Filed Pursuant to Rule 497(e)
Registration File No. 33-34080
June 24, 1999
ISG FUNDS
SUPPLEMENT TO PROSPECTUS
DATED MAY 1, 1999
THE FOLLOWING SUPERSEDES ANY CONTRARY INFORMATION CONTAINED IN THE PROSPECTUS
UNDER THE CAPTION "DESCRIPTION OF THE FUNDS - OBJECTIVES, RISK/RETURN AND
EXPENSES - ISG STRATEGIC PORTFOLIOS."
The Strategic Portfolios set forth below will invest their assets in the
Underlying Funds within the strategy ranges (expressed as a percentage of the
Strategic Portfolio's total assets) indicated below:
<TABLE>
<CAPTION>
Strategy Range
--------------------------------------------------------------------------------
ISG
ISG Moderate
Aggressive ISG Growth Growth &
Growth ISG Growth & Income Income
Underlying Funds Portfolio Portfolio Portfolio Portfolio
- ------------------------------ --------------- -------------- -------------- ------------
Equity Funds
<S> <C> <C> <C> <C>
ISG Large-Cap Equity Fund 0-70% 0-65% 0-60% 0-50%
ISG Capital Growth Fund 0-45% 0-25% 0-25% 0-15%
ISG Equity Income Fund None 0-25% 0-25% 0-15%
ISG Mid-Cap Fund 0-30% 0-25% 0-20% None
ISG Small-Cap Opportunity Fund 0-30% 0-25% 0-20% None
ISG International Equity Fund 0-20% 0-15% 0-15% None
FIXED INCOME FUNDS
ISG Government Income Fund None 0-25% 0-60% 0-70%
ISG Limited Term Income Fund None None 0-20% 0-45%
MONEY MARKET FUND
ISG Prime Money Market Fund 0-30% 0-20% 0-20% 0-20%
</TABLE>
If you buy and hold shares of a Strategic Portfolio, you will indirectly bear
your pro rata share of fees and expenses incurred by the Underlying Funds in
which the Fund invests, so that the investment returns of the Fund will be net
of the expenses of the Underlying Funds. After combining the total estimated
operating expenses of the Fund with those of the Underlying Funds, the estimated
average weighted expense ratios are as follows:
<PAGE>
<TABLE>
<CAPTION>
Aggressive Growth Growth Growth & Income Moderate Growth &
Portfolio Portfolio Portfolio Income Portfolio
- --------------------------------- ------------------------------ ----------------------------- ----------------------------
Class A Class B Class I Class A Class B Class I Class A Class B Class I Class A Class B Class I
Shares Shares Shares Shares Shares Shares Shares Shares Shares Shares Shares Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2.38% 2.98% 2.13% 2.24% 2.84% 1.99% 1.93% 2.53% 1.68% 1.91% 2.51% 1.66%
</TABLE>
Use the example below to help you compare the cost of investing in the Fund with
the cost of investing in other mutual funds. It illustrates the amount of fees
and expenses you would pay based on the estimated weighted expense ratio
described above, assuming the following:
o $10,000 investment
o 5% annual return
o no changes in the Fund's operating expenses
o reinvestment of all dividends and distributions
Because actual returns and operating expenses will be different, this example is
for comparison only.
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH GROWTH GROWTH & INCOME MODERATE GROWTH &
PORTFOLIO PORTFOLIO PORTFOLIO INCOME PORTFOLIO
-------------------- ------------------ --------------------- ------------------------
1 YEAR 3 YEARS 1 YEAR 3 YEARS 1 YEAR 3 YEARS 1 YEAR 3 YEARS
-------- -------- ------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES $705 $1,182 $691 $1,142 $662 $1,052 $660 $ 1,047
CLASS B SHARES
Assuming Redemption $701 $1,221 $687 $1,180 $656 $1,088 $654 $1,082
Assuming no Redemption $301 $921 $287 $880 $256 $788 $254 $782
CLASS I SHARES $216 $667 $202 $624 $171 $530 $169 $523
</TABLE>
* * * *
THE FOLLOWING SUPPLEMENTS AND SUPERSEDES ANY CONTRARY INFORMATION CONTAINED IN
THE PROSPECTUS UNDER THE CAPTION "SHAREHOLDER INFORMATION--DISTRIBUTION
ARRANGEMENTS/SALES CHARGES--CALCULATION OF SALES CHARGES--CLASS A SHARES."
Shareholders who beneficially acquired Class A shares of a Fund in connection
with the reorganization of a corresponding DG Investor Series fund in December
1998 may be eligible for lower sales charges; consult your investment
representative or see the Statement of Additional Information.
THE INFINITY MUTUAL FUNDS, INC.
ISG FUNDS
o International Equity Fund o Municipal Income Fund
o Small-Cap Opportunity Fund o Limited Term Tennessee Tax-
Exempt Fund
o Mid-Cap Fund o Prime Money Market Fund
o Capital Growth Fund o Government Money Market Fund
o Large-Cap Equity Fund o Treasury Money Market Fund
o Equity Income Fund o Tax-Exempt Money Market Fund
o Income Fund o Aggressive Growth Portfolio
o Government Income Fund o Growth Portfolio
o Limited Term Income Fund o Growth & Income Portfolio
o Limited Term U.S. Government o Moderate Growth & Income
Fund Portfolio
o Tennessee Tax-Exempt Fund o Current Income Portfolio
CLASS A SHARES, CLASS B SHARES AND INSTITUTIONAL (CLASS I) SHARES
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
AS REVISED JUNE 25, 1999
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the applicable current
Prospectus for the ISG Funds listed above (each, a "Fund" and collectively, the
"Funds") of The Infinity Mutual Funds, Inc. (the "Company"), dated May 1, 1999,
as it may be revised from time to time. To obtain a copy of the Prospectus,
please write to the Company at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
This Statement of Additional Information relates only to the Funds and not to
any of the Company's other portfolios.
The most recent Annual Report and Semi-Annual Report to Shareholders
for each Fund are separate documents supplied with this Statement of Additional
Information, and the financial statements, accompanying notes and report of
independent auditors appearing in the Annual Report are incorporated by
reference into this Statement of Additional Information.
<PAGE>
TABLE OF CONTENTS
PAGE
Description of the Company and the Funds...............................B-3
Management of the Company.............................................B-48
Management Arrangements...............................................B-51
Purchase and Redemption of Shares.....................................B-65
Determination of Net Asset Value......................................B-80
Shareholder Services and Privileges...................................B-83
Performance Information...............................................B-88
Dividends, Distribution and Taxes....................................B-101
Portfolio Transactions...............................................B-104
Information About the Company and the Funds..........................B-107
Counsel and Independent Auditors.....................................B-120
Financial Statements.................................................B-121
Appendix ............................................................B-122
<PAGE>
DESCRIPTION OF THE COMPANY AND THE FUNDS
GENERAL
The Company is a Maryland corporation organized on March 6, 1990. Each
Fund is a separate portfolio of the Company, an open-end management investment
company, known as a mutual fund. Each of the Large-Cap Equity, Small-Cap
Opportunity, Mid-Cap, Municipal Income, Government Income, Prime Money Market,
Government Money Market, Treasury Money Market and Tax-Exempt Money Market Funds
is a diversified investment company, which means that, with respect to 75% of
its total assets, the Fund will not invest more than 5% of its assets in the
securities of any single issuer. Each other Fund is a non-diversified investment
company, which means that the proportion of the Fund's assets that may be
invested in the securities of a single issuer is not limited by the Investment
Company Act of 1940, as amended (the "1940 Act").
First American National Bank (the "Adviser") serves as each Fund's
investment adviser.
BISYS Fund Services Ohio, Inc. (the "Administrator") serves as each
Fund's administrator.
BISYS Fund Services Limited Partnership (the "Distributor"), an
affiliate of the Administrator, serves as each Fund's distributor.
STRATEGIC PORTFOLIOS
Each of the Aggressive Growth Portfolio, Growth Portfolio, Growth &
Income Portfolio, Moderate Growth & Income Portfolio and Current Income
Portfolio (collectively, the "Strategic Portfolios") seeks to achieve its
investment objective by allocating its assets among other mutual funds
("Underlying Funds") advised by the Adviser, within predetermined strategy
ranges, as set forth below. The Adviser will make allocation decisions according
to its outlook for the economy, financial markets and relative market valuation
of the Underlying Funds.
Each Strategic Portfolio will invest its assets in Institutional
Shares of the following Underlying Funds within the strategy ranges (expressed
as a percentage of the Strategic Portfolio's assets) indicated below:
<PAGE>
<TABLE>
<CAPTION>
Strategy Ranges
-----------------------------------------------------------------------------------------
UNDERLYING FUND MODERATE
- --------------- AGGRESSIVE GROWTH & GROWTH & CURRENT
GROWTH GROWTH INCOME INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Large-Cap Equity Fund 35-50% 15-30% 15-25% 5-15% 0%
Capital Growth Fund 25-45% 15-30% 15-25% 5-15% 0%
Equity Income Fund 0% 15-25% 15-25% 5-15% 0%
Small-Cap Opportunity Fund 5-15% 5-10% 0% 0% 0%
International Equity Fund 5-15% 5-10% 0% 0% 0%
Income Fund 0% 10-20% 15-25% 20-40% 35-55%
Limited Term Income Fund 0% 0% 10-20% 25-45% 40-60%
Prime Money Market Fund 0-30% 0-20% 0-20% 0-20% 0-30%
</TABLE>
The Strategic Portfolios' selection of the Underlying Funds in which
to invest, as well as the percentage of a Strategic Portfolio's assets which can
be invested in each Underlying Fund, are not fundamental investment policies and
can be changed without the approval of shareholders.
Changes in the net asset value of the Underlying Funds may affect cash
income, if any, derived from these investments and will affect a Strategic
Portfolio's net asset value. Because each Strategic Portfolio invests primarily
in other mutual funds, which fluctuate in value, the Strategic Portfolio's
shares will correspondingly fluctuate in value. Although the Strategic
Portfolios normally seek to remain substantially fully invested in the
Underlying Funds, each Strategic Portfolio may invest temporarily in certain
short-term obligations. Such obligations may be used to invest uncommitted cash
balances or to maintain liquidity to meet shareholder redemptions. Each
Strategic Portfolio also may borrow money for temporary or emergency purposes.
The 1940 Act permits the Strategic Portfolios to invest without
limitation in other investment companies that are part of the same "group of
investment companies" (as defined in the 1940 Act), such as the Strategic
Portfolios and the Underlying Funds, provided that the Strategic Portfolios
observe certain limitations on the amount of sales loads and
distribution-related fees that are borne by shareholders and do not invest in
other funds of funds.
The following is additional information about the investment
management policies of the Underlying Funds.
CERTAIN PORTFOLIO SECURITIES
The following information supplements and should be read in
conjunction with the applicable Funds' Prospectus.
U.S. TREASURY SECURITIES. (All Funds) Each Fund may invest in U.S.
Treasury securities which include Treasury Bills, Treasury Notes and Treasury
Bonds that differ in their interest rates, maturities and times of issuance.
Treasury Bills have initial maturities of one year or less; Treasury Notes have
initial maturities of one to ten years; and Treasury Bonds generally have
initial maturities of greater than ten years.
U.S. GOVERNMENT SECURITIES. (All Funds) In addition to U.S. Treasury
securities, each Fund may invest in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities. Some obligations issued or
guaranteed by U.S. Government agencies and instrumentalities, for example,
Government National Mortgage Association pass-through certificates, are
supported by the full faith and credit of the U.S. Treasury; others, such as
those of the Federal Home Loan Banks, by the right of the issuer to borrow from
the Treasury; others, such as those issued by the Federal National Mortgage
Association, by discretionary authority of the U.S. Government to purchase
certain obligations of the agency or instrumentality; and others, such as those
issued by the Student Loan Marketing Association, only by the credit of the
agency or instrumentality. These securities bear fixed, floating or variable
rates of interest. Principal and interest may fluctuate based on generally
recognized reference rates or the relationship of rates. While the U.S.
Government provides financial support to such U.S. Government-sponsored agencies
or instrumentalities, no assurance can be given that it will always do so, since
it is not so obligated by law. Each Fund will invest in such securities only
when it is satisfied that the credit risk with respect to the issuer is minimal.
The Treasury Money Market Fund will not invest in securities issued or
guaranteed by U.S. Government agencies, instrumentalities or
government-sponsored enterprises that are not backed by the full faith and
credit of the United States.
BANK OBLIGATIONS. (All Funds, except the Limited Term U.S. Government
Fund, Government Money Market Fund and Treasury Money Market Fund) Each of these
Funds may invest in bank obligations (other than those issued by the Adviser or
its affiliates), including certificates of deposit ("CDs"), time deposits
("TDs"), bankers' acceptances and other short-term obligations of domestic
banks, foreign subsidiaries or foreign branches of domestic banks, and domestic
branches of foreign banks, domestic savings and loan associations and other
banking institutions. Domestic commercial banks organized under Federal law are
supervised and examined by the Comptroller of the Currency and are required to
be members of the Federal Reserve System and to have their deposits insured by
the Federal Deposit Insurance Corporation (the "FDIC"). Domestic banks organized
under state law are supervised and examined by state banking authorities but are
members of the Federal Reserve System only if they elect to join. In addition,
state banks whose CDs may be purchased by the Fund are insured by the Bank
Insurance Fund administered by the FDIC (although such insurance may not be of
material benefit to the Fund, depending upon the principal amount of the CDs of
each bank held by the Fund) and are subject to Federal examination and to a
substantial body of Federal law and regulation. As a result of Federal and state
laws and regulations, domestic branches of domestic banks, among other things,
are generally required to maintain specified levels of reserves, and are subject
to other supervision and regulation designed to promote financial soundness.
Obligations of foreign branches of domestic banks, foreign
subsidiaries of domestic banks and domestic branches of foreign banks, such as
CDs and TDs, may be general obligations of the parent banks in addition to the
issuing branch, or may be limited by the terms of a specific obligation or
governmental regulation. Such obligations are subject to different risks than
are those of domestic banks. These risks include foreign economic and political
developments, foreign governmental restrictions that may adversely affect
payment of principal and interest on the obligations, foreign exchange controls
and foreign withholding and other taxes on interest income. Foreign branches and
subsidiaries are not necessarily subject to the same or similar regulatory
requirements that apply to domestic banks, such as mandatory reserve
requirements, loan limitations, and accounting, auditing and financial
recordkeeping requirements. In addition, less information may be publicly
available about a foreign branch of a domestic bank or about a foreign bank than
about a domestic bank. If a domestic bank with deposits insured by the FDIC
becomes insolvent, unsecured deposits and other general obligations of such
bank's foreign branches will be subordinated to the receivership expenses of the
FDIC and such bank's domestic deposits and would be subject to the loss of
principal to a greater extent than such bank's domestic branch deposits. The
Prime Money Market Fund's investment in obligations of foreign subsidiaries of
domestic banks are subject, to the extent required by 1940 Act, to the
limitations on investing in the securities of other investment companies.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by Federal and state
regulation as well as governmental action in the country in which the foreign
bank has its head office. In addition, Federal branches licensed by the
Comptroller of the Currency and branches licensed by certain states ("State
Branches") may be required to: (1) pledge to the regulator, by depositing assets
with a designated bank within the state, a certain percentage of their assets as
fixed from time to time by the appropriate regulatory authority; and (2)
maintain assets within the state in an amount equal to a specified percentage of
the aggregate amount of liabilities of the foreign bank payable at or through
all of its agencies or branches within the state. The deposits of Federal and
State Branches generally must be insured by the FDIC if such branches take
deposits of less than $100,000.
In view of the foregoing factors associated with the purchase of CDs
and TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, or by domestic branches of foreign banks, the Adviser carefully
evaluates such investments on a case-by-case basis.
Each of these Funds may purchase CDs issued by banks, savings and loan
associations and similar thrift institutions with less than $1 billion in
assets, which are members of the FDIC, provided the Fund purchases any such CD
in a principal amount of not more than $100,000, which amount would be fully
insured by the Bank Insurance Fund or the Savings Association Insurance Fund
administered by the FDIC. Interest payments on such a CD are not insured by the
FDIC. No Fund will own more than one such CD per such issuer.
Each of these Funds may invest in short-term U.S. dollar denominated
corporate obligations that are originated, negotiated and structured by a
syndicate of lenders ("Co-Lenders") consisting of commercial banks, thrift
institutions, insurance companies, finance companies or other financial
institutions one or more of which administers the security on behalf of the
syndicate (the "Agent Bank"). Co-Lenders may sell such securities to third
parties called "Participants." The Fund may invest in such securities either by
participating as a Co-Lender at origination or by acquiring an interest in the
security from a Co-Lender or a Participant (collectively, "participation
interests"). Co-Lenders and Participants interposed between the Fund and the
corporate borrower (the "Borrower"), together with Agent Banks, are referred
herein as "Intermediate Participants." The Fund also may purchase a
participation interest in a portion of the rights of an Intermediate
Participant, which would not establish any direct relationship between the Fund
and the Borrower. In such cases, the Fund would be required to rely on the
Intermediate Participant that sold the participation interest not only for the
enforcement of the Fund's rights against the Borrower but also for the receipt
and processing of payments due to the Fund under the security. Because it may be
necessary to assert through an Intermediate Participant such rights as may exist
against the Borrower, in the event the Borrower fails to pay principal and
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would be involved if the Fund could enforce its
rights directly against the Borrower. Moreover, under the terms of a
participation interest, the Fund may be regarded as a creditor of the
Intermediate Participant (rather than of the Borrower), so that the Fund also
may be subject to the risk that the Intermediate Participant may become
insolvent. Similar risks may arise with respect to the Agent Bank if, for
example, assets held by the Agent Bank for the benefit of the Fund were
determined by the appropriate regulatory authority or court to be subject to the
claims of the Agent Bank's creditors. In such cases, the Fund might incur
certain costs and delays in realizing payment in connection with the
participation interest or suffer a loss of principal and/or interest. Further,
in the event of the bankruptcy or insolvency of the Borrower, the obligation of
the Borrower to repay the loan may be subject to certain defenses that can be
asserted by such Borrower as a result of improper conduct by the Agent Bank or
Intermediate Participant.
Under normal circumstances, and as a matter of fundamental policy, the
Prime Money Market Fund will "concentrate" at least 25% of its assets in debt
instruments issued by domestic and foreign companies engaged in the banking
industry, including bank holding companies. Such investments may include CDs,
TDs, bankers' acceptances and obligations issued by bank holding companies, as
well as repurchase agreements entered into with banks (as distinct from non-bank
dealers) in accordance with the policies set forth in "Repurchase Agreements"
below. During periods when the Adviser determines that the Prime Money Market
Fund should be in a temporary defensive position, the Fund may invest less than
25% of its total assets in the banking industry; during such times the Prime
Money Market Fund's assets will be invested in accordance with its other
investment policies. The Adviser may determine that the adoption of a temporary
defensive position with respect to issuers in the banking industry is
appropriate on the basis of such factors as political, economic, market or
regulatory developments adversely affecting that industry as compared to the
industries of other issuers of securities available for investment by the Prime
Money Market Fund.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS. (Each
Fund, except the Limited Term U.S. Government Fund, Government Money Market Fund
and Treasury Money Market Fund) Each of these Funds may invest in commercial
paper, which consists of short-term, unsecured promissory notes issued to
finance short-term credit needs. The commercial paper purchased by the Funds
will consist only of direct obligations which, at the time of their purchase,
are (a) rated not lower than Prime-1 by Moody's Investors Service, Inc.
("Moody's"), A-1 by Standard & Poor's Ratings Group ("S&P"), F-1 by Fitch IBCA,
Inc. ("Fitch") or Duff-1 by Duff & Phelps Credit Rating Co. ("Duff"), or (b)
issued by companies having an outstanding unsecured debt issue currently rated
not lower than Aa3 by Moody's or AA- by S&P, Fitch or Duff, or (c) if unrated,
determined by the Adviser to be of comparable quality to those rated obligations
which may be purchased by the Fund.
REPURCHASE AGREEMENTS. (All Funds) Each Fund may enter into repurchase
agreements which involve the acquisition by a Fund of an underlying debt
instrument, subject to an obligation of the seller to repurchase, and such Fund
to resell, the instrument at a fixed price usually not more than one week after
its purchase. The Fund's custodian or sub-custodian employed in connection with
third-party repurchase transactions will have custody of, and will hold in a
segregated account, securities acquired by a Fund under a repurchase agreement.
In connection with its third-party repurchase transactions, the Fund will employ
only eligible sub-custodians that meet the requirements set forth in Section
17(f) of the 1940 Act. Repurchase agreements are considered by the staff of the
Securities and Exchange Commission to be loans by the Fund entering into them.
Certain costs may be incurred by a Fund in connection with the sale of the
securities if the seller does not repurchase them in accordance with the
repurchase agreement. In addition, if bankruptcy or insolvency proceedings are
commenced with respect to the seller of the securities, realization on the
securities by a Fund may be delayed or limited. Each Fund will consider on an
ongoing basis the creditworthiness of the institutions with which it enters into
repurchase agreements. In an attempt to reduce the risk of incurring a loss on a
repurchase agreement, each Fund will enter into repurchase agreements only with
registered or unregistered securities dealers or banks with total assets in
excess of one billion dollars or primary government securities dealers reporting
to the Federal Reserve Bank of New York, with respect to securities of the type
in which such Fund may invest or government securities regardless of their
remaining maturities, and will require that additional securities be deposited
with it if the value of the securities purchased should decrease below resale
price. The Adviser will monitor on an ongoing basis the value of the collateral
to assure that it always equals or exceeds the repurchase price. Each Fund will
consider on an ongoing basis the creditworthiness of the institutions with which
it enters into repurchase agreements.
ZERO COUPON AND STRIPPED SECURITIES. (All Funds) Each Fund may invest
in zero coupon U.S. Treasury securities, which are Treasury Notes and Bonds that
have been stripped of their unmatured interest coupons, the coupons themselves
and receipts or certificates representing interests in such stripped debt
obligations and coupons. Each Fund, except the Limited Term U.S. Government
Fund, Prime Money Market Fund and Treasury Money Market Fund, also may invest in
zero coupon securities issued by corporations and financial institutions which
constitute a proportionate ownership of the issuer's pool of underlying U.S.
Treasury securities. A zero coupon security pays no interest to its holder
during its life and is sold at a discount to its face value at maturity. The
amount of the discount fluctuates with the market price of the security. The
market prices of zero coupon securities generally are more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to a greater degree to changes in interest rates than non-zero coupon
securities having similar maturities and credit qualities. The Tennessee
Tax-Exempt Fund will invest no more than 25% of the value of its net assets in
zero coupon and stripped securities.
FOREIGN GOVERNMENT OBLIGATIONS; SECURITIES OF SUPRANATIONAL ENTITIES.
(Each Fund, except the Limited Term U.S. Government Fund, Government Money
Market Fund and Treasury Money Market Fund) Each of these Funds may invest in
obligations issued or guaranteed by one or more foreign governments or any of
their political subdivisions, agencies or instrumentalities that are determined
by the Adviser to be of comparable quality to the other obligations in which
such Fund may invest. Such securities also include debt obligations of
supranational entities. Supranational entities include international
organizations designated or supported by governmental entities to promote
economic reconstruction or development and international banking institutions
and related government agencies. Examples include the International Bank for
Reconstruction and Development (the World Bank), the European Coal and Steel
Community, the Asian Development Bank and the InterAmerican Development Bank.
The percentage of a Fund's assets invested in securities issued by foreign
governments will vary depending on the relative yields of such securities, the
economic and financial markets of the countries in which the investments are
made and the interest rate climate of such countries.
FLOATING AND VARIABLE RATE OBLIGATIONS. (Each Fund, except the Limited
Term U.S. Government Fund, Government Money Market Fund and Treasury Money
Market Fund) Each of these Funds may purchase floating and variable rate demand
notes and bonds, which are obligations ordinarily having stated maturities in
excess of 397 days, but which permit the holder to demand payment of principal
at any time, or at specified intervals. Variable rate demand notes include
master demand notes which are obligations that permit the Fund to invest
fluctuating amounts, at varying rates of interest, pursuant to direct
arrangements between the Fund, as lender, and the borrower. These obligations
permit daily changes in the amount borrowed. Because these obligations are
direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments generally will be traded, and there generally
is no established secondary market for these obligations, although they are
redeemable at face value. Accordingly, where these obligations are not secured
by letters of credit or other credit support arrangements, the Fund's right to
redeem is dependent on the ability of the borrower to pay principal and interest
on demand. Such obligations frequently are not rated by credit rating agencies
and a Fund may invest in obligations which are not so rated only if the Adviser
determines that at the time of investment the obligations are of comparable
quality to the other obligations in which the Fund may invest. The Adviser, on
behalf of each Fund, will consider on an ongoing basis the creditworthiness of
the issuers of the floating and variable rate demand obligations purchased by
such Fund.
NOTES. (Each Fund, except the Limited Term U.S. Government Fund,
Government Money Market Fund and Treasury Money Market Fund) Each of these Funds
may purchase unsecured promissory notes ("Notes") which are not readily
marketable and have not been registered under the Securities Act of 1933, as
amended (the "1933 Act"), provided such investments are consistent with its
investment objective.
PARTICIPATION INTERESTS AND TRUST RECEIPTS. (Each Fund, except the
Limited Term U.S. Government Fund, Government Money Market Fund and Treasury
Money Market Fund) Each of these Funds may purchase from financial institutions
and trusts created by such institutions participation interests and trust
receipts in securities in which it may invest and may enter into loan
participation agreements. A participation interest or receipt gives the Fund an
undivided interest in the security in the proportion that the Fund's
participation interest or receipt bears to the total principal amount of the
security. These instruments may have fixed, floating or variable rates of
interest with remaining maturities of 397 days or less. If the instrument is
unrated, or has been given a rating below that which is permissible for purchase
by the Fund, the instrument will be backed by an irrevocable letter of credit or
guarantee of a bank or other entity the debt securities of which are rated high
quality, or the payment obligation otherwise will be collateralized by U.S.
Government securities, or, in the case of unrated instruments, the Adviser,
acting upon delegated authority from the Company's Board of Directors, must have
determined that the instrument is of comparable quality to those instruments in
which the Fund may invest. Participation interests or trust receipts with a
rating below high quality that are backed by an irrevocable letter of credit or
guarantee as described above will be purchased only if the Adviser, acting as
described above, determines after an analysis of, among other factors, the
creditworthiness of the guarantor that such instrument is high quality, and if
the rating agency did not include the letter of credit or guarantee in its
determination of the instrument's rating. If the rating of a participation
interest or trust receipt is reduced subsequent to its purchase by the Fund, the
Adviser will consider, in accordance with procedures established by the Board of
Directors, all circumstances deemed relevant in determining whether the Fund
should continue to hold the instrument. The guarantor of a participation
interest or trust receipt will be treated as a separate issuer. For certain
participation interests and trust receipts, the Fund will have the unconditional
right to demand payment, on not more than seven days' notice, for all or any
part of the Fund's interest in the security, plus accrued interest. As to these
instruments, the Fund intends to exercise its right to demand payment only upon
a default under the terms of the security, as needed to provide liquidity to
meet redemptions, or to maintain or improve the quality of its investment
portfolio.
GUARANTEED INVESTMENT CONTRACTS. (Each Fund, except the Limited Term
U.S. Government Fund, Government Money Market Fund and Treasury Money Market
Fund) Each of these Funds may make limited investments in guaranteed investment
contracts ("GICs") issued by highly rated U.S. insurance companies. Pursuant to
such a contract, the Fund would make cash contributions to a deposit fund of the
insurance company's general account. The insurance company would then credit to
the Fund on a monthly basis interest which is based on an index (in most cases
the Salomon Smith Barney CD Index), but is guaranteed not to be less than a
certain minimum rate. The Prime Money Market Fund currently does not expect to
invest more than 5% of its net assets in GICs.
ILLIQUID SECURITIES. (All Funds) Each Fund may invest up to 15% (10%
in the case of the Capital Growth, Equity Income, Income, Limited Term Income,
Limited Term U.S. Government, Tennessee Tax-Exempt, Limited Term Tennessee
Tax-Exempt, and Money Market Funds) of the value of its net assets in illiquid
securities. As to these securities, the Fund is subject to a risk that should
the Fund desire to sell them when a ready buyer is not available at a price the
Fund deems representative of their value, the value of the Fund's net assets
could be adversely affected. The term "illiquid securities" for this purpose
means securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, restricted securities other than
those the Adviser has determined to be liquid pursuant to guidelines established
by the Company's Board and repurchase agreements maturing in more than seven
days. Commercial paper issues include securities issued by major corporations
without registration under the 1933 Act, in reliance on the exemption from such
registration afforded by Section 3(a)(3) thereof and commercial paper and medium
term notes issued in reliance on the so-called "private placement" exemption
from registration which is afforded by Section 4(2) of the 1933 Act ("Section
4(2) paper"). Section 4(2) paper is restricted as to disposition under the
Federal securities laws in that any resale must similarly be made in an exempt
transaction. Section 4(2) paper ordinarily is resold to other institutional
investors through or with the assistance of investment dealers who make a market
in Section 4(2) paper, thus providing liquidity.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are sold in transactions not requiring registration.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.
To facilitate the increased size and liquidity of the institutional
markets for unregistered securities, the Securities and Exchange Commission
adopted Rule 144A under the 1933 Act. Rule 144A establishes a "safe harbor" from
the registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Section 4(2) paper that is issued by a
company that files reports under the Securities Exchange Act of 1934, as
amended, generally is eligible to be sold in reliance on the safe harbor of Rule
144A. Pursuant to Rule 144A, the institutional restricted securities markets may
provide both readily ascertainable values for restricted securities and the
ability to liquidate an investment in order to satisfy share redemption orders
on a timely basis. Where a substantial market of qualified institutional buyers
has developed for certain restricted securities purchased by the Fund pursuant
to Rule 144A under the 1933 Act, the Fund intends to treat such securities as
liquid securities in accordance with procedures approved by the Company's Board.
Because it is not possible to predict with assurance how the market for specific
restricted securities sold pursuant to Rule 144A will develop, the Company's
Board has directed the Adviser to monitor carefully each Fund's investments in
such securities with particular regard to trading activity, availability of
reliable price information and other relevant information. To the extent that,
for a period of time, qualified institutional buyers cease purchasing restricted
securities pursuant to Rule 144A, a Fund's investing in such securities may have
the effect of increasing the level of illiquidity in its investment portfolio
during such period.
FORWARD COMMITMENTS. (All Funds) Each Fund may purchase securities on
a when-issued or forward commitment basis, which means that the price is fixed
at the time of commitment, but delivery and payment ordinarily take place a
number of days after the date of the commitment to purchase. Each Fund will make
commitments to purchase such securities only with the intention of actually
acquiring the securities, but the Fund may sell these securities before the
settlement date if it is deemed advisable. The Fund will not accrue income in
respect of a security purchased on a forward commitment basis prior to its
stated delivery date.
Securities purchased on a forward commitment or when-issued basis are
subject to changes in value (generally changing in the same way, i.e.,
appreciating when interest rates decline and depreciating when interest rates
rise) based upon the public's perception of the creditworthiness of the issuer
and changes, real or anticipated, in the level of interest rates. Securities
purchased on a forward commitment or when-issued basis may expose the Fund to
risks because they may experience such fluctuations prior to their actual
delivery. Purchasing securities on a when-issued basis can involve the
additional risk that the yield available in the market when the delivery takes
place actually may be higher than that obtained in the transaction itself.
Purchasing securities on a forward commitment or when-issued basis when the Fund
is fully or almost fully invested may result in greater potential fluctuation in
the value of the Fund's net assets and its net asset value per share.
INVESTMENT COMPANY SECURITIES. (All Funds) Each Fund may invest in
securities issued by other investment companies which principally invest in
securities of the type in which such Fund invests. Under the 1940 Act, a Fund's
investment in such securities currently is limited to, subject to certain
exceptions, (i) 3% of the total voting stock of any one investment company, (ii)
5% of such Fund's total assets with respect to any one investment company and
(iii) 10% of such Fund's total assets in the aggregate. Investments in the
securities of other investment companies will involve duplication of advisory
fees and certain other expenses.
CONVERTIBLE SECURITIES. (Large-Cap Equity, Capital Growth, Small-Cap
Opportunity, Mid-Cap, Equity Income, International Equity, Income and Limited
Term Income Funds) Convertible securities may be converted at either a stated
price or stated rate into underlying shares of common stock. Convertible
securities have characteristics similar to both fixed income and equity
securities. Convertible securities generally are subordinated to other similar
but non-convertible securities of the same issuer, although convertible bonds,
as corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
Although to a lesser extent than with fixed income securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion feature, the market value of convertible
securities tends to vary with fluctuations in the market value of the underlying
common stock. A unique feature of convertible securities is that as the market
price of the underlying common stock declines, convertible securities tend to
trade increasingly on a yield basis, and so may not experience market value
declines to the same extent as the underlying common stock. When the market
price of the underlying common stock increases, the prices of the convertible
securities tend to rise as a reflection of the value of the underlying common
stock. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.
Convertible securities are investments that provide for a stable
stream of income with generally higher yields than common stocks. There can be
no assurance of current income because the issuers of the convertible securities
may default on their obligations. A convertible security, in addition to
providing fixed income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because securities prices fluctuate. Convertible
securities, however, generally offer lower interest or dividend yields than
non-convertible securities of similar quality because of the potential for
capital appreciation.
WARRANTS. (Large-Cap Equity, Capital Growth, Small-Cap Opportunity,
Equity Income, Mid-Cap and International Equity Funds) A warrant is an
instrument issued by a corporation which gives the holder the right to subscribe
to a specified amount of the corporation's capital stock at a set price for a
specified period of time. A Fund may invest up to 5% of its net assets in
warrants, except that this limitation does not apply to warrants purchased by
the Fund that are sold in units with, or attached to, other securities.
MORTGAGE-RELATED SECURITIES. (Income, Capital Growth, Equity Income,
Government Income and Limited Term Income Funds) Mortgage-related securities are
a form of derivative collateralized by pools of commercial or residential
mortgages. Pools of mortgage loans are assembled as securities for sale to
investors by various governmental, government-related and private organizations.
These securities may include complex instruments such as collateralized mortgage
obligations and stripped mortgage-backed securities, mortgage pass-through
securities, interests in real estate mortgage investment conduits ("REMICs"),
adjustable rate mortgages, real estate investment trusts ("REITs"), including
debt and preferred stock issued by REITs, as well as other real estate-related
securities. The mortgage-related securities in which the Fund may invest include
those with fixed, floating and variable interest rates, those with interest
rates that change based on multiples of changes in a specified index of interest
rates and those with interest rates that change inversely to changes in interest
rates.
GOVERNMENT AGENCY SECURITIES--Mortgage-related securities issued by the
Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the department of Housing and Urban
Development. GNMA certificates also are supported by the authority of GNMA to
borrow funds from the U.S. Treasury to make payments under its guarantee.
GOVERNMENT RELATED SECURITIES--Mortgage-related securities issued by the Federal
National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the Untied States. The FNMA is a government-sponsored organization
owned entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of principal and interest by FNMA.
<PAGE>
Mortgage-related securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "PCs"). The FHLMC is a corporate instrumentality of
the United States created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Bank and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by the
FHLMC. The FHLMC guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. When the FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
PRIVATE ENTITY SECURITIES--These mortgage-related securities are issued by
commercial banks, savings and loan institutions, mortgage bankers, private
mortgage insurance companies and other non-governmental issuers. Timely payment
of principal and interest on mortgage-related securities backed by pools created
by non-governmental issuers often is supported partially by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance. The insurance and guarantees are issued by government entities,
private insurers and the mortgage poolers. There can be no assurance that the
private insurers or mortgage poolers can meet their obligations under the
policies, so that if the issuers default on their obligations the holders of the
security could sustain a loss. No insurance or guarantee covers the Fund or the
price of the Fund's shares. Mortgage-related securities issued by
non-governmental issuers generally offer a higher rate of interest than
government-agency and government-related securities because there are no direct
or indirect government guarantees of payment.
COMMERCIAL MORTGAGE-RELATED SECURITIES--Commercial mortgage-related securities
generally are multi-class debt or pass-through certificates secured by mortgage
loans on commercial properties. These mortgage-related securities generally are
structured to provide protection to the senior classes investors against
potential losses on the underlying mortgage loans. This protection generally is
provided by having the holders of subordinated classes of securities
("Subordinated Securities") take the first loss if there are defaults on the
underlying commercial mortgage loans. Other protection, which may benefit all of
the classes or particular classes, may include issuer guarantees, reserve funds,
additional Subordinated Securities, cross-collateralization and
over-collateralization.
Each of these Funds may invest in Subordinated Securities issued or
sponsored by commercial banks, savings and loan institutions, mortgage bankers,
private mortgage insurance companies and other non-governmental issuers.
Subordinated Securities have no governmental guarantee, and are subordinated in
some manner as to the payment of principal and/or interest to the holders of
more senior mortgage-related securities arising out of the same pool of
mortgages. The holders of Subordinated Securities typically are compensated with
a higher stated yield than are the holders of more senior mortgage-related
securities. On the other hand, Subordinated Securities typically subject the
holder to greater risk than senior mortgage-related securities and tend to be
rated in a lower rating category, and frequently a substantially lower rating
category, than the senior mortgage-related securities issued in respect of the
same pool of mortgage. Subordinated Securities generally are likely to be more
sensitive to changes in prepayment and interest rates and the market for such
securities may be less liquid than is the case for traditional fixed-income
securities and senior mortgage-related securities.
The market for commercial mortgage-related securities developed more
recently and in terms of total outstanding principal amount of issues is
relatively small compared to the market for residential single-family
mortgage-related securities. In addition, commercial lending generally is viewed
as exposing the lender to a greater risk of loss than one- to four-family
residential lending. Commercial lending, for example, typically involves larger
loans to single borrowers or groups of related borrowers than residential one-
to four-family mortgage loans. In addition, the repayment of loans secured by
income producing properties typically is dependent upon the successful operation
of the related real estate project and the cash flow generated therefrom.
Consequently, adverse changes in economic conditions and circumstances are more
likely to have an adverse impact on mortgage-related securities secured by loans
on commercial properties than on those secured by loans on residential
properties.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")--A CMO is a multiclass bond backed
by a pool of mortgage pass-through certificates or mortgage loans. CMOs may be
collateralized by (a) Ginnie Mae, Fannie Mae, or Freddie Mac pass-through
certificates, (b) unsecuritized mortgage loans insured by the Federal Housing
Administration or guaranteed by the Department of Veterans' Affairs, (c)
unsecuritized conventional mortgages, (d) other mortgage-related securities, or
(e) any combination thereof. Each class of CMOs, often referred to as a
"tranche," is issued at a specific coupon rate and has a stated maturity or
final distribution date. Principal prepayments on collateral underlying a CMO
may cause it to be retired substantially earlier than the stated maturities or
final distribution dates. The principal and interest on the underlying mortgages
may be allocated among the several classes of a series of a CMO in many ways.
One or more tranches of a CMO may have coupon rates which reset periodically at
a specified increment over an index, such as the London Interbank Offered Rate
("LIBOR") (or sometimes more than one index). These floating rate CMOs typically
are issued with lifetime caps on the coupon rate thereon. Each of these Funds
also may invest in inverse floating rate CMOs. Inverse floating rate CMOs
constitute a tranche of a CMO with a coupon rate that moves in the reverse
direction to an applicable index such a LIBOR. Accordingly, the coupon rate
thereon will increase as interest rates decrease. Inverse floating rate CMOs are
typically more volatile than fixed or floating rate tranches of CMOs.
Many inverse floating rate CMOs have coupons that move inversely to a
multiple of the applicable indexes. The effect of the coupon varying inversely
to a multiple of an applicable index creates a leverage factor. Inverse floaters
based on multiples of a stated index are designed to be highly sensitive to
changes in interest rates and can subject the holders thereof to extreme
reductions of yield and loss of principal. The markets for inverse floating rate
CMOs with highly leveraged characteristics at times may be very thin. The Fund's
ability to dispose of its positions in such securities will depend on the degree
of liquidity in the markets for such securities. It is impossible to predict the
amount of trading interest that may exist in such securities, and therefore the
future degree of liquidity.
STRIPPED MORTGAGE-BACKED SECURITIES--Each of these Funds also may invest in
stripped mortgage-backed securities. Stripped mortgage-backed securities are
created by segregating the cash flows from underlying mortgage loans or mortgage
securities to create two or more new securities, each with a specified
percentage of the underlying security's principal or interest payments. Mortgage
securities may be partially stripped so that each investor class receives some
interest and some principal. When securities are completely stripped, however,
all of the interest is distributed to holders of one type of security, known as
an interest-only security, or IO, and all of the principal is distributed to
holders of another type of security known as a principal-only security, or PO.
Strips can be created in a pass-through structure or as tranches of a CMO. The
yields to maturity on IOs and POs are very sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage assets. If
the underlying mortgage assets experience greater than anticipated prepayments
of principal, the Fund may not fully recoup its initial investment in IOs.
Conversely, if the underlying mortgage assets experience less than anticipated
prepayments of principal, the yield on POs could be materially and adversely
affected.
REAL ESTATE INVESTMENT TRUSTS--A REIT is a corporation, or a business trust that
would otherwise be taxed as a corporation, which meets the definitional
requirements of the Internal Revenue Code of 1986, as amended (the "Code"). The
Code permits a qualifying REIT to deduct dividends paid, thereby effectively
eliminating corporate level Federal income tax and making the REIT a
pass-through vehicle for Federal income tax purposes. To meet the definitional
requirements of the Code, a REIT must, among other things, invest substantially
all of its assets in interests in real estate (including mortgages and other
REITs) or cash and government securities, derive most of its income from rents
from real property or interest on loans secured by mortgages on real property,
and distribute to shareholders annually a substantial portion of its otherwise
taxable income.
REITs are characterized as equity REITs, mortgage REITs and hybrid
REITs. Equity REITs, which may include operating or finance companies, own real
estate directly and the value of, and income earned by, the REITs depends upon
the income of the underlying properties and the rental income they earn. Equity
REITs also can realize capital gains (or losses) by selling properties that have
appreciated (or depreciated) in value. Mortgage REITs can make construction,
development or long-term mortgage loans and are sensitive to the credit quality
of the borrower. Mortgage REITs derive their income from interest payments on
such loans. Hybrid REITs combine the characteristics of both equity and mortgage
REITs, generally by holding both ownership interests and mortgage interests in
real estate. The value of securities issued by REITs are affected by tax and
regulatory requirements and by perceptions of management skill. They also are
subject to heavy cash flow dependency, defaults by borrowers or tenants,
self-liquidation and the possibility of failing to qualify for tax-free status
under the Code or to maintain exemption from the 1940 Act.
ADJUSTABLE-RATE MORTGAGE LOANS ("ARMS")--ARMs eligible for inclusion in a
mortgage pool will generally provide for a fixed initial mortgage interest rate
for a specified period of time, generally for either the first three, six,
twelve, thirteen, thirty-six, or sixty scheduled monthly payments. Thereafter,
the interest rates are subject to periodic adjustment based on changes in an
index. ARMs typically have minimum and maximum rates beyond which the mortgage
interest rate may not vary over the lifetime of the loans. Certain ARMs provide
for additional limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. Negatively amortizing ARMs may
provide limitations on changes in the required monthly payment. Limitations on
monthly payments can result in monthly payments that are greater or less than
the amount necessary to amortize a negatively amortizing ARM by its maturity at
the interest rate in effect during any particular month.
OTHER MORTGAGE-RELATED SECURITIES--Other mortgage-related securities include
securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals. Other mortgage-related securities may
be equity or debt securities issued by agencies or instrumentalities of the U.S.
Government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.
ASSET-BACKED SECURITIES. (Capital Growth, Equity Income, Income,
Limited Term Income, Government Income and Prime Money Market Funds)
Asset-backed securities are a form of derivative. The securitization techniques
used for asset-backed securities are similar to those used for mortgage-related
securities. These securities include debt securities and securities with
debt-like characteristics. The collateral for these securities has included home
equity loans, automobile and credit card receivables, boat loans, computer
leases, airplane leases, mobile home loans, recreational vehicle loans and
hospital account receivables. Each of these Funds may invest in these and other
types of asset-backed securities that may be developed in the future.
The Prime Money Market Fund may purchase asset-backed securities
issued by special purpose entities whose primary assets consist of a pool of
mortgages, loans, receivables or other assets. Payment of principal and interest
may depend largely on the cash flows generated by the assets backing the
securities and, in certain cases, supported by letters of credit, surety bonds
or other forms of credit or liquidity enhancements. The value of asset-backed
securities also may be affected by the creditworthiness of the servicing agent
for the pool of assets, the originator of the loans or receivables or the
financial institution providing the credit support.
Asset-backed securities present certain risks that are not presented
by mortgage-backed securities. Primarily, these securities may provide the Fund
with a less effective security interest in the related collateral than do
mortgage-backed securities. Therefore, there is the possibility that recoveries
on the underlying collateral may not, in some cases, be available to support
payments on these securities.
AMERICAN DEPOSITARY RECEIPTS. (Large-Cap Equity, Capital Growth,
Small-Cap Opportunity, Mid-Cap, Equity Income and International Equity Funds)
Each of these Funds may invest in the securities of foreign issuers in the form
of American Depositary Receipts ("ADRs") and other forms of depositary receipts.
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by a United States bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. Generally, ADRs in registered form
are designed for use in the United States securities markets. Each of these
Funds may invest in ADRs through "sponsored" or "unsponsored" facilities. A
sponsored facility is established jointly by the issuer of the underlying
security and a depositary, whereas a depositary may establish an unsponsored
facility without participation by the issuer of the deposited security. Holders
of unsponsored depositary receipts generally bear all the costs of such
facilities and the depositary of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of
the deposited security or to pass through voting rights to the holders of such
receipts in respect of the deposited securities.
STANDARD & POOR'S DEPOSITARY RECEIPTS. (Capital Growth and Equity
Income Funds) These securities, commonly referred to as "spiders," represent an
interest in a fixed portfolio of common stocks designed to track the price and
dividend yield performance of the Standard & Poor's 500 Index or the Standard &
Poor's MidCap 400 Index, as the case may be.
MUNICIPAL OBLIGATIONS. (Income, Limited Term Income, Municipal Income,
Limited Term Tennessee Tax-Exempt, Tennessee Tax-Exempt, Tax-Exempt Money Market
and, to a limited extent, Prime Money Market Funds) The term "Municipal
Obligations" generally includes debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Municipal Obligations may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses and
lending such funds to other public institutions and facilities. In addition,
certain types of industrial development bonds are issued by or on behalf of
public authorities to obtain funds to provide for the construction, equipment,
repair or improvement of privately operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass transit,
industrial, port or parking facilities, air or water pollution control
facilities and certain local facilities for water supply, gas, electricity, or
sewage or solid waste disposal; the interest paid on such obligations may be
exempt from Federal income tax, although current tax laws place substantial
limitations on the size of such issues. There are, of course, variations in the
security of Municipal Obligations, both within a particular classification and
between classifications.
Municipal Obligations bear fixed, floating or variable rates of
interest, which are determined in some instances by formulas under which the
Municipal Obligation's interest rate will change directly or inversely to
changes in interest rates or an index, or multiples thereof, in many cases
subject to a maximum and minimum. Certain Municipal Obligations are subject to
redemption at a date earlier than their stated maturity pursuant to call
options, which may be separated from the related Municipal Obligations and
purchased and sold separately.
Floating and variable rate demand notes and bonds are tax exempt
obligations ordinarily having stated maturities in excess of one year, but which
permit the holder to demand payment of principal at any time, or at specified
intervals. The issuer of such obligations ordinarily has a corresponding right,
after a given period, to prepay in its discretion the outstanding principal
amount of the obligations plus accrued interest upon a specified number of days'
notice to the holders thereof. The interest rate on a floating rate demand
obligation is based on a known lending rate, such as a bank's prime rate, and is
adjusted automatically each time such rate is adjusted. The interest rate on a
variable rate demand obligation is adjusted automatically at specified
intervals.
The yields on Municipal Obligations are dependent on a variety of
factors, including general economic and monetary conditions, money market
factors, conditions in the Municipal Obligations market, size of a particular
offering, maturity of the obligation and rating of the issue. The imposition of
the advisory and administration fees, as well as other Fund operating expenses,
will have the effect of reducing the yield to investors.
Each of these Funds may invest up to 5% of the value of its total
assets in municipal lease obligations or installment purchase contract
obligations (collectively, "lease obligations"). Lease obligations have special
risks not ordinarily associated with Municipal Obligations. Although lease
obligations do not constitute general obligations of the municipality for which
the municipality's taxing power is pledged, a lease obligation ordinarily is
backed by the municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. Certain lease obligations in which
these Funds may invest may contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease payments in future years
unless money is appropriated for such purpose on a yearly basis. Although "non-
appropriation" lease obligations are secured by the leased property, disposition
of the leased property in the event of foreclosure might prove difficult. In
addition, no assurance can be given as to the liquidity of certain lease
obligations. The staff of the Securities and Exchange Commission currently
considers certain lease obligations to be illiquid. The Company's Board of
Directors has established guidelines for the Adviser to determine the liquidity
and appropriate valuation of lease obligations based on factors which include:
(1) the frequency of trades and quotes for the lease obligation or similar
securities; (2) the number of dealers willing to purchase or sell the lease
obligation or similar securities and the number of other potential buyers; (3)
the willingness of dealers to undertake to make a market in the security or
similar securities; and (4) the nature of the marketplace trades, including the
time needed to dispose of the security, the method of soliciting offers, and the
mechanics of transfer.
Each of these Funds may purchase tender option bonds and similar
securities. A tender option bond is a Municipal Obligation (generally held
pursuant to a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax exempt rates, that has been coupled with the agreement of a third party,
such as a bank, broker-dealer or other financial institution, pursuant to which
such institution grants the security holders the option, at periodic intervals,
to tender their securities to the institution and receive the face value
thereof. As consideration for providing the option, the financial institution
receives periodic fees equal to the difference between the Municipal
Obligation's fixed coupon rate and the rate, as determined by a remarketing or
similar agent at or near the commencement of such period, that would cause the
securities, coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term tax
exempt rate. The Adviser, on behalf of the Fund, will consider on an ongoing
basis the creditworthiness of the issuer of the underlying Municipal Obligation,
of any custodian and of the third party provider of the tender option. In
certain instances and for certain tender option bonds, the option may be
terminable in the event of a default in payment of principal or interest on the
underlying Municipal Obligations and for other reasons.
The Fund will purchase tender option bonds only when it is satisfied
that the custodial and tender option arrangements, including the fee payment
arrangements, will not adversely affect the tax exempt status of the underlying
Municipal Obligations and that payment of any tender fees will not have the
effect of creating taxable income for the Fund. Based on the tender option bond
agreement, each of these Funds expects to be able to value the tender option
bond at par; however, the value of the instrument will be monitored to assure
that is valued at fair value.
RATINGS OF MUNICIPAL OBLIGATIONS. Subsequent to its purchase by a
Fund, an issue of rated Municipal Obligations may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require the sale of such Municipal Obligations by the Fund,
but the Adviser will consider such event in determining whether the Fund should
continue to hold the Municipal Obligations. To the extent that the ratings given
by Moody's, S&P or Fitch for Municipal Obligations may change as a result of
changes in such organizations or their rating systems, the Fund will attempt to
use comparable ratings as standards for its investments in accordance with the
investment policies contained in the Fund's Prospectus and this Statement of
Additional Information. The ratings of Moody's, S&P and Fitch represent their
opinions as to the quality of the Municipal Obligations which they undertake to
rate. It should be emphasized, however, that ratings are relative and subjective
and are not absolute standards of quality. Although these ratings may be an
initial criterion for selection of portfolio investments, the Adviser also will
evaluate these securities and the creditworthiness of the issuers of such
securities based upon financial and other available information.
The average dollar-weighted credit rating of the Municipal Obligations
held by the Tennessee Tax-Exempt Fund and Limited Term Tennessee Tax-Exempt Fund
will be at least A- by Moody's, S&P or Fitch. To further limit risk, each
Municipal Obligation in which the Fund may invest must be rated, in the case of
bonds, at least Baa by Moody's or at least BBB by S&P and Fitch. Each Fund may
invest in short-term Municipal Obligations which are rated in the two highest
categories by Moody's, S&P or Fitch. The average dollar-weighted portfolio
credit rating will be measured on the basis of the dollar value of the Municipal
Obligations purchased and their credit rating without reference to rating
subcategories. The Tennessee Tax-Exempt Fund and Limited Term Tennessee
Tax-Exempt Fund also may invest in Municipal Obligations which, while not rated,
are determined by the Adviser to be of comparable quality to the rated
securities in which the Fund may invest.
The average distribution of investments (at value) in Municipal
Obligations by ratings for the fiscal year ended December 31, 1998 computed on a
monthly basis, for the Municipal Income Fund, Tennessee Tax-Exempt Fund and
Limited Term Tennessee Tax-Exempt Fund was as follows:
Percentage of Value
Limited Term
Municipal Tennessee Tennessee
Income Tax-Exempt Tax-Exempt
Moody's Fitch S&P Fund Fund Fund
- ------- ----- ---- ---------- ---------- --------------
Aaa AAA AAA 48.0% 65.9% 25.5%
Aa AA AA 47.4% 31.5% 55.6%
A A A 4.6% 2.6% 15.1%
Baa BBB BBB - - 3.8%
------- ------- ------
100.0% 100.0% 100.0%
====== ====== ======
MANAGEMENT POLICIES
INVESTMENT TECHNIQUES AND PORTFOLIO TURNOVER RATES. (All Funds) Each
Fund may engage in various investment techniques the use of which involves risk.
Investors in the Municipal Income, Tennessee Tax-Exempt or Limited Term
Tennessee Tax-Exempt Funds should be aware that the use of these techniques may
give rise to taxable income. Using these techniques may produce higher than
normal portfolio turnover for a Fund and may affect the degree to which its net
asset value fluctuates.
Portfolio turnover may vary from year to year, as well as within a
year. No Fund will consider portfolio turnover to be a limiting factor in making
investment decisions. Under normal market conditions, the portfolio turnover
rate for the current fiscal year is anticipated to be less than 200% for the
Small-Cap Opportunity Fund, Mid-Cap Fund, Capital Growth Fund, International
Equity Fund, Tennessee Tax-Exempt Fund and Limited Term Tennessee Tax-Exempt
Fund, and is anticipated to be less than 100% for the Large-Cap Equity Fund,
Equity Income Fund, Income Fund, Limited Term Income Fund, Municipal Income
Fund, Government Income Fund, Limited Term U.S. Government Fund and each
Strategic Portfolio. A portfolio turnover rate of 100% is equivalent to the Fund
buying and selling all of the securities in its portfolio once in the course of
a year. Higher portfolio turnover rates are likely to result in comparatively
greater brokerage commissions or transaction costs. In addition, short-term
gains realized from portfolio transactions are taxable to shareholders as
ordinary income. Each Money Market Fund will have a high portfolio turnover, but
that should not adversely affect the Fund since it usually does not pay
brokerage commissions when it purchases short-term debt obligations.
DURATION. (Income, Limited Term Income, Limited Term U.S. Government
Income and Limited Term Tennessee Tax-Exempt Funds) Each of these Funds follows
a controlled duration strategy. As a measure of a fixed income security's cash
flow, duration is an alternative to the concept of "term to maturity" in
assessing the price volatility associated with changes in interest rates.
Generally, the longer the duration, the more volatility an investor should
expect. For example, the market price of a bond with a duration of three years
would be expected to decline 3% if interest rates rose 1%. Conversely, the
market price of the same bond would be expected to increase 3% if interest rates
fell 1%. The market price of a bond with a duration of six years would be
expected to increase or decline twice as much as the market price of a bond with
a three-year duration. Duration is a way of measuring a security's maturity in
terms of the average time required to receive the present value of all interest
and principal payments as opposed to its term to maturity. The maturity of a
security measures only the time until final payment is due; it does not take
account of the pattern of a security's cash flows over time, which would include
how cash flow is affected by prepayments and by changes in interest rates.
Incorporating a security's yield, coupon interest payments, final maturity and
option features into one measure, duration is computed by determining the
weighted average maturity of a bond's cash flows, where the present values of
the cash flows serve as weights. In computing the duration of the Fund, the
Adviser will estimate the duration of obligations that are subject to features
such as prepayment or redemption by the issuer, put options retained by the
investor or other imbedded options, taking into account the influence of
interest rates on prepayments and coupon flows.
LENDING PORTFOLIO SECURITIES. (All Funds) From time to time, each Fund
may lend securities from its investment portfolio to brokers, dealers and other
financial institutions needing to borrow securities to complete certain
transactions. Such loans may not exceed 33-1/3% of the value of the relevant
Fund's total assets. In connection with such loans, each Fund will receive
collateral consisting of cash or U.S. Government securities which will be
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. Each Fund can increase its income through
the investment of such collateral. Each Fund continues to be entitled to
payments in amounts equal to the dividends, interest and other distributions
payable on the loaned security and receives interest on the amount of the loan.
Such loans will be terminable at any time upon specified notice. A Fund might
experience risk of loss if the institution with which it has engaged in a
portfolio loan transaction breaches its agreement with such Fund. From time to
time, a Fund may return to the borrower or a third party which is unaffiliated
with the Fund, and which is acting as a "placing broker," a part of the interest
earned from the investment of collateral received for securities loaned.
The Securities and Exchange Commission currently requires that the
following conditions must be met whenever portfolio securities are loaned: (1)
the Fund must receive at least 100% cash collateral from the borrower; (2) the
borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) the Fund must be able
to terminate the loan at any time; (4) the Fund must receive reasonable interest
on the loan, as well as any dividends, interest or other distributions payable
on the loaned securities, and any increase in market value; (5) the Fund may pay
only reasonable custodian fees in connection with the loan; and (6) while voting
rights on the loaned securities may pass to the borrower, the Company's Board of
Directors must terminate the loan and regain the right to vote the securities if
a material event adversely affecting the investment occurs.
OPTIONS TRANSACTIONS. (Large-Cap Equity, Capital Growth, Small-Cap
Opportunity, Mid-Cap, Equity Income, Government Income and International Equity
Funds) Each of these Funds may purchase call and put options in respect of
specific securities in which the Fund may invest and write covered call and put
option contracts. A call option gives the purchaser of the option the right to
buy, and obligates the writer to sell, the underlying security at the exercise
price at any time during the option period. Conversely, a put option gives the
purchaser of the option the right to sell, and obligates the writer to buy, the
underlying security at the exercise price at any time during the option period.
A covered call option sold by the Fund, which is a call option with respect to
which the Fund owns the underlying security, exposes the Fund during the term of
the option to possible loss of opportunity to realize appreciation in the market
price of the underlying security or to possible continued holding of a security
which might otherwise have been sold to protect against depreciation in the
market price of the security. A covered put option sold by the Fund exposes the
Fund during the term of the option to a decline in price of the underlying
security. A put option sold by the Fund is covered when, among other things,
permissible liquid assets are placed in a segregated account to fulfill the
obligation undertaken.
The principal reason for the Fund writing covered call options is to
realize, through the receipt of premiums, a greater return than would be
realized on its portfolio securities alone. In return for a premium, the writer
of a covered call option forfeits the right to any appreciation in the value of
the underlying security above the strike price for the life of the option (or
until a closing purchase transaction can be effected). Nevertheless, the call
writer retains the risk of a decline in the price of the underlying security.
Similarly, the principal reason for writing covered put options is to realize
income in the form of premiums. The writer of a covered put option accepts the
risk of a decline in the price of the underlying security. The size of the
premiums that the Fund may receive may be adversely affected as new or existing
institutions, including other investment companies, engage in or increase their
option-writing activities.
Options written ordinarily will have expiration dates between one and
nine months from the date written. The exercise price of the options may be
below, equal to or above the market values of the underlying securities at the
time the options are written. In the case of call options, these exercise prices
are referred to as "in-the-money," "at-the-money" and "out-of-the-money,"
respectively. The Fund may write (a) in-the-money call options when the Adviser
expects that the price of the underlying security will remain stable or decline
moderately during the option period, (b) at-the-money call options when the
Adviser expects that the price of the underlying security will remain stable or
advance moderately during the option period and (c) out-of-the-money call
options when the Adviser expects that the premiums received from writing the
call option plus the appreciation in market price of the underlying security up
to the exercise price will be greater than the appreciation in the price of the
underlying security alone. In these circumstances, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the-money, at-the-money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be utilized in the same market environments that such call options are used
in equivalent transactions.
So long as the Fund's obligation as the writer of an option continues,
it may be assigned an exercise notice by the broker-dealer through which the
option was sold, requiring it to deliver, in the case of a call, or take
delivery of, in the case of a put, the underlying security against payment of
the exercise price. This obligation terminates when the option expires or the
Fund effects a closing purchase transaction. The Fund can no longer effect a
closing purchase transaction with respect to an option once it has been assigned
an exercise notice.
While it may choose to do otherwise, the Fund generally will purchase
or write only those options for which the Adviser believes there is an active
secondary market so as to facilitate closing transactions. There is no assurance
that sufficient trading interest to create a liquid secondary market on a
securities exchange will exist for any particular option or at any particular
time, and for some options no such secondary market may exist. A liquid
secondary market in an option may cease to exist for a variety of reasons. In
the past, for example, higher than anticipated trading activity or order flow,
or other unforeseen events, at times have rendered certain clearing facilities
inadequate and resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that otherwise may interfere with the timely execution of
customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. If, as a covered call option
writer, the Fund is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise or it
otherwise covers its position.
The Fund intends to treat options in respect of specific securities
that are not traded on a national securities exchange and the securities
underlying covered call options written by the Fund as illiquid securities.
STOCK INDEX OPTIONS. (Large-Cap Equity, Capital Growth, Small-Cap
Opportunity, Mid-Cap, Equity Income and International Equity Funds) Each of
these Funds may purchase and write put and call options on stock indexes listed
on national securities exchanges or traded in the over-the-counter market to the
extent of 15% of the value of its net assets. A stock index fluctuates with
changes in the market values of the stocks included in the index. Options on
stock indexes are similar to options on stock except that (a) the expiration
cycles of stock index options are monthly, while those of stock options are
currently quarterly, and (b) the delivery requirements are different. Instead of
giving the right to take or make delivery of a stock at a specified price, an
option on a stock index gives the holder the right to receive a cash "exercise
settlement amount" equal to (i) the amount, if any, by which the fixed exercise
price of the option exceeds (in the case of a put) or is less than (in the case
of a call) the closing value of the underlying index on the date of exercise,
multiplied by (ii) a fixed "index multiplier." Receipt of this cash amount will
depend upon the closing level of the stock index upon which the option is based
being greater than, in the case of a call, or less than, in the case of a put,
the exercise price of the option. The amount of cash received will be equal to
such difference between the closing price of the index and the exercise price of
the option expressed in dollars times a specified multiple. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. The writer may offset its position in stock index options prior to
expiration by entering into a closing transaction on an exchange or it may let
the option expire unexercised.
The effectiveness of the Fund's purchasing or writing stock index
options will depend upon the extent to which price movements in its portfolio
correlate with price movements of the stock index selected. Because the value of
an index option depends upon movements in the level of the index rather than the
price of a particular stock, whether the Fund will realize a gain or loss from
the purchase or writing of options on an index depends upon movements in the
level of stock prices in the stock market generally or, in the case of certain
indexes, in an industry or market segment, rather than movements in the price of
a particular stock. Accordingly, successful use by the Fund of options on stock
indexes will be subject to the Adviser's ability to predict correctly movements
in the direction of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the price of
individual stocks.
When the Fund writes an option on a stock index, it will place in a
segregated account permissible liquid assets in an amount at least equal to the
market value of the underlying stock index and will maintain the account while
the option is open or will otherwise cover the transaction.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. (Large-Cap Equity,
Capital Growth, Small-Cap Opportunity, Mid-Cap, Equity Income, International
Equity, Tennessee Tax-Exempt and Limited Term Tennessee Tax-Exempt Funds) None
of these Funds will be a commodity pool. However, as a substitute for a
comparable market position in the underlying securities or for hedging purposes,
each of these Funds may engage in futures and options on futures transactions,
as described below.
The commodities transactions of each of these Funds must constitute
bona fide hedging or other permissible transactions pursuant to regulations
promulgated by the Commodity Futures Trading Commission. In addition, none of
these Funds may engage in such transactions if the sum of the amount of initial
margin deposits and premiums paid for unexpired commodity options, other than
for bona fide hedging transactions, would exceed 5% of the liquidation value of
the Fund's total assets, after taking into account unrealized profits and
unrealized losses on such contracts it has entered into; provided, however, that
in the case of an option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in calculating the 5%. Pursuant to
regulations and/or published positions of the Securities and Exchange
Commission, each of these Funds may be required to segregate permissible liquid
assets in connection with its commodities transactions in an amount at least
equal to the value of the underlying commodity.
Initially, when purchasing or selling futures contracts, a Fund will
be required to deposit with the Company's custodian in the broker's name an
amount of cash or cash equivalents up to approximately 10% of the contract
amount. This amount is subject to change by the exchange or board of trade on
which the contract is traded and members of such exchange or board of trade may
impose their own higher requirements. This amount is known as "initial margin"
and is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Fund upon termination of the futures position, assuming
all contractual obligations have been satisfied. Subsequent payments, known as
"variation margin," to and from the broker will be made daily as the price of
the index or securities underlying the futures contract fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as "marking-to-market." At any time prior to the expiration of a
futures contract, the Fund may elect to close the position by taking an opposite
position, at the then prevailing price, which will operate to terminate its
existing position in the contract.
Although each of these Funds intends to purchase or sell futures
contracts only if there is an active market for such contracts, no assurance can
be given that a liquid market will exist for any particular contract at any
particular time. Many futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may be suspended for
specified periods during the trading day. Futures contract prices could move to
the limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and potentially
subjecting the relevant Fund to substantial losses. If it is not possible, or
the Fund determines not, to close a futures position in anticipation of adverse
price movements, it will be required to make daily cash payments of variation
margin. In such circumstances, an increase in the value of the portion of the
portfolio being hedged, if any, may offset partially or completely losses on the
futures contract. However, no assurance can be given that the price of the
securities being hedged will correlate with the price movements in a futures
contract and thus provide an offset to losses on the futures contract.
To the extent a Fund is engaging in a futures transaction as a hedging
device, because of the risk of an imperfect correlation between securities in a
portfolio that are the subject of a hedging transaction and the futures contract
used as a hedging device, it is possible that the hedge will not be fully
effective if, for example, losses on the portfolio securities exceed gains on
the futures contract or losses on the futures contract exceed gains on the
portfolio securities. For futures contracts based on indexes, the risk of
imperfect correlation increases as the composition of a Fund's investments
varies from the composition of the index. In an effort to compensate for the
imperfect correlation of movements in the price of the securities being hedged
and movements in the price of futures contracts, the Fund may buy or sell
futures contracts in a greater or lesser dollar amount than the dollar amount of
the securities being hedged if the historical volatility of the futures contract
has been less or greater than that of the securities. Such "over hedging" or
"under hedging" may adversely affect the Fund's net investment results if market
movements are not as anticipated when the hedge is established.
Successful use of futures by a Fund also is subject to the Adviser's
ability to predict correctly movements in the direction of the market or
interest rates. For example, if a Fund has hedged against the possibility of a
decline in the market adversely affecting the value of securities held in its
portfolio and prices increase instead, such Fund will lose part or all of the
benefit of the increased value of securities which it has hedged because it will
have offsetting losses in its futures positions. Furthermore, if in such
circumstances the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. The Fund may have to sell such
securities at a time when it may be disadvantageous to do so.
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the option exercise period. The
writer of the option is required upon exercise to assume an offsetting futures
position (a short position if the option is a call and a long position if the
option is a put). Upon exercise of the option, the assumption of offsetting
futures positions by the writer and holder of the option will be accompanied by
delivery of the accumulated cash balance in the writer's futures margin account
which represents the amount by which the market price of the futures contract,
at exercise, exceeds, in the case of a call, or is less than, in the case of a
put, the exercise price of the option on the futures contract.
Call options sold by a Fund with respect to futures contracts will be
covered by, among other things, entering into a long position in the same
contract at a price no higher than the strike price of the call option, or by
ownership of the instruments underlying, or instruments the prices of which are
expected to move relatively consistently with, the instruments underlying the
futures contract. Put options sold by a Fund with respect to futures contracts
will be covered in the same manner as put options on specific securities as
described above.
Upon exercise of an option, the writer of the option delivers to the
holder of the option the futures position and the accumulated balance in the
writer's futures margin account, which represents the amount by which the market
price of the futures contract exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
The potential loss related to the purchase of options on futures contracts is
limited to the premium paid for the option (plus transaction costs). Because the
value of the option is fixed at the time of sale, there are no daily cash
payments to reflect changes in the value of the underlying contract; however,
the value of the option does change daily and that change would be reflected in
the net asset value of the Fund.
STOCK INDEX FUTURES AND OPTIONS ON STOCK INDEX FUTURES. (Large-Cap
Equity, Capital Growth, Small-Cap Opportunity, Mid-Cap, Equity Income and
International Equity Funds) Each of these Funds may purchase and sell stock
index futures contracts and options on stock index futures contracts to the
extent of 15% of the value of its net assets.
A stock index future obligates the seller to deliver (and the
purchaser to take) an amount of cash equal to a specific dollar amount times the
difference between the value of a specific stock index at the close of the last
trading day of the contract and the price at which the agreement is made. No
physical delivery of the underlying stocks in the index is made. With respect to
stock indexes that are permitted investments, each of these Funds intends to
purchase and sell futures contracts on the stock index for which it can obtain
the best price with consideration also given to liquidity.
Each of these Funds may use index futures as a substitute for a
comparable market position in the underlying securities.
INTEREST RATE FUTURES CONTRACTS AND OPTIONS ON INTEREST RATE FUTURES
CONTRACTS. (Tennessee Tax-Exempt and Limited Term Tennessee Tax-Exempt Funds)
Each of these Funds may invest in interest rate futures contracts and options on
interest rate futures contracts as a substitute for a comparable market position
and to hedge against adverse movements in interest rates to the extent of 15% of
the value of its net assets.
To the extent the Fund has invested in interest rate futures contracts
or options on interest rate futures contracts as a substitute for a comparable
market position, the Fund will be subject to the same investment risks had it
purchased the securities underlying the contract.
Each of these Funds may purchase call options on interest rate futures
contracts to hedge against a decline in interest rates and may purchase put
options on interest rate futures contracts to hedge its portfolio securities
against the risk of rising interest rates. The Fund may sell call options on
interest rate futures contracts to partially hedge against declining prices of
portfolio securities. The Fund may sell put options on interest rate futures
contracts to hedge against increasing prices of the securities which are
deliverable upon exercise of the futures contracts.
Each of these Funds also may sell options on interest rate futures
contracts as part of closing purchase transactions to terminate its options
positions. No assurance can be given that such closing transactions can be
effected or the degree of correlation between price movements in the options on
interest rate futures and price movements in the Fund's investment securities
which are the subject of the hedge.
<PAGE>
FUTURE DEVELOPMENTS. Each Fund may take advantage of opportunities in
the area of options and futures contracts and options on futures contracts and
any other derivative investments which are not presently contemplated for use by
such Fund or which are not currently available but which may be developed, to
the extent such opportunities are both consistent with its investment objective
and legally permissible for the Fund. Before entering into such transactions or
making any such investment, the Fund will provide appropriate disclosure in its
Prospectus or this Statement of Additional Information.
FOREIGN CURRENCY TRANSACTIONS. (International Equity Fund) Foreign
currency transactions may be entered into for a variety of purposes, including:
to fix in U.S. dollars, between trade and settlement date, the value of a
security the Fund has agreed to buy or sell; to hedge the U.S. dollar value of
securities the Fund already owns, particularly if it expects a decrease in the
value of the currency in which the foreign security is denominated; or to gain
exposure to the foreign currency in an attempt to realize gains.
Foreign currency transactions may involve, for example, the Fund's
purchase of foreign currencies for U.S. dollars or the maintenance of short
positions in foreign currencies, which would involve the Fund agreeing to
exchange an amount of a currency it did not currently own for another currency
at a future date in anticipation of a decline in the value of the currency sold
relative to the currency the Fund contracted to receive in the exchange. The
Fund's success in these transactions will depend principally on the ability of
the Fund's Sub-Adviser to predict accurately the future exchange rates between
foreign currencies and the U.S. dollar.
SHORT-SELLING. (International Equity Fund and, to a limited extent,
Capital Growth, Equity Income, Income, Limited Term Income, Limited Term U.S.
Government, Tennessee Tax-Exempt and Limited Term Tennessee Tax-Exempt Funds) In
these transactions the Fund sells a security it does not own in anticipation of
a decline in the market value of the security. To complete the transaction, the
Fund must borrow the security to make delivery to the buyer. The Fund is
obligated to replace the security borrowed by purchasing it subsequently at the
market price at the time of replacement. The price at such time may be more or
less than the price at which the security was sold by the Fund, which would
result in a loss or gain, respectively. Securities will not be sold short if,
after effect is given to any such short sale, the total market value of all
securities sold short would exceed 25% of the value of the Fund's net assets.
Each of these Funds, other than the International Equity Fund, will limit its
short sales to those that are "against the box," a transaction in which the Fund
enters into a short sale of a security which it owns. The proceeds of the short
sale will be held by a broker until the settlement date at which time the Fund
delivers the security to close the short position. The Fund receives the net
proceeds from the short sale. At no time will any of these Funds have more than
15% of the value of its net assets in deposits on short sales against the box.
BORROWING MONEY. (All Funds) As a fundamental policy, each Fund is
permitted to borrow money in an amount up to 33-1/3% of the value of its total
assets. However, each Fund currently intends to borrow money only for temporary
or emergency (not leveraging) purposes, in an amount up to 33-1/3% of the value
of its total assets (including the amount borrowed) valued at the lesser of cost
or market, less liabilities (not including the amount borrowed) at the time the
borrowing is made. While borrowings exceed 5% of a Fund's total assets, such
Fund will not make any investments. In addition, each Money Market Fund may
borrow for investment purposes on a secured basis through entering into reverse
repurchase agreements as described below.
REVERSE REPURCHASE AGREEMENTS. (Prime Money Market, Government Money
Market and Treasury Money Market Funds only) Each of these Funds may enter into
reverse repurchase agreements with banks, brokers or dealers. Reverse repurchase
agreements involve the transfer by the Fund of an underlying debt instrument in
return for cash proceeds based on a percentage of the value of the security. The
Fund retains the right to receive interest and principal payments on the
security. The Fund will use the proceeds of reverse repurchase agreements only
to make investments which generally either mature or have a demand feature to
resell to the issuer at a date simultaneous with or prior to the expiration of
the reverse repurchase agreement. At an agreed upon future date, the Fund
repurchases the security at principal plus accrued interest. In certain types of
agreements, there is no agreed upon repurchase date and interest payments are
calculated daily, often based on the prevailing overnight repurchase rate. As a
result of these transactions, the Fund may be exposed to greater potential
fluctuations in the value of its assets and its net asset value per share.
Interest costs on the money borrowed may exceed the return received on the
securities purchased. The Company's Directors have considered the risks to each
of these Funds and their shareholders which may result from the entry into
reverse repurchase agreements and have determined that the entry into such
agreements is consistent with such Fund's investment objective and management
policies. The Fund will maintain in a segregated account permissible liquid
assets equal to the aggregate amount of its reverse repurchase obligations, plus
accrued interest, in certain cases, in accordance with releases promulgated by
the Securities and Exchange Commission.
INVESTMENT CONSIDERATIONS AND RISK FACTORS
RISK OF INVESTING IN MUNICIPAL OBLIGATIONS. (Municipal Income,
Tennessee Tax-Exempt, Limited Term Tennessee Tax-Exempt and Tax-Exempt Money
Market Funds) Each of these Funds may invest more than 25% of the value of its
total assets in Municipal Obligations which are related in such a way that an
economic, business or political development or change affecting one such
security also would affect the other securities; for example, securities the
interest upon which is paid from revenues of similar types of projects or
securities whose issuers are located in the same state. As a result, the Fund
may be subject to greater risk as compared to a fund that does not follow this
practice.
Certain provisions in the Code relating to the issuance of Municipal
Obligations may reduce the volume of Municipal Obligations qualifying for
Federal tax exemption. One effect of these provisions could be to increase the
cost of the Municipal Obligations available for purchase by the Fund and thus
reduce its available yield. Proposals that may restrict or eliminate the income
tax exemption for interest on Municipal Obligations may be introduced in the
future. If any such proposal were enacted that would reduce the availability of
Municipal Obligations for investment by the Fund so as to adversely affect its
shareholders, the Company would reevaluate the Fund's investment objective and
policies and submit possible changes in the Fund's structure to shareholders for
their consideration. If legislation were enacted that would treat a type of
Municipal Obligation as taxable, the Fund would treat such security as a
permissible taxable investment within the applicable limits set forth in the
Prospectus.
RISK OF INVESTING IN TENNESSEE MUNICIPAL OBLIGATIONS. (Tennessee
Tax-Exempt Fund and Limited Term Tennessee Tax-Exempt Fund) Investors in the
Tennessee Tax-Exempt Fund and Limited Term Tennessee Tax-Exempt Fund should
consider carefully the special risks inherent in such Funds' investment in
Tennessee Municipal Obligations. These risks result from the financial condition
of the State of Tennessee. The following information constitutes only a brief
summary, does not purport to be a complete description, and is based on
information drawn from official statements relating to securities offerings of
the State of Tennessee (the "State") and various local agencies, available as of
the date of the Statement of Additional Information. While the Company has not
independently verified such information, it has no reason to believe that such
information is not correct in all material respects.
The Constitution of the State of Tennessee requires a balanced budget.
In 1978, the voters of the State of Tennessee approved an amendment to the State
Constitution requiring that (1) the total expenditures of the State for any
fiscal year may not exceed the State's revenues and reserves, including the
proceeds of debt obligations issued to finance capital expenditures and (2) in
no year may the rate of growth of appropriations from State tax revenues exceed
the estimated rate of growth of the State's economy. In the past the Governor
and the General Assembly have had to restrict expenditures to comply with the
State Constitution.
Tennessee's fiscal year 1997-98 budget completed a six year plan for
funding of improvements in the Basic Education Program for public schools and of
teacher salary equalization, funded certain crime legislation aimed at juvenile
crime, and expanded TennCare enrollment to all children without access to health
insurance. The reduction in retirement contributions sufficient to fund
contingency appropriations for a compound cost-of-living retirement adjustment,
a 3.6% retirement adjustment, and a 1.5% salary increase for state employees,
teachers and higher education was confirmed effective January 1, 1998. The
General Assembly approved $60.8 million in general obligation bonds (excluding
highway bonds), of which $24.8 million was for higher education projects, to
fund part of the $93.1 million capital projects program.
A budget transfer of $43 million from the Tennessee Housing
Development Agency dedicated tax revenues, reserves and other funds was made as
of June 30, 1998, to the State's General Fund. Such transfer did not impact the
ratings on the Agency's outstanding debt.
The Governor's $15.4 billion budget for fiscal year 1998-99 was
amended and approved April 29, 1998. The budget includes a 1,049 reduction in
then existing staff positions and an increase of 406 positions necessary for
recommended improvements. The base budget includes a $57.1 million reduction in
expenditures from General Fund taxes ($66.2 million from all tax sources). The
improvement budget of $370 million from General Fund taxes includes $66.3
million for the Basic Education Program for public schools; $20.3 million for
higher education operating budgets; $67.8 million for TennCare; $21 million for
new prison beds and operating requirements; and a 2% salary increase effective
January 1, 1999. The Governor recommended and the General Assembly passed $265.5
million in general obligation bonds (excluding highway bonds), of which $196.2
million is for higher education projects, to fund part of the $322.7 million
capital projects program.
On February 8, 1999, the Funding Board reported to the Governor and
the Chairmen of the Finance, Ways & Means Committees of the Tennessee General
Assembly its revised consensus revenue estimates for fiscal year 1998-99 and the
first estimates for fiscal year 1999-2000, which became the basis for the fiscal
year 1998-99 revised estimates and the estimates for fiscal year 1999-2000. The
growth estimates for fiscal year 1998-99 for the General Fund taxes range from
2.25% to 2.75% and for all tax collections range from 2.5% to 3.0%. The budget
document for fiscal year 1999-2000 estimates growth of 2.43% in 1998-99 which is
$69.8 million less than the budgeted estimate. The shortfall is offset by fiscal
year 1997-98's surplus and available reserves in the current year.
Revenue collections for the six months of August 1998 through January
1999 increased by 3.36% over the same period last year. General Fund collections
are $2.6 billion which is $20.2 million less than budgeted. The undercollection
was in the franchise and excise taxes.
The estimated financial effects of the Governor's proposed "Tax Relief
& Fairness Act of 1999", which repeals the sales tax on grocery food and
replaces the franchise and excise taxes with the "fair business tax" -a 2.5%
tax on business compensation and profits (with a $50,000 exemption on each), are
included in the 1999-2000 budget. The budget contemplates a net revenue increase
from the 1999 Tax Bill of $406 million in General Fund revenue consisting of
$40.6 million to the Reserve for Revenue Fluctuations and $365.4 million to fund
the 1999-2000 budget.
The $16.568 billion budget recommended for fiscal year 1999-2000
includes no growth in positions. The base budget includes $42.3 million to fund
supplemental appropriations. The improvement budget of $416 million from general
fund taxes includes $68.9 million for the Basic Education Program for public
schools; $25.6 million for higher education operating budgets; $142.3 million
for TennCare; $13.6 million for new prison beds and local jail beds; $20 million
for state employee compensation issues; and $26 million for a 1.7% salary
increase effective January 1, 2000 for state employees, teachers and higher
education employees. The Governor recommended $166.5 million in general
obligation bonds (excluding highway bonds), of which $75.9 million is for higher
education projects, to fund part of the $246.9 million capital projects program.
LOWER RATED SECURITIES RISK. (Capital Growth and Equity Income Funds)
Each of the Capital Growth Fund and Equity Income Fund is permitted to invest,
to a limited extent, in securities rated as low as Ba by Moody's or BB by S&P,
Fitch or Duff. Such securities, though higher yielding, are characterized by
risk. See the "Appendix" for a general description of Moody's, S&P, Fitch and
Duff ratings. Although ratings may be useful in evaluating the safety of
interest and principal payments, they do not evaluate the market value risk of
these securities. The Fund will rely on the Adviser's judgment, analysis and
experience in evaluating the creditworthiness of an issuer.
Investors should be aware that the market values of many of these
securities tend to be more sensitive to economic conditions than are higher
rated securities and will fluctuate over time. These securities are considered
by S&P, Moody's, Fitch and Duff generally to be predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation and generally will involve more credit risk than
securities in the higher rating categories.
Companies that issue certain of these securities often are highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with the higher rated securities.
For example, during an economic downturn or a sustained period of rising
interest rates, highly leveraged issuers of these securities may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be affected adversely by
specific corporate developments, forecasts, or the unavailability of additional
financing. The risk of loss because of default by the issuer is significantly
greater for the holders of these securities because such securities generally
are unsecured and often are subordinated to other creditors of the issuer.
Because there is no established retail secondary market for many of
these securities, the Fund anticipates that such securities could be sold only
to a limited number of dealers or institutional investors. To the extent a
secondary trading market for these securities does exist, it generally is not as
liquid as the secondary market for higher rated securities. The lack of a liquid
secondary market may have an adverse impact on market price and yield and the
Fund's ability to dispose of particular issues when necessary to meet its
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities also may make it more difficult for the
Fund to obtain accurate market quotations for purposes of valuing its securities
and calculating its net asset value. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of these securities. In such cases, judgment may play a greater role
in valuation because less reliable, objective data may be available.
These securities may be particularly susceptible to economic
downturns. It is likely that an economic recession could disrupt severely the
market for such securities and may have an adverse impact on the value of such
securities. In addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon and increase the incidence of default for
such securities.
Each of these Funds may acquire these securities during an initial
offering. Such securities may involve special risks because they are new issues.
The Fund does not have any arrangement with any persons concerning the
acquisition of such securities, and the Adviser will review carefully the credit
and other characteristics pertinent to such new issues.
The credit risk factors pertaining to lower rated securities also
apply to lower rated zero coupon securities. Such zero coupon securities carry
an additional risk in that, unlike securities which pay interest throughout the
period to maturity, the Fund will realize no cash until the cash payment date
unless a portion of such securities are sold and, if the issuer defaults, the
Fund may obtain no return at all on its investment. See "Dividends,
Distributions and Taxes."
MORTGAGE-RELATED SECURITIES RISK. (Capital Growth, Equity Income,
Limited Term Income, Income and Government Income Funds) Mortgage-related
securities in which these Funds may invest are complex derivative instruments,
subject to both credit and prepayment risk, and may be more volatile and less
liquid than more traditional debt securities. Some mortgage-related securities
have structures that make their reactions to interest rate changes and other
factors difficult to predict, making their value highly volatile. No assurance
can be given as to the liquidity of the market for certain mortgage-backed
securities, such as collateralized mortgage obligations and stripped
mortgage-backed securities. Determination as to the liquidity of interest-only
and principal-only fixed mortgage-backed securities issued by the U.S.
Government or its agencies and instrumentalities will be made in accordance with
guidelines established by the Company's Board of Directors. In accordance with
such guidelines, the Adviser will monitor investments in such securities with
particular regard to trading activity, availability of reliable price
information and other relevant information. The Fund intends to treat other
stripped mortgage-backed securities as illiquid securities.
Mortgage-related securities are subject to credit risks associated
with the performance of the underlying mortgage properties. Adverse changes in
economic conditions and circumstances are more likely to have an adverse impact
on mortgage-related securities secured by loans on certain types of commercial
properties than on those secured by loans on residential properties. In
addition, these securities are subject to prepayment risk, although commercial
mortgages typically have shorter maturities than residential mortgages and
prepayment protection features. In certain instances, the credit risk associated
with mortgage-related securities can be reduced by third party guarantees or
other forms of credit support. Improved credit risk does not reduce prepayment
risk which is unrelated to the rating assigned to the mortgage-related security.
Prepayment risk can lead to fluctuations in value of the mortgage-related
security which may be pronounced. If a mortgage-related security is purchased at
a premium, all or part of the premium may be lost if there is a decline in the
market value of the security, whether resulting from changes in interest rates
or prepayments in the underlying mortgage collateral. Certain mortgage-related
securities that may be purchased by the Fund, such as inverse floating rate
collateralized mortgage obligations, have coupons that move inversely to a
multiple of a specific index which may result in a form of leverage. As with
other interest-bearing securities, the prices of certain mortgage-related
securities are inversely affected by changes in interest rates. However, though
the value of a mortgage-related security may decline when interest rates rise,
the converse is not necessarily true, since in periods of declining interest
rates the mortgages underlying the security are more likely to be prepaid. For
this and other reasons, a mortgage-related security's stated maturity may be
shortened by unscheduled prepayments on the underlying mortgages, and,
therefore, it is not possible to predict accurately the security's return to the
Fund. Moreover, with respect to certain stripped mortgage-backed securities, if
the underlying mortgage securities experience greater than anticipated
prepayments of principal, the Fund may fail to fully recoup its initial
investment in these securities even if the securities are rated in the highest
rating category. During periods of rapidly rising interest rates, prepayments of
mortgage-related securities may occur at slower than expected rates. Slower
prepayments effectively may lengthen a mortgage-related security's expected
maturity which generally would cause the value of such security to fluctuate
more widely in response to changes in interest rates. Were the prepayments on
the Fund's mortgage-related securities to decrease significantly, the Fund's
effective duration, and thus sensitivity to interest rate fluctuations, would
increase.
SIMULTANEOUS INVESTMENTS. (All Funds) Investment decisions for each
Fund are made independently from those of the other investment companies,
investment advisory accounts, custodial accounts, individual trust accounts and
commingled funds that may be advised by the Adviser or, if applicable, sub-
investment adviser. However, if such other investment companies or managed
accounts desire to invest in, or dispose of, the same securities as the Fund,
available investments or opportunities for sales will be allocated equitably to
each of them. In some cases, this procedure may adversely affect the size of the
position obtained for or disposed of by a Fund or the price paid or received by
a Fund.
INVESTMENT RESTRICTIONS
Each Fund's investment objective is a fundamental policy, which cannot
be changed without approval by the holders of a majority (as defined in the 1940
Act) of the Fund's outstanding voting shares. In addition, each Fund has adopted
investment restrictions numbered 1 through 7 as fundamental policies, and only
the Funds so indicated have adopted investment restrictions numbered 8 through
13 as additional fundamental policies. These restrictions cannot be changed, as
to a Fund, without approval by the holders of a majority (as defined in the 1940
Act) of such Fund's outstanding voting securities. Each Fund, except as
otherwise indicated, has adopted investment restrictions numbered 14 through 19
as non-fundamental policies which may be changed by vote of a majority of the
Company's Directors at any time. No Fund may:
1. Invest in commodities, except that each Fund may purchase and sell
options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
2. Purchase, hold or deal in real estate, or oil, gas or other mineral
leases or exploration or development programs, but each Fund may purchase and
sell securities that are secured by real estate or issued by companies that
invest or deal in real estate.
3. Borrow money, except that each Fund may borrow up to 33-1/3% of the
value of its total assets. For purposes of this investment restriction, a Fund's
entry into options, forward contracts, futures contracts, including those
relating to indexes, and options on futures contracts or indexes shall not
constitute borrowing.
4. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, each Fund may
lend its portfolio securities in an amount not to exceed 33-1/3% of the value of
its total assets. Any loans of portfolio securities will be made according to
guidelines established by the Securities and Exchange Commission and the
Company's Board of Directors.
5. Act as an underwriter of securities of other issuers, except to the
extent the Fund may be deemed an underwriter under the 1933 Act by virtue of
disposing of portfolio securities, and except that the Municipal Income Fund,
Tennessee Tax-Exempt Fund, Limited Term Tennessee Tax-Exempt Fund, Tax-Exempt
Money Market Fund, Limited Term Income Fund and Income Fund each may bid
separately or as part of a group for the purchase of Municipal Obligations
directly from an issuer for its own portfolio to take advantage of the lower
purchase price available.
6. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act). A Fund's permitted borrowings and transactions in futures and
options, to the extent permitted under the 1940 Act, are not considered senior
securities for purposes of this investment restriction.
7. Purchase securities on margin, but each Fund may make margin
deposits in connection with transactions in options, forward contracts, futures
contracts, including those relating to indexes, and options on futures contracts
or indexes.
The following investment restrictions numbered 8 and 9 are fundamental
policies which apply only to the Prime Money Market Fund. The Prime Money Market
Fund may not:
8. Invest more than 5% of its assets in the obligations of any one
issuer, except that up to 25% of the value of the Prime Money Market Fund's
total assets may be invested without regard to any such limitation, provided
that not more than 10% of its assets may be invested in securities issued or
guaranteed by any single guarantor of obligations held by the Prime Money Market
Fund.
9. Invest less than 25% of its total assets in securities issued by
banks or invest more than 25% of its assets in the securities of issuers in any
other industry, provided that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Notwithstanding the foregoing, for temporary defensive
purposes the Prime Money Market Fund may invest less than 25% of its assets in
bank obligations.
The following investment restriction number 10 is a fundamental policy
which applies to each Fund, except the Strategic Portfolios and Prime Money
Market Fund. None of these Funds may:
10. Invest more than 25% of its assets in the securities of issuers in
any single industry, provided that, in the case of the Municipal Income Fund,
Tennessee Tax-Exempt Fund, Limited Term Tennessee Tax-Exempt Fund and Tax-Exempt
Money Market Fund, there shall be no such limitation on the purchase of
tax-exempt municipal obligations and, in the case of each Fund, there shall be
no limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
The following investment restrictions numbered 11 and 12 are
fundamental policies which apply only to the Large-Cap Equity Fund, Small-Cap
Opportunity Fund, Mid-Cap Fund, Municipal Income Fund and Government Income
Fund. None of these Funds may:
11. With respect to 75% of its total assets, invest more than 5% of
its assets in the obligations of any single issuer. This investment restriction
does not apply to the purchase of U.S. Government securities.
12. Hold more than 10% of the outstanding voting securities of any
single issuer. This investment restriction applies only with respect to 75% of
the Fund's total assets.
The following investment restriction number 13 is a fundamental policy
which applies only to the Strategic Portfolios. None of the Strategic Portfolios
may:
13. Invest less than 25% of the value of its total assets in
securities issued by investment companies or invest more than 25% of the value
of its total assets in the securities of issuers in any other industry, provided
that there shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
* * *
14. Invest in the securities of a company for the purpose of
exercising management or control, but each Fund will vote (as provided in the
Company's Charter) the securities it owns as a shareholder in accordance with
its views.
15. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
purchase of securities on a when-issued or forward commitment basis and the
deposit of assets in escrow in connection with writing covered put and call
options and collateral and initial or variation margin arrangements with respect
to options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
16. Enter into repurchase agreements providing for settlement in more
than seven days after notice or purchase securities which are illiquid, if, in
the aggregate, more than 15% (10% in the case of the Capital Growth, Equity
Income, Income, Limited Term Income, Limited Term U.S. Government, Tennessee
Tax-Exempt, Limited Term Tennessee Tax-Exempt and Money Market Funds) of the
value of the Fund's net assets would be so invested.
17. Purchase securities of other investment companies, except to the
extent permitted under the 1940 Act.
The following investment restrictions numbered 18 and 19 are
non-fundamental policies which apply to each Fund, except the Strategic
Portfolios, Large-Cap Equity Fund, Small-Cap Opportunity Fund, Mid-Cap Fund,
International Equity Fund, Municipal Income Fund, Government Income Fund, Prime
Money Market Fund, Government Money Market Fund, Treasury Money Market Fund and
Tax-Exempt Money Market Fund. None of these Funds may:
18. Purchase, sell or write puts, calls or combinations thereof,
except as may be described in the Funds' Prospectus and this Statement of
Additional Information.
19. Purchase securities of any company having less than three years'
continuous operations (including operations of any predecessors) if such
purchase would cause the value of the Fund's investments in all such companies
to exceed 5% of the value of its total assets.
For purposes of Investment Restriction No. 10, industrial development
bonds, where the payment of principal and interest is the ultimate
responsibility of companies within the same industry, are grouped together as an
"industry."
If a percentage restriction is adhered to at the time of investment, a
later change in percentage resulting from a change in values or assets will not
constitute a violation of such restriction.
MANAGEMENT OF THE COMPANY
The Company's Board of Directors is responsible for the management and
supervision of each Fund. The Board approves all significant agreements with
those companies that furnish services to the Funds. These companies are as
follows:
First American National Bank..................... Investment Adviser and
Custodian
Lazard Asset Management.......................... Sub-Investment Adviser
Womack Asset Management, Inc..................... Sub-Investment Adviser
Bennett Lawrence Management, LLC................. Sub-Investment Adviser
BISYS Fund Services Limited
Partnership................................. Distributor
BISYS Fund Services Ohio, Inc.................... Administrator and Transfer
Agent
The Bank of New York............................. Sub-Custodian
Directors and officers of the Company, together with information as to
their principal business occupations during at least the last five years, are
shown below. Each Director who is an "interested person" of the Company, as
defined in the 1940 Act, is indicated by an asterisk.
Name, Address Position(s) Held Principal Occupation(s)
And Age With Company During Past 5 Years
- ------------- ----------------- -------------------------
WILLIAM B. BLUNDIN* President and An employee of BISYS Fund
90 Park Avenue Chairman of the Services, Inc., general
New York, New York 10016 Board of Directors partner of the Distributor.
Age 60 Mr. Blundin also is an
officer of other investment
companies administered by
the Administrator or its
affiliates.
NORMA A. COLDWELL Director International Economist and
3330 Southwestern Boulevard Consultant; Executive Vice
Dallas, Texas 75225 President of Coldwell
Age 72 Financial Consultants;
Trustee and Treasurer of
Meridian House
International
(International Education
and Cultural Group); Member
of the Board of Advisors of
Meridian International
Center and Emerging Capital
Markets, S.A. (Montevideo,
Uruguay); formerly, Chief
International Economist of
Riggs National Bank,
Washington, D.C.
RICHARD H. FRANCIS Director Former Executive Vice
40 Grosvenor Road President and Chief
Short Hills, New Jersey 07078 Financial Officer of Pan
Age 66 American World Airways,
Inc. (currently, debtor-in-
possession under the U.S.
Bankruptcy Code), March
1988 to October 1991;
Senior Vice President and
Chief Financial Officer of
American Standard Inc.,
1960 to March 1988. Mr.
Francis is a director of
Allendale Mutual Insurance
and The Indonesia Fund,
Inc.
WILLIAM W. McINNEES Director Private investor. From
116 30th Avenue South July 1978 to February 1993,
Nashville, Tennessee 37212 he was Vice-President--
Age 48 Finance and Treasurer of
Hospital Corp. of America.
He is also a director of
Gulf South Medical Supply
and Diversified Trust Co.
ROBERT A. ROBERTSON Director Private investor. Since
2 Hathaway Common 1991, President Emeritus,
New Canaan, Connecticut 06840 and from 1968 to 1991,
Age 71 President of The Church
Pension Group, NYC. From
1956 to 1966, Senior Vice
President of Colonial Bank
& Trust Co. He is also a
director of Mariner
Institutional Funds, Inc.,
Mariner Tax-Free
Institutional Funds, Inc.,
UST Master Funds, UST
Master Tax Exempt Funds,
H.B. and F.H. Bugher
Foundation, Morehouse-
Barlow Co. Publishers, The
Canterbury Cathedral Trust
in America, The Living
Church Foundation and
Hoosac School.
JEFFREY C. CUSICK Vice President and An employee of BISYS Fund
3435 Stelzer Road Assistant Services, Inc. since
Columbus, Ohio 43219 Secretary July 1995, and an officer
Age 38 of other investment
companies administered by
the Administrator or its
affiliates. From
September 1993 to
July 1995, he was Assistant
Vice President of Federated
Administrative Services.
WILLIAM TOMKO Vice President An employee of BISYS Fund
3435 Stelzer Road Services, Inc. and an
Columbus, Ohio 43219 officer of other investment
Age 38 companies administered by
the Administrator or its
affiliates.
GARY R. TENKMAN Treasurer An employee of BISYS Fund
3435 Stelzer Road Services, Inc. since April
Columbus, Ohio 43219 1998, and an officer of
Age 34 other investment companies
administered by the
Administrator or its
affiliates. For more than
five years prior thereto,
he was an audit manager
with Ernst & Young LLP.
ROBERT L. TUCH Assistant An employee of BISYS Fund
3435 Stelzer Road Secretary Services, Inc. and an
Columbus, Ohio 43219 officer of other investment
Age 45 companies administered by
the Administrator or its
affiliates.
ALAINA METZ Assistant An employee of BISYS Fund
3435 Stelzer Road Secretary Services, Inc. and an
Columbus, Ohio 43219 officer of other investment
Age 29 companies administered by
the Administrator or its
affiliates.
For so long as the Distribution Plan described in the section
captioned "Management Arrangements--Distribution Plan" remains in effect, the
Directors who are not "interested persons" of the Company, as defined in the
1940 Act, will be selected and nominated by the Directors who are not
"interested persons" of the Company.
Directors and officers of the Company, as a group, owned less than 1%
of any Fund's shares of common stock outstanding on April 1, 1999.
The Company does not pay any remuneration to its officers and
Directors other than fees and expenses to those Directors who are not directors,
officers or employees of the Adviser or the Administrator or any of their
affiliates. The aggregate amount of compensation paid to each such Director by
the Company for year ended December 31, 1998 was as follows:
Total Compensation
Aggregate From Company
Name of Board Compensation from and Fund Complex Paid
Member Company* to Board Member
- ------------------- ---------------------- ---------------------
Norma A. Coldwell $18,000 $18,000
Richard H. Francis $18,000 $18,000
William W. McInnes $18,000 $18,000
Robert A. Robinson $18,000 $18,000
- -------------
* Amount does not include reimbursed expenses for attending Board
meetings, which amounted to $21,441 for all Directors as a group.
MANAGEMENT ARRANGEMENTS
INVESTMENT ADVISERS. First American National Bank serves as each
Fund's investment adviser. The Adviser is a wholly-owned subsidiary of First
American Corporation, a registered bank holding company. The Adviser and its
affiliates deal, trade and invest for their own accounts and for the accounts of
their clients, in the types of securities in which the Funds may invest, and may
have deposit, loan and commercial banking relationships with the issuers of
securities purchased by a Fund. The Adviser has informed the Company that in
making its investment decisions it does not obtain or use material inside
information in its or its affiliates' possession. The Adviser also provides
research services for the Funds through a professional staff of portfolio
managers and securities analysts. All activities of the Adviser are conducted by
persons who are also officers of one or more of the Adviser's affiliates.
The Adviser also is responsible for the selection of brokers to effect
securities transactions and the negotiation of brokerage commissions, if any.
Purchases and sale of securities on a securities exchange are effected through
brokers who charge a negotiated commission for their services. Brokerage
commissions may be paid to affiliates of the Adviser for executing securities
transactions if the use of such affiliates is likely to result in price and
execution at least as favorable as those of other qualified brokers.
The Adviser provides investment advisory services pursuant to the
Investment Advisory Agreement (the "Agreement") dated February 15, 1994 with the
Company. As to each Fund, the Agreement is subject to annual approval by (i) the
Company's Board of Directors or (ii) vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of such Fund, provided that in either
event the continuance also is approved by a majority of the Directors who are
not "interested persons" (as defined in the 1940 Act) of the Company or the
Adviser, by vote cast in person at a meeting called for the purpose of voting on
such approval. The Agreement was last approved by the Company's Board of
Directors, including a majority of the Directors who are not "interested
persons" of any party to the Agreement, at a meeting held on November 18, 1998.
As to each Fund, the Agreement is terminable without penalty, on 60 days'
notice, by the Company's Board of Directors or by vote of the holders of a
majority of such Fund's shares, or, on not less than 90 days' notice, by the
Adviser. The Agreement will terminate automatically, as to the relevant Fund, in
the event of its assignment (as defined in the 1940 Act).
Under the terms of the Agreement, the Company has agreed to pay the
Adviser a monthly fee at the annual rate set forth below as a percentage of the
relevant Fund's average daily net assets.
Annual Rate of
Investment
Name of Fund Advisory Fee Payable
- ------------ --------------------
International Equity Fund 1.00%
Small-Cap Opportunity Fund .95%
Mid-Cap Fund 1.00%
Capital Growth Fund .65%
Large-Cap Equity Fund .75%
Equity Income Fund .65%
Income Fund .50%
Government Income Fund .60%
Limited Term Income Fund .50%
Limited Term U.S. Government Fund .50%
Tennessee Tax-Exempt Fund .50%
Municipal Income Fund .60%
Limited Term Tennessee Tax-Exempt Fund .50%
Prime Money Market Fund .25%*
Government Money Market Fund .25%
Treasury Money Market Fund .25%
Tax-Exempt Money Market Fund .35%
Aggressive Growth Portfolio .20%
Growth Portfolio .20%
Growth & Income Portfolio .20%
Moderate Growth & Income Portfolio .20%
Current Income Portfolio .20%
- ----------------
* Prior to January 30, 1998, the Fund paid the Prime Money Market Fund's
former sub-adviser, Barnett Capital Advisors, Inc. ("Barnett"), .15% and
the Adviser .10% of the value of the Fund's average daily net assets.
From time to time, the Adviser may waive receipt of its fees and/or
voluntarily assume certain expenses of a Fund, which would have the effect of
lowering the overall expense ratio of that Fund and increasing yield to its
investors. The Fund will not pay the Adviser at a later time for any amounts it
may waive, nor will the Fund reimburse the Adviser for any amounts it may
assume. For the fiscal years and/or periods ended December 31, 1996, 1997 and
1998, as applicable, the investment advisory fees payable by each indicated
Fund, the amounts waived by the Adviser, and the actual net fees paid by each
Fund, were as follows:
<TABLE>
<CAPTION>
Name of Fund Management Fee Payable Reduction in Fee Net Fee Paid
1996 1997 1998 1996 1997 1998 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Large-Cap $3,213,522(1) $4,445,559(2) $4,767,781(3) $0 $0 $0 $3,213,522 $4,445,559 $4,767,781
Equity Fund*
Capital Growth $214,961(4) $783,646 $1,005,152 $0 $141,465 $10,128 $214,961 $642,181 $995,024
Fund
Equity Income N/A $332,185(5) $501,817 N/A $65,601 $4,867 N/A $266,584 $496,950
Fund
International N/A $95,011(6) $239,978(3) N/A $47,505 $77,837 N/A $47,506 $162,141
Equity Fund*
Small-Cap $684,142(1) $966,775(2) $874,343(3) $115,580 $112,136 $0 $568,562 $854,639 $874,343
Opportunity Fund*
Mid-Cap Fund+ N/A N/A N/A N/A N/A N/A N/A N/A N/A
Income Fund $136,354(4) $328,302 $394,548 $0 $55,665 $3,965 $136,354 $272,637 $390,583
Government $1,369,096(1) $1,580,350(2) $1,364,121(3) $228,183 $163,534 $0 $1,140,913 $1,416,816 $1,364,121
Income Fund*
Limited Term $519,442 $496,933 $461,085 $0 $72,002 $4,977 $519,442 $424,931 $456,108
Income Fund
Limited Term N/A $81,110(5) $108,195 N/A $41,559 $35,572 N/A $39,551 $72,623
U.S.
Government Fund
Municipal $279,232(1) $289,417(2) $273,164(3) $162,886 $150,568 $136,582 $116,346 $138,849 $136,582
Income Fund*
Tennessee Tax- $456,926 $502,268 $497,352 $0 $78,469 $5,617 $456,926 $423,799 $491,735
Exempt Fund
Limited Term N/A $93,669(5) $112,873 N/A $34,669 $25,811 N/A $59,000 $87,062
Tennessee Tax-
Exempt Fund
Treasury Money $459,479 $474,129 $480,809 $0 $0 $0 $459,479 $474,129 $480,809
Market Fund
Prime Money $74,618 $80,064 $340,372 $0 $0 $0 $74,618 $80,064 $340,372
Market Fund
Government N/A N/A N/A N/A N/A N/A N/A N/A N/A
Money Market
Fund+
Tax-Exempt N/A N/A N/A N/A N/A N/A N/A N/A N/A
Money Market
Fund+
Aggressive N/A N/A N/A N/A N/A N/A N/A N/A N/A
Growth
Portfolio+
Growth N/A N/A N/A N/A N/A N/A N/A N/A N/A
Portfolio+
Growth & N/A N/A N/A N/A N/A N/A N/A N/A N/A
Income
Portfolio+
Moderate N/A N/A N/A N/A N/A N/A N/A N/A N/A
Growth &
Income
Portfolio+
Current Income N/A N/A N/A N/A N/A N/A N/A N/A N/A
Portfolio+
- ---------------------------
* Prior to December 14, 1998, the Fund was a series of DG Investor Series, a registered investment
company advised by ParkSouth Corporation, a wholly-owned subsidiary of Deposit Guaranty Corp.,
which merged into First American Corporation on May 1, 1998.
+ As of December 31, 1998, the Fund had not commenced operations.
(1) For the period March 1, 1996 through February 28, 1997.
(2) For the period March 1, 1997 through February 28, 1998.
(3) For the period March 1, 1998 through December 31, 1998.
(4) For the period April 1, 1996 (commencement of operations) through December 31, 1996.
(5) For the period February 28, 1997 (commencement of operations) through December 31, 1997.
(6) For the period August 15, 1997 (commencement of operations) through February 28, 1998.
</TABLE>
<PAGE>
For the fiscal years and/or periods ended December 31, 1996, 1997 and 1998, the
Prime Money Market Fund paid Barnett $111,623, $120,097 and $11,578,
respectively.
With respect to Small-Cap Opportunity Fund, the Adviser has entered
into a Sub-Investment Advisory Agreement (the "Womack Sub-Advisory Agreement")
with Womack Asset Management, Inc. ("Womack") dated May 14, 1998. As to such
Fund, the Womack Sub-Advisory Agreement is subject to annual approval by (i)
the Board or (ii) vote of a majority (as defined in the 1940 Act) of the Fund's
outstanding voting securities, provided that in either event the continuance
also is approved by a majority of the Board members who are not "interested
persons" (as defined in the 1940 Act) of the Fund or Womack, by vote cast in
person at a meeting called for the purpose of voting on such approval. The
Womack Sub-Advisory Agreement is terminable without penalty, (i) by the Adviser
on 60 days' notice, (ii) by the Fund's Board or by vote of the holders of a
majority of the Fund's outstanding voting securities on 60 days' notice, or
(iii) upon not less than 90 days' notice, by Womack. The Womack Sub-Advisory
Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act). Under the terms of the Womack Sub-Advisory Agreement,
the Adviser has agreed to pay Womack a monthly fee at the annual rate of .35% of
the value of the Small-Cap Opportunity Fund's average daily net assets.
With respect to International Equity Fund, the Adviser has entered
into a Sub-Investment Advisory Agreement (the "Lazard Sub-Advisory Agreement")
with Lazard Asset Management ("Lazard") dated May 14, 1998. As to such Fund, the
Lazard Sub-Advisory Agreement is subject to annual approval by (i) the Board or
(ii) vote of a majority (as defined in the 1940 Act) of the Fund's outstanding
voting securities, provided that in either event the continuance also is
approved by a majority of the Board members who are not "interested persons" (as
defined in the 1940 Act) of the Fund or Lazard, by vote cast in person at a
meeting called for the purpose of voting on such approval. The Lazard
Sub-Advisory Agreement is terminable without penalty, (i) by the Adviser on 60
days' notice, (ii) by the Fund's Board or by vote of the holders of a majority
of the Fund's outstanding voting securities on 60 days' notice, or (iii) upon
not less than 90 days' notice, by Lazard. The Lazard Sub-Advisory Agreement will
terminate automatically in the event of its assignment (as defined in the 1940
Act). Under the terms of the Lazard Sub-Advisory Agreement, the Adviser has
agreed to pay Lazard a monthly fee at the annual rate of .50% of the value of
the International Equity Fund's average daily net assets.
<PAGE>
With respect to Mid-Cap Fund, the Adviser has entered into a
Sub-Investment Advisory Agreement (the "Bennett Lawrence Sub-Advisory
Agreement") with Bennett Lawrence Management, LLC ("Bennett Lawrence") dated
August 12, 1998. As to such Fund, the Bennett Lawrence Sub-Advisory Agreement is
subject to annual approval by (i) the Board or (ii) vote of a majority (as
defined in the 1940 Act) of the Fund's outstanding voting securities, provided
that in either event the continuance also is approved by a majority of the Board
members who are not "interested persons" (as defined in the 1940 Act) of the
Fund or Bennett Lawrence, by vote cast in person at a meeting called for the
purpose of voting on such approval. The Bennett Lawrence Sub-Advisory Agreement
is terminable without penalty, (i) by the Adviser on 60 days' notice, (ii) by
the Fund's Board or by vote of the holders of a majority of the Fund's
outstanding voting securities on 60 days' notice, or (iii) upon not less than 90
days' notice, by Bennett Lawrence. The Bennett Lawrence Sub-Advisory Agreement
will terminate automatically in the event of its assignment (as defined in the
1940 Act). Under the terms of the Bennett Lawrence Sub-Advisory Agreement, the
Adviser has agreed to pay Bennett Lawrence a monthly fee at the annual rate set
forth below as a percentage of the average daily net assets of the Mid-Cap Fund:
Annual Rate of Sub-
Average Daily New Advisory Fee Payable
Assets of Mid-Cap Fund By the Adviser
on the first $25 million .75%
on the next $50 million .625%
on assets in excess of $75 million .50%
ADMINISTRATOR. BISYS Fund Services Ohio, Inc., a wholly-owned
subsidiary of The BISYS Group, Inc., provides certain administrative services
pursuant to the Administration Agreement (the "Administration Agreement") dated
October 29, 1998 with the Company. Under the Administration Agreement with the
Company, the Administrator generally assists in all aspects of the Funds'
operations, other than providing investment advice, subject to the overall
authority of the Company's Board of Directors in accordance with Maryland law.
In connection therewith, the Administrator provides the Funds with office
facilities, personnel, and certain clerical and bookkeeping services (e.g.,
preparation of reports to shareholders and the Securities and Exchange
Commission and filing of Federal, state and local income tax returns) that are
not being furnished by the Funds' custodian. As to each Fund, the Administration
Agreement will continue until December 31, 2003 and thereafter is subject to
annual approval by (i) the Company's Board of Directors or (ii) vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
such Fund, provided that in either event the continuance also is approved by a
majority of the Directors who are not "interested persons" (as defined in the
1940 Act) of the Company or the Administrator, by vote cast in person at a
meeting called for the purpose of voting such approval. The Administration
Agreement was last approved by the Company's Board of Directors, including a
majority of the Directors who are not "interested persons" of any party to the
Administration Agreement, at a meeting held on August 12, 1998. As to each Fund,
the Administration Agreement is terminable without penalty, at any time if for
cause, by the Company's Board of Directors or by vote of the holders of a
majority of such Fund's outstanding voting securities, or, on not less than 90
days' notice, by the Administrator. The Administration Agreement will terminate
automatically, as to the relevant Fund, in the event of its assignment (as
defined in the 1940 Act).
As compensation for the Administrator's services, the Company has
agreed to pay the Administrator a monthly administration fee at the annual rate
of .10% of the value of each Money Market Fund's average daily net assets and
.15% of the value of each other Fund's average daily net assets. For the fiscal
years and/or periods ended December 31, 1996, 1997 and 1998, as applicable, the
administration fees payable by each indicated Fund, the amounts waived by the
Administrator, and the actual net administration fees paid by each Fund, were as
follows:
<TABLE>
<CAPTION>
Name of Fund Administration Fee Payable Reduction in Fee Net Fee Paid
- ------------- -------------------------------- ------------------------------- ---------------------------------
1996 1997 1998 1996 1997 1998 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Large-Cap N/A N/A $630,646(3) N/A N/A $0 N/A N/A $630,646
Equity Fund*
Capital Growth $49,609(1) $180,842 $231,959 $0 $0 $0 $49,609 $180,842 $231,959
Fund
Equity Income N/A $76,658(2) $115,804 N/A $0 $0 N/A $76,658 $115,804
Fund
International N/A N/A $68,863(3) N/A N/A $0 N/A N/A $68,863
Equity Fund*
Small-Cap N/A N/A $90,864(3) N/A N/A $0 N/A N/A $90,864
Opportunity
Fund*
Mid-Cap Fund+ N/A N/A N/A N/A N/A N/A N/A N/A N/A
Income Fund $40,906(1) $98,491 $118,365 $0 $0 $0 $40,906 $98,491 $118,365
Government N/A N/A $227,828(3) N/A N/A $0 N/A N/A $227,828
Income Fund*
Limited Term $155,644 $149,081 $138,326 $0 $0 $0 $155,644 $149,081 $138,326
Income Fund
Limited Term N/A $24,333(2) $32,459 N/A $17,844 $23,803 N/A $6,489 $8,656
U.S.
Government Fund
Municipal N/A N/A $83,073(3) N/A N/A $0 N/A N/A $83,073
Income Fund*
Tennessee Tax- $137,079 $150,681 $149,206 $0 $0 $0 $137,079 $150,681 $149,206
Exempt Fund
Limited Term N/A $28,101(2) $33,862 N/A $20,607 $24,832 N/A $7,494 $9,030
Tennessee Tax-
Exempt Fund
Treasury Money $183,791 $189,650 $192,322 $0 $0 $0 $183,791 $189,650 $192,322
Market Fund
Prime Money $74,618 $80,064 $136,147 $0 $0 $0 $74,618 $80,064 $136,147
Market Fund
Government N/A N/A N/A N/A N/A N/A N/A N/A N/A
Money Market
Fund+
Tax-Exempt N/A N/A N/A N/A N/A N/A N/A N/A N/A
Money Market
Fund+
Aggressive N/A N/A N/A N/A N/A N/A N/A N/A N/A
Growth Portfolio+
Growth N/A N/A N/A N/A N/A N/A N/A N/A N/A
Portfolio+
Growth & N/A N/A N/A N/A N/A N/A N/A N/A N/A
Income
Portfolio+
Moderate N/A N/A N/A N/A N/A N/A N/A N/A N/A
Growth &
Income Portfolio+
Current Income N/A N/A N/A N/A N/A N/A N/A N/A N/A
Portfolio+
- ---------------------------
* Prior to December 14, 1998, the Fund was a series of DG Investor Series, a registered
investment company administered by an entity other than the Administrator.
+ As of December 31, 1998, the Fund had not commenced operations.
(1) For the period April 1, 1996 (commencement of operations) through December 31, 1996.
(2) For the period February 28, 1997 (commencement of operations) through December 31, 1997.
(3) For the period March 1, 1998 through December 31, 1998.
</TABLE>
DISTRIBUTOR. BISYS Fund Services Limited Partnership, a wholly-owned
subsidiary of The BISYS Group, Inc., acts as the exclusive distributor of each
Fund's shares on a best efforts basis pursuant to a Distribution Agreement (the
"Distribution Agreement") dated November 11, 1997, with the Company. Shares are
sold on a continuous basis by the Distributor as agent, although the Distributor
is not obliged to sell any particular amount of shares. No compensation is
payable by the Company to the Distributor pursuant to the Distribution Plan for
its distribution services.
For fiscal year ended December 31, 1996, the Distributor did not
retain any amounts from sales loads on shares of any Fund. For the fiscal years
ended December 31, 1997 and 1998, the Distributor retained $28,514 and $111,381,
respectively, and re-allowed $28,434 and $2,316, respectively, to affiliated
broker/dealers of the Company from sales loads on Class A Shares. For the fiscal
years ended December 31, 1997 and 1998, the Distributor retained $0 and
$440,902, respectively, and re-allowed $0 and $1,198, respectively, to
affiliated broker/dealers of the Company from contingent deferred sales charges
on Class B Shares.
DISTRIBUTION PLAN. (Applicable only with respect to Class A Shares of
each Fund other than the Prime Money Market Fund and Treasury Money Market Fund
and Class B Shares of each Fund offering Class B Shares) Rule 12b-1 (the "Rule")
adopted by the Securities and Exchange Commission under the 1940 Act provides,
among other things, that an investment company may bear expenses of distributing
its shares only pursuant to a plan adopted in accordance with the Rule. The
Company's Directors have adopted such a plan (the "Distribution Plan") with
respect to Class A Shares of each Fund other than the Prime Money Market Fund
and Treasury Money Market Fund and Class B Shares of each Fund offering Class B
Shares pursuant to which each such Fund pays the Distributor for advertising,
marketing and distributing Class A Shares and Class B Shares at an annual rate
of .25% and .75% of the value of the average daily net assets represented by
Class A Shares and Class B Shares, respectively. Under the Distribution Plan,
the Distributor may make payments to certain financial institutions, securities
dealers and other industry professionals that have entered into agreements with
the Distributor ("Service Organizations") in respect of these services. The
Distributor determines the amounts to be paid to Service Organizations. Service
Organizations receive such fees in respect of the average daily value of Class A
Shares or Class B Shares owned by their clients. From time to time, the
Distributor may defer or waive receipt of fees under the Distribution Plan while
retaining the ability to be paid by the Fund under the Distribution Plan
thereafter. The fees payable to the Distributor under the Distribution Plan for
advertising, marketing and distributing are payable without regard to actual
expenses incurred. The Company's Directors believe that there is a reasonable
likelihood that the Distribution Plan will benefit each such Fund and the
holders of its Class A Shares and Class B Shares.
A quarterly report of the amounts expended under the Distribution
Plan, and the purposes for which such expenditures were incurred, must be made
to the Directors for their review. In addition, the Distribution Plan provides
that it may not be amended to increase materially the costs which holders of the
Class A Shares and Class B Shares may bear for distribution pursuant to the
Distribution Plan without approval of such shareholders and that other material
amendments of the Distribution Plan must be approved by the Board of Directors,
and by the Directors who are neither "interested persons" (as defined in the
1940 Act) of the Company nor have any direct or indirect financial interest in
the operation of the Distribution Plan or in the related Distribution Plan
agreements, by vote cast in person at a meeting called for the purpose of
considering such amendments. The Distribution Plan and related agreements are
subject to annual approval by such vote of the Directors cast in person at a
meeting called for the purpose of voting on the Distribution Plan. The
Distribution Plan was last so approved on November 18, 1998. As to each Class,
the Distribution Plan is terminable at any time by vote of a majority of the
Directors who are not "interested persons" and who have no direct or indirect
financial interest in the operation of the Distribution Plan or in the
Distribution Plan agreements or by vote of the holders of a majority of Class A
Shares or Class B Shares, as the case may be, voting separately as a Class. A
Distribution Plan agreement is terminable without penalty, at any time, by such
vote of the Directors, upon not more than 60 days' written notice to the parties
to such agreement or by vote of the holders of a majority of the Fund's Class A
Shares or Class B Shares, as the case may be, voting separately as a Class. A
Distribution Plan agreement will terminate automatically, as to the relevant
Class, in the event of its assignment (as defined in the 1940 Act).
For the fiscal year and/or period ended December 31, 1998, the
Distribution Plan fees payable by each indicated Fund, the amounts waived by the
Distributor, and the actual net Distribution Plan fees paid by each Fund, were
as follows:
<PAGE>
<TABLE>
<CAPTION>
NAME OF FUND DISTRIBUTION PLAN FEE PAYABLE REDUCTION IN FEE NET FEE PAID
------------ -------------------------------- ------------------------ -------------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Large-Cap $0(1) $23(2) $0 $23 $0 $0
Equity Fund*
Capital Growth $6,073 $8,089 $0 $0 $6,073 $8,089
Fund
Equity Income $4,515 $13,211 $0 $0 $4,515 $13,211
Fund
International $0(1) N/A $0 N/A $0 N/A
Equity Fund*
Small-Cap $0(1) $2(3) $0 $2 $0 $0
Opportunity Fund*
Mid-Cap Fund+ N/A N/A N/A N/A N/A N/A
Income Fund $3,242 $5,085 $0 $0 $3,242 $5,085
Government $0(1) N/A $0 N/A $0 N/A
Income Fund*
Limited Term $16,575 $2,615 $0 $0 $16,575 $2,615
Income Fund
Limited Term $48,533 $1,398 $48,533 $0 $0 $1,398
U.S.
Government Fund
Municipal $0(1) N/A $0 N/A $0 N/A
Income Fund*
Tennessee Tax- $6,387 $5,131 $0 $0 $6,387 $5,131
Exempt Fund
Limited Term $55,168 $3,332 $55,168 $0 $0 $3,332
Tennessee Tax-
Exempt Fund
Prime Money N/A $476 N/A $0 N/A $476
Market Fund
Government N/A N/A N/A N/A N/A N/A
Money Market
Fund+
Tax-Exempt N/A N/A N/A N/A N/A N/A
Money Market Fund+
Aggressive N/A N/A N/A N/A N/A N/A
Growth Portfolio+
Growth N/A N/A N/A N/A N/A N/A
Portfolio+
Growth & N/A N/A N/A N/A N/A N/A
Income Portfolio+
Moderate N/A N/A N/A N/A N/A N/A
Growth & Income
Portfolio+
Current Income N/A N/A N/A N/A N/A N/A
Portfolio+
- ---------------------------
* Prior to December 14, 1998, the Fund was a series of DG Investor Series and was
not subject to the Distribution Plan.
+ As of December 31, 1998, the Fund had not commenced operations.
(1) For the period March 1, 1998 through December 31, 1998.
(2) For the period December 15, 1998 (commencement of operations) through
December 31, 1998.
(3) For the period December 21, 1998 (commencement of operations) through December
31, 1998.
</TABLE>
<PAGE>
Of the $36,792 paid by Class A and $39,337 paid by Class B pursuant to
the Distribution Plan, $28,937 and $39,337, respectively, was paid to
broker/dealers in connection with the sale of Fund shares and $7,855 paid by
Class A and $0 paid by Class B was retained by the Distributor in connection
with advertising and marketing Fund shares.
SHAREHOLDER SERVICES PLAN. The Company's Directors have adopted a
shareholder services plan (the "Shareholder Services Plan") pursuant to which
each Fund pays the Distributor for the provision of certain services to the
holders of its shares at an annual rate of .15% of the value of the average
daily net assets represented by Institutional Shares and Class A Shares (.25% in
the case of the Prime Money Market Fund and Treasury Money Market Fund) and at
an annual rate of .25% of the value of the average daily net assets represented
by Class B Shares. The services provided may include personal services relating
to shareholder accounts, such as answering shareholder inquiries regarding a
Fund and providing reports and other information, and services related to the
maintenance of such shareholder accounts. The fee payable for such services is
intended to be a "service fee" as defined in the NASD Conduct Rules. Under the
Shareholder Services Plan, the Distributor may make payments to certain Service
Organizations in respect of these services. The Distributor determines the
amounts to be paid to Service Organizations. Service Organizations receive such
fees in respect of the average daily value of the relevant Class of shares owned
by their clients. From time to time, BISYS may defer or waive receipt of fees
under the Shareholder Services Plan while retaining the ability to be paid by
the Fund under the Shareholder Services Plan thereafter. The fees payable to
BISYS under the Shareholder Services Plan are payable without regard to actual
expenses incurred. The Company's Directors believe that there is a reasonable
likelihood that the Shareholder Services Plan will benefit each Fund and its
shareholders.
A quarterly report of the amounts expended under the Shareholder
Services Plan, and the purposes for which such expenditures were incurred, must
be made to the Directors for their review. In addition, the Shareholder Services
Plan provides that material amendments of the Plan must be approved by the Board
of Directors, and by the Directors who are neither "interested persons" (as
defined in the 1940 Act) of the Company nor have any direct or indirect
financial interest in the operation of the Shareholder Services Plan or in the
related Shareholder Services Plan agreements, by vote cast in person at a
meeting called for the purpose of considering such amendments. The Shareholder
Services Plan and related agreements are subject to annual approval by such vote
of the Directors cast in person at a meeting called for the purpose of voting on
the Shareholder Services Plan. The Shareholder Services Plan was last so
approved on November 18, 1998. The Shareholder Services Plan is terminable at
any time by vote of a majority of the Directors who are not "interested persons"
and who have no direct or indirect financial interest in the operation of the
Shareholder Services Plan or in the Shareholder Services Plan agreements. A
Shareholder Services Plan agreement is terminable without penalty, at any time,
by such vote of the Directors. A Shareholder Services Plan agreement will
terminate automatically in the event of its assignment (as defined in the 1940
Act).
For the fiscal year and/or period ended December 31, 1998, the
Shareholder Services Plan fees payable by each indicated Fund, the amounts
waived by the Distributor, and the actual net Shareholder Services Plan fees
paid by each Fund, were as follows:
<PAGE>
<TABLE>
<CAPTION>
Shareholder Services Plan
Name of Fund Fee Payable Reduction in Fee Net Fee Paid
---------------------------------------- -------------------------------- -------------------------------
INST. CLASS A CLASS B INST. CLASS A CLASS B INST. CLASS A CLASS B
----- ------- ------- ----- ------- ------- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Large-Cap $54,187(1) $899,369(2) $8(3) $0 $0 $8 $54,187 $899,369 $0
Equity Fund*
Capital $0 $0 $2,697 $0 $0 $0 $0 $0 $2,697
Growth Fund
Equity Income $0 $0 $4,404 $0 $0 $0 $0 $0 $4,404
Fund
International $1,923(1) $34,073(2) N/A $0 $0 N/A $1,923 $34,073 N/A
Equity Fund*
Small-Cap $6,414(1) $131,641(2) $1(4) $0 $0 $1 $6,414 $131,641 $0
Opportunity Fund*
Mid-Cap Fund+ N/A N/A N/A N/A N/A N/A N/A N/A N/A
Income Fund $0 $0 $1,695 $0 $0 $0 $0 $0 $1,695
Government $20,409(1) 319,247(2) N/A $0 $0 N/A $20,409 $319,247 N/A
Income Fund*
Limited Term $0 $0 $871 $0 $0 $0 $0 $0 $871
Income Fund
Limited Term $0 $0 $466 $0 $0 $0 $0 $0 $466
U.S.
Government Fund
Municipal $3,797(1) $64,495(2) N/A $0 $0 N/A $3,797 64,495 N/A
Income Fund*
Tennessee $0 $0 $1,710 $0 $0 $0 $0 $0 $1,710
Tax-Exempt
Fund
Limited Term N/A $0 $1,110 N/A $0 $0 N/A $0 $1,110
Tennessee
Tax-Exempt
Fund
Treasury $0 $230,368 N/A $0 $0 N/A $0 $230,368 N/A
Money Market
Fund
Prime Money N/A $200,958 $159 N/A $0 $0 N/A $200,958 $159
Market Fund
Government N/A N/A N/A N/A N/A N/A N/A N/A N/A
Money Market
Fund+
Tax-Exempt N/A N/A N/A N/A N/A N/A N/A N/A N/A
Money Market
Fund+
Aggressive N/A N/A N/A N/A N/A N/A N/A N/A N/A
Growth Portfolio+
Growth N/A N/A N/A N/A N/A N/A N/A N/A N/A
Portfolio+
Growth & N/A N/A N/A N/A N/A N/A N/A N/A N/A
Income Portfolio+
Moderate N/A N/A N/A N/A N/A N/A N/A N/A N/A
Growth &
Income Portfolio+
Current N/A N/A N/A N/A N/A N/A N/A N/A N/A
Income Portfolio+
- ---------------------------
* Prior to December 14, 1998, the Fund was a series of DG Investor Series and was not
subject to the Shareholder Services Plan.
+ As of December 31, 1998, the Fund had not commenced operations.
(1) For the period December 14, 1998 (commencement of operations) through December 31, 1998.
(2) For the period March 1, 1998 through December 31, 1998.
(3) For the period December 15, 1998 (commencement of operations) through December 31, 1998.
(4) For the period December 21, 1998 (commencement of operations) through December 31, 1998.
</TABLE>
TRANSFER AND DIVIDEND DISBURSING AGENT AND CUSTODIAN. BISYS Fund
Services Ohio, Inc. (the "Transfer Agent"), a wholly-owned subsidiary of The
BISYS Group, Inc., located at 3435 Stelzer Road, Columbus, Ohio 43219-3035, is
the Company's transfer and dividend disbursing agent. Under a transfer agency
agreement with the Company, the Transfer Agent arranges for the maintenance of
shareholder account records for each Fund, the handling of certain
communications between shareholders and the Fund and the payment of dividends
and distributions payable by the Fund. For these services, the Transfer Agent
receives a monthly fee computed on the basis of the number of shareholder
accounts it maintains for each Fund during the month, and is reimbursed for
certain out-of-pocket expenses.
First American National Bank acts as custodian of the investments of
each Fund. Under a custody agreement with the Company, First American National
Bank provides for the holding of each Fund's securities and the retention of all
necessary accounts and records. For its custody services, First American
National Bank receives a monthly fee based on the market value of the Funds'
assets held in custody and receives certain securities transactions charges. The
Bank of New York, 90 Washington Street, New York, New York 10286, is the Funds'
sub-custodian.
<PAGE>
EXPENSES. All expenses incurred in the operation of the Company are
borne by the Company, except to the extent specifically assumed by others. The
expenses borne by the Company include: taxes, interest, brokerage fees and
commissions, if any, fees of Directors who are not officers, directors,
employees or holders of 5% or more of the outstanding voting securities of the
Adviser or the Administrator or any of their affiliates, Securities and Exchange
Commission fees, state Blue Sky qualification fees, advisory and administration
fees, charges of custodians, transfer and dividend disbursing agents' fees,
certain insurance premiums, industry association fees, auditing and legal
expenses, costs of maintaining corporate existence, costs of independent pricing
services, costs attributable to investor services (including, without
limitation, telephone and personnel expenses), costs of calculating the net
asset value of each Fund's shares, costs of shareholders' reports and corporate
meetings, costs of preparing and printing certain prospectuses and statements of
additional information, and any extraordinary expenses. Expenses attributable to
a Fund are charged against the assets of that Fund; other expenses of the
Company are allocated among the Funds on the basis determined by the Board of
Directors, including, but not limited to, proportionately in relation to the net
assets of each Fund.
PURCHASE AND REDEMPTION OF SHARES
ALTERNATIVE PURCHASE METHODS. Orders for purchases of Institutional
Shares (also referred to as "Class I Shares"), may be placed only for certain
eligible investors as described below. An investor who is not eligible to
purchase Institutional Shares may choose from Class A Shares and Class B Shares
the Class of shares that best suits the investor's needs, given the amount of
purchase, the length of time the investor expects to hold the shares and any
other relevant circumstances. Class B Shares are not offered for the Treasury
Money Market Fund. Each Class A, Class B and Institutional Share represents an
identical pro-rata interest in a Fund's investment portfolio.
Class A Shares are sold at net asset value per share plus, for each
Fund, other than the Money Market Funds, an initial sales charge imposed at the
time of purchase, which may be reduced or waived for certain purchases, as
described below.
Class B Shares are sold at net asset value per share with no initial
sales charge at the time of purchase; as a result, the entire purchase price is
immediately invested in the Fund. Class B Shares are subject to a contingent
deferred sales charge ("CDSC"), which is assessed only if Class B Shares are
redeemed within six years of purchase. Shareholders investing directly in Class
B Shares of the Prime Money Market Fund, as opposed to obtaining such shares
through an exchange, will be required to participate in the Prime Money Market
Fund's Auto-Exchange Plan. In accordance with said Plan, shareholders will be
required to establish the time and amount of their automatic exchanges such that
all of the Prime Money Market Fund Class B Shares so purchased will have been
exchanged for Class B Shares of the other Funds within two years of purchase.
Approximately seven years after the date of purchase, Class B Shares
automatically will convert to Class A Shares, based on the relative net asset
values for shares of each such Class.
Institutional Shares are sold at net asset value with no sales charge.
Institutional Shares are sold exclusively to clients of the Adviser for their
qualified trust, custody and/or agency accounts and to clients of the Adviser's
affiliated and correspondent banks and certain other affiliated and
non-affiliated institutions for their similar accounts maintained at such
affiliates or institutions. These accounts are referred to herein as "Fiduciary
Accounts."
Class B Shares will receive lower per share dividends and at any given
time the performance of Class B should be expected to be lower than for shares
of each other Class because of the higher expenses borne by Class B. Similarly,
Class A Shares will receive lower per share dividends and the performance of
Class A should be expected to be lower than Institutional Shares because of the
higher expenses borne by Class A.
An investor who is not eligible to purchase Institutional Shares
should consider whether, during the anticipated life of the investor's
investment in the Fund, the accumulated distribution and service fees and CDSC
on Class B Shares prior to conversion would be less than the initial sales
charge, if any, on Class A Shares purchased at the same time, and to what
extent, if any, such differential would be offset by the return of Class A.
Additionally, investors qualifying for reduced initial sales charges who expect
to maintain their investment for an extended period of time might consider
purchasing Class A Shares because the accumulated continuing distribution fees
on Class B Shares may exceed the initial sales charge on Class A Shares during
the life of the investment.
GENERAL PURCHASE INFORMATION. Class A Shares and Class B Shares may be
purchased through a number of institutions, including the Adviser and its
affiliates, Service Organizations, and directly from the Distributor. Orders for
purchases of Institutional Shares may be placed only for clients of the Adviser,
its affiliated and correspondent banks and other affiliated and non-affiliated
institutions (collectively, "Institutions") for their Fiduciary Accounts
maintained at such Institutions. When purchasing Fund shares, you must specify
the Fund and Class of shares being purchased. The Adviser, its affiliates and
Service Organizations may receive different levels of compensation for selling
different Classes of Fund shares. Stock certificates will not be issued. It is
not recommended that the Tax-Exempt Fixed Income Funds be used as a vehicle for
Keogh, IRA and other qualified plans, because such plans are otherwise entitled
to tax deferred benefits. The Company reserves the right to reject any purchase
order in whole or in part, including purchases made with foreign checks and
third party checks not originally made payable to the order of the investor.
The minimum initial investment for Institutional Shares of each Fund
is $100,000, with no subsequent minimum investment. The Institution through
which Institutional Shares are purchased may impose initial or subsequent
investment minimums which are higher or lower than those specified above and may
impose different minimums for different types of accounts or purchase
arrangements.
Investors may purchase Institutional Shares through procedures
established by their Institution and an investor should contact such entity
directly for appropriate instructions, as well as for information about
conditions pertaining to the account and any related fees. The investor's
Institution will transmit an investor's payment to the Fund and will supply the
Fund with the required information. It is the Institution's responsibility to
transmit the order properly on a timely basis.
The minimum initial investment for Class A Shares or Class B Shares of
each Fund is $1,000, and subsequent investments must be at least $100. The
minimum initial investment is $100 for IRAs, and subsequent investments for IRAs
must be at least $50. For full-time or part-time employees of the Adviser or any
of its affiliates, the minimum initial investment is $500, and subsequent
investments must be at least $50. For full-time or part-time employees of the
Adviser or any of its affiliates who elect to have a portion of their pay
directly deposited into their ISG Fund accounts, the minimum initial or
subsequent investment must be at least $25. The Adviser, its affiliates and
Service Organizations may impose initial or subsequent investment minimums which
are higher or lower than those specified above and may impose different minimums
for different types of accounts or purchase arrangements. In addition, purchases
of shares made in connection with certain shareholder privileges may have
different minimum investment requirements.
<PAGE>
You may purchase Class A Shares or Class B Shares by check or wire, or
through TeleTrade or, for the Money Market Funds only, a sweep program as
described below. Investors purchasing shares through the Adviser, its affiliates
or Service Organizations should contact such entity directly for appropriate
instructions, as well as for information about conditions pertaining to the
account and any related fees.
For written orders for Class A Shares or Class B Shares, you may send
your initial or subsequent purchase order, together with the Funds' Account
Application for initial orders and your check or money order payable to: ISG
Funds (Fund Name), to ISG Funds, c/o BISYS Fund Services, Inc., Department
L-1686, Columbus, Ohio 43260-1686. For subsequent investments, your Fund account
number should appear on the check or money order. All payments should be made in
U.S. dollars and, to avoid fees and delays, should be drawn only on U.S. banks.
A charge will be imposed if a check used for investment in your account does not
clear.
For wire orders for Class A Shares or Class B Shares, you must call
the Transfer Agent at 1-800-852-0045. If a subsequent payment is being made,
your Fund account number should be included. Information on remitting funds in
this manner, including any related fees, may be obtained from your bank.
Subsequent investments also may be made by electronic transfer of
funds from an account maintained in a bank or other domestic financial
institution that is an Automated Clearing House member. For information on
purchasing shares through the Automated Clearing House, you must call the
Transfer Agent at 1-800-852-0045.
Management understands that the Adviser, its affiliates and some
Service Organizations may impose certain conditions on their clients which are
different from those described herein or in the Funds' Prospectus, and, to the
extent permitted by applicable regulatory authority, may charge their clients a
direct fee for effecting transactions in Fund shares. You should consult the
Adviser, its affiliates or your Service Organization in this regard.
SALES LOADS. (Applicable to Class A Shares of each Fund other than the
Money Market Funds). The public offering price of Class A Shares of the Fixed
Income Funds, Tax-Exempt Fixed Income Funds and Current Income Portfolio is the
net asset value per share of that Class, plus (except for shareholders who
beneficially acquired Class A Shares of Government Income Fund, Limited Term
U.S. Government Fund and Municipal Income Fund in connection with the
reorganization of a corresponding DG Investor Series fund) a sales load as shown
below:
<TABLE>
<CAPTION>
Total Sales Load
------------------------------------
As a % of Dealers' Reallowance
As a % of Net Asset As a % of Offering
Amount of Transaction Offering Price Value Price
- ------------------------------------- ------------------ ------------ -----------------------
<S> <C> <C> <C>
Less than $50,000.................... 3.00% 3.09% 2.70%
$50,000 to less than
$100,000....................... 2.50% 2.56% 2.25%
$100,000 to less than
$250,000....................... 2.00% 2.04% 1.80%
$250,000 to less than
$500,000....................... 1.50% 1.52% 1.35%
$500,000 to less than
$1,000,000..................... 1.00% 1.01% 0.90%
$1,000,000 or more................... 0% 0% 0%
For shareholders who beneficially acquired Class A Shares of the Government
Income Fund, Limited Term U.S. Government Fund and Municipal Income Fund in
connection with the reorganization of a corresponding DG Investor Series fund,
the public offering price of Class A Shares of such Funds (until May 1, 2000) is
the net asset value per share of that Class, plus a sales load as shown below:
Total Sales Load
------------------------------------
As a % of Dealers' Reallowance
As a % of Net Asset As a % of Offering
Amount of Transaction Offering Price Value Price
- ------------------------------------- --------------- ------------ ----------------------
Less than $100,000................... 2.00% 2.04% 1.80%
$100,000 to less than 1.58%
$250,000.................... 1.75% 1.78%
$250,000 to less than 1.35%
$500,000.................... 1.50% 1.52%
$500,000 to less than 0.90%
$1,000,000.................. 1.00% 1.01%
$1,000,000 or more................... -0- -0- -0-
</TABLE>
The public offering price of Class A Shares of the Equity Funds and Aggressive
Growth Portfolio, Growth Portfolio, Growth & Income Portfolio and Moderate
Growth & Income Portfolio is the net asset value per share of that Class, plus
(except for shareholders who beneficially owned Class A Shares of Capital Growth
Fund and Equity Income Fund on September 30, 1997, or beneficially acquired
Class A Shares of Large-Cap Equity Fund, Small-Cap Opportunity Fund and
International Equity Fund in connection with the reorganization of a
corresponding DG Investor Series fund), a sales load as shown below:
<TABLE>
<CAPTION>
Total Sales Load
---------------------------------------
As a % of Dealers' Reallowance
As a % of Net Asset As a % of Offering
Amount of Transaction Offering Price Value Price
- ---------------------------------------- -------------------- --------------- ---------------------
<S> <C> <C> <C>
Less than $50,000...................... 4.75% 4.99% 4.28%
$50,000 to less than
$100,000.......................... 4.00% 4.17% 3.60%
$100,000 to less than
$250,000.......................... 3.25% 3.36% 2.93%
$250,000 to less than
$500,000.......................... 2.50% 2.56% 2.25%
$500,000 to less than
$1,000,000.......................... 1.75% 1.78% 1.58%
$1,000,000 or more..................... 0% 0% 0%
For shareholders beneficially owning Class A Shares of the Capital Growth Fund
and Equity Income Fund on September 30, 1997, the public offering price of Class
A Shares of such Funds is the net asset value per share of that Class, plus a
sales load as shown below:
Total Sales Load
-------------------------------------
As a % of Dealers' Reallowance
As a % of Net Asset As a % Offering
Amount of Transaction Offering Price Value Price
- --------------------------------------- ---------------- ------------- -----------------------
Less than $100,000..................... 3.00% 3.09% 2.70%
$100,000 to less than
$250,000........................ 2.50% 2.56% 2.25%
$250,000 to less than
$500,000........................ 2.00% 2.04% 1.80%
$500,000 to less than
$750,000........................ 1.50% 1.52% 1.35%
$750,000 to less than
$1,000,000........................ 1.00% 1.01% 0.90%
$1,000,000 or more..................... 0% 0% 0%
</TABLE>
For shareholders who beneficially acquired Class A Shares of the International
Equity Fund in connection with the reorganization of a corresponding DG Investor
Series fund, the public offering price for Class A Shares of such Fund (until
May 1, 2000) is the net asset value per share of that Class. Until May 1, 2000,
no initial sales charge is imposed at the time of purchase of Class A Shares of
the International Equity Fund by such shareholders.
For shareholders who beneficially acquired Class A Shares of the Large-Cap
Equity Fund and Small-Cap Opportunity Fund in connection with the reorganization
of a corresponding DG Investor Series fund, the public offering price of Class A
Shares of such Funds (until May 1, 2000) is the net asset value per share of
that Class, plus a sales load as shown below:
<TABLE>
<CAPTION>
Total Sales Load
--------------------------------------
As a % of Dealers' Reallowance
As a % of Net Asset As a % of Offering
Amount of Transaction Offering Price Value Price
- ------------------------------------- ----------------- ------------- ----------------------
<S> <C> <C> <C>
Less than $100,000................... 3.50% 3.63% 3.15%
$100,000 to less than
$250,000.................... 3.00% 3.09% 2.70%
$250,000 to less than
$500,000.................... 2.50% 2.56% 2.25%
$500,000 to less than
$1,000,000.................. 1.00% 1.01% 0.90%
$1,000,000 or more................... -0- -0- -0-
</TABLE>
Except for shareholders who beneficially acquired Class A Shares of a
Fund in connection with the reorganization of a corresponding DG Investor Series
fund, a CDSC of 1% will be assessed at the time of redemption of Class A Shares
purchased without an initial sales charge as part of an investment of at least
$1,000,000 and redeemed within one year after purchase. For shareholders who
beneficially acquired Class A Shares of a Fund in connection with such
reorganization, a CDSC of .50% will be assessed at the time of redemption of
Class A Shares of such Funds, except the International Equity Fund, purchased
without an initial sales charge as part of an investment of at least $1,000,000
(.25% will be assessed on purchases over $2,000,000) and redeemed within one
year after purchase. The Distributor may pay Service Organizations an amount up
to 1% of the net asset value of Class A Shares purchased by their clients that
are subject to a CDSC. Letter of Intent and Right of Accumulation apply to such
purchases of Class A Shares.
The scale of sales loads applies to purchases of Class A Shares of
each Fund other than the Prime Money Market Fund and Treasury Money Market Fund
made by any "purchaser," which term includes an individual and/or spouse
purchasing securities for his, her or their own account or for the account of
any minor children, or a trustee or other fiduciary purchasing securities for a
single trust estate or a single fiduciary account trust estate or a single
fiduciary account (including a pension, profit-sharing or other employee benefit
trust created pursuant to a plan qualified under Section 401 of the Code)
although more than one beneficiary is involved; or a group of accounts
established by or on behalf of the employees of an employer or affiliated
employers pursuant to an employee benefit plan or other program (including
accounts established pursuant to Sections 403(b), 408(k) and 457 of the Code);
or an organized group which has been in existence for more than six months,
provided that it is not organized for the purpose of buying redeemable
securities of a registered investment company and provided that the purchases
are made through a central administration or a single dealer, or by other means
which result in economy of sales effort or expense.
<PAGE>
Set forth below are examples of the method of computing the offering
price of Class A Shares. The examples assume a purchase of Class A Shares of the
indicated Fund aggregating less than $50,000 subject to the current schedule of
sales charges set forth above for Class A Shares at a price based upon the net
asset value of the Fund's Class A Shares on December 31, 1998:
LARGE-CAP EQUITY FUND:
Net Asset Value per Share $ 27.55
Per Share Sales Charge - 4.75%
of offering price (4.99% of
net asset value per share) $ 1.37
----------------
Per Share Offering Price to
the Public $ 28.92
================
SMALL-CAP OPPORTUNITY FUND:
Net Asset Value per Share $ 12.93
Per Share Sales Charge - 4.75%
of offering price (4.99% of
net asset value per share) $ .64
Per Share Offering Price to
the Public $ 13.57
================
INTERNATIONAL EQUITY FUND:
Net Asset Value per Share $ 10.58
Per Share Sales Charge - 4.75%
of offering price (4.99% of
net asset value per share) $ .53
----------------
Per Share Offering Price to
the Public $ 11.11
================
CAPITAL GROWTH FUND*:
Net Asset Value per Share $ 14.20
Per Share Sales Charge - 4.75%
of offering price (4.99% of
net asset value per share) $ .71
Per Share Offering Price to
the Public $ 14.91
================
EQUITY INCOME FUND*:
Net Asset Value per Share $ 10.05
Per Share Sales Charge - 4.75%
of offering price (4.99% of
net asset value per share) $ .50
----------------
Per Share Offering Price to
the Public $ 10.55
================
- -----------
* Class A Shares of the Capital Growth Fund and Equity Income Fund
purchased by shareholders beneficially owning Class A Shares of such
Funds on September 30, 1997 are subject to a different sales load
schedule, as described above.
LIMITED TERM INCOME FUND:
Net Asset Value per Share $ 10.05
Per Share Sales Charge - 3.00%
of offering price (3.09% of $ .31
----------------
net asset value per share)
Per Share Offering Price to
the Public $ 10.36
================
LIMITED TERM U.S. GOVERNMENT FUND:
Net Asset Value per Share $ 10.25
Per Share Sales Charge - 3.00%
of offering price (3.09% of $ .32
----------------
net asset value per share)
Per Share Offering Price to
the Public $ 10.57
================
LIMITED TERM TENNESSEE TAX-EXEMPT FUND:
Net Asset Value per Share $ 10.11
Per Share Sales Charge - 3.00%
of offering price (3.09% of $ .31
net asset value per share)
Per Share Offering Price to
the Public $ 10.42
================
TENNESSEE TAX-EXEMPT FUND:
Net Asset Value per Share $ 10.19
Per Share Sales Charge - 3.00%
of offering price (3.09% of
net asset value per share) $ .32
----------------
Per Share Offering Price to
the Public $ 10.51
================
INCOME FUND:
Net Asset Value per Share $ 10.39
Per Share Sales Charge - 3.00%
of offering price (3.09% of
net asset value per share) $ .32
Per Share Offering Price to
the Public $ 10.71
================
GOVERNMENT INCOME FUND:
Net Asset Value per Share $ 10.38
Per Share Sales Charge - 3.00%
of offering price (3.09% of $ .32
----------------
net asset value per share)
Per Share Offering Price to
the Public $ 10.70
================
MUNICIPAL INCOME FUND:
Net Asset Value per Share $ 10.96
Per Share Sales Charge - 3.00%
of offering price (3.09% of $ .34
----------------
net asset value per share)
Per Share Offering Price to
the Public $ 11.30
================
Class A Shares will be offered at net asset value without a sales load
to registered representatives of NASD member firms which have entered into an
agreement with the Distributor pertaining to the sale of Fund shares, full-time
employees of the Adviser or the Distributor, their spouses and minor children,
current and retired directors of the Adviser or any of its affiliates, and
accounts opened by a bank, trust company or thrift institution which is acting
as a fiduciary and has entered into an agreement with the Distributor pertaining
to the sale of Fund shares, provided that they have furnished the Distributor
appropriate notification of such status at the time of the investment and with
such information as the Distributor may request from time to time in order to
verify eligibility for this privilege. This privilege also applies to the
Company's Directors, fee-based financial planners and registered investment
advisers not affiliated with or clearing purchases through full service
broker/dealers, investment advisers regulated by Federal or state governmental
authority when such investment advisers purchase shares for their own accounts
or for accounts for which they are authorized to make investment decisions
(i.e., discretionary accounts), asset allocation programs offered by the Adviser
for its clients, and corporate/business retirement plans (such as 401(k),
403(b)(7), 457 and Keogh plans) sponsored by the Adviser, the Distributor or
their affiliates or subsidiaries or pursuant to a payroll deduction system which
makes direct investments in a Fund by means of electronic data transmission in a
form acceptable to the Fund. The sales load is not charged on shares acquired
through the reinvestment of dividends or distributions or pursuant to the
Directed Distribution Plan or Reinstatement Privilege.
Class A Shares also may be purchased at net asset value or at a
reduced sales load, subject to appropriate documentation, through a
broker-dealer or other financial institution with the proceeds from the
redemption of shares of a registered open-end management investment company not
managed by the Adviser or its affiliates. The purchase of Class A Shares of a
Fund must be made within 90 days of such redemption and the shares redeemed must
have been subject to an initial sales charge or a contingent deferred sales
charge to have the Fund's sales load waived or reduced to the extent of such
sales charge.
The dealer reallowance may be changed from time to time but will
remain the same for all dealers. From time to time, the Distributor may make or
allow additional payments or promotional incentives in the form of cash or other
compensation to dealers that sell Fund shares. Such compensation may include
financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising
campaigns regarding the Funds, and/or other dealer-sponsored special events.
Compensation may include payment for travel expenses, including lodging, to
various locations for meetings or seminars of a business nature. Compensation
also may include the following types of non-cash compensation offered through
promotional contests: travel and lodging at vacation locations; tickets for
entertainment events; and merchandise. In some instances, these incentives may
be offered only to certain dealers who have sold or may sell significant amounts
of Fund shares. None of the aforementioned compensation is paid for by the
Company, any Fund or its shareholders.
RIGHT OF ACCUMULATION--CLASS A SHARES. Reduced sales loads apply to
any purchase of Class A Shares by you and any related "purchaser," where the
aggregate investment in Class A Shares among any of the Funds offered with a
sales load, including such purchase, is $50,000 or more. If, for example, you
previously purchased and still hold Class A Shares of the Municipal Income Fund,
with an aggregate current market value of $40,000 and subsequently purchase
Class A Shares of the Municipal Income Fund having a current value of $20,000,
the sales load applicable to the subsequent purchase would be reduced to 2.50%
of the offering price (2.56% of the net asset value). Class A Shares of the
other Funds may be subject to different sales load schedules, as described
above. All present holdings of Class A Shares may be combined to determine the
current offering price of the aggregate investment in ascertaining the sales
load applicable to each subsequent purchase. To qualify for reduced sales loads,
at the time of a purchase an investor or the investor's Service Organization
must notify the Transfer Agent. The reduced sales load is subject to
confirmation of an investor's holdings through a check of appropriate records.
CONTINGENT DEFERRED SALES CHARGE. If a shareholder redeems Class B
Shares prior to the sixth anniversary of purchase, the shareholder will pay a
CDSC at the rates set forth below. The CDSC is assessed on an amount equal to
the lesser of the then-current market value or the cost of the Class B Shares
being redeemed. Accordingly, no sales charge is imposed on increases in net
asset value above the initial purchase price. In addition, no charge is assessed
on Class B Shares derived from reinvestment of dividends or capital gain
distributions.
The amount of CDSC, if any, varies depending on the number of years
from the time of payment for the purchase of Class B Shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of Class B Shares, all
payments during a month are aggregated and deemed to have been made on the first
day of the month.
The following table sets forth the rates of the CDSC for Class B
Shares:
CDSC as a % of Amount
Invested or Redemption
Year Since Purchase Payment Was Made Proceeds
- -------------------------------------- -----------------------
First................................. 4.00
Second................................ 3.00
Third................................. 3.00
Fourth................................ 2.00
Fifth................................. 2.00
Sixth................................. 1.00
Seventh............................... 0.00
When an investor redeems his or her Class B Shares, the redemption
order is processed so as to minimize the amount of the CDSC that will be
charged. Class B Shares that are not subject to the CDSC (i.e., Class B Shares
that were acquired through reinvestment of dividends or capital gain
distributions) are redeemed first and after that Class B Shares that have been
held the longest are redeemed.
To provide an example, assume you purchased 100 Class B Shares at $10
per share (a total cost of $1,000) and prior to the second anniversary after
purchase, the net asset value per share is $12 and during such time you have
acquired 10 additional Class B Shares through dividends reinvested in Class B
Shares. If you then make your first redemption of 50 Class B Shares (proceeds of
$600), the first 10 Class B Shares will not be subject to the CDSC because you
received them as dividends. With respect to the remaining 40 Class B Shares, the
CDSC is applied only to the original cost of $10 per share and not to the
increase in net asset value of $2 per share. Therefore, $400 of the $600
redemption proceeds is subject to a CDSC at a rate of 3.00% (the applicable rate
prior to the second anniversary after purchase).
The Distributor compensates certain Service Organizations for selling
Class B Shares at the time of purchase from the Distributor's own assets. The
proceeds of the CDSC and distribution fee, in part, are used to defray these
expenses.
WAIVER OF CDSC. The CDSC may be waived in connection with (a)
redemptions made within one year after the death or disability, as defined in
Section 72(m)(7) of the Code, of the shareholder, (b) redemptions by
participants in qualified or non-qualified employee benefit plans or other
programs (such as 401(k), 403(b)(7), 457 and Keogh plans) sponsored by the
Adviser, the Administrator or their affiliates or subsidiaries or which make
direct investments in the Fund by means of electronic data transmission, (c)
redemptions as a result of a combination of any investment company with the Fund
by merger, acquisition of assets or otherwise, (d) a distribution following
retirement under a tax-deferred retirement plan or upon attaining age 70-1/2 in
the case of an IRA or Keogh plan or custodial account pursuant to Section 403(b)
of the Code, and (e) redemptions pursuant to the Automatic Withdrawal Plan, as
described in the Funds' Prospectus and this Statement of Additional Information.
Any Fund shares subject to a CDSC which were purchased prior to the termination
of such waiver will have the CDSC waived as provided in the Funds' Prospectus at
the time of the purchase of such shares.
CONVERSION OF CLASS B SHARES. Approximately seven years after the date
of purchase, Class B Shares automatically will convert to Class A Shares, based
on the relative net asset values for shares of each such Class, and will no
longer be subject to the distribution fee and shareholder services fee charged
Class B Shares, but will be subject to the distribution fee and shareholder
services fee charged Class A Shares. At that time, Class B Shares that have been
acquired through the reinvestment of dividends and distributions ("Dividend
Shares") will be converted in the proportion that a shareholder's Class B Shares
(other than Dividend Shares) converting to Class A Shares bears to the total
Class B Shares then held by the shareholder which were not acquired through the
reinvestment of dividends and distributions.
"SWEEP" PROGRAM. (Applicable to the Money Market Funds Only) Shares of
the Money Market Funds may be purchased or sold through the "sweep" program
established by certain financial institutions under which a portion of their
customers' accounts may be automatically invested in the Fund. The customer
becomes the beneficial owner of specific shares of the Fund which may be
purchased, redeemed and held by the financial institution in accordance with the
customer's instructions and may fully exercise all rights as a shareholder. The
shares will be held by the Transfer Agent in book-entry form. A statement with
regard to the customer's shares is generally supplied to the customer monthly,
and confirmations of all transactions for the account of the customer ordinarily
are available to the customer promptly on request. In addition, each customer is
sent proxies, periodic reports and other information from the Company with
regard to shares of the Funds. The customer's shares are fully assignable and
may be encumbered by the customer. The "sweep" agreement can be terminated by
the customer at any time, without affecting its beneficial ownership of the
shares.
To obtain the benefits of this service, a customer typically is
required to maintain a minimum balance subject to a monthly maintenance fee, or
a higher minimum balance for which no monthly fee would be imposed. In either
case, a penalty fee is imposed if the minimum should not be maintained. In
general, the automatic investment in the Fund's shares occurs on the same day
that withdrawals are made by the financial institution, at the next determined
net asset value after the order is received.
All agreements which relate to the service are with the financial
institution. Neither the Distributor nor the Company is a party to any of those
agreements and no part of the compensation received by the financial institution
flows to the Company or to BISYS or to any of their affiliates, either directly
or indirectly. Further information concerning this program and any related
charges or fees is provided by the financial institution prior to any purchase
of the Fund's shares. Any fees charged by the financial institution effectively
reduces the Fund's yield for those customers.
REOPENING AN ACCOUNT. An investor may reopen an account with a minimum
investment of $100 without filing a new Account Application during the calendar
year the account is closed or during the following calendar year, provided the
information on the old Account Application is still applicable.
SIGNATURE-GUARANTIES. Written redemption requests must be signed by
each shareholder, including each holder of a joint account, and each signature
must be guaranteed. The Transfer Agent has adopted standards and procedures
pursuant to which signature-guarantees in proper form generally will be accepted
from domestic banks, brokers, dealers, credit unions, national securities
exchanges, registered securities associations, clearing agencies and savings
associations, as well as from participants in the New York Stock Exchange
Medallion Signature Program, the Securities Transfer Agents Medallion Program
("STAMP") and the Stock Exchanges Medallion Program. Signature-guaranties may
not be provided by notaries public. If the signature is guaranteed by a broker
or dealer, such broker or dealer must be a member of a clearing corporation and
maintain net capital of at least $100,000. Guarantees must be signed by an
authorized signatory of the guarantor and "Signature-Guaranteed" must appear
with the signature. The signature guarantee requirement will be waived if the
following conditions apply: (1) the redemption check is payable to the
shareholder(s) of record; and (2) the redemption check is mailed to the
shareholder(s) at the address of record or the proceeds are either mailed or
wired to a financial institution account previously designated. Redemption
requests by corporate and fiduciary shareholders must be accompanied by
appropriate documentation establishing the authority of the person seeking to
act on behalf of the account.
REDEMPTION COMMITMENT. Each Fund has committed itself to pay in cash
all redemption requests by any shareholder of record, limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the value of such Fund's
net assets at the beginning of such period. Such commitment is irrevocable
without the prior approval of the Securities and Exchange Commission. In the
case of requests for redemption in excess of such amount, the Board of Directors
reserves the right to make payments in whole or in part in securities or other
assets in case of an emergency or any time a cash distribution would impair the
liquidity of the Fund to the detriment of the existing shareholders. In this
event, the securities would be valued in the same manner as the Fund is valued.
If the recipient sold such securities, brokerage charges might be incurred.
SUSPENSION OF REDEMPTIONS. The right of redemption may be suspended or
the date of payment postponed (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closing), (b) when
trading in the markets the Fund normally utilizes is restricted, or when an
emergency exists as determined by the Securities and Exchange Commission so that
disposal of the Fund's investments or determination of its net asset value is
not reasonably practicable, or (c) for such other periods as the Securities and
Exchange Commission by order may permit to protect the Fund's shareholders.
DETERMINATION OF NET ASSET VALUE
GENERAL. Expenses and fees, including the advisory fee and fees paid
pursuant to the Distribution Plan and Shareholder Services Plan, are accrued
daily and taken into account for the purpose of determining the net asset value
of the relevant Class of Fund shares. Each Strategic Portfolio's net asset value
will fluctuate with changes in the securities markets and the value of the
Underlying Funds in which it invests. Each Underlying Fund's investments are
valued each business day generally by using available market quotations or at
fair value which may be determined by one or more pricing services approved by
its Board. Each pricing service's procedures are reviewed under the general
supervision of the Board. Set forth below is further information regarding the
methods employed in valuing the Underlying Fund's investments.
LARGE-CAP EQUITY, SMALL-CAP OPPORTUNITY, MID-CAP, INTERNATIONAL
EQUITY, CAPITAL GROWTH, AND EQUITY INCOME FUNDS. Each of these Funds'
securities, including covered call options written by the Fund, are valued at
the last sale price on the securities exchange or national securities market on
which such securities primarily are traded. Securities not listed on an exchange
or national securities market, or securities in which there were no
transactions, are valued at the average of the most recent bid and asked prices,
except in the case of open short positions where the asked price is used for
valuation purposes. Bid price is used when no asked price is available. Any
assets or liabilities initially expressed in terms of foreign currency will be
translated into dollars at the midpoint of the New York interbank market spot
exchange rate as quoted on the day of such translation by the Federal Reserve
Bank of New York or if no such rate is quoted on such date, at the exchange rate
previously quoted by the Federal Reserve Bank of New York or at such other
quoted market exchange rate as may be determined to be appropriate by the
Adviser. Forward currency contracts will be valued at the current cost of
offsetting the contract. Since the International Equity Fund has to obtain
prices as of the close of trading on various exchanges throughout the world, the
calculation of net asset value may not take place contemporaneously with the
determination of prices of certain of the Fund's securities. Debt securities
maturing in 60 days or less generally are carried at amortized cost, which
approximates value, except where to do so would not reflect accurately their
fair value, in which case such securities would be valued at their fair value as
determined under the supervision of the Board of Directors. Any securities or
other assets for which recent market quotations are not readily available are
valued at fair value as determined in good faith by the Company's Board of
Directors.
Restricted securities, as well as securities or other assets for which
market quotations are not readily available, or are not valued by a pricing
service approved by the Board of Directors, are valued at fair value as
determined in good faith by the Board of Directors. The Board of Directors will
review the method of valuation on a current basis. In making their good faith
valuation of restricted securities, the Directors generally will take the
following factors into consideration: restricted securities which are, or are
convertible into, securities of the same class of securities for which a public
market exists usually will be valued at market value less the same percentage
discount at which purchased. This discount will be revised periodically by the
Board of Directors if the Directors believe that it no longer reflects the value
of the restricted securities. Restricted securities not of the same class as
securities for which a public market exists usually will be valued initially at
cost. Any subsequent adjustment from cost will be based upon considerations
deemed relevant by the Board of Directors.
INCOME, GOVERNMENT INCOME, LIMITED TERM INCOME AND LIMITED TERM U.S.
GOVERNMENT FUNDS. Each of these 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. The
Service's procedures are reviewed by the Company's officers under the general
supervision of the Board of Directors.
MUNICIPAL INCOME, TENNESSEE TAX-EXEMPT AND LIMITED TERM TENNESSEE
TAX-EXEMPT FUNDS. Each of these Funds' investments are valued by the Service.
When, in the judgment of the Service, quoted bid prices for investments are
readily available and are representative of the bid side of the market, these
investments are valued at the mean between the quoted bid prices (as obtained by
the Service from dealers in such securities) and asked prices (as calculated by
the Service based upon its evaluation of the market for such securities). Other
investments (which constitute a majority of the Fund's securities) are carried
at fair value as determined by the Service, based on methods which include
consideration of: yields or prices of municipal bonds of comparable quality,
coupon, maturity and type; indications as to values from dealers; and general
market conditions. The Service may employ electronic data processing techniques
and/or a matrix system to determine valuations. The Service's procedures are
reviewed by the Company's officers under the general supervision of the Board of
Directors.
PRIME MONEY MARKET FUND, GOVERNMENT MONEY MARKET FUND, TREASURY MONEY
MARKET FUND AND TAX-EXEMPT MONEY MARKET FUND. The valuation of each of these
Funds' investment securities is based upon their amortized cost which does not
take into account unrealized capital gains or losses. This involves valuing an
instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Fund would
receive if it sold the instrument.
The Board of Directors has established, as a particular responsibility
within the overall duty of care owed to each of these Funds' investors,
procedures reasonably designed to stabilize each such Fund's price per share as
computed for the purpose of purchases and redemptions at $1.00. Such procedures
include review of the Fund's investment holdings by the Board of Directors, at
such intervals as it deems appropriate, to determine whether such Fund's net
asset value calculated by using available market quotations or market
equivalents deviates from $1.00 per share based on amortized cost. In such
review, investments for which market quotations are readily available will be
valued at the most recent bid price or yield data for such securities or for
securities of comparable maturity, quality and type, as obtained from one or
more of the major market makers for the securities to be valued. Other
investments and assets will be valued at fair value as determined in good faith
by the Board of Directors. With respect to the Tax-Exempt Money Market Fund,
market quotations and market equivalents used in the Board's review are obtained
from an independent pricing service (the "Service") approved by the Board. The
Service values the Tax-Exempt Money Market Fund's investments based on methods
which include considerations of: yields or prices of municipal obligations of
comparable quality, coupon, maturity and type; indications of values from
dealers; and general market conditions. The Service also may employ electronic
data processing techniques and/or a matrix system to determine valuations.
The extent of any deviation between a Fund's net asset value based
upon available market quotations or market equivalents and $1.00 per share based
on amortized cost will be examined by the Board of Directors. If such deviation
exceeds 1/2 of 1%, the Board of Directors promptly will consider what action, if
any, will be initiated. In the event the Board of Directors determines that a
deviation exists which may result in material dilution or other unfair results
to investors or existing shareholders, it has agreed to take such corrective
action as it regards as necessary and appropriate, including: selling portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity; withholding dividends or paying distributions from
capital or capital gains; redeeming shares in kind; or establishing a net asset
value per share by using available market quotations or market equivalents.
SHAREHOLDER SERVICES AND PRIVILEGES
The services and privileges described under this heading may not be
available to certain clients of the Adviser, its affiliates, certain Service
Organizations and Institutions, and the Adviser, its affiliates, some Service
Organizations and Institutions may impose certain conditions on their clients
which are different from those described in the Prospectus or this Statement of
Additional Information. Such investors should consult the Adviser, its
affiliates, their Service Organization or Institution in this regard.
EXCHANGE PRIVILEGE. The Exchange Privilege enables you to purchase, in
exchange for shares of a Fund, shares of the same Class of another Fund in the
ISG Family of Funds, to the extent such shares are offered for sale in your
state of residence. If you desire to use this Privilege, you should consult the
Adviser, its affiliate or Institution where you maintain your account, your
Service Organization or the Administrator to determine if it is available and
whether any conditions are imposed on its use.
The shares being exchanged must have a current value of at least $500;
furthermore, when establishing a new account by exchange, the shares being
exchanged must have a value of at least the minimum initial investment required
for the Fund into which the exchange is being made.
Shares will be exchanged at the next determined net asset value;
however, a sales load, which may be waived or reduced as described below, may be
charged with respect to exchanges of Class A Shares. No CDSC will be imposed on
Class B Shares at the time of an exchange; however, shares acquired through an
exchange will be subject to the CDSC applicable to the exchanged or acquired
shares. The CDSC applicable on redemption of the acquired shares will be
calculated from the date of the initial purchase of the Class B Shares
exchanged. If you are exchanging Class A Shares into a Fund that charges a sales
load, you may qualify for share prices which do not include the sales load or
which reflect a reduced sales load, if the shares you are exchanging were: (a)
purchased with a sales load, (b) acquired by a previous exchange from shares
purchased with a sales load, or (c) acquired through reinvestment of dividends
or distributions paid with respect to the foregoing categories of shares. No
fees currently are charged shareholders directly in connection with exchanges
although the Company reserves the right, upon not less than 60 days' written
notice, to charge shareholders a nominal administrative fee in accordance with
rules promulgated by the Securities and Exchange Commission. The Company
reserves the right to reject any exchange request in whole or in part. The
Exchange Privilege may be modified or terminated at any time upon notice to
shareholders.
The exchange of shares of one Fund for shares of another is treated
for Federal income tax purposes as a sale of the shares given in exchange by the
shareholder and, therefore, an exchanging shareholder may realize a taxable gain
or loss.
AUTO-EXCHANGE PLAN--PRIME, GOVERNMENT AND TAX-EXEMPT MONEY MARKET
FUNDS ONLY. The Auto-Exchange Plan enables holders of Class B Shares of these
Money Market Funds to make regular monthly or quarterly exchanges into Class B
Shares of another Fund. The Transfer Agent will exchange automatically Class B
Shares of the Fund in the amount specified (subject to applicable minimums)
according to the schedule the investor has selected. Shares will be exchanged at
the then-current net asset value. No CDSC will be imposed at the time of the
exchange; however, the Class B Shares acquired through an exchange will be
subject on redemption to the applicable CDSC, which will be calculated from the
date of the initial purchase of the Class B Shares exchanged.
Shareholders investing directly in Class B Shares of these Money
Market Funds, as opposed to through an exchange, will be required to participate
in the Auto-Exchange Plan and to establish the time and amount of their
automatic exchanges such that all of the Class B Shares of the Fund so purchased
will have been exchanged for Class B Shares of the other Funds within two years
of purchase.
To participate in the Auto-Exchange Plan, shareholders must complete
the appropriate section of the Account Application. The Auto-Exchange Plan may
be modified or canceled by the Company or the Administrator at any time. You may
modify your instructions or cancel your participation in the Auto-Exchange Plan
at any time by mailing written notification to ISG Funds, c/o BISYS Fund
Services, Inc., Department L-1686, Columbus, Ohio 43260-1686.
AUTOMATIC INVESTMENT PLAN. The Automatic Investment Plan permits you
to purchase Class A or Class B Shares (minimum initial investment of $1,000 and
minimum subsequent investments of $100 per transaction) at regular intervals
selected by you. Provided your bank or other financial institution allows
automatic withdrawals, Class A or Class B Shares may be purchased by
transferring funds from the bank account designated by you. At your option, the
account designated will be debited in the specified amount, and Class A or Class
B Shares will be purchased, once a month, on either the first or fifteenth day,
or twice a month, on both days. Only an account maintained at a domestic
financial institution which is an Automated Clearing House member may be so
designated. This service enables you to make regularly scheduled investments and
may provide you with a convenient way to invest for long-term financial goals.
You should be aware, however, that periodic investment plans do not guarantee a
profit and will not protect an investor against loss in a declining market. To
establish an Automatic Investment Plan account, you must check the appropriate
box and supply the necessary information on the Account Application. You may
obtain the necessary applications from the Administrator. You may cancel your
participation in the Automatic Investment Plan or change the amount of purchase
at any time by mailing written notification to ISG Funds, c/o BISYS Fund
Services, Inc., Department L-1686, Columbus, Ohio 43260-1686, and such
notification will be effective three business days following receipt. The
Company may modify or terminate the Automatic Investment Plan at any time or
charge a service fee. No such fee currently is contemplated.
DIRECTED DISTRIBUTION PLAN. The Directed Distribution Plan enables you
to invest automatically dividends and capital gain distributions, if any, paid
by a Fund in Class A or Class B Shares of another Fund of which you are a
shareholder. Class A or Class B Shares of the other Fund will be purchased at
the then-current net asset value. Minimum subsequent investments do not apply.
Investors desiring to participate in the Directed Distribution Plan should check
the appropriate box and supply the necessary information on the Account
Application. The Plan is available only for existing accounts and may not be
used to open new accounts. The Company may modify or terminate the Directed
Distribution Plan at any time or charge a service fee. No such fee currently is
contemplated.
AUTOMATIC WITHDRAWAL PLAN. The Automatic Withdrawal Plan permits you
to request withdrawal of a specified dollar amount (minimum of $50), with
respect to Class A or Class B Shares, on either a monthly, quarterly,
semi-annual or annual basis if you have a $5,000 minimum account. The automatic
withdrawal will be made on the first or fifteenth day, at your option, of the
period selected. To participate in the Automatic Withdrawal Plan, you must check
the appropriate box and supply the necessary information on the Account
Application. The Automatic Withdrawal Plan may be ended at any time by the
investor, the Company or the Transfer Agent.
No CDSC with respect to Class B Shares will be imposed on withdrawals
made under the Automatic Withdrawal Plan, provided that the amounts withdrawn
under the plan do not exceed on an annual basis 10% of the account value at the
time the shareholder elects to participate in the Automatic Withdrawal Plan.
Withdrawals with respect to Class B Shares under the Automatic Withdrawal Plan
that exceed on an annual basis 10% of the value of the shareholder's account
will be subject to a CDSC on the amounts exceeding 10% of the initial account
value. Purchases of additional Class A Shares where the sales load is imposed
concurrently with withdrawals of Class A Shares generally are undesirable.
REINSTATEMENT PRIVILEGE. The Reinstatement Privilege enables investors
who have redeemed Class A or Class B Shares to repurchase, within 90 days of
such redemption, Class A or Class B Shares of a Fund in an amount not to exceed
the redemption proceeds received at a purchase price equal to the then-current
net asset value determined after a reinstatement request and payment are
received by the Transfer Agent. This privilege also enables such investors to
reinstate their account for the purpose of exercising the Exchange Privilege.
Upon reinstatement for Class B Shares, the investor's account will be credited
with an amount equal to the CDSC previously paid upon redemption of the Class B
Shares reinvested. To use the Reinstatement Privilege, you must submit a written
reinstatement request to the Transfer Agent. The reinstatement request and
payment must be received within 90 days of the trade date of the redemption.
There currently are no restrictions on the number of times an investor may use
this privilege.
LETTER OF INTENT. By signing a Letter of Intent form, available from
the Administrator or certain Service Organizations, you become eligible for the
reduced sales load applicable to the total number of Class A Shares purchased in
a 13-month period (beginning up to 90 days prior to the date of execution of the
Letter of Intent) pursuant to the terms and conditions set forth in the Letter
of Intent. A minimum initial purchase of $5,000 is required. To compute the
applicable sales load, the offering price of shares you hold (on the date of
submission of the Letter of Intent) in any Fund that may be used toward "Right
of Accumulation" benefits described above may be used as a credit toward
completion of the Letter of Intent.
The Transfer Agent will hold in escrow 5% of the amount indicated in
the Letter of Intent for payment of a higher sales load if the investor does not
purchase the full amount indicated in the Letter of Intent. The escrow will be
released when the investor fulfills the terms of the Letter of Intent by
purchasing the specified amount. Assuming completion of the total minimum
investment specified under a Letter of Intent, an adjustment will be made to
reflect any reduced sales load applicable to shares purchased during the 90-day
period prior to the submission of the Letter of Intent. In addition, if the
investor's purchases qualify for a further sales load reduction, the sales load
will be adjusted to reflect the investor's total purchase at the end of 13
months.
If total purchases are less than the amount specified, the investor
will be requested to remit an amount equal to the difference between the sales
load actually paid and the sales load applicable to the aggregate purchases
actually made. If such remittance is not received within 20 days, the Transfer
Agent, as attorney-in-fact pursuant to the terms of the Letter of Intent, will
redeem an appropriate number of Class A Shares held in escrow to realize the
difference. Signing a Letter of Intent does not bind the investor to purchase,
or the Company to sell, the full amount indicated at the sales load in effect at
the time of signing, but the investor must complete the intended purchase to
obtain the reduced sales load. At the time you purchase Class A Shares, you must
indicate your intention to do so under a Letter of Intent. Purchases pursuant to
a Letter of Intent will be made at the then-current net asset value plus the
applicable sales load in effect at the time such Letter of Intent was executed.
PERFORMANCE INFORMATION
Current yield is computed pursuant to a formula which operates as
follows: The amount of the Fund's expenses accrued for the 30-day period (net of
reimbursements) is subtracted from the amount of the dividends and interest
earned by the Fund during the period. That result is then divided by the product
of: (a) the average daily number of shares outstanding during the period that
were entitled to receive dividends, and (b) the maximum offering price per share
on the last day of the period less any undistributed earned income per share
reasonably expected to be declared as a dividend shortly thereafter. The
quotient is then added to 1, and that sum is raised to the 6th power, after
which 1 is subtracted. The current yield is then arrived at by multiplying the
result by 2.
Tax equivalent yield is computed by dividing that portion of the
current yield (calculated as described above) which is tax exempt by 1 minus a
stated tax rate and adding the quotient to that portion, if any, of the yield of
the Fund that is not tax exempt.
Average annual total return is calculated by determining the ending
redeemable value of an investment purchased with a hypothetical $1,000 payment
made at the beginning of the period (assuming the reinvestment of dividends and
distributions), dividing by the amount of the initial investment, taking the
"n"th root of the quotient (where "n" is the number of years in the period) and
subtracting 1 from the result. A Class's average annual total return figures
calculated in accordance with such formula assume that in the case of Class A
the maximum sales load has been deducted from the hypothetical initial
investment at the time of purchase or, in the case of Class B, the maximum
applicable CDSC has been paid upon redemption at the end of the period.
Total return is calculated by subtracting the amount of the maximum
offering price per share at the beginning of a stated period from the net asset
value per share at the end of the period (after giving effect to the
reinvestment of dividends and distributions during the period and any applicable
CDSC), and dividing the result by the maximum offering price per share at the
beginning of the period. Total return also may be calculated based on the net
asset value per share at the beginning of the period for Class A Shares or
without giving effect to any applicable CDSC at the end of the period for Class
B Shares. In such cases, the calculation would not reflect the deduction of the
sales load with respect to Class A Shares or any applicable CDSC with respect to
Class B Shares, which, if reflected, would reduce the performance quoted.
Seven-day yield will be computed in accordance with a standardized
method which involves determining the net change in the value of a hypothetical
pre-existing Fund account having a balance of one share at the beginning of a
seven calendar day period for which yield is to be quoted, dividing the net
change by the value of the account at the beginning of the period to obtain the
base period return, and annualizing the results (i.e., multiplying the base
period return by 365/7). The net change in the value of the account reflects the
value of additional shares purchased with dividends declared on the original
share and any such additional shares and fees that may be charged to shareholder
accounts, in proportion to the length of the base period and the Fund's average
account size, but does not include realized gains and losses or unrealized
appreciation and depreciation. Effective annualized yield is computed by adding
1 to the base period return (calculated as described above), raising that sum to
a power equal to 365 divided by 7, and subtracting 1 from the result.
Yields will fluctuate and are not necessarily representative of future
results. The investor should remember that yield is a function of the type and
quality of the instruments held, their maturity and operating expenses. An
investor's principal in the Fund is not guaranteed. See "Determination of Net
Asset Value" for a discussion of the manner in which each Fund's price per share
is determined.
Set forth below is the average annual total return for the indicated
Fund and Class of shares as of December 31, 1998:
<PAGE>
INTERNATIONAL EQUITY FUND
Average Annual
Total Return
---------------------------
Without Sales With Sales
Class A Shares Charge Charge*
-------------- ----------
1-Year............................................. 9.47% 4.31%
Since Inception 8/15/97............................ 4.48% 0.83%
* Reflects the maximum sales charge of 4.75%.
Average Annual
Institutional Shares Total Return
--------------------
1-Year............................................. 9.47%
Since Inception 8/15/97............................ 4.48%
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.
SMALL-CAP OPPORTUNITY FUND
- ---------------------------
Average Annual
Total Return
------------------------------
Without Sales With Sales
Class A Shares Charge Charge*
--------------- ------------
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%.
Average Annual
Total Return
------------------------------
Without CDSC With CDSC**
Class B Shares --------------- -------------
1-Year.................................. -7.13% -9.74%
5-Year.................................. 11.48% 10.35%
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 would have been lower.
Average Annual
Total Return
---------------------------
Institutional Shares
1-Year.................................. -7.20%
5-Year.................................. 11.46%
10-Year................................. 17.61%
The quoted returns reflect the performance from 8/1/94 to 12/14/98 of the DG
Opportunity 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 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.
CAPITAL GROWTH FUND
Average Annual
Total Return
------------------------------
Without Sales With Sales
Class A Shares Charge Charge*
-------------- -------------
1-Year................................. 32.05% 25.77%
5-Year................................. 22.35% 21.15%
10-Year................................ 16.43% 15.87%
* Reflects the maximum sales charge of 4.75%.
Average Annual
Total Return
---------------------------
Without CDSC With CDSC**
Class B Shares ------------ ------------
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 would have been lower.
Average Annual
Total Return
-------------------
Institutional Shares
1-Year................................. 32.40%
5-Year................................. 22.21%
10-Year................................ 16.36%
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 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.
LARGE-CAP EQUITY FUND
Average Annual
Total Return
-----------------------------
Without Sales With Sales
Class A Share Charge Charge*
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%.
Average Annual
Total Return
-----------------------------
Without CDSC With CDSC**
-------------- -------------
Class B Shares
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%).
The data for Class B Shares primarily presents the results of the Class A
Shares. Actual Class B Shares average annual total return would have been lower.
Average Annual
Total Return
--------------------
Institutional Shares
1-Year................................. 37.83%
5-Year................................. 24.80%
10-Year................................ 20.88%
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 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.
EQUITY INCOME FUND
Average Annual
Total Return
----------------------------
Without Sales With Sales
Class A Shares Charge Charge*
-------------- ------------
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%.
Average Annual
Total Return
---------------------------
Without CDSC With CDSC**
Class B Shares ------------- ------------
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%).
The data for Class B Shares primarily presents the results of the Class A
Shares. Actual Class B Shares average annual total return would have been lower.
Average Annual
Total Return
Institutional Shares -----------------
1-Year................................. 19.72%
5-Year................................. 17.46%
10-Year................................ 14.80%
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 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.
INCOME FUND
Average Annual
Total Return
---------------------------
Without Sales With Sales
Class A Shares Charge Charge*
------------- -----------
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%.
Average Annual
Total Return
-------------------------
Without CDSC With CDSC**
Class B Shares ------------- -----------
1-Year................................. 7.59% 4.59%
5-Year................................. 5.84% 5.68%
10-Year................................ 7.78% 7.78%
**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 would have been lower.
Average Annual
Total Return
------------------
Institutional Shares
1-Year................................. 8.55%
5-Year................................. 6.03%
10 Year................................ 7.88%
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 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.
GOVERNMENT INCOME FUND
Average Annual
Total Return
--------------------------------
Without Sales With Sales
Class A Shares Charge Charge*
-------------- ---------------
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%.
Average Annual
Total Return
---------------------
Institutional Shares
1-Year................................. 8.83%
5-Year................................. 6.45%
Since Inception 8/3/92................. 6.89%
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.
LIMITED TERM INCOME FUND
Average Annual
Total Return
--------------------------
Without Sales With Sales
Class A Shares Charge Charge*
-------------- -----------
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%.
Average Annual
Total Return
----------------------------
Without CDSC With CDSC**
Class B Shares -------------- -------------
1-Year................................. 5.86% 2.86%
5-Year................................. 5.33% 5.17%
10-Year................................ 6.86% 6.86%
**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 would have been lower.
Average Annual
Total Return
---------------------
Institutional Shares
1-Year................................. 6.86%
5-Year................................. 5.54%
10-Year................................ 6.97%
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 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.
LIMITED TERM U.S. GOVERNMENT FUND
Average Annual
Total Return
------------------------------
Without Sales With Sales
Class A Shares Charge Charge*
---------------- -------------
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%.
Average Annual
Total Return
---------------------------
Without CDSC With CDSC**
Class B Shares -------------- -------------
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 would have been lower.
Average Annual
Total Return
---------------------
Institutional Shares
1-Year................................. 6.64%
5-Year................................. 5.00%
10-Year................................ 6.91%
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 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.
TENNESSEE TAX-EXEMPT FUND
Average Annual
Total Return
-----------------------------
Without Sales With Sales
Class A Shares Charge Charge*
---------------- ------------
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%.
Average Annual
Total Return
----------------------------
Without CDSC With CDSC**
-------------- --------------
Class B Shares
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 would have been lower.
Average Annual
Total Return
--------------------
Institutional Shares
1-Year................................. 4.52%
5-Year................................. 3.32%
10-Year................................ 5.47%
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 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.
MUNICIPAL INCOME FUND
Average Annual
Total Return
--------------------------------
Without Sales With Sales
Class A Shares Charge Charge*
-------------- ---------------
1-Year................................. 5.33% 2.14%
5-Year................................. 5.06% 4.43%
Since Inception 12/29/92............... 6.29% 5.75%
**Reflects the maximum sales charge of 3.00%.
Average Annual
Total Return
-------------------
Institutional Shares
1-Year.................................. 5.34%
5-Year.................................. 5.06%
Since Inception 12/29/92................ 6.29%
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.
LIMITED TERM TENNESSEE TAX-EXEMPT FUND
Average Annual
Total Return
------------------------------
Without Sales With Sales
Class A Shares Charge Charge*
--------------- -------------
1-Year................................. 3.76% 0.68%
5-Year................................. 3.36% 2.74%
10-Year................................ 4.91% 4.58%
* Reflects the maximum sales charge of 3.00%.
<PAGE>
Average Annual
Total Return
---------------------------
Without CDSC With CDSC**
Class B Shares ------------- -------------
1-Year.................................. 2.76% -0.23%
5-Year.................................. 3.16% 2.98%
10-Year................................. 4.81% 4.81%
**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 would have been lower.
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 would have been lower.
Past performance is not a prediction of future results. Each 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.
From time to time, advertising materials for a Fund may refer to or
discuss current or past business, political, economic or financial conditions,
such as U.S. monetary or fiscal policies and actual or proposed tax legislation.
In addition, from time to time, advertising materials for a Fund may include
information concerning retirement and investing for retirement, average life
expectancy and pension and social security benefits. Comparative performance
information may be used from time to time in advertising or marketing each
Fund's shares, including data from Lipper Analytical Services, Inc.,
Morningstar, Inc., Bank Rate MonitorTM, IBC Money Fund Averages ReportTM, Bond
Buyer's 20-Bond Index, Moody's Bond Survey Bond Index, Lehman Brothers Aggregate
Bond Index and components thereof, S&P 500 Index, Russell 2000 Index, EAFE
Index, the Dow Jones Industrial Average, CDA/Wiesenberger Investment Companies
Service, Mutual Fund Values; Mutual Fund Forecaster, Mutual Fund Investing and
other industry publications.
<PAGE>
DIVIDENDS, DISTRIBUTION AND TAXES
The Adviser believes that each operational Fund qualified as a
"regulated investment company" under the Code for the fiscal year ended December
31, 1998. Each Fund intends to continue to so qualify if such qualification is
in the best interests of its shareholders. To qualify as a regulated investment
company, the Fund must pay out to its shareholders at least 90% of its net
income (consisting of net investment income from tax exempt obligations and net
short-term capital gain), and must meet certain asset diversification and other
requirements. Qualification as a regulated investment company relieves the Fund
from any liability for Federal income taxes to the extent its earnings are
distributed in accordance with the applicable provisions of the Code. If a Fund
did not qualify as a regulated investment company, it would be treated for tax
purposes as an ordinary corporation subject to Federal income tax. The term
"regulated investment company" does not imply the supervision of management or
investment practices or policies by any government agency.
Any dividend or distribution paid shortly after an investor's purchase
may have the effect of reducing the aggregate net asset value of his shares
below the cost of his investment. Such a distribution would be a return on
investment in an economic sense although taxable as stated in the Prospectus. In
addition, the Code provides that if a shareholder holds shares for six months or
less and has received a capital gain dividend with respect to such shares, any
loss incurred on the sale of such shares will be treated as a long-term capital
loss to the extent of the capital gain dividend received.
Depending upon the composition of a Fund's income, the entire amount
or a portion of the dividends paid by the Fund from net investment income may
qualify for the dividends received deduction allowable to qualifying U.S.
corporate shareholders ("dividends received deduction"). In general, dividend
income from a Fund distributed to qualifying corporate shareholders will be
eligible for the dividends received deduction only to the extent that such
Fund's income consists of dividends paid by U.S. corporations. However, Section
246(c) of the Code generally provides that if a qualifying corporate shareholder
has disposed of Fund shares held for less than 46 days, which 46 days generally
must be during the 90-day period commencing 45 days before the shares become
ex-dividend, and has received a dividend from net investment income with respect
to such shares, the portion designated by the Fund as qualifying for the
dividends received deduction will not be eligible for such shareholder's
dividends received deduction. In addition, the Code provides other limitations
with respect to the ability of a qualifying corporate shareholder to claim the
dividends received deduction in connection with holding Fund shares.
Ordinarily, gains and losses realized from portfolio transactions will
be treated as capital gains and losses. However, a portion of the gain or loss
realized from the disposition of non-U.S. dollar denominated securities
(including debt instruments, certain financial futures and options, and certain
preferred stock) may be treated as ordinary income or loss under Section 988 of
the Code. In addition, all or a portion of the gain realized from the
disposition of market discount bonds will be treated as ordinary income under
Section 1276 of the Code. A market discount bond is defined as any bond
purchased by a Fund after April 30, 1993, and after its original issuance, at a
price below its face or accredited value. Finally, all or a portion of the gain
realized from engaging in "conversion transactions" may be treated as ordinary
income under Section 1258. "Conversion transactions" are defined to include
certain forward, futures, option and "straddle" transactions, transactions
marketed or sold to produce capital gains, or transactions described in Treasury
regulations to be issued in the future.
Under Section 1256 of the Code, any gain or loss realized by the Fund
from certain financial futures and options transactions (other than those taxed
under Section 988 of the Code) will be treated as 60% long-term capital gain or
loss and 40% short-term capital gain or loss. Gain or loss will arise upon the
exercise or lapse of such futures and options as well as from closing
transactions. In addition, any such futures or options remaining unexercised at
the end of the Fund's taxable year will be treated as sold for their then fair
market value, resulting in additional gain or loss to the Fund characterized in
the manner described above.
Offsetting positions held by a Fund involving financial futures and
options may constitute "straddles." Straddles are defined to include "offsetting
positions" in actively traded personal property. The tax treatment of straddles
is governed by Sections 1092 and 1258 of the Code, which, in certain
circumstances, override or modify the provisions of Sections 988 and 1256 of the
Code. If the Fund was treated as entering into straddles by reason of its
futures or options transactions, such straddles could be characterized as "mixed
straddles" if the futures or options transactions comprising such straddles were
governed by Section 1256. The Fund may make one or more elections with respect
to "mixed straddles." Depending upon which election is made, if any, the results
to the Fund may differ. If no election is made, to the extent the straddle rules
apply to positions established by the Fund, losses realized by the Fund will be
deferred to the extent of unrealized gain in any offsetting positions. Moreover,
as a result of the straddle rules, short-term capital loss on straddle positions
may be recharacterized as long-term capital loss, and long-term capital gain on
straddle positions may be treated as short-term capital gain or ordinary income.
The Taxpayer Relief Act of 1997 included constructive sale provisions
that generally will apply if a Fund either (1) holds an appreciated financial
position with respect to stock, certain debt obligations, or partnership
interests ("appreciated financial position") and then enters into a short sale,
futures, forward, or offsetting notional principal contract (collectively, a
"Contract") respecting the same or substantially identical property or (2) holds
an appreciated financial position that is a Contract and then acquires property
that is the same as or substantially identical to the underlying property. In
each instance, with certain exceptions, the Fund generally will be taxed as if
the appreciated financial position were sold at its fair market value on the
date the Fund enters into the financial position or acquires the property,
respectively. Transactions that are identified hedging or straddle transactions
under other provisions of the Code can be subject to the constructive sale
provisions.
Investment by a Fund in securities issued or acquired at a discount,
or providing for deferred interest or for payment of interest in the form of
additional obligations could under special tax rules affect the amount, timing
and character of distributions to shareholders by causing such Fund to recognize
income prior to the receipt of cash payments. For example, the Fund could be
required to accrue a portion of the discount (or deemed discount) at which the
securities were issued each year and to distribute such income in order to
maintain its qualifica tion as a regulated investment company. In such case, the
Fund may have to dispose of securities which it might otherwise have continued
to hold in order to generate cash to satisfy these distribution requirements.
All distributions from the Tennessee Tax-Exempt Fund or Tennessee
Limited Term Tax-Exempt Fund, regardless of source, will be subject to the
Tennessee corporate excise tax. Shares of these Funds may be subject to the
Tennessee inheritance tax and the Tennessee estate tax if owned by a Tennessee
decedent at the time of death.
The International Equity Fund may qualify for and may make an election
permitted under Section 853 of the Code so that shareholders may be eligible to
claim a credit or deduction on their Federal income tax returns for, and will be
required to treat as part of the amounts distributed to them, their pro rata
portion of qualified taxes paid or incurred by the Fund to foreign countries
(which taxes relate primarily to investment income). The International Equity
Fund may make an election under Section 853 of the Code, provided more than 50%
of the value of the Fund's total assets at the close of the taxable year
consists of securities in foreign corporations, and the Fund satisfies the
applicable distribution provisions of the Code. The foreign tax credit available
to shareholders is subject to certain limitations imposed by the Code.
If the International Equity Fund invests in an entity that is
classified as a "passive foreign investment company" ("PFIC") for Federal income
tax purposes, the operation of certain provisions of the Code applying to PFICs
could result in the imposition of certain federal income taxes on the Fund. In
addition, gain realized from the sale or other disposition of PFIC securities
may be treated as ordinary income under Section 1291 of the Code and gain
realized with respect to PFIC securities that are marked-to-market will be
treated as ordinary income under Section 1296 of the Code.
PORTFOLIO TRANSACTIONS
GENERAL. Transactions are allocated to various dealers by the Funds'
investment personnel in their best judgment. The primary consideration is prompt
and effective execution of orders at the most favorable price. Subject to that
primary consideration, dealers may be selected to act on an agency basis for
research, statistical or other services to enable the Adviser to supplement its
own research and analysis with the views and information of other securities
firms. The allocation of brokerage transactions also may take into account a
broker's sales of Fund shares. No brokerage commissions have been paid to date,
except as noted below.
To the extent research services are furnished by brokers through which
a Fund effects securities transactions, the Adviser may use such information in
advising other funds or accounts it advises and, conversely, to the extent
research services are furnished to the Adviser by brokers in connection with
other funds or accounts the Adviser advises, the Adviser also may use such
information in advising the Funds. Although it is not possible to place a dollar
value on these services, if they are provided, it is the opinion of the Adviser
that the receipt and study of any such services should not reduce the overall
expenses of its research department.
The overall reasonableness of brokerage commissions paid is evaluated
by the Adviser based upon its knowledge of available information as to the
general level of commissions paid by other institutional investors for
comparable services. The Fund may pay commission rates in excess of those
another broker or dealer would have charged for effecting the same transaction,
if the Adviser determines in good faith that the commission paid is reasonable
in relation to the value of the brokerage and research services provided.
When transactions are executed in the over-the-counter market, the
Adviser will deal with the primary market makers unless a more favorable price
or execution otherwise is obtainable.
The Company's Board of Directors has determined, in accordance with
Section 17(e) of the 1940 Act and Rule 17e-1 thereunder, that any portfolio
transaction for the Fund may be executed by certain brokers that are affiliates
of the Adviser when such broker's charge for the transaction does not exceed the
usual and customary level.
LARGE-CAP EQUITY, SMALL-CAP OPPORTUNITY, MID-CAP, INTERNATIONAL
EQUITY, CAPITAL GROWTH AND EQUITY INCOME FUNDS. Brokers also are selected
because of their ability to handle special executions such as are involved in
large block trades or broad distributions, provided the primary consideration is
met. Large block trades may, in certain cases, result from two or more clients
the Adviser might advise being engaged simultaneously in the purchase or sale of
the same security. Portfolio turnover may vary from year to year, as well as
within a year. It is anticipated that in any fiscal year, the turnover rate for
each of these Funds generally should be less than 100%. Higher turnover rates
are likely to result in comparatively greater brokerage expenses.
For the fiscal years and/or periods ended December 31, 1996, 1997 and
1998, the amounts paid by the indicated Funds for brokerage commissions, gross
spreads and concessions on principal transactions, none of which was paid to the
Distributor, were as follows:
NAME OF FUND 1996 1997 1998
- ------------ ---- ---- ----
Large-Cap Equity $75,624(1) $74,672(2) $76,036(3)
Capital Growth $88,860(4) $360,208 $494,130
Small-Cap Opportunity $315,139(1) $498,832(2) $318,620(3)
Equity Income N/A $16,678(5) $314,269
International Equity N/A $67,394(2) $68,007(3)
- ------------------
(1) For the period March 1, 1996 through February 28, 1997.
(2) For the period March 1, 1997 through February 28, 1998.
(3) For the period March 1, 1998 through December 31, 1998.
(4) For the period April 1, 1996 (commencement of operations) through December
31, 1996.
(5) For the period February 27, 1997 (commencement of operations) through
December 31, 1997.
The aggregate amount of transactions during the last fiscal year in
securities effected on an agency basis through a broker for, among other things,
research services, and the commissions and concessions related to such
transactions for the indicated Funds were as follows:
Commissions/
Name of Fund Transaction Amounts Concessions
Large-Cap Equity $0 $0
Capital Growth $0 $0
Small-Cap Opportunity $0 $0
Equity Income $0 $0
International Equity $0 $0
During the fiscal years and/or periods ended December 31, 1996, 1997
and 1998, the amounts paid to the Adviser or its affiliates by the indicated
Fund for brokerage Commissions and the percentage such amounts represent of the
aggregate brokerage commissions paid by the Fund and of the aggregate dollar
amount of transactions for which the Fund paid brokerage commissions were as
follows:
<TABLE>
<CAPTION>
% of Aggregate Brokerage % of Aggregate Dollar
Name of Fund Brokerage Commissions Commissions Amount of Transactions
- ---------------- ----------------------------- ----------------------------- -------------------------------
1996(1) 1997 1998 1996(1) 1997 1998 1996(1) 1997 1998
------- ---- ---- ------- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Growth $0 $0 $34,567 0% 0% 6.99% 0% 0% 0.10%
Equity Income $0 $0 $17,821 0% 0% 5.67% 0% 0% 0.12%
- ------------------------
(1) For the period from April 1, 1996 (commencement of operations) through
December 31, 1996.
</TABLE>
INCOME, LIMITED TERM INCOME, MUNICIPAL INCOME, TENNESSEE TAX-EXEMPT,
LIMITED TERM TENNESSEE TAX-EXEMPT, GOVERNMENT INCOME, LIMITED TERM U.S.
GOVERNMENT, PRIME MONEY MARKET, GOVERNMENT MONEY MARKET, TREASURY MONEY MARKET
AND TAX-EXEMPT MONEY MARKET FUNDS. Purchases and sales of Fund securities
usually are principal transactions. Portfolio securities ordinarily are
purchased directly from the issuer or from an underwriter or market maker.
Usually no brokerage commissions are paid by the Fund for such purchases and
sales. The prices paid to underwriters of newly-issued securities usually
include a concession paid by the issuer to the underwriter, and purchases of
securities from market makers may include the spread between the bid and asked
price.
INFORMATION ABOUT THE COMPANY AND THE FUNDS
The Fund is authorized to issue 28 billion 500 million shares of
Common Stock (with 1 billion 250 million shares allocated to the Prime Money
Market Fund and 750 million shares allocated to each other Fund), par value
$.001 per share. Each Fund's shares are classified into Class A Shares (250
million, 500 million in the case of each Money Market Fund), Class B Shares (250
million, except for Treasury Money Market Fund which does not offer Class B
Shares) and Institutional Shares (250 million, 500 million in the case of each
Money Market Fund). Each share has one vote and shareholders will vote in the
aggregate and not by Class except as otherwise required by law. Each Fund share,
when issued and paid for in accordance with the terms of the offering, is fully
paid and non-assessable. Shares have no preemptive or subscription rights and
are freely transferable.
Unless otherwise required by the 1940 Act, ordinarily it will not be
necessary for the Company to hold annual meetings of shareholders. As a result,
shareholders may not consider each year the election of Directors or the
appointment of auditors. However, the holders of at least 10% of the shares
outstanding and entitled to vote may require the Company to hold a special
meeting of shareholders for purposes of removing a Director from office.
Shareholders may remove a Director by the affirmative vote of a majority of the
Company's outstanding voting shares. In addition, the Board of Directors will
call a meeting of shareholders for the purpose of electing Directors if, at any
time, less than a majority of the Directors then holding office have been
elected by shareholders.
The Company is a "series fund," which is a mutual fund divided into
separate portfolios, each of which is treated as a separate entity for certain
matters under the 1940 Act and for other purposes. A shareholder of one
portfolio is not deemed to be a shareholder of any other portfolio. For certain
matters shareholders vote together as a group; as to others they vote separately
by portfolio. From time to time, other portfolios may be established and sold
pursuant to other offering documents.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted under the provisions of the 1940 Act or applicable state law or
otherwise, to the holders of the outstanding voting securities of an investment
company, such as the Company, will not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by such matter. Rule 18f-2 further provides that a
portfolio shall be deemed to be affected by a matter unless it is clear that the
interests of each portfolio in the matter are identical or that the matter does
not affect any interest of such portfolio. However, the Rule exempts the
election of directors from the separate voting requirements of the Rule.
To date, 28 portfolios have been authorized. All consideration
received by the Company for shares of one of the portfolios, and all assets in
which such consideration is invested, belong to that portfolio (subject only to
the rights of creditors of the Company) and will be subject to the liabilities
related thereto. The income attributable to, and expenses of, one portfolio are
treated separately from those of the other portfolios.
Each Fund will send annual and semi-annual financial statements to all
its shareholders.
As of January 31, 1999, the following shareholders owned of record 5%
or more of the outstanding shares of the indicated Fund and Class:
Percent of Total Shares
Name and Address of Class Outstanding
ISG CAPITAL GROWTH FUND:
JC Bradford Company 8.35% (Class A Shares)
F/B/O Robert Jernigan
330 Commerce Street
Nashville, TN 37201-1899
FTC & Company 5.58% (Class A Shares)
Attn: Datalynx No. 106
P.O. Box 173736
Denver, CO 80217-3736
First American National Bank 56.32% (Class A Shares)
Attn: ISG Investment Management 96.80% (Institutional Shares)
and Trust
800 First American Center
Nashville, TN 37237
ISG EQUITY INCOME FUND:
First American National Bank 62.45% (Class A Shares)
Attn: ISG Investment Management 97.10% (Institutional Shares)
and Trust
800 First American Center
Nashville, TN 37237
ISG LARGE-CAP EQUITY FUND:
First American National Bank 85.59% (Institutional Shares)
Attn: ISG Investment Management and Trust
800 First American Center
Nashville, TN 37237
NFSC FEBO FAN-156833 10.55% (Class B Shares)
Charles T. Duke
206 Bonnabrook Drive
Hermitage, TN 37076
NFSC FEBO FAN-158690 7.21% (Class B Shares)
Patricia A. Estes
104 Bill Stewart Blvd.
Lavergne, TN 37086
NFSC FEBO FAN-159417 7.06% (Class B Shares)
Albert Don Taylor
7492 Nolensville Road
Nolensville, TN 37135
ISG SMALL-CAP OPPORTUNITY FUND:
First American National Bank 90.76% (Institutional Shares)
Attn: ISG Investment Management and Trust
800 First American Center
Nashville, TN 37237
NFSC FEBO FAE-004251 12.47% (Class B Shares)
First American National Bank, Custodian
738 Tobylynn Drive
Nashville, TN 37211
NFSC FEBO FAN-110625 28.26% (Class B Shares)
Rhonda K. Sheppard, Custodian
532 Emily Drive
Smyrna, TN 37167
NFSC FEBO FAN-110833 26.31% (Class B Shares)
Rhonda K. Sheppard, Custodian
532 Emily Drive
Smyrna, TN 37167
NFSC FEBO FAN-110833 32.94% (Class B Shares)
Janis G. Lopez
2723 Albany Court
Murfreesboro, TN 37219
Sanwa Bank of California 15.76% (Class A Shares)
Wilshire Associates, Inc.
444 Market Street, 23rd Floor
San Francisco, CA 94111-5325
JC Bradford Company 12.96% (Class A. Shares)
RCIP Limited Partners 1
330 Commerce Street
Nashville, TN 37201-1899
ISG INCOME FUND:
First American National Bank 83.52% (Class A Shares)
Attn: ISG Investment Management 99.83% (Institutional Shares)
and Trust
800 First American Center
Nashville, TN 37237
NFSC FEBO FAN-107280 6.26% (Class B Shares)
Mary M. McGavock
115 Woodmont Blvd. Apt. 22O
Nashville, TN 37205
NFSC FEBO FAE-033243 10.40% (Class B Shares)
NFSC FEBO FAN-109630
Mildred V. Morgan 5.96% (Class B Shares)
1449 Fosterville Loop
Bell Buckle, TN 37020
ISG LIMITED TERM U.S. GOVERNMENT FUND:
First American National Bank 93.68% (Institutional Shares)
Attn: ISG Investment Management and Trust
800 First American Center
Nashville, TN 37237
Martha D. Waller 5.50% (Class A Shares)
Martha Sue Waller
2615 Poplar Springs Drive
Meridian, MS 38305-4614
Anderson Support and Equipment 7.85% (Class A Shares)
Foundation Inc.
1400 20th Avenue
Meridian, MS 38301-4103
National Financial Services Corp. 10.86% (Class B Shares)
Rasberry Comm. Properties, L.P.
800 Spring Street S
Bethany, LA 71007-9532
NFSC FEBO FAN-107280 17.66% (Class B Shares)
Mary M. McGarock
115 Woodmont Blvd. Apt. 22O
Nashville, TN 37205
NFSC FEBO FAD-029864 6.03% (Class B Shares)
Ruby Page Morton
521 Fairfax Avenue
Nashville, TN 37212
NFSC FEBO FAN-092312 7.23% (Class B Shares)
Lois B. Hoge
20 Ridge Road
Westminster, MD 21157
NFSC FEBO FAN-103012 13.28% (Class B Shares)
Mary L. Binkley
309 Chesterfield Circle
Madison, TN 37115
NFSC FEBO FAN-137383 10.79% (Class B Shares)
Beatrice P. Rushing
430 Forrest Avenue
Jackson, TN 38301
NFSC FEBO FAP-068025 11.57% (Class B Shares)
First American National Bank, Custodian
306 Dye Road
Bell Buckle, TN 37020
NFSC FEBO FAN-155306 10.13% (Class B Shares)
Woodrow W. Billips
3701 Woodlawn Drive
Nashville, TN 37215
ISG LIMITED TERM TENNESSEE TAX-EXEMPT FUND:
First American National Bank 99.40% (Class A Shares)
ATTN: ISG Investment Management & Trust
800 First American Center
Nashville, TN 37237
NFSC FEBO FAN-000078 8.95% (Class B Shares)
Rose S. Kennon
1603 Tyne Blvd.
Nashville, TN 37216
NFSC FEBO FAD-024937 8.38% (Class B Shares)
Mary Ann Pangle
3916 Caylor Drive
Nashville, TN 37215
NFSC FEBO FAD-027499 6.87% (Class B Shares)
Thomas I. Sutton
4616 Tara Drive
Nashville, TN 37215
NFSC FEBO FAN-059580 7.70% (Class B Shares)
Floyd W. Rhew
5009 D. Camelot Drive
Columbia, TN 38401
NFSC FEBO FAN-090565 13.96% (Class B Shares)
Mary Dye
1913 Truett Street
Nashville, TN 37206
NFSC FEBO FAN-109183 6.99% (Class B Shares)
Louese H. Peace
7919 Lakeview Heights
Baxter, TN 39544
NFSC FEBO FAN-142115 13.49% (Class B Shares)
Yvonne P. Benson
4409 Belmont Terrace #246
Nashville, TN 37215
ISG TENNESSEE TAX-EXEMPT FUND:
First American National Bank 16.78% (Class A Shares)
Attn: ISG Investment Management & Trust
800 First American Center
Nashville, TN 37237
CoreLink Financial Inc. 12.07% (Class A Shares)
PO Box 4054
Concord, CA 94520
JC Bradford Company 13.24% (Class A Shares)
BTC SUC TUA Jeanne A
330 Commerce Street
Nashville, TN 37201-1899
NFSC FEBO FAN-060623 7.66% (Class A Shares)
James E. Richards, III
10 Castlewood Court
Nashville, TN 37215
NFSC FEBO FAN-071587 8.63% (Class A Shares)
Janet Myers Trent
1400 Kenesaw Avenue, Apt. 12R
Knoxville, TN 37918
NFSC FEBO FAN-080438 6.79% (Class A Shares)
Alan F. Cooper
3305 Honeywood Drive
Johnson City, TN 37604
NFSC FEBO FAN-048933 7.29% (Class B Shares)
Vivian M. Jones
5400 Park Avenue Unit - 306
Memphis, TN 34119
NFSC FEBO FAN-128732 5.36% (Class B Shares)
Emil Fay Penley
1920 Bowster Drive, Apt C-8
Kingport, TN 37660
NFSC FEBO FAN-068340 9.13% (Class B Shares)
Frances T. Harris
8045 Sunrise Circle
Franklin, TN 37067
NFSC FEBO FAN-267880 10.76% (Class B Shares)
Bobby L. Jones
9 Abbeywood Court
Nashville, TN 37215
NFSC FEBO FAN-230626 10.02% (Class B Shares)
Emmet R. Ray Sr.
Mary F. Ray
802 Davis Drive
Brentwood, TN 37027
NFSC FEBO FAN-162552 7.19% (Class B Shares)
Brenda K. Brasher
8244 Spring Ridge Drive
Nashville, TN 37221
ISG LIMITED TERM INCOME FUND:
CoreLink Financial Inc. 24.60% (Class A Shares)
P.O. Box 4054
Concord, CA 94520
FTC & Company 35.09% (Class A Shares)
P.O. Box 173736
Denver, CO 80217-3736
First American National Bank 38.28% (Institutional Shares)
Attn: ISG Investment Management and Trust
800 First American Center
Nashville, TN 37237
NFSC FEBO FAN-107280 12.51% (Class B Shares)
Mary M. McGavook
115 Woodmont Blvd. Apt. 220
Nashville, TN 37206
NFSC FEBO FAN-092312 5.06% (Class B Shares)
Lois B. Hoge
20 Ridge Road
Westminster, MD 21157
NFSC FEBO FAN-109630 13.25% (Class B Shares)
Mildred V. Morgan
1448 Footerville Loop
Bell Buckle, TN 37020
NFSC FEBO FAN-121002 5.09% (Class B Shares)
Faye Ellen Dunlap
4612 Singleton Station Road
Louisville, TN 37777
NFSC FEBO FAN-129216 8.46% (Class B Shares)
Margaret H. Leeper
137 Piney Flats Road
Piney Flats, TN 37686
NFSC FEBO FAP-062073 9.84% (Class B Shares)
First American National Bank, Custodian
202 Windsor Terr. Road
Nashville, TN 37221
NFSC FEBO FAP-074845 10.29% (Class B Shares)
First American National Bank, Custodian
347 Dafoe Circle
Maryville, TN 37804
NFSC FEBO FAP-058025 8.16% (Class B Shares)
First American National Bank, Custodian
306 Dye Road
Bell Buckle, TN 37020
First American National Bank 99.84% (Institutional Shares)
First American Center
300 Union Street
Nashville, TN 37237
ISG PRIME MONEY MARKET FUND:
First American National Bank 12.99% (Class A Shares)
Attn: ISG Investment 99.44% (Institutional Shares)
Management and Trust
800 First American Center
Nashville, TN 37237
National Financial Services Corp. 86.54% (Class A Shares)
Exclusively for the Benefit of our Customers
200 Liberty Street
New York, NY 10281
NFSC FEBO FAD-034177 11.72% (Class B Shares)
Sanh Huzl Huynh
4917 Franklin Road
Nashville, TN 37220
NFSC FEBO FAN-064009121002 22.50% (Class B Shares)
William E. Brazell
127 W End
Dickson, TN 37055
NFSC FEBO FAN-104426 23.23% (Class B Shares)
Norma I. Haden
272 Sailboat Drive
Nashville, TN 37217
NFSC FEBO FAP-065617 10.08% (Class B Shares)
First American National Bank, Custodian
272 Sailboat Drive
Nashville, TN 37217
NFSC FEBO FAN-102121 11.50% (Class B Shares)
First American National Bank, Custodian
610 Henslee Drive
Dickson, TN 37055
NFSC FEBO FAN-156019 10.50% (Class B Shares)
Glynda B. Pendergrass
204 Village Circle West
Dickson, TN 37055
NFSC FEBO FAD-044407 10.47% (Class B Shares)
Scott A. Moore
753 Radiance Drive
Cordova, TN 38018
ISG TREASURY MONEY MARKET FUND:
First American National Bank 24.35% (Class A Shares)
Attn: ISG Investment 97.75% (Institutional Shares)
Management and Trust
800 First American Center
Nashville, TN 37237
Hare & Co. 66.01% (Class A Shares)
c/o The Bank of New York
Attn: Stif/Master Note
One Wall Street
New York, NY 10286
National Financial Services Corp. 6.72% (Class A Shares)
Exclusively for the Benefit
of our Customers
200 Liberty Street
New York, NY 10281
ISG GOVERNMENT INCOME FUND:
National Financial Services Corp. 5.14% (Class A Shares)
Highland Plantation
Attn: James D. Bell
1248 Highland Plantation Road
Greenville, MS 36701-9252
NFSC FEBO OIC 800962 11.33% (Class A Shares)
Hodding Carter Memorial YMCA
1688 Fairground Road
Greenville, MS 38703-7805
NFSC FEBO BH2 379948 5.39% (Class A Shares)
William F. Ford
SH 2069
Shreveport, LA 71101-3666
NFSC FEBO BH2 190349 16.49% (Class A Shares)
Johnny B. Mitchell
Mary Sue Mitchell
904 Meadowbrook Drive
West Monroe, LA 71291-5035
NFSC FEBO BH2 001392 10.11% (Class A Shares)
Marie Gober
2326 Bienville Drive
Monroe, LA 71201-2945
NFSC FEBO FAD-045543 99.96% (Class B Shares)
James R. Wesson
612 Spring House Court
Brentwood, TN 37027
First American National Bank 88.40% (Institutional Shares)
Attn: ISG Investment Management & Trust
800 First American Center
Nashville, TN 37237
ISG MUNICIPAL INCOME FUND:
Pullen Estate LP 5.82% (Class A Shares)
PO Box 5372
Jackson, MS 39296-5372
NFSC FEBO OIC 375128 10.59% (Class A Shares)
Blanche R. Young
334 Williamsburg Road
Columbia, MS 36701-1948
NFSC FEBO OIC 528730 5.60% (Class A Shares)
Harvey C. Sanders
Alda Sanders
PO Box 4387
Jackson, MS 39296-4387
NFSC FEBO OIC 215384 5.19% (Class A Shares)
James A. O'Neill, Jr.
Marie D. O'Neill
2302 St. Charles Avenue, 3A
New Orleans, LA 70130-5849
NFSC FEBO OIC 560251 36.13% (Class A Shares)
Cheryl Jean Jones
Max & Martha Jordan Family Trust
1175 Jordan Lane
Raymond, MS 39154-8725
BISYS Fund Services, L.P. 100.00% (Class B Shares)
3435 Stelzer Road
Columbus, Ohio 43219-8001
First American National Bank 99.39% (Institutional Shares)
Attn: ISG Investment Management & Trust
800 First American Center
Nashville, TN 37237
ISG INTERNATIONAL EQUITY FUND:
Houvis & Co. 59.61% (Class A Shares)
First American National Bank
RPO Legwell & Sons, Enterprises
300 Union Street, NA 0052
Nashville, TN 37237-0001
NFSC FEBO OIC 054372 7.00% (Class A Shares)
John R. Nunnery
PO Box 1325
Meridian, MS 39302-1325
NFSC FEBO BH2 128899 7.27% (Class A Shares)
David H. Nordyke
6113 River Road
Shreveport, LA 71105-4833
NFSC FEBO OIC 176060215384 13.85% (Class A Shares)
Mark A. Barger
Lacy N. Langford
PO Box 296
Greenwood, MS 38936-0295
BISYS Fund Services, L.P. 100.00% (Class B Shares)
3435 Stelzer Road
Columbia, Ohio 43219-8001
First American National Bank 90.13% (Institutional Shares)
Attn: ISG Investment Management & Trust
800 First American Center
Nashville, TN 37237
ISG AGGRESSIVE GROWTH PORTFOLIO:
Lorrie D. Madden 99.01% (Class A Shares)
James B. Madden
1054 Huntsman CR
Franklin, TN 37064
BISYS Fund Services, L.P. 100.00% (Institutional Shares)
3435 Stelzer Road
Columbus, Ohio 43219-8001
ISG GROWTH PORTFOLIO:
BISYS Fund Services, L.P. 100.00% (Institutional Shares)
3435 Stelzer Road
Columbus, Ohio 43219-8001
ISG GROWTH & INCOME PORTFOLIO:
BISYS Fund Services, L.P. 100.00% (Class A Shares)
3435 Stelzer Road
Columbus, Ohio 43219-8001
BISYS Fund Services, L.P. 100.00% (Institutional Shares)
3435 Stelzer Road
Columbus, Ohio 43219-8001
ISG MODERATE GROWTH & INCOME PORTFOLIO:
BISYS Fund Services, L.P. 100.00% (Class A Shares)
3435 Stelzer Road
Columbus, Ohio 43219-8001
BISYS Fund Services, L.P. 100.00% (Institutional Shares)
3435 Stelzer Road
Columbus, Ohio 43219-8001
ISG CURRENT INCOME PORTFOLIO:
BISYS Fund Services, L.P. 100.00% (Class A Shares)
3435 Stelzer Road
Columbus, Ohio 43219-8001
BISYS Fund Services, L.P. 100.00% (Institutional Shares)
3435 Stelzer Road
Columbus, Ohio 43219-8001
A shareholder who beneficially owns, directly or indirectly, more than
25% of a Fund's voting securities may be deemed a "control person" (as defined
in the 1940 Act) of the Fund.
COUNSEL AND INDEPENDENT AUDITORS
Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York
10038-4982, as counsel for the Company, has rendered its opinion as to certain
legal matters regarding the due authorization and valid issuance of the shares
of Common Stock being sold pursuant to the Prospectus.
KPMG LLP, Two Nationwide Plaza, Columbus, Ohio 43215, independent
auditors, have been selected as each Fund's auditors.
<PAGE>
FINANCIAL STATEMENTS
The Funds' Annual Report to Shareholders for the fiscal year ended
December 31, 1998 is a separate document supplied with this Statement of
Additional Information, and the financial statements, accompanying notes and
report of independent auditors appearing therein are incorporated by reference
into this Statement of Additional Information.
<PAGE>
APPENDIX
Description of certain ratings assigned by Standard & Poor's Ratings
Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch IBCA, Inc.
("Fitch"), Duff & Phelps Credit Rating Co. ("Duff") and Thomson BankWatch,
Inc.("BankWatch"):
S&P
BOND RATINGS
AAA
Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA
Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A
Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB
Bonds rated BB have less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payment.
S&P's letter ratings may be modified by the addition of a plus (+) or
minus (-) sign designation, which is used to show relative standing within the
major rating categories, except in the AAA (Prime Grade) category.
COMMERCIAL PAPER RATING
The designation A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus sign (+) designation. Capacity for timely payment on issues with an A-2
designation is strong. However, the relative degree of safety is not as high as
for issues designated A-1.
Moody's
BOND RATINGS
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category. The
modifier 1 indicates a ranking for the security in the higher end of a rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of a rating category.
COMMERCIAL PAPER RATING
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity for
repayment of short-term promissory obligations, and ordinarily will be evidenced
by leading market positions in well established industries, high rates of return
on funds employed, conservative capitalization structures with moderate reliance
on debt and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers (or relating supporting institutions) rated Prime-2 (P-2) have
a strong capacity for repayment of short-term promissory obligations. This
ordinarily will be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Fitch
BOND RATINGS
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings take
into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA
Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA
Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A
Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB
Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB
Bonds rated BB are considered speculative. The obligor's ability to
pay interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category.
SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+
EXCEPTIONALLY STRONG CREDIT QUALITY. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1
VERY STRONG CREDIT QUALITY. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2
GOOD CREDIT QUALITY. Issues carrying this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
Duff
BOND RATINGS
AAA
Bonds rated AAA are considered highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA
Bonds rated AA are considered high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
A
Bonds rated A have protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
BBB
Bonds rated BBB are considered to have below average protection
factors but still considered sufficient for prudent investment. Considerable
variability in risk exists during economic cycles.
BB
Bonds rated BB are below investment grade but are deemed by Duff as
likely to meet obligations when due. Present or prospective financial protection
factors fluctuate according to industry conditions or company fortunes. Overall
quality may move up or down frequently within the category.
Plus (+) and minus (-) signs are used with a rating symbol (except
AAA) to indicate the relative position of a credit within the rating category.
COMMERCIAL PAPER RATING
The rating Duff-1 is the highest commercial paper rating assigned by
Duff. Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are small.
BankWatch
COMMERCIAL PAPER AND SHORT-TERM OBLIGATIONS RATINGS
The rating TBW-1 is the highest short-term obligation rating assigned
by BankWatch. Obligations rated TBW-1 are regarded as having the strongest
capacity for timely repayment. Obligations rated TBW-2 are supported by a strong
capacity for timely repayment, although the degree of safety is not as high as
for issues rated TBW-1.
INTERNATIONAL AND U.S. BANK RATINGS
In addition to its ratings of short-term obligations, BankWatch
assigns a rating to each issuer it rates, in gradations of A through E.
BankWatch examines all segments of the organization, including, where
applicable, the holding company, member banks or associations, and other
subsidiaries. In those instances where financial disclosure is incomplete or
untimely, a qualified rating (QR) is assigned to the institution. BankWatch also
assigns, in the case of foreign banks, a country rating which represents an
assessment of the overall political and economic stability of the country in
which the bank is domiciled.
