOR 1999?
A. We are essentially positive on the bond market. Although it is unlikely that
we will have another dramatic decline in interest rates, as we did in 1998, we
see many factors that are positive for bonds: the continuing secular trend in
disinflation, the very low levels of commodity prices, excessive global
production capacity, technological efficiencies and demographic trends. All of
these circumstances favor low inflation, which is good for fixed-income
investors.
This is not to say that there are not some negative factors that pose risks to
the bond market. The most prominent of these are shortages in the domestic labor
force, which can run up costs and spark inflation; the introduction of the new
euro currency in Europe, which could make U.S. debt less desirable; and the
possibility of an overheating U.S. economy.
But in general, we feel that bonds should remain stable, with yields on
long-term Treasuries remaining in the range of 4.5% to 5.5%. If anything, we
believe there is a greater probability that yields could fall to the lower end
of this range than that they could rise.
- ---------------
(1) Including the 3.00% sales load, the Fund's return was 5.00% for the period.
* The Fund's portfolio composition is subject to change.
67
<PAGE> 71
- --------------------------------------------------------------------------------
ISG INCOME FUND
PERFORMANCE (AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME FUND WITH SALES INCOME FUND WITHOUT SALES MERRILL LYNCH CORP./GOV'T
CLASS A SHARES CHARGE CHARGE MASTER INDEX
---------------------- ------------------------- -------------------------
<S> <C> <C> <C>
'88' 9700 10000 10000
'89' 10797 11130 11413
'90' 11471 11826 12382
'91' 13243 13652 14350
'92' 14036 14470 15453
'93' 15453 15930 17161
'94' 14896 15357 16600
'95' 17376 17913 19752
'96' 17564 18107 20339
'97' 19087 19677 22328
'98' 20667 21306 24456
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT SALES WITH SALES
CHARGE CHARGE*
CLASS A SHARES ------------- ----------
<S> <C> <C>
1-Year........................ 8.28% 5.00%
5-Year........................ 5.99% 5.35%
10-Year....................... 7.86% 7.53%
*Reflects the maximum sales charge of 3.00%.
</TABLE>
<TABLE>
<CAPTION>
MERRILL LYNCH CORP./GOV'T MASTER
CLASS B SHARES INCOME FUND INDEX
----------- --------------------------------
<S> <C> <C>
'88' 10000 10000
'89' 11130 11413
'90' 11826 12382
'91' 13652 14350
'92' 14470 15453
'93' 15930 17161
'94' 15357 16600
'95' 17913 19752
'96' 18107 20339
'97' 19665 22328
'98' 21157 24456
</TABLE>
The Class B contingent deferred sales charge (CDSC) is not included in the
above graph, since the performance is for more than 6 years and the CDSC
would no longer apply.
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT CDSC WITH CDSC**
CLASS B SHARES ------------ -----------
<S> <C> <C>
1-Year..................... 7.59% 4.59%
5-Year..................... 5.84% 5.68%
10-Year.................... 7.78% 7.78%
**Reflects the applicable contingent deferred sales
charges (maximum 4.00%).
THE DATA FOR CLASS B SHARES PRIMARILY PRESENTS THE
RESULTS OF THE CLASS A SHARES. ACTUAL CLASS B SHARES
AVERAGE ANNUAL TOTAL RETURN AND HYPOTHETICAL GROWTH
RESULTS WOULD HAVE BEEN LOWER. SEE NOTES BELOW.
</TABLE>
<TABLE>
<CAPTION>
MERRILL LYNCH CORP./GOV'T MASTER
INSTITUTIONAL SHARES INCOME FUND INDEX
----------- --------------------------------
<S> <C> <C>
'88' 10000 10000
'89' 11130 11413
'90' 11826 12382
'91' 13652 14350
'92' 14470 15453
'93' 15930 17161
'94' 15357 16600
'95' 17913 19752
'96' 18107 20339
'97' 19670 22328
'98' 21352 24456
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
INSTITUTIONAL SHARES --------------
<S> <C>
1-Year................................. 8.55%
5-Year................................. 6.03%
10-Year................................ 7.88%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment in
the indicated share class versus a similar investment in the Fund's benchmark.
PERFORMANCE FOR THE CLASS B SHARES, WHICH COMMENCED OPERATIONS ON 2/4/98, IS
BASED ON THE HISTORICAL PERFORMANCE OF THE CLASS A SHARES (WITHOUT SALES CHARGE)
PRIOR TO THAT DATE. CLASS A SHARES PERFORMANCE DOES NOT REFLECT THE HIGHER 12B-1
FEES OR THE CONTINGENT DEFERRED SALES CHARGE (CDSC). HAD THE CDSC AND HIGHER
12B-1 FEES BEEN INCORPORATED, TOTAL RETURN AND HYPOTHETICAL GROWTH FIGURES WOULD
HAVE BEEN LOWER.
The Institutional Share class was initially offered on 10/3/97 and reflects the
historical performance of the Class A Shares (without sales charge) prior to
that date.
The ISG Income Fund commenced operations on 4/1/96 through a transfer of assets
from certain collective trust fund ("commingled") accounts managed by First
American National Bank, using materially equivalent investment objectives,
policies and methodologies as the Fund. The quoted performance of the Fund
includes performance of the commingled accounts for periods prior to the Fund's
commencement of operations, as adjusted to reflect the expenses associated with
the Fund. The commingled accounts were not registered with the Securities and
Exchange Commission and, therefore, were not subject to the investment
restrictions imposed by law on registered mutual funds. If the commingled
accounts had been registered, the commingled accounts' performance may have been
adversely affected. The performance also reflects reinvestment of dividends and
capital gains distributions.
The Fund's performance is compared to the Merrill Lynch Corporate/Government
Master Index, which is generally representative of the performance of corporate
and U.S. Government bonds. The index is unmanaged and does not reflect expenses
associated with a mutual fund, such as investment management and fund accounting
fees. The Fund's performance reflects the deduction of fees for these
value-added services.
PAST PERFORMANCE IS NOT A PREDICTION OF FUTURE RESULTS. THE FUND'S INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL PURCHASE PRICE.
68
<PAGE> 72
- --------------------------------------------------------------------------------
ISG INCOME FUND
(AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
[Income Sector Profile Pie Chart]
SECTOR PROFILE*
<TABLE>
<S> <C>
U.S. Government Agencies............5.4%
U.S. Treasuries.....................5.1%
Cash Equivalents....................1.2%
Municipal Bonds.....................1.1%
Corporate Bonds.....................87.2%
</TABLE>
The Income Fund invests primarily in investment-grade, U.S. dollar denominated
fixed-income securities of domestic and foreign issuers. The Fund is designed to
provide current income without assuming undue risk. The Fund's adviser has
latitude in deciding how assets are invested among corporate and government
obligations. As a result, the Fund enjoys flexibility to make the most of
changing market conditions.
[Income Maturity Profile Pie Chart]
MATURITY PROFILE*
<TABLE>
<S> <C>
0 - 1 Years.........................7.6%
1 - 5 Years........................40.5%
6 -10 Years........................19.0%
11-20 Years.........................4.1%
Over 20 Years......................28.8%
</TABLE>
By design, the Fund attempts to generate current income without undue risk to
principal. The chart shows that the Fund is currently focused primarily on bonds
with maturities of 1 to 10 years and those with maturities greater than 20
years.
[Income Quality Profile Pie Chart]
QUALITY PROFILE*
<TABLE>
<S> <C>
AAA.................................20.8%
AA..................................12.2%
A...................................59.0%
BBB................................. 8.0%
</TABLE>
The Fund's research team and the Fund Manager continuously monitor debt
instruments and issuer quality to identify fixed-income securities for the Fund.
* The Fund's portfolio composition is subject to change.
69
<PAGE> 73
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
INCOME FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
CORPORATE BONDS (85.9%)
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ---------------------------------- ---------- -----------
BANKING (9.4%)
ABN AMRO Bank, 6.63%, 10/31/01.... $1,550,000 $ 1,598,438
Bank One, Texas, 6.25%, 2/15/08... 1,000,000 1,048,750
First Union Corp., 6.18%,
2/15/36......................... 1,700,000 1,757,375
NationsBank Corp., 7.75%,
8/15/15......................... 925,000 1,066,063
Wachovia Corp., 6.61%, 10/1/25.... 2,100,000 2,254,874
-----------
7,725,500
-----------
BEVERAGES (2.9%)
Anheuser-Busch Cos., 7.13%,
7/1/17.......................... 2,250,000 2,365,313
-----------
FINANCIAL SERVICES (14.1%)
Associates Corp. N.A., 7.32%,
1/13/03, MTN.................... 800,000 852,000
Countrywide Home Loan, 6.84%,
10/22/04, MTN................... 2,400,000 2,469,000
Ford Motor Credit Corp., 7.35%,
11/7/11, MTN.................... 2,000,000 2,115,000
General Electric Capital Corp.,
7.50%, 8/21/35.................. 1,500,000 1,785,000
General Motors Acceptance Corp.,
7.25%, 5/5/99, MTN.............. 1,000,000 1,006,350
Salomon Smith Barney Holdings,
6.13%, 1/15/03.................. 2,000,000 2,027,500
USLIFE Corp., 6.38%, 6/15/00...... 1,250,000 1,262,500
-----------
11,517,350
-----------
INDUSTRIAL GOODS & SERVICES
(20.9%)
Albertson's, Inc., 6.52%, 4/10/28,
MTN............................. 2,500,000 2,415,625
Caterpillar, Inc., 6.63%,
7/15/28......................... 2,500,000 2,553,124
General Mills, 7.50%, 5/1/09,
MTN............................. 250,000 251,250
H.J. Heinz Co., 6.38%, 7/15/28.... 2,000,000 2,080,000
Harris Corp., 10.38%, 12/1/18..... 1,050,000 1,107,750
IBM Corp., 6.25%, 2/24/00......... 1,000,000 1,008,600
IBM Corp., 6.50%, 1/15/28......... 2,000,000 2,107,500
Lockheed Martin Corp., 6.55%,
5/15/99......................... 1,300,000 1,304,875
Reliance Electric Co., 6.80%,
4/15/03......................... 1,500,000 1,590,000
Weyerhaeuser Co., 7.13%,
7/15/23......................... 2,250,000 2,292,188
Xerox Corp., 7.50%, 4/16/12,
MTN............................. 500,000 502,500
-----------
17,213,412
-----------
INSURANCE -- PROPERTY & CASUALTY
(2.5%)
Travelers/Aetna Property &
Casualty, 6.75%, 4/15/01........ 2,000,000 2,060,000
-----------
RETAIL -- STORES (7.6%)
AutoZone, Inc., 6.50%, 7/15/08.... $2,000,000 $ 2,050,000
Dayton Hudson Co., 6.80%,
10/1/01......................... 1,500,000 1,552,500
J.C. Penney & Co., 6.50%, 6/15/02,
MTN............................. 1,500,000 1,554,375
May Department Stores Co., 7.15%,
8/15/04......................... 1,000,000 1,077,500
-----------
6,234,375
-----------
TELECOMMUNICATIONS (6.7%)
BellSouth Corp., 8.25%, 7/1/32.... 475,000 535,563
BellSouth Corp., 6.75%,
10/15/33........................ 2,000,000 2,072,499
GTE Corp., 7.90%, 2/1/27, Callable
2/1/07 @ 103.95................. 1,450,000 1,613,125
WorldCom Inc., 6.13%, 8/15/01..... 1,250,000 1,270,313
-----------
5,491,500
-----------
UTILITIES -- ELECTRIC (15.1%)
Florida Power Corp., 6.54%,
7/1/02, MTN..................... 1,500,000 1,563,750
Houston Light & Power Corp.,
6.10%, 3/1/00, MTN.............. 1,725,000 1,742,250
National Rural Utilities Corp.,
Series C, 6.49%, 7/10/02, MTN... 1,600,000 1,672,000
Public Service Electric & Gas,
6.25%, 1/1/07................... 2,400,000 2,487,000
Puget Sound Power & Light, 6.61%,
2/9/00, MTN..................... 1,500,000 1,522,500
SCANA Corp., Series B, 6.25%,
7/8/03, MTN..................... 1,500,000 1,546,875
Virginia Electric & Power, 6.63%,
4/1/03.......................... 1,750,000 1,846,250
-----------
12,380,625
-----------
UTILITIES -- GAS (4.7%)
Consolidated Natural Gas, 6.80%,
12/15/27........................ 1,600,000 1,666,000
Smith Enron, 5.97%, 12/15/06...... 2,157,700 2,214,340
-----------
3,880,340
-----------
UTILITIES -- GAS & ELECTRIC (2.0%)
Washington Gas Light, Series D,
6.85%, 3/9/28, MTN.............. 1,500,000 1,603,125
-----------
TOTAL CORPORATE BONDS (Cost
$68,016,950).................... 70,471,540
-----------
MUNICIPAL BONDS (1.1%)
GEORGIA (1.1%)
Atlanta Downtown Development Lease
Revenue Bond, 6.88%, 2/1/21..... 800,000 880,000
-----------
TOTAL MUNICIPAL BONDS (Cost
$761,452)....................... 880,000
-----------
</TABLE>
Continued
70
<PAGE> 74
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
INCOME FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
U.S. GOVERNMENT AGENCIES (5.3%)
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ---------------------------------- ---------- -----------
FANNIE MAE (1.2%)
6.35%, 11/23/01................... $1,000,000 $ 1,011,400
-----------
GOVERNMENT NATIONAL MORTGAGE
ASSOC. (4.1%)
8.00%, 5/15/10, Pool # 407413..... 417,627 432,632
6.50%, 8/15/11, Pool # 780479..... 851,529 868,287
7.50%, 8/15/11, Pool # 423914..... 792,846 820,342
7.00%, 9/15/11, Pool # 423923..... 1,235,221 1,270,734
-----------
3,391,995
-----------
TOTAL U.S. GOVERNMENT AGENCIES
(Cost $4,405,396)............... 4,403,395
-----------
U.S. TREASURY BONDS (5.1%)
8.13%, 8/15/21.................... 1,000,000 1,354,910
6.13%, 11/15/27................... 2,500,000 2,794,950
-----------
TOTAL U.S. TREASURY BONDS (Cost
$3,937,686)..................... 4,149,860
-----------
INVESTMENT COMPANIES (1.2%)
AIM Liquid Assets Money Market
Fund............................ 10,759 $ 10,759
AIM Prime Money Market Fund....... 937,290 937,290
-----------
TOTAL INVESTMENT COMPANIES (Cost
$948,049)....................... 948,049
-----------
TOTAL INVESTMENTS (Cost
$78,069,533) (a) -- (98.6%)..... 80,852,844
Other assets in excess of
liabilities -- (1.4%)........... 1,117,628
-----------
TOTAL NET ASSETS -- (100.0%)...... $81,970,472
===========
</TABLE>
- ---------------
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation................. $3,007,033
Unrealized depreciation................. (223,722)
----------
Net unrealized appreciation............. $2,783,311
==========
</TABLE>
MTN -- Medium Term Note
See notes to financial statements
71
<PAGE> 75
ISG FUNDS
INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (cost
$78,069,533)................... $ 80,852,844
Interest and dividends
receivable..................... 1,528,478
Prepaid expenses and other
assets......................... 21,713
------------
TOTAL ASSETS................... 82,403,035
LIABILITIES:
Distributions payable............ $ 359,023
Payable for capital shares
redeemed....................... 4,733
Accrued expenses and other
payables:
Advisory fees.................. 34,637
Administration fees............ 1,336
Shareholder servicing
fees -- Class B Shares....... 34
Distribution fees -- Class A
Shares....................... 72
Distribution fees -- Class B
Shares....................... 102
Other.......................... 32,626
----------
TOTAL LIABILITIES.............. 432,563
------------
NET ASSETS:
Capital.......................... 79,275,776
Undistributed (distributions in
excess of) net investment
income......................... (88,595)
Undistributed (distributions in
excess of) net realized
gains.......................... (20)
Net unrealized appreciation
(depreciation) from
investments.................... 2,783,311
------------
NET ASSETS....................... $ 81,970,472
============
Class A Shares
Net Assets..................... $ 2,624,457
Shares outstanding............. 252,563
Redemption price per share..... $ 10.39
============
Class A Shares -- Maximum Sales
Charge......................... 3.00%
------------
Maximum Offering Price Per
Share (100%/(100% -- Maximum
Sales Charge) of net asset
value adjusted to the nearest
cent)........................ $ 10.71
============
Class B Shares
Net Assets..................... $ 1,241,393
Shares outstanding............. 119,544
Offering price per share*...... $ 10.38
============
Institutional Shares
Net Assets..................... $ 78,104,622
Shares outstanding............. 7,519,843
Offering and redemption price
per share.................... $ 10.39
============
</TABLE>
- ---------------
* Redemption price per share varies by length of time shares are held.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income...................... $4,945,494
Dividend income...................... 87,245
Income from securities lending....... 7,632
----------
TOTAL INVESTMENT INCOME............ 5,040,371
EXPENSES:
Investment advisory fees............. $394,548
Administration fees.................. 118,365
Shareholder servicing fees -- Class B
Shares............................. 1,695
Distribution fees -- Class A
Shares............................. 3,242
Distribution fees -- Class B
Shares............................. 5,085
Accounting fees...................... 76,240
Transfer agent fees.................. 70,898
Directors' fees...................... 5,375
Other fees........................... 108,108
--------
Total expenses before voluntary fee
reductions....................... 783,556
Expenses voluntarily reduced....... (3,965)
----------
Net Expenses....................... 779,591
----------
NET INVESTMENT INCOME................ 4,260,780
----------
REALIZED/UNREALIZED GAINS (LOSSES)
FROM INVESTMENTS:
Net realized gains (losses) from
investment transactions............ 1,166,328
Net change in unrealized appreciation
(depreciation) from investment
transactions....................... 1,069,978
----------
Net realized/unrealized gains
(losses) from investments.......... 2,236,306
----------
Change in net assets resulting from
operations......................... $6,497,086
==========
</TABLE>
See notes to financial statements
72
<PAGE> 76
ISG FUNDS
INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net investment income..................................... $ 4,260,780 $ 3,857,165
Net realized gains (losses) from investment
transactions............................................ 1,166,328 14,563
Net change in unrealized appreciation (depreciation) from
investments............................................. 1,069,978 1,897,381
----------- -----------
Change in net assets resulting from operations.............. 6,497,086 5,769,109
----------- -----------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS:
From net investment income................................ (66,097) (2,755,744)
From net realized gains on investment transactions........ (37,753) --
In excess of net realized gains........................... (571) --
DISTRIBUTIONS TO CLASS B SHAREHOLDERS:
From net investment income................................ (29,251)(b) --
From net realized gains on investment transactions........ (17,873)(b) --
In excess of net realized gains........................... (271)(b) --
DISTRIBUTIONS TO INSTITUTIONAL SHAREHOLDERS:
From net investment income................................ (4,165,432) (1,101,421)(a)
From net realized gains on investment transactions........ (1,110,702) --
In excess of net realized gains........................... (16,809) --
----------- -----------
Change in net assets from shareholder distributions......... (5,444,759) (3,857,165)
----------- -----------
Change in net assets from capital transactions.............. 8,832,471 31,358,470
----------- -----------
Change in net assets........................................ 9,884,798 33,270,414
----------- -----------
NET ASSETS:
Beginning of period....................................... 72,085,674 38,815,260
----------- -----------
End of period............................................. $81,970,472 $72,085,674
=========== ===========
</TABLE>
- ---------------
(a) For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
(b) For the period from February 4, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
73
<PAGE> 77
ISG FUNDS
INCOME FUND
FINANCIAL HIGHLIGHTS, CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996(a)
------------ ------------- ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $ 10.25 $ 10.00 $ 10.00
------- ------- -------
Investment Activities
Net investment income..................................... 0.54 0.58 0.40
Net realized and unrealized gains (losses) from
investments............................................. 0.29 0.26 --
------- ------- -------
Total from Investment Activities.......................... 0.83 0.84 0.40
------- ------- -------
Distributions
Net investment income..................................... (0.54) (0.59) (0.40)
Net realized gains........................................ (0.14) -- --
In excess of net realized gains........................... (0.01) -- --
------- ------- -------
Total Distributions....................................... (0.69) (0.59) (0.40)
------- ------- -------
Net change in asset value................................... 0.14 0.25 --
------- ------- -------
Net Asset Value, End of Period.............................. $ 10.39 $ 10.25 $ 10.00
======= ======= =======
TOTAL RETURN (EXCLUDES SALES CHARGE)........................ 8.28% 8.66% 4.12%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $ 2,624 $ 95 $38,815
Ratio of expenses to average net assets..................... 1.24% 0.87% 1.13%(c)
Ratio of net investment income to average net assets........ 5.07% 5.74% 5.37%(c)
Ratio of expenses to average net assets*.................... 1.24% 1.12% 1.32%(c)
Portfolio turnover**........................................ 42% 56% 65%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from April 1, 1996 (commencement of operations) through
December 31, 1996.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS, CLASS B SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1998(a)
------------
<S> <C>
Net Asset Value, Beginning of Period........................ $10.32
------
Investment Activities
Net investment income..................................... 0.43
Net realized and unrealized gains (losses) from
investments............................................. 0.21
------
Total from Investment Activities.......................... 0.64
------
Distributions
Net investment income..................................... (0.43)
Net realized gains........................................ (0.14)
In excess of net realized gains........................... (0.01)
------
Total Distributions....................................... (0.58)
------
Net change in net asset value............................... 0.06
------
Net Asset Value, End of Period.............................. $10.38
======
TOTAL RETURN (EXCLUDES REDEMPTION CHARGE)................... 6.30%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $1,241
Ratio of expenses to average net assets..................... 1.98%(c)
Ratio of net investment income to average net assets........ 4.29%(c)
Portfolio turnover*......................................... 42%
</TABLE>
* Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from February 4, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
74
<PAGE> 78
ISG FUNDS
INCOME FUND
FINANCIAL HIGHLIGHTS, INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1998 1997(a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................ $ 10.25 $ 10.16
------- -------
Investment Activities
Net investment income..................................... 0.56 0.16
Net realized and unrealized gains (losses) from
investments............................................. 0.29 0.09
------- -------
Total from Investment Activities.......................... 0.85 0.25
------- -------
Distributions
Net investment income..................................... (0.56) (0.16)
Net realized gains........................................ (0.14) --
In excess of net realized gains........................... (0.01) --
------- -------
Total Distributions....................................... (0.71) (0.16)
------- -------
Net change in asset value................................... 0.14 0.09
------- -------
Net Asset Value, End of Period.............................. $ 10.39 $ 10.25
======= =======
TOTAL RETURN................................................ 8.55% 2.45%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $78,105 $71,991
Ratio of expenses to average net assets..................... 0.97% 0.60%(c)
Ratio of net investment income to average net assets........ 5.41% 6.28%(c)
Ratio of expenses to average net assets*.................... 0.98% 0.92%(c)
Portfolio turnover**........................................ 42% 56%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reduction had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
75
<PAGE> 79
[THIS PAGE INTENTIONALLY LEFT BLANK]
76
<PAGE> 80
<TABLE>
<S> <C>
ROBERT A. RINNER
Portfolio Manager
[Rinner Photo] ISG Equity Income Fund
</TABLE>
- ---------------------------------------------------------------
- ---------------------------------------------------------------
INVESTMENT GOAL
The Fund seeks to provide investors with current income and capital
appreciation. The Fund invests primarily in dividend-paying equity securities
of domestic issuers that are expected to provide reasonable income and may
have capital appreciation potential.
- ---------------------------------------------------------------
Q. HOW DID THE FUND PERFORM DURING THE PERIOD?
A. For the 12 months ended December 31, 1998, the Fund's total return was 19.46%
(Class A shares at NAV).(1) In comparison, the Lipper Equity Income Fund
Index(2) rose 11.78%, and the Standard & Poor's 500 Stock Index rose 28.74% for
the period.
We were very satisfied with the Fund's total return. We not only outperformed
the Lipper Equity Income Fund Index by nearly 8%, but did so while providing
shareholders with healthy yields. Strong capital appreciation helped
shareholders, while higher-than-average current income smoothed out some of the
market's volatility.
Q. WHAT FACTORS LED TO THESE STRONG RETURNS?
A. The three primary sectors for an equity income fund such as ours are energy,
financial services and utilities. In 1998, none of these sectors did
particularly well; energy stocks were especially lethargic. Because we were not
able to depend on our traditional areas, we relied on successful stock picking
within other sectors.
We had some very good stock picks such as: Wal-Mart Stores (1.2% of the Fund's
net assets), which we owned the entire year, and which was up 106% in 1998.
Other big winners included General Electric (2.0%), Pitney Bowes (1.9%), United
Technologies (1.8%), McGraw-Hill (0.1%) and Fannie Mae (3.1%). Some of our
pharmaceutical stocks did very well, such as Schering-Plough (2.3%), Glaxo
Wellcome PLC (2.7%) and Abbott Labs (1.7%). Xerox (1.2%), IBM (0.6%) and
Automatic Data Processing (2.4%) were among our leading technology holdings. A
lot of these winners were among our top 10 holdings throughout the year, and
they really drove the Fund's performance.*
Q. WITH THE FUND'S STRONG TOTAL RETURN, WERE YOU ABLE TO PROVIDE SHAREHOLDERS
WITH AN ABOVE-AVERAGE YIELD?
A. Yes. As of December 31, 1998, the Fund's yield was 2.3%, versus 1.3% for the
S&P 500. This relatively high yield cushioned the Fund against some of the
volatility we saw during the year, particularly during the market correction in
August and September. During that time, the Fund went down less than the general
market. Our yield was boosted by our significant holdings in the utility sector
and in real estate investment trusts (REITs). Overall, REITs were poor
performers in 1998, but they did provide steady income, which was especially
comforting when the market turned down. We feel very positive about REITs going
forward. We believe REITs offer the potential for good total returns during the
next year--an attractive combination of capital appreciation and generous
income. Many REITs are available with yields in the 7% range, supported by the
requirement that REITs must pay out 95% of their earnings each year to their
shareholders.
Q. WHAT IS YOUR STRATEGY FOR 1999?
A. We expect to see more volatility and uncertainty in the markets. A number of
factors -- such as fallout from President Clinton's impeachment trial, economic
weakness in South America and Asia, and continued concerns about growth in the
U.S. economy -- could strike the financial markets.
With all of these potential perils, we will attempt to focus on companies that
have reasonably predictable earnings -- not just for the next year, but looking
out for five years or more. We believe we can make a reasonable assumption about
the predictability of earnings for such companies as Fannie Mae (3.1%), Dayton
Hudson (3.1%), PepsiCo (2.6%) and Campbell's Soup (2.1%). Even if the political
and economic situations remain unsettled, people will still buy houses, drink
soda pop and eat snack food.*
- ---------------
(1) Including the 4.75% sales load, the Fund's return was 13.76% for the period.
(2) The Lipper Equity Income Fund Index is comprised of managed funds that are
generally representative of funds that invest more than 60% of their assets
in equities.
* The Fund's portfolio composition is subject to change.
77
<PAGE> 81
- --------------------------------------------------------------------------------
ISG EQUITY INCOME FUND
PERFORMANCE (AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EQUITY INCOME FUND WITH EQUITY INCOME FUND
CLASS A SHARES SALES CHARGE WITHOUT SALES CHARGE S&P 500 STOCK INDEX
----------------------- -------------------- -------------------
<S> <C> <C> <C>
'88' 9525 10000 10000
'89' 12301 12914 13149
'90' 12276 12888 12732
'91' 15001 15749 16621
'92' 15408 16177 17896
'93' 16936 17781 19684
'94' 15867 16658 19942
'95' 20807 21845 27406
'96' 23863 25054 33729
'97' 31633 33210 44982
'98' 37789 39673 57839
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT SALES WITH SALES
CHARGE CHARGE*
CLASS A SHARES ------------- ----------
<S> <C> <C>
1-Year........................ 19.46% 13.76%
5-Year........................ 17.41% 16.28%
10-Year....................... 14.78% 14.21%
*Reflects the maximum sales charge of 4.75%.
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES EQUITY INCOME FUND S&P 500 STOCK INDEX
------------------ -------------------
<S> <C> <C>
'88' 10000 10000
'89' 12914 13149
'90' 12888 12732
'91' 15749 16621
'92' 16177 17896
'93' 17781 19684
'94' 16658 19942
'95' 21845 27406
'96' 25054 33729
'97' 33213 44982
'98' 39448 57839
</TABLE>
The Class B contingent deferred sales charge (CDSC) is not included in the
above graph, since the performance is for more than 6 years and the CDSC
would no longer apply.
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT CDSC WITH CDSC**
CLASS B SHARES ------------ -----------
<S> <C> <C>
1-Year..................... 18.77% 15.87%
5-Year..................... 17.28% 17.17%
10-Year.................... 14.71% 14.71%
**Reflects the applicable contingent deferred sales
charge (maximum 4.00%).
</TABLE>
THE DATA FOR CLASS B SHARES PRIMARILY PRESENTS THE RESULTS OF THE CLASS A
SHARES. ACTUAL CLASS B SHARES AVERAGE ANNUAL TOTAL RETURN AND HYPOTHETICAL
GROWTH RESULTS WOULD HAVE BEEN LOWER. SEE NOTES BELOW.
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES EQUITY INCOME FUND S&P 500 STOCK INDEX
- -------------------- ------------------ -------------------
<S> <C> <C>
'88' 10000 10000
'89' 12914 13149
'90' 12888 12732
'91' 15749 16621
'92' 16177 17896
'93' 17781 19684
'94' 16658 19942
'95' 21845 27406
'96' 25054 33729
'97' 33213 44982
'98' 39763 57839
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
INSTITUTIONAL SHARES --------------
<S> <C>
1-Year................................. 19.72%
5-Year................................. 17.46%
10-Year................................ 14.80%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment in
the indicated share class versus a similar investment in the Fund's benchmark.
PERFORMANCE FOR THE CLASS B SHARES, WHICH COMMENCED OPERATIONS ON 2/3/98, IS
BASED ON THE HISTORICAL PERFORMANCE OF THE CLASS A SHARES (WITHOUT SALES CHARGE)
PRIOR TO THAT DATE. CLASS A SHARES PERFORMANCE DOES NOT REFLECT THE HIGHER 12B-1
FEES OR THE CONTINGENT DEFERRED SALES CHARGE (CDSC). HAD THE CDSC AND HIGHER
12B-1 FEES BEEN INCORPORATED, TOTAL RETURN AND HYPOTHETICAL GROWTH FIGURES WOULD
HAVE BEEN LOWER.
The Institutional Share class was initially offered on 10/3/97 and reflects the
historical performance of the Class A Shares (without sales charge) prior to
that date.
The ISG Equity Income Fund commenced operations on 2/28/97 through a transfer of
assets from certain collective trust fund ("commingled") accounts managed by
First American National Bank, using materially equivalent investment objectives,
policies and methodologies as the Fund. The quoted performance of the Fund
includes performance of the commingled accounts for periods prior to the Fund's
commencement of operations, as adjusted to reflect the expenses associated with
the Fund. The commingled accounts were not registered with the Securities and
Exchange Commission and, therefore, were not subject to the investment
restrictions imposed by law on registered mutual funds. If the commingled
accounts had been registered, the commingled accounts' performance may have been
adversely affected. The performance also reflects reinvestment of dividends and
capital gains distributions.
The Fund's performance is compared to the Standard & Poor's 500 Stock Index, a
broad measure of the stock market as a whole. The index is unmanaged and does
not reflect the expenses associated with a mutual fund, such as investment
management and fund accounting fees. The Fund's performance reflects the
deduction of fees for these value-added services.
PAST PERFORMANCE IS NOT A PREDICTION OF FUTURE RESULTS. THE FUND'S INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL PURCHASE PRICE.
78
<PAGE> 82
- --------------------------------------------------------------------------------
ISG EQUITY INCOME FUND
(AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
[Equity Income Fund Sector Profile Pie Chart]*
<TABLE>
<CAPTION>
Cash and Capital
Capital Goods and Utilities/ Consumer Consumer Consumer Cash Goods and Financial
Technology Telecommunications Cyclicals Services Staples Health Care Equivalents Industry Services Energy
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6.2% 15.3% 7.7% 2.0% 20.3% 13.1% 1.6% 8.7% 19.8% 5.1%
</TABLE>
TOP 10 EQUITY HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
TOTAL INVESTMENTS**
-------------------
<S> <C>
1. Bristol Myers Squibb Co. .............................. 3.3%
2. Fannie Mae............................................. 3.1%
3. Dayton Hudson Corp. ................................... 3.1%
4. First Union Corp....................................... 3.0%
5. Glaxo Wellcome PLC-ADR................................. 2.7%
6. Duke Energy Corp. ..................................... 2.7%
7. PepsiCo, Inc........................................... 2.6%
8. Sprint Corp. .......................................... 2.5%
9. Automatic Data Processing, Inc......................... 2.4%
10. Schering-Plough Corp. ................................. 2.3%
</TABLE>
* The Fund's portfolio composition is subject to change.
** Total investments excluding short-term securities held as collateral.
79
<PAGE> 83
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
EQUITY INCOME FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
COMMON STOCKS (98.8%)
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ---------------------------------- --------- -----------
AEROSPACE & MILITARY TECHNOLOGY
(1.8%)
United Technologies Corp.......... 14,000 $ 1,522,500
-----------
BANKING (7.1%)
BankAmerica Corp.................. 13,000 781,625
First Tennessee National Corp..... 28,000 1,065,750
First Union Corp.................. 41,000 2,493,313
Wells Fargo & Co.................. 40,000 1,597,500
-----------
5,938,188
-----------
BEVERAGES (4.6%)
Coca-Cola Co. (b)................. 24,000 1,605,000
PepsiCo, Inc. (b)................. 54,000 2,210,625
-----------
3,815,625
-----------
BUILDING & CONSTRUCTION (2.1%)
Masco Corp. (b)................... 60,000 1,725,000
-----------
BUSINESS EQUIPMENT & SERVICES (3.2%)
Pitney Bowes, Inc................. 24,000 1,585,500
Xerox Corp. (b)................... 9,000 1,062,000
-----------
2,647,500
-----------
CONSUMER NON-DURABLES (1.9%)
Philip Morris Cos., Inc........... 30,000 1,605,000
-----------
CONTAINERS & PACKAGING (0.4%)
Sherwin Williams Co............... 10,000 293,750
-----------
COSMETICS & TOILETRIES (2.7%)
Avon Products, Inc................ 12,000 531,000
Colgate-Palmolive Co. (b)......... 19,000 1,764,625
-----------
2,295,625
-----------
DATA PROCESSING (2.4%)
Automatic Data Processing, Inc.... 25,400 2,036,763
-----------
ELECTRICAL EQUIPMENT (4.4%)
Emerson Electric (b).............. 19,900 1,203,950
General Electric Co. (b).......... 16,000 1,633,000
Honeywell, Inc.................... 11,400 858,563
-----------
3,695,513
-----------
COMMON STOCKS, CONTINUED
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ---------------------------------- --------- -----------
FINANCIAL SERVICES (7.6%)
American Express Co............... 16,500 $ 1,687,125
Citigroup, Inc.................... 22,500 1,113,750
Fannie Mae........................ 35,500 2,626,999
Washington Mutual, Inc............ 24,000 916,500
-----------
6,344,374
-----------
FOOD & RELATED (6.4%)
Bestfoods......................... 36,000 1,917,000
Campbell Soup Co.................. 32,000 1,760,000
Heinz (H.J.) Co................... 29,000 1,642,125
-----------
5,319,125
-----------
HEALTH CARE -- DRUGS (13.0%)
Abbott Laboratories............... 29,000 1,421,000
Bristol Myers Squibb Co........... 21,000 2,810,062
Glaxo Wellcome PLC - ADR.......... 33,000 2,293,499
Merck & Co., Inc.................. 11,000 1,624,563
Schering-Plough Corp.............. 35,000 1,933,750
Warner-Lambert Co................. 12,000 902,250
-----------
10,985,124
-----------
HOUSEHOLD -- GENERAL PRODUCTS (1.2%)
Procter & Gamble Co............... 11,000 1,004,438
-----------
INDUSTRIAL GOODS & SERVICES (2.5%)
Hewlett-Packard Co................ 22,000 1,502,875
IBM Corp.......................... 3,000 554,250
-----------
2,057,125
-----------
INSURANCE (1.9%)
Allstate Corp..................... 41,000 1,583,625
-----------
MANUFACTURING (1.4%)
Fortune Brands, Inc. (b).......... 37,000 1,170,125
-----------
MATERIALS (0.5%)
Textron, Inc...................... 6,000 455,625
-----------
OIL & GAS (6.3%)
Atlantic Richfield Co............. 18,000 1,174,500
Chevron Corp...................... 1,000 82,938
Enron Corp........................ 18,000 1,027,125
Exxon Corp........................ 18,000 1,316,250
Mobil Corp........................ 1,000 87,125
Texaco, Inc. (b).................. 30,000 1,586,250
-----------
5,274,188
-----------
PETROLEUM -- SERVICES (0.0%)
Halliburton Co.................... 1,000 29,625
-----------
</TABLE>
Continued
80
<PAGE> 84
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
EQUITY INCOME FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
COMMON STOCKS, CONTINUED
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ---------------------------------- --------- -----------
PUBLISHING (2.0%)
Gannett Co., Inc. (b)............. 25,000 $ 1,612,500
McGraw-Hill, Inc.................. 1,000 101,875
-----------
1,714,375
-----------
REAL ESTATE INVESTMENT TRUST (3.3%)
Equity Residential Property....... 30,000 1,213,125
Post Properties................... 17,000 653,438
Simon Debartolo Group, Inc........ 30,000 855,000
-----------
2,721,563
-----------
RETAIL (5.8%)
Dayton Hudson Corp. (b)........... 48,000 2,604,000
Dollar General Stores............. 35,000 1,246,875
Wal-Mart Stores, Inc. (b)......... 12,000 977,250
-----------
4,828,125
-----------
UTILITIES (2.3%)
DPL, Inc. (b)..................... 21,000 454,125
Sierra Pacific Resources.......... 38,000 1,444,000
-----------
1,898,125
-----------
UTILITIES-ELECTRIC (3.5%)
Duke Energy Corp.................. 35,000 2,242,188
NIPSCO Industries, Inc............ 21,500 654,406
-----------
2,896,594
-----------
UTILITIES-GAS & PIPELINE (1.0%)
Consolidated Natural Gas Co.
(b)............................. 15,000 810,000
-----------
UTILITIES-TELEPHONE (7.4%)
AT&T Corp......................... 18,000 1,354,500
GTE Corp.......................... 28,000 1,820,000
SBC Communications, Inc........... 17,000 911,625
Sprint Corp....................... 25,000 2,103,124
-----------
6,189,249
-----------
WHOLESALE (2.1%)
Sysco Corp. (b)................... 64,000 1,756,000
-----------
TOTAL COMMON STOCKS (Cost
$74,535,041).................... 82,612,869
-----------
INVESTMENT COMPANIES (1.6%)
AIM Liquid Assets Money Market
Fund............................ 291,314 291,314
AIM Prime Money Market Fund....... 1,066,083 1,066,082
-----------
TOTAL INVESTMENT COMPANIES (Cost
$1,357,396)..................... 1,357,396
-----------
SHORT-TERM SECURITIES HELD AS
COLLATERAL (25.1%)
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- --------------------------------- ---------- -----------
COMMERCIAL PAPER (17.8%)
Dominion SemiConductor, 5.86%,
2/16/99........................ $5,000,000 $ 4,962,336
PS Colorado Credit Corp., 5.45%,
1/4/99......................... 2,000,000 1,998,789
Working Capital II, 7.00%,
1/8/99......................... 8,000,000 7,988,800
-----------
14,949,925
-----------
FLOATING RATE NOTE (7.2%)
General Motors Acceptance Corp.,
5.30%*, 11/13/00............... 6,000,000 6,000,000
-----------
REPURCHASE AGREEMENTS (0.1%)
Lehman Brothers, 4.70%, 1/4/99,
dated 12/31/98, with a maturity
value of $81,544
(Collateralized by $122,316
Capstead Mortgage, 10/25/24,
fair value -- $86,390; $1,000
Ryland Mortgage Securities
Corp., 5/15/00, fair
value -- $900)................. 81,501 81,501
-----------
TOTAL SHORT-TERM SECURITIES HELD
AS COLLATERAL (Cost
$21,031,426)................... 21,031,426
-----------
TOTAL INVESTMENTS (Cost
$96,923,863) (a) -- (125.5%)... 105,001,691
Liabilities in excess of other
assets -- (-25.5)%............. (21,312,814)
-----------
TOTAL NET ASSETS -- (100.0%)..... $83,688,877
===========
</TABLE>
- ---------------
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting in excess of federal income tax reporting of $247,087.
Cost for federal income tax purposes differs from value by net unrealized
appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.................... $ 9,221,126
Unrealized depreciation.................... (1,390,385)
-----------
Net unrealized appreciation................ $ 7,830,741
===========
</TABLE>
(b) All or a portion of this security has been loaned at December 31, 1998.
* Variable rate security. Rate represents rate in effect at December 31, 1998.
ADR -- American Depository Receipt
PLC -- Public Limited Company
See notes to financial statements
81
<PAGE> 85
ISG FUNDS
EQUITY INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (cost
$96,842,362).................. $104,920,190
Repurchase agreements, at
cost.......................... 81,501
------------
TOTAL INVESTMENTS............. 105,001,691
Interest and dividends
receivable.................... 117,040
Receivable for capital shares
issued........................ 103,269
Receivable for investments
sold.......................... 526,332
Deferred organization costs..... 3,163
Prepaid expenses and other
assets........................ 21,076
------------
TOTAL ASSETS.................. 105,772,571
LIABILITIES:
Payable for return of collateral
held for securities on loan... $21,031,426
Distributions payable........... 47,956
Payable for investments
purchased..................... 898,621
Payable for capital shares
redeemed...................... 25,553
Accrued expenses and other
payables:
Advisory fees................. 44,633
Administration fees........... 1,377
Shareholder servicing
fees--Class B Shares........ 113
Distribution fees--Class A
Shares...................... 100
Distribution fees--Class B
Shares...................... 338
Other......................... 33,577
-----------
TOTAL LIABILITIES............. 22,083,694
------------
NET ASSETS:
Capital......................... 71,318,762
Undistributed (distributions in
excess of) net investment
income........................ (1,789)
Undistributed (distributions in
excess of) net realized
gains......................... 4,294,076
Net unrealized appreciation
(depreciation) of
investments................... 8,077,828
------------
NET ASSETS...................... $ 83,688,877
============
Class A Shares
Net Assets.................... $ 3,658,170
Shares outstanding............ 364,050
Redemption price per share.... $ 10.05
============
Class A Shares--Maximum Sales
Charge........................ 4.75%
------------
Maximum Offering Price Per
Share (100%/(100%--Maximum
Sales Charge) of net asset
value adjusted to the
nearest cent)............... $ 10.55
============
Class B Shares
Net Assets.................... $ 4,188,589
Shares outstanding............ 417,153
Offering price per share*..... $ 10.04
============
Institutional Shares
Net Assets.................... $ 75,842,118
Shares outstanding............ 7,542,907
Offering and redemption price
per share................... $ 10.05
============
</TABLE>
- ---------------
* Redemption price per share varies by length of time shares are held.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income.................... $ 10,796
Dividend income.................... 1,742,742
Income from securities lending..... 25,285
-----------
TOTAL INVESTMENT INCOME.......... 1,778,823
EXPENSES:
Investment advisory fees........... $501,817
Administration fees................ 115,804
Shareholder servicing fees--Class B
Shares........................... 4,404
Distribution fees--Class A
Shares........................... 4,515
Distribution fees--Class B
Shares........................... 13,211
Accounting fees.................... 72,786
Transfer agent fees................ 89,706
Directors' fees.................... 5,135
Other fees......................... 120,058
--------
Total expenses before voluntary
fee reductions................. 927,436
Expenses voluntarily reduced..... (4,867)
-----------
Net Expenses..................... 922,569
-----------
NET INVESTMENT INCOME.............. 856,254
-----------
REALIZED/UNREALIZED GAINS (LOSSES)
FROM INVESTMENTS:
Net realized gains (losses) from
investment transactions.......... 17,445,684
Net change in unrealized
appreciation (depreciation) from
investments...................... (4,356,815)
-----------
Net realized/unrealized gains
(losses) from investments........ 13,088,869
-----------
Change in net assets resulting from
operations....................... $13,945,123
===========
</TABLE>
See notes to financial statements
82
<PAGE> 86
ISG FUNDS
EQUITY INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1998 1997(a)
------------ ------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net investment income..................................... $ 856,254 $ 1,081,521
Net realized gains (losses) from investments
transactions............................................ 17,445,684 12,492,214
Net change in unrealized appreciation (depreciation) from
investments............................................. (4,356,815) 132,903
------------ ------------
Change in net assets resulting from operations.............. 13,945,123 13,706,638
------------ ------------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS:
From net investment income................................ (17,468) (723,804)
From net realized gains on investment transactions........ (643,995) (45,604)
DISTRIBUTIONS TO CLASS B SHAREHOLDERS:
From net investment income................................ (4,921)(c) --
From net realized gains on investment transactions........ (657,287)(c) --
DISTRIBUTIONS TO INSTITUTIONAL SHAREHOLDERS:
From net investment income................................ (833,860) (361,492)(b)
From net realized gains on investment transactions........ (14,249,617) (10,045,338)(b)
------------ ------------
Change in net assets from shareholder distributions......... (16,407,148) (11,176,238)
------------ ------------
Change in net assets from capital transactions.............. 17,813,222 65,807,280
------------ ------------
Change in net assets........................................ 15,351,197 68,337,680
NET ASSETS:
Beginning of period....................................... 68,337,680 --
------------ ------------
End of period............................................. $ 83,688,877 $ 68,337,680
============ ============
</TABLE>
- ---------------
(a) For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
(b) For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
(c) For the period from February 3, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
83
<PAGE> 87
ISG FUNDS
EQUITY INCOME FUND
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net investment income..................................... $ 856,254
Adjustments to reconcile net investment income to net cash
provided by (used in) operating activities:
Cost of investment securities purchased................. (186,145,942)
Proceeds from disposition of investment securities...... 183,999,571
Decrease (increase) in investments purchased with cash
collateral from securities lending..................... (21,031,426)
Decrease (increase) in interest and dividends
receivable............................................. 27,777
Decrease (increase) in other assets..................... (10,923)
Increase (decrease) in payable for return of collateral
received from securities lending....................... 21,031,426
Increase (decrease) in accrued expenses................. 42,273
Net amortization/accretion from investments............. (10,972)
------------
Net cash provided by (used in) operating activities....... (1,241,962)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shares issued............................... 17,751,839
Cost of shares redeemed................................... (10,331,839)
Cash distributions paid................................... (6,178,038)
------------
Net cash provided by (used in) financing activities....... 1,241,962
------------
Net increase (decrease) in cash............................. --
CASH:
Beginning balance......................................... --
------------
Ending balance............................................ $ --
============
</TABLE>
- ---------------
Non-cash financing activities not included herein consist of reinvestment of
dividends and distributions of $10,315,506.
See notes to financial statements
84
<PAGE> 88
ISG FUNDS
EQUITY INCOME FUND
FINANCIAL HIGHLIGHTS, CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1998 1997(a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................ $10.37 $ 10.00
------ -------
Investment Activities
Net investment income..................................... 0.10 0.65
Net realized and unrealized gains (losses) from
investments............................................. 1.81 1.71
------ -------
Total from Investment Activities.......................... 1.91 2.36
------ -------
Distributions
Net investment income..................................... (0.10) (0.19)
Net realized gains........................................ (2.13) (1.80)
------ -------
Total Distributions....................................... (2.23) (1.99)
------ -------
Net change in asset value................................... (0.32) 0.37
------ -------
Net Asset Value, End of Period.............................. $10.05 $ 10.37
====== =======
TOTAL RETURN (EXCLUDES SALES CHARGE)........................ 19.46% 24.20%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $3,658 $ 388
Ratio of expenses to average net assets..................... 1.45% 1.06%(c)
Ratio of net investment income to average net assets........ 0.86% 2.11%(c)
Ratio of expenses to average net assets*.................... 1.45% 1.31%(c)
Portfolio turnover**........................................ 159% 86%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS, CLASS B SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1998(a)
------------
<S> <C>
Net Asset Value, Beginning of Period........................ $10.63
------
Investment Activities
Net investment income..................................... 0.04
Net realized and unrealized gains (losses) from
investments............................................. 1.54
------
Total from Investment Activities.......................... 1.58
------
Distributions
Net investment income..................................... (0.04)
Net realized gains........................................ (2.13)
------
Total Distributions....................................... (2.17)
------
Net change in net asset value............................... (0.59)
------
Net Asset Value, End of Period.............................. $10.04
======
TOTAL RETURN (EXCLUDES REDEMPTION CHARGE)................... 15.79%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $4,189
Ratio of expenses to average net assets..................... 2.20%(c)
Ratio of net investment income to average net assets........ 0.12%(c)
Portfolio turnover*......................................... 159%
</TABLE>
* Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from February 3, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
85
<PAGE> 89
ISG FUNDS
EQUITY INCOME FUND
FINANCIAL HIGHLIGHTS, INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1998 1997(a)
------------ -------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................ $ 10.37 $ 11.73
------- -------
Investment Activities
Net investment income..................................... 0.13 0.06
Net realized and unrealized gains (losses) from
investments............................................. 1.81 0.44
------- -------
Total from Investment Activities.......................... 1.94 0.50
------- -------
Distributions
Net investment income..................................... (0.13) (0.06)
Net realized gains........................................ (2.13) (1.80)
------- -------
Total Distributions......................................... (2.26) (1.86)
------- -------
Net change in asset value................................... (0.32) (1.36)
------- -------
Net Asset Value, End of Period.............................. $ 10.05 $ 10.37
======= =======
TOTAL RETURN................................................ 19.72% 4.62%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $75,842 $67,949
Ratio of expenses to average net assets..................... 1.16% 0.68%(c)
Ratio of net investment income to average net assets........ 1.14% 2.15%(c)
Ratio of expenses to average net assets*.................... 1.17% 1.09%(c)
Portfolio turnover**........................................ 159% 86%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
86
<PAGE> 90
<TABLE>
<S> <C>
RON LINDQUIST
Portfolio Manager
[Photo of Ron ISG Large-Cap
Lindquist] Equity Fund
</TABLE>
- ---------------------------------------------------------------
- ---------------------------------------------------------------
INVESTMENT GOAL
The Fund seeks to provide investors with long-term capital appreciation by
investing primarily in large-capitalization stocks (market caps over $1
billion). The Fund's holdings are typically characterized by higher-
than-average returns on equity, superior long-term earnings-per-share
growth rates, and consistent earnings generation. This Fund is suitable for
investors who are investing for the long-term and are willing to assume the
additional risk of investing in growth stocks in return for potentially
higher total returns.
- ---------------------------------------------------------------
Q. HOW DID THE FUND PERFORM DURING THE PERIOD?
A. We outperformed our long-term benchmark by a considerable margin. For the 12
months ended December 31, 1998, the Fund's total return was 37.87% (Class A
Shares at NAV).(1) In comparison, the Standard & Poor's 500 Stock Index
generated a 28.74% total return.
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. During the period, large-caps as a group outperformed smaller issues, while
growth-style stocks generally outperformed value stocks. With our orientation
directed at large-cap growth stocks, we very much benefited from these disparate
market trends. Over full market cycles, we expect the stocks in our Fund to
average significantly higher earnings-per-share growth rates than those of the
S&P 500. Such a robust growth rate differential has been generously rewarded in
recent years and will likely continue to be so favored in the future, we
believe.
We believe our Fund's outperformance also was enhanced by other facets of our
investment strategy. For one thing, we are very single-minded in our approach to
selecting and buying stocks. If a potential candidate is not a growth stock, we
do not buy it. We never knowingly stray from having a 100% true growth
portfolio. We also believe in giving our companies ample time to perform. Our
annual turnover rate is in the neighborhood of 5%, which means that, on average,
we hold stocks for approximately 20 years. We are long-term investors; we do not
waiver from our strategy in an attempt to seize upon and benefit from short-term
trends.
Additionally, we focus on a relatively small number of good companies whose
managements' have demonstrated, over long periods of time, the ability to
realize the full growth potential of their companies, year in and year out.
Finally, we do not rotate our holdings from one economic sector to another. We
are more or less indifferent to sector weighting, with the exception being our
belief that certain sectors of the U. S. economy are more likely than others to
offer the type of growth opportunities we pursue over time. Taken in consort,
all of these factors contributed to our having such a good year in 1998.
Q. WHAT STOCKS PERFORMED WELL FOR YOU?
A. The Consumer Cyclicals sector did very well for us. We enjoyed significant
market gains from such holdings as Gap Stores (1.3% of the Fund's net assets),
Home Depot (3.2%) and Wal-Mart Stores (2.3%). Another consumer-related area,
Consumer Staples, was productive, although not universally so. Solid returns
were posted by Walgreen (4.1%), McDonald's (2.9%) and Albertson's (1.5%).*
Still another economic sector that will, we believe, continue to offer a great
opportunity for long-term growth is Health Care. During the last 12 months, we
owned a number of Healthcare winners, including Amgen (1.1%), Pfizer (3.2%),
Schering-Plough (3.6%), Medtronic (2.6%) and Merck (2.9%).*
Possibly most importantly, we have been, and are still, very optimistic about
the Fund's largest economic sector, Technology, and its great potential for the
future. Some of our most productive "tech" holdings over the last year were
Lucent Technologies (1.5%), Sun Microsystems (1.3%), Microsoft (3.2%), Oracle
(0.9%), IBM (4.3%), Compaq (4.0%), Applied Materials (1.1%) and Automatic Data
Processing (2.6%).*
Q. WHAT IS YOUR OUTLOOK FOR 1999?
A. We believe that the first quarter is likely to be stronger than most
prognosticators now expect. However, later in the year, there could very well be
some slowing in the economy. How will that relative weakness be reflected in the
stock market and in the issues we hold? Most likely, all other things being
equal, our stocks will trade in sympathy, but not necessarily in union, with the
overall market and the broad market indicators.
However, in the long run, the success of our Fund may have a good deal more to
do with interest rate direction than with earnings-per-share growth rates. In
our opinion, the extended and dramatic decline in interest rates largely
explains why growth-style stocks have done so well during the last 15 years. We
feel that interest rates will be the major determinant to future growth stock
performance. Nevertheless, we will continue to buy the stocks that we believe
are likely to outperform our benchmark in the long run, companies whose
earnings-per-share are relatively consistent from year to year, and of higher
relative predictability than our benchmark's earnings-per-share pattern.
- ---------------
(1) Including the 4.75% sales load, the Fund's return was 31.30% for the period.
* The Fund's portfolio composition is subject to change.
87
<PAGE> 91
- --------------------------------------------------------------------------------
ISG LARGE-CAP EQUITY FUND
PERFORMANCE (AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LARGE-CAP EQUITY FUND LARGE-CAP EQUITY FUND
CLASS A SHARES WITH SALES CHARGE WITHOUT SALES CHARGE S&P 500 STOCK INDEX
--------------------- --------------------- -------------------
<S> <C> <C> <C>
Aug. 92 9525 9870 10000
Dec. 92 10190 10559 10631
'93' 10760 11150 11693
'94' 10952 11348 11846
'95' 14784 15319 16280
'96' 17389 18019 20036
'97' 23637 24493 26721
'98' 32589 33769 34358
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT SALES WITH SALES
CHARGE CHARGE*
CLASS A SHARES ------------- ----------
<S> <C> <C>
1-Year........................ 37.87% 31.30%
5-Year........................ 24.81% 23.60%
Since Inception 8/3/92........ 20.88% 19.97%
*Reflects the maximum sales charge of 4.75%.
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES LARGE-CAP EQUITY FUND S&P 500 STOCK INDEX
--------------------- -------------------
<S> <C> <C>
Aug. 92 9870 10000
Dec. 92 10559 10631
'93' 11150 11693
'94' 11348 11846
'95' 15319 16280
'96' 18019 20036
'97' 24493 26721
'98' 33759 34358
</TABLE>
The Class B contingent deferred sales charge (CDSC) is not included in the
above graph, since the performance is for more than 6 years and the CDSC
would no longer apply.
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
------------------------
WITH
WITHOUT CDSC CDSC**
CLASS B SHARES ------------ ---------
<S> <C> <C>
1-Year...................... 37.83% 34.83%
5-Year...................... 24.80% 24.72%
Since Inception 8/3/92...... 20.88% 20.88%
**Reflects the applicable contingent deferred sales
charge (maximum 4.00%).
</TABLE>
THE DATA FOR CLASS B SHARES PRIMARILY PRESENTS THE RESULTS OF THE CLASS A
SHARES. ACTUAL CLASS B SHARES AVERAGE ANNUAL TOTAL RETURN AND HYPOTHETICAL
GROWTH RESULTS WOULD HAVE BEEN LOWER. SEE NOTES BELOW.
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES LARGE-CAP EQUITY FUND S&P 500 STOCK INDEX
--------------------- -------------------
<S> <C> <C>
Aug. 92 9870 10000
Dec. 92 10559 10631
'93' 11150 11693
'94' 11348 11846
'95' 15319 16280
'96' 18019 20036
'97' 24493 26721
'98' 33759 34358
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
INSTITUTIONAL SHARES --------------
<S> <C>
1-Year................................. 37.83%
5-Year................................. 24.80%
Since Inception 8/3/92................. 20.88%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment in
the indicated share class versus a similar investment in the Fund's benchmark.
The quoted returns reflect the performance from 8/3/92 to 12/14/98 of the DG
Equity Fund, an open-end investment company that was the predecessor fund to the
ISG Large-Cap Equity Fund.
PERFORMANCE FOR THE CLASS B SHARES, WHICH COMMENCED OPERATIONS ON 12/15/98, IS
BASED ON THE HISTORICAL PERFORMANCE OF THE CLASS A SHARES (WITHOUT SALES CHARGE)
PRIOR TO THAT DATE. CLASS A SHARES PERFORMANCE DOES NOT REFLECT THE HIGHER 12B-1
FEES OR THE CONTINGENT DEFERRED SALES CHARGE (CDSC). HAD THE CDSC AND HIGHER
12B-1 FEES BEEN INCORPORATED, TOTAL RETURN AND HYPOTHETICAL GROWTH FIGURES WOULD
HAVE BEEN LOWER.
The Institutional Share class was initially offered on 12/14/98 and reflects the
historical performance of the Class A Shares (without sales charge) prior to
that date.
The Fund's performance is compared to the Standard & Poor's 500 Stock Index, a
broad measure of the stock market as a whole. The index is unmanaged and does
not reflect the expenses associated with a mutual fund, such as investment
management and fund accounting fees. The Fund's performance reflects the
deduction of fees for these value-added services.
PAST PERFORMANCE IS NOT A PREDICTION OF FUTURE RESULTS. THE FUND'S INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL PURCHASE PRICE.
88
<PAGE> 92
- --------------------------------------------------------------------------------
ISG LARGE-CAP EQUITY FUND
(AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
[Sector Profile Pie Chart]*
<TABLE>
<CAPTION>
Utilities/ Consumer Consumer Consumer Basic Capital Goods Capital Goods
Telecommunications Services Cyclicals Staples Industry and Industry and Technology Health Care
<C> <C> <C> <C> <C> <C> <C> <C>
1.5% 6.0% 7.4% 19.2% 2.5% 14.7% 27.9% 20.8%
</TABLE>
TOP 10 EQUITY HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
TOTAL INVESTMENTS
-----------------
<S> <C>
1. IBM Corp. ............................................. 4.4%
2. Walgreen Co............................................ 4.2%
3. Compaq Computer Corp................................... 4.1%
4. General Electric Co. .................................. 3.8%
5. Schering-Plough Corp. ................................. 3.7%
6. Microsoft Corp. ....................................... 3.3%
7. Pfizer, Inc. .......................................... 3.3%
8. Home Depot, Inc. ...................................... 3.3%
9. Pitney Bowes, Inc. .................................... 3.3%
10. McDonald's Corp. ...................................... 2.9%
</TABLE>
* The Fund's portfolio composition is subject to change.
89
<PAGE> 93
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
LARGE-CAP EQUITY FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
COMMON STOCKS (97.7%)
MARKET
SECURITY VALUE
DESCRIPTION SHARES (NOTE 4)
- --------------------------------- ---------- ------------
BEVERAGES (4.2%)
Coca-Cola Co..................... 280,000 $ 18,725,000
PepsiCo, Inc..................... 411,200 16,833,500
------------
35,558,500
------------
BUSINESS EQUIPMENT & SERVICES (4.8%)
Donnelley (R.R.) & Sons Co....... 133,600 5,853,350
Electronic Data Systems Corp..... 150,000 7,537,500
Pitney Bowes, Inc................ 415,400 27,442,363
------------
40,833,213
------------
CAPITAL GOODS (2.9%)
Dover Corp....................... 520,000 19,045,000
PPG Industries, Inc.............. 100,000 5,825,000
------------
24,870,000
------------
CONSUMER NON-DURABLES (5.8%)
Gillette Co...................... 260,000 12,561,250
International Flavors and
Fragrances, Inc................ 250,000 11,046,875
Nike, Inc., Class B.............. 60,000 2,433,750
Philip Morris Cos., Inc.......... 200,000 10,700,000
Sara Lee Corp.................... 419,600 11,827,475
------------
48,569,350
------------
CONSUMER SERVICES (2.2%)
Disney (Walt) Co................. 613,500 18,405,000
------------
DATA PROCESSING (2.7%)
Automatic Data Processing,
Inc............................ 280,000 22,452,500
------------
ELECTRICAL EQUIPMENT (3.8%)
General Electric Co.............. 311,000 31,741,438
------------
FOOD & RELATED (1.8%)
Bestfoods........................ 150,000 7,987,500
Heinz (H.J.) Co.................. 129,450 7,330,106
------------
15,317,606
------------
HEALTH CARE (5.1%)
American Home Products Corp...... 220,000 12,388,750
Hillenbrand Industries, Inc...... 100,000 5,687,500
Johnson & Johnson................ 250,000 20,968,750
United Health Care Corp.......... 100,000 4,306,250
------------
43,351,250
------------
HEALTH CARE -- DRUGS (13.1%)
Abbott Laboratories.............. 374,600 18,355,400
Amgen, Inc. (b).................. 90,000 9,410,625
Merck & Co., Inc................. 166,000 24,516,125
Pfizer, Inc...................... 220,000 27,596,250
Schering-Plough Corp............. 560,000 30,940,000
------------
110,818,400
HOUSEHOLD -- GENERAL PRODUCTS (2.5%)
Procter & Gamble Co.............. 230,000 21,001,875
------------
COMMON STOCKS, CONTINUED
MARKET
SECURITY VALUE
DESCRIPTION SHARES (NOTE 4)
- --------------------------------- ---------- ------------
INDUSTRIAL GOODS & SERVICES (6.6%)
Hewlett-Packard Co............... 277,200 $ 18,936,225
IBM Corp......................... 200,000 36,950,000
------------
55,886,225
------------
MANUFACTURING (2.1%)
Tyco International, Ltd.......... 240,000 18,105,000
------------
MEDICAL EQUIPMENT & SUPPLIES (3.5%)
IMS Health, Inc.................. 100,000 7,543,750
Medtronic, Inc................... 300,000 22,275,000
------------
29,818,750
------------
RAW MATERIALS (1.1%)
Avery Dennison Corp.............. 120,000 5,407,500
Morton International, Inc........ 150,000 3,675,000
------------
9,082,500
------------
RETAIL (8.0%)
Albertsons, Inc.................. 200,000 12,737,500
Gap (The), Inc................... 195,000 10,968,750
McDonald's Corp.................. 320,000 24,520,000
Wal-Mart Stores, Inc............. 240,000 19,545,000
------------
67,771,250
------------
RETAIL-SPECIALTY STORES (7.4%)
Home Depot, Inc.................. 450,000 27,534,375
Walgreen Co...................... 600,000 35,137,500
------------
62,671,875
------------
TECHNOLOGY (16.1%)
AMP, Inc......................... 130,837 6,811,701
Applied Materials, Inc........... 220,000 9,391,250
Boeing Co........................ 177,200 5,781,150
Compaq Computer Corp............. 822,850 34,508,271
Intel Corp....................... 200,000 23,712,500
Microsoft Corp. (b).............. 200,000 27,737,500
Motorola, Inc.................... 130,000 7,938,125
Oracle Corp. (b)................. 180,000 7,762,500
Sun Microsystems, Inc. (b)....... 130,000 11,131,250
------------
134,774,247
------------
TELECOMMUNICATIONS (1.6%)
Lucent Technologies, Inc......... 120,000 13,200,000
------------
UTILITIES-TELEPHONE (1.4%)
AT&T Corp........................ 103,800 7,810,950
SBC Communications, Inc.......... 80,000 4,290,000
------------
12,100,950
------------
WHOLESALE (1.0%)
Sysco Corp..................... 320,000 8,780,000
------------
TOTAL COMMON STOCKS (Cost
$313,110,355).................. 825,109,929
------------
</TABLE>
Continued
90
<PAGE> 94
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
LARGE-CAP EQUITY FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT COMPANIES (2.2%)
MARKET
SECURITY VALUE
DESCRIPTION SHARES (NOTE 4)
- --------------------------------- ---------- ------------
AIM Liquid Assets Money Market
Fund........................... 214,064 $ 214,064
AIM Prime Money Market Fund...... 18,522,863 18,522,863
------------
TOTAL INVESTMENT COMPANIES (Cost
$18,736,927)................... 18,736,927
------------
TOTAL INVESTMENTS (Cost
$331,847,282) (a) -- (99.9%)... 843,846,856
Other assets in excess of
liabilities -- (0.1%).......... 486,998
------------
TOTAL NET ASSETS -- (100.0%)..... $844,333,854
============
</TABLE>
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation................. $514,700,505
Unrealized depreciation................. (2,700,931)
------------
Net unrealized appreciation............. $511,999,574
============
</TABLE>
(b) Non-income producing security.
See notes to financial statements
91
<PAGE> 95
ISG FUNDS
LARGE-CAP EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (cost
$331,847,282)................. $843,846,856
Interest and dividends
receivable.................... 845,710
Receivable for capital shares
issued........................ 79,190
Receivable from investment
advisor....................... 20,950
------------
TOTAL ASSETS.................. 844,792,706
LIABILITIES:
Distributions payable........... $ 59,451
Payable for capital shares
redeemed...................... 48,420
Accrued expenses and other
payables:
Advisory fees................. 306,188
Administration fees........... 13,949
Shareholder servicing fees --
Class A Shares.............. 955
Shareholder servicing fees --
Institutional Shares........ 12,994
Directors' fees............... 422
Other......................... 16,473
--------
TOTAL LIABILITIES............. 458,852
------------
NET ASSETS:
Capital......................... 332,342,520
Undistributed (distributions in
excess of) net investment
income........................ (8,240)
Net unrealized appreciation
(depreciation) from
investments................... 511,999,574
------------
NET ASSETS...................... $844,333,854
============
Class A Shares
Net Assets.................... $ 57,771,559
Shares outstanding............ 2,096,935
Redemption price per share.... $ 27.55
============
Class A Shares -- Maximum Sales
Charge........................ 4.75%
------------
Maximum Offering Price Per
Share
(100%/(100% -- Maximum Sales
Charge) of net asset value
adjusted to the nearest
cent)....................... $ 28.92
============
Class B Shares
Net Assets.................... $ 100,451
Shares outstanding............ 3,648
Offering price per share*..... $ 27.54
============
Institutional Shares
Net Assets.................... $786,461,844
Shares outstanding............ 28,555,870
Offering and redemption price
per share................... $ 27.54
============
</TABLE>
- ---------------
* Redemption price per share varies by length of time shares are held.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28,
1998(a) 1998
------------ ------------
<S> <C> <C>
INVESTMENT INCOME:
Interest income............. $ 1,436,644 $ 2,036,113
Dividend income............. 6,526,960 7,026,887
------------ ------------
TOTAL INVESTMENT INCOME... 7,963,604 9,063,000
EXPENSES:
Investment advisory fees.... 4,767,781 4,445,559
Administration fees......... 630,646 587,750
Shareholder servicing fees
-- Class A Shares......... 899,369 554,868
Shareholder servicing fees
-- Class B Shares......... 8 --
Shareholder servicing fees
-- Institutional Shares... 54,187 --
Distribution fees -- Class B
Shares.................... 23 --
Accounting fees............. 91,552 106,076
Transfer agent fees......... 103,535 86,439
Directors' fees............. 5,431 6,241
Other fees.................. 99,995 96,454
------------ ------------
Total expenses before
voluntary fee
reductions/
reimbursements.......... 6,652,527 5,883,387
Expenses voluntarily
reduced/reimbursed...... (20,981) --
------------ ------------
Net Expenses.............. 6,631,546 5,883,387
------------ ------------
NET INVESTMENT INCOME....... 1,332,058 3,179,613
------------ ------------
REALIZED/UNREALIZED GAINS
(LOSSES) FROM INVESTMENTS:
Net realized gains (losses)
from investment
transactions.............. 32,550,780 9,991,335
Net change in unrealized
appreciation
(depreciation) from
investments............... 146,744,324 193,990,094
------------ ------------
Net realized/unrealized
gains (losses) from
investments............... 179,295,104 203,981,429
------------ ------------
Change in net assets
resulting from
operations................ $180,627,162 $207,161,042
============ ============
</TABLE>
- ---------------
(a) For the period from March 1, 1998 through December 31, 1998.
See notes to financial statements
92
<PAGE> 96
ISG FUNDS
LARGE-CAP EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 28,
1998(a) 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net investment income..................................... $ 1,332,058 $ 3,179,613 $ 4,083,126
Net realized gains (losses) from investment
transactions............................................ 32,550,780 9,991,335 10,108,185
Net change in unrealized appreciation (depreciation) from
investments............................................. 146,744,324 193,990,094 63,747,215
------------ ------------ ------------
Change in net assets resulting from operations.............. 180,627,162 207,161,042 77,938,526
------------ ------------ ------------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS:
From net investment income................................ (1,672,643) (3,295,484) (3,964,723)
From net realized gains on investment transactions........ (38,068,113) (4,463,969) (10,093,485)
DISTRIBUTIONS TO CLASS B SHAREHOLDERS:
From net investment income................................ (10)(b) -- --
DISTRIBUTIONS TO INSTITUTIONAL SHAREHOLDERS:
From net investment income................................ (58,445)(c) -- --
------------ ------------ ------------
Change in net assets from shareholder distributions......... (39,799,211) (7,759,453) (14,058,208)
------------ ------------ ------------
Change in net assets from capital transactions.............. (12,124,764) 25,837,177 41,366,546
------------ ------------ ------------
Change in net assets........................................ 128,703,187 225,238,766 105,246,864
------------ ------------ ------------
NET ASSETS:
Beginning of period....................................... 715,630,667 490,391,901 385,145,037
------------ ------------ ------------
End of period............................................. $844,333,854 $715,630,667 $490,391,901
============ ============ ============
</TABLE>
- ---------------
(a) For the period from March 1, 1998 through December 31, 1998.
(b) For the period from December 15, 1998 (commencement of operations) through
December 31, 1998.
(c) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
93
<PAGE> 97
ISG FUNDS
LARGE-CAP EQUITY FUND
FINANCIAL HIGHLIGHTS, CLASS A SHARES
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1998(a) 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.... $ 23.01 $ 16.68 $ 14.49 $ 11.41 $ 10.87 $ 10.54
------- -------- -------- -------- -------- --------
Investment Activities
Net investment income................. 0.05 0.11 0.14 0.16 0.16 0.14
Net realized and unrealized gains
(losses) from investments........... 5.79 6.48 2.54 3.63 0.71 0.38
------- -------- -------- -------- -------- --------
Total from Investment Activities.... 5.84 6.59 2.68 3.79 0.87 0.52
------- -------- -------- -------- -------- --------
Distributions
Net investment income................. (0.05) (0.11) (0.14) (0.17) (0.16) (0.14)
Net realized gains.................... (1.25) (0.15) (0.35) (0.54) (0.17) (0.05)
------- -------- -------- -------- -------- --------
Total Distributions................... (1.30) (0.26) (0.49) (0.71) (0.33) (0.19)
------- -------- -------- -------- -------- --------
Net change in asset value............... 4.54 6.33 2.19 3.08 0.54 0.33
------- -------- -------- -------- -------- --------
Net Asset Value, End of Period.......... $ 27.55 $ 23.01 $ 16.68 $ 14.49 $ 11.41 $ 10.87
======= ======== ======== ======== ======== ========
TOTAL RETURN (EXCLUDES SALES CHARGE).... 25.83%(b) 39.74% 18.79% 33.73% 8.23% 4.99%
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)....... $57,772 $715,631 $490,392 $385,145 $259,998 $284,203
Ratio of expenses to average net
assets................................ 1.03%(c) 0.99% 0.92% 0.94% 0.95% 0.96%
Ratio of net investment income to
average net assets.................... 0.21%(c) 0.54% 0.95% 1.24% 1.54% 1.38%
Ratio of expenses to average net
assets*............................... 1.03%(c) (d) (d) (d) (d) 0.97%
Portfolio turnover**.................... 3% 6% 7% 15% 1% 7%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If such
voluntary fee reductions/reimbursements had not occurred, the ratio would
have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from March 1, 1998 through December 31, 1998. In conjunction
with the reorganization of the ISG Funds, the Fund changed its fiscal year
end to December 31.
(b) Not annualized.
(c) Annualized.
(d) There were no fee reductions in this period.
FINANCIAL HIGHLIGHTS, CLASS B SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1998(a)
------------
<S> <C>
Net Asset Value, Beginning of Period........................ $25.98
------
Investment Activities
Net realized and unrealized gains (losses) from
investments............................................. 1.56
------
Total from Investment Activities.......................... 1.56
------
Net change in net asset value............................... 1.56
------
Net Asset Value, End of Period.............................. $27.54
======
TOTAL RETURN (EXCLUDES REDEMPTION CHARGE)................... 6.02%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $ 100
Ratio of expenses to average net assets..................... 1.10%(c)
Ratio of net investment income to average net assets........ 0.23%(c)
Ratio of expenses to average net assets*.................... 2.11%(c)
Portfolio turnover**........................................ 3%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from December 15, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
94
<PAGE> 98
ISG FUNDS
LARGE-CAP EQUITY FUND
FINANCIAL HIGHLIGHTS, INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1998(a)
------------
<S> <C>
Net Asset Value, Beginning of Period........................ $ 25.52
--------
Investment Activities
Net realized and unrealized gains (losses) from
investments............................................. 2.02
--------
Total from Investment Activities.......................... 2.02
--------
Net change in asset value................................... 2.02
--------
Net Asset Value, End of Period.............................. $ 27.54
========
TOTAL RETURN................................................ 7.92%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $786,462
Ratio of expenses to average net assets..................... 1.04%(c)
Ratio of net investment income to average net assets........ 0.20%(c)
Ratio of expenses to average net assets*.................... 1.09%(c)
Portfolio turnover**........................................ 3%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If such
voluntary fee reductions/reimbursements had not occurred, the ratio would
have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
95
<PAGE> 99
[THIS PAGE INTENTIONALLY LEFT BLANK]
96
<PAGE> 100
<TABLE>
<S> <C>
CHARLES WINGER
Portfolio Manager
[Winger Photo] ISG Capital Growth Fund
</TABLE>
- ---------------------------------------------------------------
- ---------------------------------------------------------------
INVESTMENT GOAL
The Fund seeks to provide investors with long-term capital growth by
investing primarily in the equity securities of domestic issuers whose
earnings are growing faster than the economy as a whole. It invests
primarily in large U.S. companies with market capitalizations of at least
$500 million. This Fund is suitable for investors who are investing for the
long-term and are comfortable assuming the additional risk of investing in
stocks in exchange for potentially higher total returns.
- ---------------------------------------------------------------
Q. HOW DID THE FUND PERFORM DURING THE PERIOD?
A. It was a good time to be invested in a growth fund. For the 12 months ended
December 31, 1998, the Fund's total return was 32.05% (Class A Shares at
NAV).(1) In comparison, the Lipper Growth Fund Index(2) was up 25.69%, and the
Standard & Poor's 500 Stock Index rose 28.74%.
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. Our outperformance had as much to do with the stocks we
avoided -- particularly during the second half of the year -- as with the stocks
we owned. We had decreased our holdings in basic industry and energy stocks,
which helped, as both sectors badly underperformed the market. At the same time,
we were overweighted in three areas that did very well: technology, health care
and consumer cyclicals, the latter being comprised mostly of specialty
retailers. Because we were overweighted in three sectors that did much better
than the overall market, it is easy to understand why we did so well.
Another factor that helped us was our decision, some time late in the second
quarter, to lighten up on our small- and mid-capitalization stocks. By the end
of the year, we had only a small weighting in stocks with market caps under $8
billion. The decision to focus almost exclusively on large-cap stocks was very
deliberate and proved to be correct. Not only did growth stocks outperform value
stocks, but large-caps outperformed smaller issues by a wide margin.
Q. SO WITHIN SPECIFIC SECTORS, YOU SOLD SMALLER NAMES AND BOUGHT BIGGER ONES?
A. Yes. For example, in health care, we sold HEALTHSOUTH, Boston Scientific and
Centocor, and took new positions in Eli Lilly (1.8% of the Fund's net assets)
and Merck (1.4%). In the consumer cyclicals area, we sold Barnes &
Noble -- which was hurt by competitors, such as Amazon.com -- and Office Depot,
and bought Gap Stores (1.3%) and Best Buy (1.3%). And in technology, we added
several new names, including Hewlett Packard (2.3%), Xerox (2.0%) and America
Online (1.1%). America Online was particularly helpful; in the last four months
of the year, the stock tripled in price. In a related area, telecommunications,
we added MCI Worldcom (2.9%), which is second only to AT&T in long-distance
telecommunications; we think that, from the standpoint of technological
expertise, MCI Worldcom is in the forefront of its industry. *
Q. YOUR STRATEGY WAS TO BUY BIG AND BUY GROWTH?
A. Yes, and one more thing. We also felt, early in the year, that large
multinational companies would not necessarily do well. Consequently, we
liquidated positions that we felt could be hurt due to the turmoil in Asia and
elsewhere.
It was a stock-picker's market for just about the entire year. To outperform our
benchmark, you had to pick the right stocks, and we were fortunate to be right
most of the time.
Q. WHAT'S YOUR OUTLOOK FOR 1999?
A. The biggest wild card in the short run will be what the new euro currency
conversion will mean for American companies. We think it could end up creating
more competition for companies in the United States; that situation could
warrant more caution about the large multi-nationals. There also could be
consequences for the U.S. dollar -- which, in turn, could have implications for
our bond market and for stocks. If the dollar becomes significantly weak against
the new euro, the result could be higher interest rates and inflationary
pressure here in the United States.
- ---------------
(1) Including the 4.75% sales load, the Fund's return was 25.77% for the period.
(2) The Lipper Growth Fund Index is comprised of managed funds that normally
invest in companies with long-term earnings expected to grow significantly
faster than the earnings of the stocks represented in the major unmanaged
stock indices.
* The Fund's portfolio composition is subject to change.
97
<PAGE> 101
- --------------------------------------------------------------------------------
ISG CAPITAL GROWTH FUND
PERFORMANCE (AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CAPITAL GROWTH FUND WITH CAPITAL GROWTH FUND
CLASS A SHARES SALES CHARGE WITHOUT SALES CHARGE S&P 500 STOCK INDEX
------------------------ -------------------- -------------------
<S> <C> <C> <C>
'88' 9525 10000 10000
'89' 12268 12881 13149
'90' 11577 12155 12732
'91' 14433 15152 16621
'92' 15369 16136 17896
'93' 15905 16698 19684
'94' 15838 16628 19942
'95' 20656 21686 27406
'96' 25251 26511 33729
'97' 33026 34673 44982
'98' 43612 45787 57839
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT SALES WITH SALES
CHARGE CHARGE*
CLASS A SHARES ------------- ----------
<S> <C> <C>
1-Year........................ 32.05% 25.77%
5-Year........................ 22.35% 21.15%
10-Year....................... 16.43% 15.87%
*Reflects maximum sales charge of 4.75%.
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES CAPITAL GROWTH FUND S&P 500 STOCK INDEX
------------------- -------------------
<S> <C> <C>
'88' 10000.00 10000.00
'89' 12881.00 13149.00
'90' 12155.00 12732.00
'91' 15152.00 16621.00
'92' 16136.00 17896.00
'93' 16698.00 19684.00
'94' 16628.00 19942.00
'95' 21686.00 27406.00
'96' 26511.00 33729.00
'97' 34378.00 44982.00
'98' 45023.00 57839.00
</TABLE>
The Class B contingent deferred sales charge (CDSC) is not included in the
above graph, since the performance for more than 6 years and the CDSC
would no longer apply.
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT CDSC WITH CDSC**
CLASS B SHARES ------------ -----------
<S> <C> <C>
1-Year..................... 30.96% 27.96%
5-Year..................... 21.94% 21.85%
10-Year.................... 16.24% 16.24%
**Reflects applicable contingent deferred sales charge
(maximum 4.00%).
THE DATA FOR CLASS B SHARES PRIMARILY PRESENTS THE
RESULTS OF THE CLASS A SHARES. ACTUAL CLASS B SHARES
AVERAGE ANNUAL TOTAL RETURN AND HYPOTHETICAL GROWTH
RESULTS WOULD HAVE BEEN LOWER. SEE NOTES BELOW.
</TABLE>
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES CAPITAL GROWTH FUND S&P 500 STOCK INDEX
------------------- -------------------
<S> <C> <C>
'88' 10000.00 10000.00
'89' 12881.00 13149.00
'90' 12155.00 12732.00
'91' 15152.00 16621.00
'92' 16136.00 17896.00
'93' 16698.00 19684.00
'94' 16628.00 19942.00
'95' 21686.00 27406.00
'96' 26511.00 33729.00
'97' 34378.00 44982.00
'98' 45518.00 57839.00
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
INSTITUTIONAL SHARES --------------
<S> <C>
1-Year................................. 32.40%
5-Year................................. 22.21%
10-Year................................ 16.36%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment in
the indicated share class versus a similar investment in the Fund's benchmark.
PERFORMANCE FOR THE CLASS B SHARES, WHICH COMMENCED OPERATIONS ON 2/5/98, IS
BASED ON THE HISTORICAL PERFORMANCE OF THE CLASS A SHARES (WITHOUT SALES CHARGE)
PRIOR TO THAT DATE. CLASS A SHARES PERFORMANCE DOES NOT REFLECT THE HIGHER 12B-1
FEES OR THE CONTINGENT DEFERRED SALES CHARGE (CDSC). HAD THE CDSC AND HIGHER
12B-1 FEES BEEN INCORPORATED, TOTAL RETURN AND HYPOTHETICAL GROWTH FIGURES WOULD
HAVE BEEN LOWER.
The Institutional Share class was initially offered on 10/3/97 and reflects the
historical performance of the Class A Shares (without sales charge) prior to
that date.
The ISG Capital Growth Fund commenced operations on 4/1/96 through a transfer of
assets from certain collective trust fund ("commingled") accounts managed by
First American National Bank, using materially equivalent investment objectives,
policies and methodologies as the Fund. The quoted performance of the Fund
includes performance of the commingled accounts for periods prior to the Fund's
commencement of operations, as adjusted to reflect the expenses associated with
the Fund. The commingled accounts were not registered with the Securities and
Exchange Commission and, therefore, were not subject to the investment
restrictions imposed by law on registered mutual funds. If the commingled
accounts had been registered, the commingled accounts' performance may have been
adversely affected. The performance also reflects reinvestment of dividend and
capital gain distributions.
The Fund's performance is compared to the Standard & Poor's 500 Stock Index, a
broad measure of the stock market as a whole. The index is unmanaged and does
not reflect the expenses associated with a mutual fund, such as investment
management and fund accounting fees. The Fund's performance reflects the
deduction of fees for these value-added services.
PAST PERFORMANCE IS NOT A PREDICTION OF FUTURE RESULTS. THE FUND'S INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL PURCHASE PRICE.
98
<PAGE> 102
- --------------------------------------------------------------------------------
ISG CAPITAL GROWTH FUND
(AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
[PIE CHART]
SECTOR PROFILE*
<TABLE>
<S> <C>
Capital Goods--Technology............................................. 27.3%
Health Care........................................................... 16.7%
Consumer Cyclicals.................................................... 14.6%
Capital Goods--Industry............................................... 8.9%
Consumer Staples...................................................... 8.8%
Financial Services.................................................... 7.4%
Cash and Cash Equivalents............................................. 4.7%
Utilities/Telecommunications.......................................... 4.4%
Consumer Services..................................................... 3.2%
S&P Depositary Receipts............................................... 2.1%
Transportation........................................................ 1.9%
</TABLE>
TOP 10 EQUITY HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
TOTAL INVESTMENTS**
-------------------
<S> <C>
1. Home Depot, Inc. ...................................... 3.3%
2. Cisco Systems, Inc. ................................... 3.2%
3. General Electric Co. .................................. 3.2%
4. MCI Worldcom, Inc. .................................... 3.0%
5. Wal-Mart Stores, Inc. ................................. 2.9%
6. Lucent Technologies, Inc............................... 2.8%
7. Pfizer, Inc. .......................................... 2.7%
8. Microsoft Corp. ....................................... 2.6%
9. Automatic Data Processing, Inc......................... 2.5%
10. Warner Lambert Co. .................................... 2.4%
</TABLE>
* The Fund's portfolio composition is subject to change.
** Total investments excluding short-term securities held as collateral.
99
<PAGE> 103
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
CAPITAL GROWTH FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
COMMON STOCKS (93.1%)
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- --------------------------------- ---------- ------------
AEROSPACE & MILITARY TECHNOLOGY (1.5%)
United Technologies Corp......... 25,000 $ 2,718,750
------------
AIR TRANSPORTATION (1.9%)
Southwest Airlines Co............ 156,000 3,500,250
------------
BANKING (4.1%)
Firstar Corp..................... 45,000 4,196,250
Wachovia Corp.................... 36,000 3,147,750
------------
7,344,000
------------
BUSINESS EQUIPMENT & SERVICES (4.1%)
Pitney Bowes, Inc................ 55,500 3,666,469
Xerox Corp....................... 31,500 3,717,000
------------
7,383,469
------------
COMPUTER SOFTWARE AND SERVICES (8.6%)
America Online, Inc.(c).......... 12,000 1,920,000
Cisco Systems, Inc.(b)(c)........ 61,687 5,725,324
Dell Computer Corp.(b)(c)........ 40,000 2,927,500
Keane, Inc.(c)................... 48,500 1,936,969
SunGard Data Systems, Inc.(c).... 75,000 2,976,563
------------
15,486,356
------------
CONSUMER SERVICES (1.9%)
Service Corp. International...... 89,500 3,406,594
------------
COSMETICS & TOILETRIES (1.0%)
Colgate-Palmolive Co.(b)......... 20,000 1,857,500
------------
DATA PROCESSING (2.5%)
Automatic Data Processing,
Inc............................ 55,500 4,450,406
------------
ELECTRICAL EQUIPMENT (3.2%)
General Electric Co.(b).......... 56,000 5,715,500
------------
ENTERTAINMENT (1.3%)
Time Warner, Inc................. 38,000 2,358,375
------------
FINANCIAL SERVICES (2.4%)
Fannie Mae(b).................... 58,000 4,292,000
------------
HEALTH CARE -- DRUGS (14.4%)
Abbott Laboratories.............. 75,500 3,699,500
Amgen, Inc.(c)................... 34,500 3,607,406
Eli Lilly & Co................... 37,500 3,332,813
Merck & Co., Inc.(b)............. 17,000 2,510,688
Pfizer, Inc...................... 38,500 4,829,343
Schering-Plough Corp............. 70,000 3,867,500
Warner-Lambert Co................ 59,500 4,473,655
------------
26,320,905
------------
INDUSTRIAL GOODS & SERVICES (4.6%)
Hewlett-Packard Co............... 60,000 4,098,750
IBM Corp......................... 22,500 4,156,875
------------
8,255,625
------------
INSURANCE -- PROPERTY & CASUALTY (1.0%)
American International Group,
Inc. (b)....................... 18,750 1,811,719
------------
COMMON STOCKS, CONTINUED
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- --------------------------------- ---------- ------------
MANUFACTURING (2.2%)
Tyco International, Ltd. (b)..... 52,510 $ 3,961,223
------------
MEDICAL EQUIPMENT & SUPPLIES (2.1%)
Medtronic, Inc.(b)............... 51,500 3,823,875
------------
RETAIL (11.9%)
Albertsons, Inc.(b).............. 58,500 3,725,719
Dayton Hudson Corp.(b)........... 75,000 4,068,750
Dollar General Corp.(b).......... 144,750 3,419,719
Gap (The), Inc................... 42,500 2,390,625
Safeway, Inc.(c)................. 48,000 2,925,000
Wal-Mart Stores, Inc.(b)......... 64,000 5,212,000
------------
21,741,813
------------
RETAIL -- SPECIALTY STORES (10.4%)
Best Buy Co., Inc.(c)............ 37,500 2,301,563
CVS Corp......................... 66,618 3,663,990
Home Depot, Inc.................. 96,000 5,874,000
Lowe's Cos., Inc................. 62,000 3,173,625
Walgreen Co.(b).................. 64,500 3,777,281
------------
18,790,459
------------
TECHNOLOGY (5.8%)
Applied Materials, Inc.(c)....... 41,000 1,750,188
Intel Corp....................... 33,800 4,007,413
Microsoft Corp.(b)(c)............ 34,200 4,743,112
------------
10,500,713
------------
TELECOMMUNICATIONS (3.8%)
Lucent Technologies, Inc.(b)..... 46,500 5,115,000
Tellabs, Inc.(c)................. 27,000 1,851,188
------------
6,966,188
------------
UTILITIES -- TELEPHONE (4.4%)
GTE Corp......................... 40,000 2,600,000
MCI Worldcom, Inc.(c)............ 75,500 5,417,125
------------
8,017,125
------------
TOTAL COMMON STOCKS
(Cost $117,970,683)............ 168,702,845
------------
INVESTMENT COMPANIES (6.1%)
AIM Liquid Assets Money Market
Fund........................... 371,567 371,567
AIM Prime Money Market Fund...... 6,907,234 6,907,234
Dreyfus Prime Money Market
Fund........................... 1 1
S&P 500 Depository Receipt....... 30,000 3,690,000
------------
TOTAL INVESTMENT COMPANIES
(Cost $10,743,493)............. 10,968,802
------------
</TABLE>
Continued
100
<PAGE> 104
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
CAPITAL GROWTH FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
SHORT-TERM SECURITIES HELD AS COLLATERAL (28.2%)
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ------------------------------------- ----------- ------------
COMMERCIAL PAPER (24.7%)
Dominion SemiConductor, 5.86%,
2/16/99............................ $ 5,000,000 $ 4,962,336
GTE, 5.40%, 1/4/99................... 5,000,000 4,997,000
MCI WorldCom, 5.55%, 2/24/99......... 4,000,000 3,966,613
PS Colorado Credit Corp., 5.45%,
1/4/99............................. 3,500,000 3,497,881
Raytheon Company, 5.85%, 2/5/99...... 12,259,000 12,188,371
Working Capital II, 7.00%, 1/8/99.... 15,000,000 14,979,000
------------
44,591,201
------------
FLOATING RATE NOTE (3.3%)
General Motors Acceptance Corp.,
5.30%*, 11/13/00................... 6,000,000 6,000,000
------------
REPURCHASE AGREEMENTS (0.2%)
Lehman Brothers, 4.70%, 1/4/99, dated
12/31/98, with a maturity value of
$421,815 (Collateralized by
$310,266 Capstead Mortgage,
10/25/24, fair value -- $100,537;
$566,973 Saxon Mortgage, 7.50%,
7/25/24, fair value -- $330,068)... 421,595 421,595
SHORT-TERM SECURITIES HELD AS COLLATERAL, CONTINUED
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ------------------------------------- ----------- ------------
------------
TOTAL SHORT-TERM SECURITIES HELD AS COLLATERAL
(Cost $51,012,796).............................. $ 51,012,796
------------
TOTAL INVESTMENTS (Cost $179,726,972) (a) --
(127.4%)........................................ 230,684,443
Liabilities in excess of other assets --
(-27.4)%........................................ (49,657,201)
------------
TOTAL NET ASSETS -- (100.0%)...................... $181,027,242
============
</TABLE>
- ---------------
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting in excess of federal income tax reporting of $193,167.
Cost for federal income tax purposes differs from value by net unrealized
appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation........ $51,514,224
Unrealized depreciation........ (749,920)
-----------
Net unrealized appreciation.... $50,764,304
===========
</TABLE>
(b) All or a portion of this security has been loaned at December 31, 1998.
(c) Non-income producing security.
* Variable rate security. Rate represents rate in effect at December 31, 1998.
See notes to financial statements.
101
<PAGE> 105
ISG FUNDS
CAPITAL GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (cost
$179,305,377)................ $230,262,848
Repurchase agreements, at
cost......................... 421,595
------------
Total Investments.......... 230,684,443
Interest and dividends
receivable................... 121,137
Receivable for capital shares
issued....................... 43,747
Receivable for investments
sold......................... 3,168,633
Deferred organization costs.... 5,181
Prepaid expenses and other
assets....................... 18,035
------------
TOTAL ASSETS............... 234,041,176
LIABILITIES:
Payable for return of
collateral held for
securities on loan........... $51,012,796
Distributions payable.......... 19,095
Payable for investments
purchased.................... 1,843,459
Payable for capital shares
redeemed..................... 1,159
Accrued expenses and other
payables:
Advisory fees................ 93,029
Administration fees.......... 2,963
Shareholder servicing fees --
Class B Shares............. 76
Distribution fees -- Class A
Shares..................... 126
Distribution fees -- Class B
Shares..................... 229
Other........................ 41,002
-----------
TOTAL LIABILITIES.......... 53,013,934
------------
NET ASSETS:
Capital........................ 125,688,049
Undistributed (distributions in
excess of) net investment
income....................... (3,699)
Undistributed (distributions in
excess of) net realized
gains........................ 4,385,421
Net unrealized appreciation
(depreciation) from
investments.................. 50,957,471
------------
NET ASSETS..................... $181,027,242
============
Class A Shares
Net Assets................... $ 4,631,427
Shares outstanding........... 326,256
Redemption price per share... $ 14.20
============
Class A Shares -- Maximum Sales
Charge....................... 4.75%
------------
Maximum Offering Price Per
Share (100%/(100% --
Maximum Sales Charge) of
net asset value adjusted to
the nearest cent).......... $ 14.91
============
Class B Shares
Net Assets................... $ 2,853,712
Shares outstanding........... 204,983
Offering price per share*.... $ 13.92
============
Institutional Shares
Net Assets................... $173,542,103
Shares outstanding........... 12,319,904
Offering and redemption price
per share.................. $ 14.09
============
</TABLE>
- ---------------
* Redemption price per share varies by length of time shares are held.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income................... $ 130,755
Dividend income................... 1,475,385
Income from securities lending.... 82,019
-----------
TOTAL INVESTMENT INCOME....... 1,688,159
EXPENSES:
Investment advisory fees.......... $1,005,152
Administration fees............... 231,959
Shareholder servicing fees --
Class B Shares.................. 2,697
Distribution fees -- Class A
Shares.......................... 6,073
Distribution fees -- Class B
Shares.......................... 8,089
Accounting fees................... 71,337
Transfer agent fees............... 88,295
Directors' fees................... 10,187
Other fees........................ 187,749
----------
Total expenses before voluntary
fee reductions................ 1,611,538
Expenses voluntarily reduced.... (10,128)
-----------
Net Expenses.................... 1,601,410
-----------
NET INVESTMENT INCOME............. 86,749
-----------
REALIZED/UNREALIZED GAINS (LOSSES)
FROM INVESTMENTS:
Net realized gains (losses) from
investment transactions......... 31,139,357
Net change in unrealized
appreciation (depreciation) from
investments..................... 13,755,998
-----------
Net realized/unrealized gains
(losses) from investments....... 44,895,355
-----------
Change in net assets resulting
from operations................. $44,982,104
===========
</TABLE>
See notes to financial statements
102
<PAGE> 106
ISG FUNDS
CAPITAL GROWTH FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net investment income..................................... $ 86,749 $ 641,875
Net realized gains (losses) from investment
transactions............................................ 31,139,357 19,491,761
Net change in unrealized appreciation (depreciation) from
investments............................................. 13,755,998 11,188,742
------------ ------------
Change in net assets resulting from operations.............. 44,982,104 31,322,378
------------ ------------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS:
From net investment income................................ -- (374,481)
From net realized gains on investment transactions........ (660,055) (121,087)
DISTRIBUTIONS TO CLASS B SHAREHOLDERS:
From net realized gains on investment transactions........ (355,976)(b) --
DISTRIBUTIONS TO INSTITUTIONAL SHAREHOLDERS:
From net investment income................................ (86,749) (266,590)(a)
In excess of net investment income........................ (1,592) --(a)
From net realized gains on investment transactions........ (25,873,606) (19,052,919)(a)
------------ ------------
Change in net assets from shareholder distributions......... (26,977,978) (19,815,077)
------------ ------------
Change in net assets from capital transactions.............. 20,403,758 82,104,090
------------ ------------
Change in net assets........................................ 38,407,884 93,611,391
------------ ------------
NET ASSETS:
Beginning of period....................................... 142,619,358 49,007,967
------------ ------------
End of period............................................. $181,027,242 $142,619,358
============ ============
</TABLE>
- ---------------
(a) For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
(b) For the period from February 5, 1998 (commencement of operations) through
December 31, 1998.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net investment income..................................... $ 86,749
Adjustments to reconcile net investment income to net cash
provided by (used in) operating activities:
Cost of investment securities purchased................. (397,392,812)
Proceeds from disposition of investment securities...... 404,171,911
Decrease (increase) in investments purchased with cash
collateral from securities lending..................... (51,012,796)
Decrease (increase) in interest and dividends
receivable............................................. 20,740
Decrease (increase) in other assets..................... 3,678
Increase (decrease) in payable for return of collateral
received from securities lending....................... 51,012,796
Increase (decrease) in accrued expenses................. 92,147
Net amortization/accretion from investments............. (131,565)
------------
Net cash provided by (used in) operating activities....... 6,850,848
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shares issued............................... 20,329,200
Cost of shares redeemed................................... (26,373,877)
Cash distributions paid................................... (806,171)
------------
Net cash provided by (used in) financing activities....... (6,850,848)
------------
Net increase (decrease) in cash............................. --
CASH:
Beginning balance......................................... --
------------
Ending balance............................................ $ --
============
</TABLE>
- ---------------
Non-cash financing activities not included herein consist of reinvestment of
dividends and distributions of $26,420,847.
See notes to financial statements.
103
<PAGE> 107
ISG FUNDS
CAPITAL GROWTH FUND
FINANCIAL HIGHLIGHTS, CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996(a)
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $12.80 $11.32 $ 10.00
------ ------ -------
Investment Activities
Net investment income (loss).............................. (0.01) 0.06 --
Net realized and unrealized gains (losses) from
investments............................................. 3.89 3.40 1.32
------ ------ -------
Total from Investment Activities.......................... 3.88 3.46 1.32
------ ------ -------
Distributions
Net investment income..................................... -- (0.06) --
Net realized gains........................................ (2.48) (1.92) --
------ ------ -------
Total Distributions....................................... (2.48) (1.98) --
------ ------ -------
Net change in asset value................................... 1.40 1.48 1.32
------ ------ -------
Net Asset Value, End of Period.............................. $14.20 $12.80 $ 11.32
====== ====== =======
TOTAL RETURN (EXCLUDES SALES CHARGE)........................ 32.05% 30.79% 13.20% (b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $4,631 $ 858 $49,008
Ratio of expenses to average net assets..................... 1.28% 0.93% 1.20% (c)
Ratio of net investment income (loss) to average net
assets.................................................... (0.19)% 0.42% (0.02)%(c)
Ratio of expenses to average net assets*.................... 1.29% 1.18% 1.39% (c)
Portfolio turnover**........................................ 152% 116% 69%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from April 1, 1996 (commencement of operations) through
December 31, 1996.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS, CLASS B SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1998(a)
------------
<S> <C>
Net Asset Value, Beginning of Period........................ $13.10
------
Investment Activities
Net investment income (loss).............................. (0.05)
Net realized and unrealized gains (losses) from
investments............................................. 3.35
------
Total from Investment Activities.......................... 3.30
------
Distributions
Net realized gains........................................ (2.48)
------
Total Distributions....................................... (2.48)
------
Net change in net asset value............................... 0.82
------
Net Asset Value, End of Period.............................. $13.92
======
TOTAL RETURN (EXCLUDES REDEMPTION CHARGE)................... 26.86% (b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $2,854
Ratio of expenses to average net assets..................... 2.04% (c)
Ratio of net investment income (loss) to average net
assets.................................................... (0.95)%(c)
Portfolio turnover*......................................... 152%
</TABLE>
* Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from February 5, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
104
<PAGE> 108
ISG FUNDS
CAPITAL GROWTH FUND
FINANCIAL HIGHLIGHTS, INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1998 1997(a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................ $ 12.69 $ 14.51
-------- --------
Investment Activities
Net investment income..................................... 0.01 0.02
Net realized and unrealized gains (losses) from
investments............................................. 3.88 0.10
-------- --------
Total from Investment Activities.......................... 3.89 0.12
-------- --------
Distributions
Net investment income..................................... (0.01) (0.02)
Net realized gains........................................ (2.48) (1.92)
-------- --------
Total Distributions....................................... (2.49) (1.94)
-------- --------
Net change in asset value................................... 1.40 (1.82)
-------- --------
Net Asset Value, End of Period.............................. $ 14.09 $ 12.69
======== ========
TOTAL RETURN................................................ 32.40% 0.88%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $173,542 $141,761
Ratio of expenses to average net assets..................... 1.02% 0.58%(c)
Ratio of net investment income to average net assets........ 0.07% 0.80%(c)
Ratio of expenses to average net assets*.................... 1.03% 0.99%(c)
Portfolio turnover**........................................ 152% 116%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
105
<PAGE> 109
[THIS PAGE INTENTIONALLY LEFT BLANK]
106
<PAGE> 110
<TABLE>
<S> <C>
WILLIAM A. WOMACK
Portfolio Manager
[WOMACK PHOTO] ISG Small-Cap Opportunity Fund+
</TABLE>
- ---------------------------------------------------------------
- ---------------------------------------------------------------
INVESTMENT GOAL
The Fund aggressively seeks to provide investors with the potential to achieve
a high level of total return through investments in smaller, domestic,
high-growth companies with small capitalizations. The Fund is most suitable
for investors who are investing for the long term and are comfortable assuming
the additional risk of investing in stocks in exchange for potentially higher
total returns.
- ---------------------------------------------------------------
Q. HOW DID THE FUND PERFORM DURING THE PERIOD?
A. It was a tough year for small-cap stocks. For the 12 months ended December
31, 1998, the Fund's total return was -7.20% (Class A shares at NAV).(1) In
comparison, the Russell 2000 Stock Index returned -2.55% for the period.
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. Small-cap stocks, in general, underperformed large-cap issues. In our view,
the Fund has tended to outperform in years with positive market returns and
underperform in years with negative market returns. Because this was a negative
year for the types of stocks we select, we found the climate especially
challenging. In particular, our holdings in the oil and oil field service areas
hindered performance. When energy prices collapsed in late summer and early
fall, we were hurt by our exposure to those sectors.
However, we stayed true to our investment objective; unlike some other small-cap
funds, we did not chase after larger names just because they had momentum. This
past year, as always, we remained disciplined in our approach.
Q. WHAT IS YOUR INVESTMENT APPROACH?
A. We start by looking for stocks with a minimum of 20% growth in revenues
and/or earnings; that is our minimum cut. Beyond that, we are strong believers
in "growth at a reasonable price." We stay away from stocks with excessively
high price-to-earnings ratios, and we follow a bottom-up approach. We do our
homework, researching as many companies as we can find, that meet our basic
criteria. From a working list of approximately 100 companies, we perform
rigorous fundamental analysis and attempt to own between 40 and 60 of these
best-known stocks.
We also look at initial public offerings, or IPOs, because we think those are
the new growth companies for the future. And we try to take advantage of
inefficiencies in the market, identifying stocks that are under pressure for
various reasons that, we believe, will not adversely affect their earnings going
forward.
At the same time, if we think a stock we own is overvalued, we will sell it and
wait for the price to come back down. We also maintain a strict sell discipline,
and we will sell a stock if its earnings projections fall or its relative price
strength weakens.
Q. WHAT STOCKS PERFORMED WELL FOR YOU?
A. One stock that did well for us was Terex Corp. (3.4% of the Fund's net
assets), which is in the crane and equipment-lifting business. Arterial Vascular
Engineering (2.6%) has been a great stock for us; it recently was bought out by
Medtronics. In the restaurant group, Outback Steakhouse (2.2%) and Brinker
International (1.2%) did well. Other stocks that helped us were Cree Research
(5.9%), which is in the semiconductor business, and Insight Enterprises (3.2%),
which sells computers and computer peripherals through telemarketing and over
the Internet.*
Q. WHAT IS YOUR OUTLOOK FOR 1999?
A. We are very optimistic of the coming year. The reason is, we believe the
valuations in the small-cap market are extremely attractive, versus the
overbought levels we see in some of the large-cap stocks. We believe there
continues to be plenty of money coming into the stock market and that investors
will realize that the growth they want is in small-company stocks.
- ---------------
+ Small-capitalization funds typically carry additional risks since smaller
companies generally have a higher risk of failure. Historically, smaller
companies' stocks have experienced a greater degree of market volatility than
large company stocks on average.
(1) Including the 4.75% sales load, the Fund's return was -11.60% for the
period.
* The Fund's portfolio composition is subject to change.
107
<PAGE> 111
- --------------------------------------------------------------------------------
ISG SMALL-CAP OPPORTUNITY FUND
PERFORMANCE (AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL-CAP OPPORTUNITY SMALL-CAP OPPORTUNITY
CLASS A SHARES FUND WITH SALES CHARGE FUND WITHOUT SALES CHARGE RUSSELL 2000 STOCK INDEX
---------------------- ------------------------- ------------------------
<S> <C> <C> <C>
'88' 9525 10000 10000
'89' 11454 12026 11624
'90' 10697 11231 9356
'91' 17023 17872 13665
'92' 21273 22333 16181
'93' 28038 29436 19240
'94' 26017 27315 18890
'95' 33428 35095 24262
'96' 41779 43862 28264
'97' 51978 54571 34584
'98' 48237 50643 33703
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT SALES WITH SALES
CHARGE CHARGE*
CLASS A SHARES ------------- ----------
<S> <C> <C>
1-Year........................ -7.20% -11.60%
5-Year........................ 11.46% 10.39%
10-Year....................... 17.61% 17.05%
*Reflects the maximum sales charge of 4.75%.
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES SMALL-CAP OPPORTUNITY FUND RUSSELL 2000 STOCK INDEX
-------------------------- ------------------------
<S> <C> <C>
'88' 10000 10000
'89' 12026 11624
'90' 11231 9356
'91' 17872 13665
'92' 22333 16181
'93' 29436 19240
'94' 27315 18890
'95' 35095 24262
'96' 43862 28264
'97' 54571 34584
'98' 50682 33703
</TABLE>
The Class B contingent deferred sales charge (CDSC) is not included in the
above graph, since the performance is for more than 6 years and the CDSC
would no longer apply.
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT CDSC WITH CDSC**
CLASS B SHARES ------------ -----------
<S> <C> <C>
1-Year..................... -7.13% -9.74%
5-Year..................... 11.48% 11.35%
10-Year.................... 17.62% 17.62%
**Reflects the applicable contingent deferred sales
charge (maximum 4.00%).
THE DATA FOR CLASS B SHARES PRIMARILY PRESENTS THE
RESULTS OF THE CLASS A SHARES. ACTUAL CLASS B SHARES
AVERAGE ANNUAL TOTAL RETURN AND HYPOTHETICAL GROWTH
RESULTS WOULD HAVE BEEN LOWER. SEE NOTES BELOW.
</TABLE>
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES SMALL-CAP OPPORTUNITY FUND RUSSELL 2000 STOCK INDEX
- -------------------- -------------------------- ------------------------
<S> <C> <C>
'88' 10000 10000
'89' 12026 11624
'90' 11231 9356
'91' 17872 13665
'92' 22333 16181
'93' 29436 19240
'94' 27315 18890
'95' 35095 24262
'96' 43862 28264
'97' 54571 34584
'98' 50643 33703
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
INSTITUTIONAL SHARES --------------
<S> <C>
1-Year................................. -7.20%
5-Year................................. 11.46%
10-Year................................ 17.61%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment in
the indicated share class versus a similar investment in the Fund's benchmark.
The quoted returns reflect the performance from 8/1/94 to 12/14/98 of the DG
Opportunity Fund (the "Predecessor Fund"), an open-end investment company that
was the predecessor fund to the ISG Small-Cap Opportunity Fund.
PERFORMANCE FOR THE CLASS B SHARES, WHICH COMMENCED OPERATIONS ON 12/21/98, IS
BASED ON THE HISTORICAL PERFORMANCE OF THE CLASS A SHARES, (WITHOUT SALES
CHARGE) PRIOR TO THAT DATE. CLASS A SHARES PERFORMANCE DOES NOT REFLECT THE
HIGHER 12B-1 FEES OR THE CONTINGENT DEFERRED SALES CHARGE (CDSC). HAD THE CDSC
AND HIGHER 12B-1 FEES BEEN INCORPORATED, TOTAL RETURN AND HYPOTHETICAL GROWTH
FIGURES WOULD HAVE BEEN LOWER.
The Institutional Share class was initially offered on 12/14/98 and reflects the
historical performance of the Class A Shares (without sales charge) prior to
that date.
The Predecessor Fund commenced operations on 8/1/94 through a transfer of assets
from certain collective trust fund ("commingled") accounts managed by Deposit
Guaranty Corp., using materially equivalent investment objectives, policies and
methodologies as the Fund. The quoted performance of the Fund includes
performance of the commingled accounts for periods prior to the Fund's
commencement of operations, as adjusted to reflect the expenses associated with
the Fund. The commingled accounts were not registered with the Securities and
Exchange Commission and, therefore, were not subject to the investment
restrictions imposed by law on registered mutual funds. If the commingled
accounts had been registered, the commingled accounts' performance may have been
adversely affected. The performance also reflects reinvestment of dividends and
capital gain distributions.
The Fund's performance is compared to the Russell 2000 Stock Index, an unmanaged
index generally representative of the performance of small-capitalization
stocks. The Index is unmanaged and does not reflect expenses associated with a
mutual fund, such as investment management and fund accounting fees. The Fund's
performance reflects the deduction of fees for these value-added services.
PAST PERFORMANCE IS NOT A PREDICTION OF FUTURE RESULTS. THE FUND'S INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL PURCHASE PRICE.
108
<PAGE> 112
- --------------------------------------------------------------------------------
ISG SMALL-CAP OPPORTUNITY FUND
(AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
[PIE CHART]
<TABLE>
<CAPTION>
<S> <C>
Consumer Cyclicals .................... 4.2%
Utilities/Telecommunications .......... 5.2%
Cash and Cash Equivalents ............. 10.7%
Transportation ........................ 4.0%
Consumer Services ..................... 6.1%
Health Care ........................... 5.8%
Capital Goods - Technology ............ 22.9%
Capital Goods and Industry ............ 6.8%
Restaurant ............................ 10.0%
Financial Services .................... 7.1%
Retail ................................ 12.1%
Energy ................................ 5.1%
</TABLE>
TOP 10 EQUITY HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
TOTAL INVESTMENTS
-----------------
<S> <C>
1. Cree Research, Inc. ................................... 5.9%
2. T. Rowe Price Associates .............................. 4.0%
3. Kuhlman Corp. ......................................... 3.5%
4. Terex Corp. ........................................... 3.4%
5. Insight Enterprises, Inc. ............................. 3.2%
6. Hunt (J.B.) Transport Services, Inc.................... 3.2%
7. Ames Department Stores, Inc. .......................... 3.2%
8. INSO Corp. ............................................ 3.1%
9. Micros Systems, Inc. .................................. 3.1%
10. Foodmaker, Inc. ....................................... 2.8%
</TABLE>
* The Fund's portfolio composition is subject to change.
109
<PAGE> 113
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
SMALL-CAP OPPORTUNITY FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
COMMON STOCKS (91.7%)
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- -------------------------------- ----------- ------------
AIR TRANSPORTATION (0.6%)
Atlantic Coast Airlines Holdings
(b)........................... 27,000 $ 675,000
------------
BUSINESS EQUIPMENT & SERVICES (7.5%)
Comforce Corp. (b).............. 218,000 1,171,750
Employee Solutions, Inc. (b).... 85,000 217,813
Master Graphics, Inc. (b)....... 57,500 283,906
Micros Systems, Inc. (b)........ 100,000 3,287,500
Rainbow Rentals, Inc. (b)....... 130,000 1,283,750
Staffmark, Inc. (b)............. 83,000 1,857,125
------------
8,101,844
------------
CAPITAL GOODS (7.0%)
Kuhlman Corp.................... 100,000 3,787,500
Terex Corp. (b)................. 129,700 3,704,556
------------
7,492,056
------------
COMPUTER SOFTWARE AND SERVICES (3.2%)
Insight Enterprises, Inc. (b)... 68,000 3,459,500
------------
ENVIRONMENTAL CONTROL (1.9%)
Eastern Environmental Services,
Inc. (b)...................... 70,000 2,073,750
------------
FINANCIAL SERVICES (7.1%)
Hambrecht & Quist Group (b)..... 40,200 912,038
Morgan Keegan, Inc.............. 130,000 2,445,625
T. Rowe Price Associates........ 126,000 4,315,500
------------
7,673,163
------------
HEALTH CARE (4.3%)
Arterial Vascular Engineering,
Inc. (b)...................... 54,200 2,845,500
Neotherapeutics, Inc. (b)....... 119,000 1,249,500
ProMedCo Management Co. (b)..... 82,500 495,000
------------
4,590,000
------------
LEISURE & RESORTS (1.6%)
Fairfield Communities, Inc.
(b)........................... 158,000 1,747,875
------------
MACHINERY & EQUIPMENT (0.2%)
Iteq, Inc. (b).................. 76,000 161,500
------------
OIL & GAS (5.3%)
Forcenergy, Inc. (b)............ 100,000 262,500
Friede Goldman International,
Inc. (b)...................... 106,600 1,212,575
Gulf Island Fabrication, Inc.
(b)........................... 106,000 821,500
Input/Output, Inc. (b).......... 113,800 832,163
Pool Energy Services Co. (b).... 123,000 1,329,937
Snyder Oil Corp................. 57,600 766,800
TransCoastal Marine Services,
Inc. (b)...................... 167,500 497,266
------------
5,722,741
------------
COMMON STOCKS, CONTINUED
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- -------------------------------- ----------- ------------
PHARMACEUTICALS (3.4%)
Horizon Pharmacies, Inc. (b).... 161,000 $ 1,740,813
Sangstat Medical Corp. (b)...... 90,000 1,912,500
------------
3,653,313
------------
RESTAURANTS (10.6%)
Brinker International, Inc.
(b)........................... 47,800 1,380,225
Dave & Buster's, Inc. (b)....... 84,500 1,948,781
Foodmaker, Inc. (b)............. 136,000 3,000,500
Outback Steakhouse, Inc. (b).... 61,000 2,432,375
RARE Hospitality International,
Inc. (b)...................... 185,000 2,590,000
------------
11,351,881
------------
RETAIL (10.3%)
Ames Department Stores, Inc.
(b)........................... 127,000 3,428,999
Consolidated Stores Corp. (b)... 61,500 1,241,531
General Nutrition Cos. (b)...... 110,000 1,787,499
Pamida Holdings Corp. (b)....... 104,400 437,175
Stage Stores, Inc. (b).......... 138,500 1,298,438
Stein Mart, Inc. (b)............ 118,000 822,313
Trans World Entertainment Corp.
(b)........................... 85,000 1,620,313
Ugly Duckling Corp.............. 91,700 424,113
------------
11,060,381
------------
TECHNOLOGY (9.4%)
Data General Corp. (b).......... 160,000 2,630,000
Datastream Systems, Inc. (b).... 204,000 2,346,000
Inso Corp. (b).................. 133,000 3,325,000
Microage, Inc. (b).............. 50,400 774,900
Micrografx, Inc. (b)............ 89,500 984,500
------------
10,060,400
------------
TELECOMMUNICATIONS (14.0%)
Carrier Access Corp. (b)........ 37,800 1,301,738
Cree Research, Inc. (b)......... 133,000 6,367,374
Semtech Corp. (b)............... 75,200 2,697,799
Skytel Communications, Inc.
(b)........................... 121,100 2,679,338
World Access, Inc. (b).......... 90,000 1,923,750
------------
14,969,999
------------
TRANSPORTATION (4.2%)
Hunt (J.B.) Transport Services,
Inc........................... 150,000 3,450,000
U.S. Xpress Enterprises, Inc.,
Class A (b)................... 72,000 1,080,000
------------
4,530,000
------------
</TABLE>
Continued
110
<PAGE> 114
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
SMALL-CAP OPPORTUNITY FUND DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCKS, CONTINUED
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- -------------------------------- ----------- ------------
<S> <C> <C>
WHOLESALE DISTRIBUTION (1.1%)
United Stationers, Inc. (b)..... 47,000 $ 1,222,000
------------
TOTAL COMMON STOCKS (Cost
$84,391,488).................. 98,545,403
------------
CASH EQUIVALENTS (0.1%)
Bank of New York Cash Reserve
Money Market Fund............. $ 149,961 149,961
------------
TOTAL CASH EQUIVALENTS
(Cost $149,961)............... 149,961
------------
REPURCHASE AGREEMENTS (8.4%)
SHARES OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- -------------------------------- ----------- ------------
Cantor Fitzgerald, 5.00%,
1/4/99, dated 12/30/98, with a
maturity value of $9,006,250
(Collateralized by $8,935,000
U.S. Treasury Notes, 5.50%,
2/29/00, fair
value -- $9,181,178).......... $ 9,000,000 $ 9,000,000
------------
TOTAL REPURCHASE AGREEMENTS
(Cost $9,000,000)............. 9,000,000
------------
TOTAL INVESTMENTS
(Cost $93,541,449)
(a) -- (100.2%) 107,695,364
Liabilities in excess of other
assets -- (-0.2%) (241,836)
------------
TOTAL NET ASSETS -- (100.0%) $107,453,528
============
</TABLE>
- ---------------
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting in excess of federal income tax reporting of $448,145.
Cost for federal income tax purposes differs from value by net unrealized
appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation........... $24,719,710
Unrealized depreciation........... (11,013,940)
-----------
Net unrealized appreciation....... $13,705,770
===========
</TABLE>
(b) Non-income producing security.
See notes to financial statements.
111
<PAGE> 115
ISG FUNDS
SMALL-CAP OPPORTUNITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (cost
$84,541,449)..................... $ 98,695,364
Repurchase agreements, at cost..... 9,000,000
------------
Total Investments................ 107,695,364
Interest and dividends
receivable....................... 48,167
Receivable for capital shares
issued........................... 1,448
Receivable from investment
advisor.......................... 11,067
------------
TOTAL ASSETS..................... 107,756,046
LIABILITIES:
Custody payable.................... $ 120
Payable for investments
purchased........................ 236,188
Payable for capital shares
redeemed......................... 665
Accrued expenses and other
payables:
Advisory fees.................... 48,713
Administration fees.............. 1,744
Shareholder servicing
fees -- Class A Shares......... 217
Shareholder servicing fees --
Institutional Shares........... 1,527
Other............................ 13,344
--------
TOTAL LIABILITIES................ 302,518
------------
NET ASSETS:
Capital............................ 104,693,657
Undistributed (distributions in
excess of) net realized gains
(losses)......................... (11,394,044)
Net unrealized appreciation
(depreciation) from
investments...................... 14,153,915
------------
NET ASSETS......................... $107,453,528
============
Class A Shares
Net Assets....................... $ 11,144,548
Shares outstanding............... 861,920
Redemption price per share....... $ 12.93
============
Class A Shares -- Maximum Sales
Charge........................... 4.75%
------------
Maximum Offering Price Per Share
(100%/(100% -- Maximum Sales
Charge) of net asset value
adjusted to the nearest
cent).......................... $ 13.57
============
Class B Shares
Net Assets....................... $ 8,377
Shares outstanding............... 647
Offering price per share *....... $ 12.94
============
Institutional Shares
Net Assets....................... $ 96,300,603
Shares outstanding............... 7,446,043
Offering and redemption price per
share.......................... $ 12.93
============
</TABLE>
- ---------------
* Redemption price per share varies by length of time shares are held.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28,
1998(A) 1998
------------ ------------
<S> <C> <C>
INVESTMENT INCOME:
Interest income................. $ 752,564 $ 638,380
Dividend income................. 124,649 180,173
------------ -----------
TOTAL INVESTMENT INCOME....... 877,213 818,553
EXPENSES:
Investment advisory fees........ 874,343 966,775
Administration fees............. 90,864 105,468
Shareholder servicing
fees -- Class A Shares........ 131,641 97,554
Shareholder servicing fees --
Class B Shares................ 1 --
Shareholder servicing fees --
Institutional Shares.......... 6,414 --
Distribution fees --
Class B Shares................ 2 --
Accounting fees................. 39,766 39,084
Transfer agent fees............. 65,849 52,313
Directors' fees................. 1,768 3,344
Other fees...................... 64,835 65,085
------------ -----------
Total expenses before
voluntary fee
reductions/reimbursements... 1,275,483 1,329,623
Expenses voluntarily
reduced/reimbursed.......... (11,067) (112,136)
------------ -----------
Net Expenses.................. 1,264,416 1,217,487
------------ -----------
NET INVESTMENT LOSS............. (387,203) (398,934)
------------ -----------
REALIZED/UNREALIZED GAINS
(LOSSES) FROM INVESTMENTS:
Net realized gains (losses) from
investment transactions....... (11,393,210) 24,232,586
Net change in unrealized
appreciation (depreciation)
from investments.............. (3,912,574) 8,351,884
------------ -----------
Net realized/unrealized gains
(losses) from investments..... (15,305,784) 32,584,470
------------ -----------
Change in net assets resulting
from operations............... $(15,692,987) $32,185,536
============ ===========
</TABLE>
- ---------------
(a) For the period from March 1, 1998 through December 31, 1998.
See notes to financial statements
112
<PAGE> 116
ISG FUNDS
SMALL-CAP OPPORTUNITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 28,
1998(a) 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net investment loss....................................... $ (387,203) $ (398,934) $ (169,394)
Net realized gains (losses) from investment
transactions............................................ (11,393,210) 24,232,586 5,530,831
Net change in unrealized appreciation (depreciation) from
investment transactions................................. (3,912,574) 8,351,884 1,007,879
------------ ------------ ------------
Change in net assets resulting from operations.............. (15,692,987) 32,185,536 6,369,316
------------ ------------ ------------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS:
From net realized gains on investment transactions........ (7,316,799) (16,352,806) (4,554,267)
------------ ------------ ------------
Change in net assets from shareholder distributions......... (7,316,799) (16,352,806) (4,554,267)
------------ ------------ ------------
Change in net assets from capital transactions.............. 7,591,804 26,511,632 25,234,774
------------ ------------ ------------
Change in net assets........................................ (15,417,982) 42,344,362 27,049,823
NET ASSETS:
Beginning of period....................................... 122,871,510 80,527,148 53,477,325
------------ ------------ ------------
End of period............................................. $107,453,528 $122,871,510 $ 80,527,148
============ ============ ============
</TABLE>
- ---------------
(a) For the period from March 1, 1998 through December 31, 1998.
See notes to financial statements
113
<PAGE> 117
ISG FUNDS
SMALL-CAP OPPORTUNITY FUND
FINANCIAL HIGHLIGHTS, CLASS A SHARES
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1998(d) 1998 1997 1996 1995(a)
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........... $ 15.84 $ 13.53 $ 12.79 $ 11.15 $ 10.00
-------- -------- -------- -------- --------
Investment Activities
Net investment income (loss)................. (0.42) (0.05) (0.03) -- 0.02
Net realized and unrealized gains (losses)
from investments........................... (1.61) 4.90 1.60 3.30 1.17
-------- -------- -------- -------- --------
Total from Investment Activities............. (2.03) 4.85 1.57 3.30 1.19
-------- -------- -------- -------- --------
Distributions
Net investment income........................ -- -- -- -- (0.02)
Net realized gains........................... (0.88) (2.54) (0.83) (1.66) (0.02)
-------- -------- -------- -------- --------
Total Distributions.......................... (0.88) (2.54) (0.83) (1.66) (0.04)
-------- -------- -------- -------- --------
Net change in asset value...................... (2.91) 2.31 0.74 1.64 1.15
-------- -------- -------- -------- --------
Net Asset Value, End of Period................. $ 12.93 $ 15.84 $ 13.53 $ 12.79 $ 11.15
======== ======== ======== ======== ========
TOTAL RETURN (EXCLUDES SALES CHARGE)........... (13.00)%(b) 37.81% 12.08% 31.42% 11.84%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000).............. $ 11,145 $122,872 $ 80,527 $ 53,477 $ 36,664
Ratio of expenses to average net assets........ 1.38%(c) 1.20% 1.14% 1.17% 0.79%(c)
Ratio of net investment income (loss) to
average net assets........................... (0.42)%(c) (0.39)% (0.24)% 0.00% 0.06%(c)
Ratio of expenses to average net assets*....... 1.39%(c) 1.31% 1.30% 1.52% 2.13%(c)
Portfolio turnover**........................... 110% 180% 116% 154% 45%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If such
voluntary fee reductions/reimbursements had not occurred, the ratio would
have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from August 1, 1994 (commencement of operations) through
February 28, 1995.
(b) Not annualized.
(c) Annualized.
(d) For the period March 1, 1998 to December 31, 1998. In conjunction with the
reorganization of the ISG Funds, the Fund changed its fiscal year end to
December 31.
FINANCIAL HIGHLIGHTS, CLASS B SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1998(a)
------------
<S> <C>
Net Asset Value, Beginning of Period........................ $12.38
------
Investment Activities
Net realized and unrealized gains (losses) from
investments............................................. 0.56
------
Total from Investment Activities.......................... 0.56
------
Net change in net asset value............................... 0.56
------
Net Asset Value, End of Period.............................. $12.94
======
TOTAL RETURN (EXCLUDES REDEMPTION CHARGE)................... 4.52%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $ 8
Ratio of expenses to average net assets..................... 1.36%(c)
Ratio of net investment income (loss) to average net
assets.................................................... (0.45)%(c)
Ratio of expenses to average net assets*.................... 2.35%(c)
Portfolio turnover**........................................ 110%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from December 21, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
114
<PAGE> 118
ISG FUNDS
SMALL-CAP OPPORTUNITY FUND
FINANCIAL HIGHLIGHTS, INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1998(a)
------------
<S> <C>
Net Asset Value, Beginning of Period........................ $ 11.85
-------
Investment Activities
Net realized and unrealized gains (losses) from
investments............................................. 1.08
-------
Total from Investment Activities.......................... 1.08
-------
Net change in asset value................................... 1.08
-------
Net Asset Value, End of Period.............................. $ 12.93
=======
TOTAL RETURN................................................ 9.11%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $96,301
Ratio of expenses to average net assets..................... 1.33%(c)
Ratio of net investment income (loss) to average net
assets.................................................... (0.54)%(c)
Ratio of expenses to average net assets*.................... 1.48%(c)
Portfolio turnover**........................................ 110%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements.
115
<PAGE> 119
[THIS PAGE INTENTIONALLY LEFT BLANK]
116
<PAGE> 120
LAZARD INTERNATIONAL EQUITY INVESTMENT TEAM
Portfolio Manager
ISG International Equity Fund+
- ---------------------------------------------------------------
- ---------------------------------------------------------------
INVESTMENT GOAL
The Fund seeks to provide investors with capital appreciation. The Fund
invests primarily in the equity securities of foreign issuers that the Fund
manager considers undervalued based on their return on total capital or
equity. The Fund expects to invest primarily in the stocks of companies
located in developed foreign countries. However, the Fund may invest up to
25% of its assets in companies located or doing significant business, in
emerging markets.
- ---------------------------------------------------------------
Q. HOW DID THE FUND PERFORM DURING THE PERIOD?
A. For the 12 months ended December 31, 1998, the Fund's total return was 9.47%
(Class A shares at NAV).(1) In comparison, the MSCI EAFE Index rose 20.33%.
Q. WHAT FACTORS AFFECTED YOUR PERFORMANCE?
A. Financial markets in 1998 were highlighted by record-high stock prices, as
well as by financial crises, unprecedented corporate consolidation and the dawn
of the European Monetary Union.
Mergers, acquisitions and restructuring drove many equity markets to all-time
highs in July. However, the Russian government's default on its debt, coupled
with a devaluation of the ruble, triggered margin calls on leveraged investments
throughout the world. This sharp sell-off caused a ripple effect of additional
margin calls, and forced sales of liquid assets that destabilized both emerging
and developed markets. The financial collapse of the Long-Term Capital
Management hedge fund, along with a rash of corporate profit warnings, further
damaged investors' faith in the markets.
However, three successive rate cuts by the U.S. Federal Reserve Board, and a
coordinated Europe-wide rate cut, restored stability. Corporate activity
resumed, and investors returned, sending international equity markets up more
than 20% during the fourth quarter. Our Fund participated in this rally to
finish up the year solidly.
Q. HOW DIVERSIFIED WAS THE FUND ACROSS THE WORLD'S MARKETS?
A. One significant advantage the Fund offers shareholders is the opportunity to
invest in many countries, sectors and individual companies, with a single
investment vehicle.
As of December 31, 1998, approximately 22.2% of the Fund's portfolio were
invested in the United Kingdom, 15.8% in France, 16.0% in Japan, 8.3% in
Germany, 7.4% in Sweden, 7.4% in Switzerland, 6.0% in Spain, 6.2% in Italy and
3.0% in the Netherlands. Our remaining assets were invested in Australia,
Denmark, Finland, Hong Kong, Singapore and Malaysia.*
The Fund's top five holdings were Vivendi (3.0% of the Fund's net assets),
British Aerospace PLC (2.7%), Allied Zurich AG (2.7%), Telefonica de Espana
(2.4%) and Telecom Italia SpA (2.3%).*
Q. WHAT IS YOUR OUTLOOK FOR 1999?
A. Many economies throughout the world, especially those of Russia and most
Asian and South American countries, continue to be roiled by uncertainty and
crisis. In developed nations, competitive pressures on margins should continue
in 1999. Top-line revenues may not be secure, as pricing power could be nearly
nonexistent and the global outlook could remain uncertain.
With the advent of the new European Monetary Union, which began January 1, 1999,
the trend toward mergers and restructurings should continue. The
mergers-and-acquisitions activity we have seen in the United States and Europe
may be joined by more of the same in Asia and Latin America if the economies in
these regions can stabilize and attract foreign capital. Although the financial
crises of the last two years suggest that caution would be prudent, we feel that
investment opportunities could arise as select companies take action to improve
their financial productivity.
- ---------------
+ International investing involves increased risk and volatility.
(1) Including the 4.75% sales load, the Fund's return was 4.31% for the period.
* The Fund's portfolio composition is subject to change.
117
<PAGE> 121
- --------------------------------------------------------------------------------
ISG INTERNATIONAL EQUITY FUND
PERFORMANCE (AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND INTERNATIONAL EQUITY FUND
CLASS A SHARES WITH SALES CHARGE WITHOUT SALES CHARGE MSCI EAFE INDEX
------------------------- ------------------------- ---------------
<S> <C> <C> <C>
Aug. 97 9525 10000 10000
Dec. 97 9238 9702 9472
Dec 98 10114 10619 11723
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
--------------------------
WITHOUT SALES WITH SALES
CHARGE CHARGE*
CLASS A SHARES ------------- ----------
<S> <C> <C>
1-Year........................ 9.47% 4.31%
Since Inception 8/15/97....... 4.48% 0.83%
*Reflects the maximum sales charge of 4.75%.
</TABLE>
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES INTERNATIONAL EQUITY FUND MSCI EAFE INDEX
------------------------- ---------------
<S> <C> <C>
Aug. 97 10000 10000
Dec. 97 9702 9472
Dec 98 10619 11723
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
INSTITUTIONAL SHARES --------------
<S> <C>
1-Year................................. 9.47%
Since Inception 8/15/97................ 4.48%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment in
the indicated share class versus a similar investment in the Fund's benchmark.
The quoted returns reflect the performance from 8/15/97 to 12/14/98 of the DG
International Equity Fund, an open-end investment company that was the
predecessor fund to the ISG International Equity Fund.
The Institutional Share class was initially offered on 12/14/98 and reflects the
historical performance of the Class A Shares (without sales charge) prior to
that date.
The Fund's performance is compared to the MSCI EAFE Index, which is unmanaged
and is generally representative of the performance of stock markets in those
regions. The index is unmanaged and does not reflect the expenses associated
with a mutual fund, such as investment management and fund accounting fees. The
Fund's performance reflects the deduction of fees for these value-added
services.
PAST PERFORMANCE IS NOT A PREDICTION OF FUTURE RESULTS. THE FUND'S INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL PURCHASE PRICE.
118
<PAGE> 122
- --------------------------------------------------------------------------------
ISG INTERNATIONAL EQUITY FUND
(AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------
[International Equity Fund Country Weightings Pie Chart]
COUNTRY WEIGHTINGS*
<TABLE>
<CAPTION>
<S> <C>
Cash & Cash Equivalents .................. 1.3%
Finland .................................. 1.0
Australia ................................ 2.3
France ................................... 15.8
Switzerland .............................. 7.4
Germany .................................. 8.3
Sweden ................................... 7.4
United Kingdom ........................... 22.2
Hong Kong/Malaysia/Singapore ............. 1.9
Spain .................................... 6.0
Japan .................................... 16.0
Italy .................................... 6.2
Denmark .................................. 1.2
Netherlands .............................. 3.0
</TABLE>
TOP 10 EQUITY HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
TOTAL INVESTMENTS
-----------------
<S> <C>
1. Vivendi................................................ 3.0%
2. British Aerospace PLC.................................. 2.7%
3. Allied Zurich AG....................................... 2.7%
4. Telefonica de Espana................................... 2.5%
5. Telecom Italia SpA..................................... 2.4%
6. Metro AG............................................... 2.3%
7. Istituto Bancario San Paolo di Torino.................. 2.3%
8. Argentina, Caja Postal y Banco Hipotecario de Espana
SA........................................................ 2.1%
9. Prudential Corp. PLC................................... 2.0%
10. Rhone-Poulenc, Class A................................. 2.0%
</TABLE>
* The Fund's portfolio composition is subject to change.
119
<PAGE> 123
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
INTERNATIONAL EQUITY FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
COMMON STOCKS (98.5%)
MARKET
SECURITY VALUE
DESCRIPTION SHARES (NOTE 4)
- ------------------------------------ -------- -----------
AUSTRALIA (2.3%):
BANKING (1.1%)
Westpac Banking Corp. Ltd.,
Sydney............................ 44,400 $ 297,386
-----------
MATERIALS & COMMODITIES (1.2%)
Broken Hill Proprietary Co. Ltd..... 46,917 345,871
-----------
643,257
-----------
DENMARK (1.2%):
BANKING (1.2%)
Unidanmark, Class A................. 3,850 347,836
-----------
FINLAND (1.0%):
BANKING (0.6%)
Merita Ltd., Class A................ 28,600 181,881
-----------
FOREST PRODUCTS & PAPER (0.4%)
UPM-Kymmene OYJ..................... 3,900 109,376
-----------
291,257
-----------
FRANCE (15.8%):
AUTOMOBILE (0.7%)
Michelin, Class B................... 4,900 196,052
-----------
BANKING (1.9%)
Banque Nationale de Paris........... 6,500 535,499
-----------
CHEMICALS (2.0%)
Rhone-Poulenc SA, Class A........... 11,100 571,492
-----------
ELECTRICAL & ELECTRONICS (1.4%)
Alcatel Alsthom..................... 3,140 384,489
-----------
ENERGY SOURCES (1.8%)
Elf Aquitaine SA.................... 4,330 500,748
-----------
INSURANCE (1.9%)
AXA................................. 3,700 536,519
-----------
MATERIALS & COMMODITIES (1.6%)
Compagnie de Saint Gobain........... 3,100 437,862
-----------
MULTI-INDUSTRY (4.5%)
Suez Lyonnaise des Eaux............. 2,090 429,523
Vivendi............................. 3,270 848,818
-----------
1,278,341
-----------
4,441,002
-----------
GERMANY (8.3%):
AUTOMOBILE (1.3%)
DaimlerChrysler AG (b).............. 3,718 367,218
-----------
CHEMICALS (1.8%)
Hoechst AG.......................... 12,100 502,010
-----------
RETAIL (2.3%)
Metro AG............................ 8,244 658,323
-----------
INSURANCE (1.1%)
Allianz AG.......................... 810 297,150
-----------
MACHINERY & ENGINEERING (0.7%)
Thyssen AG.......................... 1,000 185,587
-----------
UTILITIES -- ELECTRICAL & GAS (1.1%)
Viag AG............................. 530 310,899
-----------
2,321,187
-----------
COMMON STOCKS, CONTINUED
MARKET
SECURITY VALUE
DESCRIPTION SHARES (NOTE 4)
- ------------------------------------ -------- -----------
HONG KONG (0.9%):
BANKING (0.9%)
HSBC Holdings PLC................... 10,400 $ 259,093
-----------
ITALY (6.2%):
BANKING (2.3%)
Istituto Bancario San Paolo di
Torino............................ 35,900 635,748
-----------
ENERGY SOURCES (1.5%)
ENI SpA............................. 66,500 435,565
-----------
TELECOMMUNICATIONS (2.4%)
Telecom Italia SpA.................. 104,800 661,001
-----------
1,732,314
-----------
JAPAN (16.0%):
APPLIANCES & HOUSEHOLD DURABLES (1.1%)
Matsushita Electric Industrial Co.
Ltd............................... 18,000 318,999
-----------
AUTOMOBILE (0.5%)
Nissan Motor Co. Ltd................ 43,000 131,901
-----------
BANKING (0.6%)
Sumitomo Trust & Banking Ltd........ 66,000 175,537
-----------
BEVERAGES (1.4%)
Asahi Breweries Ltd................. 27,000 398,549
-----------
ELECTRICAL & ELECTRONICS (1.8%)
Omron Corp.......................... 9,000 123,514
Sony Corp........................... 5,400 394,002
-----------
517,516
-----------
FINANACIAL SERVICES (3.0%)
Orix Corp........................... 6,400 478,880
Promise Co. Ltd..................... 6,940 361,777
-----------
840,657
-----------
OFFICE EQUIPMENT (1.5%)
Ricoh Co. Ltd....................... 45,000 415,704
-----------
RECREATION & OTHER CONSUMER GOODS (1.3%)
Nintendo Co. Ltd.................... 3,900 378,602
-----------
TELECOMMUNICATIONS (3.2%)
Nippon Telegraph & Telephone
Corp.............................. 59 456,114
NTT Mobile Communication Network,
Inc............................... 10 412,246
-----------
868,360
-----------
TOBACCO (1.6%)
Japan Tobacco, Inc.................. 45 450,811
-----------
4,496,636
-----------
MALAYSIA (0.2%):
LEISURE & TOURISM (0.2%)
Genting Berhad...................... 41,300 62,750
-----------
NETHERLANDS (3.0%):
APPLIANCES & HOUSEHOLD DURABLES (1.1%)
Philips Electronics NV.............. 4,700 315,559
-----------
BEVERAGES (1.9%)
Heineken NV......................... 8,725 525,360
-----------
840,919
-----------
</TABLE>
Continued
120
<PAGE> 124
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
INTERNATIONAL EQUITY FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
COMMON STOCKS, CONTINUED
MARKET
SECURITY VALUE
DESCRIPTION SHARES (NOTE 4)
- ------------------------------------ -------- -----------
SINGAPORE (0.8%):
BANKING (0.8%)
United Overseas Bank, Ltd........... 34,000 $ 218,430
-----------
SPAIN (6.0%):
BANKING (2.1%)
Argentaria, Caja Postal y Banco
Hipotecario de Espana SA.......... 22,500 583,575
-----------
ENERGY SOURCES (1.5%)
Endesa SA........................... 15,400 408,663
-----------
TELECOMMUNICATIONS (2.4%)
Telefonica de Espana................ 15,518 691,070
-----------
1,683,308
-----------
SWEDEN (7.3%):
APPLIANCES & HOUSEHOLD DURABLES (1.6%)
Electrolux AB, Class B.............. 25,900 445,751
-----------
AUTOMOBILE (0.9%)
Volvo AB, Class B................... 10,500 240,946
-----------
BANKING (2.0%)
Nordbanken Holding AB............... 30,400 195,027
Svenska Handelsbanken, Stockholm,
Class A........................... 9,300 392,398
-----------
587,425
-----------
HEALTH & PERSONAL CARE (1.8%)
Astra AB, Class B................... 24,500 498,733
-----------
MACHINERY & ENGINEERING (1.0%)
ABB AB, Class A..................... 27,500 293,472
-----------
2,066,327
-----------
SWITZERLAND (7.4%):
BUSINESS & PUBLIC SERVICES (0.5%)
SGS Societe Generale de Surveillance
Holding SA........................ 143 140,035
-----------
FOOD & HOUSEHOLD PRODUCTS (1.2%)
Nestle SA........................... 157 341,781
-----------
INSURANCE (2.8%)
Zurich Allied AG.................... 1,030 762,667
-----------
MULTI-INDUSTRY (1.3%)
Siemens AG.......................... 5,800 374,357
-----------
PHARMACEUTICAL (1.0%)
Roche Holding AG.................... 22 268,456
-----------
COMMON STOCKS, CONTINUED
MARKET
SECURITY VALUE
DESCRIPTION SHARES (NOTE 4)
- ------------------------------------ -------- -----------
SWITZERLAND, CONTINUED
RETAIL (0.6%)
The Swatch Group AG, Class B........ 291 $ 180,090
-----------
2,067,386
-----------
UNITED KINGDOM (22.1%):
AEROSPACE & MILITARY TECHNOLOGY (2.7%)
British Aerospace PLC............... 90,800 769,717
-----------
BANKING (1.8%)
National Westminster Bank PLC,
London............................ 26,600 512,939
-----------
BEVERAGES (1.5%)
Diageo PLC.......................... 35,868 408,192
-----------
BROADCASTING & PUBLISHING (0.3%)
Mirror Group PLC.................... 36,800 91,995
-----------
CHEMICALS (1.2%)
Imperial Chemical Industries PLC.... 37,800 327,665
-----------
ELECTRICAL & ELECTRONICS (1.4%)
Siebe PLC........................... 100,000 394,320
-----------
ENERGY SOURCES (1.8%)
British Petroleum Co. PLC........... 34,600 516,668
-----------
FOOD & HOUSEHOLD PRODUCTS (1.9%)
Cadbury Schweppes PLC............... 12,600 214,880
Unilever PLC........................ 28,800 322,963
-----------
537,843
-----------
INSURANCE (4.8%)
Prudential Corp. PLC................ 38,100 575,272
Royal & Sun Alliance Insurance
Group............................. 53,700 438,466
Allied Zurich PLC (b)............... 22,700 338,592
-----------
1,352,330
-----------
LEISURE & TOURISM (1.6%)
Granada Group PLC................... 25,500 450,786
-----------
RECREATION & OTHER CONSUMER GOODS (0.5%)
EMI Group PLC....................... 21,400 143,133
-----------
RETAIL (1.1%)
Great Universal Stores PLC.......... 30,300 319,367
-----------
TOBACCO (1.5%)
British American Tobacco PLC........ 46,900 412,400
-----------
6,237,355
-----------
TOTAL COMMON STOCKS(Cost $24,788,992) 27,709,057
-----------
</TABLE>
Continued
121
<PAGE> 125
ISG FUNDS SCHEDULE OF PORTFOLIO INVESTMENTS
INTERNATIONAL EQUITY FUND DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
CASH EQUIVALENTS (1.3%)
SHARES
OR MARKET
SECURITY PRINCIPAL VALUE
DESCRIPTION AMOUNT (NOTE 4)
- ------------------------------------ -------- -----------
Bank of New York Cash Reserve Money
Market Fund....................... $354,059 $ 354,059
-----------
TOTAL CASH EQUIVALENTS
(Cost $354,059) 354,059
-----------
RIGHTS (0.0%)
- ------------------------------------------------------------
SPAIN (0.0%)
TELECOMMUNICATIONS (0.0%)
Telefonica de Espana................ 15,518 13,800
-----------
TOTAL RIGHTS (Cost $0) 13,800
-----------
TOTAL INVESTMENTS
(Cost $25,143,051)(a) (99.8%) 28,076,916
Other assets in excess of liabilities (0.2%) 49,007
-----------
TOTAL NET ASSETS (100.0%) $28,125,923
===========
</TABLE>
- ---------------
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting in excess of federal income tax reporting of $90,658 and
by the amount of market to market adjustment for passive foreign investment
companies of $38,052. Cost for federal income tax purposes differs from
value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation............. $ 4,483,628
Unrealized depreciation............. (1,678,473)
-----------
Net unrealized appreciation......... $ 2,805,155
===========
</TABLE>
(b) Non-income producing security.
PLC -- Public Limited Company
See notes to financial statements
122
<PAGE> 126
ISG FUNDS
INTERNATIONAL EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value
(cost $25,143,051).................. $28,076,916
Foreign currency (cost $509).......... 356
Interest and dividends receivable..... 24,176
Reclaim receivable.................... 43,574
-----------
TOTAL ASSETS........................ 28,145,022
LIABILITIES:
Accrued expenses and other payables:
Advisory fees....................... $9,807
Administration fees................. 461
Shareholder servicing fees -- Class
A Shares.......................... 3
Shareholder servicing fees --
Institutional Shares.............. 458
Accounting fees..................... 990
Directors' fees..................... 72
Other............................. 7,308
------
TOTAL LIABILITIES................... 19,099
-----------
NET ASSETS:
Capital............................... 27,012,093
Undistributed (distributions in excess
of) net investment income........... (38,989)
Accumulated net realized gains
(losses) from investments and
foreign currency transactions....... (1,790,858)
Net unrealized appreciation
(depreciation) from investments and
translation of assets and
liabilities denominated in foreign
currencies.......................... 2,943,677
-----------
NET ASSETS............................ $28,125,923
===========
Class A Shares
Net Assets.......................... $ 149,508
Shares outstanding.................. 14,135
Redemption price per share.......... $ 10.58
===========
Class A Shares -- Maximum Sales
Charge.............................. 4.75%
-----------
Maximum Offering Price Per Share
(100%/(100% -- Maximum Sales
Charge) of net asset value
adjusted to the nearest cent)..... $ 11.11
===========
Institutional Shares
Net Assets.......................... $27,976,415
Shares outstanding.................. 2,644,521
Offering and redemption price per
share............................. $ 10.58
===========
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD ENDED PERIOD ENDED
DECEMBER 31, FEBRUARY 28,
1998(b) 1998(a)
-------------- --------------
<S> <C> <C>
INVESTMENT INCOME:
Interest income............. $ 55,976 $ 71,091
Dividend income............. 581,262 51,524
Foreign withholding tax
expense................... (61,623) --
----------- ----------
TOTAL INVESTMENT INCOME... 575,615 122,615
EXPENSES:
Investment advisory fees.... 239,978 95,011
Administration fees......... 68,863 9,237
Shareholder servicing
fees -- Class A Shares.... 34,073 14,252
Shareholder servicing
fees -- Institutional
Shares.................... 1,923 --
Accounting fees............. 51,254 31,787
Transfer agent fees......... 24,383 11,533
Directors' fees............. 1,186 509
Other fees.................. 92,642 53,510
----------- ----------
Total expenses before
voluntary fee
reductions/reimbursements.. 514,302 215,839
Expenses voluntarily
reduced/reimbursed...... (82,019) (47,505)
----------- ----------
Net Expenses.............. 432,283 168,334
----------- ----------
NET INVESTMENT INCOME
(LOSS).................... 143,332 (45,719)
----------- ----------
REALIZED/UNREALIZED GAINS
(LOSSES) FROM INVESTMENTS:
Net realized gains (losses)
from investments and
foreign currency
transactions.............. (1,608,869) (240,297)
Net change in unrealized
appreciation
(depreciation) from
investments and
translation of assets and
liabilities in foreign
currencies................ 1,521,825 1,421,852
----------- ----------
Net realized/unrealized
gains (losses) from
investments............... (87,044) 1,181,555
----------- ----------
Change in net assets
resulting from
operations................ $ 56,288 $1,135,836
=========== ==========
</TABLE>
- ---------------
(a) For the period from August 15, 1997 (commencement of operations) through
February 28, 1998.
(b) For the period from March 1, 1998 through December 31, 1998.
See notes to financial statements
123
<PAGE> 127
ISG FUNDS
INTERNATIONAL EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD ENDED PERIOD ENDED
DECEMBER 31, FEBRUARY 28,
1998(b) 1998(a)
-------------- --------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net investment income (loss).............................. $ 143,332 $ (45,719)
Net realized gains (losses) from investment and foreign
currency transactions................................... (1,608,869) (240,297)
Net change in unrealized appreciation (depreciation) from
investments and translation of assets and liabilities in
foreign currencies...................................... 1,521,825 1,421,852
-------------- --------------
Change in net assets resulting from operations.............. 56,288 1,135,836
-------------- --------------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS:
From net investment income................................ (71,392) --
In excess of net investment income........................ -- (20,145)
-------------- --------------
Change in net assets from shareholder distributions......... (71,392) (20,145)
-------------- --------------
Change in net assets from capital transactions.............. 1,607,816 25,417,520
-------------- --------------
Change in net assets........................................ 1,592,712 26,533,211
NET ASSETS:
Beginning of period....................................... 26,533,211 --
-------------- --------------
End of period............................................. $ 28,125,923 $ 26,533,211
============== ==============
</TABLE>
- ---------------
(a) For the period from August 15, 1997 (commencement of operations) through
February 28, 1998.
(b) For the period from March 1, 1998 through December 31, 1998.
See notes to financial statements
124
<PAGE> 128
ISG FUNDS
INTERNATIONAL EQUITY FUND
FINANCIAL HIGHLIGHTS, CLASS A SHARES
<TABLE>
<CAPTION>
PERIOD ENDED PERIOD ENDED
DECEMBER 31, FEBRUARY 28,
1998(b) 1998(a)
------------- ------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................ $ 10.46 $ 10.00
-------- --------
Investment Activities
Net investment income (loss).............................. 0.03 (0.02)
Net realized and unrealized gains (losses) from
investments and foreign currencies...................... 0.12 0.49
-------- --------
Total from Investment Activities.......................... 0.15 0.47
-------- --------
Distributions
Net investment income..................................... (0.03) --
In excess of net investment income........................ -- (0.01)
-------- --------
Total Distributions....................................... (0.03) (0.01)
-------- --------
Net change in asset value................................... 0.12 0.46
-------- --------
Net Asset Value, End of Period.............................. $ 10.58 $ 10.46
======== ========
TOTAL RETURN (EXCLUDES SALES CHARGE)........................ 1.42%(c) 4.71%(c)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000)........................... $ 149 $ 26,533
Ratio of expenses to average net assets..................... 1.81%(d) 1.77%(d)
Ratio of net investment income (loss) to average net
assets.................................................... 0.71%(d) (0.48)%(d)
Ratio of expenses to average net assets*.................... 2.16%(d) 2.27%(d)
Portfolio turnover**........................................ 62% 21%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from August 15, 1997 (commencement of operations) through
February 28, 1998.
(b) For the period from March 1, 1998 through December 31, 1998. In conjunction
with the reorganization of the ISG Funds, the Fund changed its year end to
December 31.
(c) Not annualized.
(d) Annualized.
FINANCIAL HIGHLIGHTS, INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1998(a)
------------
<S> <C>
Net Asset Value, Beginning of Period........................ $ 10.05
-------
Investment Activities
Net investment income (loss).............................. (0.01)
Net realized and unrealized gains (losses) from
investments and foreign currencies...................... 0.54
-------
Total from Investment Activities.......................... 0.53
-------
Net change in asset value................................... 0.53
-------
Net Asset Value, End of Period.............................. $ 10.58
=======
TOTAL RETURN................................................ 5.27%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $27,977
Ratio of expenses to average net assets..................... 1.61%(c)
Ratio of net investment income (loss) to average net
assets.................................................... (1.47)%(c)
Ratio of expenses to average net assets*.................... 1.89%(c)
Portfolio turnover**........................................ 62%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) Period from December 14, 1998 (commencement of operations) through December
31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
125
<PAGE> 129
[THIS PAGE INTENTIONALLY LEFT BLANK]
126
<PAGE> 130
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 -- ORGANIZATION
ISG Funds, formerly known as the AmeriStar Funds, are a separate series of
The Infinity Mutual Funds, Inc. (the "Company") which was organized as a
Maryland corporation on March 6, 1990 and is registered under the Investment
Company Act of 1940, as amended (the "Act"), as an open-end, management
investment company. The Company operates as a series of sixteen funds. The
accompanying financial statements and notes relate to the ISG Treasury Money
Market Fund and the ISG Prime Money Market Fund (collectively the "Money Market
Funds"), the ISG Limited Term U.S. Government Fund, the ISG Government Income
Fund, the ISG Municipal Income Fund, the ISG Limited Term Tennessee Tax-Exempt
Fund, the ISG Tennessee Tax-Exempt Fund, the ISG Limited Term Income Fund, the
ISG Income Fund, the ISG Equity Income Fund, the ISG Large-Cap Equity Fund, the
ISG Capital Growth Fund, the ISG Small-Cap Opportunity Fund and the ISG
International Equity Fund (collectively, the "Variable Net Asset Value Funds")
(individually, a "Fund" and collectively the "Funds").
The TREASURY MONEY MARKET FUND (formerly known as the U.S. Treasury Money
Market Portfolio) seeks to provide investors with as high a level of current
income as is consistent with the preservation of capital and the maintenance of
liquidity. This Fund will invest only in U.S. Treasury securities and in other
securities guaranteed as to principal and interest by the U.S. Government, and
repurchase agreements in respect thereof.
The PRIME MONEY MARKET FUND (formerly known as the Prime Money Market
Portfolio) seeks to provide investors with as high a level of current income as
is consistent with the preservation of capital and the maintenance of liquidity.
This Fund will invest in short-term money market instruments.
The LIMITED TERM U.S. GOVERNMENT FUND (formerly known as the Limited
Duration U.S. Government Portfolio) seeks to provide investors with high current
income without assuming undue risk. This Fund will invest primarily in a
portfolio of U.S. government securities that, under normal market conditions,
has an effective duration that approximates that of the Merrill Lynch Government
1 to 5 Year Bond Index.
The GOVERNMENT INCOME FUND (formerly known as the DG Government Income
Fund) seeks to provide investors with current income. This Fund will invest
primarily in securities guaranteed as to payment of principal and interest by
the U.S. government, its agencies or instrumentalities.
The MUNICIPAL INCOME FUND (formerly known as the DG Municipal Income Fund)
seeks to provide investors with current income exempt from Federal income tax.
This Fund will invest primarily in investment grade municipal obligations.
The LIMITED TERM TENNESSEE TAX EXEMPT-FUND (formerly known as the Limited
Duration Tennessee Tax Free Portfolio) seeks to provide investors with current
income exempt from Federal and Tennessee income taxes without assuming undue
risk. This Fund will invest primarily in a portfolio of investment grade
Tennessee municipal obligations that, under normal market conditions, has a
duration of under five years and an effective average portfolio maturity ranging
between three and five years.
The TENNESSEE TAX-EXEMPT FUND (formerly known as the Tennessee Tax Exempt
Bond Portfolio) seeks to provide investors with current income exempt from
Federal and Tennessee income taxes without assuming undue risk. This Fund will
invest primarily in investment grade Tennessee municipal obligations without
regard to maturity.
The LIMITED TERM INCOME FUND (formerly known as the Limited Duration Income
Portfolio) seeks to provide investors with current income without assuming undue
risk. This Fund will invest primarily in a portfolio of investment grade, U.S.
dollar denominated fixed-income securities of domestic and foreign issuers,
which, under normal market conditions, has a duration of under four years.
The INCOME FUND (formerly known as the Core Income Portfolio) seeks to
provide investors with current income without assuming undue risk. This Fund
will invest primarily in a portfolio of investment grade, U.S. dollar
denominated
Continued
127
<PAGE> 131
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998
fixed-income securities of domestic and foreign issuers, which, under normal
market conditions, has an effective duration of 50% to 150% of that of the
Merrill Lynch Corporate Government Master Index.
The EQUITY INCOME FUND (formerly known as the Dividend Growth Portfolio)
seeks to provide investors with current income and capital appreciation. This
Fund will invest primarily in dividend-paying equity securities of domestic
issuers which are expected to provide reasonable income and may have capital
appreciation potential.
The LARGE-CAP EQUITY FUND (formerly known as the DG Equity Fund) seeks to
provide investors with long-term capital appreciation and, as a secondary
objective, current income. This Fund will invest primarily in equity securities
of large capitalization (over $1 billion) domestic issuers that have the
potential to provide capital appreciation and income.
The CAPITAL GROWTH FUND (formerly known as the Capital Growth Portfolio)
seeks to provide investors with capital growth. This Fund will invest primarily
in the equity securities of domestic issuers.
The SMALL-CAP OPPORTUNITY FUND (formerly known as the DG Opportunity Fund)
seeks to provide investors with capital appreciation. This Fund will invest
primarily in equity securities of small capitalization (under $1 billion)
domestic issuers.
The INTERNATIONAL EQUITY FUND (formerly known as the DG International
Equity Fund) seeks to provide investors with capital appreciation. This Fund
will invest primarily in equity securities of foreign issuers which are
established companies in economically developed countries.
The Funds are authorized to issue three classes of shares as follows:
Institutional Shares (formerly known as the Trust Shares), Class A Shares
(formerly known as the Investor Shares) and Class B Shares (except for the
Treasury Money Market Fund which does not offer Class B Shares and the Limited
Term Tennessee Tax-Exempt Fund which does not currently offer Institutional
Shares). At December 31, 1998, the Government Income Fund, the Municipal Income
Fund and the International Equity Fund had no Class B shares outstanding and
therefore no operations for such shares are shown. Class A Shares are subject to
an initial sales charge imposed at the time of purchase and Class B Shares are
subject to a contingent deferred sales charge at the time of redemption, as
described in the Funds' prospectus. Class A and Class B Shares bear distribution
(12b-1) fees (except for the Government Income Fund, the Municipal Income Fund,
the Large-Cap Equity Fund, the Small-Cap Opportunity Fund and International
Equity Fund, which did not bear 12b-1 fees until January 1, 1999). Class B
Shares bear shareholder servicing fees. Class A and Institutional Shares bear
shareholder servicing fees (except for the Limited Term U.S. Government Fund,
the Limited Term Tennessee Tax-Exempt Fund, the Tennessee Tax-Exempt Fund, the
Limited Term Income Fund, the Income Fund, The Equity Income Fund and the
Capital Growth Fund, which did not bear shareholder servicing fees until January
1, 1999). Each class has identical rights and privileges except with respect to
the distribution (12b-1) fees paid by Class A and Class B Shares, the
shareholder servicing fees paid by each respective class, voting matters
affecting a single class of shares and the exchange privileges of each class of
shares.
At December 31, 1998, there were 25 billion shares of the Funds' $0.001 par
value common stock authorized, of which each Fund's shares are classified into
Class A Shares, Class B Shares and Institutional Shares.
NOTE 2 -- REORGANIZATION
The Funds entered into an Agreement and Plan of Reorganization with the DG
Investor Series (the "DG Funds") pursuant to which all of the assets and
liabilities of each DG Fund transferred to a corresponding ISG Fund in exchange
for shares of the ISG Fund. Each DG Fund listed below transferred all of its
assets and liabilities to the corresponding ISG Fund identified opposite its
name in exchange for shares of such ISG Fund and changed its fiscal year end to
December 31:
<TABLE>
<CAPTION>
DG FUNDS ISG FUNDS
-------- ---------
<S> <C>
DG Treasury Money Market Fund ISG Treasury Money Market Fund
DG Prime Money Market Fund ISG Prime Money Market Fund
DG Limited Term Government Income Fund ISG Limited Term U.S. Government Fund
DG Government Income Fund ISG Government Income Fund
DG Municipal Income Fund ISG Municipal Income Fund
DG Equity Fund ISG Large-Cap Equity Fund
DG Opportunity Fund ISG Small-Cap Opportunity Fund
DG International Equity Fund ISG International Equity Fund
</TABLE>
Continued
128
<PAGE> 132
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998
The reorganization, which qualified as a tax-free exchange for federal income
tax purposes, was completed on December 14, 1998 and was approved by
shareholders of the DG Funds at a special shareholder meeting held on December
11, 1998. The following is a summary of shares outstanding, net assets, net
asset value per share and unrealized appreciation immediately before and after
the reorganization:
<TABLE>
<CAPTION>
AFTER
BEFORE REORGANIZATION REORGANIZATION
----------------------------- --------------
AMERISTAR
DG TREASURY U.S. TREASURY ISG TREASURY
MONEY MARKET MONEY MARKET MONEY MARKET
FUND PORTFOLIO FUND
------------ ------------- --------------
<S> <C> <C> <C>
Shares (000)................................................ 318,817 173,477 492,271
Net Assets (000)............................................ $318,794 $173,477 $492,271
Net Asset Value............................................. $ 1.00 $ 1.00 $ 1.00
Unrealized Appreciation (000)............................... $ -- $ -- $ --
</TABLE>
The ISG Treasury Money Market Fund retained the investment objective and
financial history of the AmeriStar U.S. Treasury Money Market Portfolio.
<TABLE>
<CAPTION>
AFTER
BEFORE REORGANIZATION REORGANIZATION
---------------------------- --------------
AMERISTAR
DG PRIME PRIME ISG PRIME
MONEY MARKET MONEY MARKET MONEY MARKET
FUND PORTFOLIO FUND
------------ ------------ --------------
<S> <C> <C> <C>
Shares (000)................................................ 222,460 155,053 377,513
Net Assets (000)............................................ $222,460 $155,048 $377,508
Net Asset Value............................................. $ 1.00 $ 1.00 $ 1.00
Unrealized Appreciation (000)............................... $ -- $ -- $ --
</TABLE>
The ISG Prime Money Market Fund retained the investment objective and
financial history of the AmeriStar Prime Money Market Portfolio.
<TABLE>
<CAPTION>
AFTER
BEFORE REORGANIZATION REORGANIZATION
------------------------------- --------------
DG LIMITED AMERISTAR ISG LIMITED
TERM LIMITED DURATION TERM U.S.
GOVERNMENT U.S. GOVERNMENT GOVERNMENT
INCOME FUND PORTFOLIO FUND
----------- ---------------- --------------
<S> <C> <C> <C>
Shares (000)................................................ 2,959 2,007 4,825
Net Assets (000)............................................ $ 28,973 $ 20,633 $ 49,606
Net Asset Value............................................. $ 9.79 $ 10.28 $ 10.28
Unrealized Appreciation (000)............................... $ 660 $ 1,213 $ 1,873
</TABLE>
The ISG Limited Term U.S. Government Fund retained the investment objective
and financial history of the AmeriStar Limited Duration U.S. Government
Portfolio.
Continued
129
<PAGE> 133
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
AFTER
BEFORE REORGANIZATION REORGANIZATION
---------------------------- --------------
DG ISG ISG
GOVERNMENT GOVERNMENT GOVERNMENT
INCOME FUND INCOME FUND INCOME FUND
------------ ------------ --------------
<S> <C> <C> <C>
Shares (000)................................................ 28,264 -- 28,264
Net Assets (000)............................................ $294,149 $ -- $294,149
Net Asset Value............................................. $ 10.41 $ -- $ 10.41
Unrealized Appreciation (000)............................... $ 17,995 $ -- $ 17,995
</TABLE>
<TABLE>
<CAPTION>
AFTER
BEFORE REORGANIZATION REORGANIZATION
-------------------------- --------------
DG ISG ISG
MUNICIPAL MUNICIPAL MUNICIPAL
INCOME FUND INCOME FUND INCOME FUND
----------- ----------- --------------
<S> <C> <C> <C>
Shares (000)................................................ 5,127 -- 5,127
Net Assets (000)............................................ $56,475 $ -- $56,475
Net Asset Value............................................. $ 11.01 $ -- $ 11.01
Unrealized Appreciation (000)............................... $ 3,402 $ -- $ 3,402
</TABLE>
<TABLE>
<CAPTION>
AFTER
BEFORE REORGANIZATION REORGANIZATION
-------------------------- --------------
ISG ISG
DG LARGE-CAP LARGE-CAP
EQUITY FUND EQUITY FUND EQUITY FUND
----------- ----------- --------------
<S> <C> <C> <C>
Shares (000)................................................ 30,913 -- 30,913
Net Assets (000)............................................ $806,528 $ -- $806,528
Net Asset Value............................................. $ 26.09 $ -- $ 26.09
Unrealized Appreciation (000)............................... $467,153 $ -- $467,153
</TABLE>
<TABLE>
<CAPTION>
AFTER
BEFORE REORGANIZATION REORGANIZATION
---------------------------- --------------
DG ISG SMALL-CAP ISG SMALL-CAP
OPPORTUNITY OPPORTUNITY OPPORTUNITY
FUND FUND FUND
----------- ------------- --------------
<S> <C> <C> <C>
Shares (000)................................................ 8,357 -- 8,357
Net Assets (000)............................................ $101,250 $ -- $101,250
Net Asset Value............................................. $ 12.12 $ -- $ 12.12
Unrealized Appreciation (000)............................... $ 8,590 $ -- $ 8,590
</TABLE>
<TABLE>
<CAPTION>
AFTER
BEFORE REORGANIZATION REORGANIZATION
------------------------------ --------------
DG ISG ISG
INTERNATIONAL INTERNATIONAL INTERNATIONAL
EQUITY FUND EQUITY FUND EQUITY FUND
------------- ------------- --------------
<S> <C> <C> <C>
Shares (000)................................................ 2,663 -- 2,663
Net Assets (000)............................................ $26,991 $ -- $26,991
Net Asset Value............................................. $ 10.14 $ -- $ 10.14
Unrealized Appreciation (000)............................... $ 1,735 $ -- $ 1,735
</TABLE>
Continued
130
<PAGE> 134
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998
NOTE 3 -- SPECIAL MEETING OF SHAREHOLDERS (UNAUDITED)
A Special Meeting of Shareholders of the DG Investors Series was held on
December 11, 1998. At the meeting, shareholders voted on the following matters
with the following results as indicated below:
Proposal 1
To approve an Agreement and Plan of Reorganization pursuant to which each
DG Fund listed below will transfer all of its assets and liabilities solely in
exchange (the "Exchange") for Class A Shares and Institutional Shares of the
corresponding ISG Fund identified opposite its name:
<TABLE>
<CAPTION>
DG FUNDS ISG FUNDS
-------- ---------
<S> <C>
DG Treasury Money Market Fund ISG Treasury Money Market Fund
DG Prime Money Market Fund ISG Prime Money Market Fund
DG Limited Term Government Income Fund ISG Limited Term U.S. Government Fund
DG Government Income Fund ISG Government Income Fund
DG Municipal Income Fund ISG Municipal Income Fund
DG Equity Fund ISG Large-Cap Equity Fund
DG Opportunity Fund ISG Small-Cap Opportunity Fund
DG International Equity Fund ISG International Equity Fund
</TABLE>
Each DG Fund will distribute the Class A Shares or Institutional Shares, as
applicable, of the corresponding ISG Fund received in the Exchange to its
shareholders in an amount equal in net asset value to the shares of the DG Fund
held by such shareholders as of the date of the Exchange, after which the DG
Fund will be terminated.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
----------- --------- -----------
<S> <C> <C> <C>
DG Treasury Money Market Fund............................... 187,366,851 262,702 3,992,398
DG Prime Money Market Fund.................................. 121,116,108 1,812,537 100,808,395
DG Limited Term Government Income Fund...................... 2,792,682 -- 60,600
DG Government Income Fund................................... 25,662,347 -- 38,566
DG Municipal Income Fund.................................... 4,831,785 170 96,652
DG Equity Fund.............................................. 27,338,291 22,838 1,134,549
DG Opportunity Fund......................................... 7,618,435 3,476 562,801
DG International Equity Fund................................ 2,641,027 -- 4,158
</TABLE>
Proposal 2
To approve a new Investment Advisory Contract between the DG Funds, on
behalf of each DG Fund, and ParkSouth Corporation ("ParkSouth"), the terms of
which are identical in all material respects to the prior investment advisory
agreement for the DG Funds. The new Investment Advisory Contract was approved by
the Board of Trustees, effective as of the date of the merger (the "Merger") of
Deposit Guaranty Corp., the former ultimate corporate parent of the DG Funds'
investment adviser, ParkSouth, with and into First American Corporation.
Continued
131
<PAGE> 135
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
----------- --------- ---------
<S> <C> <C> <C>
DG Treasury Money Market Fund............................... 191,290,460 92,805 238,686
DG Prime Money Market Fund.................................. 217,557,853 1,877,500 4,301,687
DG Limited Term Government Income Fund...................... 2,853,282 -- --
DG Government Income Fund................................... 25,696,987 -- 3,926
DG Municipal Income Fund.................................... 4,928,607 -- --
DG Equity Fund.............................................. 28,438,800 16,724 40,154
DG Opportunity Fund......................................... 8,176,893 3,708 4,111
DG International Equity Fund................................ 2,645,185 -- --
</TABLE>
Proposal 3(A)
To approve a new Sub-Investment Advisory Agreement between Womack Asset
Management, Inc. (Womack), sub-adviser to the DG Opportunity Fund, and
ParkSouth, on behalf of the DG Opportunity Fund, the terms of which are
identical in all material respects to the prior sub-advisory agreement for the
DG Opportunity Fund.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
----------- --------- ---------
<S> <C> <C> <C>
DG Opportunity Fund......................................... 8,177,031 3,948 3,733
</TABLE>
Proposal 3(B)
To approve a new Sub-Investment Advisory Agreement between Lazard Asset
Management (Lazard), sub-adviser to the DG International Equity Fund, and
ParkSouth, on behalf of the DG International Equity Fund, the terms of which are
identical in all material respects to the prior sub-advisory agreement for the
DG International Equity Fund.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
----------- --------- ---------
<S> <C> <C> <C>
DG International Equity Fund................................ 2,645,086 -- 99
</TABLE>
NOTE 4 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Funds in preparation of their financial statements. The policies are in
conformity with generally accepted accounting principles (GAAP). The preparation
of financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses for the
period. Actual results could differ from those estimates.
A) Security Valuation:
The Money Market Funds' securities are valued at amortized cost, which
approximates market value. The amortized cost method involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of the difference between the principal amount due at
maturity and cost.
The Variable Net Asset Value Funds' 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. Investments in foreign securities of the International Equity Fund
are valued based on quotations from the primary market in which they are traded.
Investment companies are valued at the published net asset value per share. Debt
securities with remaining maturities of 60 days or less are normally valued at
amortized cost, which approximates market value. Restricted securities and
securities for which market quotations are not readily available, if any, are
valued at fair value using methods approved by the Board of Directors. The
differences between cost and market values of such investments are reflected as
unrealized appreciation or depreciation.
Continued
132
<PAGE> 136
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998
B) Security Transactions and Investment Income:
Security transactions are recorded on trade date. Realized gains and losses
from sales of investments are calculated on the identified cost basis. Interest
income, including accretion of discount and amortization of premium on
investments (when applicable), is accrued daily. Dividend income is recorded on
the ex-dividend date.
C) Repurchase Agreements:
The Funds may invest in repurchase agreements from financial institutions,
such as banks and broker-dealers approved by the Board of Directors. The Funds'
custodian and other banks acting in a sub-custodian capacity take possession of
the collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily on a mark-to-market basis to determine that the
value, including accrued interest, exceeds the repurchase price. In the event of
the seller's default on the obligation to repurchase, the Funds have the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings. Accordingly, the Funds could
receive less than the carrying value upon the sale of the underlying collateral
securities.
D) Securities Purchased on a When-Issued Basis:
Each Fund may purchase securities on a "when-issued" basis. When-issued
securities are securities purchased for delivery beyond the normal settlement
date at a stated price and/or yield, thereby, involving the risk that the price
and/or yield obtained may be more or less than those available in the market
when delivery takes place. At the time a Fund makes the commitment to purchase a
security on a when-issued basis, the Fund records the transaction and reflects
the value of the security in determining net asset value. Normally, the
settlement date occurs within one month of the purchase. A segregated account is
established and the Funds maintain cash and marketable securities at least equal
in value to commitments for when-issued securities. Securities purchased on a
when-issued basis do not earn income until settlement date.
E) Foreign Currency Translation:
The market value of investment securities, other assets and liabilities of
the International Equity Fund denominated in a foreign currency are translated
into U.S. dollars at the current exchange rate. Purchases and sales of
securities, income receipts and expense payments are translated into U.S.
dollars at the exchange rate on the dates of the transactions.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gains or losses
from investments.
Reported net realized foreign exchange gains or losses arise from sales and
maturities of fund securities, sales of foreign currencies, currency exchange
fluctuations between the trade and settlement dates of securities transactions,
and the difference between the amounts of assets and liabilities recorded and
the U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the value of
assets and liabilities, including investments in securities, resulting from
changes in currency exchange rates.
F) Risks Associated with Foreign Securities and Currencies:
Investments in securities of foreign issuers carry certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include future political and economic developments, and the possible
imposition of exchange controls or other foreign governmental laws and
restrictions. In addition, with respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
Continued
133
<PAGE> 137
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998
Certain countries may also impose substantial restrictions on investments
in their capital markets by foreign entities, including restrictions on
investments in issuers or industries deemed sensitive to relevant national
interests. These factors may limit the investment opportunities available to the
International Equity Fund or result in a lack of liquidity and high price
volatility with respect to securities of issuers from developing countries.
G) Forward Currency Contracts:
The International Equity Fund may enter into a forward currency contract
("forward") which is an agreement between two parties to buy and sell a currency
at a set price on a future date. The market value of the forward fluctuates with
changes in currency exchange rates. The forward is marked-to-market daily and
the change in market value is recorded by the Fund as unrealized appreciation or
depreciation. When the forward is closed, the Fund records a realized gain or
loss equal to the difference between the value at the time it was opened and the
value at the time it was closed. The Fund could be exposed to risk if a
counterparty is unable to meet the terms of a forward or if the value of the
currency changes unfavorably.
Forwards may involve market or credit risk in excess of the amounts
reflected on the Fund's statement of assets and liabilities. The gain or loss
from the difference between the cost of original contracts and the amount
realized upon the closing of such contracts is included in net realized
gains/losses from investment and foreign currency transactions. Fluctuations in
the value of forwards held are recorded for financial reporting purposes as
unrealized gains and losses by the Fund. There were no forwards open at December
31, 1998.
H) Securities Lending:
To generate additional income, the Funds may lend up to 33 1/3% of
securities in which they are invested pursuant to agreements requiring that the
loan be continuously secured by cash, U.S. government or U.S. government agency
securities, shares of an investment trust or mutual fund, or any combination of
cash and such securities as collateral equal at all times to at least 100% of
the market value plus accrued interest on the securities lent. The Funds
continue to earn interest and dividends on securities lent while simultaneously
seeking to earn interest on the investment of collateral.
When cash is received as collateral for securities loaned, the Funds may
invest such cash in short-term U.S. government securities, repurchase
agreements, or other short-term corporate securities. The cash or subsequent
short-term investments are recorded as assets of the Funds, offset by a
corresponding liability to repay the cash at the termination of the loan. In
addition, the short-term securities purchased with the cash collateral are
included in the accompanying schedules of portfolio investments. Fixed income
securities received as collateral are not recorded as an asset or liability of
the Fund because the Fund does not have effective control of such securities.
There may be risks of delay in recovery of the securities or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, loans will be made only to borrowers deemed by the adviser to be of
good standing and creditworthy under guidelines established by the Board of
Directors and when, in the judgment of the adviser, the consideration which can
be earned currently from such securities loans justifies the attendant risks.
Loans are subject to termination by the Funds or the borrower at any time, and
are, therefore, not considered to be illiquid investments. According to GAAP, a
statement of cash flows is presented if the Fund lent out, on average, more than
10% of net assets during the year. Under this guideline, a statement of cash
flows is presented for the Equity Income Fund and Capital Growth Fund. As of
December 31, 1998, the following Funds had securities with the following market
values on loan:
<TABLE>
<CAPTION>
MARKET MARKET VALUE
VALUE OF OF LOANED
COLLATERAL SECURITIES
---------- ------------
<S> <C> <C>
Limited Term Income Fund.................................... $8,321,126 $8,197,425
Equity Income Fund.......................................... 21,031,426 20,321,400
Capital Growth Fund......................................... 51,012,796 49,756,463
</TABLE>
Continued
134
<PAGE> 138
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998
The loaned securities were fully collateralized by cash which was invested
in U.S. government securities, commercial paper and repurchase agreements at
December 31, 1998.
I) Expenses:
The Funds incurred certain costs in connection with their organization.
These costs were deferred and are being amortized on a straight-line basis over
five years from their commencement of operations.
The Funds account separately for the assets, liabilities and operations of
each Fund. Direct expenses of a Fund are charged to that Fund while general Fund
or Company expenses are allocated among the ISG Funds and the Company's other
series based on the relative net assets of each Fund and series.
J) Federal Income Taxes:
For federal income tax purposes, each Fund is treated as a separate entity
for the purpose of determining its qualification as a regulated investment
company under the Internal Revenue Code (the "Code"). It is the policy of each
Fund to meet the requirements of the Code applicable to regulated investment
companies, including the requirement that they distribute substantially all of
their income and capital gains to shareholders. Therefore, no federal income tax
provision is required.
For federal income tax purposes, the following Funds have capital loss
carryovers as of December 31, 1998, which are available to offset future capital
gains, if any, on securities transactions to the extent provided for in the
Code:
<TABLE>
<CAPTION>
FUND AMOUNT EXPIRES
---- ---------- -------
<S> <C> <C>
Treasury Money Market Fund.................................. $ 15,528 2000
122 2001
479 2002
6,387 2003
----------
$ 22,516
==========
Prime Money Market Fund..................................... $ 889 2002
149 2004
9 2005
3,675 2006
----------
$ 4,722
==========
Limited Term U.S. Government Fund........................... $1,246,785 2001
1,040,337 2002
758,580 2003
378,938 2004
----------
$3,424,640
==========
Government Income Fund...................................... $ 181,520 2002
467,764 2003
498,409 2004
763,279 2005
151,172 2006
----------
$2,062,144
==========
Small-Cap Opportunity Fund.................................. $7,749,584 2006
==========
International Equity Fund................................... $1,684,022 2006
==========
</TABLE>
Under current tax law, capital losses realized after October 31 may be deferred
and treated as occurring on the first day of the next fiscal year. As of
December 31, 1998, Income Fund, Small-Cap Opportunity Fund and International
Equity Fund elected to defer such losses of $74, $3,195,481 and $22,668,
respectively.
Continued
135
<PAGE> 139
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998
K) Dividends and Distributions to Shareholders:
Dividends are declared daily to shareholders of record at the close of
business on the day of declaration and are paid monthly for the Treasury Money
Market Fund, Prime Money Market Fund, Limited Term U.S. Government Fund, Limited
Term Tennessee Tax-Exempt Fund, Tennessee Tax-Exempt Fund, Limited Term Income
Fund and Income Fund. Dividends are declared and paid monthly for the Government
Income Fund, Municipal Income Fund and Equity Income Fund. Dividends if, any,
are declared and paid quarterly for the Large-Cap Equity Fund, Capital Growth
Fund and Small-Cap Opportunity Fund. Dividends, if any, are declared and
distributed annually for International Equity Fund. For all Funds, distributions
of net realized gains, if any, will be paid at least annually.
Dividends and distributions are recorded on the ex-dividend date.
Distributions from net investment income and from net realized gains are
determined in accordance with federal income tax regulations that may differ
from GAAP. These "book/tax" differences are either considered temporary or
permanent in nature. To the extent these differences are permanent in nature,
such amounts are reclassified within the composition of net assets based on
their federal tax-basis treatment; temporary differences do not require
reclassification.
As of December 31, 1998, the following reclassifications have been made to
increase (decrease) such amounts with offsetting adjustments made to capital:
<TABLE>
<CAPTION>
UNDISTRIBUTED
(DISTRIBUTIONS IN
UNDISTRIBUTED EXCESS OF)
(DISTRIBUTIONS IN NET REALIZED GAINS
EXCESS OF) (LOSSES) ON
NET INVESTMENT INVESTMENT
INCOME (LOSS) TRANSACTIONS
----------------- ------------------
<S> <C> <C>
Limited Term U.S. Government Fund........................... $ 689 $(3,505,024)
Government Income Fund...................................... (397) 397
Municipal Income Fund....................................... 72,376 (72,376)
Limited Term Income Fund.................................... (77,594) 77,594
Income Fund................................................. (55,719) 55,719
Equity Income Fund.......................................... 275 (275)
Large-Cap Equity Fund....................................... (47,314) (25,917)
Small-Cap Opportunity Fund.................................. 387,203 86,058
International Equity Fund................................... (87,760) 55,284
</TABLE>
L) Reclassifications
Certain reclassifications have been made to the prior year financial
statements in order to conform to the current presentation.
NOTE 5 -- RELATED PARTY TRANSACTIONS
First American National Bank ("First American"), the Funds' investment
adviser, is a wholly-owned subsidiary of First American Corporation. Barnett
Capital Advisors, Inc. served as the sub-investment adviser with respect to the
Prime Money Market Fund until January 30, 1998 when First American assumed the
day-to-day management of the Prime Money Market Fund.
Prior to the merger on December 14, 1998, ParkSouth, an indirect subsidiary
of Deposit Guaranty Corp., served as investment adviser to the DG Investor
Series. Deposit Guaranty Corp. was merged with and into First American
Corporation on May 1, 1998. Lazard served as the sub-investment adviser to the
DG International Equity Fund and continues to serve as sub-investment adviser to
the ISG International Equity Fund after the merger of the Funds. Womack served
as the sub-investment adviser to the DG Opportunity Fund and continues to serve
as the sub-investment adviser to the ISG Small-Cap Opportunity Fund after the
merger of the Funds.
Continued
136
<PAGE> 140
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998
BISYS Fund Services Limited Partnership ("BISYS") serves as the Funds'
administrator and distributor. BISYS is a subsidiary of The BISYS Group, Inc.
Prior to the merger on December 14, 1998, Federated Administrative Services
(Federated) provided the DG Funds with administrative personnel and services,
such as certain legal and accounting services. Their fee was paid based on the
0.15% on the first $250 million, 0.125% on the next $250 million, 0.10% on the
next $250 million and .075% in excess of $750 million of the total annual
average net assets of the former DG Funds, subject to a minimum of $100,000 per
Fund per year.
As investment adviser, First American manages the investments of each Fund,
supervises the sub-investment advisers with respect to the ISG Prime Money
Market Fund (until January 30, 1998 as noted above), the ISG International
Equity Fund, and the ISG Small-Cap Opportunity Fund and is responsible for all
purchases and sales of each Fund's investment securities. Under the terms of the
subinvestment advisory agreements with Lazard and Womack, the Adviser has agreed
to pay Lazard and Womack a monthly fee at the annual rate of 0.50% of the
International Equity Fund's average daily net assets and 0.35% of the Small-Cap
Opportunity Fund's average daily net assets, respectively.
Pursuant to the Administration Agreement, BISYS assists in supervising the
operations of the Funds. For its services, BISYS is entitled to receive a fee at
the annual rate of 0.10% of the average daily net assets of each Money Market
Fund and 0.15% of the average daily net assets of each Variable Net Asset Value
Fund.
Pursuant to the Shareholder Service Plan, the Funds pay BISYS for the
provision of certain services at an annual rate of 0.15% of the average daily
net assets represented by Institutional Shares and Class A Shares (except for
the Limited Term U.S. Government Fund, Limited Term Tennessee Tax-Exempt Fund,
Tennessee Tax-Exempt Fund, Limited Term Income Fund, Income Fund, Equity Income
Fund and Capital Growth Fund, for which the Shareholder Service Plan did not
become effective until January 1, 1999) (0.25% in the case of Class A Shares of
the Money Market Funds) and at an annual rate of 0.25% of the average daily net
assets represented by Class B Shares. The services provided may include personal
services relating to shareholder accounts and services related to the
maintenance of such shareholder accounts. BISYS may pay financial institutions,
including the investment adviser, broker/dealers and other institutions in
respect to these services. Federated received an annual rate of 0.15% of the
average daily net assets of each former DG Fund.
Pursuant to the Distribution Plan, each Fund pays BISYS for advertising,
marketing and distributing Class A Shares (other than the Money Market Funds and
except for the Government Income Fund, Municipal Income Fund, Large-Cap Equity
Fund, Small-Cap Opportunity Fund and International Equity Fund, for which the
Distribution Plan did not become effective until January 1, 1999) and Class B
Shares (other than the Treasury Money Market Fund which does not offer Class B
Shares) at an annual rate of 0.25% of the average daily net assets represented
by Class A Shares and at an annual rate of 0.75% of the average daily net assets
represented by Class B Shares. BISYS may pay financial institutions,
broker/dealers and other institutions, in respect of these services.
For the year ended December 31, 1998, BISYS realized $552,283 from
commissions on the sales of Class A Shares and Class B Shares, of which, $3,514
was reallowed to affiliated broker/dealers of the Funds. For the period from
March 1, 1998 through December 13, 1998 Federated Securities Corp., the former
Distributor, realized $2,618 from commissions on the sales of Class A Shares, of
which, all was reallowed to affiliated broker/dealers of the former DG Funds.
BISYS Fund Services Ohio, Inc., a subsidiary of The BISYS Group, Inc., serves
the Funds as Transfer Agent and Mutual Fund Accountant. The Mutual Fund
Accountant fees are based on a minimum fee of $48,000 per year or 0.03% of the
average daily net assets of each Fund, whichever is greater, an additional
$10,000 per year per class, plus out of pocket costs. The Transfer Agent Fees
are based on a fixed fee of $19,000 per class, plus out of pocket costs.
Federated Services Company, the Mutual Fund Accountant for the former DG Funds,
fees were based on 0.03% on the first $100 million, 0.02% on the next $200
million, 0.01% on the next $200 million and 0.005% in excess of $500 million of
the total annual average net assets of each of the former DG Funds. Federated
Shareholder Service Company, the Transfer Agent for the former DG Funds, fees
were based on $24,000 annually per Fund, plus out-of-pocket costs.
Continued
137
<PAGE> 141
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998
Certain officers and Directors of the Company are "affiliated persons" (as
defined in the Act) of BISYS and therefore do not receive compensation. Each
"non-affiliated" Director receives an annual fee of $12,000 and a meeting fee of
$1,500 per meeting for services relating to the Company.
Information regarding these transactions for the year ended December 31,
1998 is as follows:
<TABLE>
<CAPTION>
INVESTMENT ADVISORY FEES ADMINISTRATION DISTRIBUTION FEES --
----------------------------- FEES CLASS A SHARES REIMBURSEMENTS
ANNUAL FEE VOLUNTARY -------------- -------------------- -----------------------------
BEFORE VOLUNTARY FEE VOLUNTARY FEE VOLUNTARY FEE CLASS A INSTITUTIONAL
FEE REDUCTIONS REDUCTIONS REDUCTIONS REDUCTIONS SHARES SHARES
---------------- ---------- -------------- -------------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Treasury Money Market
Fund................... 0.25% $ -- $ -- $ -- $8,913 $ --
Prime Money Market Fund.. 0.25% -- -- -- 5,675 --
Limited Term U.S.
Government Fund........ 0.50% 35,572 23,803 48,533 -- --
Government Income Fund... 0.60% -- -- -- -- --
Municipal Income Fund.... 0.60% 136,582 -- -- 160 992
Limited Term Tennessee
Tax-Exempt Fund........ 0.50% 25,811 24,832 55,168 -- --
Tennessee Tax-Exempt
Fund................... 0.50% 5,617 -- -- -- --
Limited Term Income
Fund................... 0.50% 4,977 -- -- -- --
Income Fund.............. 0.50% 3,965 -- -- -- --
Equity Income Fund....... 0.65% 4,867 -- -- -- --
Large-Cap Equity Fund.... 0.75% -- -- -- 2,580 18,370
Capital Growth Fund...... 0.65% 10,128 -- -- -- --
Small-Cap Opportunity
Fund................... 0.95% -- -- -- 4,701 6,363
International Equity
Fund................... 1.00% 77,837 -- -- 4,182 --
</TABLE>
Additionally, the distributor voluntarily waived distribution fees for
Class B Shares in the amount of $23 for the Large-Cap Equity Fund and $2 for the
Small-Cap Opportunity Fund. The distributor also waived shareholder servicing
fees for Class B Shares in the amount of $8 for the Large-Cap Equity Fund and $1
for the Small-Cap Opportunity Fund.
NOTE 6 -- PURCHASES AND SALES OF INVESTMENT SECURITIES
For the year ended December 31, 1998, the cost of purchases and the
proceeds from sales of fund securities (excluding short-term investments) were
as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
----------- -----------
<S> <C> <C>
Limited Term U.S. Government Fund........................... $39,467,027 $18,075,712
Government Income Fund (a).................................. 94,850,862 53,965,807
Municipal Income Fund (a)................................... 9,294,047 1,497,658
Limited Term Tennessee Tax-Exempt Fund...................... 36,372,448 44,151,279
Tennessee Tax-Exempt Fund................................... 149,417,235 154,203,635
Limited Term Income Fund.................................... 38,704,911 36,601,016
Income Fund................................................. 40,395,568 32,295,103
Equity Income Fund.......................................... 121,528,986 117,788,695
Large-Cap Equity Fund (a)................................... 20,942,781 25,227,265
Capital Growth Fund......................................... 219,921,258 252,119,198
Small-Cap Opportunity Fund (a).............................. 119,107,164 127,691,660
International Equity Fund (a)............................... 19,462,475 17,581,394
</TABLE>
- ---------------
(a) For the period from March 1, 1998 through December 31, 1998.
Continued
138
<PAGE> 142
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998
NOTE 7 -- CONCENTRATION OF CREDIT RISK
The Tennessee Tax-Exempt Fund and Limited Term Tennessee Tax-Exempt Fund
invest substantially all of their assets in a non-diversified portfolio of
tax-exempt debt obligations primarily consisting of securities issued by the
State of Tennessee, its municipalities, counties and other taxing districts. The
issuers' abilities to meet their obligations may be affected by Tennessee
economic, regional and political developments.
The Municipal Income Fund, Tennessee Tax-Exempt Fund and Limited Term
Tennessee Tax-Exempt Fund had the following concentrations by sector at December
31, 1998 (as a percentage of total investments):
<TABLE>
<CAPTION>
LIMITED TERM
TENNESSEE TENNESSEE
MUNICIPAL TAX-EXEMPT TAX-EXEMPT
INCOME FUND FUND FUND
----------- ---------- ------------
<S> <C> <C> <C>
General Obligation.......................................... 71.9% 45.7% 41.6%
Utilities................................................... 8.8% 17.9% 9.7%
Health & Medical............................................ 8.2% 16.4% 14.3%
Educational................................................. 1.8% 11.5% 3.6%
Transportation.............................................. 1.9% 4.8% --
Others...................................................... 3.9% 2.8% 15.1%
Cash and Cash Equivalents................................... 2.5% 0.9% 10.9%
Housing..................................................... 1.0% -- 4.8%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Continued
139
<PAGE> 143
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998
NOTE 8 -- CAPITAL SHARE TRANSACTIONS
Transactions in shares in the multi-class Funds are summarized below:
<TABLE>
<CAPTION>
TREASURY MONEY MARKET FUND PRIME MONEY MARKET FUND
------------------------------ ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
CLASS A SHARES:
Proceeds from shares issued............... $ 451,868,071 $ 261,551,242 $ 570,797,942 $ 203,448,543
Dividends reinvested...................... 394,398 107,555 1,864,545 357,816
Cost of shares redeemed................... (361,844,685) (262,902,182) (318,621,139) (170,480,515)
------------- ------------- ------------- -------------
90,417,784 (1,243,385) 254,041,348 33,325,844
------------- ------------- ------------- -------------
CLASS B SHARES:
Proceeds from shares issued............... -- -- 232,471(a) --
Dividends reinvested...................... -- -- 1,499(a) --
Cost of shares redeemed................... -- -- (47,165)(a) --
------------- ------------- ------------- -------------
-- -- 186,805 --
------------- ------------- ------------- -------------
INSTITUTIONAL SHARES:
Proceeds from shares issued............... 382,986,334 208,119,313 190,307,006 143,744,469
Dividends reinvested...................... 10,935 -- 1 1
Cost of shares redeemed................... (187,178,191) (203,642,569) (149,980,261) (165,455,650)
------------- ------------- ------------- -------------
195,819,078 4,476,744 40,326,746 (21,711,180)
------------- ------------- ------------- -------------
Total net increase (decrease) from capital
transactions.............................. $ 286,236,862 $ 3,233,359 $ 294,554,899 $ 11,614,664
============= ============= ============= =============
SHARE TRANSACTIONS:
CLASS A SHARES:
Issued.................................... 451,868,071 261,551,242 570,797,942 203,448,543
Reinvested................................ 394,398 107,555 1,864,545 357,816
Redeemed.................................. (361,844,685) (262,902,182) (318,621,139) (170,480,515)
------------- ------------- ------------- -------------
90,417,784 (1,243,385) 254,041,348 33,325,844
------------- ------------- ------------- -------------
CLASS B SHARES:
Issued.................................... -- -- 232,471(a) --
Reinvested................................ -- -- 1,499(a) --
Redeemed.................................. -- -- (47,165)(a) --
------------- ------------- ------------- -------------
-- -- 186,805 --
------------- ------------- ------------- -------------
INSTITUTIONAL SHARES:
Issued.................................... 382,986,334 208,119,313 190,307,006 143,744,469
Reinvested................................ 10,935 -- 1 1
Redeemed.................................. (187,178,191) (203,642,569) (149,980,261) (165,455,650)
------------- ------------- ------------- -------------
195,819,078 4,476,744 40,326,746 (21,711,180)
------------- ------------- ------------- -------------
Total net increase (decrease) from share
transactions.............................. 286,236,862 3,233,359 294,554,899 11,614,664
============= ============= ============= =============
</TABLE>
- ---------------
(a) For the period from July 23, 1998 (commencement of operations) through
December 31, 1998.
Continued
140
<PAGE> 144
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LIMITED TERM
U.S. GOVERNMENT FUND GOVERNMENT INCOME FUND
---------------------------- ---------------------------------------------
YEAR ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, FEBRUARY 28, FEBRUARY 28,
1998 1997(a) 1998(d) 1998 1997
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
CLASS A SHARES:
Proceeds from shares issued... $ 33,332,277 $22,172,121 $ 100,273,406 $ 97,746,058 $113,591,135
Dividends reinvested.......... 52,770 4,769 4,696,756 5,515,899 5,048,640
Cost of shares redeemed....... (52,018,890) (2,291,568) (383,504,573) (92,600,823) (48,955,255)
------------ ----------- ------------- ------------ ------------
(18,633,843) 19,885,322 (278,534,411) 10,661,134 69,684,520
------------ ----------- ------------- ------------ ------------
CLASS B SHARES:
Proceeds from shares issued... 428,519(b) -- -- -- --
Dividends reinvested.......... 5,919(b) -- -- -- --
Cost of shares redeemed....... (7,611)(b) -- -- -- --
------------ ----------- ------------- ------------ ------------
426,827 -- -- -- --
------------ ----------- ------------- ------------ ------------
INSTITUTIONAL SHARES:
Proceeds from shares issued... 47,242,730(c) -- 299,288,856(c) -- --
Dividends reinvested.......... --(c) -- --(c) -- --
Cost of shares redeemed....... (764,822)(c) -- (3,700,206)(c) -- --
------------ ----------- ------------- ------------ ------------
46,477,908 -- 295,588,650 -- --
------------ ----------- ------------- ------------ ------------
Total net increase (decrease)
from capital transactions..... $ 28,270,892 $19,885,322 $ 17,054,239 $ 10,661,134 $ 69,684,520
============ =========== ============= ============ ============
SHARE TRANSACTIONS:
CLASS A SHARES:
Issued........................ 3,245,674 2,213,380 9,822,777 9,911,035 11,623,519
Reinvested.................... 5,139 473 460,321 561,104 521,253
Redeemed...................... (4,999,183) (227,864) (37,005,291) (9,367,967) (5,043,232)
------------ ----------- ------------- ------------ ------------
(1,748,370) 1,985,989 (26,722,193) 1,104,172 7,101,540
------------ ----------- ------------- ------------ ------------
CLASS B SHARES:
Issued........................ 42,105(b) -- -- -- --
Reinvested.................... 577(b) -- -- -- --
Redeemed...................... (749)(b) -- -- -- --
------------ ----------- ------------- ------------ ------------
41,933 -- -- -- --
------------ ----------- ------------- ------------ ------------
INSTITUTIONAL SHARES:
Issued........................ 4,594,333(c) -- 28,716,929(c) -- --
Reinvested.................... --(c) -- --(c) -- --
Redeemed...................... (74,494)(c) -- (355,731)(c) -- --
------------ ----------- ------------- ------------ ------------
4,519,839 -- 28,361,198 -- --
------------ ----------- ------------- ------------ ------------
Total net increase (decrease)
from share transactions....... 2,813,402 1,985,989 1,639,005 1,104,172 7,101,540
============ =========== ============= ============ ============
</TABLE>
- ---------------
(a) For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
(b) For the period from March 3, 1998 (commencement of operations) through
December 31, 1998.
(c) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
(d) For the period from March 1, 1998 through December 31, 1998.
Continued
141
<PAGE> 145
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LIMITED TERM TENNESSEE
MUNICIPAL INCOME FUND TAX-EXEMPT FUND
-------------------------------------------- ----------------------------
PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 28, DECEMBER 31, DECEMBER 31,
1998(a) 1998 1997 1998 1997(c)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
CLASS A SHARES:
Proceeds from shares
issued............... $ 16,018,219 $ 12,400,013 $ 13,965,127 $ 3,962,167 $ 28,464,155
Dividends reinvested.... 18,913 26,535 34,266 12,988 6
Cost of shares
redeemed............. (63,292,954) (12,157,682) (11,330,842) (7,373,121) (5,750,464)
------------ ------------ ------------ ------------ ------------
(47,255,822) 268,866 2,668,551 (3,397,966) 22,713,697
------------ ------------ ------------ ------------ ------------
CLASS B SHARES:
Proceeds from shares
issued............... -- -- -- 755,289(d) --
Dividends reinvested.... -- -- -- 8,566(d) --
Cost of shares
redeemed............. -- -- -- (30,613)(d) --
------------ ------------ ------------ ------------ ------------
-- -- -- 733,242 --
------------ ------------ ------------ ------------ ------------
INSTITUTIONAL SHARES:
Proceeds from shares
issued............... 55,260,352(b) -- -- -- --
Dividends reinvested.... --(b) -- -- -- --
Cost of shares
redeemed............. (417,507)(b) -- -- -- --
------------ ------------ ------------ ------------ ------------
54,842,845 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total net increase
(decrease) from capital
transactions............ $ 7,587,023 $ 268,866 $ 2,668,551 $ (2,664,724) $ 22,713,697
============ ============ ============ ============ ============
SHARE TRANSACTIONS:
CLASS A SHARES:
Issued.................. 1,473,050 1,162,205 1,331,086 390,602 2,833,470
Reinvested.............. 1,731 2,485 3,288 1,281 1
Redeemed................ (5,756,013) (1,136,101) (1,083,418) (727,402) (574,372)
------------ ------------ ------------ ------------ ------------
(4,281,232) 28,589 250,956 (335,519) 2,259,099
------------ ------------ ------------ ------------ ------------
CLASS B SHARES:
Issued.................. -- -- -- 74,613(d) --
Reinvested.............. -- -- -- 844(d) --
Redeemed................ -- -- -- (2,987)(d) --
------------ ------------ ------------ ------------ ------------
-- -- -- 72,470 --
------------ ------------ ------------ ------------ ------------
INSTITUTIONAL SHARES:
Issued.................. 5,018,064(b) -- -- -- --
Reinvested.............. --(b) -- -- -- --
Redeemed................ (37,974)(b) -- -- -- --
------------ ------------ ------------ ------------ ------------
4,980,090 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total net increase
(decrease) from share
transactions............ 698,858 28,589 250,956 (263,049) 2,259,099
============ ============ ============ ============ ============
</TABLE>
- ---------------
(a) For the period from March 1, 1998 through December 31, 1998.
(b) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
(c) For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
(d) For the period from February 3, 1998 (commencement of operations) through
December 31, 1998.
Continued
142
<PAGE> 146
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
TENNESSEE TAX-EXEMPT FUND LIMITED TERM INCOME FUND
----------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
CLASS A SHARES:
Proceeds from shares issued................. $ 1,752,569 $ 23,465,567 $ 4,247,501 $ 18,061,691
Dividends reinvested........................ 50,304 208,184 356,704 2,425,448
Cost of shares redeemed..................... (552,522) (111,627,908) (3,059,492) (113,120,158)
------------ ------------- ------------ -------------
1,250,351 (87,954,157) 1,544,713 (92,633,019)
------------ ------------- ------------ -------------
CLASS B SHARES:
Proceeds from shares issued................. 1,466,601(a) -- 596,723(c) --
Dividends reinvested........................ 11,439(a) -- 12,488(c) --
Cost of shares redeemed..................... (85,460)(a) -- (10,782)(c) --
------------ ------------- ------------ -------------
1,392,580 -- 598,429 --
------------ ------------- ------------ -------------
INSTITUTIONAL SHARES:
Proceeds from shares issued................. 7,579,865 103,242,548(b) 17,402,254 97,264,930(b)
Dividends reinvested........................ 362,424 24,834(b) 1,814,546 377,078(b)
Cost of shares redeemed..................... (17,158,922) (3,792,891)(b) (19,236,804) (12,647,715)(b)
------------ ------------- ------------ -------------
(9,216,633) 99,474,491 (20,004) 84,994,293
------------ ------------- ------------ -------------
Total net increase (decrease) from capital
transactions................................ $ (6,573,702) $ 11,520,334 $ 2,123,138 $ (7,638,726)
============ ============= ============ =============
SHARE TRANSACTIONS:
CLASS A SHARES:
Issued...................................... 171,828 2,362,712 423,480 1,811,625
Reinvested.................................. 4,932 21,009 35,505 244,124
Redeemed.................................... (54,274) (11,118,420) (304,615) (11,327,489)
------------ ------------- ------------ -------------
122,486 (8,734,699) 154,370 (9,271,740)
------------ ------------- ------------ -------------
CLASS B SHARES:
Issued...................................... 144,107(a) -- 59,685(c) --
Reinvested.................................. 1,117(a) -- 1,241(c) --
Redeemed.................................... (8,459)(a) -- (1,067)(c) --
------------ ------------- ------------ -------------
136,765 -- 59,859 --
------------ ------------- ------------ -------------
INSTITUTIONAL SHARES:
Issued...................................... 746,499 10,272,191(b) 1,734,900 9,730,880(b)
Reinvested.................................. 35,452 2,474(b) 180,765 37,731(b)
Redeemed.................................... (1,681,956) (376,678)(b) (1,918,236) (1,266,172)(b)
------------ ------------- ------------ -------------
(900,005) 9,897,987 (2,571) 8,502,439
------------ ------------- ------------ -------------
Total net increase (decrease) from share
transactions................................ (640,754) 1,163,288 211,658 (769,301)
============ ============= ============ =============
</TABLE>
- ---------------
(a) For the period from February 24, 1998 (commencement of operations) through
December 31, 1998.
(b) For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
(c) For the period from February 4, 1998 (commencement of operations) through
December 31, 1998.
Continued
143
<PAGE> 147
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
INCOME FUND EQUITY INCOME FUND
----------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997(c)
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
CLASS A SHARES:
Proceeds from shares issued................ $ 2,623,611 $ 43,676,646 $ 3,518,621 $ 71,071,654
Dividends reinvested....................... 67,401 1,100,106 544,283 58,646
Cost of shares redeemed.................... (166,568) (84,785,631) (448,062) (80,669,327)
------------ ------------- ----------- ------------
2,524,444 (40,008,879) 3,614,842 (9,539,027)
------------ ------------- ----------- ------------
CLASS B SHARES:
Proceeds from shares issued................ 1,212,642(a) -- 4,390,413(d) --
Dividends reinvested....................... 36,013(a) -- 503,786(d) --
Cost of shares redeemed.................... (11,721)(a) -- (330,052)(d) --
------------ ------------- ----------- ------------
1,236,934 -- 4,564,147 --
------------ ------------- ----------- ------------
INSTITUTIONAL SHARES:
Proceeds from shares issued................ 13,962,624 74,176,796(b) 9,946,074 66,268,900(b)
Dividends reinvested....................... 1,919,389 229,138(b) 9,267,437 10,029,575(b)
Cost of shares redeemed.................... (10,810,920) (3,038,585)(b) (9,579,278) (952,168)(b)
------------ ------------- ----------- ------------
5,071,093 71,367,349 9,634,233 75,346,307
------------ ------------- ----------- ------------
Total net increase (decrease) from capital
transactions............................... $ 8,832,471 $ 31,358,470 $17,813,222 $ 65,807,280
============ ============= =========== ============
SHARE TRANSACTIONS:
CLASS A SHARES:
Issued..................................... 252,785 4,394,727 313,892 5,889,075
Reinvested................................. 6,446 110,432 55,085 5,646
Redeemed................................... (15,901) (8,376,453) (42,400) (5,857,248)
------------ ------------- ----------- ------------
243,330 (3,871,294) 326,577 37,473
------------ ------------- ----------- ------------
CLASS B SHARES:
Issued..................................... 117,222(a) 396,049(d) --
Reinvested................................. 3,447(a) 51,347(d) --
Redeemed................................... (1,125)(a) (30,243)(d) --
------------ ------------- ----------- ------------
119,544 -- 417,153 --
------------ ------------- ----------- ------------
INSTITUTIONAL SHARES:
Issued..................................... 1,349,996 7,300,711(b) 907,955 5,657,103(b)
Reinvested................................. 184,826 22,454(b) 936,932 983,212(b)
Redeemed................................... (1,041,209) (296,935)(b) (856,372) (85,923)(b)
------------ ------------- ----------- ------------
493,613 7,026,230 988,515 6,554,392
------------ ------------- ----------- ------------
Total net increase (decrease) from share
transactions............................... 856,487 3,154,936 1,732,245 6,591,865
============ ============= =========== ============
</TABLE>
- ---------------
(a) For the period from February 4, 1998 (commencement of operations) through
December 31, 1998.
(b) For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
(c) For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
(d) For the period from February 3, 1998 (commencement of operations) through
December 31, 1998.
Continued
144
<PAGE> 148
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LARGE-CAP EQUITY FUND CAPITAL GROWTH FUND
-------------------------------------------- ----------------------------
PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 28, DECEMBER 31, DECEMBER 31,
1998(A) 1998 1997 1998 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
CLASS A SHARES:
Proceeds from shares
issued............. $114,374,074 $146,010,215 $102,599,959 $ 3,357,975 $101,329,579
Dividends
reinvested......... 27,316,773 4,620,893 8,350,813 629,861 250,838
Cost of shares
redeemed........... (882,188,167) (124,793,931) (69,584,226) (390,437) (179,442,673)
------------ ------------ ------------ ------------ ------------
(740,497,320) 25,837,177 41,366,546 3,597,399 (77,862,256)
------------ ------------ ------------ ------------ ------------
CLASS B SHARES:
Proceeds from shares
issued............. 96,706(b) -- -- 2,770,518(d) --
Dividends
reinvested......... --(b) -- -- 321,359(d) --
Cost of shares
redeemed........... --(b) -- -- (255,741)(d) --
------------ ------------ ------------ ------------ ------------
96,706 -- -- 2,836,136 --
------------ ------------ ------------ ------------ ------------
INSTITUTIONAL SHARES:
Proceeds from shares
issued............. 740,608,981(c) -- -- 14,229,454 147,332,294(e)
Dividends
reinvested......... --(c) -- -- 25,469,627 19,050,221(e)
Cost of shares
redeemed........... (12,333,131)(c) -- -- (25,728,858) (6,416,169)(e)
------------ ------------ ------------ ------------ ------------
728,275,850 -- -- 13,970,223 159,966,346
------------ ------------ ------------ ------------ ------------
Total net increase
(decrease) from
capital transactions.. $(12,124,764) $ 25,837,177 $ 41,366,546 $ 20,403,758 $ 82,104,090
============ ============ ============ ============ ============
SHARE TRANSACTIONS:
CLASS A SHARES:
Issued................ 4,798,706 7,924,532 6,852,631 238,241 6,860,600
Reinvested............ 1,053,720 234,089 537,524 48,319 19,516
Redeemed.............. (34,859,881) (6,448,544) (4,578,933) (27,381) (11,141,321)
------------ ------------ ------------ ------------ ------------
(29,007,455) 1,710,077 2,811,222 259,179 (4,261,205)
------------ ------------ ------------ ------------ ------------
CLASS B SHARES:
Issued................ 3,648(b) -- -- 198,308(d) --
Reinvested............ --(b) -- -- 25,125(d) --
Redeemed.............. --(b) -- -- (18,450)(d) --
------------ ------------ ------------ ------------ ------------
3,648 -- -- 204,983 --
------------ ------------ ------------ ------------ ------------
INSTITUTIONAL SHARES:
Issued................ 29,010,448(c) -- -- 1,020,991 10,167,911(e)
Reinvested............ --(c) -- -- 1,969,036 1,504,756(e)
Redeemed.............. (454,578)(c) -- -- (1,842,736) (500,054)(e)
------------ ------------ ------------ ------------ ------------
28,555,870 -- -- 1,147,291 11,172,613
------------ ------------ ------------ ------------ ------------
Total net increase
(decrease) from share
transactions.......... (447,937) 1,710,077 2,811,222 1,611,453 6,911,408
============ ============ ============ ============ ============
</TABLE>
- ---------------
(a) For the period from March 1, 1998 through December 31, 1998.
(b) For the period from December 15, 1998 (commencement of operations) through
December 31, 1998.
(c) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
(d) For the period from February 5, 1998 (commencement of operations) through
December 31, 1998.
(e) For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
Continued
145
<PAGE> 149
ISG FUNDS
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SMALL-CAP OPPORTUNITY FUND INTERNATIONAL EQUITY FUND
-------------------------------------------- ----------------------------
PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, FEBRUARY 28, FEBRUARY 28, DECEMBER 31, FEBRUARY 28,
1998(a) 1998 1997 1998(a) 1998(d)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
CLASS A SHARES:
Proceeds from shares
issued............... $ 77,866,066 $ 47,226,667 $ 35,538,237 $ 7,649,448 $ 26,266,042
Dividends reinvested.... 4,840,922 10,900,651 3,267,077 48,021 17,816
Cost of shares
redeemed............. (163,322,368) (31,615,686) (13,570,540) (32,664,626) (866,338)
------------ ------------ ------------ ------------ ------------
(80,615,380) 26,511,632 25,234,774 (24,967,157) 25,417,520
------------ ------------ ------------ ------------ ------------
CLASS B SHARES:
Proceeds from shares
issued............... 8,011(b) -- -- -- --
Dividends reinvested.... --(b) -- -- -- --
Cost of shares
redeemed............. --(b) -- -- -- --
------------ ------------ ------------ ------------ ------------
8,011 -- -- -- --
------------ ------------ ------------ ------------ ------------
INSTITUTIONAL SHARES:
Proceeds from shares
issued............... 89,048,532(c) -- -- 26,755,898(c) --
Dividends reinvested.... --(c) -- -- --(c) --
Cost of shares
redeemed............. (849,359)(c) -- -- (180,925)(c) --
------------ ------------ ------------ ------------ ------------
88,199,173 -- -- 26,574,973 --
------------ ------------ ------------ ------------ ------------
Total net increase
(decrease) from capital
transactions............ $ 7,591,804 $ 26,511,632 $ 25,234,774 $ 1,607,816 $ 25,417,520
============ ============ ============ ============ ============
SHARE TRANSACTIONS:
CLASS A SHARES:
Issued.................. 6,023,495 3,050,510 2,464,715 693,655 2,623,705
Reinvested.............. 360,456 759,627 234,535 4,764 1,867
Redeemed................ (13,280,164) (2,003,613) (929,615) (3,221,732) (88,124)
------------ ------------ ------------ ------------ ------------
(6,896,213) 1,806,524 1,769,635 (2,523,313) 2,537,448
------------ ------------ ------------ ------------ ------------
CLASS B SHARES:
Issued.................. 647(b) -- -- -- --
Reinvested.............. --(b) -- -- -- --
Redeemed................ --(b) -- -- -- --
------------ ------------ ------------ ------------ ------------
647 -- -- -- --
------------ ------------ ------------ ------------ ------------
INSTITUTIONAL SHARES:
Issued.................. 7,515,579(c) -- -- 2,661,813(c) --
Reinvested.............. --(c) -- -- --(c) --
Redeemed................ (69,536)(c) -- -- (17,292)(c) --
------------ ------------ ------------ ------------ ------------
7,446,043 -- -- 2,644,521 --
------------ ------------ ------------ ------------ ------------
Total net increase
(decrease) from share
transactions............ 550,477 1,806,524 1,769,635 121,208 2,537,448
============ ============ ============ ============ ============
</TABLE>
- ---------------
(a) For the period from March 1, 1998 through December 31, 1998.
(b) For the period from December 21, 1998 (commencement of operations) through
December 31, 1998.
(c) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
(d) For the period from August 15, 1997 (commencement of operations) through
February 28, 1998.
NOTE 9 -- SUBSEQUENT EVENTS
Effective January 4, 1999, ISG began offering to the public Institutional
Shares, Class A Shares and Class B Shares of the Aggressive Growth Fund, the
Growth Fund, the Growth & Income Fund, the Moderate Growth & Income Fund and the
Current Income Fund (the "Strategic Portfolios"). The Strategic Portfolios
invest directly in Institutional Shares of various ISG Funds.
146
<PAGE> 150
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors of
The Infinity Mutual Funds, Inc. --
ISG Funds:
We have audited the accompanying statements of assets and liabilities of The
Infinity Mutual Funds, Inc. -- ISG Funds (ISG Treasury Money Market Fund, ISG
Prime Money Market Fund, ISG Limited Term U.S. Government Fund, ISG Government
Income Fund, ISG Municipal Income Fund, ISG Limited Term Tennessee Tax-Exempt
Fund, ISG Tennessee Tax-Exempt Fund, ISG Limited Term Income Fund, ISG Income
Fund, ISG Equity Income Fund, ISG Large-Cap Equity Fund, ISG Capital Growth
Fund, ISG Small-Cap Opportunity Fund, and ISG International Equity Fund)
including the schedules of portfolio investments, as of December 31, 1998, and
the related statements of operations and cash flows, statements of changes in
net assets and the financial highlights for each of the periods indicated
herein. These financial statements and the financial highlights are the
responsibility of The Infinity Mutual Funds, Inc.'s management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification of securities owned as of
December 31, 1998, by confirmation with the custodian, correspondence with
brokers and other appropriate audit procedures. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the aforementioned funds comprising The Infinity Mutual Funds, Inc. -- ISG
Funds as of December 31, 1998, the results of their operations and their cash
flows, the changes in their net assets and the financial highlights for each of
the periods indicated herein, in conformity with generally accepted accounting
principles.
KPMG LLP
Columbus, Ohio
February 19, 1999
147
<PAGE> 151
- --------------------------------------------------------------------------------
ISG FUNDS
3435 Stelzer Road - Columbus, OH 43219
INVESTMENT ADVISER
First American National Bank
315 Deaderick Street - Nashville, TN 37237-0401
ADMINISTRATOR
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road - Columbus, OH 43219
DISTRIBUTOR
BISYS Fund Services Limited Partnership
3435 Stelzer Road - Columbus, OH 43219
CUSTODIAN
The Bank of New York
90 Washington Street - New York, NY 10286
TRANSFER AGENT &
DIVIDEND DISBURSING AGENT
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road - Columbus, OH 43219
BISYS Fund Services Limited Partnership is the Funds' distributor and is
unaffiliated with First American National Bank, the Funds' adviser.
Investments in the Funds are neither guaranteed by nor obligations of First
American National Bank or any other bank and are not insured by the FDIC or any
other government agency. Investments in mutual funds involve risk, including
the possible loss of principal. This material must be preceded or accompanied
by a current prospectus.
<PAGE> 152
-----------------
BULK RATE
U.S. POSTAGE
PAID
CLEVELAND, OH
PERMIT NO. 1
-----------------
ISG-0012-0299
