<PAGE>
[LOGO OF ISG FUNDS]
[GRAPHIC]
ANNUAL REPORT December 31, 1999
<PAGE>
[LOGO OF ISG FUNDS]
The ISG Funds provide shareholders with a variety of features to make investing
in the Funds easy, convenient and manageable.
ISG FUND FACTS
ISG Fund Features ISG Fund Benefits
Professional Investment The investment managers at First American National
Management Bank are experienced investment professionals who
oversee the investments in each mutual fund.
Low Minimum Investment Initial investments in the Funds can be as low as
$1,000.
Dedicated Customer Account information is available from helpful
Service representatives. Just call 1-800-852-0045.
Automatic Investments Investments can be made once or twice a month with
automatic transfers from your checking account to
your Fund account.
Dollar Cost Averaging Dollar Cost Averaging is a means of investing by
which you invest a fixed dollar amount on a
consistent basis. You invest whether the financial
markets are high or low. As a result, you buy more
shares when prices are low and fewer when prices are
high. In this way, you can achieve a lower average
cost per share.*
Automatic Withdrawals Automatic withdrawals from your Fund account can be
made and credited to any account you designate.
Free Exchange Privileges Shares of a Fund can be exchanged into shares of
other ISG Funds at no cost.**
Regular Informative You will receive account statements after each
Statements and Reports transaction, plus regular financial reports
highlighting performance and investment strategies.
Dividend Reinvestment Dividend income and capital gains can be reinvested
automatically in additional shares of a Fund.
Daily Redemptions Shares are redeemable each business day (at the net
asset value per share, which may be worth more or
less than your original cost, next determined after
receipt of your redemption request) by mail,
telephone or bank wire.
* Dollar Cost Averaging does not assure a profit and does not protect against
loss in declining markets. You should consider your financial ability to
continue your investment program during periods of extreme share price
fluctuations.
** Exchange privileges may be modified or discontinued by the Funds at any time.
Upon redemption, shares may be worth more or less than their original cost.
<PAGE>
Table of Contents
Letter from the Chief Investment Officer
Page 1
Treasury Money Market Fund
Prime Money Market Fund
Tax-Exempt Money Market Fund
Page 3
Limited Term U.S. Government Fund
Page 21
Government Income Fund
Page 29
Municipal Income Fund
Page 39
Limited Term Tennessee Tax-Exempt Fund
Page 49
Tennessee Tax-Exempt Fund
Page 57
Limited Term Income Fund
Page 67
Income Fund
Page 77
Equity Income Fund
Page 87
Large-Cap Equity Fund
Page 97
Capital Growth Fund
Page 107
Mid-Cap Fund
Page 117
Small-Cap Opportunity Fund
Page 127
International Equity Fund
Page 137
Strategic Portfolios
Page 147
Notes to Financial Statements
Page 186
Independent Auditors' Report
Page 206
<PAGE>
Letter from the Chief Investment Officer
- --------------------------------------------------------------------------------
To Our Shareholders:
I am pleased to send you the ISG Funds' annual report for the 12 months ended
December 31, 1999, a time of extraordinary volatility and opportunity in the
financial markets, and of earthshaking news for our fund family.
As we entered the year 2000, the big news is not that computer networks around
the world crashed--they did not--but that the ISG Funds are merging with a new
partner. Last year, First American Bancorporation, our parent company, was
bought by AmSouth Bancorporation of Birmingham, Alabama. As a result, the ISG
Funds will merge into the AmSouth Family of Funds as of March 13, 2000.
What does this mean to you, our shareholders? We believe that the alliance of
our funds, within the AmSouth Funds will produce a number of significant
benefits, such as:
. More fund choices. The merger will significantly increase the number of funds
available to you, to 29 separate funds, with total anticipated assets in
excess of $7 billion. Larger fund families, such as ours becomes with this
merger, often offer greater investment opportunities, to the benefit of their
shareholders.
. Additional diversification. The AmSouth family offers a strong value bent in
their equity funds, including a couple of niche products--such as the
Enhanced Market Fund, which attempts to magnify the returns of stocks in the
S&P 500 Stock Index./1/
. Increased research capabilities. By combining our resources, we will be able
to offer you better and larger research departments and a deeper well of
investment expertise.
Who will actually be managing the funds you currently own? In many cases, it
will be the same managers you now have running your funds--including the
managers of our very successful Mid-Cap Fund and International Equity Fund.
And, in case you are wondering whether the reorganization will have any tax
impact on your holdings, rest assured that the move is considered a "tax-free
merger." The merger alone will not cause a taxable event in your portfolio.
Now to the markets.
Stocks: Tech mania or a new order?
For most of 1999, and certainly for the year as a whole, there were two types
of equity investors. Those who owned shares of a relatively small group of
large-growth stocks, mostly in the technology sector (happy investors), and
those who owned shares of just about any other type of stocks (broken-hearted
investors).
The market's narrowness was exceptional and extreme. If you ignored traditional
valuation measures and invested in just the right places, there were rewards.
If you followed time-honored investment strategies based on finding intrinsic
value, the results could be dismal. Except for a three-month period stretching
from April to July, value-driven names were not even on the radar screen of
most investors--unless the companies had the foresight to reinvent themselves
and put a "dot.com" after their name.
No sour grapes are intended here. As a fund family, we did not ignore
opportunities in the technology and telecommunications sectors--the white-hot
supernova sectors that burned at the core of the tech-heavy Nasdaq
Composite/2/--and we had our share of winners. But we must admit that we were
pleasantly surprised by the market's sudden moves and the scale of those moves.
In the months of November and December alone, the Nasdaq shot up more than
34.44%. For the year as a whole, the Nasdaq soared 85.59% to 4,069, a level
that had seemed unimaginable at the beginning of 1999.
Other market indices also rose impressively, though not as dynamically as the
Nasdaq. During the 12-month period, the Dow Jones Industrial Average/3/
advanced 25.22%, while the S&P 500 Stock Index gained 21.03%. This was the
fifth straight year that both the Dow and the S&P posted double-digit annual
increases. Despite the market's volatility and rapid
- ---------
/1/The Standard & Poor's 500 Stock Index is an unmanaged index generally
representative of the stock market as a whole. Investors cannot invest
directly in an index, although they can invest in the underlying securities.
Past performance is not a prediction of future results.
/2/The NASDAQ Composite Index is a market capitalization price-only index that
tracks the performance of domestic common stocks traded on the regular NASDAQ
market, as well as National Market System-traded foreign common stocks and
American Depositary Receipts. Investors cannot invest directly in an index,
although they can invest in the underlying securities.
/3/The Dow Jones Industrial Average is a price-weighted average based on the
price movements of 30 blue-chip stocks. Investors cannot invest directly in
an index, although they can invest in the underlying securities.
1
<PAGE>
Letter from the Chief Investment Officer -- (continued)
- --------------------------------------------------------------------------------
sector rotation, the latter half of the 1990s was truly a remarkable period for
long-term investors.
Now we are facing a new year and new challenges. As I write this letter in mid-
January, volatility has not abated; if possible, it has become even more gut-
wrenching. In addition, we believe that, despite last year's performance (or
perhaps because of it), many valuations in the technology sector are
astronomical, unsupportable and simply out of whack. Quite plainly, the reality
of investing, as it existed in 1999, seems beyond reality. Consequently, we are
not going to change the way we invest. We are not going to blindly chase the
stock or sector of the week, regardless of valuation, and hope the tech bubble
does not burst. Instead, we are going to continue to practice the investing
fundamentals we have employed for years that we believe can add significant
value to our long-term shareholders' accounts.
Bond's: Hard to find refuge
The stock market seemed to have two faces in 1999, bonds wore a single
expression, and it was a scowl. There were no mysteries about what went wrong
with fixed-income securities. For the entire year, the bond market was not
popular with investors for two reasons. First, interest rates shot up right out
of the gate early in the year, trending upward with little pause. The benchmark
30-year Treasury bond, for example, rose nearly 150 basis points (1.50%) in
yield. With interest rates trending upward, bond prices could not help but sink
steadily.
Second, the stock market, at least in terms of its averages, provided outsized
returns that bonds could not be expected to match. This encouraged many
investors to pull their money out of bonds and put it into stocks. Overall,
bond investors, especially those purchasing longer-term, more volatile
securities, seemed to be exposed to an inordinate amount of risk, with little
upside in the short run.
Going forward, we continue to invest in fixed-income securities that appear to
offer the best combination of value and safety. Even though we feel the worst
of the interest rate risk is over, there is still some downside potential in
the bond market. It is our opinion that the Federal Reserve Board (the Fed)
will raise short-term rates again early in 2000. In the second half of the
year, however, we believe that rates will stabilize and perhaps even decline--
which would spell relief for bonds.
This is an exciting time--for the markets, for us and for our shareholders. As
we begin our relationship with AmSouth, we will continue to work toward a
single objective: helping you invest wisely and achieve your financial goals.
We thank you for your continued support.
Sincerely,
/s/ Frederick S. Crown Jr.
Frederick S. Crown, Jr., CFA
Chief Investment Officer
2
<PAGE>
John Mark McKenzie Sharon Brown
[PHOTO] Portfolio Manager [PHOTO] Portfolio Manager
ISG Prime Money Market Fund ISG Tax-Exempt Money
ISG Treasury Money Market Fund Market Fund*
- --------------------------------------------------------------------------------
Investment Goal
The ISG money market funds seek to provide as high a level of current income
as is consistent with the preservation of capital and the maintenance of
liquidity. Each Fund seeks its objective by investing in:
Prime Money Market Fund -- A broad range of U.S. Government, bank and
corporate short-term, money market obligations.
Treasury Money Market Fund -- U.S. Treasury securities and other obligations
that are guaranteed as to principal and interest by the U.S. Government, and
related repurchase agreements.
Tax-Exempt Money Market Fund* -- Variable-rate municipal notes, along with
short-term municipal bonds with maturities less than 397 days--producing
income that is free from federal income tax.
- --------------------------------------------------------------------------------
Q. What factors affected the performance of the money market funds?
A. Throughout the year, interest rates rose steadily across the yield curve.
After significantly lowering the fed funds rate in 1998, the Fed adopted a
hawkish stance in 1999, raising the short-term benchmark three times, in June,
August and again in November. While these actions were disastrous for bond
prices in general, higher rates actually helped boost yields on the very short
paper we buy for the Funds.
We maintained fairly short average maturities for the Funds. With interest
rates so volatile, it made sense to stay on the shorter end of our range.
As of December 31, 1999, the average maturity of the Prime Money Market Fund
was 40 days; for the Treasury Money Market Fund, 55 days; for the Tax-Exempt
Money Market Fund, 54 days.**
Q. What is your outlook for the next 12 months?
A. We expect to see rates rise a bit more in the first few months of 2000. This
should not adversely impact the Funds; in fact, our yields should continue to
slowly rise. With inflation in the neighborhood of 2.5%, very low on an
historical basis, we anticipate that shareholders could receive fairly generous
inflation-adjusted returns.
- ---------
* The Fund's income may be subject to certain state and local taxes and,
depending on your tax status, the federal alternative minimum tax.
** The Fund's portfolio composition is subject to change.
An investment in any of the Funds is not insured or guaranteed by the FDIC or
any other government agency. Although each Fund seeks to preserve the value of
your investment at $1.00 per share, it is possible to lose money by investing
in a Fund.
3
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Treasury Money Market Fund December 31, 1999
U.S. Treasury Bills* (13.2%)
<TABLE>
<CAPTION>
Amortized
Principal Cost
Amount (Note 2)
------------ ------------
<S> <C> <C>
5.30%, 1/13/00...................................... $ 20,000,000 $ 19,964,700
5.27%, 4/20/00...................................... 20,000,000 19,678,250
5.25%, 5/4/00....................................... 25,000,000 24,547,917
------------
TOTAL U.S. TREASURY BILLS (Cost $64,190,867)........ 64,190,867
------------
U.S. Treasury Notes (39.3%)
5.38%, 1/31/00...................................... 20,000,000 20,008,020
7.75%, 1/31/00...................................... 10,000,000 10,020,877
8.50%, 2/15/00...................................... 25,000,000 25,103,509
5.50%, 2/29/00...................................... 25,000,000 25,009,325
6.88%, 3/31/00...................................... 25,000,000 25,096,105
6.38%, 5/15/00...................................... 25,000,000 25,094,249
6.25%, 5/31/00...................................... 20,000,000 20,062,486
5.88%, 6/30/00...................................... 20,000,000 20,027,530
6.13%, 7/31/00...................................... 20,000,000 20,044,213
------------
TOTAL U.S. TREASURY NOTES (Cost $190,466,314)....... 190,466,314
------------
Cash Equivalents (0.0%)
Bank of New York Cash Reserve....................... 1,014 1,014
------------
TOTAL CASH EQUIVALENTS (Cost $1,014)................ 1,014
------------
Repurchase Agreements (47.2%)
Merrill Lynch, 2.75%, 1/3/00, dated 12/31/99, with a
maturity value of $114,548,626 (Collateralized by
$123,783,000 Treasury Inflation Index Notes/Bonds
3.63%-3.88%, 4/15/28-4/15/29, fair value --
$116,814,663)...................................... 114,522,381 114,522,381
Prudential, 3.00%, 1/3/00, dated 12/31/99, with a
maturity value of $114,551,012 (Collateralized by
$167,333,588 Ginnie Mae, 5.00%-9.00%, 11/15/14-
12/20/29, fair value -- $116,812,829).............. 114,522,381 114,522,381
------------
TOTAL REPURCHASE AGREEMENTS (Cost $229,044,762)..... 229,044,762
------------
</TABLE>
Short-Term Securities+ (12.8%)
<TABLE>
<CAPTION>
Amortized
Principal Cost
Amount (Note 2)
----------- ------------
<S> <C> <C>
Repurchase Agreements (12.8%)
SBC Warburg, 3.00%, 1/3/00, dated 12/31/99, with a
maturity value of $61,882,967 (Collateralized by
$62,520,000 Treasury Inflation Index Note/Bond,
3.63%, 1/15/08, fair value -- $63,107,525).......... $61,867,500 $ 61,867,500
------------
TOTAL SHORT-TERM SECURITIES
(Cost $61,867,500).................................. 61,867,500
------------
TOTAL INVESTMENTS
(Cost $545,570,457) (a) -- (112.5%)................. 545,570,457
Liabilities in excess of other
assets -- (-12.5%).................................. (60,558,497)
------------
TOTAL NET ASSETS -- (100.0%)......................... $485,011,960
============
</TABLE>
- ---------
(a) Cost for federal income tax and financial reporting purposes are the same.
* Rates disclosed represent yield effective at purchase.
+ Represents securities purchased with cash collateral received on loaned
securities.
See notes to financial statements
4
<PAGE>
ISG FUNDS
Treasury Money Market Fund
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments, at amortized cost...................... $254,658,195
Repurchase agreements, at cost...................... 290,912,262
------------
Total Investments.................................. 545,570,457
Interest and dividends receivable................... 3,332,209
Receivable for capital shares issued................ 34,665
Receivable from investment adviser.................. 28,471
Prepaid expenses and other assets................... 40,022
------------
Total Assets....................................... 549,005,824
Liabilities:
Payable for return of collateral held for securities
on loan............................................ $61,867,500
Distributions payable............................... 1,890,324
Payable for capital shares redeemed................. 6,600
Accrued expenses and other payables:
Investment advisory fees........................... 101,466
Administration fees................................ 5,264
Distribution fees.................................. 72,417
Other.............................................. 50,293
-----------
Total Liabilities.................................. 63,993,864
------------
Net Assets:
Capital............................................. 485,030,937
Undistributed (distributions in excess of) net
investment income.................................. 3,539
Accumulated net realized losses from investment
transactions....................................... (22,516)
------------
Net Assets.......................................... $485,011,960
============
Class A Shares
Net Assets......................................... $143,208,473
Shares outstanding................................. 143,215,960
Offering and redemption price per share............ $ 1.00
============
Institutional Shares
Net Assets......................................... $341,803,487
Shares outstanding................................. 341,818,516
Offering and redemption price per share............ $ 1.00
============
</TABLE>
Statement of Operations
For the year ended December 31, 1999
<TABLE>
<S> <C> <C>
Investment Income:
Interest income........................................ $23,619,428
Income from securities lending......................... 53,011
-----------
Total Investment Income............................... 23,672,439
Expenses:
Investment advisory fees............................... $1,210,598
Administration fees.................................... 484,234
Shareholder servicing fees--Class A Shares............. 398,355
Shareholder servicing fees--Institutional Shares....... 483,525
Custodian fees......................................... 120,089
Accounting fees........................................ 21,035
Transfer agent fees.................................... 34,616
Directors' fees........................................ 14,224
Other fees............................................. 314,865
----------
Total expenses before voluntary fee
reductions/reimbursements............................ 3,081,541
Expenses voluntarily reduced/reimbursed............... (215,483)
-----------
Net expenses.......................................... 2,866,058
-----------
Net Investment Income.................................. 20,806,381
-----------
Change in net assets resulting from operations......... $20,806,381
===========
</TABLE>
See notes to financial statements
5
<PAGE>
ISG FUNDS
Treasury Money Market Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income............................. $ 20,806,381 $ 8,989,954
Net realized gains (losses) from investment
transactions..................................... -- (22,516)
------------ ------------
Change in net assets resulting from operations..... 20,806,381 8,967,438
------------ ------------
Distributions to Class A Shareholders:
From net investment income........................ (6,818,831) (4,199,074)
Distributions to Institutional Shareholders:
From net investment income........................ (13,987,550) (4,790,880)
------------ ------------
Change in net assets from shareholder
distributions..................................... (20,806,381) (8,989,954)
------------ ------------
Change in net assets from capital transactions..... 7,557,852 286,236,862
------------ ------------
Change in net assets............................... 7,557,852 286,214,346
Net Assets:
Beginning of period............................... 477,454,108 191,239,762
------------ ------------
End of period..................................... $485,011,960 $477,454,108
============ ============
</TABLE>
See notes to financial statements
6
<PAGE>
ISG FUNDS
Treasury Money Market Fund
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- ------- ------- --------
Investment Activities
Net investment income.. 0.043 0.046 0.047 0.047 0.053
-------- -------- ------- ------- --------
Total from Investment
Activities............ 0.043 0.046 0.047 0.047 0.053
-------- -------- ------- ------- --------
Distributions
Net investment income.. (0.043) (0.046) (0.047) (0.047) (0.053)
-------- -------- ------- ------- --------
Total Distributions.... (0.043) (0.046) (0.047) (0.047) (0.053)
-------- -------- ------- ------- --------
Net change in asset
value.................. -- -- -- -- --
-------- -------- ------- ------- --------
Net Asset Value, End of
Period................. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======= ======= ========
Total Return............ 4.38% 4.68% 4.78% 4.78% 5.41%
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $143,208 $167,475 $77,065 $78,308 $168,430
Ratio of expenses to
average net assets..... 0.60% 0.77% 0.75% 0.56% 0.50%
Ratio of net investment
income to average net
assets................. 4.28% 4.56% 4.68% 4.72% 5.28%
Ratio of expenses to
average net assets*.... 0.70% 0.78% (a) 0.74% 0.75%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
(a) There were no fee reductions in this period.
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
1999 1998 1997 1996 (a)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- --------
Investment Activities
Net investment income.. 0.043 0.048 0.049 0.024
-------- -------- -------- --------
Total from Investment
Activities............ 0.043 0.048 0.049 0.024
-------- -------- -------- --------
Distributions
Net investment income.. (0.043) (0.048) (0.049) (0.024)
-------- -------- -------- --------
Total Distributions.... (0.043) (0.048) (0.049) (0.024)
-------- -------- -------- --------
Net change in asset
value.................. -- -- -- --
-------- -------- -------- --------
Net Asset Value, End of
Period................. $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ========
Total Return............ 4.39% 4.93% 5.05% 2.43%(b)
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $341,803 $309,979 $114,175 $109,698
Ratio of expenses to
average net assets..... 0.59% 0.53% 0.50% 0.52%(c)
Ratio of net investment
income to average net
assets................. 4.31% 4.78% 4.94% 4.78%(c)
Ratio of expenses to
average net assets*.... 0.60% (d) (d) (d)
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
(a) For the period from July 1, 1996 (commencement of operations) through
December 31, 1996.
(b) Not annualized.
(c) Annualized.
(d) There were no fee reductions in this period.
See notes to financial statements
7
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Prime Money Market Fund December 31, 1999
Commercial Paper* (72.2%)
<TABLE>
<CAPTION>
Amortized
Principal Cost
Amount (Note 2)
----------- ------------
<S> <C> <C>
Agriculture (2.7%)
Cargill, Inc., 5.90%, 1/13/00......................... $20,000,000 $ 19,960,667
------------
Banking/Finance (45.6%)
Abbey National N.A., 5.99%, 1/20/00................... 20,000,000 19,936,772
American Express Credit, 5.65%, 2/18/00............... 20,000,000 19,849,333
American General Finance Corp., 5.91%, 3/13/00........ 20,000,000 19,763,600
Associates Corp. of N.A., 5.65%, 2/28/00.............. 20,000,000 19,817,944
Banc of America, 5.85%, 2/16/00....................... 20,000,000 19,850,500
Bancque Generale du Luxembourg S.A., 6.30%, 1/21/00... 20,000,000 19,930,000
Bank Austria AG, 5.86%, 1/7/00........................ 20,000,000 19,980,467
Bayerische Landesbank NY, 5.81%, 3/15/00.............. 20,000,000 19,761,144
Citicorp, 5.85%, 2/4/00............................... 20,000,000 19,889,500
Ford Motor Credit Co., 5.96%, 1/24/00................. 20,000,000 19,923,844
GE Capital Corp., 5.81%, 2/22/00...................... 20,000,000 19,832,156
GMAC, 5.98%, 2/23/00.................................. 20,000,000 19,823,922
IBM Credit Corp., 5.90%, 2/11/00...................... 20,000,000 19,865,611
Lloyds Bank PLC, 5.71%, 3/1/00........................ 20,000,000 19,809,667
USAA Capital Corp., 5.94%, 1/26/00.................... 20,000,000 19,917,500
USB Finance, 5.95%, 3/9/00............................ 20,000,000 19,775,222
Wells Fargo Co., 5.95%, 2/3/00........................ 20,000,000 19,890,917
------------
337,618,099
------------
Chemicals (2.7%)
Du Pont (E.I.) de Nemours & Co., 5.88%, 1/28/00....... 20,000,000 19,911,800
------------
Consumer Products (10.7%)
AT&T, 5.90%, 1/10/00.................................. 20,000,000 19,970,500
BellSouth Telecommunications, Inc., 5.25%, 3/3/00..... 20,000,000 19,819,167
Coca-Cola Co., 5.74%, 3/7/00.......................... 20,000,000 19,789,533
Proctor & Gamble, 5.87%, 1/25/00...................... 20,000,000 19,921,764
------------
79,500,964
------------
Oil & Gas Exploration Production & Services (5.1%)
Chevron USA, Inc., 5.80%, 2/1/00...................... 20,000,000 19,900,111
Texaco, Inc., 5.95%, 1/18/00.......................... 18,000,000 17,949,425
------------
37,849,536
------------
Printing & Publishing (2.7%)
Gannett Co., 5.85%, 1/14/00........................... 20,000,000 19,957,750
------------
Water Utility (2.7%)
National Rural Utilities Corp., 5.80%, 2/14/00........ 20,000,000 19,858,222
------------
TOTAL COMMERCIAL PAPER
(Cost $534,657,038).................................. 534,657,038
------------
</TABLE>
U.S. Government Agency Securities (14.3%)
<TABLE>
<CAPTION>
Amortized
Principal Cost
Amount (Note 2)
----------- ------------
<S> <C> <C>
Fannie Mae (2.7%)
5.61%*, 4/5/00....................................... $20,000,000 $ 19,703,917
------------
Federal Farm Credit Bank (2.0%)
5.26%, 3/17/00....................................... 15,000,000 15,000,000
------------
Federal Home Loan Bank (4.9%)
5.00%, 2/24/00....................................... 15,000,000 15,000,000
5.10%, 3/8/00........................................ 15,000,000 15,000,000
5.07%, 4/19/00....................................... 6,500,000 6,500,000
------------
36,500,000
------------
Freddie Mac (2.7%)
5.56%*, 3/30/00...................................... 20,000,000 19,725,089
------------
Student Loan Marketing Assoc. (2.0%)
5.16%, 3/8/00........................................ 15,000,000 15,000,000
------------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES
(Cost $105,929,006)................................. 105,929,006
------------
Cash Equivalents (0.0%)
Bank of New York Cash Reserve ....................... 38 38
------------
TOTAL CASH EQUIVALENTS
(Cost $38).......................................... 38
------------
Repurchase Agreements (13.6%)
Cantor Fitzgerald, 2.75%, 1/3/00, dated 12/31/99,
with a maturity value of $100,910,877
(Collateralized by $17,500,000 U.S. Treasury Notes,
5.25%, 5/31/01, fair value--$17,370,094; $19,995,000
Federal Farm Credit Bank, 7.11%, 12/13/04, fair
value--$19,843,387; $28,185,000 Federal Home Loan
Bank, 6.42%-7.34%, 6/30/04 - 10/4/06, fair value--
$27,884,143; $14,275,000 Fannie Mae, 3/23/00, fair
value--$14,090,853; $24,265,000 Freddie Mac, 5.13%-
7.75%, 12/8/04 -8/25/14, fair value--$23,852,477)... 100,887,757 100,887,757
------------
TOTAL REPURCHASE AGREEMENTS
(Cost $100,887,757)................................. 100,887,757
------------
TOTAL INVESTMENTS
(cost $741,473,839) (a) -- (100.1%)................. 741,473,839
Liabilities in excess of other
assets -- (-0.1%)................................... (687,546)
------------
TOTAL NET ASSETS -- (100.0%)......................... $740,786,293
============
</TABLE>
- ---------
(a)Cost for federal income tax and financial reporting purposes are the same.
*Rates disclosed represent yield effective at purchase.
PLC -- Public Limited Company
See notes to financial statements
8
<PAGE>
ISG FUNDS
Prime Money Market Fund
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments, at amortized cost....................... $640,586,082
Repurchase agreements, at cost....................... 100,887,757
------------
Total Investments................................... 741,473,839
Interest and dividends receivable.................... 2,760,588
Receivable for capital shares issued................. 61,804
Receivable from investment adviser................... 71,024
Prepaid expenses and other assets.................... 25,966
------------
Total Assets........................................ 744,393,221
Liabilities:
Distributions payable................................ $3,141,176
Payable for capital shares redeemed.................. 18,350
Accrued expenses and other payables:
Investment advisory fees............................ 154,329
Administration fees................................. 8,110
Distribution fees................................... 133,549
Custodian fees...................................... 15,817
Other............................................... 135,597
----------
Total Liabilities................................... 3,606,928
------------
Net Assets:
Capital.............................................. 740,839,307
Undistributed (distributions in excess of) net
investment income................................... 3,563
Accumulated net realized losses from investment
transactions........................................ (56,577)
------------
Net Assets........................................... $740,786,293
============
Class A Shares
Net Assets.......................................... $487,742,877
Shares outstanding.................................. 487,782,819
Offering and redemption price per share............. $ 1.00
============
Class B Shares
Net Assets.......................................... $ 731,886
Shares outstanding.................................. 731,925
Offering price per share*........................... $ 1.00
============
Institutional Shares
Net Assets.......................................... $252,311,530
Shares outstanding.................................. 252,328,126
Offering and redemption price per share............. $ 1.00
============
</TABLE>
- ---------
* Redemption price per share varies by length of time shares are held.
Statement of Operations
For the year ended December 31, 1999
<TABLE>
<S> <C> <C>
Investment Income:
Interest income........................................ $28,423,863
Expenses:
Investment advisory fees............................... $1,356,198
Administration fees.................................... 542,461
Distribution fees -- Class B Shares.................... 2,517
Shareholder servicing fees --
Class A Shares........................................ 974,995
Shareholder servicing fees --
Class B Shares........................................ 839
Shareholder servicing fees --Institutional Shares...... 227,473
Custodian fees......................................... 140,698
Accounting fees........................................ 25,992
Transfer agent fees.................................... 64,229
Directors' fees........................................ 15,535
Other fees............................................. 406,230
----------
Total expenses before voluntary fee
reductions/reimbursements........................... 3,757,167
Expenses voluntarily reduced/reimbursed.............. (246,625)
-----------
Net expenses......................................... 3,510,542
-----------
Net Investment Income.................................. 24,913,321
-----------
Realized Gains (Losses) from Investments:
Net realized gains (losses) from investment
transactions.......................................... (51,855)
-----------
Change in net assets resulting from operations......... $24,861,466
===========
</TABLE>
See notes to financial statements
9
<PAGE>
ISG FUNDS
Prime Money Market Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income.......................... $ 24,913,321 $ 6,576,108
Net realized gains (losses) from investment
transactions.................................. (51,855) (2,924)
------------ ------------
Change in net assets resulting from operations.. 24,861,466 6,573,184
------------ ------------
Distributions to Class A Shareholders:
From net investment income..................... (17,807,527) (3,802,606)
Distributions to Class B Shareholders:
From net investment income..................... (12,725) (2,455)(a)
Distributions to Institutional Shareholders:
From net investment income..................... (7,093,069) (2,771,047)
------------ ------------
Change in net assets from shareholder
distributions.................................. (24,913,321) (6,576,108)
------------ ------------
Change in net assets from capital transactions.. 363,735,826 294,554,899
------------ ------------
Change in net assets............................ 363,683,971 294,551,975
Net Assets:
Beginning of period............................ 377,102,322 82,550,347
------------ ------------
End of period.................................. $740,786,293 $377,102,322
============ ============
</TABLE>
- ---------
(a) For the period from July 23, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
10
<PAGE>
ISG FUNDS
Prime Money Market Fund
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- ------- ------- -------
Investment Activities
Net investment income
(loss)................ 0.045 0.047 0.048 0.048 0.054
-------- -------- ------- ------- -------
Total from Investment
Activities............ 0.045 0.047 0.048 0.048 0.054
-------- -------- ------- ------- -------
Distributions
Net investment income.. (0.045) (0.047) (0.048) (0.048) (0.054)
-------- -------- ------- ------- -------
Total Distributions.... (0.045) (0.047) (0.048) (0.048) (0.054)
-------- -------- ------- ------- -------
Net change in asset
value.................. -- -- -- -- --
-------- -------- ------- ------- -------
Net Asset Value, End of
Period................. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======= ======= =======
Total Return............ 4.62% 4.85% 4.90% 4.88% 5.51%
Ratios/Supplementary
Data:
Net Assets at end of pe-
riod (000)............. $487,743 $310,201 $56,163 $22,836 $63,919
Ratio of expenses to av-
erage net assets....... 0.66% 0.81% 0.87% 0.68% 0.65%
Ratio of net investment
income to average net
assets................. 4.57% 4.73% 4.82% 4.83% 5.37%
Ratio of expenses to av-
erage net assets*...... 0.72% 0.82% (a) 0.86% 0.90%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
(a) There were no fee reductions in this period.
Financial Highlights, Class B Shares
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1999 1998(a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period............... $1.000 $1.000
------ ------
Investment Activities
Net investment income (loss)...................... 0.037 0.021
------ ------
Total from Investment Activities.................. 0.037 0.021
------ ------
Distributions
Net investment income............................. (0.037) (0.021)
------ ------
Total Distributions............................... (0.037) (0.021)
------ ------
Net change in asset value.......................... -- --
------ ------
Net Asset Value, End of Period..................... $1.000 $1.000
====== ======
Total Return (excludes redemption charge).......... 3.79% 2.07%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000).................. $ 732 $ 187
Ratio of expenses to average net assets............ 1.44% 1.55%(c)
Ratio of net investment income to average net
assets............................................ 3.74% 3.77%(c)
Ratio of expenses to average net assets*........... 1.45% (d)
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
(a) For the period from July 23, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
(d) There were no fee reductions in this period.
See notes to financial statements
11
<PAGE>
ISG FUNDS
Prime Money Market Fund
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
1999 1998 1997 1996 (a)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- ------- ------- -------
Investment Activities
Net investment income
(loss)................. 0.046 0.050 0.051 0.024
-------- ------- ------- -------
Total from Investment
Activities............. 0.046 0.050 0.051 0.024
-------- ------- ------- -------
Distributions
Net investment income... (0.046) (0.050) (0.051) (0.024)
-------- ------- ------- -------
Total Distributions..... (0.046) (0.050) (0.051) (0.024)
-------- ------- ------- -------
Net change in asset
value................... -- -- -- --
-------- ------- ------- -------
Net Asset Value, End of
Period.................. $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======= ======= =======
Total Return............. 4.68% 5.11% 5.17% 2.46%(b)
Ratios/Supplementary
Data:
Net Assets at end of
period (000)............ $252,312 $66,715 $26,389 $48,101
Ratio of expenses to
average net assets...... 0.61% 0.58% 0.62% 0.65%(c)
Ratio of net investment
income to average net
assets.................. 4.66% 4.97% 5.05% 4.86%(c)
Ratio of expenses to
average net assets*..... 0.63% (d) (d) (d)
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
(a) For the period from July 1, 1996 (commencement of operations) through
December 31, 1996.
(b) Not annualized.
(c) Annualized.
(d) There were no fee reductions in this period.
See notes to financial statements
12
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Tax-Exempt Money Market Fund December 31, 1999
Tax-Exempt Commercial Paper (1.8%)
<TABLE>
<CAPTION>
Shares
or Amortized
Principal Cost
Amount (Note 2)
----------- -------------
<S> <C> <C>
New Jersey (1.8%)
New Jersey, 3.65%, 2/2/00............................ $ 2,000,000 $ 1,999,074
-------------
Total Tax-Exempt Commercial Paper (Cost $1,999,074).. 1,999,074
-------------
Municipal Bonds (94.4%)
Alabama (0.3%)
Mountain Brook City Board of Education, Capital
Outlay Warrants, 6.75%, 2/1/00...................... 100,000 100,230
St. Clair County Board of Education, School Tax
Anticipation Warrants, Series C, 5.25%, 2/1/00,
FSA................................................. 195,000 195,238
-------------
295,468
-------------
Alaska (0.4%)
Alaska Energy Authority Utility Revenue, 6.00%,
7/1/00, FSA......................................... 300,000 302,912
Anchorage Alaska Hospital Revenue, Sisters of
Providence Project, 6.75%, 10/1/00.................. 160,000 163,196
-------------
466,108
-------------
Arizona (2.9%)
Arizona Health Facilities Authority Revenue, Pooled
Loan Program, 5.60%*, 10/1/15, FGIC................. 1,000,000 1,000,000
Central Arizona Water Conservation District, Contract
Revenue, Central Arizona Project, 6.00%, 11/1/00.... 400,000 406,470
Maricopa County School District No. 097, Deer Valley
Project, Series G, 5.60%, 7/1/00, FSA, GO........... 1,880,000 1,896,371
-------------
3,302,841
-------------
Arkansas (3.1%)
Arkansas Development Finance Authority Revenue, State
Agency Facilities, Department of Corrections
Project, Series A, 5.00%, 11/1/00, FSA.............. 430,000 433,464
University of Arkansas, University Revenues, 5.65%*,
12/1/19, MBIA....................................... 3,000,000 3,000,000
-------------
3,433,464
-------------
Connecticut (4.6%)
Connecticut State Health & Educational Facilities
Authority, Series T-1, Yale University, 5.10%* ,
7/1/29.............................................. 5,000,000 5,000,000
Norwalk, 4.38%, 1/15/00, GO.......................... 200,000 200,024
-------------
5,200,024
-------------
District of Columbia (0.5%)
District of Columbia, Series B-2, 4.80%, 6/1/00, FSA,
GO.................................................. 500,000 501,621
</TABLE>
Municipal Bonds, continued
<TABLE>
<CAPTION>
Shares
or Amortized
Principal Cost
Amount (Note 2)
----------- -------------
<S> <C> <C>
District of Columbia (continued)
District of Columbia, Series B, 7.40%, 6/1/05,
Prerefunded 6/1/00 @ 102, FSA, GO................... $ 30,000 $ 31,001
District of Columbia, 1998 Series A, 6.75%, 6/1/08,
Prerefunded 6/1/00 @ 102, MBIA, GO.................. 25,000 25,769
-------------
558,391
-------------
Florida (1.0%)
Fort Walton Beach Public Improvement Revenue, 5.80%,
6/1/03, Prerefunded 6/1/00 @ 102, AMBAC............. 230,000 236,257
Fort Walton Beach Public Improvement Revenue, 5.90%,
6/1/04, Prerefunded 6/1/00 @ 102, AMBAC............. 245,000 251,764
Martin County, 6.50%, 2/1/10, Prerefunded 2/1/00 @
102, AMBAC, GO...................................... 30,000 30,660
Orlando & Orange County Expressway Revenue, Jr. Lien,
6.50%, 7/1/20, Prerefunded 7/1/00 @ 102, FGIC....... 40,000 41,266
Sarasota County School Board Financing Corporation
Lease Revenue, 7.25%, 7/1/10, Prerefunded 7/1/00 @
101, MBIA........................................... 500,000 512,815
-------------
1,072,762
-------------
Georgia (2.6%)
Albany Sewer Systems Revenue, 5.35%, 7/1/00, FGIC.... 50,000 50,325
Atlanta Airport Extension & Improvement Revenue,
7.00%, 1/1/00....................................... 30,000 30,000
Cherokee County School System, 5.00%, 2/1/00, GO..... 1,310,000 1,311,305
Douglas County Water & Sewer Authority, 6.70%,
6/1/05, Prerefunded 6/1/00 @ 102, MBIA.............. 1,000,000 1,033,842
Jackson County School District, 4.90%, 7/1/00, MBIA.. 30,000 30,130
Metropolitan Atlanta Rapid Transit Authority, Sales
Tax Revenue, Series P, 5.60%, 7/1/00, AMBAC......... 500,000 503,893
-------------
2,959,495
-------------
Hawaii (1.8%)
Hawaii County, Series A, 4.80%, 5/1/00, FGIC, GO..... 1,300,000 1,306,923
Honolulu City and County, Series B, 4.70%, 10/1/00,
GO.................................................. 750,000 754,267
-------------
2,061,190
-------------
</TABLE>
Continued
13
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Tax-Exempt Money Market Fund December 31, 1999
Municipal Bonds, continued
<TABLE>
<CAPTION>
Shares
or Amortized
Principal Cost
Amount (Note 2)
----------- -------------
<S> <C> <C>
Illinois (12.3%)
Chicago School Finance Authority, Series A, 4.70%,
6/1/00, FGIC, GO................................... $ 165,000 $ 165,468
Chicago, O'Hare International Airport, Special
Facilities Revenue, International Terminal, Series
A, 7.63%, 1/1/10, Prerefunded 1/1/00 @ 102, MBIA... 145,000 147,900
Chicago, O'Hare International Airport, Special
Facilities
Revenue, International Terminal, Series A, 7.50%,
1/1/17, Prerefunded 1/1/00 @ 102................... 245,000 249,900
Elmhurst Revenue, Joint Common Accredation, 5.85%*,
7/1/18............................................. 4,895,000 4,895,000
Hoffman Estates Park District, 4.25%, 12/1/00, GO... 275,000 275,000
Illinois, 4.80%, 6/1/00, GO......................... 500,000 501,619
Illinois Developmental Finance Authority, Series C,
Provena Health, 5.50%*, 5/1/28, MBIA............... 5,000,000 4,999,999
Illinois Health Facilities Authority Revenue,
Ingalls Memorial Hospital Project, 7.00%, 1/1/19,
Prerefunded 1/1/00 @ 102, MBIA..................... 90,000 91,800
Illinois Health Facilities Authority Revenue,
Decatur Memorial Hospital Project, Series A,
5.60%*, 11/15/24, MBIA............................. 1,600,000 1,600,000
Illinois Health Facilities Authority Revenue,
Swedish Covenant Hospital Project, 5.70%*, 8/1/25,
AMBAC.............................................. 900,000 900,000
-------------
13,826,686
-------------
Indiana (0.6%)
Indiana Secondary Market for Education Loans Income,
Series E, 4.20%, 6/1/00, AMBAC..................... 250,000 250,200
Noblesville Economic Development Infrastructure,
Building Corporation Redevelopment, 4.40%, 8/1/00,
MBIA............................................... 150,000 150,334
Vigo County Middle School Building, 1st Mortgage,
4.90%, 7/1/00...................................... 250,000 251,205
-------------
651,739
-------------
Iowa (4.5%)
Iowa Finance Authority Revenue, Series B, Wheaton
Franciscan, 5.60%*, 8/15/24, MBIA.................. 5,000,000 5,000,000
West Des Moines, Series B, 5.50%, 6/1/00, GO........ 100,000 100,605
-------------
5,100,605
-------------
</TABLE>
Municipal Bonds, continued
<TABLE>
<CAPTION>
Shares
or Amortized
Principal Cost
Amount (Note 2)
----------- -------------
<S> <C> <C>
Massachusetts (2.4%)
Lowell, 7.20%, 2/15/00, GO.......................... $ 435,000 $ 436,931
Weston Revenue Anticipation Notes, 4.50%, 1/14/00... 2,300,000 2,300,521
-------------
2,737,452
-------------
Michigan (5.1%)
Detroit, Series A, 8.70%, 4/1/10, Prerefunded 4/1/00
@ 102, GO.......................................... 5,000,000 5,159,909
Detroit, Series B, 6.00%, 4/1/00, GO................ 400,000 401,771
Marquette Electric Utility Revenue, 4.80%, 7/1/00,
AMBAC.............................................. 25,000 25,059
Michigan State Housing Development Authority, Rental
Housing Revenue, Series B, 6.90%, 4/1/00........... 150,000 151,052
-------------
5,737,791
-------------
Minnesota (1.7%)
Minnesota Public Facilities Authority, Water PCR,
7.10%, 3/1/12, Prerefunded 3/1/00 @ 102............ 1,850,000 1,897,513
-------------
Mississippi (1.0%)
Gulfport School District, 6.70%, 4/1/00, FSA, GO.... 355,000 357,595
Jackson County PCR, International Paper Company
Project, Series A, 4.50%*, 8/1/01.................. 790,000 790,821
-------------
1,148,416
-------------
Missouri (0.1%)
Jefferson County, School District C-1, 4.60%,
3/1/00, MBIA, GO................................... 100,000 100,177
-------------
Nebraska (0.4%)
American Public Energy Agency, Series A, Nebraska
Public Gas Agency Project, 3.35%, 6/1/00, AMBAC.... 250,000 249,645
Omaha Auditorium Facilities Corporation, Lease
Revenue, Omaha Civic Auditorium Project, 4.35%,
8/15/00............................................ 200,000 200,415
-------------
450,060
-------------
Nevada (0.0%)
Washoe County, Reno Sparks Convention/Visitor,
7.10%, 7/1/07, Prerefunded 7/1/00 @ 102, AMBAC..... 25,000 25,864
-------------
New Jersey (0.1%)
Ocean County General Improvements, 6.75%, 7/13/00,
GO................................................. 100,000 101,424
-------------
New Mexico (0.3%)
Las Cruces School District No. 002, Series A, 4.20%,
8/1/00, GO......................................... 300,000 300,329
-------------
</TABLE>
Continued
14
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Tax-Exempt Money Market Fund December 31, 1999
Municipal Bonds, continued
<TABLE>
<CAPTION>
Shares
or Amortized
Principal Cost
Amount (Note 2)
----------- -------------
<S> <C> <C>
New York (8.4%)
Canisteo Central School District, 5.00%, 6/15/00,
FSA, GO............................................. $ 100,000 $ 100,442
Grand Island Central School District, 4.80%, 3/1/00,
MBIA, GO............................................ 110,000 110,135
New York City, Series F-3, 5.40%*, 2/15/13, GO....... 5,000,000 5,000,001
New York State Dorm Authority Revenue, New York
Foundling Charitable Corp., 5.35%*, 7/1/12.......... 2,540,000 2,540,000
New York State Dorm Authority Revenue, Series A,
5.10%, 5/15/00...................................... 250,000 251,091
New York State Dorm Authority Revenue, Series B,
4.80%, 5/15/00...................................... 250,000 251,348
Rensselaer County, 6.70%, 2/15/00, AMBAC, GO......... 100,000 100,313
Roxbury Central School District, Series B, 5.35%,
6/15/00, MBIA....................................... 105,000 105,627
Suffolk County Industrial Development Agency,
Continuing Care Retirement, 1st Mortgage, Jefferson
Ferry, Series C, 5.65%*, 11/1/09.................... 1,000,000 1,000,000
-------------
9,458,957
-------------
North Carolina (0.2%)
Clinton, 4.00%, 6/1/00, GO........................... 155,000 155,000
Dare County Utility System Revenue, Series A, 4.00%,
6/1/00, MBIA........................................ 100,000 99,998
-------------
254,998
-------------
Ohio (0.9%)
Columbus Sewer Revenue, 5.70%, 6/1/00................ 1,000,000 1,009,893
-------------
Oklahoma (2.6%)
Broken Arrow, 7.00%, 7/1/00, GO...................... 750,000 761,954
Cleveland County Independent School District, 7.40%,
4/1/00, GO.......................................... 610,000 615,459
Oklahoma County Independent School District #12,
4.50%, 7/1/00, GO................................... 575,000 577,214
Oklahoma County Independent School District #12,
Series B, 6.20%, 7/1/00, GO......................... 980,000 992,799
-------------
2,947,426
-------------
Pennsylvania (4.6%)
Allegheny County Hospital Development Authority,
St. Francis Medical Center, 5.60%*, 11/1/27......... 5,000,000 5,000,000
Derry Township School District, 6.20%, 9/1/13,
Prerefunded 3/1/00 @ 100, AMBAC, GO................. 50,000 50,175
</TABLE>
Municipal Bonds, continued
<TABLE>
<CAPTION>
Shares
or Amortized
Principal Cost
Amount (Note 2)
----------- -------------
<S> <C> <C>
Pennsylvania, (continued)
Manheim Township School District, Series A, 4.50%,
6/1/00, FGIC, GO................................... $ 25,000 $ 25,050
Perkiomen Valley School District, 4.35%, 3/1/00,
AMBAC, GO.......................................... 25,000 25,000
Westmoreland County Municipal Authority Revenue,
Series M, 7.25%, 7/1/15, Prerefunded 7/1/00 @ 100,
MBIA............................................... 25,000 25,392
-------------
5,125,617
-------------
South Carolina (1.5%)
Colleton County School District, Tax Anticipation
Notes, 4.13%, 4/14/00, SCSDE, GO................... 1,500,000 1,501,570
Oconee County School District, 5.50%, 1/1/00, MBIA,
GO................................................. 20,000 20,000
Richland County, 8.13%, 3/1/00, GO.................. 210,000 211,607
-------------
1,733,177
-------------
Tennessee (17.9%)
Knox County Health & Hospital Facilities, Baptist
Health System, 5.00%, 4/15/00, AMBAC............... 2,245,000 2,255,662
Knox County Hospital Facilities Revenue, Series C,
Fort Sanders Alliance Obligation, 7.00%, 1/1/08,
Prerefunded 1/1/00 @ 102, MBIA..................... 25,000 25,500
Metropolitan Government, Nashville & Davidson
County, 4.63%, 5/15/00, GO......................... 30,000 30,067
Metropolitan Government, Nashville & Davidson
County, Country Music Hall of Fame, 5.35%*,
6/1/22............................................. 5,000,000 5,000,000
Metropolitan Government, Nashville & Davidson County
Health & Education Facilities Board Revenue, The
Vanderbilt University, Series A, 5.25%, 5/1/00..... 1,055,000 1,059,739
Metropolitan Nashville Airport Authority Revenue,
Series C, 5.90%, 7/1/00, FGIC...................... 40,000 40,366
Rhea County, 5.25%, 3/1/00, AMBAC, GO............... 40,000 40,031
Sevier County Public Building Authority, Series B-1,
Local Government Public Improvement, 5.50%*,
6/1/25............................................. 5,000,000 5,000,000
Shelby County Health, Educational & Housing
Facilities Board Revenue, Multifamily Housing,
Wyndridge, 5.75%*, 11/1/19......................... 2,000,000 2,000,000
</TABLE>
Continued
15
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Tax-Exempt Money Market Fund December 31, 1999
Municipal Bonds, continued
<TABLE>
<CAPTION>
Shares
or Amortized
Principal Cost
Amount (Note 2)
----------- -------------
<S> <C> <C>
Tennessee, (continued)
Sullivan County Health, Educational & Housing
Facilities Board Revenue, Holston Valley Health
Care, 7.25%, 2/15/20, Prerefunded 2/15/00 @ 102,
MBIA............................................... $ 2,570,000 $ 2,632,753
Sumner County Capital Outlay Notes, Series D, 4.00%,
6/26/00, GO........................................ 190,000 189,967
Tennessee State, Series A, 5.00%, 5/1/00, GO........ 1,725,000 1,731,113
-------------
20,005,198
-------------
Texas (3.3%)
Austin Texas Utility System Revenue, Electric Power
& Light Revenues, Series A, 5.50%, 11/15/00, FSA... 150,000 151,901
Coastal Bend Health Facilities Development Corp.,
Incarnate Word Health System Updates, Series B,
5.60%*, 8/15/28, AMBAC............................. 1,000,000 1,000,000
Dallas, Dallas Denton & Collin Co., 4.50%, 2/15/00,
GO................................................. 150,000 150,102
Harris County Health Facilities Development Corp.,
Hospital Revenue, St. Lukes, 8.25%, 2/15/08,
Callable 2/15/00 @ 100, MBIA-IBC................... 420,000 422,075
Houston Public Improvements, Series B, 4.10%,
3/1/00, GO......................................... 100,000 100,008
Lone Star Texas Airport Improvement Authority,
Series B-3, American Airlines Inc., 4.80%*,
12/1/14............................................ 1,800,000 1,799,999
University of North Texas, University Revenue,
7.30%, 4/15/00, MBIA............................... 130,000 131,196
-------------
3,755,281
-------------
Utah (0.2%)
Utah, Series A-F, 4.70%, 7/1/00, GO................. 200,000 200,723
-------------
Virginia (1.0%)
Arlington County, 5.50%, 6/1/00, GO................. 1,000,000 1,009,374
Henrico County Public Improvements, 4.50%, 1/15/00,
GO................................................. 150,000 150,061
-------------
1,159,435
-------------
</TABLE>
Municipal Bonds, continued
<TABLE>
<CAPTION>
Shares
or Amortized
Principal Cost
Amount (Note 2)
----------- -------------
<S> <C> <C>
Washington (4.7%)
Seattle Municipal Light & Power Revenue, 4.60%,
5/1/00............................................. $ 175,000 $ 175,327
Washington State, Series VR 96B, 5.40%*, 6/1/20,
GO................................................. 5,000,000 4,999,999
Washington State Public Power Supply, Series A,
Project 2, 5.10%, 7/1/00........................... 50,000 50,265
Washington State Public Power Supply, Series B,
7.50%, 7/1/18, Prerefunded 7/1/00 @ 102............ 30,000 31,095
-------------
5,256,686
-------------
West Virginia (3.2%)
Brooke County Board of Education, 8.63%, 8/1/00,
AMBAC, GO.......................................... 100,000 102,614
West Virginia Public Improvements, 5.25%, 6/1/00,
GO................................................. 200,000 200,000
West Virginia School Building Authority Revenue,
6.00%, 7/1/20, Prerefunded 7/1/00 @ 100, MBIA...... 3,220,000 3,252,864
-------------
3,555,478
-------------
Wisconsin (0.2%)
Madison Waterworks Management Revenue, 6.80%,
1/1/00............................................. 100,000 100,000
Wisconsin State Health & Educational Facilities
Authority Revenue, Series B, SSM Healthcare
Projects, 7.00%, 6/1/20, Prerefunded 6/1/00 @ 102,
MBIA............................................... 30,000 30,953
Wisconsin Transportation Revenue, Highway
Improvements, Series A, 4.90%, 7/1/00.............. 100,000 100,433
-------------
231,386
-------------
TOTAL MUNICIPAL BONDS (Cost $106,122,054)........... 106,122,054
-------------
AIM Tax-Free Money Market Fund...................... 3,586,740 3,586,740
Dreyfus Tax-Free Money Market Fund.................. 1,000 1,000
-------------
TOTAL INVESTMENT COMPANIES (Cost $3,587,740)........ 3,587,740
-------------
</TABLE>
Investment Companies (3.2%)
Continued
16
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Tax-Exempt Money Market Fund December 31, 1999
Cash Equivalents (0.0%)
<TABLE>
<CAPTION>
Shares
or Amortized
Principal Cost
Amount (Note 2)
----------- -------------
<S> <C> <C>
Bank of New York Cash Reserve....................... $ 1,204 $ 1,204
-------------
TOTAL CASH EQUIVALENTS (Cost $1,204)................ 1,204
-------------
TOTAL INVESTMENTS (Cost $111,710,072) (a) --
(99.4%)........................................... 111,710,072
Other assets in excess of liabilities -- (0.6%)..... 670,932
-------------
TOTAL NET ASSETS --(100.0%)......................... $ 112,381,004
=============
</TABLE>
- ---------
(a) Cost for federal income tax and financial reporting purposes are the same.
* Variable rate security. Rate represents rate in effect at December 31, 1999.
Maturity date shown reflects final maturity date.
AMBAC -- Insured by AMBAC Indemnity Corp.
FGIC -- Insured by Financial Guaranty Insurance Corp.
FSA -- Insured by Financial Security Assurance Inc.
GO -- General Obligation
MBIA -- Insured by Municipal Bond Insurance Association
MBIA - IBC -- MBIA Insured Bond Certificates
PCR -- Pollution Control Revenue
SCSDE -- South Carolina School District Enhancement
See notes to financial statements
17
<PAGE>
ISG FUNDS
Tax-Exempt Money Market Fund
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments, at amortized cost......................... $111,710,072
Interest and dividends receivable...................... 1,085,096
Receivable from investment adviser..................... 1,429
Prepaid expenses and other assets...................... 1,556
------------
Total Assets.......................................... 112,798,153
Liabilities:
Distributions payable.................................. $299,249
Accrued expenses and other payables:
Investment advisory fees.............................. 34,207
Administration fees................................... 1,232
Distribution fees..................................... 15,294
Custodian fees........................................ 3,379
Other................................................. 63,788
--------
Total Liabilities..................................... 417,149
------------
Net Assets:
Capital................................................ 112,570,873
Undistributed (distributions in excess of) net
investment income..................................... 23,831
Accumulated net realized losses from investment
transactions.......................................... (213,700)
------------
Net Assets............................................. $112,381,004
============
Class A Shares
Net Assets............................................ $ 7,912,890
Shares outstanding.................................... 7,925,329
Offering and redemption price per share............... $ 1.00
============
Institutional Shares
Net Assets............................................ $104,468,114
Shares outstanding.................................... 104,669,375
Offering and redemption price per share............... $ 1.00
============
</TABLE>
Statement of Operations
For the period ended December 31, 1999(a)
<TABLE>
<S> <C> <C>
Investment Income:
Interest income........................................... $2,367,422
Dividend income........................................... 117,591
----------
Total Investment Income.................................. 2,485,013
Expenses:
Investment advisory fees.................................. $253,567
Administration fees....................................... 72,450
Shareholder servicing fees -- Class A Shares.............. 10,947
Shareholder servicing fees -- Institutional Shares........ 102,107
Custodian fees............................................ 23,407
Accounting fees........................................... 16,364
Transfer agent fees....................................... 18,019
Directors' fees........................................... 2,402
Registration and filing fees.............................. 39,458
Other fees................................................ 41,837
--------
Total expenses before voluntary fee
reductions/reimbursements............................... 580,558
Expenses voluntarily reduced/reimbursed.................. (8,046)
----------
Net expenses............................................. 572,512
----------
Net Investment Income..................................... 1,912,501
----------
Realized Gains (Losses) from Investments:
Net realized gains (losses) from investment transactions (213,700)
----------
Change in net assets resulting from operations............ $1,698,801
==========
</TABLE>
- ---------
(a) For the period from May 3, 1999 (commencement of operations) through
December 31, 1999.
See notes to financial statements
18
<PAGE>
ISG FUNDS
Tax-Exempt Money Market Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Period Ended
December 31,
1999(a)
------------
<S> <C>
From Investment Activities:
Operations:
Net investment income............................................ $ 1,912,501
Net realized gains (losses) from investment transactions......... (213,700)
------------
Change in net assets resulting from operations.................... 1,698,801
------------
Distributions to Class A Shareholders:
From net investment income....................................... (113,123)
Distributions to Institutional Shareholders:
From net investment income....................................... (1,799,378)
------------
Change in net assets from shareholder distributions............... (1,912,501)
------------
Change in net assets from capital transactions.................... 112,594,704
------------
Change in net assets.............................................. 112,381,004
Net Assets:
Beginning of period.............................................. --
------------
End of period.................................................... $112,381,004
============
</TABLE>
- ---------
(a) For the period May 3, 1999 (commencement of operations) through December
31, 1999.
See notes to financial statements
19
<PAGE>
ISG FUNDS
Tax-Exempt Money Market Fund
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999(a)
------------
<S> <C>
Net Asset Value, Beginning of Period.............................. $1.000
------
Investment Activities
Net investment income (loss)..................................... 0.017
------
Total from Investment Activities................................. 0.017
------
Distributions
Net investment income............................................ (0.017)
------
Total Distributions.............................................. (0.017)
------
Net change in asset value......................................... --
------
Net Asset Value, End of Period.................................... $1.000
======
Total Return...................................................... 1.69%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................................. $7,913
Ratio of expenses to average net assets........................... 0.88%(c)
Ratio of net investment income to average net assets.............. 2.58%(c)
Ratio of expenses to average net assets*.......................... 0.89%(c)
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If such
voluntary fee reductions/reimbursements had not occurred, the ratios would
have been as indicated.
(a) For the period from May 3, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999(a)
------------
<S> <C>
Net Asset Value, Beginning of Period............................. $ 1.000
--------
Investment Activities
Net investment income (loss).................................... 0.018
--------
Total from Investment Activities................................ 0.018
--------
Distributions
Net investment income........................................... (0.018)
--------
Total Distributions............................................. (0.018)
--------
Net change in asset value........................................ --
--------
Net Asset Value, End of Period................................... $ 1.000
========
Total Return..................................................... 1.77%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................................ $104,468
Ratio of expenses to average net assets.......................... 0.78%(c)
Ratio of net investment income to average net assets............. 2.64%(c)
Ratio of expenses to average net assets*......................... 0.80%(c)
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If such
voluntary fee reductions/reimbursements had not occurred, the ratios would
have been as indicated.
(a) For the period from May 3, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
20
<PAGE>
John Mark McKenzie
[PHOTO] Portfolio Manager
ISG Limited Term U.S. GovernmentFund
- -------------------------------------------------------------------------------
Investment Goal
The Fund seeks to provide investors with high current income without assuming
undue risk. The Fund will invest primarily in a portfolio of U.S. Government
securities that, under normal market conditions, has a duration that
approximates that of the Merrill Lynch 1-5-Year Government Bond Index. This
Fund is suitable for investors seeking regular monthly income without undue
risk to principal.
- -------------------------------------------------------------------------------
Q. How did the Fund perform during 1999?
A. It was a difficult period for all types of fixed-income instruments. For
the 12 months ended December 31, 1999, the Fund produced a total return of
1.08% (Class A Shares at NAV).+ In comparison, the Merrill Lynch 1-5-Year
Government Bond Index, produced a total return of 2.11%. We achieved our
objectives while maintaining an average credit quality of AAA (as rated by
Standard & Poor's). As of December 31, 1999, the Fund's average maturity was
2.7 years.*
Q. What factors affected your performance?
A. Nineteen-ninety-nine was the worst year for bonds since 1994, and the
second-worst year ever. Throughout the period, bond prices suffered from
rising interest rates--from an increase of 30 basis points (0.30%) on the two-
year note to a surge of 180 basis points (1.80%) on the 10-year T-bills. This
was due to the Fed's decision to raise short-term interest rates three times
in 1999--taking back the three rate cuts from 1998--and the attractiveness of
explosive stock prices, which drew money away from bonds.
Nonetheless, we were able to produce a positive return for the Fund, due in
large measure to the fact that we operated on the shorter end of the yield
curve. With all of the volatility roiled by rising interest rates and other
factors, "shorter was better."
Q. The Fed's moves were designed to curb inflation. Has there been evidence of
inflationary pressures?
A. Yes. Although the economy is unusually strong, this is one of the few
economic expansions that has not included significant wage increases. While
oil prices have risen sharply, an event that usually triggers inflation, we no
longer are as dependent on oil as in years past. We are now more of a service
economy. Overall, inflation has been remarkably benign, especially in light of
the economy's continued strength.
Q. During the period, what steps did you take to enhance the Fund's current
income?
A. We made a concerted effort to expand into U.S. Government agency securities
when opportunities arose, due to the favorable spreads between agency bonds
and Treasury bonds. (A "spread" is the dividend premium for a fixed-income
security, compared to a Treasury bond of like maturity.) We did not focus on
one particular agency issue, but bought a selection of securities issued by
such agencies as Freddie Mac, Federal Farm Credit Bank, Fannie Mae and
Tennessee Valley Authority. We were attracted by the safety of agency debt and
the very nice spreads that were available, compared to what we could get on
Treasuries.
As of December 31, 1999, 54.9% of the Fund's net assets was invested in
agencies, 36.0% in Treasury securities and 9.1% in cash and equivalents. We
kept our cash working for the Fund by buying "overnight repo's," short-term
securities that tracks the fed funds rate.*
Q. What is your outlook for 2000?
A. Unfortunately, we feel there will be further rate increases in the first
three to six months of the year, which will put pressure on bond prices. We do
not believe this situation will improve until the Fed concludes that their
rate increases have successfully slowed down the economy. Later in the year,
however, we believe rates should stabilize and then decline, which would give
a boost to bonds.
If rates do rise, as we expect, the Fund's short relative maturity should
offer some downside price protection.
- ---------
+ Including the 3.00% sales load, the Fund's return was -1.98% for the period.
* The Fund's portfolio composition is subject to change.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
21
<PAGE>
ISG Limited Term U.S. Government Fund
Performance (as of December 31, 1999)
- -------------------------------------------------------------------------------
[GRAPH]
Class A Shares
Limited Term U.S. Limited Term U.S. Merrill Lynch
Government Fund Government Fund 1-
5 Year Government
with Sales Charge without Sales Charge Bond Index
1989 9,690 10,000 10,000
1990 10,476 10,811 10,982
1991 11,807 12,183 12,396
1992 12,457 12,855 13,231
1993 13,333 13,760 14,148
1994 13,198 13,619 14,218
1995 14,634 15,101 16,034
1996 15,027 15,506 16,762
1997 15,955 16,465 17,954
1998 17,023 17,566 19,331
1999 17,206 17,758 19,739
[GRAPH]
Class B Shares
Merrill Lynch
Limited Term U.S. 1-5 Year Government
Government Fund Bond Index
1989 10,000 10,000
1990 10,811 10,982
1991 12,183 12,396
1992 12,855 13,231
1993 13,760 14,148
1994 13,619 14,218
1995 15,101 16,034
1996 15,506 16,762
1997 16,485 17,954
1998 17,441 19,331
1999 17,480 19,739
The Class B contingent deferred
sales charge (CDSC) is not
included in the above graph,
since the performance is for more
than 6 years and the CDSC would
no longer apply.
[GRAPH]
Institutional Shares
Merrill Lynch
Limited Term U.S. 1-5 Year Government
Government Fund Bond Index
1989 10,000 10,000
1990 10,811 10,982
1991 12,183 12,396
1992 12,855 13,231
1993 13,760 14,148
1994 13,619 14,218
1995 15,101 16,034
1996 15,506 16,762
1997 16,465 17,954
1998 17,557 19,331
1999 17,747 19,739
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without Sales With Sales
Charge Charge*
Class A Shares ------------- ----------
<S> <C> <C>
1-Year................................................. 1.08% -1.98%
5-Year................................................. 5.45% 4.81%
10-Year................................................ 5.91% 5.58%
</TABLE>
*Reflects the maximum sales charge of 3.00%.
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without CDSC With CDSC**
Class B Shares ------------ -----------
<S> <C> <C>
1-Year................................................. 0.22% -2.66%
5-Year................................................. 5.12% 4.95%
10-Year................................................ 5.74% 5.74%
</TABLE>
**Reflects the applicable contingent deferred sales charge (maximum 4.00%).
The data for Class B Shares primarily represents the results of the Class A
Shares, Actual Class B Shares average annual total return and hypothetical
growth results would have been lower. See notes below.
<TABLE>
<CAPTION>
Average Annual
Total Return
Institutional Shares --------------
<S> <C>
1-Year........................................................... 1.08%
5-Year........................................................... 5.44%
10-Year.......................................................... 5.90%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment
in the indicated share class versus a similar investment in the Fund's
benchmark.
Performance for the Class B Shares, which commenced operations on 3/3/98, is
based on the historical performance of the Class A Shares (without sales
charge) prior to that date. Class A Shares performance does not reflect the
higher 12b-1 fees or the contingent deferred sales charge (CDSC). Had the CDSC
and higher 12b-1 fees been incorporated, total return and hypothetical growth
figures would have been lower.
The Institutional Share class was initially offered on 12/14/98 and reflects
the historical performance of the Class A Shares (without sales charge) prior
to that date.
The ISG Limited Term U.S. Government Fund commenced operations on 2/28/97
through a transfer of assets from certain collective trust fund ("commingled")
accounts managed by First American National Bank using materially equivalent
investment objectives, policies and methodologies as the Fund. The quoted
performance of the Fund includes performance of the commingled accounts for
periods prior to the Fund's commencement of operations, as adjusted to reflect
the expenses associated with the Fund. The commingled accounts were not
registered with the Securities and Exchange Commission and, therefore, were
not subject to the investment restrictions imposed by law on registered mutual
funds. If the commingled accounts had been registered, the commingled
accounts' performance may have been adversely affected. The performance also
reflects reinvestment of dividends and capital gain distributions.
The Fund's performance is compared to the Merrill Lynch 1-5-Year Government
Bond Index, which is generally representative of the performance of government
bonds in that maturity range with a rating of at least Baa. The index is
unmanaged and does not reflect the expenses associated with a mutual fund,
such as investment management and fund accounting fees. The Fund's performance
reflects the deduction of fees for these value-added services. Investors
cannot invest directly in an index, although they can invest in the underlying
securities.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
22
<PAGE>
ISG Limited Term U.S. Government Fund
(as of December 31, 1999)
- --------------------------------------------------------------------------------
[GRAPH]
Sector Profile*
Cash and Cash Equivalents 8.3%
U.S. Treasuries 36.3%
U.S. Government Agencies 55.4%
The Limited Term U.S. Government Fund will invest in securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities and
repurchase agreements in respect of such securities. The Fund is designed to
provide high current income without assuming undue risk.
[GRAPH]
Maturity Profile*
6-10 Years 5.4%
1-5 Years 71.5%
0-1 Years 23.1%
By design, the Fund attempts to generate current income without undue risk to
principal. The chart above shows that the Fund is primarily focused on bonds
with maturities of 1 to 5 years.
[GRAPH]
Quality Profile*
AAA 100%
The Fund's research team and the Fund Manager continuously monitor debt
instruments and issuer quality to identify fixed-
income securities for the Fund.
* The Fund's portfolio composition is subject to change.
23
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Limited Term U.S. Government Fund December 31, 1999
U.S. Government Agencies (54.9%)
<TABLE>
<CAPTION>
Shares
or Market
Principal Value
Amount (Note 2)
---------- -----------
<S> <C> <C>
Fannie Mae (8.9%)
6.05%, 10/20/00......................................... $1,000,000 $ 994,450
5.38%, 3/15/02.......................................... 1,000,000 976,250
5.98%, 11/12/02......................................... 500,000 491,245
5.63%, 5/14/04.......................................... 500,000 477,905
5.75%, 6/15/05.......................................... 250,000 237,763
6.44%, 8/14/07.......................................... 500,000 482,510
6.65%, 11/14/07......................................... 500,000 472,765
-----------
4,132,888
-----------
Federal Farm Credit Bank (10.8%)
5.76%, 7/7/03........................................... 750,000 726,698
5.07%, 12/15/03......................................... 3,500,000 3,292,239
6.15%, 3/23/05.......................................... 1,000,000 957,750
-----------
4,976,687
-----------
Federal Home Loan Bank (9.9%)
5.20%, 9/8/00........................................... 1,500,000 1,486,575
5.55%, 1/28/02.......................................... 1,000,000 979,370
5.39%, 3/8/02........................................... 1,000,000 974,210
6.34%, 6/29/04.......................................... 750,000 735,285
6.00%, 9/15/04.......................................... 400,000 375,792
-----------
4,551,232
-----------
Freddie Mac (8.0%)
6.16%, 9/25/02.......................................... 500,000 493,875
5.89%, 7/17/03.......................................... 400,000 386,276
5.00%, 1/15/04.......................................... 1,000,000 936,720
6.25%, 5/18/04.......................................... 1,000,000 968,040
6.53%, 3/3/08........................................... 1,000,000 936,790
-----------
3,721,701
-----------
Government National Mortgage Assoc. (5.6%)
9.00%, 12/15/01, Pool # 152718.......................... 16,988 17,742
9.00%, 2/15/03, Pool # 248038........................... 83,239 86,932
7.50%, 5/15/10, Pool # 407408........................... 516,835 521,192
7.00%, 8/15/11, Pool # 423984........................... 559,276 553,683
7.50%, 8/15/11, Pool # 423914........................... 552,846 557,507
7.00%, 9/15/11, Pool # 423923........................... 498,301 493,318
7.50%, 10/15/11, Pool # 431451.......................... 380,812 384,022
-----------
2,614,396
-----------
Private Export Funding (2.1%)
6.45%, 9/30/04.......................................... 1,000,000 981,250
-----------
Tennessee Valley Authority (9.6%)
6.50%, 8/20/01.......................................... 1,000,000 996,250
5.28%, 9/14/01.......................................... 2,000,000 1,955,000
6.00%, 9/24/02.......................................... 1,000,000 983,750
5.38%, 11/13/08......................................... 600,000 533,478
-----------
4,468,478
-----------
TOTAL U.S. GOVERNMENT AGENCIES (Cost $26,286,956)....... 25,446,632
-----------
</TABLE>
U.S. Treasury Notes (36.0%)
<TABLE>
<CAPTION>
Shares
or Market
Principal Value
Amount (Note 2)
---------- ------------
<S> <C> <C>
6.38%, 5/15/00......................................... $2,000,000 $ 2,005,260
6.63%, 7/31/01......................................... 4,000,000 4,024,880
7.50%, 11/15/01........................................ 6,500,000 6,642,545
7.50%, 5/15/02......................................... 1,000,000 1,026,760
6.25%, 6/30/02......................................... 750,000 749,820
5.63%, 12/31/02........................................ 2,000,000 1,964,740
6.50%, 10/15/06........................................ 250,000 249,425
------------
TOTAL U.S. TREASURY NOTES (Cost $16,741,828)........... 16,663,430
------------
Investment Companies (8.3%)
AIM Treasury Money Market Fund......................... 1,599,846 1,599,846
ISG Prime Money Market Fund............................ 2,245,451 2,245,451
------------
TOTAL INVESTMENT COMPANIES
(Cost $3,845,297)..................................... 3,845,297
------------
Cash Equivalents (0.0%)
Bank of New York Cash Reserve.......................... $ 1,057 1,057
------------
TOTAL CASH EQUIVALENTS (Cost $1,057)................... 1,057
------------
TOTAL INVESTMENTS
(Cost $46,875,138) (a) -- (99.2%)..................... 45,956,416
Other assets in excess
of liabilities (0.8%)............................... 357,512
------------
TOTAL NET ASSETS -- (100.0%)........................... $ 46,313,928
============
</TABLE>
- ---------
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting in excess of federal income tax reporting of
$1,796. Cost for federal income tax purposes differs from value by net
unrealized depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation......................................... $ 91,613
Unrealized depreciation......................................... (1,012,131)
-----------
Net unrealized depreciation..................................... $ (920,518)
===========
</TABLE>
See notes to financial statements
24
<PAGE>
ISG FUNDS
Limited Term U.S. Government Fund
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $46,875,138)................. $45,956,416
Interest and dividends receivable........................ 576,008
Receivable for capital shares issued..................... 136
Deferred organization costs.............................. 800
Prepaid expenses and other assets........................ 16,971
-----------
Total Assets............................................ 46,550,331
Liabilities:
Distributions payable.................................... $197,732
Accrued expenses and other payables:
Investment advisory fees................................ 13,572
Administration fees..................................... 767
Distribution fees....................................... 6,331
Other................................................... 18,001
--------
Total Liabilities....................................... 236,403
-----------
Net Assets:
Capital.................................................. 50,637,940
Undistributed (distributions in excess of) net investment
income.................................................. (13,281)
Accumulated net realized losses from investment
transactions............................................ (3,392,009)
Net unrealized appreciation (depreciation) from
investments............................................. (918,722)
-----------
Net Assets............................................... $46,313,928
===========
Class A Shares
Net Assets.............................................. $ 3,570,954
Shares outstanding...................................... 362,507
Redemption price per share.............................. $ 9.85
===========
Class A Shares--Maximum Sales Charge..................... 3.00%
-----------
Maximum Offering Price Per Share (100%/(100%--Maximum
Sales Charge) of net asset value adjusted to the
nearest cent).......................................... $ 10.15
===========
Class B Shares
Net Assets.............................................. $ 461,643
Shares outstanding...................................... 46,828
Offering price per share*............................... $ 9.86
===========
Institutional Shares
Net Assets.............................................. $42,281,331
Shares outstanding...................................... 4,292,526
Offering and redemption price per share................. $ 9.85
===========
</TABLE>
- --------
* Redemption price per share varies by length of time shares are held.
Statement of Operations
For the year ended December 31, 1999
<TABLE>
<S> <C> <C>
Investment Income:
Interest income......................................... $ 2,710,611
Dividend income......................................... 100,867
Income from securities lending.......................... 174
-----------
Total Investment Income................................ 2,811,652
Expenses:
Investment advisory fees................................ $237,733
Administration fees..................................... 71,320
Distribution fees--Class A Shares....................... 7,305
Distribution fees--Class B Shares....................... 3,735
Shareholder servicing fees--Class A Shares.............. 4,383
Shareholder servicing fees--Class B Shares.............. 1,245
Shareholder servicing fees--Institutional Shares........ 66,190
Custodian fees.......................................... 15,405
Accounting fees......................................... 28,595
Transfer agent fees..................................... 47,502
Directors' fees......................................... 1,360
Registration and filing fees............................ 42,919
Other fees.............................................. 26,555
--------
Total expenses before voluntary fee reductions......... 554,247
Expenses voluntarily reduced........................... (84,867)
-----------
Net expenses........................................... 469,380
-----------
Net Investment Income................................... 2,342,272
-----------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment
transactions........................................... 21,898
Net change in unrealized appreciation (depreciation)
from investments....................................... (1,865,274)
-----------
Net realized/unrealized gains (losses) from
investments............................................ (1,843,376)
-----------
Change in net assets resulting from operations.......... $ 498,896
===========
</TABLE>
See notes to financial statements
25
<PAGE>
ISG FUNDS
Limited Term U.S. Government Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income............................ $ 2,342,272 $ 1,120,345
Net realized gains (losses) from investment
transactions.................................... 21,898 148,381
Net change in unrealized appreciation
(depreciation) from investments................. (1,865,274) 699,001
----------- -----------
Change in net assets resulting from operations.... 498,896 1,967,727
----------- -----------
Distributions to Class A Shareholders:
From net investment income....................... (144,345) (1,001,210)
From net realized gains on investment
transactions.................................... (1,500) (10,045)
In excess of net realized gains.................. (2,518) --
Distributions to Class B Shareholders:
From net investment income....................... (20,244) (7,517)(a)
From net realized gains on investment
transactions.................................... (216) (189)(a)
In excess of net realized gains.................. (363) --
Distributions to Institutional Shareholders:
From net investment income....................... (2,177,683) (111,618)(b)
From net realized gains on investment
transactions.................................... (20,182) --
In excess of net realized gains.................. (33,882) --
----------- -----------
Change in net assets from shareholder
distributions.................................... (2,400,933) (1,130,579)
----------- -----------
Change in net assets from capital transactions.... (995,426) 28,270,892
----------- -----------
Change in net assets.............................. (2,897,463) 29,108,040
Net Assets:
Beginning of period.............................. 49,211,391 20,103,351
----------- -----------
End of period.................................... $46,313,928 $49,211,391
=========== ===========
</TABLE>
- ---------
(a) For the period from March 3, 1998 (commencement of operations) through
December 31, 1998.
(b) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
26
<PAGE>
ISG FUNDS
Limited Term U.S. Government Fund
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
1999 1998 1997 (a)
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period... $10.25 $10.12 $ 10.00
------ ------ -------
Investment Activities
Net investment income (loss).......... 0.50 0.53 0.42
Net realized and unrealized gains
(losses) from investments............ (0.39) 0.14 0.12
------ ------ -------
Total from Investment Activities...... 0.11 0.67 0.54
------ ------ -------
Distributions
Net investment income................. (0.50) (0.53) (0.42)
Net realized gains.................... (0.01) (0.01) --
------ ------ -------
Total Distributions................... (0.51) (0.54) (0.42)
------ ------ -------
Net change in asset value.............. (0.40) 0.13 0.12
------ ------ -------
Net Asset Value, End of Period......... $ 9.85 $10.25 $ 10.12
====== ====== =======
Total Return (excludes sales charge)... 1.08% 6.69% 5.54%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)...... $3,571 $2,437 $20,103
Ratio of expenses to average net
assets................................ 0.98% 1.02% 1.00%(c)
Ratio of net investment income to
average net assets.................... 4.93% 5.16% 5.34%(c)
Ratio of expenses to average net
assets*............................... 1.40% 1.54% 1.62%(c)
Portfolio turnover**................... 17% 86% 52%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
(b) Not annualized.
(c) Annualized.
Financial Highlights, Class B Shares
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1999 1998 (a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period................ $10.26 $10.12
------ ------
Investment Activities
Net investment income (loss)....................... 0.41 0.35
Net realized and unrealized gains (losses) from
investments....................................... (0.39) 0.15
------ ------
Total from Investment Activities................... 0.02 0.50
------ ------
Distributions
Net investment income.............................. (0.41) (0.35)
Net realized gains................................. (0.01) (0.01)
------ ------
Total Distributions................................ (0.42) (0.36)
------ ------
Net change in asset value........................... (0.40) 0.14
------ ------
Net Asset Value, End of Period...................... $ 9.86 $10.26
====== ======
Total Return (excludes redemption charge)........... 0.22% 4.98%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................... $ 462 $ 430
Ratio of expenses to average net assets............. 1.83% 1.97%(c)
Ratio of net investment income to average net
assets............................................. 4.06% 4.01%(c)
Ratio of expenses to average net assets*............ 1.99% 2.24%(c)
Portfolio turnover**................................ 17% 86%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from March 3, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
27
<PAGE>
ISG FUNDS
Limited Term U.S. Government Fund
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1999 1998 (a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period............... $ 10.25 $ 10.29
------- -------
Investment Activities
Net investment income (loss)...................... 0.50 0.03
Net realized and unrealized gains (losses) from
investments...................................... (0.39) (0.04)
------- -------
Total from Investment Activities.................. 0.11 (0.01)
------- -------
Distributions
Net investment income............................. (0.50) (0.03)
Net realized gains................................ (0.01) --
------- -------
Total Distributions............................... (0.51) (0.03)
------- -------
Net change in asset value.......................... (0.40) (0.04)
------- -------
Net Asset Value, End of Period..................... $ 9.85 $ 10.25
======= =======
Total Return....................................... 1.08% (0.14)%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000).................. $42,281 $46,344
Ratio of expenses to average net assets............ 0.98% 0.69%(c)
Ratio of net investment income to average net
assets............................................ 4.94% 5.29%(c)
Ratio of expenses to average net assets*........... 1.14% 0.96%(c)
Portfolio turnover**............................... 17% 86%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
28
<PAGE>
John Mark McKenzie
[PHOTO] Portfolio Manager
ISG Government Income Fund
- -------------------------------------------------------------------------------
Investment Goal
The Fund seeks to provide investors with current income without assuming undue
risk. It invests primarily in securities guaranteed as to payment of principal
and interest by the U.S. Government, its agencies or instrumentalities. This
Fund is suitable for investors seeking regular monthly income without undue
risk to principal.
- -------------------------------------------------------------------------------
Q. How did the Fund perform during the period?
A. We had good relative performance, in light of the fact that it was a
difficult year for all types of fixed-income securities. For the 12 months
ended December 31, 1999, the Fund produced a total return of -2.50% (Class A
Shares at NAV).+ In comparison, the Merrill Lynch Government/Corporate Master
Index produced a total return of -2.05%. We achieved our objectives while
maintaining an average credit quality of AAA. As of December 31, 1999, the
Fund's average maturity was 6.9 years.*
Q. What factors affected your performance?
A. Nineteen-ninety-nine was the worst year for bonds since 1994, and the
second worst year ever. Throughout the period, bond prices suffered from
rising interest rates--from an increase of 30 basis points (0.30%) on the two-
year note to a surge of 180 basis points (1.80%) on the 10-year T-bills. This
was due to the Fed's decision to raise short-term interest rates three times
in 1999--taking back the three rate cuts from 1998--and the attractiveness of
explosive stock prices, which drew money away from bonds.
Q. The Fed's moves were designed to curb inflation. Has there been evidence of
inflationary pressures?
A. Yes. Although the economy is unusually strong, this is one of the few
economic expansions that has not included significant wage increases. While
oil prices have risen sharply, an event that usually triggers inflation, we no
longer are as dependent on oil as in years past. We are now more of a service
economy. Overall, inflation has been remarkably benign, especially in light of
the economy's continued strength.
Q. During the period, were you more concerned with boosting the Fund's total
return, or with generating high current income?
A. Many of our shareholders are less concerned with short-term price
fluctuations than with the level of current income; relatively high yield is
of prime importance. Therefore, we made a concerted effort to expand into U.S.
Government agency securities when opportunities arose, due to the favorable
spreads between agency bonds and Treasury bonds. (A "spread" is the dividend
premium for a fixed-income security, compared to a Treasury bond of like
maturity.) We did not focus on one particular agency issue, but bought a
selection of securities issued by such agencies as Freddie Mac, Federal Farm
Credit Bank, Fannie Mae and Tennessee Valley Authority. We were attracted by
the safety of agency debt and the very nice spreads that were available,
compared to what we could get on Treasuries.
Another decision we made was to let the portfolio's average maturity fall
slightly--that is, we did not buy longer paper to compensate for the natural
shortening of the securities we held--to the point where it ended shorter than
its benchmark's average maturity.
As of December 31, 1999, 41.7% of the Fund's net assets was invested in
Treasury debt, 36.7% in agency securities, 12.8% in corporate debt and 8.8% in
cash and cash equivalents.*
Q. What is your outlook for 2000?
A. Unfortunately, we feel there will be further rate increases in the first
three to six months of the year, which will put pressure on bond prices. We do
not believe this situation will improve until the Fed concludes that their
rate increases have successfully slowed down the economy. Later in the year,
however, rates should stabilize and then decline, which would give a boost to
bonds.
- ---------
+ Including the 3.00% sales load, the Fund's return was -5.41% for the period.
* The Fund's portfolio composition is subject to change.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
29
<PAGE>
ISG Government Income Fund
Performance (as of December 31, 1999)
- -------------------------------------------------------------------------------
[GRAPH]
Class A Shares
Government Government Merrill Lynch
Income Fund Income Fund Government/Corporate
with Sales Charge without Sales Charge Master Index
8/1992 9,700 10,000 10,000
12/1992 9,925 10,233 10,144
1993 10,879 11,217 11,265
1994 10,505 10,831 10,898
1995 12,262 12,642 12,966
1996 12,563 12,953 13,352
1997 13,664 14,088 14,658
1998 14,886 15,349 16,054
1999 14,516 14,966 15,725
[GRAPH]
Class B Shares
Merrill Lynch
Government Government/Corporate
Income Fund Master Index
8/1992 10,000 10,000
12/1992 9,835 10,144
1993 10,917 11,265
1994 10,555 10,898
1995 12,442 12,966
1996 12,757 13,352
1997 13,988 14,658
1998 15,349 16,054
1999 14,802 15,725
The Class B contingent deferred
sales charge (CDSC) is not
included in the above graph,
since the performance is for more
than 6 years and the CDSC would
no longer apply.
[GRAPH]
Institutional Shares
Merrill Lynch
Government Government/Corporate
Income Fund Master Index
8/1992 10,000 10,000
12/1992 10,233 10,144
1993 11,217 11,265
1994 10,831 10,898
1995 12,642 12,966
1996 12,953 13,352
1997 14,088 14,658
1998 15,332 16,054
1999 14,963 15,725
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without Sales With Sales
Charge Charge*
Class A Shares ------------- ----------
<S> <C> <C>
1-Year................................................ -2.50% -5.41%
5-Year................................................ 6.68% 6.04%
Since Inception 8/3/92................................ 5.59% 5.15%
</TABLE>
*Reflects the maximum sales charge of 3.00%.
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without CDSC With CDSC**
Class B Shares ------------ -----------
<S> <C> <C>
1-Year................................................ -3.57% -6.33%
5-Year................................................ 6.44% 6.29%
Since Inception 8/3/92................................ 5.43% 5.43%
</TABLE>
**Reflects the applicable contingent deferred sales charge (maximum 4.00%).
The data for Class B Shares primarily represents the results of the Class A
Shares. Actual Class B Shares average annual total return and hypothetical
growth results would have been lower. See notes below.
<TABLE>
<CAPTION>
Average Annual
Total Return
Institutional Shares --------------
<S> <C>
1-Year.......................................................... -2.41%
5-Year.......................................................... 6.68%
Since Inception 8/3/92.......................................... 5.58%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment
in the indicated share class versus a similar investment in the Fund's
benchmark.
Performance for the Class B Shares, which commenced operations on 1/21/99, is
based on the historical performance of the Class A Shares (without sales
charge) prior to that date. Class A Shares performance does not reflect the
higher 12b-1 fees or the contingent deferred sales charge (CDSC). Had the CDSC
and higher 12b-1 fees been incorporated, total return and hypothetical growth
figures would have been lower.
The quoted returns reflect the performance from 8/3/92 to 12/14/98 of the DG
Government Income Fund, an open-end investment company that was the
predecessor fund to the ISG Government Income Fund.
The Institutional Share class was initially offered on 12/14/98 and reflects
the historical performance of the Class A Shares (without sales charge) prior
to that date.
The Fund's performance is compared to the Merrill Lynch Government/Corporate
Master Index, which is generally representative of the performance of
corporate and U.S. Government bonds. The index is unmanaged and does not
reflect the expenses associated with a mutual fund, such as investment
management and fund accounting fees. The Fund's performance reflects the
deduction of fees for these value-added services. Investors cannot invest
directly in an index, although they can invest in the underlying securities.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
30
<PAGE>
ISG Government Income Fund
(as of December 31, 1999)
- --------------------------------------------------------------------------------
[GRAPH]
Sector Profile*
Corporate Bonds 13.0%
Cash and Cash Equivalents 7.8%
U.S. Treasuries 42.1%
U.S. Government Agencies 37.1%
The Government Income Fund invests primarily in securities issued or guaranteed
by the U.S. Government, its agencies and instrumentalities, and also may invest
in investment-grade U.S. dollar-denominated, fixed income securities of other
issuers. The Fund is designed to provide current income without assuming undue
risk. The Fund's adviser has latitude in deciding how assets are invested among
corporate and government obligations. As a result, the Fund enjoys flexibility
to make the most of changing market conditions.
[GRAPH]
Maturity Profile*
Over 20 years 12.5%
11-20 Years 2.1%
1-5 Years 34.3%
6-10 Years 27.2%
0-1 Years 23.9%
By design, the Fund attempts to generate current income without undue risk to
principal. The chart shows that the Fund is currently focused on bonds with
maturities of 1 to 10 years and those with maturities greater than 20 years.
[GRAPH]
Quality Profile*
AAA 100%
The Fund's research team and the Fund Manager continuously monitor debt
instruments and issuer quality to identify fixed-
income securities for the Fund.
* The Fund's portfolio composition is subject to change.
31
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Government Income Fund December 31, 1999
Commercial Paper (1.9%)
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
----------- -------------
<S> <C> <C>
Telecommunications (1.9%)
AT&T Corp., 5.81%*, 1/27/00......................... $ 7,000,000 $ 6,971,503
-------------
TOTAL COMMERCIAL PAPER (Cost $6,970,627)............ 6,971,503
-------------
Corporate Bonds (12.8%)
Automotive (0.5%)
General Motors, 6.25%, 5/1/05....................... 2,000,000 1,912,500
-------------
Banking (0.3%)
NationsBank Corp., 5.38%, 4/15/00................... 1,000,000 997,500
-------------
Beverages (0.7%)
Anheuser-Busch Cos., 6.90%, 10/1/02................. 889,000 881,221
Anheuser-Busch Cos., 5.75%, 1/15/11, Callable
1/15/06 @ 100...................................... 2,000,000 1,730,000
-------------
2,611,221
-------------
Chemicals (0.4%)
Du Pont (E.I.) de Nemours & Co., 9.15%, 4/15/00..... 437,000 440,278
Du Pont (E.I.) de Nemours & Co., 6.75%, 10/15/02.... 889,000 884,555
-------------
1,324,833
-------------
Entertainment (0.7%)
The Walt Disney Co., 5.62%, 12/1/08................. 3,000,000 2,636,250
-------------
Financial Services (4.0%)
Associates Corp. N.A., 5.75%, 11/1/03............... 2,000,000 1,907,500
Chubb Corp., 6.15%, 8/15/05......................... 2,250,000 2,131,875
Ford Motor Credit Co., 5.75%, 2/23/04............... 3,000,000 2,838,750
General Electric Capital Corp., 5.92%, 4/3/01....... 2,000,000 1,977,500
General Motors Acceptance Corp., 5.75%, 11/10/03.... 1,000,000 951,250
International Lease Finance Corp., 6.00%, 6/15/03... 2,500,000 2,400,000
Merrill Lynch & Co., 6.00%, 7/15/05................. 2,500,000 2,340,625
-------------
14,547,500
-------------
Food & Related (1.4%)
Campbell Soup Co., 4.75%, 10/1/03................... 2,500,000 2,318,750
Kellogg Co., 4.88%, 10/15/05........................ 3,000,000 2,677,500
-------------
4,996,250
-------------
Industrial Goods & Services (0.3%)
Pharmacia & Upjohn Inc., 5.88%, 4/15/00............. 1,000,000 998,750
-------------
Oil & Gas (0.9%)
Atlantic Richfield Co., 5.55%, 4/15/03.............. 3,500,000 3,329,375
-------------
</TABLE>
Corporate Bonds, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
----------- -------------
<S> <C> <C>
Pharmaceuticals (0.4%)
American Home Products, 7.70%, 2/15/00............... $ 1,400,000 $ 1,403,500
-------------
Retail-Stores (0.4%)
Wal-Mart, 6.55%, 8/10/04............................. 1,500,000 1,473,750
-------------
Technology (0.1%)
Texas Instruments, 9.25%, 6/15/03.................... 437,000 460,489
-------------
Telecommunications (0.5%)
GTE South Inc., 6.13%, 6/15/07....................... 2,000,000 1,857,500
-------------
Utilities (2.2%)
Emerson Electric Co., 5.85%, 3/15/09................. 3,000,000 2,715,000
National Rural Utilities, 5.75%, 12/1/08, MTN........ 3,500,000 3,123,750
Pacific Gas & Electric, 6.25%, 3/1/04................ 1,000,000 961,250
Southern California Edison, 5.63%, 10/1/02........... 1,000,000 966,250
-------------
7,766,250
-------------
TOTAL CORPORATE BONDS (Cost $49,253,183)............. 46,315,668
-------------
U.S. Government Agencies (36.8%)
Fannie Mae (9.8%)
5.52%*, 1/20/00...................................... 12,000,000 11,974,440
5.58%*, 3/2/00....................................... 10,000,000 9,907,000
6.46%, 5/9/05, Callable 5/9/01 @ 100................. 5,000,000 4,843,900
6.94%, 9/5/07, Callable 9/5/02 @ 100................. 2,000,000 1,923,720
6.00%, 5/15/08....................................... 7,000,000 6,553,190
-------------
35,202,250
-------------
Federal Farm Credit Bank (8.4%)
6.20%, 7/1/02........................................ 10,000,000 9,902,700
5.07%, 12/15/03...................................... 15,000,000 14,109,600
5.70%, 9/3/08........................................ 7,000,000 6,394,360
-------------
30,406,660
-------------
Federal Home Loan Bank (5.3%)
5.35%, 12/1/03....................................... 3,000,000 2,833,920
5.30%, 2/18/04....................................... 5,000,000 4,724,550
6.34%, 6/29/04....................................... 2,250,000 2,205,855
5.80%, 9/2/08........................................ 10,000,000 9,216,900
-------------
18,981,225
-------------
Freddie Mac (10.1%)
5.00%, 1/15/04....................................... 10,000,000 9,367,200
5.75%, 3/15/09....................................... 10,000,000 9,137,500
7.00%, 3/23/09....................................... 5,000,000 4,695,850
6.75%, 5/4/09........................................ 10,000,000 9,431,200
7.40%, 6/9/14, Callable 6/9/00 @ 100................. 4,000,000 3,738,120
-------------
36,369,870
-------------
Private Export Funding (1.8%)
6.31%, 9/30/04, Series C............................. 2,000,000 1,950,000
6.49%, 7/15/07, Series B............................. 2,000,000 1,942,500
5.87%, 7/31/08, Series D............................. 3,000,000 2,778,750
-------------
6,671,250
-------------
</TABLE>
Continued
32
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Government Income Fund December 31, 1999
U.S. Government Agencies, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
----------- -------------
<S> <C> <C>
Tennessee Valley Authority (1.4%)
6.13%, 7/15/03...................................... $ 3,682,000 $ 3,585,347
5.38%, 11/13/08..................................... 1,500,000 1,333,695
-------------
4,919,042
-------------
TOTAL U.S. GOVERNMENT AGENCIES (Cost $139,168,909).. 132,550,297
-------------
U.S. Treasury Bonds (14.5%)
7.50%, 11/15/16..................................... 7,000,000 7,493,710
7.25%, 8/15/22...................................... 7,000,000 7,385,420
7.63%, 11/15/22..................................... 7,000,000 7,681,590
7.13%, 2/15/23...................................... 9,000,000 9,369,630
6.88%, 8/15/25...................................... 10,000,000 10,187,200
6.75%, 8/15/26...................................... 10,000,000 10,048,300
-------------
TOTAL U.S. TREASURY BONDS (Cost $50,085,959)........ 52,165,850
-------------
U.S. Treasury Notes (27.2%)
7.75%, 1/31/00...................................... 10,000,000 10,018,700
6.13%, 7/31/00...................................... 10,000,000 10,022,000
5.75%, 10/31/00..................................... 8,000,000 7,978,880
7.75%, 2/15/01...................................... 9,000,000 9,156,060
8.00%, 5/15/01...................................... 9,000,000 9,209,070
7.88%, 8/15/01...................................... 7,000,000 7,174,860
7.50%, 5/15/02...................................... 10,000,000 10,267,600
5.75%, 8/15/03...................................... 10,000,000 9,798,500
6.50%, 8/15/05...................................... 9,000,000 9,003,330
7.00%, 7/15/06...................................... 15,000,000 15,369,450
-------------
TOTAL U.S. TREASURY NOTES (Cost $100,805,756)....... 97,998,450
-------------
Investment Companies (5.8%)
AIM Treasury Money Market Fund...................... 2,780,038 2,780,038
ISG Prime Money Market Fund......................... 18,070,048 18,070,047
-------------
TOTAL INVESTMENT COMPANIES (Cost $20,850,085)....... 20,850,085
-------------
Short-Term Securities+ (52.0%)
Commercial Paper (42.3%)
Asset Backed--Miscellaneous (4.6%)
Enterprise Funding Corp., 5.95%, 1/13/00............ $ 3,170,916 3,139,996
Falcon Asset Securitization Corp., 6.10%, 1/24/00... 5,015,686 4,934,947
Preferred Receivables Funding Corp., 6.05%,
1/10/00............................................ 2,843,894 2,811,872
Receivables Capital Corp., 6.07%, 1/28/00........... 5,743,462 5,653,399
-------------
16,540,214
-------------
Finanacial Services (18.0%)
Golden Funding Corp., 6.10%, 1/28/00................ 12,037,646 11,851,564
Liberty Street Funding Corp., 6.07%--6.13%,
1/31/00--2/17/00................................... 8,777,450 8,620,394
</TABLE>
Short-Term Securities+, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
----------- -------------
<S> <C> <C>
Moat Funding Corp., 5.98%--6.07%, 1/14/00--2/11/00.. $13,651,693 $ 13,461,035
Orix Corp., 6.47%--6.50%, 1/10/00--1/14/00.......... 21,247,949 21,016,232
Superior Funding Corp., 6.00%--6.14%, 1/18/00--
1/31/00............................................ 10,233,253 10,096,751
-------------
65,045,976
-------------
Miscellaneous (19.7%)
ConAgra, Inc., 6.25%--6.33%, 1/18/00--2/4/00........ 18,781,235 18,581,467
MCI WorldCom, 6.11%, 1/18/00........................ 3,761,764 3,722,180
Moriarity, 12.75%, 1/4/00........................... 25,078,428 25,042,901
Norfolk Southern Corp., 6.30%, 1/14/00.............. 10,031,371 9,926,042
Tyco International, Ltd., 6.43%--6.65%, 1/10/00--
1/31/00............................................ 13,793,136 13,641,912
-------------
70,914,502
-------------
Total Commercial Paper.............................. 152,500,692
-------------
Floating Rate Notes (3.2%)
Finanacial Services (2.2%)
General Motors Acceptance Corp., 4.49%**, 11/13/00.. 3,009,411 3,009,411
KeyCorp, 6.42%**, 10/23/00.......................... 2,507,843 2,507,843
Textron Financial Corp., 5.92%**, 5/12/00........... 2,507,843 2,506,363
-------------
8,023,617
-------------
Miscellaneous (1.0%)
Tyco International, Ltd., 6.72%**, 9/5/00........... 3,761,764 3,760,835
-------------
Total Floating Rate Notes........................... 11,784,452
-------------
</TABLE>
Investment Companies (6.5%)
<TABLE>
<S> <C> <C>
AIM Liquid Asset Money Market Fund................... 23,401,131 23,401,131
-------------
TOTAL SHORT-TERM SECURITIES (Cost $187,686,275)...... 187,686,275
-------------
TOTAL INVESTMENTS (Cost $554,820,794) (a) --
(151.0%)........................................... 544,538,128
Other liabilities in excess of assets
-- (51.0%).......................................... (183,871,681)
-------------
TOTAL NET ASSETS -- (100.0%)......................... $ 360,666,447
=============
</TABLE>
- ---------
(a) Represents cost for federal income tax and financial reporting purposes
and differs from value by net unrealized depreciation of securities as
follows:
<TABLE>
<S> <C>
Unrealized appreciation........................................ $ 2,526,738
Unrealized depreciation........................................ (12,809,404)
------------
Net unrealized depreciation.................................... $(10,282,666)
============
</TABLE>
* Yield effective at purchase.
** Variable rate security. Rate represents rate in effect at December 31,
1999.
+ Represents securities purchased with cash collateral received on loaned
securities.
MTN -- Medium Term Note
See notes to financial statements
33
<PAGE>
ISG FUNDS
Government Income Fund
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $554,820,794)........... $544,538,128
Cash................................................ 626,960
Interest and dividends receivable................... 6,003,128
Receivable for capital shares issued................ 1,367
Receivable from investment adviser.................. 33,254
Prepaid expenses and other assets................... 21,358
------------
Total Assets...................................... 551,224,195
Liabilities:
Payable for return of collateral held for securities
on loan............................................ $188,313,235
Distributions payable............................... 1,936,019
Accrued expenses and other payables:
Investment advisory fees........................... 186,627
Administration fees................................ 5,988
Distribution fees.................................. 47,066
Custodian fees..................................... 8,360
Other.............................................. 60,453
------------
Total Liabilities................................. 190,557,748
------------
Net Assets:
Capital............................................. 372,995,078
Undistributed (distributions in excess of) net
investment income.................................. (97,314)
Accumulated net realized losses from investment
transactions....................................... (1,948,651)
Net unrealized appreciation (depreciation) from
investments........................................ (10,282,666)
------------
Net Assets.......................................... $360,666,447
============
Class A Shares
Net Assets......................................... $ 2,419,192
Shares outstanding................................. 252,128
Redemption price per share......................... $ 9.60
============
Class A Shares--Maximum Sales Charge................ 3.00%
------------
Maximum Offering Price Per Share (100%/(100%-
Maximum Sales Charge) of net asset value adjusted
to the nearest cent).............................. $ 9.90
============
Class B Shares
Net Assets......................................... $ 552,517
Shares outstanding................................. 57,770
Offering price per share*.......................... $ 9.56
============
Institutional Shares
Net Assets......................................... $357,694,738
Shares outstanding................................. 37,314,909
Offering and redemption price per share............ $ 9.59
============
</TABLE>
- ---------
* Redemption price per share varies by length of time shares are held.
Statement of Operations
For the year ended December 31, 1999
<TABLE>
<S> <C> <C>
Investment Income:
Interest income...................................... $ 20,529,204
Dividend income...................................... 1,040,481
Income from securities lending....................... 180,018
------------
Total Investment Income............................. 21,749,703
Expenses:
Investment advisory fees............................. $2,126,569
Administration fees.................................. 528,016
Distribution fees--Class A Shares.................... 4,719
Distribution fees--Class B Shares.................... 3,101
Shareholder servicing fees--Class A Shares........... 2,835
Shareholder servicing fees--Class B Shares........... 1,027
Shareholder servicing fees--Institutional Shares..... 524,561
Custodian fees....................................... 91,338
Accounting fees...................................... 30,775
Transfer agent fees.................................. 59,096
Directors' fees...................................... 10,931
Other fees........................................... 178,242
----------
Total expenses before voluntary fee
reductions/reimbursements.......................... 3,561,210
Expenses voluntarily reduced/reimbursed............. (360,710)
------------
Net expenses........................................ 3,200,500
------------
Net Investment Income................................ 18,549,203
------------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment
transactions........................................ 150,693
Net change in unrealized appreciation (depreciation)
from investments.................................... (27,073,864)
------------
Net realized/unrealized gains (losses) from
investments......................................... (26,923,171)
------------
Change in net assets resulting from operations....... $ (8,373,968)
============
</TABLE>
See notes to financial statements
34
<PAGE>
ISG FUNDS
Government Income Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Period Ended Year Ended
December 31, December 31, February 28,
1999 1998 (a) 1998
------------ ------------ ------------
<S> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income......... $ 18,549,203 $ 12,162,175 $ 14,791,115
Net realized gains (losses)
from investment
transactions................. 150,693 (151,172) 151,276
Net change in unrealized
appreciation (depreciation)
from investments............. (27,073,864) 8,210,092 9,924,175
------------ ------------ ------------
Change in net assets resulting
from operations............... (8,373,968) 20,221,095 24,866,566
------------ ------------ ------------
Distributions to Class A
Shareholders:
From net investment income.... (101,843) (11,516,524) (14,742,578)
In excess of net investment
income....................... (738) -- --
Distributions to Class B
Shareholders:
From net investment income.... (20,036)(c) -- --
In excess of net investment
income....................... (144)(c) -- --
Distributions to Institutional
Shareholders:
From net investment income.... (18,434,089) (732,820)(b) --
In excess of net investment
income....................... (133,632) -- --
------------ ------------ ------------
Change in net assets from
shareholder distributions..... (18,690,482) (12,249,344) (14,742,578)
------------ ------------ ------------
Change in net assets from
capital transactions.......... 92,301,343 17,054,239 10,661,134
------------ ------------ ------------
Change in net assets........... 65,236,893 25,025,990 20,785,122
Net Assets:
Beginning of period........... 295,429,554 270,403,564 249,618,442
------------ ------------ ------------
End of period................. $360,666,447 $295,429,554 $270,403,564
============ ============ ============
</TABLE>
- ---------
(a) For the period from March 1, 1998 through December 31, 1998.
(b) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
(c) For the period from January 21, 1999 (commencement of operations) through
December 31, 1999.
See notes to financial statements
35
<PAGE>
ISG FUNDS
Government Income Fund
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Year Ended Period Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, February 28, February 28, February 28, February 28,
1999 1998 (a) 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $10.38 $10.07 $ 9.69 $ 9.87 $ 9.47 $ 9.90
------ ------ -------- -------- -------- --------
Investment Activities
Net investment income
(loss)................ 0.51 0.45 0.55 0.57 0.58 0.54
Net realized and
unrealized gains
(losses) from
investments........... (0.77) 0.31 0.38 (0.18) 0.41 (0.44)
------ ------ -------- -------- -------- --------
Total from Investment
Activities............ (0.26) 0.76 0.93 0.39 0.99 0.10
------ ------ -------- -------- -------- --------
Distributions
Net investment income.. (0.52) (0.45) (0.55) (0.57) (0.59) (0.53)
------ ------ -------- -------- -------- --------
Total Distributions.... (0.52) (0.45) (0.55) (0.57) (0.59) (0.53)
------ ------ -------- -------- -------- --------
Net change in asset
value.................. (0.78) 0.31 0.38 (0.18) 0.40 (0.43)
------ ------ -------- -------- -------- --------
Net Asset Value, End of
Period................. $ 9.60 $10.38 $ 10.07 $ 9.69 $ 9.87 $ 9.47
====== ====== ======== ======== ======== ========
Total Return (excludes
sales charge).......... (2.50)% 7.69%(b) 9.90% 4.07% 10.70% 1.20%
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $2,419 $1,486 $270,404 $249,618 $184,226 $168,313
Ratio of expenses to
average net assets..... 0.91% 0.91%(c) 0.80% 0.70% 0.72% 0.68%
Ratio of net investment
income to average net
assets................. 5.29% 5.28%(c) 5.62% 5.82% 5.96% 5.79%
Ratio of expenses to
average net assets*.... 1.26% (d) 0.86% 0.80% 0.82% 0.83%
Portfolio turnover**.... 5% 20% 25% 7% 87% 31%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from March 1, 1998 through December 31, 1998. In conjunction
with the reorganization of the ISG Funds, the Fund changed its fiscal year
end to December 31.
(b) Not annualized.
(c) Annualized.
(d) There were no fee reductions in this period.
Financial Highlights, Class B Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999 (a)
------------
<S> <C>
Net Asset Value, Beginning of Period............................. $10.36
------
Investment Activities
Net investment income (loss).................................... 0.42
Net realized and unrealized gains (losses) from investments..... (0.77)
------
Total from Investment Activities................................ (0.35)
------
Distributions
Net investment income........................................... (0.45)
------
Total Distributions............................................. (0.45)
------
Net change in asset value........................................ (0.80)
------
Net Asset Value, End of Period................................... $ 9.56
======
Total Return (excludes redemption charge)........................ (3.57)%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................................ $ 553
Ratio of expenses to average net assets.......................... 1.85%(c)
Ratio of net investment income to average net assets............. 4.40%(c)
Ratio of expenses to average net assets*......................... 1.87%(c)
Portfolio turnover**............................................. 5%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from January 21, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
36
<PAGE>
ISG FUNDS
Government Income Fund
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1999 1998 (a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period.............. $ 10.36 $ 10.42
-------- --------
Investment Activities
Net investment income (loss)..................... 0.52 0.03
Net realized and unrealized gains (losses) from
investments..................................... (0.77) (0.06)
-------- --------
Total from Investment Activities................. (0.25) (0.03)
-------- --------
Distributions
Net investment income............................ (0.52) (0.03)
-------- --------
Total Distributions.............................. (0.52) (0.03)
-------- --------
Net change in asset value......................... (0.77) (0.06)
-------- --------
Net Asset Value, End of Period.................... $ 9.59 $ 10.36
======== ========
Total Return...................................... (2.41)% (0.33)%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................. $357,695 $293,944
Ratio of expenses to average net assets........... 0.91% 0.88%(c)
Ratio of net investment income to average net
assets........................................... 5.27% 5.07%(c)
Ratio of expenses to average net assets*.......... 1.01% (d)
Portfolio turnover**.............................. 5% 20%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
(d) There were no fee reductions in this period.
See notes to financial statements
37
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
38
<PAGE>
Sharon Brown
[PHOTO] Portfolio Manager
ISG Municipal Income Fund+
- --------------------------------------------------------------------------------
Investment Goal
The Fund seeks to provide investors
with dividend income exempt from
federal income tax, without assuming
undue risk. The Fund invests
primarily in investment-grade
municipal obligations issued by
state and local entities across the
United States.
- --------------------------------------------------------------------------------
Q. How did the Fund perform during the period?
A. For the 12 months ended December 31, 1999, the Fund produced a total return
of -3.81% (Class A Shares at NAV).++ In comparison, the Fund's benchmarks, the
Lehman Brothers Municipal Bond Index and the Lipper Municipal General Bond
Index,/1/ produced total returns of -2.06% and -4.07%, respectively.
It is also important to recognize income yield to shareholders. As of December
31, 1999, the Fund's 30-day SEC yield (Class A Shares at NAV) was 4.74%. For
investors in the 36% federal income tax bracket, that is equivalent to a
taxable yield of 7.41%. We achieved our objectives while maintaining an average
credit quality of AA+. As of December 31, 1999, the Fund's average maturity was
11.2 years.*
Q. What factors affected your performance?
A. Throughout most of the year, the bond market was both volatile and unstable.
The Fed raised short-term rates three times. While municipal bonds do not react
as sharply to Fed moves as long-term Treasuries do, this much Fed action
affected every portion of the fixed-income universe, including munis. As long
as there is turmoil in the taxable market, and there was plenty in 1999,
instability will spill over to the tax-exempt arena. Psychologically, even muni
investors feel anxiety from rising rates. All of which served to put pressure
on the Fund's total return. As rates continued to rise, we lengthened the
portfolio for two reasons: to provide our shareholders with higher current
income and to position the portfolio for price appreciation when rates turn
lower.
Q. What are a few of your favorite bonds in the Fund?
A. One of our favorites is a Houston, Texas, zero coupon issue, due 2021 (7.29%
of the Fund's net assets). "Zeroes" do not carry a coupon yield, but we had two
good reasons to buy them: First, they were attractively priced, and second,
they are a total return play for when rates turn down. The prices of zeroes are
very sensitive to interest-rate moves; when rates decline, the value of zeroes
shoot up more quickly than bonds that do provide current income. To counter
zeroes with a short-maturity, high-coupon issue, we bought Rhode Island Port
Authority paper yielding 6.75%, due 2004 (2.94%). We feel the yield is very
generous, which can offset some of the principal fluctuation.*
Q. What is your outlook for 2000?
A. We anticipate more instability, at least through the first quarter. With the
economy showing few signs of slowing down appreciably, we believe it is fairly
certain the Fed will raise rates at least once, and maybe twice. Higher rates
will continue to depress bond prices, though current income should rise. Longer
term, we believe the Fed will feel that the inflation picture is under control,
and rates will begin to turn down.
- ---------
+ The Fund's income may be subject to certain state and local taxes and
depending on your tax status, the federal alternative minimum tax.
++ Including the 3.00% sales load, the Fund's return was -6.71% for the
period.
/1/The Lipper Municipal General Bond Fund Index is an index of managed funds
that invest at least 65% of assets in municipal debt issues in the top
four credit ratings.
* The Fund's portfolio composition is subject to change.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
39
<PAGE>
ISG Municipal Income Fund
Performance (as of December 31, 1999)
- -------------------------------------------------------------------------------
[GRAPH]
Class A Shares
Municipal Municipal Lehman Brothers
Income Fund Income Fund Municipal
with Sales Charge without Sales Charge Bond Index
12/1992 9,700 10,000 10,000
1993 10,936 11,286 11,228
1994 10,189 10,514 10,647
1995 11,900 12,281 12,506
1996 12,331 12,725 13,060
1997 13,289 13,714 14,263
1998 13,997 14,444 15,188
1999 13,476 13,894 14,875
[GRAPH]
Class B Shares
Lehman Brothers
Municipal Municipal
Income Fund Bond Index
12/1992 10,000 10,000
1993 10,986 11,228
1994 10,227 10,647
1995 12,081 12,506
1996 12,525 13,080
1997 13,614 14,263
1998 14,444 15,188
1999 13,762 14,875
The Class B contingent deferred
sales charge (CDSC) is not
included in the above graph,
since the performance is for more
than 6 years and the CDSC would
no longer apply.
[GRAPH]
Institutional Shares
Lehman Brothers
Municipal Municipal
Income Fund Bond Index
12/1992 10,010 10,000
1993 11,286 11,228
1994 10,514 10,647
1995 12,281 12,506
1996 12,725 13,060
1997 13,714 14,263
1998 14,446 15,188
1999 13,896 14,875
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without Sales With Sales
Charge Charge*
Class A Shares ------------- ----------
<S> <C> <C>
1-Year................................................. -3.81% -6.71%
5-Year................................................. 5.73% 5.08%
Since Inception 12/29/92............................... 4.79% 4.34%
</TABLE>
*Reflects the maximum sales charge of 3.00%.
<TABLE>
<CAPTION>
Average Annual
Total Return
--------------
Without With
CDSC CDSC**
Class B Shares ------- ------
<S> <C> <C>
1-Year........................................................... -4.73% -7.45%
5-Year........................................................... 5.53% 5.37%
Since Inception (12/29/92)....................................... 4.65% 4.65%
</TABLE>
**Reflects the applicable contingent deferred sales charge (maximum 4.00%).
The data for Class B Shares primarily represents the results of the Class A
Shares. Actual Class B Shares average annual total return and hypothetical
growth results would have been lower. See notes below.
<TABLE>
<CAPTION>
Average Annual
Total Return
Institutional Shares --------------
<S> <C>
1-Year........................................................... -3.81%
5-Year........................................................... 5.74%
Since Inception 12/29/92......................................... 4.79%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment
in the indicated share class versus a similar investment in the Fund's
benchmark.
Performance for the Class B Shares, which commenced operations on 2/3/99, is
based on the historical performance of the Class A Shares (without sales
charge) prior to that date. Class A Shares performance does not reflect the
higher 12b-1 fees or the contingent deferred sales charge (CDSC). Had the CDSC
and higher 12b-1 fees been incorporated, total return and hypothetical growth
figures would have been lower.
The quoted returns reflect the performance from 12/29/92 to 12/14/98 of the DG
Municipal Income Fund, an open-end investment company that was the predecessor
fund to the ISG Municipal Income Fund.
The Institutional Share class was initially offered on 12/14/98 and reflects
the historical performance of the Class A Shares (without sales charge) prior
to that date.
The Fund's performance is compared to the Lehman Brothers Municipal Bond
Index, which is generally representative of the performance of investment-
grade, fixed-rate, long-term municipal bonds. The index is unmanaged and does
not reflect the expenses associated with a mutual fund, such as investment
management and fund accounting fees. The Fund's performance reflects the
deduction of fees for these value-added services. Investors cannot invest
directly in an index, although they can invest in the underlying securities.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
40
<PAGE>
ISG Municipal Income Fund
(as of December 31, 1999)
- --------------------------------------------------------------------------------
[CHART]
Sector Profile*
Cash and Cash Equivalents 0.3%
Municipal Bonds 99.7%
The ISG Municipal Income Fund invests primarily in investment-grade municipal
obligations issued by state and local entities across the United States. The
Fund seeks to provide investors with current income excempt from federal income
tax.
[CHART]
Maturity Profile*
0-1 Years 0.3%
1-5 Years 10.3%
6-10 Years 50.1%
11-20 Years 31.9%
Over 20 Years 7.4%
By design, the Fund attempts to provide current income without undue risk to
principal. The chart shows that the Fund is focused on bonds primarily with
maturities of 1 to 10 years.
[CHART]
Quality Profile*
A 4.4%
AA 16.1%
AAA 79.5%
By focusing on more general obligations and school and "essential services"
bonds, the Fund Manager and the research team provided an additional measure of
security to the Fund.
* The Fund's portfolio composition is subject to change.
41
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Municipal Income Fund December 31, 1999
Municipal Bonds (98.6%)
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
----------- -------------
<S> <C> <C>
Arkansas (2.0%)
Arkansas State Capital Appreciation, College Savings,
Series C, 0.00%, 6/1/11, GO......................... $ 1,400,000 $ 750,750
-------------
California (6.8%)
California State, 7.00%, 10/1/09, GO,................ 1,285,000 1,468,113
Franklin-McKinley School District, Refunding Bond,
6.00%, 7/1/16, GO, FSA.............................. 1,000,000 1,037,500
-------------
2,505,613
-------------
Florida (3.3%)
Dade County, Series DD, 7.70%, 10/1/12, GO, AMBAC.... 1,000,000 1,218,750
-------------
Georgia (8.8%)
Georgia State, Series B, 7.20%, 3/1/06, GO........... 1,500,000 1,678,124
Savannah Hospital Authority Revenue, St. Josephs
Hospital Project, 6.20%, 7/1/23, Prerefunded 7/1/03
@ 102............................................... 1,500,000 1,593,750
-------------
3,271,874
-------------
Illinois (7.9%)
Chicago, Metropolitan Water Reclamation District,
Greater Chicago Capital Improvements, 6.90%, 1/1/07,
GO.................................................. 1,830,000 2,001,563
Will County Forest Preservation District, Series B,
0.00%, 12/1/18, GO, FGIC............................ 3,000,000 930,000
-------------
2,931,563
-------------
Kentucky (5.2%)
Carrollton & Henderson, Public Energy Authority Gas
Revenue, Series A, 5.00%, 1/1/09, FSA............... 2,000,000 1,912,500
-------------
Louisiana (2.7%)
Louisiana Local Government Environmental Facilities,
Community Development Authority Revenue, Capital
Projects & Equipment Acquisition, 5.25%, 12/1/18,
AMBAC............................................... 1,085,000 1,002,269
-------------
Michigan (3.0%)
Battle Creek Downtown Development Authority, 7.30%,
5/1/10, Prerefunded 5/1/04 @ 102.................... 1,000,000 1,111,250
-------------
Mississippi (3.5%)
Jackson Water & Sewer System Revenue, 5.13%, 9/1/14,
FGIC................................................ 1,430,000 1,317,388
-------------
New Jersey (4.4%)
New Jersey Health Care Facilities Funding Authority
Revenue, Cathedral Health Services, 5.50%, 2/1/11,
MBIA................................................ 1,605,000 1,621,050
-------------
</TABLE>
Municipal Bonds, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
----------- -------------
<S> <C> <C>
Pennsylvania (4.3%)
Bethlehem Area School District, 6.00%, 3/1/16,
Prerefunded 3/1/06 @ 100, State Aid Withholding,
GO, MBIA........................................... $ 1,500,000 $ 1,580,625
-------------
Rhode Island (2.9%)
Rhode Island Port Authority & Economic Development
Corp. Revenue, Shepard Building Project, Series B,
6.75%, 6/1/25, Prerefunded 6/1/04 @ 102, AMBAC .... 1,000,000 1,091,250
-------------
Tennessee (6.4%)
Metropolitan Government, Nashville & Davidson
County, Industrial Development Board Revenue,
Multi-Family Housing, Arbor, Series B, 7.50%,
11/15/10, Prerefunded 5/15/10 @ 100................ 1,000,000 1,177,500
Metropolitan Government, Nashville & Davidson
County, Industrial Development Board Revenue, Multi
Family Housing, Arbor, Series C, 7.50%, 11/15/12,
Prerefunded 5/15/12 @ 100.......................... 1,000,000 1,186,250
-------------
2,363,750
-------------
Texas (27.7%)
Harris County, Housing Financial Corp., Multi Family
Housing Revenue, Breton Mill Partners, 7.00%,
3/1/07, Prerefunded 2/15/07 @ 100.................. 1,000,000 1,116,250
Houston Water & Sewer System Revenue, Capital
Appreciation, Series A, 0.00%, 12/1/21, FSA........ 10,500,000 2,703,750
Katy Independent School District, Series A, 4.50%,
2/15/20, GO, PSF-GTD............................... 3,600,000 2,879,999
Lubbock Health Facilities Development Corp.,
Hospital Revenue, Methodist Hospital, Series B,
6.75%, 12/1/10, AMBAC.............................. 1,000,000 1,121,250
North Central Texas Health Facilities Development
Corp., Baylor Health Care System, 6.25%, 5/15/10... 1,600,000 1,678,000
Richardson Independent School District, Series C,
4.75%, 2/15/22, Callable 2/15/08 @ 100, PSF-GTD.... 1,000,000 821,250
-------------
10,320,499
-------------
Washington (2.8%)
King County Public Hospital District No. 002, 5.25%,
12/1/13, GO, MBIA.................................. 1,095,000 1,044,356
-------------
</TABLE>
Continued
42
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Municipal Income Fund December 31, 1999
Municipal Bonds, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
----------- -------------
<S> <C> <C>
Wisconsin (6.9%)
Wisconsin State Health & Educational Facilities
Authority Revenue, Wheaton Franciscan Services,
Inc., 6.10%, 8/15/09, MBIA.......................... $2,420,000 $ 2,577,300
-------------
TOTAL MUNICIPAL BONDS (Cost $38,726,127)............. 36,620,787
-------------
</TABLE>
Investment Companies (0.3%)
<TABLE>
<S> <C> <C>
AIM Tax-Free Money Market Fund................................ 1,000 1,000
ISG Tax-Exempt Money Market Fund.............................. 95,647 95,647
----------
TOTAL INVESTMENT COMPANIES (Cost $96,647)..................... 96,647
----------
TOTAL INVESTMENTS (Cost $38,822,774) (a) -- (98.9%)........... 36,717,434
</TABLE>
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
----------- -------------
<S> <C> <C>
Other assets in excess of liabilities -- (1.1%)...... 392,280
-------------
TOTAL NET ASSETS -- (100.0%)......................... $ 37,109,714
=============
</TABLE>
- ---------
(a) Represents cost for federal income tax and financial reporting purposes
and differs from value by net unrealized depreciation of securities as
follows:
<TABLE>
<S> <C>
Unrealized appreciation......................................... $ --
Unrealized depreciation......................................... (2,105,340)
-----------
Net unrealized depreciation..................................... $(2,105,340)
===========
</TABLE>
AMBAC -- Insured by AMBAC Indemnity Corp.
FGIC -- Insured by Financial Guaranty Insurance Corp.
FSA -- Insured by Financial Security Assurance Inc.
GO -- General Obligation
MBIA -- Insured by Municipal Bond Insurance Assoc.
PSF-GTD -- Permanent School Fund Guarantee
See notes to financial statements
43
<PAGE>
ISG FUNDS
Municipal Income Fund
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments, at value
(cost $38,822,774)...................................... $36,717,434
Interest and dividends receivable........................ 605,719
Receivable from investment adviser....................... 1,631
Prepaid expenses and other assets........................ 15,914
-----------
Total Assets............................................ 37,340,698
Liabilities:
Distributions payable.................................... $181,132
Accrued expenses and other payables:
Investment advisory fees................................ 15,854
Administration fees..................................... 612
Distribution fees....................................... 8,101
Custodian fees.......................................... 2,114
Other................................................... 23,171
--------
Total Liabilities....................................... 230,984
-----------
Net Assets:
Capital.................................................. 39,157,917
Undistributed (distributions in excess of) net investment
income.................................................. 196
Undistributed (distributions in excess of) net realized
gains................................................... 56,941
Net unrealized appreciation (depreciation) from
investments............................................. (2,105,340)
-----------
Net Assets............................................... $37,109,714
===========
Class A Shares
Net Assets.............................................. $ 2,195,543
Shares outstanding...................................... 220,434
Redemption price per share.............................. $ 9.96
===========
Class A Shares -- Maximum Sales Charge................... 3.00%
-----------
Maximum Offering Price Per Share (100%/(100% -- Maximum
Sales Charge) of net asset value adjusted to the
nearest cent).......................................... $ 10.27
===========
Class B Shares
Net Assets.............................................. $ 240,118
Shares outstanding...................................... 24,168
Offering price per share*............................... $ 9.94
===========
Institutional Shares
Net Assets.............................................. $34,674,053
Shares outstanding...................................... 3,481,219
Offering and redemption price per share................. $ 9.96
===========
</TABLE>
- ---------
* Redemption price per share varies by length of time shares are held.
Statement of Operations
For the year ended December 31, 1999
<TABLE>
<S> <C> <C>
Investment Income:
Interest income......................................... $ 3,057,759
Dividend income......................................... 62,211
-----------
Total Investment Income................................ 3,119,970
Expenses:
Investment advisory fees................................ $393,473
Administration fees..................................... 98,368
Distribution fees -- Class A Shares..................... 7,092
Distribution fees -- Class B Shares..................... 2,006
Shareholder servicing fees -- Class A Shares............ 4,256
Shareholder servicing fees -- Class B Shares............ 669
Shareholder servicing fees--Institutional Shares........ 93,711
Custodian fees.......................................... 21,542
Accounting fees......................................... 28,715
Transfer agent fees..................................... 40,144
Directors' fees......................................... 1,881
Other fees.............................................. 73,563
--------
Total expenses before voluntary fee
reductions/reimbursements............................. 765,420
Expenses voluntarily reduced/reimbursed................ (205,460)
-----------
Net expenses........................................... 559,960
-----------
Net Investment Income................................... 2,560,010
-----------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment
transactions........................................... 913,997
Net change in unrealized appreciation (depreciation)
from investments....................................... (6,076,261)
-----------
Net realized/unrealized gains (losses) from
investments............................................ (5,162,264)
-----------
Change in net assets resulting from operations.......... $(2,602,254)
===========
</TABLE>
See notes to financial statements
44
<PAGE>
ISG FUNDS
Municipal Income Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Period Ended Year Ended
December 31, December 31, February 28,
1999 1998(a) 1998
------------ ------------ ------------
<S> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income............ $ 2,560,010 $ 1,877,207 $ 2,124,116
Net realized gains (losses) from
investment transactions......... 913,997 15,192 72,332
Net change in unrealized
appreciation (depreciation) from
investments..................... (6,076,261) 517,234 1,412,573
------------ ----------- -----------
Change in net assets resulting
from operations.................. (2,602,254) 2,409,633 3,609,021
------------ ----------- -----------
Distributions to Class A
Shareholders:
From net investment income....... (117,894) (1,816,513) (2,122,421)
From net realized gains on
investment transactions......... (44,428) (87,360) (104,785)
In excess of net realized gains.. (1,994) -- --
Distributions to Class B
Shareholders:
From net investment income....... (9,177)(c) -- --
From net realized gains on
investment transactions......... (4,856)(c) -- --
In excess of net realized gains.. (218)(c) -- --
Distributions to Institutional
Shareholders:
From net investment income....... (2,493,747) (112,697)(b) --
From net realized gains on
investment transactions......... (864,877) -- --
In excess of net realized gains.. (38,826) -- --
------------ ----------- -----------
Change in net assets from
shareholder distributions........ (3,576,017) (2,016,570) (2,227,206)
------------ ----------- -----------
Change in net assets from capital
transactions..................... (13,270,708) 7,587,023 268,866
------------ ----------- -----------
Change in net assets.............. (19,448,979) 7,980,086 1,650,681
Net Assets:
Beginning of period.............. 56,558,693 48,578,607 46,927,926
------------ ----------- -----------
End of period.................... $ 37,109,714 $56,558,693 $48,578,607
============ =========== ===========
</TABLE>
- ---------
(a) For the period from March 1, 1998 through December 31, 1998.
(b) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
(c) For the period from February 3, 1999 (commencement of operations) through
December 31, 1999.
See notes to financial statements
45
<PAGE>
ISG FUNDS
Municipal Income Fund
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Year Ended Period Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, February 28, February 28, February 28, February 28,
1999+ 1998(a) 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $10.96 $10.89 $ 10.59 $ 10.66 $ 10.15 $ 10.57
------ ------ ------- ------- ------- -------
Investment Activities
Net investment income
(loss)................ 0.41 0.34 0.47 0.49 0.49 0.49
Net realized and
unrealized gains
(losses) from
investments........... (0.82) 0.14 0.32 (0.07) 0.50 (0.43)
------ ------ ------- ------- ------- -------
Total from Investment
Activities............ (0.41) 0.48 0.79 0.42 0.99 0.06
------ ------ ------- ------- ------- -------
Distributions
Net investment income.. (0.44) (0.39) (0.47) (0.48) (0.48) (0.48)
Net realized gains..... (0.14) (0.02) (0.02) (0.01) -- --
In excess of net
realized gains........ (0.01) -- -- -- -- --
------ ------ ------- ------- ------- -------
Total Distributions..... (0.59) (0.41) (0.49) (0.49) (0.48) (0.48)
------ ------ ------- ------- ------- -------
Net change in asset
value.................. (1.00) 0.07 0.30 (0.07) 0.51 (0.42)
------ ------ ------- ------- ------- -------
Net Asset Value, End of
Period................. $ 9.96 $10.96 $ 10.89 $ 10.59 $ 10.66 $ 10.15
====== ====== ======= ======= ======= =======
Total Return (excludes
sales charge).......... (3.81)% 4.41%(b) 7.70% 4.12% 9.96% 0.81%
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $2,196 $1,980 $48,579 $46,928 $44,578 $41,542
Ratio of expenses to
average net assets..... 0.85% 0.91%(c) 0.76% 0.70% 0.70% 0.75%
Ratio of net investment
income to average net
assets................. 3.88% 4.08%(c) 4.40% 4.69% 4.65% 4.93%
Ratio of expenses to
average net assets*.... 1.41% 1.21%(c) 1.07% 1.16% 1.17% 1.16%
Portfolio turnover**.... 221%(d) 3% 6% 9% 20% 9%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
+ Net investment income is based on average shares outstanding during the
period.
(a) For the period from March 1, 1998 through December 31, 1998. In
conjunction with the reorganization of the ISG Funds, the Fund changed its
fiscal year end to December 31.
(b) Not annualized.
(c) Annualized.
(d) The Fund had an unusually high portfolio turnover due mainly to the
restructuring of the portfolio to lengthen the weighted average maturity.
See notes to financial statements
46
<PAGE>
ISG FUNDS
Municipal Income Fund
Financial Highlights, Class B Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999(a)
------------
<S> <C>
Net Asset Value, Beginning of Period............................. $11.04
------
Investment Activities
Net investment income (loss).................................... 0.32
Net realized and unrealized gains (losses) from investments..... (0.91)
------
Total from Investment Activities................................ (0.59)
------
Distributions
Net investment income........................................... (0.36)
Net realized gains.............................................. (0.14)
In excess of net realized gains................................. (0.01)
------
Total Distributions............................................. (0.51)
------
Net change in asset value........................................ (1.10)
------
Net Asset Value, End of Period................................... $ 9.94
======
Total Return (excludes redemption charge)........................ (4.73)%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................................ $ 240
Ratio of expenses to average net assets.......................... 1.71%(c)
Ratio of net investment income to average net assets............. 3.03%(c)
Ratio of expenses to average net assets*......................... 2.01%(c)
Portfolio turnover**............................................. 221%(d)
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from February 3, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
(d) The Fund had an unusually high portfolio turnover due mainly to the
restructuring of the portfolio to lengthen the weighted average maturity.
See notes to financial statements
47
<PAGE>
ISG FUNDS
Municipal Income Fund
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1999+ 1998 (a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period.............. $ 10.96 $ 11.01
------- -------
Investment Activities
Net investment income (loss)..................... 0.41 0.02
Net realized and unrealized gains (losses) from
investments..................................... (0.82) (0.05)
------- -------
Total from Investment Activities................. (0.41) (0.03)
------- -------
Distributions
Net investment income............................ (0.44) (0.02)
Net realized gains............................... (0.14) --
In excess of net realized gains.................. (0.01) --
------- -------
Total Distributions.............................. (0.59) (0.02)
------- -------
Net change in asset value......................... (1.00) (0.05)
------- -------
Net Asset Value, End of Period.................... $ 9.96 $ 10.96
======= =======
Total Return...................................... (3.81)% (0.25)%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................. $34,674 $54,578
Ratio of expenses to average net assets........... 0.85% 0.90%(c)
Ratio of net investment income to average net
assets........................................... 3.91% 4.12%(c)
Ratio of expenses to average net assets*.......... 1.15% 1.24%(c)
Portfolio turnover**.............................. 221%(d) 3%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
+ Net investment income is based on average shares outstanding during the
period.
(a) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
(d) The Fund had an unusually high portfolio turnover due mainly to the
restructuring of the portfolio to lengthen the weighted average maturity.
See notes to financial statements
48
<PAGE>
Sharon Brown
[PHOTO] Portfolio Manager
ISG Limited Term Tennessee Tax-Exempt Fund**
- -------------------------------------------------------------------------------
Investment Goal
The Fund seeks to provide investors with current income exempt from federal
and Tennessee state income taxes without assuming undue risk. The Fund invests
primarily in investment-grade Tennessee municipal obligations that generally
have a duration of under five years, producing an effective average portfolio
maturity ranging between three and five years.
- -------------------------------------------------------------------------------
Q. How did the Fund perform during the period?
A. For the 12 months ended December 31, 1999, the Fund produced a total return
of -1.00% (Class A Shares at NAV).+ In comparison, the Fund's benchmark, the
Lehman Brothers Municipal 1-5-Year Index, produced a total return of 0.73%.
It is also important to recognize income yield to shareholders. As of December
31, 1999, the Fund's 30-day SEC yield (Class A Shares at NAV) was 3.70%. For
investors in the 36% federal income tax bracket, that is equivalent to a
taxable yield of 5.78%. We achieved our objectives while maintaining an
average credit quality of AA. As of December 31, 1999, the Fund's average
maturity was 5.0 years.*
Q. What factors affected your performance?
A. Throughout most of the year, the bond market was both volatile and
unstable. The Fed raised short-term rates three times. While municipal bonds
do not react as sharply to Fed moves as long-term Treasuries do, this much Fed
action affected every portion of the fixed-income universe, including munis.
As long as there is turmoil in the taxable market, and there was plenty in
1999, instability will spill over to the tax-exempt arena. Psychologically,
even muni investors feel anxiety from rising rates. All of which served to put
pressure on the Fund's total return. As rates continued to rise, we lengthened
the portfolio slightly for two reasons: to provide our shareholders with
higher current income and to position the portfolio for price appreciation
when rates turn lower.
Q. What are a few of your favorite bonds in the Fund?
A. We like the Knoxville Electric 4.40%, due 2009 (2.34% of the Fund's net
assets), which we were able to buy at an attractive discount. Its maturity is
a bit longer than our average, which makes it a play on interest rates when
they turn around and begin to fall.*
Q. What is your outlook for 2000?
A. We anticipate more instability, at least through the first quarter. With
the economy showing few signs of slowing down appreciably, we believe it is
fairly certain the Fed will raise rates at least once, and maybe twice. Higher
rates will continue to depress bond prices, though current income should rise.
Longer term, we believe the Fed will feel that it has the inflation picture
under control, and rates will begin to turn down. Closer to home, the
Tennessee economy remains healthy, which should bode well for us.
- ---------
** Regional funds may be subject to additional risk, since the companies they
invest in are located in one geographical location. The Fund's income may
be subject to certain state and local taxes and, depending on your tax
status, the federal alternative minimum tax.
+ Including the 3.00% sales load, the Fund's return was -3.95% for the
period.
* The Fund's portfolio composition is subject to change.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
49
<PAGE>
ISG Limited Term Tennessee Tax-Exempt Fund
Performance (as of December 31, 1999)
- -------------------------------------------------------------------------------
[GRAPH]
Class A Shares
Limited Term Limited Term
Tennessee Tennessee Lehman Brothers
Tax-Exempt Fund Tax-Exempt Fund Municipal
with Sales Charge without Sales Charge 1-5 Year Index
1989 9,695 10,000 10,000
1990 10,289 10,613 10,770
1991 11,127 11,476 11,999
1992 11,640 12,006 12,913
1993 12,383 12,772 14,040
1994 12,058 12,437 13,858
1995 13,071 13,481 15,479
1996 13,354 13,774 16,129
1997 14,079 14,521 17,162
1998 14,608 15,067 18,164
1999 14,462 14,916 18,297
[GRAPH]
Class B Shares
Limited Term Lehman Brothers
Tennessee Municipal
Tax-Exempt Fund 1-5 Year Index
1989 10,000 10,000
1990 10,613 10,770
1991 11,476 11,999
1992 12,006 12,913
1993 12,772 14,040
1994 12,437 13,858
1995 13,481 15,479
1996 13,774 16,129
1997 14,521 17,162
1998 14,922 18,164
1999 14,646 18,297
The Class B contingent deferred
sales charge (CDSC) is not
included in the above graph,
since the performance is for more
than 6 years and the CDSC would
no longer apply.
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without Sales With Sales
Charge Charge*
Class A Shares ------------- ----------
<S> <C> <C>
1-Year................................................. -1.00% -3.95%
5-Year................................................. 3.70% 3.06%
10-Year................................................ 4.08% 3.77%
</TABLE>
*Reflects the maximum sales charge of 3.00%.
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without CDSC With CDSC**
Class B Shares ------------ -----------
<S> <C> <C>
1-Year................................................. -1.84% -4.72%
5-Year................................................. 3.32% 3.15%
10-Year................................................ 3.89% 3.89%
</TABLE>
**Reflects the applicable contingent deferred sales charge (maximum 4.00%).
The data for Class B Shares primarily represents the results of the Class A
Shares. Actual Class B Shares average annual total return and hypothetical
growth results would have been lower. See notes below.
The charts above represent a comparison of a hypothetical $10,000 investment
in the indicated share class versus a similar investment in the Fund's
benchmark.
Performance for the Class B Shares, which commenced operations on 2/3/98, is
based on the historical performance of the Class A Shares (without sales
charge) prior to that date. Class A Shares performance does not reflect the
higher 12b-1 fees or the contingent deferred sales charge (CDSC). Had the CDSC
and higher 12b-1 fees been incorporated, total return and hypothetical growth
figures would have been lower.
The ISG Limited Term Tennessee Tax-Exempt Fund commenced operations on 2/28/97
through a transfer of assets from certain collective trust fund ("commingled")
accounts managed by First American National Bank, using materially equivalent
investment objectives, policies and methodologies as the Fund. The quoted
performance of the Fund includes performance of the commingled accounts for
periods prior to the Fund's commencement of operations, as adjusted to reflect
the expenses associated with the Fund. The commingled accounts were not
registered with the Securities and Exchange Commission and, therefore, were
not subject to the investment restrictions imposed by law on registered mutual
funds. If the commingled accounts had been registered, the commingled
accounts' performance may have been adversely affected. The performance also
reflects reinvestment of dividends and capital gain distributions.
The Fund's performance is compared to the Lehman Brothers Municipal 1-5-Year
Index, an unmanaged index that is generally representative of municipal bonds
with maturities between 1 and 5 years. The index does not reflect the expenses
associated with a mutual fund, such as investment management and fund
accounting fees. The Fund's performance reflects the deduction of fees for
these value-added services. Investors cannot invest directly in an index,
although they can invest in the underlying securities.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
50
<PAGE>
ISG Limited Term Tennessee Tax-Exempt Fund
(as of December 31, 1999)
- --------------------------------------------------------------------------------
[CHART]
Sector Profile*
Cash and Cash Equivalents 6.6%
Municipal Bonds 93.4%
The Limited Term Tennessee Tax-Exempt Fund invests primarily in a portfolio of
investment-grade Tennessee municipal obligations that, under normal market
conditions, have a duration of under five years and an effective average
portfolio maturity ranging between 3 and 5 years. With an emphasis on quality,
the Fund seeks to generate current income that is exempt from federal and
Tennessee state income taxes without undue risk to principal.
[CHART]
Maturity Profile*
0-1 Years 11.6%
1-5 Years 51.2%
6-10 Years 33.3%
11-20 Years 3.9%
By design, the Fund focuses on achieving an average maturity of 3 to 5 years. By
emphasizing overall average maturity, the Fund attempts to provide high current
tax-free yield while controlling principal value.
[CHART]
Quality Profile*
A 4.6%
AA 52.4%
AAA 39.6%
BBB 3.4%
By focusing on more general obligations and school and "essential services"
bonds, the Fund Manager and the research team provide an additional measure of
security to the Fund.
* The Fund's portfolio composition is subject to change.
51
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Limited Term Tennessee Tax-Exempt Fund December 31, 1999
Municipal Bonds (92.3%)
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- -----------
<S> <C> <C>
Arizona (5.2%)
Pima County, Unified School District, Series C, 6.60%,
7/1/03,
Prerefunded 7/1/01 @ 101, GO, MBIA.................... $1,000,000 $ 1,041,250
-----------
Ohio (5.0%)
Youngstown City School District, Revenue Anticipation
Notes, 5.00%, 6/15/00, AMBAC.......................... 1,000,000 1,004,320
-----------
Tennessee (82.1%)
Chattanooga, Health Education & Housing, Facilities
Board Revenue, Series A, 5.25%, 12/1/02............... 900,000 909,000
Hamilton County, 6.25%, 2/1/20, Prerefunded 2/1/05 @
102, GO............................................... 490,000 526,138
Knox County Refunding, 6.50%, 4/1/04, Callable 4/1/03 @
102, GO............................................... 750,000 798,750
Knox County, Health Education & Housing, Facilities
Board Hospital Revenue Refunding, 7.25%, 1/1/08,
MBIA.................................................. 750,000 842,813
Knoxville Electric Revenue, 4.40%, 7/1/09, Callable
7/1/05 @ 101.......................................... 500,000 467,500
Lenoir City Electrical System Revenue, 4.80%, 6/1/11,
Callable 6/1/08 @ 100, AMBAC.......................... 1,000,000 931,250
Memphis, 6.00%, 7/1/03, GO............................. 500,000 520,625
Memphis, 6.00%, 11/1/03, GO............................ 500,000 523,125
Memphis, 6.00%, 7/1/04, GO............................. 1,000,000 1,048,750
Metropolitan Government, Nashville & Davidson County
Refunding, 6.25%, 12/1/01, GO......................... 1,000,000 1,033,750
Metropolitan Government, Nashville & Davidson County,
Health & Education Facilities Board Revenue, The
Vanderbilt University, Series A, 6.00%, 7/1/07........ 625,000 660,938
Montgomery County, Tennessee Health Reference &
Improvement, Clarksville Regional Health System,
5.10%, 1/1/11, Callable 1/1/08 @ 101.................. 750,000 675,000
Rutherford County Capital Outlay Notes, 6.00%, 4/1/04,
GO.................................................... 1,370,000 1,435,074
Shelby County Refunding Bond, Series B, 5.50%, 8/1/10,
GO.................................................... 750,000 765,938
Shelby County, Series B, 6.00%, 12/1/05, GO............ 750,000 793,125
Tennergy Corp., Tennessee Gas Revenue, 5.00%, 6/1/09,
MBIA.................................................. 900,000 841,500
Tennessee State, Series B, 6.50%, 6/1/03, Prerefunded
6/1/01 @ 102, GO...................................... 750,000 781,875
Tennessee State, Series C, 5.00%, 3/1/04, GO........... 1,085,000 1,097,206
</TABLE>
Municipal Bonds, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
--------- -----------
<S> <C> <C>
Tennessee, continued
Williamson County, 6.00%, 3/1/08, GO.................... $ 785,000 $ 836,025
Wilson County, 5.00%, 4/1/03, GO........................ 900,000 909,000
-----------
16,397,382
-----------
TOTAL MUNICIPAL BONDS
(Cost $18,961,313)..................................... 18,442,952
-----------
Investment Companies (6.5%)
AIM Tax-Free Money Market Fund.......................... 400,750 400,750
ISG Tax-Exempt Money Market Fund........................ 897,419 897,419
-----------
TOTAL INVESTMENT COMPANIES
(Cost $1,298,169)...................................... 1,298,169
-----------
TOTAL INVESTMENTS
(Cost $20,259,482) (a) -- (98.8%)...................... 19,741,121
Other assets in excess of
liabilities -- (1.2%).................................. 231,182
-----------
TOTAL NET ASSETS -- (100.0%)............................ $19,972,303
===========
</TABLE>
- ---------
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation......................................... $ 5,366
Unrealized depreciation......................................... (523,727)
---------
Net unrealized depreciation..................................... $(518,361)
=========
</TABLE>
AMBAC -- Insured by AMBAC Indemnity Corp.
GO -- General Obligation
MBIA -- Insured by Municipal Bond Insurance Assoc.
See notes to financial statements
52
<PAGE>
ISG FUNDS
Limited Term Tennessee Tax-Exempt Fund
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $20,259,482).................. $19,741,121
Interest and dividends receivable......................... 298,641
Deferred organization costs............................... 967
Prepaid expenses and other assets......................... 14,202
-----------
Total Assets............................................. 20,054,931
Liabilities:
Distributions payable..................................... $53,615
Accrued expenses and other payables:
Investment advisory fees................................. 6,649
Administration fees...................................... 87
Distribution fees........................................ 3,015
Custodian fees........................................... 1,934
Other.................................................... 17,328
-------
Total Liabilities........................................ 82,628
-----------
Net Assets:
Capital................................................... 20,581,919
Undistributed (distributions in excess of) net realized
gains.................................................... (91,255)
Net unrealized appreciation (depreciation) from
investments.............................................. (518,361)
-----------
Net Assets................................................ $19,972,303
===========
Class A Shares
Net Assets............................................... $19,360,541
Shares outstanding....................................... 1,998,753
Redemption price per share............................... $ 9.69
===========
Class A Shares--Maximum Sales Charge...................... 3.00%
-----------
Maximum Offering Price Per Share (100%/(100%--Maximum
Sales Charge) of net asset value adjusted to the nearest
cent)................................................... $ 9.99
===========
Class B Shares
Net Assets............................................... $ 611,762
Shares outstanding....................................... 63,166
Offering price per share*................................ $ 9.68
===========
</TABLE>
- ---------
* Redemption price per share varies by length of time shares are held.
Statement of Operations
For the year ended December 31, 1999
<TABLE>
<S> <C> <C>
Investment Income:
Interest income........................................... $ 801,576
Dividend income........................................... 35,899
---------
Total Investment Income.................................. 837,475
Expenses:
Investment advisory fees.................................. $100,988
Administration fees....................................... 30,297
Distribution fees -- Class A Shares....................... 48,523
Distribution fees -- Class B Shares....................... 5,915
Shareholder servicing fees -- Class A Shares.............. 29,114
Shareholder servicing fees -- Class B Shares.............. 1,972
Custodian fees............................................ 7,647
Accounting fees........................................... 16,157
Transfer agent fees....................................... 27,939
Directors' fees........................................... 474
Registration and filing fees.............................. 33,845
Other fees................................................ 15,587
--------
Total expenses before voluntary fee reductions........... 318,458
Expenses voluntarily reduced............................. (93,418)
---------
Net expenses............................................. 225,040
---------
Net Investment Income..................................... 612,435
---------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment transactions.. (60,047)
Net change in unrealized appreciation (depreciation) from
investments.............................................. (765,375)
---------
Net realized/unrealized gains (losses) from investments... (825,422)
---------
Change in net assets resulting from operations............ $(212,987)
=========
</TABLE>
See notes to financial statements
53
<PAGE>
ISG FUNDS
Limited Term Tennessee Tax-Exempt Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income............................ $ 612,435 $ 697,091
Net realized gains (losses) from investment
transactions.................................... (60,047) 155,050
Net change in unrealized appreciation
(depreciation) from investments................. (765,375) (54,273)
----------- -----------
Change in net assets resulting from operations.... (212,987) 797,868
----------- -----------
Distributions to Class A Shareholders:
From net investment income....................... (594,978) (688,069)
From net realized gains on investment
transactions.................................... -- (152,027)
In excess of net realized gains.................. (32,489) --
Distributions to Class B Shareholders:
From net investment income....................... (17,457) (9,022)(a)
From net realized gains on investment
transactions.................................... -- (5,771)(a)
In excess of net realized gains.................. (1,177) --
----------- -----------
Change in net assets from shareholder
distributions.................................... (646,101) (854,889)
----------- -----------
Change in net assets from capital transactions.... 660,076 (2,664,724)
----------- -----------
Change in net assets.............................. (199,012) (2,721,745)
Net Assets:
Beginning of period.............................. 20,171,315 22,893,060
----------- -----------
End of period.................................... $19,972,303 $20,171,315
=========== ===========
</TABLE>
- ---------
(a) For the period from February 3, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
54
<PAGE>
ISG FUNDS
Limited Term Tennessee Tax-Exempt Fund
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
1999 1998 1997 (a)
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period... $ 10.11 $ 10.13 $ 10.00
------- ------- -------
Investment Activities
Net investment income (loss).......... 0.30 0.32 0.29
Net realized and unrealized gains
(losses) from investments............ (0.40) 0.06 0.13
------- ------- -------
Total from Investment Activities...... (0.10) 0.38 0.42
------- ------- -------
Distributions
Net investment income................. (0.30) (0.32) (0.29)
Net realized gains.................... -- (0.08) --
In excess of net realized gains....... (0.02) -- --
------- ------- -------
Total Distributions................... (0.32) (0.40) (0.29)
------- ------- -------
Net change in asset value.............. (0.42) (0.02) 0.13
------- ------- -------
Net Asset Value, End of Period......... $ 9.69 $ 10.11 $ 10.13
======= ======= =======
Total Return (excludes sales charge)... (1.00)% 3.76% 4.26%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)...... $19,361 $19,439 $22,893
Ratio of expenses to average net
assets................................ 1.08% 1.05% 0.98%(c)
Ratio of net investment income to
average net assets.................... 3.07% 3.11% 3.48%(c)
Ratio of expenses to average net
assets*............................... 1.55% 1.52% 1.52%(c)
Portfolio turnover**................... 52% 189% 179%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
(b) Not annualized.
(c) Annualized.
Financial Highlights, Class B Shares
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1999 1998 (a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period................ $10.10 10.18
------ ------
Investment Activities
Net investment income (loss)....................... 0.22 0.20
Net realized and unrealized gains (losses) from
investments....................................... (0.40) --
------ ------
Total from Investment Activities................... (0.18) 0.20
------ ------
Distributions
Net investment income.............................. (0.22) (0.20)
Net realized gains................................. -- (0.08)
In excess of net realized gains.................... (0.02) --
------ ------
Total Distributions................................ (0.24) (0.28)
------ ------
Net change in asset value........................... (0.42) (0.08)
------ ------
Net Asset Value, End of Period...................... $ 9.68 $10.10
====== ======
Total Return (excludes redemption charge)........... (1.84)% 1.94%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................... $ 612 $ 732
Ratio of expenses to average net assets............. 1.93% 2.05%(c)
Ratio of net investment income to average net
assets............................................. 2.21% 2.02%(c)
Ratio of expenses to average net assets*............ 2.15% 2.27%(c)
Portfolio turnover**................................ 52% 189%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from February 3, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
55
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
56
<PAGE>
Sharon Brown
[PHOTO] Portfolio Manager
ISG Tennessee Tax-Exempt Fund**
- -------------------------------------------------------------------------------
Investment Goal
The Fund seeks to provide investors with current income exempt from federal
and Tennessee state income taxes without assuming undue risk. The Fund invests
primarily in investment-grade Tennessee municipal obligations and is suitable
for Tennessee residents seeking monthly state income exempt from both federal
and Tennessee personal income taxes. The Fund affords greater diversification
and liquidity than most investors would achieve by purchasing municipal
securities directly.
- -------------------------------------------------------------------------------
Q. How did the Fund perform during the period?
A. For the 12 months ended December 31, 1999, the Fund produced a total return
of -3.07% (Class A Shares at NAV).+ In comparison, the Fund's benchmarks, the
Lehman Brothers Municipal 10-Year Index and the Lipper States Intermediate
Municipal Index/1/, produced total returns of -1.25% and -2.06%, respectively.
It is also important to recognize income yield to shareholders. As of December
31, 1999, the Fund's 30-day SEC yield (Class A Shares at NAV) was 3.98%. For
investors in the 36% federal income tax bracket, that is equivalent to a
taxable yield of 6.22%. We achieved our objectives while maintaining an
average credit quality of AA+ (as rated Standard & Poor's). As of December 31,
1999, the Fund's average maturity was 9.1 years.*
Q. What factors affected your performance?
A. Throughout most of the year, the bond market was both volatile and unstable.
The Fed raised short-term rates three times. While municipal bonds do not react
as sharply to Fed moves as long-term Treasuries do, this much Fed action
affected every portion of the fixed-income universe, including munis. As long as
there is turmoil in the taxable market, and there was plenty in 1999,
instability will spill over to the tax-exempt arena. Psychologically, even muni
investors feel anxiety from rising rates. All of which served to put pressure on
the Fund's total return. As rates continued to rise, we lengthened the portfolio
for two reasons: to provide our shareholders with higher current income and to
position the portfolio for price appreciation when rates turn lower.
Toward the end of the period, we saw an increase in "tax swapping"; a number
of investors with large gains in the stock market offset those profits by
selling bonds that had suffered price declines. As a result of this activity,
there were some attractive bargains available in the Tennessee muni market. We
took advantage of this opportunity to pick up some new holdings that we feel
will provide added value in the long run.
Q. What are a few of your favorite bonds in the Fund?
A. One of our favorites is the Tennessee Housing Development Authority 5.95%,
due 2028 (1.25% of the Fund's net assets). This is a long-term bond, with a
solid coupon, that we were able to buy below par, so that the real yield was
more in the neighborhood of 6.05%--6.10%. Shorter on the yield curve, with
less volatility, is the Shelby County 6.75%, due 2005 (1.35%). This paper
provides a healthy coupon, with less price instability.*
Q. What is your outlook for 2000?
A. We anticipate more instability, at least through the first quarter. With
the economy showing few signs of slowing down appreciably, we believe it is
fairly certain the Fed will raise rates at least once, and maybe twice. Higher
rates will continue to depress bond prices, though current income should rise.
Longer term, we believe the Fed will feel that it has the inflation picture
under control, and rates will begin to turn down. Closer to home, the
Tennessee economy remains healthy, which should bode well for us.
- ---------
** Regional funds may be subject to additional risk, since the issues they
invest in are located in one geographical location. The Fund's income may
be subject to certain state and local taxes and, depending on your tax
status, the federal alternative minimum tax.
+ Including the 3.00% sales load, the Fund's return was -6.02% for the period.
/1/The Lipper States Intermediate Municipal Average is comprised of managed
funds that invest in municipal debt issues that have dollar-weighted average
maturities of five to ten years and are exempt from taxation on a specified
city or state basis.
* The Fund's portfolio composition is subject to change.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
57
<PAGE>
ISG Tennessee Tax-Exempt Fund
Performance (as of December 31, 1999)
- -------------------------------------------------------------------------------
[CHART]
Class A Shares
Tennessee Tennessee Lehman Brothers
Tax-Exempt Fund Tax-Exempt Fund Municipal
with Sales Charge without Sales Charge 10 Year Index
1989 9,700 10,000 10,000
1990 10,250 10,567 10,735
1991 11,205 11,551 12,035
1992 11,816 12,182 13,108
1993 13,027 13,430 14,781
1994 11,910 12,279 14,075
1995 13,506 13,924 16,491
1996 13,693 14,117 17,240
1997 14,669 15,123 18,832
1998 15,294 15,766 20,104
1999 14,824 15,282 19,855
[CHART]
Class B Shares
Lehman Brothers
Tennessee Municipal
Tax-Exempt Fund 10 Year Index
1989 10,000 10,000
1990 10,567 10,735
1991 11,551 12,035
1992 12,182 13,108
1993 13,430 14,781
1994 12,279 14,075
1995 13,924 16,491
1996 14,117 17,240
1997 15,124 18,832
1998 15,716 20,104
1999 15,143 19,855
The Class B contingent deferred
sales charge (CDSC) is not
included in the above graph,
since the performance is for more
than 6 years and the CDSC would
no longer apply.
[CHART]
Institutional Shares
Lehman Brothers
Tennessee Municipal
Tax-Exempt Fund 10 Year Index
--------------- ---------------
1989 10,000 10,000
1990 10,567 10,735
1991 11,551 12,035
1992 12,182 13,108
1993 13,430 14,781
1994 12,279 14,075
1995 13,924 16,491
1996 14,117 17,240
1997 15,128 18,832
1998 15,811 20,104
1999 15,363 19,855
<TABLE>
<CAPTION>
Average Annual
Total Return
---------------
Without With
Sales Sales
Charge Charge*
Class A Shares ------- -------
<S> <C> <C>
1-Year.......................................................... -3.07% -6.02%
5-Year.......................................................... 4.47% 3.84%
10-Year......................................................... 4.33% 4.01%
</TABLE>
*Reflects the maximum sales charge of 3.00%.
<TABLE>
<CAPTION>
Average Annual
Total Return
--------------
Without With
CDSC CDSC**
Class B Shares ------- ------
<S> <C> <C>
1-Year.......................................................... -3.65% -6.46%
5-Year.......................................................... 4.28% 4.11%
10-Year......................................................... 4.24% 4.24%
</TABLE>
**Reflects the applicable contingent deferred sales charge (maximum 4.00%).
The data for Class B Shares primarily represents the results of the Class A
Shares. Actual Class B Shares average annual total return and hypothetical
growth results would have been lower. See notes below.
<TABLE>
<CAPTION>
Average Annual
Total Return
Institutional Shares --------------
<S> <C>
1-Year........................................................... -2.83%
5-Year........................................................... 4.58%
10-Year.......................................................... 4.39%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment
in the indicated share class versus a similar investment in the Fund's
benchmark.
Performance for the Class B Shares, which commenced operations on 2/24/98, is
based on the historical performance of the Class A Shares (without sales
charge) prior to that date. Class A Shares performance does not reflect the
higher 12b-1 fees or the contingent deferred sales charge (CDSC). Had the CDSC
and higher 12b-1 fees been incorporated, total return and hypothetical growth
figures would have been lower.
The Institutional Share class was initially offered on 10/3/97 and reflects
the historical performance of the Class A Shares (without sales charge) prior
to that date.
The ISG Tennessee Tax-Exempt Fund commenced operations on 3/28/94 through a
transfer of assets from certain collective trust fund ("commingled") accounts
managed by First American National Bank, using materially equivalent
investment objectives, policies and methodologies as the Fund. The quoted
performance of the Fund includes performance of the commingled accounts for
periods prior to the Fund's commencement of operations, as adjusted to reflect
the expenses associated with the Fund. The commingled accounts were not
registered with the Securities and Exchange Commission and, therefore, were
not subject to the investment restrictions imposed by law on registered mutual
funds. If the commingled accounts had been registered, the commingled
accounts' performance may have been adversely affected. The performance also
reflects reinvestment of dividends and capital gain distributions.
The Fund's performance is compared to the Lehman Brothers Municipal 10-Year
Index, an unmanaged index that includes municipal bonds issued within the last
five years by municipalities throughout the United States, with maturities of
at least one year, but no more than 12 years, and a credit quality of at least
Baa. The index does not reflect the expenses associated with a mutual fund,
such as investment management and fund accounting fees. The Fund's performance
reflects the deduction of fees for these value-added services. Investors
cannot invest directly in an index, although they can invest in the underlying
securities.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
58
<PAGE>
ISG Tennessee Tax-Exempt Fund
(as of December 31, 1999)
- --------------------------------------------------------------------------------
[CHART]
Sector Profile*
Cash and Cash Equivalents 0.8%
Municipal Bonds 99.2%
The Tennessee Tax-Exempt Fund Invests primarily in investment-grade Tennessee
municipal obligations. The Fund is designed to provide investors with current
income exempt from federal and Tennessee state income taxes, without assuming
undue risk.
[CHART]
Maturity Profile*
0-1 Years 2.9%
1-5 Years 16.6%
6-10 Years 57.5%
11-20 Years 23.0%
By design, the Fund attempts to generate current income without undue risk to
principal. The chart shows that the Fund is focused on bonds primarily with
maturities of 6 to 10 years.
[CHART]
Quality Profile*
A 1.3%
AA 30.4%
AAA 68.3%
By focusing on more general obligations and school and "essential services"
bonds, the Fund Manager and the research team provide an additional measure of
security to the Fund.
* The Fund's portfolio composition is subject to change.
59
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Tennessee Tax-Exempt Fund December 31, 1999
Municipal Bonds (98.0%)
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- -----------
<S> <C> <C>
Alabama (2.4%)
Jefferson County Sewer Revenue Refunded Warrants,
Series A, 5.63%, 2/1/22, Callable 2/1/07 @ 101, FGIC.. $1,995,000 $ 1,885,275
-----------
Arkansas (1.4%)
North Little Rock Electric Power and Light Refunding,
Series A, 6.50%, 7/1/15, MBIA......................... 1,000,000 1,085,000
-----------
Florida (2.7%)
Hillsborough County Industrial Development Authority,
PCR, Tampa Electric Project, 8.00%, 5/1/22, Callable
5/1/02 @ 103.......................................... 2,000,000 2,180,000
-----------
Minnesota (1.3%)
Minnesota Public Facilities Authority, Water PCR,
Series B, 6.50%, 3/1/03............................... 1,000,000 1,057,500
-----------
Tennessee (90.2%)
Bristol Health & Educational Facilities Revenue,
Bristol Memorial Hospital, Revenue Bond, 6.75%,
9/1/07, FGIC.......................................... 3,340,000 3,657,300
Chattanooga-Hamilton County Hospital Authority,
Hospital Revenue, 5.63%, 10/1/09, FSA................. 1,000,000 1,017,500
Clarksville Water, Sewer & Gas, Natural Gas Utility
Improvements, 6.13%, 2/1/12, Callable 2/1/02 @ 102,
MBIA.................................................. 500,000 515,625
Dickson County School Improvements, 6.25%, 4/1/08, GO,
FGIC.................................................. 1,220,000 1,305,400
Hallsdale Powell Utility District, Knox County Water &
Sewer Revenue, 4.50%, 4/1/12, Callable 4/1/09 @ 102,
AMBAC................................................. 1,200,000 1,068,000
Hamilton County Industrial Development Board Lease,
Rent Revenue, 5.75%, 9/1/05, FGIC..................... 1,000,000 1,038,750
Harpeth Valley Utility District, Davidson & Williamson
Counties Revenue, 5.25%, 9/1/17, MBIA................. 1,000,000 940,000
Humphreys County Industrial Development Board, Solid
Waste Disposal Revenue, E.I. Dupont de Nemours & Co.
Project, 6.70%, 5/1/24, Callable 5/1/04 @ 102......... 1,455,000 1,553,213
Jackson Hospital Revenue Refunding and Improvement,
6.00%, 4/1/05, AMBAC.................................. 1,150,000 1,198,875
Johnson City, 4.35%, 6/1/07, GO, FGIC.................. 1,000,000 955,000
Knox County Health, Education & Housing Facilities
Board Hospital Facilities Revenue, Fort Sanders
Alliance, 7.25%, 1/1/09, MBIA......................... 2,000,000 2,262,500
</TABLE>
Municipal Bonds, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- ----------
<S> <C> <C>
Tennessee, continued
Knox County Health, Education & Housing Facilities Board
Hospital Facilities Revenue, Fort Sanders Alliance,
6.25%, 1/1/13, MBIA ................................... $1,000,000 $1,057,500
Knox County Health, Education & Housing Facilities Board
Hospital Facilities Revenue, Fort Sanders Alliance,
5.75%, 1/1/14, MBIA.................................... 2,000,000 2,010,000
Knox County Refunding, 6.50%, 4/1/04, Callable 4/1/03 @
102, GO................................................ 1,965,000 2,092,725
Knoxville Electric Revenue, Series Q, 5.25%, 7/1/09,
Callable 7/1/00 @ 102.................................. 1,625,000 1,627,031
Lawrenceburg Electric, Revenue Bond, 6.63%, 7/1/18,
MBIA................................................... 1,250,000 1,354,688
Madison County, Capital Outlay, 4.20%, 5/1/08, GO,
MBIA................................................... 1,000,000 932,500
Marion County, 6.00%, 4/1/14, Callable 4/1/09 @ 100, GO,
FGIC................................................... 590,000 603,275
Marion County, 6.00%, 4/1/16, Callable 4/1/09 @ 100, GO,
FGIC................................................... 510,000 515,100
Marion County, 6.00%, 4/1/17, Callable 4/1/09 @ 100, GO,
FGIC................................................... 900,000 905,625
Memphis, 6.25%, 7/1/04, GO.............................. 1,500,000 1,588,125
Memphis, 6.00%, 11/1/06, GO............................. 1,000,000 1,062,500
Memphis, School Improvements, 5.25%, 10/1/10, Callable
10/1/06 @ 101, GO...................................... 1,000,000 1,000,000
Memphis, School Improvements, 5.25%, 10/1/14, Callable
10/1/06 @ 101, GO...................................... 2,800,000 2,677,500
Memphis-Shelby County Airport Authority, Revenue Bonds,
Series A, 6.25%, 2/15/09, MBIA......................... 1,790,000 1,892,925
Metropolitan Government, Nashville & Davidson County,
5.60%, 5/15/07, Callable 5/15/06 @ 101, GO............. 1,045,000 1,082,881
Metropolitan Government, Nashville & Davidson County
Energy Project, Series B, Revenue Bond, 6.00%, 7/1/10,
AMBAC.................................................. 1,335,000 1,400,081
Metropolitan Government, Nashville & Davidson County
Health & Educational Facilities Board, Refunding &
Improvements, Meharry Medical College, 6.00%, 12/1/09,
AMBAC.................................................. 1,000,000 1,050,000
Metropolitan Government, Nashville & Davidson County
Health & Educational Facilities Board, Refunding &
Improvements, Meharry Medical College, 6.00%, 12/1/13,
AMBAC.................................................. 2,030,000 2,093,438
Metropolitan Government, Nashville & Davidson County
Water & Sewer Revenue, 6.50%, 4/1/03, Callable 4/1/99 @
102.................................................... 1,000,000 1,052,500
Metropolitan Government, Nashville & Davidson County,
Industrial Development Board Revenue, Multi-Family
Housing, Arbor, Series B, 7.50%, 11/15/10, Prerefunded
5/15/10 @ 100.......................................... 5,000,000 5,887,499
</TABLE>
Continued
60
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Tennessee Tax-Exempt Fund December 31, 1999
Municipal Bonds, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- ----------
<S> <C> <C>
Tennessee, continued
Rutherford County, Capital Outlay, Series A, 6.25%,
5/1/04, GO............................................. $2,000,000 $2,117,500
Rutherford County, Capital Outlay, Series A, 6.25%,
5/1/05, GO............................................. 2,500,000 2,659,375
Shelby County Health, Education & Housing Facilities
Board, Hospital Revenue, Methodist Health Systems,
Inc., 6.25%, 8/1/07, MBIA.............................. 3,500,000 3,718,750
Shelby County, Series A, 6.75%, 4/1/05, GO.............. 1,000,000 1,085,000
Shelby County, Series B, 6.00%, 12/1/05, GO............. 1,250,000 1,321,875
Tennergy Corp., Tennessee Gas Revenue, 4.13%, 6/1/09,
MBIA................................................... 2,000,000 1,725,000
Tennergy Corp., Tennessee Gas Revenue, 5.00%, 6/1/09,
MBIA................................................... 1,000,000 935,000
Tennessee Energy Acquisition Corp. Gas Revenue, Series
B, 5.00%, 9/1/07, AMBAC................................ 2,000,000 1,915,000
Tennessee Housing Development Agency, Series A, 5.95%,
7/1/28, Callable 7/1/03 @ 102.......................... 1,000,000 1,005,000
Tennessee State, Refunded, Series B, 6.00%, 5/1/05, GO.. 1,500,000 1,580,625
Tennessee State, Refunded, Series B, 6.00%, 5/1/06, GO.. 1,000,000 1,058,750
Tennessee State, Series B, 5.50%, 5/1/27, Callable
5/1/07 @ 101.5, GO..................................... 1,000,000 941,250
White House Utility District, Robertson & Sumner
Counties Waterworks, Series B, 5.25%, 1/1/17, Callable
1/1/07 @ 100, FGIC..................................... 1,450,000 1,357,563
Williamson County Public Improvement, 6.25%, 4/1/06,
GO..................................................... 1,000,000 1,068,750
Williamson County, Rural School, 5.50%, 9/1/09, GO...... 1,000,000 1,030,000
Wilson County Certificate of Participation Refunding,
5.25%, 6/30/15, Callable 6/30/09 @ 101, FSA............ 1,500,000 1,421,250
----------
72,338,744
----------
TOTAL MUNICIPAL BONDS
(Cost $80,662,917)..................................... 78,546,519
----------
</TABLE>
Investment Companies (0.8%)
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
--------- ------------
<S> <C> <C>
AIM Tax-Free Money Market Fund.......................... 7,924 $ 7,924
ISG Tax-Exempt Money Market Fund........................ 629,878 629,878
------------
TOTAL INVESTMENT COMPANIES
(Cost $637,802)........................................ 637,802
------------
TOTAL INVESTMENTS
(Cost $81,300,719) (a) -- (98.8%)...................... 79,184,321
Other assets in excess of
liabilities -- (1.2%).................................. 964,459
------------
TOTAL NET ASSETS -- (100.0%)............................ $ 80,148,780
============
</TABLE>
- ---------
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation........................................ $ 107,369
Unrealized depreciation........................................ (2,223,767)
------------
Net unrealized depreciation.................................... $(2,116,398)
============
</TABLE>
AMBAC -- Insured by AMBAC Indemnity Corp.
FGIC -- Insured by Financial Guaranty Insurance Corp.
FSA -- Insured by Financial Security Assurance Inc.
GO -- General Obligation
MBIA -- Insured by Municipal Bond Insurance Assoc.
PCR -- Pollution Control Revenue
See notes to financial statements
61
<PAGE>
ISG FUNDS
Tennessee Tax-Exempt Fund
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $81,300,719)................. $79,184,321
Interest and dividends receivable........................ 1,273,629
Receivable for capital shares issued..................... 17,260
Prepaid expenses and other assets........................ 15,083
-----------
Total Assets............................................ 80,490,293
Liabilities:
Distributions payable.................................... $268,679
Accrued expenses and other payables:
Investment advisory fees................................ 34,576
Administration fees..................................... 1,317
Distribution fees....................................... 12,004
Custodian fees.......................................... 5,370
Other................................................... 19,567
--------
Total Liabilities....................................... 341,513
-----------
Net Assets:
Capital.................................................. 83,544,845
Undistributed (distributions in excess of) net investment
income.................................................. 5,860
Accumulated net realized losses from investment
transactions............................................ (1,285,527)
Net unrealized appreciation (depreciation) from
investments............................................. (2,116,398)
-----------
Net Assets............................................... $80,148,780
===========
Class A Shares
Net Assets.............................................. $ 3,324,102
Shares outstanding...................................... 348,191
Redemption price per share.............................. $ 9.55
===========
Class A Shares -- Maximum Sales Charge................... 3.00%
-----------
Maximum Offering Price Per Share (100%/(100%--Maximum
Sales Charge) of net asset value adjusted to the
nearest cent).......................................... $ 9.85
===========
Class B Shares
Net Assets.............................................. $ 1,287,955
Shares outstanding...................................... 134,635
Offering price per share*............................... $ 9.57
===========
Institutional Shares
Net Assets.............................................. $75,536,723
Shares outstanding...................................... 7,913,149
Offering and redemption price per share................. $ 9.55
===========
</TABLE>
- ---------
* Redemption price per share varies by length of time shares are held.
Statement of Operations
For the year ended December 31, 1999
<TABLE>
<S> <C> <C>
Investment Income:
Interest income......................................... $ 4,007,561
Dividend income......................................... 66,845
-----------
Total Investment Income................................ 4,074,406
Expenses:
Investment advisory fees................................ $445,950
Administration fees..................................... 133,786
Distribution fees -- Class A Shares..................... 7,736
Distribution fees--Class B Shares....................... 10,630
Shareholder servicing fees--Class A Shares.............. 4,642
Shareholder servicing fees--Class B Shares.............. 3,543
Shareholder servicing fees--Institutional Shares........ 127,018
Custodian fees.......................................... 25,159
Accounting fees......................................... 28,900
Transfer agent fees..................................... 43,368
Directors' fees......................................... 2,034
Other fees.............................................. 81,835
--------
Total expenses before voluntary fee
reductions/reimbursements............................. 914,601
Expenses voluntarily reduced/reimbursed................ (7,257)
-----------
Net expenses........................................... 907,344
-----------
Net Investment Income................................... 3,167,062
-----------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment
transactions........................................... (1,285,527)
Net change in unrealized appreciation (depreciation)
from investments....................................... (4,483,553)
-----------
Net realized/unrealized gains (losses) from
investments............................................ (5,769,080)
-----------
Change in net assets resulting from operations.......... $(2,602,018)
===========
</TABLE>
See notes to financial statements
62
<PAGE>
ISG FUNDS
Tennessee Tax-Exempt Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income.......................... $ 3,167,062 $ 3,612,792
Net realized gains (losses) from investment
transactions.................................. (1,285,527) 1,356,524
Net change in unrealized appreciation
(depreciation) from investments............... (4,483,553) (524,589)
------------ ------------
Change in net assets resulting from operations.. (2,602,018) 4,444,727
------------ ------------
Distributions to Class A Shareholders:
From net investment income..................... (103,456) (86,286)
From net realized gains on investment
transactions.................................. (1,041) (19,251)
Distributions to Class B Shareholders:
From net investment income..................... (38,481) (17,207)(a)
From net realized gains on investment
transactions.................................. (468) (9,170)(a)
Distributions to Institutional Shareholders:
From net investment income..................... (3,025,125) (3,509,299)
From net realized gains on investment
transactions.................................. (27,837) (638,254)
------------ ------------
Change in net assets from shareholder
distributions.................................. (3,196,408) (4,279,467)
------------ ------------
Change in net assets from capital transactions.. (10,055,247) (6,573,702)
------------ ------------
Change in net assets............................ (15,853,673) (6,408,442)
Net Assets:
Beginning of period............................ 96,002,453 102,410,895
------------ ------------
End of period.................................. $ 80,148,780 $ 96,002,453
============ ============
</TABLE>
- ---------
(a) For the period from February 24, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
63
<PAGE>
ISG FUNDS
Tennessee Tax-Exempt Fund
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $10.19 $10.18 $ 9.90 $ 10.19 $ 9.40
------ ------ ------ ------- -------
Investment Activities
Net investment income
(loss)................ 0.33 0.35 0.44 0.42 0.45
Net realized and
unrealized gains
(losses) from
investments........... (0.64) 0.08 0.25 (0.29) 0.79
------ ------ ------ ------- -------
Total from Investment
Activities............ (0.31) 0.43 0.69 0.13 1.24
------ ------ ------ ------- -------
Distributions
Net investment income.. (0.33) (0.35) (0.41) (0.42) (0.45)
Net realized gains..... -- (0.07) -- -- --
------ ------ ------ ------- -------
Total Distributions.... (0.33) (0.42) (0.41) (0.42) (0.45)
------ ------ ------ ------- -------
Net change in asset
value.................. (0.64) 0.01 0.28 (0.29) 0.79
------ ------ ------ ------- -------
Net Asset Value, End of
Period................. $ 9.55 $10.19 $10.18 $ 9.90 $ 10.19
====== ====== ====== ======= =======
Total Return (excludes
sales charge).......... (3.07)% 4.25% 7.13% 1.39% 13.40%
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $3,324 $2,919 $1,669 $88,084 $94,143
Ratio of expenses to
average net assets..... 1.25% 1.20% 0.84% 0.86% 0.87%
Ratio of net investment
income to average net
assets................. 3.34% 3.37% 4.13% 4.29% 4.52%
Ratio of expenses to
average net assets*.... 1.26% 1.20% 1.09% 1.11% 1.12%
Portfolio turnover**.... 64% 155% 253% 219% 188%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
Financial Highlights, Class B Shares
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1999 1998(a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period................ $10.21 $10.22
------ ------
Investment Activities
Net investment income (loss)....................... 0.27 0.26
Net realized and unrealized gains (losses) from
investments....................................... (0.64) 0.06
------ ------
Total from Investment Activities................... (0.37) 0.32
------ ------
Distributions
Net investment income.............................. (0.27) (0.26)
Net realized gains................................. -- (0.07)
------ ------
Total Distributions................................ (0.27) (0.33)
------ ------
Net change in asset value........................... (0.64) (0.01)
------ ------
Net Asset Value, End of Period...................... $ 9.57 $10.21
====== ======
Total Return (excludes redemption charge)........... (3.65)% 3.17%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................... $1,288 $1,397
Ratio of expenses to average net assets............. 1.84% 1.95%(c)
Ratio of net investment income to average net
assets............................................. 2.72% 2.50%(c)
Ratio of expenses to average net assets*............ 1.85% (d)
Portfolio turnover**................................ 64% 155%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from February 24, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
(d) There were no fee reductions in this period.
See notes to financial statements
64
<PAGE>
ISG FUNDS
Tennessee Tax-Exempt Fund
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
1999 1998 1997(a)
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.. $ 10.19 $ 10.18 $ 10.05
------- ------- --------
Investment Activities
Net investment income (loss)......... 0.35 0.37 0.10
Net realized and unrealized gains
(losses) from investments........... (0.64) 0.08 0.13
------- ------- --------
Total from Investment Activities..... (0.29) 0.45 0.23
------- ------- --------
Distributions
Net investment income................ (0.35) (0.37) (0.10)
Net realized gains................... -- (0.07) --
------- ------- --------
Total Distributions.................. (0.35) (0.44) (0.10)
------- ------- --------
Net change in asset value............. (0.64) 0.01 0.13
------- ------- --------
Net Asset Value, End of Period........ $ 9.55 $ 10.19 $ 10.18
======= ======= ========
Total Return.......................... (2.83)% 4.52% 2.35%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)..... $75,537 $91,687 $100,742
Ratio of expenses to average net
assets............................... 1.00% 0.95% 0.56%(c)
Ratio of net investment income to
average net assets................... 3.57% 3.65% 4.22%(c)
Ratio of expenses to average net
assets*.............................. 1.00% 0.95% 0.87%(c)
Portfolio turnover**.................. 64% 155% 253%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
65
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
66
<PAGE>
Donald F. Turk, CFA
[PHOTO] Portfolio Manager
ISG Limited Term Income Fund
- -------------------------------------------------------------------------------
Investment Goal
The Fund seeks to provide investors with current income without assuming undue
risk. It invests primarily in investment-grade, U.S. dollar-denominated,
fixed-income securities of domestic and foreign issuers that generally have a
duration of less than four years. This Fund is suitable for investors seeking
regular monthly income without undue risk to principal.
- -------------------------------------------------------------------------------
Q. How did the Fund perform during the period?
A. For the 12 months ended December 31, 1999, the Fund produced a total return
of 0.95% (Class A Shares at NAV).+ In comparison, the Merrill Lynch 1-5-Year
Government/ Corporate Bond Index produced a total return of 2.19%.
It is also important to recognize income yield to shareholders. As of December
31, 1999, the Fund's 30-day SEC yield was 5.64% (Class A Shares at NAV),
compared to 4.06% at the end of 1998. The yield percentage is annualized. We
achieved our objectives while maintaining an average credit quality of AA
(rated by Standard & Poor's). As of December 31, 1999, the Fund's average
maturity was 4.58 years.*
Q. What factors affected your performance?
A. To put it simply, there were two factors: the economy and the Fed. The
economy grew at a very strong rate, greater than 4%, far and above what most
economists had estimated. The Fed took a look at this robust economic activity
and decided it was necessary to raise interest rates three times during the
year, in an effort to restrain growth and help reduce the risk of an
overheated economy igniting inflation. Consequently, investors feared the Fed
would continue its tightening bias, and so they shied away from bonds, which
drove prices down further.
Q. Amidst all this turmoil, what steps did you take?
A. Throughout much of the year, we kept the portfolio's average maturity a bit
longer than our benchmark's. In the short run, this decision did not help the
Fund's net asset value. When interest rates rise, a longer-than-average
maturity dampens price appreciation. Rising rates result in lower bond prices.
However, our first priority is to generate high current income for our
shareholders--this is the real reason people invest in bonds--and the Fund's
longer maturity structure accomplished this goal. In the long run, when
interest rates finally turn around and decline, we believe bond prices will
recover.
In the corporate sector, we added to our positions in debt issued by familiar
names such as United Technologies (1.58% of the Fund's net assets), MCI
Worldcom (1.49%) and May Department Stores (1.74%). Also our sell discipline
directed us to unload Lockheed Martin notes; the company's credit strength was
deteriorating. We made the decision not to wait until the situation became a
crisis; we got out while it was relatively easy to do so.*
Q. The Fund holds both corporate and government bonds. Did you favor one
sector over the other?
A. We made only slight allocation changes during the period. For the most
part, we kept approximately 30% of the Fund's assets invested in Treasury and
agency bonds, with the rest in corporate bonds. This represented an
overweighting in the corporate sector. We believe that the spreads between
corporates and Treasuries will narrow, which will enable corporate bond prices
to do better than Treasuries, regardless of whether rates go up or down. This
strategy positions the Fund to generate higher income from corporates, and to
reap significant price appreciation when rates decline.*
As of December 31, 1999, 66.6% of the Fund's net assets was invested in
corporate paper, with a total of 29.0% invested in Treasury, agency and pass-
through securities, and 3.4% in cash and equivalents.*
Q. What is your outlook for 2000?
A. The bond market ended the year with interest rates moving sharply higher,
and the new year continued with the same theme. Of course, this is not good
news for bonds, at least in the short term. The economy remains very strong;
labor markets are very tight; and the Fed has at least implied that it is
worried that this could lead to higher wage costs and inflation. Yields could
continue to rise in the first part of 2000. However, we believe the bond
market has already priced in a lot of bad news, and that bonds have real value
at this point.
- ---------
+ Including the 3.00% sales load, the Fund's return was -2.07% for the period.
* The Fund's portfolio composition is subject to change.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
67
<PAGE>
ISG Limited Term Income Fund
Performance (as of December 31, 1999)
- -------------------------------------------------------------------------------
[GRAPH]
Class A Shares
Merrill Lynch
Limited Term Limited Term 1-5 Year
Income Fund Income Fund Government/Corporate
with Sales Charge without Sales Charge Bond Index
1989 9,695 10,000 10,000
1990 10,479 10,809 11,091
1991 11,864 12,237 12,360
1992 12,439 12,830 13,477
1993 13,210 13,625 14,340
1994 13,121 13,533 14,357
1995 14,590 15,049 16,117
1996 15,214 15,692 16,787
1997 16,200 16,709 18,118
1998 17,250 17,792 19,381
1999 17,415 17,962 19,662
[GRAPH]
Class B
Merrill Lynch
1-5 Year
Limited Term Government/Corporate
Income Fund Bond Index
1989 10,000 10,000
1990 10,809 11,091
1991 12,237 12,360
1992 12,830 13,477
1993 13,625 14,340
1994 13,533 14,357
1995 15,049 16,117
1996 15,692 16,787
1997 16,689 18,118
1998 17,666 19,381
1999 17,711 19,662
The Class B contingent deferred
sales charge (CDSC) is not
included in the above graph,
since the performance is for more
than 6 years and the CDSC would
no longer apply.
[GRAPH]
Institutional Shares
Merrill Lynch
1-5 Year
Limited Term Government/Corporate
Income Fund Bond Index
1989 10,000 10,000
1990 10,809 11,091
1991 12,237 12,360
1992 12,830 13,477
1993 13,625 14,340
1994 13,533 14,357
1995 15,049 16,117
1996 15,692 16,787
1997 16,694 18,118
1998 17,840 19,381
1999 18,054 19,662
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without Sales With Sales
Charge Charge*
Class A Shares ------------- ----------
<S> <C> <C>
1-Year................................................. 0.95% -2.07%
5-Year................................................. 5.83% 5.18%
10-Year................................................ 6.03% 5.71%
</TABLE>
*Reflects the maximum sales charge of 3.00%.
<TABLE>
<S> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without CDSC With CDSC**
Class B Shares ------------ -----------
<S> <C> <C>
1-Year................................................. 0.25% -2.63%
5-Year................................................. 5.53% 5.37%
10-Year................................................ 5.88% 5.88%
</TABLE>
**Reflects applicable contingent deferred sales charge (maximum 4.00%).
The data for Class B Shares primarily represents the results of the Class A
Shares. Actual Class B Shares average annual total return and hypothetical
growth results would have been lower. See notes below.
<TABLE>
<CAPTION>
Average Annual
Total Return
Institutional Shares --------------
<S> <C>
1-Year........................................................... 1.20%
5-Year........................................................... 5.93%
10-Year.......................................................... 6.09%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment
in the indicated share class versus a similar investment in the Fund's
benchmark.
Performance for the Class B Shares, which commenced operations on 2/4/98, is
based on the historical performance of the Class A Shares (without sales
charge) prior to that date. Class A Shares performance does not reflect the
higher 12b-1 fees or the contingent deferred sales charge (CDSC). Had the CDSC
and higher 12b-1 fees been incorporated, total return and hypothetical growth
figures would have been lower.
The Institutional Share class was initially offered on 10/3/97 and reflects
the historical performance of the Class A Shares (without sales charge) prior
to that date.
The ISG Limited Term Income Fund commenced operations on 3/28/94 through a
transfer of assets from certain collective trust fund ("commingled") accounts
managed by First American National Bank, using materially equivalent
investment objectives, policies and methodologies as the Fund. The quoted
performance of the Fund includes performance of the commingled accounts for
periods prior to the Fund's commencement of operations, as adjusted to reflect
the expenses associated with the Fund. The commingled accounts were not
registered with the Securities and Exchange Commission and, therefore, were
not subject to the investment restrictions imposed by law on registered mutual
funds. If the commingled accounts had been registered, the commingled accounts
performance may have been adversely affected. The performance also reflects
reinvestment of dividends and capital gain distributions.
The Fund's performance is compared to the Merrill Lynch 1-5-Year
Government/Corporate Bond Index, which is generally representative of the
performance of government and corporate bonds in that maturity range with a
rating of at least Baa. The index is unmanaged and does not reflect the
expenses associated with a mutual fund, such as investment management and fund
accounting fees. The Fund's performance reflects the deduction of fees for
these value-added services. Investors cannot invest directly in an index,
although they can invest in the underlying securities.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed may be worth more or less than their original purchase price.
68
<PAGE>
ISG Limited Term Income Fund
(as of December 31, 1999)
- --------------------------------------------------------------------------------
[CHART]
Sector Profile*
Cash and Cash Equivalents 3.3%
U.S. Government Agencies 23.9%
U.S. Treasury Notes 5.5%
Corporate Bonds 67.3%
The Limited Term Income Fund invests primarily in investment grade, U.S. dollar
denominated, fixed income securities of domestic and foreign issuers. The Fund
is designed to provide investors with current income without assuming undue
risk. The Fund's adviser has latitude in deciding how assets are invested among
corporate and government obligations. As a result, the Fund enjoys flexibility
to make the most of changing market conditions.
[CHART]
Maturity Profile*
1-5 Years 60.7%
11-20 Years 3.5%
6-10 Years 3.6%
Over 20 Years 7.3%
0-1 Years 24.9%
By design, the Fund attempts to generate current income without undue risk to
principal. The chart shows that the Fund is primarily focused on bonds with
maturities of 1 to 5 years.
[CHART]
Quality Profile*
BBB 4.0%
AA 14.2%
AAA 33.6%
A 48.2%
The Fund's research team and the Fund Manager continuously monitor debt
instruments and issuer quality to identify fixed income securities for the
Fund.
* The Fund's portfolio composition is subject to change.
69
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Limited Term Income Fund December 31, 1999
Corporate Bonds (66.5%)
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- -----------
<S> <C> <C>
Aerospace & Military Technology (1.6%)
United Technologies Corp., 6.40%, 9/15/01............... $1,600,000 $ 1,586,000
-----------
Banking (5.9%)
ABN AMRO Bank, 6.63%, 10/31/01.......................... 2,500,000 2,484,375
Bankers Trust, 6.75%, 10/3/01........................... 1,500,000 1,492,500
NationsBank Corp., 7.00%, 9/15/01....................... 2,000,000 2,002,500
-----------
5,979,375
-----------
Chemicals (1.9%)
Eastman Chemical, 6.38%, 1/15/04........................ 2,000,000 1,900,000
-----------
Entertainment (1.5%)
The Walt Disney Co., 6.38%, 3/30/01..................... 1,500,000 1,492,500
-----------
Financial Services (11.5%)
Associates Corp. N.A., 7.68%, 3/3/00.................... 1,500,000 1,503,225
Ford Motor Credit Co., 6.50%, 2/28/02................... 3,000,000 2,966,250
General Motors Acceptance Corp., 5.80%, 4/9/01, MTN..... 2,000,000 1,972,500
General Motors Acceptance Corp., 7.13%, 5/1/01.......... 1,500,000 1,503,750
John Deere Capital Corp., 5.90%, 4/8/03................. 2,000,000 1,922,500
Merrill Lynch & Co., Inc., 6.00%, 1/15/01............... 1,750,000 1,736,875
-----------
11,605,100
-----------
Industrial Goods & Services (5.9%)
Archer Daniels Midland, 6.25%, 5/15/03.................. 2,100,000 2,055,375
IBM Corp., 6.25%, 2/24/00............................... 1,036,000 1,034,225
IBM Corp., 6.04%, 8/7/00, MTN........................... 1,000,000 997,500
Imperial Oil Ltd., 8.75%, 10/15/19...................... 1,767,000 1,835,471
-----------
5,922,571
-----------
Insurance -- Property & Casualty (2.0%)
Travelers/Aetna Property & Casualty, 6.75%, 4/15/01..... 2,000,000 1,992,500
-----------
Paper Products (2.0%)
International Paper Co., 6.88%, 7/10/00................. 2,000,000 2,002,500
-----------
Retail-Stores (8.6%)
Dayton Hudson Co., 6.40%, 2/15/03....................... 2,500,000 2,434,375
J.C. Penney & Co., 7.25%, 4/1/02........................ 2,000,000 1,957,500
May Department Stores Co., 7.15%, 8/15/04............... 1,750,000 1,745,625
Wal-Mart Stores, 5.85%, 6/1/18.......................... 2,500,000 2,496,875
-----------
8,634,375
-----------
Telecommunications (3.5%)
MCI WorldCom, Inc., 7.13%, 1/20/00...................... 1,500,000 1,500,615
WorldCom, Inc., 6.13%, 8/15/01.......................... 2,000,000 1,975,000
-----------
3,475,615
-----------
</TABLE>
Corporate Bonds, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- ------------
<S> <C> <C>
Utilities--Gas & Electric (22.1%)
Alabama Power Co., 5.35%, 11/15/03..................... $2,500,000 $ 2,350,000
Baltimore Gas & Electric, 6.50%, 2/15/03............... 2,500,000 2,459,375
Central Power & Light Co., 6.00%, 4/1/00............... 2,300,000 2,297,125
Cincinnati Gas & Electric Co., 6.45%, 2/15/04.......... 1,300,000 1,252,875
Florida Power Corp., 6.54%, 7/1/02, MTN................ 2,000,000 1,975,000
MidAmerican Energy, 6.50%, 12/15/01.................... 2,500,000 2,468,749
National Rural Utilities Corp.,
Series C, 6.49%, 7/10/02, MTN......................... 2,000,000 1,970,000
Potomac Electric Power Corp., 6.00%, 4/1/04............ 2,500,000 2,378,125
Puget Sound Power & Light, 6.61%, 2/9/00, MTN.......... 2,000,000 2,000,000
SCANA Corp., Series B, 6.25%, 7/8/03, MTN.............. 2,000,000 1,917,500
Smith Enron, 5.97%, 12/15/06........................... 1,250,000 1,217,188
------------
22,285,937
------------
TOTAL CORPORATE BONDS (Cost $68,043,132)............... 66,876,473
------------
U.S. Government Agencies (23.6%)
Fannie Mae (3.4%)
5.49%*, 8/4/00......................................... 2,000,000 1,933,060
6.35%, 11/23/01........................................ 1,500,000 1,488,330
------------
3,421,390
------------
Freddie Mac (1.9%)
6.75%, 4/1/08.......................................... 2,000,000 1,900,440
------------
Government National Mortgage Assoc. (18.3%)
8.00%, 12/15/07, Pool # 339455......................... 411,588 420,462
8.00%, 8/15/08, Pool # 358725.......................... 770,532 787,145
7.50%, 4/15/09, Pool # 392085.......................... 491,612 495,756
7.50%, 4/15/09, Pool # 368641.......................... 356,906 359,915
7.50%, 6/15/09, Pool # 345752.......................... 416,874 420,388
8.50%, 9/15/09, Pool # 376589.......................... 427,757 441,792
8.00%, 11/15/09, Pool # 380660......................... 890,567 909,768
8.50%, 12/15/09, Pool # 392814......................... 435,919 450,222
8.50%, 12/15/09, Pool # 392770......................... 331,342 342,213
8.00%, 4/15/10, Pool # 407337.......................... 830,103 848,000
8.00%, 4/15/10, Pool # 405445.......................... 1,082,150 1,105,482
7.50%, 8/15/11, Pool # 423983.......................... 1,151,912 1,161,623
6.00%, 1/15/14, Pool # 439688.......................... 1,827,217 1,731,855
6.00%, 1/15/14, Pool # 494279.......................... 1,825,864 1,730,572
6.50%, 1/15/29, Pool # 467451.......................... 1,896,052 1,781,094
6.50%, 1/20/29, Pool # 2701............................ 1,892,142 1,769,153
6.50%, 3/15/29, Pool # 434219.......................... 1,951,829 1,833,490
6.50%, 4/20/29, Pool # 2741............................ 1,958,311 1,831,021
------------
18,419,951
------------
TOTAL U.S. GOVERNMENT AGENCIES
(Cost $24,467,000).................................... 23,741,781
------------
</TABLE>
Continued
70
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Limited Term Income Fund December 31, 1999
U.S. Treasury Notes (5.4%)
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- ----------
<S> <C> <C>
7.75%, 1/31/00.......................................... $1,500,000 $1,502,973
6.00%, 8/15/04.......................................... 1,000,000 984,530
5.88%, 11/15/04......................................... 3,000,000 2,942,100
----------
TOTAL U.S. TREASURY NOTES (Cost $5,503,950)............. 5,429,603
----------
Investment Companies (3.4%)
AIM Liquid Assets Money Market Fund..................... 85,991 85,991
ISG Prime Money Market Fund............................. 3,298,183 3,298,183
----------
TOTAL INVESTMENT COMPANIES
(Cost $3,384,174)...................................... 3,384,174
----------
Short-Term Securities+ (3.0%)
Commercial Paper (2.4%)
Asset Backed -- Miscellaneous (0.3%)
Enterprise Funding Corp., 5.95%, 1/13/00................ $ 51,363 50,862
Falcon Asset Securitization Corp., 6.10%, 1/24/00....... 81,245 79,937
Preferred Receivables Funding Corp., 6.05%, 1/10/00..... 46,066 45,547
Receivables Capital Corp., 6.07%, 1/28/00............... 93,033 91,574
----------
267,920
----------
Financial Services (1.0%)
Golden Funding Corp., 6.10%, 1/28/00.................... 194,987 191,973
Liberty Street Funding Corp., 6.07%-6.13%, 1/31/00-
2/17/00................................................ 142,178 139,634
Moat Funding Corp., 5.98%-6.07%, 1/14/00-2/11/00........ 221,131 218,043
Orix Corp., 6.47%-6.50%, 1/10/00-1/14/00................ 344,176 340,423
Superior Funding Corp., 6.00%-6.14%, 1/18/00-1/31/00.... 165,759 163,548
----------
1,053,621
----------
Miscellaneous (1.1%)
ConAgra, Inc., 6.25%-6.33%, 1/18/00-2/4/00.............. 304,220 300,984
MCI WorldCom, 6.11%, 1/18/00............................ 60,933 60,292
Moriarity, 12.75%, 1/4/00............................... 406,223 405,647
Norfolk Southern Corp., 6.30%, 1/14/00.................. 162,489 160,783
Tyco International, Ltd., 6.43%-6.65%, 1/10/00-1/31/00.. 223,422 220,973
----------
1,148,679
----------
Total Commercial Paper.................................. 2,470,220
----------
Floating Rate Notes (0.2%)
Financial Services (0.1%)
General Motors Acceptance Corp., 4.49%**, 11/13/00...... 48,747 48,747
</TABLE>
Short-Term Securities+, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
--------- ------------
<S> <C> <C>
Financial Services,
continued
KeyCorp, 6.42%**,
10/23/00............... $40,622 $ 40,622
Textron Financial Corp.,
5.92%**, 5/12/00....... 40,622 40,598
------------
129,967
------------
Miscellaneous (0.1%)
Tyco International,
Ltd., 6.72%**, 9/5/00.. 60,933 60,918
------------
Total Floating Rate
Notes.................. 190,885
------------
Investment Companies
(0.4%)
AIM Liquid Asset Money
Market Fund............ 379,054 379,054
------------
TOTAL SHORT-TERM
SECURITIES (Cost
$3,040,159)............ 3,040,159
------------
TOTAL INVESTMENTS (Cost
$104,438,415) (a) --
(101.9%).............. 102,472,190
Liabilities in excess of
other assets --
(-1.9%)............... (1,944,832)
------------
TOTAL NET ASSETS --
(100.0%).............. $100,527,358
============
</TABLE>
- ---------
(a) Represents cost for federal income tax and financial reporting purposes
and differs from value by net unrealized depreciation of securities as
follows:
<TABLE>
<S> <C>
Unrealized appreciation......................................... $ 119,735
Unrealized depreciation......................................... (2,085,960)
-----------
Net unrealized depreciation..................................... $(1,966,225)
===========
</TABLE>
* Yield effective at purchase.
** Variable rate security. Rate represents rate in effect at December 31,
1999.
+ Represents securities purchased with cash collateral received on loaned
securities.
MTN -- Medium Term Note
See notes to financial statements
71
<PAGE>
ISG FUNDS
Limited Term Income Fund
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments, at value
(cost $104,438,415).................................. $102,472,190
Cash.................................................. 10,156
Interest and dividends receivable..................... 1,550,451
Receivable for capital shares issued.................. 93,762
Receivable from investment adviser.................... 2,811
Prepaid expenses and other assets..................... 16,339
------------
Total Assets......................................... 104,145,709
Liabilities:
Payable for return of collateral held for securities
on loan.............................................. $3,050,315
Distributions payable................................. 463,353
Payable for capital shares redeemed................... 21,606
Accrued expenses and other payables:
Investment advisory fees............................. 42,947
Administration fees.................................. 1,661
Distribution fees.................................... 14,809
Other................................................ 23,660
----------
Total Liabilities.................................... 3,618,351
------------
Net Assets:
Capital............................................... 102,930,818
Undistributed (distributions in excess of) net
investment income.................................... (87,869)
Accumulated net realized losses from investment
transactions......................................... (349,366)
Net unrealized appreciation (depreciation) from
investments.......................................... (1,966,225)
------------
Net Assets............................................ $100,527,358
============
Class A Shares
Net Assets........................................... $ 6,700,926
Shares outstanding................................... 695,315
Redemption price per share........................... $ 9.64
============
Class A Shares -- Maximum Sales Charge................ 3.00%
------------
Maximum Offering Price Per Share (100%/(100% --
Maximum Sales Charge) of net asset value adjusted
to the nearest cent)................................ $ 9.94
============
Class B Shares
Net Assets........................................... $ 682,516
Shares outstanding................................... 70,928
Offering price per share*............................ $ 9.62
============
Institutional Shares
Net Assets........................................... $ 93,143,916
Shares outstanding................................... 9,665,410
Offering and redemption price per share.............. $ 9.64
============
</TABLE>
- ---------
* Redemption price per share varies by length of time shares are held.
Statement of Operations
For the year ended December 31, 1999
<TABLE>
<S> <C> <C>
Investment Income:
Interest income......................................... $ 6,064,877
Dividend income......................................... 236,924
Income from securities lending.......................... 4,857
-----------
Total Investment Income................................ 6,306,658
Expenses:
Investment advisory fees................................ $497,174
Administration fees..................................... 149,153
Distribution fees -- Class A Shares..................... 17,787
Distribution fees -- Class B Shares..................... 4,974
Shareholder servicing fees -- Class A Shares............ 10,672
Shareholder servicing fees -- Class B Shares............ 1,658
Shareholder servicing fees -- Institutional Shares...... 137,486
Custodian fees.......................................... 27,819
Accounting fees......................................... 29,495
Transfer agent fees..................................... 44,634
Directors' fees......................................... 2,255
Other fees.............................................. 82,427
--------
Total expenses before voluntary fee
reductions/reimbursements............................. 1,005,534
Expenses voluntarily reduced/reimbursed................ (11,417)
-----------
Net expenses........................................... 994,117
-----------
Net Investment Income................................... 5,312,541
-----------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment
transactions........................................... (358,186)
Net change in unrealized appreciation (depreciation)
from investments....................................... (3,821,111)
-----------
Net realized/unrealized gains (losses) from
investments............................................ (4,179,297)
-----------
Change in net assets resulting from operations.......... $ 1,133,244
===========
</TABLE>
See notes to financial statements
72
<PAGE>
ISG FUNDS
Limited Term Income fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income........................... $ 5,312,541 $ 4,984,671
Net realized gains (losses) from investment
transactions................................... (358,186) 394,336
Net change in unrealized appreciation
(depreciation) from investments................ (3,821,111) 697,321
------------ -----------
Change in net assets resulting from operations... 1,133,244 6,076,328
------------ -----------
Distributions to Class A Shareholders:
From net investment income...................... (363,611) (343,556)
In excess of net investment income.............. -- (100)
From net realized gains on investment
transactions................................... -- (33,464)
In excess of net realized gains................. -- (6,420)
Distributions to Class B Shareholders:
From net investment income...................... (29,980) (15,167)(a)
In excess of net investment income.............. -- (5)(a)
From net realized gains on investment
transactions................................... -- (2,607)(a)
In excess of net realized gains................. -- (500)(a)
Distributions to Institutional Shareholders:
From net investment income...................... (4,918,950) (4,626,791)
In excess of net investment income.............. -- (1,350)
From net realized gains on investment
transactions................................... -- (368,402)
In excess of net realized gains................. -- (70,674)
------------ -----------
Change in net assets from shareholder
distributions................................... (5,312,541) (5,469,036)
------------ -----------
Change in net assets from capital transactions... 11,196,714 2,123,138
------------ -----------
Change in net assets............................. 7,017,417 2,730,430
Net Assets:
Beginning of period............................. 93,509,941 90,779,511
------------ -----------
End of period................................... $100,527,358 $93,509,941
============ ===========
</TABLE>
- ---------
(a) For the period from February 4, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
73
<PAGE>
ISG FUNDS
Limited Term Income Fund
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $10.05 $ 9.99 $ 9.96 $ 10.13 $ 9.66
------ ------ ------ ------- --------
Investment Activities
Net investment income
(loss)................ 0.50 0.52 0.59 0.58 0.59
Net realized and
unrealized gains
(losses) from
investments........... (0.41) 0.11 0.04 (0.16) 0.47
------ ------ ------ ------- --------
Total from Investment
Activities............ 0.09 0.63 0.63 0.42 1.06
------ ------ ------ ------- --------
Distributions
Net investment income.. (0.50) (0.52) (0.59) (0.58) (0.59)
Net realized gains..... -- (0.04) (0.01) (0.01) --
In excess of net
realized gains........ -- (0.01) -- -- --
------ ------ ------ ------- --------
Total Distributions.... (0.50) (0.57) (0.60) (0.59) (0.59)
------ ------ ------ ------- --------
Net change in asset
value.................. (0.41) 0.06 0.03 (0.17) 0.47
------ ------ ------ ------- --------
Net Asset Value, End of
Period................. $ 9.64 $10.05 $ 9.99 $ 9.96 $ 10.13
====== ====== ====== ======= ========
Total Return (excludes
sales charge).......... 0.95% 6.48% 6.47% 4.28% 11.20%
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $6,701 $7,484 $5,894 $98,197 $103,382
Ratio of expenses to
average net assets..... 1.23% 1.19% 0.83% 0.83% 0.87%
Ratio of net investment
income to average net
assets................. 5.11% 5.17% 5.92% 5.84% 5.89%
Ratio of expenses to
average net assets*.... 1.24% 1.20% 1.09% 1.08% 1.12%
Portfolio turnover**.... 29% 41% 45% 51% 28%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
Financial Highlights, Class B Shares
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1999 1998(a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period................ $10.04 $10.03
------ ------
Investment Activities
Net investment income (loss)....................... 0.44 0.41
Net realized and unrealized gains (losses) from
investments....................................... (0.42) 0.06
------ ------
Total from Investment Activities................... 0.02 0.47
------ ------
Distributions
Net investment income.............................. (0.44) (0.41)
Net realized gains................................. -- (0.04)
In excess of net realized gains.................... -- (0.01)
------ ------
Total Distributions................................ (0.44) (0.46)
------ ------
Net change in asset value........................... (0.42) 0.01
------ ------
Net Asset Value, End of Period...................... $ 9.62 $10.04
====== ======
Total Return (excludes redemption charge)........... 0.25% 4.76%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................... $ 683 $ 601
Ratio of expenses to average net assets............. 1.83% 1.94%(c)
Ratio of net investment income to average net
assets............................................. 4.52% 4.33%(c)
Ratio of expenses to average net assets*............ 1.84% (d)
Portfolio turnover**................................ 29% 41%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from February 4, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
(d) There were no fee reductions in this period.
See notes to financial statements
74
<PAGE>
ISG FUNDS
Limited Term Income Fund
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
1999 1998 1997 (a)
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period... $ 10.05 $ 9.98 $ 10.00
------- ------- -------
Investment Activities
Net investment income (loss).......... 0.53 0.54 0.15
Net realized and unrealized gains
(losses) from investments............ (0.41) 0.13 (0.01)
------- ------- -------
Total from Investment Activities...... 0.12 0.67 0.14
------- ------- -------
Distributions
Net investment income................. (0.53) (0.55) (0.15)
Net realized gains.................... -- (0.04) (0.01)
In excess of net realized gains....... -- (0.01) --
------- ------- -------
Total Distributions................... (0.53) (0.60) (0.16)
------- ------- -------
Net change in asset value.............. (0.41) 0.07 (0.02)
------- ------- -------
Net Asset Value, End of Period......... $ 9.64 $ 10.05 $ 9.98
======= ======= =======
Total Return........................... 1.20% 6.86% 1.36%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)...... $93,144 $85,425 $84,886
Ratio of expenses to average net
assets................................ 0.98% 0.94% 0.56%(c)
Ratio of net investment income to
average net assets.................... 5.37% 5.43% 6.08%(c)
Ratio of expenses to average net
assets*............................... 0.99% 0.95% 0.87%(c)
Portfolio turnover**................... 29% 41% 45%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
75
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
76
<PAGE>
Donald F. Turk, CFA
[PHOTO] Portfolio Manager
ISG Income Fund
- --------------------------------------------------------------------------------
Investment Goal
The Fund seeks to provide investors with current income without assuming undue
risk. It invests primarily in investment-grade, U.S. dollar-denominated,
fixed-income securities of domestic and foreign issuers with average
maturities of 8 to 13 years. This Fund is suitable for investors seeking
regular monthly income without undue risk to principal.
- --------------------------------------------------------------------------------
Q. How did the Fund perform during the period?
A. For the 12 months ended December 31, 1999, the Fund produced a total return
of -3.24% (Class A Shares at NAV).+ In comparison, the Merrill Lynch
Government/Corporate Master Index produced a total return of -2.05%.
It is also important to recognize income yield to shareholders. As of December
31, 1999, the Fund's 30-day SEC yield was 5.90% (Class A Shares at NAV),
compared to 4.11% at the end of 1998. The yield percentage is annualized. We
achieved our objectives while increasing our average credit quality of AA
(rated by Standard & Poor's). As of December 31, 1999, the Fund's average
maturity was 11.1 years.*
Q. What factors affected your performance?
A. To put it simply, there were two factors: the economy and the Fed. The
economy grew at a very strong rate, greater than 4%, far and above what most
economists had estimated. The Fed took a look at this robust economic activity
and decided it was necessary to raise interest rates three times during the
year, in an effort to restrain growth and help reduce the risk of an overheated
economy igniting inflation. Consequently, investors feared the Fed would
continue its tightening bias, and so they shied away from bonds, which drove
prices down further.
Q. Amidst all this turmoil, what steps did you take?
A. Throughout much of the year, we kept the portfolio's average maturity a bit
longer than our benchmark's. In the short run, this decision did not help the
Fund's net asset value. When interest rates rise, a longer-than-average
maturity dampens price appreciation. Rising rates result in lower bond prices.
However, our first priority is to generate high current income for our
shareholders--this is the real reason people invest in bonds--and the Fund's
longer maturity structure accomplished this goal. In the long run, when
interest rates finally turn around and decline, we believe bond prices will
recover.
In the corporate sector, we added debt issued by industrial names such as
Lucent (1.82% of the Fund's net assets) and United Technologies (1.83%). One
particularly advantageous swap we performed was selling Public Service E&G
notes due in 2007 and buying paper issued by Northern States Power due in 2009
(1.75%). By doing this, we picked up 60 basis points (0.60%) in yield.*
Q. The Fund holds both corporate and government bonds. Did you favor one sector
over the other?
A. We made only slight allocation changes during the period. For the most part,
we kept approximately 15%-17% of the Fund's assets invested in Treasury and
agency bonds, with the rest in corporate bonds. This represented a huge
overweighting in the corporate sector. We believe that the spreads between
corporates and Treasuries will narrow, which will enable corporate bond prices
to do better than Treasuries, regardless of whether rates go up or down. This
strategy positions the Fund to generate higher income from corporates, and to
reap significant price appreciation when rates decline.
As of December 31, 1999, 76.6% of the Fund's net assets was invested in
corporate paper, with a total of 16.4% invested in Treasury, agency and pass-
through securities, and 7% in cash and equivalents.*
Q. What is your outlook for 2000?
A. The bond market ended the year with interest rates moving sharply higher,
and the new year continued with the same theme. Of course, this is not good
news for bonds, at least in the short term. The economy remains very strong;
labor markets are very tight; and the Fed has at least implied that it is
worried that this could lead to higher wage costs and inflation. Yields could
continue to rise in the first part of 2000. However, we believe the bond market
has already priced in a lot of bad news, and that bonds have real value at this
point.
- ---------
+ Including the 3.00% sales load, the Fund's return was -6.13% for the
period.
* The Fund's portfolio composition is subject to change.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
77
<PAGE>
ISG Income Fund
Performance (as of December 31, 1999)
- -------------------------------------------------------------------------------
[GRAPH]
Class A Shares
Merrill Lynch
Income Fund Income Fund Government/Corporate
with Sales Charge without Sales Charge Master Index
1989 9,710 10,000 10,000
1990 10,317 10,625 10,850
1991 11,910 12,266 12,574
1992 12,623 13,000 13,540
1993 13,897 14,313 15,037
1994 13,397 13,797 14,546
1995 15,627 16,094 17,307
1996 15,797 16,268 17,821
1997 17,166 17,679 19,564
1998 18,588 19,143 21,428
1999 17,985 18,522 20,988
[GRAPH]
Class B Shares
Merrill Lynch
Government/Corporate
Income Fund Master Index
1989 10,000 10,000
1990 10,625 10,850
1991 12,266 12,574
1992 13,000 13,540
1993 14,313 15,037
1994 13,797 14,546
1995 16,094 17,307
1996 16,268 17,821
1997 17,667 19,564
1998 19,009 21,428
1999 18,282 20,988
The Class B contingent deferred
sales charge (CDSC) is not
included in the above graph,
since the performance is for more
than 6 years and the CDSC would
no longer apply.
[GRAPH]
Institutional Shares
Merrill Lynch
Government/Corporate
Income Fund Master Index
1989 10,000 10,000
1990 10,625 10,850
1991 12,226 12,574
1992 13,000 13,540
1993 14,313 15,037
1994 13,797 14,546
1995 16,094 17,307
1996 16,268 17,821
1997 17,673 19,564
1998 19,183 21,428
1999 18,589 20,988
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without Sales With Sales
Charge Charge*
------------- ----------
<S> <C> <C>
Class A Shares
1-Year................................................. -3.24% -6.13%
5-Year................................................. 6.07% 5.43%
10-Year................................................ 6.36% 6.03%
</TABLE>
*Reflects the maximum sales charge of 3.00%.
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without CDSC With CDSC**
------------ -----------
<S> <C> <C>
Class B Shares
1-Year................................................. -3.83% -6.58%
5-Year................................................. 5.79% 5.63%
10-Year................................................ 6.22% 6.22%
</TABLE>
**Reflects the applicable contingent deferred sales charges (maximum 4.00%).
The data for Class B Shares primarily represents the results of the Class A
Shares. Actual Class B Shares average annual total return and hypothetical
growth results would have been lower. See notes below.
<TABLE>
<CAPTION>
Average Annual
Total Return
--------------
<S> <C>
Institutional Shares
1-Year........................................................... -3.10%
5-Year........................................................... 6.14%
10-Year.......................................................... 6.40%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment
in the indicated share class versus a similar investment in the Fund's
benchmark.
Performance for the Class B Shares, which commenced operations on 2/4/98, is
based on the historical performance of the Class A Shares (without sales
charge) prior to that date. Class A Shares performance does not reflect the
higher 12b-1 fees or the contingent deferred sales charge (CDSC). Had the CDSC
and higher 12b-1 fees been incorporated, total return and hypothetical growth
figures would have been lower.
The Institutional Share class was initially offered on 10/3/97 and reflects
the historical performance of the Class A Shares (without sales charge) prior
to that date.
The ISG Income Fund commenced operations on 4/1/96 through a transfer of
assets from certain collective trust fund ("commingled") accounts managed by
First American National Bank, using materially equivalent investment
objectives, policies and methodologies as the Fund. The quoted performance of
the Fund includes performance of the commingled accounts for periods prior to
the Fund's commencement of operations, as adjusted to reflect the expenses
associated with the Fund. The commingled accounts were not registered with
Securities and Exchange Commission and, therefore, were not subject to the
investment restriction imposed by law on registered mutual funds. If the
commingled accounts had been registered, the commingled accounts' performance
may have been adversely affected. The performance also reflects reinvestment
of dividends and capital gains distributions.
The Fund's performance is compared to the Merrill Lynch Government/Corporate
Master Index, which is generally representative of the performance of
corporate and U.S. Government bonds. The index is unmanaged and does not
reflect expenses associated with a mutual fund, such as investment management
and fund accounting fees. The Fund's performance reflects the deduction of
fees for these value-added services. Investors cannot invest directly in an
index, although they can invest in the underlying securities.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
78
<PAGE>
ISG Income Fund
(as of December 31, 1999)
- --------------------------------------------------------------------------------
[CHART]
Sector Profile*
U.S. Government Agencies 9.9%
Cash Equivalents 7.0%
U.S. Treasuries 4.8%
Municipal Bonds 0.8%
Corporate Bonds 77.5%
The Income Fund invests primarily in investment-grade, U.S. dollar
denominated fixed income securities of domestic and foreign issuers. The Fund is
designed to provide current income without assuming undue risk. The Fund's
adviser has latitude in deciding how assets are invested among corporate and
government obligations. As a result, the Fund enjoys flexibility to make the
most of changing market conditions.
[CHART]
Maturity Profile*
0-1 Years 17.5%
Over 20 Years 28.8%
6-10 Years 13.3%
1-5 Years 36.1%
11-20 years 4.3%
By design, the Fund attempts to generate current income without undue risk to
principal. The chart shows that the Fund is currently focused primarily on bonds
with maturities of 1 to 10 years and those with maturities greater than 20
years.
[CHART]
Quality Profile*
AAA 26.1%
AA 8.3%
A 58.6%
BBB 7.0%
The Fund's research team and the Fund Manager continuously monitor debt
instruments and issuer quality to identify fixed income securities for the Fund.
* The Fund's portfolio composition is subject to change.
79
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Income Fund December 31, 1999
Corporate Bonds (76.6%)
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- -----------
<S> <C> <C>
Aerospace & Military Technology (1.8%)
United Technologies Corp., 6.40%, 9/15/01............... $1,775,000 $ 1,759,469
-----------
Banking (8.3%)
ABN AMRO Bank, 6.63%, 10/31/01.......................... 1,575,000 1,565,156
Bank One, Texas, 6.25%, 2/15/08......................... 1,000,000 918,750
First Union Corp., 6.18%, 2/15/36....................... 1,500,000 1,400,625
National City Corp., 6.88%, 5/15/19..................... 1,325,000 1,169,313
NationsBank Corp., 7.75%, 8/15/15....................... 1,100,000 1,072,500
Wachovia Corp., 6.61%, 10/1/25.......................... 1,875,000 1,804,687
-----------
7,931,031
-----------
Chemicals (1.3%)
Eastman Chemical, 6.38%, 1/15/04........................ 1,300,000 1,235,000
-----------
Electronic Components (2.0%)
Motorola, Inc., 6.50%, 11/15/28......................... 2,225,000 1,905,156
-----------
Financial Services (10.8%)
Associates Corp. N.A., 7.32%, 1/13/03, MTN.............. 800,000 804,000
Countrywide Home Loan, 6.84%, 10/22/04, MTN............. 2,125,000 2,077,187
Ford Motor Credit Corp., 7.35%, 11/7/11, MTN............ 1,750,000 1,673,438
General Electric Capital Corp., 7.50%, 8/21/35.......... 1,325,000 1,295,188
General Motors Acceptance Corp., 5.80%, 4/9/01, MTN..... 1,300,000 1,282,125
General Motors Acceptance Corp., 7.13%, 5/1/01.......... 2,000,000 2,004,999
USLIFE Corp., 6.38%, 6/15/00............................ 1,250,000 1,246,713
-----------
10,383,650
-----------
Food & Related (3.5%)
Bestfoods, 6.63%, 4/15/28............................... 2,225,000 1,916,281
Sara Lee Corp., 6.15%, 6/19/08, MTN..................... 1,625,000 1,490,938
-----------
3,407,219
-----------
Industrial Goods & Services (10.1%)
Albertsons, Inc., 6.52%, 4/10/28, MTN................... 2,500,000 2,134,374
Albertsons, Inc., 6.63%, 6/1/28......................... 1,750,000 1,513,750
H.J. Heinz Co., 6.38%, 7/15/28.......................... 2,000,000 1,712,500
IBM Corp., 6.25%, 2/24/00............................... 1,000,000 998,287
IBM Corp., 6.50%, 1/15/28............................... 1,750,000 1,550,938
Reliance Electric Co., 6.80%, 4/15/03................... 1,850,000 1,838,438
-----------
9,748,287
-----------
Insurance -- Property & Casualty (2.1%)
Travelers/Aetna Property & Casualty, 6.75%, 4/15/01..... 2,000,000 1,992,500
-----------
Paper Products (1.8%)
International Paper Co., 6.88%, 7/10/00................. 1,700,000 1,702,125
-----------
</TABLE>
Corporate Bonds, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- -----------
<S> <C> <C>
Retail-Stores (5.6%)
AutoZone, Inc., 6.50%, 7/15/08........................ $1,750,000 $ 1,585,938
Dayton Hudson Co., 6.80%, 10/1/01..................... 1,325,000 1,318,375
J.C. Penney & Co., 6.50%, 6/15/02, MTN................ 1,500,000 1,441,875
May Department Stores Co., 7.15%, 8/15/04............. 1,000,000 997,500
-----------
5,343,688
-----------
Telecommunications (8.1%)
AT&T Corp., 6.50%, 3/15/29............................ 2,225,000 1,907,938
BellSouth Corp., 8.25%, 7/1/32........................ 475,000 470,844
GTE Corp., 7.90%, 2/1/27.............................. 1,750,000 1,688,750
Lucent Technologies, Inc., 6.45%, 3/15/29............. 2,000,000 1,750,000
WorldCom, Inc., 6.13%, 8/15/01........................ 2,000,000 1,974,999
-----------
7,792,531
-----------
Utilities -- Gas & Electric (21.2%)
Cincinnati Gas & Electric Co., 6.45%, 2/15/04......... 1,500,000 1,445,625
Consolidated Natural Gas, 6.80%, 12/15/27............. 1,400,000 1,219,750
Florida Power Corp., 6.54%, 7/1/02, MTN............... 1,325,000 1,308,438
Houston Light & Power Corp., 6.10%, 3/1/00, MTN....... 1,725,000 1,725,000
National Rural Utilities Corp., Series C, 6.49%,
7/10/02, MTN......................................... 1,425,000 1,403,625
Northern States Power Co., 6.88%, 8/1/09.............. 1,750,000 1,680,000
Potomac Electric Power Corp., 6.00%, 4/1/04........... 2,325,000 2,211,655
Puget Sound Power & Light, 6.61%, 2/9/00, MTN......... 2,100,000 2,100,000
SCANA Corp., Series B, 6.25%, 7/8/03, MTN............. 2,225,000 2,133,219
Smith Enron, 5.97%, 12/15/06.......................... 1,940,700 1,889,757
Virginia Electric & Power, 6.63%, 4/1/03.............. 2,000,000 1,957,500
Washington Gas Light, Series D, 6.85%, 3/9/28, MTN.... 1,500,000 1,325,625
-----------
20,400,194
-----------
TOTAL CORPORATE BONDS
(Cost $77,308,232)................................... 73,600,850
-----------
Municipal Bonds (0.7%)
Georgia (0.7%)
Atlanta Downtown Development Lease Revenue Bond,
6.88%, 2/1/21........................................ 800,000 714,000
-----------
TOTAL MUNICIPAL BONDS
(Cost $762,191)...................................... 714,000
-----------
U.S. Government Agencies (9.8%)
Fannie Mae (1.0%)
6.35%, 11/23/01....................................... 1,000,000 992,220
-----------
</TABLE>
Continued
80
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Income Fund December 31, 1999
<TABLE>
<S> <C> <C>
U.S. Government Agencies, continued
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
--------- -----------
<S> <C> <C>
Government National Mortgage Assoc. (8.8%)
8.00%, 5/15/10, Pool # 407413.......................... $ 352,567 $ 360,168
6.50%, 8/15/11, Pool # 780479.......................... 708,325 687,734
7.50%, 8/15/11, Pool # 423914.......................... 552,846 557,506
7.00%, 9/15/11, Pool # 423923.......................... 978,393 968,609
6.50%, 1/15/29, Pool # 467451.......................... 1,422,039 1,335,821
6.50%, 3/15/29, Pool # 434219.......................... 1,951,829 1,833,490
6.50%, 4/20/29, Pool # 2741............................ 2,839,552 2,654,980
-----------
8,398,308
-----------
TOTAL U.S. GOVERNMENT AGENCIES
(Cost $9,895,702)..................................... 9,390,528
-----------
U.S. Treasury Bonds (1.2%)
8.13%, 8/15/21......................................... 1,000,000 1,147,570
-----------
TOTAL U.S. TREASURY BONDS
(Cost $1,243,989)..................................... 1,147,570
-----------
U.S. Treasury Notes (3.5%)
6.00%, 8/15/09......................................... 3,500,000 3,392,970
-----------
TOTAL U.S. TREASURY NOTES
(Cost $3,520,049)..................................... 3,392,970
-----------
Investment Companies (7.0%)
AIM Liquid Assets Money Market Fund.................... 1,916,547 1,916,547
ISG Prime Money Market Fund............................ 4,801,542 4,801,542
-----------
TOTAL INVESTMENT COMPANIES
(Cost $6,718,089)..................................... 6,718,089
-----------
Short-Term Securities+ (3.7%)
Commercial Paper (3.0%)
Asset Backed -- Miscellaneous (0.3%)
Enterprise Funding Corp., 5.95%, 1/13/00............... $ 60,137 59,550
Falcon Asset Securitization Corp., 6.10%, 1/24/00...... 95,123 93,591
Preferred Receivables Funding Corp., 6.05%, 1/10/00.... 53,935 53,327
Receivables Capital Corp., 6.07%, 1/28/00.............. 108,925 107,217
-----------
313,685
-----------
Finanacial Services (1.3%)
Golden Funding Corp., 6.10%, 1/28/00................... 228,294 224,765
Liberty Street Funding Corp., 6.07%-6.13%, 1/31/00-
2/17/00............................................... 166,465 163,486
Moat Funding Corp., 5.98%-6.07%, 1/14/00-2/11/00....... 258,905 255,289
Orix Corp., 6.47%-6.50%, 1/10/00-1/14/00............... 402,968 398,573
Superior Funding Corp., 6.00%-6.14%, 1/18/00-1/31/00... 194,074 191,485
-----------
1,233,598
-----------
</TABLE>
<TABLE>
<S> <C> <C>
Short-Term Securities+,
continued
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
--------- -----------
<S> <C> <C>
Miscellaneous
(1.4%)
ConAgra, Inc.,
6.25%-6.33%,
1/18/00-2/4/00.... $ 356,187 $ 352,398
MCI WorldCom,
6.11%, 1/18/00.... 71,342 70,591
Moriarity, 12.75%,
1/4/00............ 475,613 474,939
Norfolk Southern
Corp., 6.30%,
1/14/00........... 190,245 188,248
Tyco International,
Ltd., 6.43%-6.65%,
1/10/00-1/31/00... 261,587 258,719
-----------
1,344,895
-----------
Total Commercial
Paper............. 2,892,178
-----------
Floating Rate Notes
(0.2%)
Finanacial Services
(0.1%)
General Motors
Acceptance Corp.,
4.49%*, 11/13/00.. 57,074 57,074
KeyCorp, 6.42%*,
10/23/00.......... 47,561 47,561
Textron Financial
Corp., 5.92%*,
5/12/00........... 47,561 47,533
-----------
152,168
-----------
Miscellaneous
(0.1%)
Tyco International,
Ltd., 6.72%*,
9/5/00............ 71,342 71,324
-----------
Total Floating Rate
Notes............. 223,492
-----------
Investment
Companies (0.5%)
AIM Liquid Asset
Money Market
Fund.............. 443,803 443,803
-----------
TOTAL SHORT-TERM
SECURITIES
(Cost
$3,559,473)....... 3,559,473
-----------
TOTAL INVESTMENTS
(Cost
$103,007,725)(a) --
(102.5%)......... 98,523,480
Liabilities in
excess of other
assets --
(-2.5%).......... (2,409,032)
-----------
TOTAL NET ASSETS --
(100.0%)......... $96,114,448
===========
</TABLE>
- ---------
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting in excess of federal income tax reporting of
$11,957. Cost for federal income tax purposes differs from value by net
unrealized depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation....................................... $ 8,375
Unrealized depreciation....................................... (4,504,577)
-----------
Net unrealized depreciation................................... $(4,496,202)
===========
</TABLE>
* Variable rate security. Rate represents rate in effect at December 31, 1999.
+ Represents securities purchased with cash collateral received on loaned
securities.
MTN -- Medium Term Note
See notes to financial statements
81
<PAGE>
ISG FUNDS
Income Fund
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments, at value
(cost $103,007,725).................................. $ 98,523,480
Cash.................................................. 11,890
Interest and dividends receivable..................... 1,674,128
Receivable for capital shares issued.................. 14
Receivable from investment adviser.................... 836
Prepaid expenses and other assets..................... 16,679
------------
Total Assets......................................... 100,227,027
Liabilities:
Payable for return of collateral held for securities
on loan.............................................. $3,571,363
Distributions payable................................. 459,325
Accrued expenses and other payables:
Investment advisory fees............................. 40,639
Administration fees.................................. 1,596
Distribution fees.................................... 13,781
Other................................................ 25,875
----------
Total Liabilities.................................... 4,112,579
------------
Net Assets:
Capital............................................... 101,248,664
Undistributed (distributions in excess of) net
investment income.................................... (107,335)
Accumulated net realized losses from investment
transactions......................................... (542,636)
Net unrealized appreciation (depreciation) from
investments.......................................... (4,484,245)
------------
Net Assets............................................ $ 96,114,448
============
Class A Shares
Net Assets........................................... $ 3,066,717
Shares outstanding................................... 321,604
Redemption price per share........................... $ 9.54
============
Class A Shares -- Maximum Sales Charge................ 3.00%
------------
Maximum Offering Price Per Share (100%/(100% --
Maximum Sales Charge) of net asset value adjusted
to the nearest cent)................................ $ 9.84
============
Class B Shares
Net Assets........................................... $ 1,273,218
Shares outstanding................................... 133,602
Offering price per share*............................ $ 9.53
============
Institutional Shares
Net Assets........................................... $ 91,774,513
Shares outstanding................................... 9,627,775
Offering and redemption price per share.............. $ 9.53
============
</TABLE>
- ---------
* Redemption price per share varies by length of time shares are held.
Statement of Operations
For the year ended December 31, 1999
<TABLE>
<S> <C> <C>
Investment Income:
Interest income......................................... $ 5,709,941
Dividend income......................................... 272,518
Income from securities lending.......................... 1,015
-----------
Total Investment Income................................ 5,983,474
Expenses:
Investment advisory fees................................ $461,188
Administration fees..................................... 138,357
Distribution fees -- Class A Shares..................... 8,408
Distribution fees -- Class B Shares..................... 10,008
Shareholder servicing fees -- Class A Shares............ 5,045
Shareholder servicing fees -- Class B Shares............ 3,336
Shareholder servicing fees -- Institutional Shares...... 131,311
Custodian fees.......................................... 25,771
Accounting fees......................................... 29,225
Transfer agent fees..................................... 46,459
Directors' fees......................................... 2,280
Other fees.............................................. 80,305
--------
Total expenses before voluntary fee
reductions/reimbursements............................. 941,693
Expenses voluntarily reduced/reimbursed................ (9,365)
-----------
Net expenses........................................... 932,328
-----------
Net Investment Income................................... 5,051,146
-----------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment
transactions........................................... (561,356)
Net change in unrealized appreciation (depreciation)
from investments....................................... (7,267,556)
-----------
Net realized/unrealized gains (losses) from
investments............................................ (7,828,912)
-----------
Change in net assets resulting from operations.......... $(2,777,766)
===========
</TABLE>
See notes to financial statements
82
<PAGE>
ISG FUNDS
Income Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income............................ $ 5,051,146 $ 4,260,780
Net realized gains (losses) from investment
transactions.................................... (561,356) 1,166,328
Net change in unrealized appreciation
(depreciation) from investments................. (7,267,556) 1,069,978
----------- -----------
Change in net assets resulting from operations.... (2,777,766) 6,497,086
----------- -----------
Distributions to Class A Shareholders:
From net investment income....................... (176,084) (66,097)
From net realized gains on investment
transactions.................................... -- (37,753)
In excess of net realized gains.................. -- (571)
Distributions to Class B Shareholders:
From net investment income....................... (61,754) (29,251)(a)
From net realized gains on investment
transactions.................................... -- (17,873)(a)
In excess of net realized gains.................. -- (271)(a)
Distributions to Institutional Shareholders:
From net investment income....................... (4,813,308) (4,165,432)
From net realized gains on investment
transactions.................................... -- (1,110,702)
In excess of net realized gains.................. -- (16,809)
----------- -----------
Change in net assets from shareholder
distributions.................................... (5,051,146) (5,444,759)
----------- -----------
Change in net assets from capital transactions.... 21,972,888 8,832,471
----------- -----------
Change in net assets.............................. 14,143,976 9,884,798
Net Assets:
Beginning of period.............................. 81,970,472 72,085,674
----------- -----------
End of period.................................... $96,114,448 $81,970,472
=========== ===========
</TABLE>
- ---------
(a) For the period from February 4, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
83
<PAGE>
ISG FUNDS
Income Fund
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
1999 1998 1997 1996 (a)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period................ $10.39 $10.25 $10.00 $ 10.00
------ ------ ------ -------
Investment Activities
Net investment income
(loss).................. 0.52 0.54 0.58 0.40
Net realized and
unrealized gains
(losses) from
investments............. (0.85) 0.29 0.26 --
------ ------ ------ -------
Total from Investment
Activities.............. (0.33) 0.83 0.84 0.40
------ ------ ------ -------
Distributions
Net investment income.... (0.52) (0.54) (0.59) (0.40)
Net realized gains....... -- (0.14) -- --
In excess of net realized
gains................... -- (0.01) -- --
------ ------ ------ -------
Total Distributions...... (0.52) (0.69) (0.59) (0.40)
------ ------ ------ -------
Net change in asset
value.................... (0.85) 0.14 0.25 --
------ ------ ------ -------
Net Asset Value, End of
Period................... $ 9.54 $10.39 $10.25 $ 10.00
====== ====== ====== =======
Total Return (excludes
sales charge)............ (3.24)% 8.28% 8.66% 4.12%(b)
Ratios/Supplementary Data:
Net Assets at end of
period (000)............. $3,067 $2,624 $ 95 $38,815
Ratio of expenses to
average net assets....... 1.24% 1.24% 0.87% 1.13%(c)
Ratio of net investment
income to average net
assets................... 5.23% 5.07% 5.74% 5.37%(c)
Ratio of expenses to
average net assets*...... 1.25% 1.24% 1.12% 1.32%(c)
Portfolio turnover**...... 38% 42% 56% 65%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from April 1, 1996 (commencement of operations) through
December 31, 1996.
(b) Not annualized.
(c) Annualized.
Financial Highlights, Class B Shares
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1999 1998 (a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period................ $10.38 $10.32
------ ------
Investment Activities
Net investment income (loss)....................... 0.46 0.43
Net realized and unrealized gains (losses) from
investments....................................... (0.85) 0.21
------ ------
Total from Investment Activities................... (0.39) 0.64
------ ------
Distributions
Net investment income.............................. (0.46) (0.43)
Net realized gains................................. -- (0.14)
In excess of net realized gains.................... -- (0.01)
------ ------
Total Distributions................................ (0.46) (0.58)
------ ------
Net change in asset value........................... (0.85) 0.06
------ ------
Net Asset Value, End of Period...................... $ 9.53 $10.38
====== ======
Total Return (excludes redemption charge)........... (3.83)% 6.30%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................... $1,273 $1,241
Ratio of expenses to average net assets............. 1.84% 1.98%(c)
Ratio of net investment income to average net
assets............................................. 4.63% 4.29%(c)
Ratio of expenses to average net assets*............ 1.85% (d)
Portfolio turnover**................................ 38% 42%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from February 4, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
(d) There were no fee reductions in this period.
See notes to financial statements
84
<PAGE>
ISG FUNDS
Income Fund
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
1999 1998 1997 (a)
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period... $ 10.39 $ 10.25 $ 10.16
------- ------- -------
Investment Activities
Net investment income (loss).......... 0.54 0.56 0.16
Net realized and unrealized gains
(losses) from investments............ (0.86) 0.29 0.09
------- ------- -------
Total from Investment Activities...... (0.32) 0.85 0.25
------- ------- -------
Distributions
Net investment income................. (0.54) (0.56) (0.16)
Net realized gains.................... -- (0.14) --
In excess of net realized gains....... -- (0.01) --
------- ------- -------
Total Distributions................... (0.54) (0.71) (0.16)
------- ------- -------
Net change in asset value.............. (0.86) 0.14 0.09
------- ------- -------
Net Asset Value, End of Period......... $ 9.53 $ 10.39 $ 10.25
======= ======= =======
Total Return........................... (3.10)% 8.55% 2.45%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)...... $91,775 $78,105 $71,991
Ratio of expenses to average net
assets................................ 0.99% 0.97% 0.60%(c)
Ratio of net investment income to
average net assets.................... 5.50% 5.41% 6.28%(c)
Ratio of expenses to average net
assets*............................... 1.00% 0.98% 0.92%(c)
Portfolio turnover**................... 38% 42% 56%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
85
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
86
<PAGE>
Robert Rinner,
CFA -- Equity Team Leader
Portfolio Manager
ISG Equity Income Fund
[PHOTO]
- -------------------------------------------------------------------------------
Investment Goal
The Fund seeks to provide investors with current income and capital
appreciation. The Fund invests primarily in dividend-paying equity securities
of domestic issuers that are expected to provide reasonable income and may
have capital appreciation potential.
- -------------------------------------------------------------------------------
Q. How did the Fund perform during the period?
A. For the 12 months ended December 31, 1999, the Fund's total return was
3.77% (Class A Shares at NAV).+ In comparison, the Lipper Equity Income
Index/1/ rose 4.19%, and the Standard & Poor's 500 Index produced a 21.03%
return.
Q. What factors affected your performance?
A. For most of 1999, technology was king; only during the April-July period
did the cyclical and value issues that complement our investment approach show
any muscle. Consequently, although we performed very well in our category, we
could not match the robust returns posted by a large-cap index such as the S&P
500 or the tech-heavy Nasdaq./2/
That is not to say we did not have a technology presence in the portfolio.
Some of our key performers, especially in the latter half of the period, were
in the technology and telecommunications sectors. Motorola (1.86% of the
Fund's net assets) and Telefonos de Mexico (0.80%) contributed significantly
to our performance. Other diverse winners included Colgate Palmolive (1.00%),
McGraw-Hill (1.25%) and Citigroup (2.36%). Citigroup prospered despite a
rising interest-rate environment that was generally inhospitable to financial
stocks.*
This points to another challenge we faced. Higher interest rates traditionally
have a negative impact on stocks that produce income or dividends, such as
utilities and financials. As a true equity income fund, we mostly focus on
companies that generate above-average dividend income; our shareholders expect
us to invest in high-quality, stable companies that grow their dividends.
Q. In what other sectors did you invest during the year?
A. We retained some positions in REITS, which provided excellent dividend
income. We also had moderate exposure to the energy sector. One of our
holdings, Sonat--a utility name that overlapped with energy--was bought out by
El Paso Group (0.66%), which generated a handsome profit. We also held such
names as Duke Energy (2.20%) and Williams Companies (1.04%). However, overall,
traditional utilities in the gas and electric areas did not fare well in
1999.*
Of course, REITS and utilities, in particular, provided dividend income that
was substantially higher than the overall markets. As of December 31, 1999,
the Fund's yield was 2.4%, versus just 1.1% for the S&P 500.*
Q. What is your outlook for 2000?
A. Interest rates had such a negative effect on the Fund's holdings in 1999,
and we are still not out of the woods; yields have been rising sharply in the
first few weeks of 2000, and it is widely expected that the Federal Reserve
will raise short- term rates at least once in the next couple of months.
However, we do believe interest rates could turn down later in the year, which
should help many of the stocks we own.
- ---------
+ Including the 4.75% sales load, the Fund's return was -1.14% for the period.
/1/The Lipper Equity Income Fund Index is an index of managed funds that seek
relatively high current income and growth of income through investing 60% or
more of assets in equities.
/2/The NASDAQ Composite Index is a market capitalization price only index that
tracks the performance of domestic common stocks traded on the regular
NASDAQ market as well as the National Market System-traded foreign common
stocks and American Depository Receipts.
* The Fund's portfolio composition is subject to change.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
87
<PAGE>
ISG Equity Income Fund
Performance (as of December 31, 1999)
- -------------------------------------------------------------------------------
[CHART]
Class A Shares
Equity Income Fund Equity Income Fund S&P 500
with Sales Charge without Sales Charge Stock Index
1989 9,525 10,000 10,000
1990 9,505 9,980 9,683
1991 11,615 12,195 12,641
1992 11,931 12,526 13,610
1993 13,114 13,768 14,970
1994 12,286 12,899 15,166
1995 18,112 16,915 20,842
1996 18,478 19,400 25,651
1997 24,494 25,716 34,209
1998 29,261 30,720 43,987
1999 30,365 31,880 53,244
[CHART]
Class B Shares
Equity S&P 500
Income Fund Stock Index
1989 10,000 10,000
1990 9,980 9,683
1991 12,195 12,641
1992 12,528 13,810
1993 13,768 14,970
1994 12,899 15,166
1995 16,915 20,842
1996 19,400 25,651
1997 25,718 34,209
1998 30,546 43,987
1999 31,516 53,244
The Class B contingent deferred
sales charge (CDSC) is not
included in the above graph,
since the performance is for more
than 6 years and the CDSC would
no longer apply.
[CHART]
Institutional Shares
Equity Income Fund S&P 500 Stock Index
1989 10,000 10,000
1990 9,980 9,683
1991 12,195 12,641
1992 12,526 13,610
1993 13,768 14,970
1994 12,899 15,166
1995 16,915 20,842
1996 19,400 25,651
1997 25,718 34,209
1998 30,790 43,987
1999 32,062 53,244
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without Sales With Sales
Charge Charge*
Class A Shares ------------- ----------
<S> <C> <C>
1-Year................................................. 3.77% -1.14%
5-Year................................................. 19.84% 18.68%
10-Year................................................ 12.29% 11.75%
</TABLE>
*Reflects the maximum sales charge of 4.75%.
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without CDSC With CDSC**
Class B Shares ------------ -----------
<S> <C> <C>
1-Year................................................. 3.18% 0.37%
5-Year................................................. 19.56% 19.47%
10-Year................................................ 12.16% 12.16%
</TABLE>
**Reflects the applicable contingent deferred sales charge (maximum 4.00%).
The data for Class B Shares primarily represents the results of the Class A
Shares. Actual Class B Shares average annual total return and hypothetical
growth results would have been lower. See notes below.
<TABLE>
<CAPTION>
Average Annual
Total Return
Institutional Shares --------------
<S> <C>
1-Year........................................................... 4.13%
5-Year........................................................... 19.97%
10-Year.......................................................... 12.36%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment
in the indicated share class versus a similar investment in the Fund's
benchmark.
Performance for the Class B Shares, which commenced operations on 2/3/98, is
based on the historical performance of the Class A Shares (without sales
charge) prior to that date. Class A Shares performance does not reflect the
higher 12b-1 fees or the contingent deferred sales charge (CDSC). Had the CDSC
and higher 12b-1 fees been incorporated, total return and hypothetical growth
figures would have been lower.
The Institutional Share class was initially offered on 10/3/97 and reflects
the historical performance of the Class A Shares (without sales charge) prior
to that date.
The ISG Equity Income Fund commenced operations on 2/28/97 through a transfer
of assets from certain collective trust fund ("commingled") accounts managed
by First American National Bank, using materially equivalent investment
objectives, policies and methodologies as the Fund. The quoted performance of
the Fund includes performance of the commingled accounts for periods prior to
the Fund's commencement of operations, as adjusted to reflect the expenses
associated with the Fund. The commingled accounts were not registered with the
Securities and Exchange Commission and, therefore, were not subject to the
investment restrictions imposed by law on registered mutual funds. If the
commingled accounts had been registered, the commingled accounts performance
may have been adversely affected. The performance also reflects reinvestment
of dividends and capital gain distributions.
The Fund's performance is compared to the Standard & Poor's 500 Stock Index, a
broad measure of stock market as a whole. The index is unmanaged and does not
reflect the expenses associated with a mutual fund, such as investment
management and fund accounting fees. The Fund's performance reflects the
deduction of fees for these value-added services. Investors cannot invest
directly in an index, although they can invest in the underlying securities.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
88
<PAGE>
ISG Equity Income Fund
(as of December 31, 1999)
- --------------------------------------------------------------------------------
[CHART]
Sector Profile*
Capital Goods and Industry 14.5%
Consumer Cyclicals 6.1%
Capital Goods and Technology 11.9%
Health Care 4.4%
Energy 6.6%
Consumer Services 5.1%
Cash and Cash Equivalents 4.2%
Utilities/Telecommunications 17.3%
Consumer Staples 7.9%
Financial Services 16.0%
Transportation 0.5%
S&P Depository Receipts 1.5%
Basic Materials 4.0%
Top 10 Equity Holdings*
<TABLE>
<CAPTION>
Percent of
Total Investments**
-------------------
<C> <S> <C>
1. Exxon Mobile Corp. ............................... 3.2%
2. Automatic Data Processing......................... 2.8%
3. Citigroup, Inc. .................................. 2.4%
4. GTE............................................... 2.3%
5. Electronic Data Systems........................... 2.2%
6. Duke Energy Corp. ................................ 2.2%
7. AT&T Corp. ....................................... 2.2%
8. General Electric Co. ............................. 2.1%
9. Mellon Financial Corp. ........................... 2.1%
10. Mead Corp. ....................................... 2.1%
</TABLE>
* The Fund's portfolio composition is subject to change.
** Total investments excluding short-term securities held as
collateral.
89
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Equity Income Fund December 31, 1999
Common Stocks (83.8%)
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- ------------
<S> <C> <C>
Aerospace & Military Technology (1.2%)
United Technologies Corp ............................... 16,600 $ 1,079,000
------------
Automobiles (1.5%)
Ford Motor Co. ......................................... 26,000 1,389,375
------------
Banking (6.0%)
Bank of America Corp. .................................. 5,000 250,938
First Tennessee National Corp. ......................... 25,000 712,500
Mellon Financial Corp................................... 55,500 1,890,468
Wachovia Corp. ......................................... 16,000 1,088,000
Wells Fargo & Co. ...................................... 38,600 1,560,887
------------
5,502,793
------------
Beverages (1.0%)
PepsiCo, Inc............................................ 25,500 898,875
------------
Business Equipment & Services (3.4%)
Electronic Data Systems Corp............................ 30,000 2,008,125
Pitney Bowes, Inc....................................... 22,000 1,062,875
------------
3,071,000
------------
Chemicals (0.9%)
Du Pont (E.I.) de Nemours & Co.......................... 12,500 823,438
------------
Cosmetics & Toiletries (1.4%)
Colgate-Palmolive Co. .................................. 14,000 910,000
Unilever................................................ 7,500 408,281
------------
1,318,281
------------
Data Processing (2.7%)
Automatic Data Processing, Inc.......................... 46,200 2,489,025
------------
Electrical Equipment (4.8%)
Emerson Electric........................................ 26,400 1,514,700
General Electric Co. ................................... 12,500 1,934,374
Honeywell International, Inc. .......................... 15,875 915,789
------------
4,364,863
------------
Electronic Components (0.5%)
Texas Instruments, Inc. ................................ 4,500 435,938
------------
Financial Services (5.2%)
American Express Co. ................................... 5,500 914,375
Citigroup, Inc. ........................................ 38,750 2,153,046
Fannie Mae.............................................. 26,400 1,648,350
------------
4,715,771
------------
Food & Related (2.8%)
Bestfoods............................................... 21,000 1,103,813
Heinz (H.J.) Co......................................... 36,500 1,453,156
------------
2,556,969
------------
Health Care--Drugs (4.5%)
Bristol Myers Squibb Co................................. 16,300 1,046,255
Merck & Co., Inc........................................ 21,000 1,408,312
Pharmacia & Upjohn, Inc................................. 4,000 180,000
Schering-Plough Corp.................................... 13,000 548,438
Warner-Lambert Co....................................... 11,000 901,313
------------
4,084,318
------------
Household--General Products (1.7%)
Procter & Gamble Co. ................................... 14,000 1,533,875
------------
</TABLE>
Common Stocks, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- ------------
<S> <C> <C>
Industrial Goods & Services (1.7%)
Hewlett-Packard Co. .................................... 6,300 $ 717,806
IBM Corp. .............................................. 8,000 864,000
------------
1,581,806
------------
Insurance (0.7%)
Torchmark Corp.......................................... 21,000 610,313
------------
Machinery & Equipment (1.6%)
Deere & Co.............................................. 33,000 1,431,375
------------
Manufacturing (1.9%)
Minnesota Mining & Manufacturing Co..................... 17,500 1,712,813
------------
Oil & Gas Exploration & Production (7.3%)
Conoco, Inc., Class A................................... 58,000 1,435,500
Enron Corp.............................................. 29,000 1,286,875
Exxon Mobil Corp........................................ 35,542 2,863,352
Royal Dutch Petroleum................................... 16,300 985,131
------------
6,570,858
------------
Paper and Forest (2.0%)
Mead Corp............................................... 42,500 1,846,094
------------
Petroleum--Services (1.7%)
El Paso Energy Corp..................................... 15,500 601,594
Halliburton Co.......................................... 24,000 966,000
------------
1,567,594
------------
Publishing (2.6%)
Gannett Co., Inc........................................ 15,600 1,272,375
McGraw-Hill, Inc. ...................................... 18,500 1,140,063
------------
2,412,438
------------
Real Estate Investment Trust (3.1%)
Equity Residential Property............................. 38,000 1,622,125
Post Properties......................................... 30,500 1,166,625
------------
2,788,750
------------
Retail (5.3%)
Dayton Hudson Corp. .................................... 13,000 954,688
Dollar General Stores................................... 16,000 364,000
Dollar General Stores STRYPES Trust..................... 19,000 686,375
McDonald's Corp. ....................................... 36,500 1,471,406
Wal-Mart Stores, Inc. .................................. 20,000 1,382,500
------------
4,858,969
------------
Telecommunications (3.3%)
BCE, Inc. .............................................. 15,000 1,352,813
Motorola, Inc. ......................................... 11,500 1,693,375
------------
3,046,188
------------
Transportation (0.6%)
CSX Corp. .............................................. 18,000 564,750
------------
Utilities (1.3%)
NiSource, Inc. ......................................... 31,000 554,125
Sierra Pacific Resources................................ 38,880 673,110
------------
1,227,235
------------
Utilities-Electric (2.2%)
Duke Energy Corp. ...................................... 40,000 2,005,000
------------
</TABLE>
Continued
90
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Equity Income Fund December 31, 1999
Common Stocks, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- ------------
<S> <C> <C>
Utilities-Gas & Pipeline (2.1%)
The Williams Cos., Inc................................. 31,000 $ 947,438
Washington Gas Light Co................................ 34,000 935,000
------------
1,882,438
------------
Utilities-Telephone (7.7%)
AT&T Corp.............................................. 38,750 1,966,562
GTE Corp............................................... 29,000 2,046,312
SBC Communications, Inc................................ 27,000 1,316,250
Sprint Corp............................................ 12,500 841,406
Telefonos de Mexico SA, Class L, ADR................... 6,500 731,250
------------
6,901,780
------------
Wholesale (1.1%)
Sysco Corp............................................. 26,000 1,028,625
------------
TOTAL COMMON STOCKS (Cost $69,658,137)................. 76,300,547
------------
Convertible Preferred Stocks (5.9%)
Containers & Packaging (1.1%)
Sealed Air Corp., 4/1/18............................... 20,500 1,035,250
------------
Financial Services (1.3%)
Lincoln National Corp., 7.75%, 8/16/01................. 52,500 1,155,000
------------
Industrial Goods & Services (1.5%)
Ingersoll-Rand Co., 6.75%, 12/31/49.................... 54,200 1,382,099
------------
Pharmaceuticals (1.2%)
Monsanto Co., (ACES) 6.50%, 11/30/03................... 32,500 1,076,563
------------
Utilities (0.8%)
Texas Utilities, 9.25%................................. 16,500 719,813
------------
TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $5,838,803)... 5,368,725
------------
Convertible Bonds (2.7%)
Electronics (1.2%)
Solectron Corp., 0.00%, 1/27/19, Callable 1/27/03 @
53.06, Convertible to 7.4720 Shares Per 1000, Until
1/27/19............................................... $1,400,000 1,051,750
------------
Industrial Goods & Services (0.5%)
EMC Corp., 3.25%, 3/15/02, Callable 3/15/00 @ 101.3,
Convertible to 88.2807 Shares Per 1000, Until
3/15/02............................................... 50,000 482,625
------------
Telecommunications (1.0%)
Clear Channel Communications, 2.63%, 4/1/03, Callable
4/1/01 @ 101.05, Convertible to 16.1421 Shares Per
1000, Until 4/1/03.................................... 600,000 887,250
------------
TOTAL CONVERTIBLE BONDS (Cost $2,060,980).............. 2,421,625
------------
</TABLE>
Corporate Bonds (1.3%)
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- ------------
<S> <C> <C>
Retail (1.3%)
Wal-Mart Stores, 6.88%, 8/10/09....................... $1,250,000 $ 1,217,188
------------
TOTAL CORPORATE BONDS (Cost $1,243,628)............... 1,217,188
------------
Investment Companies (5.5%)
AIM Liquid Assets Money Market Fund................... 73,163 73,163
ISG Prime Money Market Fund........................... 3,505,040 3,505,040
S&P 500 Depository Receipt............................ 9,800 1,439,375
------------
TOTAL INVESTMENT COMPANIES
(Cost $4,891,752).................................... 5,017,578
------------
Cash Equivalents (0.0%)
Bank of New York Cash Reserve......................... $ 1,025 1,025
------------
TOTAL CASH EQUIVALENTS (Cost $1,025).................. 1,025
------------
Short-Term Securities+ (23.5%)
Commercial Paper (19.1%)
Asset Backed--Miscellaneous (2.1%)
Enterprise Funding Corp., 5.95%, 1/13/00.............. 362,089 358,558
Falcon Asset Securitization Corp., 6.10%, 1/24/00..... 572,744 563,524
Preferred Receivables Funding Corp., 6.05%, 1/10/00... 324,746 321,089
Receivables Capital Corp., 6.07%, 1/28/00............. 655,849 645,565
------------
1,888,736
------------
Finanacial Services (8.2%)
Golden Funding Corp., 6.10%, 1/28/00.................. 1,374,585 1,353,337
Liberty Street Funding Corp., 6.07%--6.13%, 1/31/00--
2/17/00.............................................. 1,002,302 984,368
Moat Funding Corp., 5.98%--6.07%, 1/14/00--2/11/00.... 1,558,894 1,537,123
Orix Corp., 6.47%--6.50%, 1/10/00--1/14/00............ 2,426,315 2,399,855
Superior Funding Corp., 6.00%--6.14%, 1/18/00--
1/31/00.............................................. 1,168,541 1,152,954
------------
7,427,637
------------
Miscellaneous (8.8%)
ConAgra, Inc., 6.25%--6.33%, 1/18/00--2/4/00.......... 2,144,640 2,121,828
MCI WorldCom, 6.11%, 1/18/00.......................... 429,558 425,038
Moriarity, 12.75%, 1/4/00............................. 2,863,720 2,859,663
Norfolk Southern Corp., 6.30%, 1/14/00................ 1,145,488 1,133,460
Tyco International, Ltd., 6.43%--6.65%, 1/10/00--
1/31/00.............................................. 1,575,046 1,557,778
------------
8,097,767
------------
Total Commercial Paper................................ 17,414,140
------------
</TABLE>
Continued
91
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Equity Income Fund December 31, 1999
Short-Term Securities+, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- ----------
<S> <C> <C>
Floating Rate Notes (1.5%)
Finanacial Services (1.0%)
General Motors Acceptance Corp., 4.49%*, 11/13/00........ $ 343,646 $ 343,646
KeyCorp, 6.42%*, 10/23/00................................ 286,372 286,372
Textron Financial Corp., 5.92%*, 5/12/00................. 286,372 286,203
----------
916,221
----------
Miscellaneous (0.5%)
Tyco International, Ltd., 6.72%*, 9/5/00................. 429,558 429,452
----------
Total Floating Rate Notes................................ 1,345,673
----------
Investment Companies (2.9%)
AIM Liquid Asset Money Market Fund....................... 2,672,188 2,672,188
----------
TOTAL SHORT-TERM SECURITIES
(Cost $21,432,001)...................................... 21,432,001
----------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
(Note 2)
------------
<S> <C> <C>
TOTAL INVESTMENTS (Cost $105,126,326) (a) -- (122.7%) $111,758,689
Liabilities in excess of other
assets -- (-22.7%).......................................... (20,686,169)
------------
TOTAL NET ASSETS -- (100.0%) . $ 91,072,520
============
</TABLE>
- ---------
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting in excess of federal income tax reporting of
$384,551. Cost for federal income tax purposes differs from value by net
unrealized appreciation of securities as follows:
<TABLE>
<S> <C> <C>
Unrealized appreciation..................................... $10,639,327
Unrealized depreciation..................................... (4,391,515)
--- -----------
Net unrealized appreciation................................. $ 6,247,812
=== ===========
</TABLE>
* Variable rate security. Rate represents rate in effect at December 31, 1999.
+ Represents securities purchased with cash collateral received on loaned
securities.
ACES -- Adjustable Conversion-Rate Equity Security Units
ADR -- American Depository Receipt
STRYPES -- Structured Yield Product Exchangeable for Stock
See notes to financial statements
92
<PAGE>
ISG FUNDS
Equity Income Fund
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $105,126,326)............ $111,758,689
Cash................................................. 71,593
Interest and dividends receivable.................... 185,880
Receivable for capital shares issued................. 11,320
Receivable for investments sold...................... 944,068
Receivable from investment adviser................... 1,943
Deferred organization costs.......................... 2,068
Prepaid expenses and other assets.................... 18,258
------------
Total Assets........................................ 112,993,819
Liabilities:
Payable for return of collateral held for securities
on loan............................................. $21,503,594
Distributions payable................................ 87,593
Payable for investments purchased.................... 229,230
Payable for capital shares redeemed.................. 6,202
Accrued expenses and other payables:
Investment advisory fees............................ 50,335
Administration fees................................. 1,497
Distribution fees................................... 18,212
Other............................................... 24,636
-----------
Total Liabilities................................... 21,921,299
------------
Net Assets:
Capital.............................................. 84,659,225
Undistributed (distributions in excess of) net
investment income................................... 9,464
Undistributed (distributions in excess of) net
realized gains...................................... (228,532)
Net unrealized appreciation (depreciation) from
investments......................................... 6,632,363
------------
Net Assets........................................... $ 91,072,520
============
Class A Shares
Net Assets.......................................... $ 5,655,679
Shares outstanding.................................. 601,082
Redemption price per share.......................... $ 9.41
============
Class A Shares -- Maximum Sales Charge............... 4.75%
------------
Maximum Offering Price Per Share (100%/(100% --
Maximum Sales Charge) of net asset value adjusted
to the nearest cent)............................... $ 9.88
============
Class B Shares
Net Assets.......................................... $ 7,494,858
Shares outstanding.................................. 797,100
Offering price per share*........................... $ 9.40
============
Institutional Shares
Net Assets.......................................... $ 77,921,983
Shares outstanding.................................. 8,275,700
Offering and redemption price per share............. $ 9.42
============
</TABLE>
- ---------
* Redemption price per share varies by length of time shares are held.
Statement of Operations
For the year ended December 31, 1999
<TABLE>
<S> <C> <C>
Investment Income:
Interest income......................................... $ 87,941
Dividend income......................................... 2,229,853
Income from securities lending.......................... 74,592
Foreign withholding tax expense......................... (4,137)
-----------
Total Investment Income................................ 2,388,249
Expenses:
Investment advisory fees................................ $585,925
Administration fees..................................... 135,214
Distribution fees -- Class A Shares..................... 13,508
Distribution fees -- Class B Shares..................... 50,562
Shareholder servicing fees -- Class A Shares............ 8,105
Shareholder servicing fees -- Class B Shares............ 16,854
Shareholder servicing fees -- Institutional Shares...... 116,997
Custodian fees.......................................... 27,840
Accounting fees......................................... 25,745
Transfer agent fees..................................... 73,493
Directors' fees......................................... 2,175
Other fees.............................................. 79,745
--------
Total expenses before voluntary fee
reductions/reimbursements............................. 1,136,163
Expenses voluntarily reduced/reimbursed................ (12,160)
-----------
Net expenses........................................... 1,124,003
-----------
Net Investment Income................................... 1,264,246
-----------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment
transactions........................................... 3,671,328
Net change in unrealized appreciation (depreciation)
from investments....................................... (1,445,465)
-----------
Net realized/unrealized gains (losses) from
investments............................................ 2,225,863
-----------
Change in net assets resulting from operations.......... $ 3,490,109
===========
</TABLE>
See notes to financial statements
93
<PAGE>
ISG FUNDS
Equity Income Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income........................... $ 1,264,246 $ 856,254
Net realized gains (losses) from investment
transactions................................... 3,671,328 17,445,684
Net change in unrealized appreciation
(depreciation) from investments................ (1,445,465) (4,356,815)
----------- ------------
Change in net assets resulting from operations... 3,490,109 13,945,123
----------- ------------
Distributions to Class A Shareholders:
From net investment income...................... (67,866) (17,468)
In excess of net investment income.............. (130) --
From net realized gains on investment
transactions................................... (509,543) (643,995)
In excess of net realized gains................. (13,745) --
Distributions to Class B Shareholders:
From net investment income...................... (45,378) (4,921)(a)
In excess of net investment income.............. (87) --
From net realized gains on investment
transactions................................... (663,995) (657,287)(a)
In excess of net realized gains................. (17,911) --
Distributions to Institutional Shareholders:
From net investment income...................... (1,151,002) (833,860)
In excess of net investment income.............. (2,197) --
From net realized gains on investment
transactions................................... (6,791,866) (14,249,617)
In excess of net realized gains................. (183,209) --
----------- ------------
Change in net assets from shareholder
distributions................................... (9,446,929) (16,407,148)
----------- ------------
Change in net assets from capital transactions... 13,340,463 17,813,222
----------- ------------
Change in net assets............................. 7,383,643 15,351,197
Net Assets:
Beginning of period............................. 83,688,877 68,337,680
----------- ------------
End of period................................... $91,072,520 $ 83,688,877
=========== ============
</TABLE>
- ---------
(a) For the period from February 3, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
94
<PAGE>
ISG FUNDS
Equity Income Fund
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
1999 1998 1997 (a)
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period... $10.05 $10.37 $10.00
------ ------ ------
Investment Activities
Net investment income (loss).......... 0.12 0.10 0.65
Net realized and unrealized gains
(losses) from investments............ 0.25 1.81 1.71
------ ------ ------
Total from Investment Activities...... 0.37 1.91 2.36
------ ------ ------
Distributions
Net investment income................. (0.12) (0.10) (0.19)
Net realized gains.................... (0.87) (2.13) (1.80)
In excess of net realized gains....... (0.02) -- --
------ ------ ------
Total Distributions................... (1.01) (2.23) (1.99)
------ ------ ------
Net change in asset value.............. (0.64) (0.32) 0.37
------ ------ ------
Net Asset Value, End of Period......... $ 9.41 $10.05 $10.37
====== ====== ======
Total Return (excludes sales charge)... 3.77% 19.46% 24.20%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)...... $5,656 $3,658 $ 388
Ratio of expenses to average net
assets................................ 1.42% 1.45% 1.06%(c)
Ratio of net investment income to
average net assets.................... 1.25% 0.86% 2.11%(c)
Ratio of expenses to average net
assets*............................... 1.43% 1.45% 1.31%(c)
Portfolio turnover**................... 126% 159% 86%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If such
voluntary fee reductions/reimbursements had not occurred, the ratios would
have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
(b) Not annualized.
(c) Annualized.
Financial Highlights, Class B Shares
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1999 1998 (a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period................ $10.04 $10.63
------ ------
Investment Activities
Net investment income (loss)....................... 0.06 0.04
Net realized and unrealized gains (losses) from
investments....................................... 0.26 1.54
------ ------
Total from Investment Activities................... 0.32 1.58
------ ------
Distributions
Net investment income.............................. (0.07) (0.04)
Net realized gains................................. (0.87) (2.13)
In excess of net realized gains.................... (0.02) --
------ ------
Total Distributions................................ (0.96) (2.17)
------ ------
Net change in asset value........................... (0.64) (0.59)
------ ------
Net Asset Value, End of Period...................... $ 9.40 $10.04
====== ======
Total Return (excludes redemption charge)........... 3.18% 15.79%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................... $7,495 $4,189
Ratio of expenses to average net assets............. 2.02% 2.20%(c)
Ratio of net investment income to average net
assets............................................. 0.65% 0.12%(c)
Ratio of expenses to average net assets*............ 2.03% (d)
Portfolio turnover**................................ 126% 159%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If such
voluntary fee reductions/reimbursements had not occurred, the ratios would
have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from February 3, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
(d) There were no fee reductions in this period.
See notes to financial statements
95
<PAGE>
ISG FUNDS
Equity Income Fund
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, December 31, December31,
1999 1998 1997 (a)
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period... $ 10.05 $ 10.37 $ 11.73
------- ------- -------
Investment Activities
Net investment income (loss).......... 0.15 0.13 0.06
Net realized and unrealized gains
(losses) from investments............ 0.26 1.81 0.44
------- ------- -------
Total from Investment Activities...... 0.41 1.94 0.50
------- ------- -------
Distributions
Net investment income................. (0.15) (0.13) (0.06)
Net realized gains.................... (0.87) (2.13) (1.80)
In excess of net realized gains....... (0.02) -- --
------- ------- -------
Total Distributions................... (1.04) (2.26) (1.86)
------- ------- -------
Net change in asset value.............. (0.63) (0.32) (1.36)
------- ------- -------
Net Asset Value, End of Period......... $ 9.42 $ 10.05 $ 10.37
======= ======= =======
Total Return........................... 4.13% 19.72% 4.62%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)...... $77,922 $75,842 $67,949
Ratio of expenses to average net
assets................................ 1.17% 1.16% 0.68%(c)
Ratio of net investment income to
average net assets.................... 1.48% 1.14% 2.15%(c)
Ratio of expenses to average net
assets*............................... 1.18% 1.17% 1.09%(c)
Portfolio turnover**................... 126% 159% 86%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If such
voluntary fee reductions/reimbursements had not occurred, the ratios would
have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
96
<PAGE>
Ron Lindquist
[PHOTO] Portfolio Manager
ISG Large-Cap Equity Fund
- --------------------------------------------------------------------------------
Investment Goal
The Fund seeks to provide investors with long-term capital appreciation by
investing primarily in large-capitalization stocks (market caps over $1
billion). The Fund's holdings are characterized by higher-than-average return
on equity, superior long-term earnings-per-share growth rates and consistent
earnings generation. This Fund is suitable for investors who are investing for
the long term and are willing to assume the additional risk of investing in
growth stocks in return for potentially higher total returns.
- --------------------------------------------------------------------------------
Q. How did the Fund perform during the period?
A. For the 12 months ended December 31, 1999, the Fund's total return was
18.85% (Class A Shares at NAV).+ In comparison, the Standard & Poor's 500 Index
rose 21.03%.
Q. What factors affected your performance?
A. There appeared to be a great deal of randomness in the market this past
year, which presented a number of challenges throughout the period. Our long-
term positions in technology served us well throughout the year. On the other
hand, our performance was not helped by our long-term holdings in health care,
consumer cyclicals and consumer staples; stocks in these economic sectors were
left behind in the mania for tech issues. The narrowness that was so pervasive
in 1998 was even more pronounced in 1999. If you did not own a handful of
large-cap growth stocks, especially in the tech sector, you simply did not
perform. Fortunately, we had our share of high-performing names.
As valuations in technology stocks continued to rise higher during the year, we
pared back some positions in that sector. Our concern was that they were
becoming risky from a short-term market perspective, and were becoming too
large a portion of the portfolio. When we sold some holdings and reduced our
market risk exposure, we took the proceeds and put them into areas that had
been ignored during the market's dramatic rise in the fourth quarter--including
the capital goods sector. Some of the securities we acquired were Allied
Signal, which turned into Honeywell International (1.43% of the Fund's net
assets), Illinois Toolworks (0.84%), McGraw-Hill (0.38%), Interpublic Group
(1.08%), TJX (1.02%) and Dollar General Stores (0.57%).*
Q. To what extent did you reduce your exposure to technology?
A. Only modestly. For example, we started the fourth quarter with approximately
29% of the portfolio invested in technology and ended the quarter with roughly
the same allocation, despite the fact that our tech holdings grew in value by
about 30%.*
Our decision to reduce our commitment to technology was a consequence of our
bottom-up investment approach. While we are generally positive about
technology, in the long run many of the stocks we held appreciated so quickly
in price that they appeared to be overpriced. As a group, they exceeded the
amount of market exposure we wanted to add to the portfolio. Therefore, we
believe it was prudent of us to trim our exposure in this one sector.
Q. What is your outlook for 2000?
A. The tremendous growth of technology companies makes them, and their expected
earnings streams, very attractive. We intend to continue with a strong focus on
technology.
Having said that, we must note that we are concerned with the potential damage
rising interest rates could have on growth stocks. If rates continue to rise,
then, eventually, we will see rates put the brakes on the price-to-earnings
multiple expansion that we saw in technology over the last two years. In our
opinion, these multiples will begin to contract, and it will be unlikely that
we will see anywhere close to the price growth that drove the market higher
over the last two years.
- ---------
+ Including the 4.75% sales load, the Fund's return was 13.22% for the period.
* The Fund's portfolio composition is subject to change.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
97
<PAGE>
ISG Large-Cap Equity Fund
Performance (as of December 31, 1999)
- --------------------------------------------------------------------------------
[CHART]
Class A Shares
Large-Cap Equity Large-Cap Equity S&P 500
Fund with Sales Charge Fund without Sales Charge Stock Index
8/1992 9,525 10,000 10,000
12/1992 10,056 10,559 10,631
1993 10,619 11,150 11,693
1994 10,808 11,348 11,846
1995 14,589 15,319 16,280
1996 17,161 18,019 20,036
1997 23,326 24,493 26,721
1998 32,161 33,769 34,358
1999 38,222 40,133 41,584
[CHART]
Class B Shares
Large-Cap Equity Fund S&P 500 Stock Index
8/1/1992 10,000 10,000
1992 10,559 10,631
1993 11,150 11,693
1994 11,348 11,846
1995 15,319 16,280
1996 18,019 20,036
1997 24,493 26,721
1998 33,759 34,358
1999 39,761 41,584
The Class B contingent deferred sales charge (CDSC) is not included in the
above graph, since the performance is for more than 6 years and the CDSC would
no longer apply.
[CHART]
Institutional Shares
Large-Cap Equity Fund S&P 500 Stock Index
8/92 10,000 10,000
1992 10,559 10,631
1993 11,150 11,693
1994 11,348 11,846
1995 15,319 16,280
1996 18,019 20,036
1997 24,493 26,721
1998 33,759 34,358
1999 40,118 41,584
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without Sales With Sales
Charge Charge*
Class A Shares ------------- ----------
<S> <C> <C>
1-Year................................................ 18.85% 13.22%
5-Year................................................ 28.74% 27.50%
Since Inception 8/3/92................................ 20.61% 19.82%
</TABLE>
*Reflects the maximum sales charge of 4.75%.
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without CDSC With CDSC**
Class B Shares ------------ -----------
<S> <C> <C>
1-Year................................................ 17.78% 14.78%
5-Year................................................ 28.50% 28.43%
Since Inception 8/3/92................................ 20.46% 20.46%
</TABLE>
**Reflects the applicable contingent deferred sales charge (maximum 4.00%).
The data for Class B Shares primarily represents the results of the Class A
Shares. Actual Class B Shares average annual total return and hypothetical
growth results would have been lower. See notes below.
<TABLE>
<CAPTION>
Average Annual
Total Return
Institutional Shares --------------
<S> <C>
1-Year.......................................................... 18.84%
5-Year.......................................................... 28.73%
Since Inception 8/3/92.......................................... 20.60%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment in
the indicated share class versus a similar investment in the Fund's benchmark.
The quoted returns reflect the performance from 8/3/92 to 12/14/98 of the DG
Equity Fund, an open-end investment company that was the predecessor fund to
the ISG Large-Cap Equity Fund.
Performance for the Class B Shares, which commenced operations on 12/15/98, is
based on the historical performance of the Class A Shares (without sales
charge) prior to that date. Class A Shares performance does not reflect the
higher 12b-1 fees or the contingent deferred sales charge (CDSC). Had the CDSC
and higher 12b-1 fees been incorporated, total return and hypothetical growth
figures would have been lower.
The Institutional Share class was initially offered on 12/14/98 and reflects
the historical performance of the Class A Shares (without sales charge) prior
to that date.
The Fund's performance is compared to the Standard & Poor's 500 Stock Index, a
broad measure of the stock market as a whole. The index is unmanaged and does
not reflect the expenses associated with a mutual fund, such as investment
management and fund accounting fees. The Fund's performance reflects the
deduction of fees for these value-added services. Investors cannot invest
directly in an index, although they can invest in the underlying securities.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
98
<PAGE>
ISG Large-Cap Equity Fund
(as of December 31, 1999)
- --------------------------------------------------------------------------------
[CHART]
Sector Profile*
Health Care 19.4%
Capital Goods and Industry 14.3%
Consumer Cyclicals 9.0%
Utilities/Telecommunications 1.9%
Consumer Services 6.6%
Consumer Staples 16.1%
Basic Industry 0.9%
Capital Goods and Technology 28.1%
Cash & Cash Equivalents 3.7%
Top 10 Equity Holdings*
<TABLE>
<CAPTION>
Percent of
Total Investments**
-------------------
<C> <S> <C>
1. General Electric Co. ............................. 3.5%
2. Home Depot, Inc. ................................. 3.2%
3. Automatic Data Processing ........................ 3.0%
4. Merck & Co. ...................................... 2.9%
5. Microsoft Corp. .................................. 2.9%
6. Johnson & Johnson ................................ 2.9%
7. Schering Plough Corp. ............................ 2.9%
8. Hewlett Packard Co. .............................. 2.8%
9. Medtronic, Inc. .................................. 2.7%
10. IBM Corp. ........................................ 2.7%
</TABLE>
* The Fund's portfolio composition is subject to change.
** Total investments excluding short-term securities held as collateral.
99
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Large-Cap Equity Fund December 31, 1999
Common Stocks (97.2%)
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
----------- --------------
<S> <C> <C>
Advertising (1.1%)
The Interpublic Group of Companies, Inc........... 150,000 $ 8,653,125
--------------
Beverages (3.3%)
Coca-Cola Co...................................... 245,000 14,271,250
PepsiCo, Inc...................................... 355,000 12,513,750
--------------
26,785,000
--------------
Business Equipment & Services (3.3%)
Electronic Data Systems Corp...................... 150,000 10,040,625
Pitney Bowes, Inc................................. 335,000 16,184,688
--------------
26,225,313
--------------
Capital Goods (2.4%)
Dover Corp........................................ 420,000 19,057,500
--------------
Computer Software and Services (2.5%)
BMC Software, Inc. (b)............................ 50,000 3,996,875
EMC Corp. (b)..................................... 150,000 16,387,500
--------------
20,384,375
--------------
Consumer Non-Durables (3.7%)
Gillette Co....................................... 260,000 10,708,750
International Flavors and Fragrances, Inc......... 200,000 7,550,000
Philip Morris Cos., Inc........................... 150,000 3,478,125
Sara Lee Corp..................................... 350,000 7,721,875
--------------
29,458,750
--------------
Consumer Services (1.8%)
Disney (Walt) Co.................................. 500,000 14,625,000
--------------
Data Processing (3.0%)
Automatic Data Processing, Inc.................... 450,000 24,243,750
--------------
Electrical Equipment (4.9%)
General Electric Co............................... 180,000 27,855,000
Honeywell International, Inc...................... 200,000 11,537,500
--------------
39,392,500
--------------
Food & Related (1.7%)
Bestfoods......................................... 150,000 7,884,375
Heinz (H.J.) Co................................... 150,000 5,971,875
--------------
13,856,250
--------------
Health Care (5.0%)
American Home Products Corp....................... 300,000 11,831,250
Johnson & Johnson................................. 250,000 23,281,250
United Health Care Corp........................... 100,000 5,312,500
--------------
40,425,000
--------------
Health Care -- Drugs (11.9%)
Abbott Laboratories............................... 400,000 14,525,000
Amgen, Inc. (b)................................... 330,000 19,820,625
Merck & Co., Inc.................................. 350,000 23,471,874
Pfizer, Inc....................................... 450,000 14,596,875
Schering-Plough Corp.............................. 550,000 23,203,125
--------------
95,617,499
--------------
Household -- General Products (2.8%)
Clorox Co......................................... 80,000 4,030,000
Procter & Gamble Co............................... 170,000 18,625,625
--------------
22,655,625
--------------
</TABLE>
Common Stocks, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
----------- --------------
<S> <C> <C>
Industrial Goods & Services (5.5%)
Hewlett-Packard Co.................................. 200,000 $ 22,787,500
IBM Corp............................................ 200,000 21,600,000
--------------
44,387,500
--------------
Manufacturing (2.8%)
Illinois Tool Works, Inc............................ 100,000 6,756,250
Tyco International, Ltd............................. 400,000 15,550,000
--------------
22,306,250
--------------
Medical Equipment & Supplies (3.5%)
IMS Health, Inc..................................... 225,000 6,117,188
Medtronic, Inc...................................... 600,000 21,862,500
--------------
27,979,688
--------------
Pharmaceuticals (0.7%)
Cardinal Health, Inc................................ 120,000 5,745,000
--------------
Publishing (0.4%)
McGraw-Hill, Inc.................................... 50,000 3,081,250
--------------
Raw Materials (1.1%)
Avery Dennison Corp................................. 120,000 8,745,000
--------------
Retail (9.3%)
Albertsons, Inc..................................... 200,000 6,450,000
Dollar General Stores............................... 200,000 4,550,000
Gap (The), Inc...................................... 300,000 13,800,000
McDonald's Corp..................................... 520,000 20,962,500
TJX Cos., Inc....................................... 400,000 8,175,000
Wal-Mart Stores, Inc................................ 300,000 20,737,500
--------------
74,675,000
--------------
Retail -- Specialty Stores (5.7%)
Home Depot, Inc..................................... 375,000 25,710,938
Walgreen Co......................................... 700,000 20,475,000
--------------
46,185,938
--------------
Technology (15.1%)
Applied Materials, Inc. (b)......................... 100,000 12,668,750
Boeing Co........................................... 250,000 10,390,625
Compaq Computer Corp................................ 700,000 18,943,750
Intel Corp.......................................... 250,000 20,578,125
Microsoft Corp. (b)................................. 200,000 23,349,999
Oracle Corp. (b).................................... 150,000 16,809,375
Sun Microsystems, Inc. (b).......................... 250,000 19,359,375
--------------
122,099,999
--------------
Telecommunications (2.1%)
Lucent Technologies, Inc............................ 150,000 11,221,875
Motorola, Inc....................................... 40,000 5,890,000
--------------
17,111,875
--------------
Utilities -- Telephone (2.0%)
AT&T Corp........................................... 195,000 9,896,250
SBC Communications, Inc............................. 120,000 5,850,000
--------------
15,746,250
--------------
Wholesale (1.6%)
Sysco Corp.......................................... 320,000 12,660,000
--------------
TOTAL COMMON STOCKS (Cost $340,714,353)............. 782,103,437
--------------
</TABLE>
Continued
100
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Large-Cap Equity Fund December 31, 1999
Investment Companies (2.6%)
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
----------- --------------
<S> <C> <C>
AIM Liquid Assets Money Market Fund.............. 5,919 $ 5,919
ISG Prime Money Market Fund...................... 20,601,164 20,601,164
--------------
TOTAL INVESTMENT COMPANIES (Cost $20,607,083).... 20,607,083
--------------
Cash Equivalents (0.0%)
Bank of New York Cash Reserve.................... $ 1,000 1,000
--------------
TOTAL CASH EQUIVALENTS (Cost $1,000)............. 1,000
--------------
Short-Term Securities+ (50.3%)
Commercial Paper (40.8%)
Asset Backed -- Miscellaneous (4.4%)
Enterprise Funding Corp., 5.95%, 1/13/00......... 6,832,235 6,765,610
Falcon Asset Securitization Corp., 6.10%,
1/24/00......................................... 10,807,078 10,633,115
Preferred Receivables Funding Corp., 6.05%,
1/10/00......................................... 6,127,612 6,058,619
Receivables Capital Corp., 6.07%, 1/28/00........ 12,375,185 12,181,133
--------------
35,638,477
--------------
Finanacial Services (17.4%)
Golden Funding Corp., 6.10%, 1/28/00............. 25,936,989 25,536,048
Liberty Street Funding Corp., 6.07%-6.13%,
1/31/00-2/17/00................................. 18,912,386 18,573,984
Moat Funding Corp., 5.98%-6.07%, 1/14/00-
2/11/00......................................... 29,414,707 29,003,902
Orix Corp., 6.47%-6.50%, 1/10/00-1/14/00......... 45,782,027 45,282,758
Superior Funding Corp., 6.00%-6.14%, 1/18/00-
1/31/00......................................... 22,049,142 21,755,028
--------------
140,151,720
--------------
Miscellaneous (19.0%)
ConAgra, Inc., 6.25%-6.33%, 1/18/00-2/4/00....... 40,467,105 40,036,674
MCI WorldCom, 6.11%, 1/18/00..................... 8,105,310 8,020,019
Moriarity, 12.75%, 1/4/00........................ 54,035,393 53,958,843
Norfolk Southern Corp., 6.30%, 1/14/00........... 21,614,157 21,387,208
Tyco International, Ltd., 6.43%-6.65%, 1/10/00-
1/31/00......................................... 29,719,466 29,393,633
--------------
152,796,377
--------------
Total Commercial Paper........................... 328,586,574
--------------
</TABLE>
Short-Term Securities+, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
----------- --------------
<S> <C> <C>
Floating Rate Notes (3.2%)
Finanacial Services (2.2%)
General Motors Acceptance Corp., 4.49%*,
11/13/00......................................... $ 6,484,247 $ 6,484,247
KeyCorp, 6.42%*, 10/23/00......................... 5,403,539 5,403,539
Textron Financial Corp., 5.92%*, 5/12/00.......... 5,403,539 5,400,352
--------------
17,288,138
--------------
Miscellaneous (1.0%)
Tyco International, Ltd., 6.72%*, 9/5/00.......... 8,105,310 8,103,307
--------------
Total Floating Rate Notes......................... 25,391,445
--------------
Investment Companies (6.3%)
AIM Liquid Asset Money Market Fund................ 50,421,393 50,421,393
--------------
TOTAL SHORT-TERM SECURITIES
(Cost $404,399,412).............................. 404,399,412
--------------
TOTAL INVESTMENTS (Cost $765,721,848) (a) --
(150.1%)......................................... 1,207,110,932
Liabilities in excess of other assets -- (-
50.1%)........................................... (403,003,158)
--------------
TOTAL NET ASSETS -- (100.0%)...................... $ 804,107,774
==============
</TABLE>
- ---------
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation........................................ $ 450,420,585
Unrealized depreciation........................................ (9,031,501)
-------------
Net unrealized appreciation.................................... $ 441,389,084
=============
</TABLE>
(b) Non-income producing security.
* Variable rate security. Rate represents rate in effect at December 31, 1999.
+ Represents securities purchased with cash collateral received on securities
loaned.
See notes to financial statements
101
<PAGE>
ISG FUNDS
Large-Cap Equity Fund
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
December 31, 1999
<S> <C> <C>
Assets:
Investments, at value (cost $765,721,848).......... $1,207,110,932
Cash............................................... 1,350,883
Interest and dividends receivable.................. 766,612
Receivable for capital shares issued............... 108,853
Receivable for investments sold.................... 3,558,788
Receivable from investment adviser................. 99,776
Prepaid expenses and other assets.................. 29,231
--------------
Total Assets...................................... 1,213,025,075
Liabilities:
Payable for return of collateral held for
securities on loan................................ $405,750,295
Distributions payable.............................. 267,298
Payable for investments purchased.................. 2,152,500
Payable for capital shares redeemed................ 45,026
Accrued expenses and other payables:
Investment advisory fees.......................... 491,404
Administration fees............................... 13,113
Distribution fees................................. 110,895
Custodian fees.................................... 18,075
Other............................................. 68,695
------------
Total Liabilities................................. 408,917,301
--------------
Net Assets:
Capital............................................ 315,063,280
Undistributed (distributions in excess of) net
realized gains.................................... 47,655,410
Net unrealized appreciation (depreciation) from
investments....................................... 441,389,084
--------------
Net Assets......................................... $ 804,107,774
==============
Class A Shares
Net Assets........................................ $ 79,210,799
Shares outstanding................................ 2,826,994
Redemption price per share........................ $ 28.02
==============
Class A Shares -- Maximum Sales Charge............. 4.75%
--------------
Maximum Offering Price Per Share (100%/(100% --
Maximum Sales Charge) of net asset value adjusted
to the nearest cent)............................. $ 29.42
==============
Class B Shares
Net Assets........................................ $ 18,583,687
Shares outstanding................................ 669,669
Offering price per share*......................... $ 27.75
==============
Institutional Shares
Net Assets........................................ $ 706,313,288
Shares outstanding................................ 25,214,333
Offering and redemption price per share........... $ 28.01
==============
</TABLE>
- ---------
* Redemption price per share varies by length of time shares are held.
Statement of Operations
<TABLE>
<CAPTION>
For the year ended December 31, 1999
<S> <C> <C>
Investment Income:
Dividend income...................................... $ 8,553,027
Income from securities lending....................... 242,098
------------
Total Investment Income............................. 8,795,125
Expenses:
Investment advisory fees............................. $5,769,062
Administration fees.................................. 1,153,818
Distribution fees -- Class A
Shares.............................................. 172,705
Distribution fees -- Class B
Shares.............................................. 74,774
Shareholder servicing fees -- Class A Shares......... 103,711
Shareholder servicing fees -- Class B Shares......... 24,926
Shareholder servicing fees -- Institutional Shares... 1,034,936
Custodian fees....................................... 184,950
Accounting fees...................................... 25,058
Transfer agent fees.................................. 204,900
Directors' fees...................................... 24,236
Other fees........................................... 275,331
----------
Total expenses before voluntary fee
reductions/reimbursements.......................... 9,048,407
Expenses voluntarily reduced/reimbursed............. (981,992)
------------
Net expenses........................................ 8,066,415
------------
Net Investment Income................................ 728,710
------------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment
transactions........................................ 205,657,595
Net change in unrealized appreciation (depreciation)
from investments.................................... (70,610,490)
------------
Net realized/unrealized gains (losses) from
investments......................................... 135,047,105
------------
Change in net assets resulting from operations....... $135,775,815
============
</TABLE>
See notes to financial statements
102
<PAGE>
ISG FUNDS
Large-Cap Equity Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Period Ended Year Ended
December 31, December 31, February 28,
1999 1998 (a) 1998
------------- ------------ ------------
<S> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income........... $ 728,710 $ 1,332,058 $ 3,179,613
Net realized gains (losses) from
investment transactions........ 205,657,595 32,550,780 9,991,335
Net change in unrealized
appreciation (depreciation)
from investments............... (70,610,490) 146,744,324 193,990,094
------------- ------------ ------------
Change in net assets resulting
from operations................. 135,775,815 180,627,162 207,161,042
------------- ------------ ------------
Distributions to Class A
Shareholders:
From net investment income...... (73,141) (1,672,643) (3,295,484)
In excess of net investment
income......................... (506) -- --
From net realized gains on
investment transactions........ (11,380,946) (38,068,113) (4,463,969)
Distributions to Class B
Shareholders:
From net investment income...... -- (10)(b) --
From net realized gains on
investment transactions........ (2,571,829) -- --
Distributions to Institutional
Shareholders:
From net investment income...... (655,569) (58,445)(c) --
In excess of net investment
income......................... (4,531) -- --
From net realized gains on
investment transactions........ (104,281,480) -- --
------------- ------------ ------------
Change in net assets from
shareholder distributions....... (118,968,002) (39,799,211) (7,759,453)
------------- ------------ ------------
Change in net assets from capital
transactions.................... (57,033,893) (12,124,764) 25,837,177
------------- ------------ ------------
Change in net assets............. (40,226,080) 128,703,187 225,238,766
Net Assets:
Beginning of period............. 844,333,854 715,630,667 490,391,901
------------- ------------ ------------
End of period................... $ 804,107,774 $844,333,854 $715,630,667
============= ============ ============
</TABLE>
- ---------
(a) For the period from March 1, 1998 through December 31, 1998.
(b) For the period from December 15, 1998 (commencement of operations) through
December 31, 1998.
(c) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
103
<PAGE>
ISG FUNDS
Large-Cap Equity Fund
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Year Ended Period Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, February 28, February 28, February 28, February 28,
1999 1998 (a) 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 27.55 $ 23.01 $ 16.68 $ 14.49 $ 11.41 $ 10.87
------- ------- -------- -------- -------- --------
Investment Activities
Net investment income
(loss)................ 0.03 0.05 0.11 0.14 0.16 0.16
Net realized and
unrealized gains
(losses) from
investments........... 5.07 5.79 6.48 2.54 3.63 0.71
------- ------- -------- -------- -------- --------
Total from Investment
Activities............ 5.10 5.84 6.59 2.68 3.79 0.87
------- ------- -------- -------- -------- --------
Distributions
Net investment income.. (0.03) (0.05) (0.11) (0.14) (0.17) (0.16)
Net realized gains..... (4.60) (1.25) (0.15) (0.35) (0.54) (0.17)
------- ------- -------- -------- -------- --------
Total Distributions.... (4.63) (1.30) (0.26) (0.49) (0.71) (0.33)
------- ------- -------- -------- -------- --------
Net change in asset
value.................. 0.47 4.54 6.33 2.19 3.08 0.54
------- ------- -------- -------- -------- --------
Net Asset Value, End of
Period................. $ 28.02 $ 27.55 $ 23.01 $ 16.68 $ 14.49 $ 11.41
======= ======= ======== ======== ======== ========
Total Return (excludes
sales charge).......... 18.85% 25.83%(b) 39.74% 18.79% 33.73% 8.23%
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $79,211 $57,772 $715,631 $490,392 $385,145 $259,998
Ratio of expenses to
average net assets..... 1.04% 1.03%(c) 0.99% 0.92% 0.94% 0.95%
Ratio of net investment
income to average net
assets................. 0.12% 0.21%(c) 0.54% 0.95% 1.24% 1.54%
Ratio of expenses to
average net assets*.... 1.39% 1.03%(c) (d) (d) (d) (d)
Portfolio turnover**.... 15% 3% 6% 7% 15% 1%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from March 1, 1998 through December 31, 1998. In conjunction
with the reorganization of the ISG Funds, the Fund changed its fiscal year
end to December 31.
(b) Not annualized.
(c) Annualized.
(d) There were no fee reductions in this period.
See notes to financial statements
104
<PAGE>
ISG FUNDS
Large Cap Equity Fund
Financial Highlights, Class B Shares
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1999+ 1998 (a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period................ $ 27.54 $25.98
------- ------
Investment Activities
Net investment income (loss)....................... (0.23) --
Net realized and unrealized gains (losses) from
investments....................................... 5.04 1.56
------- ------
Total from Investment Activities................... 4.81 1.56
------- ------
Distributions
Net realized gains................................. (4.60) --
------- ------
Total Distributions................................ (4.60) --
------- ------
Net change in asset value........................... 0.21 1.56
------- ------
Net Asset Value, End of Period...................... $ 27.75 $27.54
======= ======
Total Return (excludes redemption charge)........... 17.78% 6.02%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................... $18,584 $ 100
Ratio of expenses to average net assets............. 1.98% 1.10%(c)
Ratio of net investment income (loss) to average net
assets............................................. (0.79%) 0.23%(c)
Ratio of expenses to average net assets*............ 2.00% 2.11%(c)
Portfolio turnover**................................ 15% 3%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
+ Net investment income (loss) is based on average shares outstanding during
the period.
(a) For the period from December 15, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1999 1998 (a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period............... $ 27.54 $ 25.52
-------- --------
Investment Activities
Net investment income (loss)...................... 0.03 --
Net realized and unrealized gains (losses) from
investments...................................... 5.07 2.02
-------- --------
Total from Investment Activities.................. 5.10 2.02
-------- --------
Distributions
Net investment income............................. (0.03) --
Net realized gains................................ (4.60) --
-------- --------
Total Distributions............................... (4.63) --
-------- --------
Net change in asset value.......................... 0.47 2.02
-------- --------
Net Asset Value, End of Period..................... $ 28.01 $ 27.54
======== ========
Total Return....................................... 18.84% 7.92%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000).................. $706,313 $786,462
Ratio of expenses to average net assets............ 1.04% 1.04%(c)
Ratio of net investment income to average net
assets............................................ 0.11% 0.20%(c)
Ratio of expenses to average net assets*........... 1.14% 1.09%(c)
Portfolio turnover**............................... 15% 3%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
105
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
106
<PAGE>
[PHOTO]
Charles Winger
Portfolio Manager
ISG Capital Growth Fund
- --------------------------------------------------------------------------------
Investment Goal
The Fund seeks to provide investors with the potential to achieve long-term
capital growth by investing primarily in the equity securities of domestic
issuers whose earnings are growing faster than the economy as a whole. It
invests primarily in large U.S. companies with market capitalizations of at
least $500 million. This Fund is suitable for investors who are investing for
the long term and are comfortable assuming the additional risk of investing in
stocks in exchange for potentially higher total returns.
- --------------------------------------------------------------------------------
Q. How did the Fund perform during the period?
A. For the 12 months ended December 31, 1999, the Fund's total return was
21.85% (Class A Shares at NAV).+ In comparison, the Lipper Growth Fund Index/1/
was up 27.96%, and the Standard & Poor's 500 Index rose 21.03%.
Q. What factors affected your performance?
A. While we lagged behind the S&P 500 by a small margin through the first nine
months of 1999, we outperformed the S&P 500 for the year by virtue of our
powerful gains in the fourth quarter of the year. Perhaps most remarkably, we
achieved this performance in the quarter without holding a single Internet
stock in the portfolio.
This is not to say that we shied away from technology. On the contrary, we were
slightly overweighted in the tech sector, and this allocation certainly boosted
our gains, as tech stocks in general soared for much of the year.
Other factors that drove our performance included positive returns from the
medical products sector: stocks such as Biomet (0.62% of the Fund's net
assets), a maker of orthopedic implants; Stryker Corp. (1.34%), whose broadly
diversified line of products includes hospital beds; and Amgen (2.22%), which
specializes in biotechnology.*
We also had a strong rally in financial stocks in the fourth quarter, even
though the sector did not perform well for the year as a whole. We did well
with both regional and money center banks, including Citigroup (1.60%), Wells
Fargo (0.47%), Firstar (0.98%) and Fifth Third Bancorp (1.41%). For the first
time, we bought two advertising stocks: Young & Rubicam (1.02%) and Interpublic
Group (1.85%). Our thinking is that advertising will be strong in 2000 for
several reasons: It is an election year and an Olympic year, and we believe
that the interest in the Millenium and Internet advertising will continue to
grow.*
On the downside, we were hurt by positions in a number of specialty retailers,
such as Abercrombie & Fitch (1.44%). Other holdings that came under pressure
were Tyco International (1.62%) and Pitney Bowes (1.39%), the latter having
suffered from competition for stamps over the Internet.*
Q. What is your outlook for 2000?
A. We are quite cautious going into the new year. Although we are not market
timers, we raised some cash at the end of 1999, paring back those areas we felt
would get hit early in the first quarter--trimming our positions in technology,
financial services and pharmaceuticals. Consequently, we entered 2000 with our
cash levels higher than usual. We feel there will be a correction, especially
in the technology sector. We are a bit more positive toward financial stocks;
bank stocks, in particular, will do better once we get the first of the Fed's
widely anticipated rate hikes out of the way.
- ---------
+ Including the 4.75% sales load, the Fund's return was 16.05% for the
period.
/1/ The Lipper Growth Fund Index is an index of managed funds that normally
invest in companies with long-term earnings expected to grow significantly
faster than the earnings of the stocks represented in the major unmanaged
stock indices.
* The Fund's portfolio composition is subject to change.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
107
<PAGE>
ISG Capital Growth Fund
Performance (as of December 31, 1999)
- -------------------------------------------------------------------------------
[CHART]
Class A Shares
Capital Growth Capital Growth Fund S&P 500
with Sales Charge without Sales Charge Stock Index
1989 9,535 10,000 10,000
1990 8,998 9,436 9,683
1991 11,217 11,764 12,641
1992 11,945 12,527 13,610
1993 12,361 12,964 14,970
1994 12,309 12,909 15,166
1995 16,053 16,836 20,842
1996 19,625 20,582 25,651
1997 25,667 26,919 34,209
1998 33,895 35,548 43,987
1999 41,302 43,316 53,244
[CHART]
Class B Shares
Capital Growth Fund S&P 500 Stock Index
1989 10,000 10,000
1990 9,436 9,683
1991 11,764 12,641
1992 12,527 13,610
1993 12,964 14,970
1994 12,909 15,166
1995 16,836 20,842
1996 20,582 25,651
1997 26,690 34,209
1998 34,954 43,987
1999 42,334 53,244
The Class B contingent deferred sales charge (CDSC) is not included in the
above graph, since the performance for more than 6 years and the CDSC would no
longer apply.
[CHART]
Institutional Shares
Capital Growth Fund S&P 500 Stock Index
1989 10,000 10,000
1990 9,436 9,683
1991 11,764 12,641
1992 12,527 13,610
1993 12,964 14,970
1994 12,909 15,166
1995 16,836 20,842
1996 20,582 25,651
1997 26,690 34,209
1998 35,338 43,987
1999 43,145 53,244
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without Sales With Sales
Charge Charge*
Class A Shares ------------- ----------
<S> <C> <C>
1-Year................................................. 21.85% 16.05%
5-Year................................................. 27.39% 26.17%
10-Year................................................ 15.79% 15.23%
</TABLE>
*Reflects the maximum sales charge of 4.75%.
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without CDSC With CDSC**
Class B Shares ------------ -----------
<S> <C> <C>
1-Year................................................. 21.11% 18.11%
5-Year................................................. 26.81% 26.73%
10-Year................................................ 15.52% 15.52%
</TABLE>
**Reflects applicable contingent deferred sales charge
(maximum 4.00%).
The data for Class B Shares primarily represents the results of the Class A
Shares. Actual Class B Shares average annual total return and hypothetical
growth results would have been lower. See notes below.
<TABLE>
<CAPTION>
Average Annual
Total Return
Institutional Shares --------------
<S> <C>
1-Year........................................................... 22.09%
5-Year........................................................... 27.29%
10-Year.......................................................... 15.74%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment
in the indicated share class versus a similar investment in the Fund's
benchmark.
Performance for the Class B Shares, which commenced operations on 2/5/98, is
based on the historical performance of the Class A Shares (without sales
charge) prior to that date. Class A Shares performance does not reflect the
higher 12b-1 fees or the contingent deferred sales charge (CDSC). Had the CDSC
and higher 12b-1 fees been incorporated, total return and hypothetical growth
figures would have been lower.
The Institutional Share class was initially offered on 10/3/97 and reflects
the historical performance of the Class A Shares (without sales charge) prior
to that date.
The ISG Capital Growth Fund commenced operations on 4/1/96 through a transfer
of assets from certain collective trust fund ("commingled") accounts managed
by First American National Bank, using materially equivalent investment
objectives, policies and methodologies as the Fund. The quoted performance of
the Fund includes performance of the commingled accounts for periods prior to
the Fund's commencement of operations, as adjusted to reflect the expenses
associated with the Fund. The commingled accounts were not registered with the
Securities and Exchange Commission and, therefore, were not subject to the
investment restrictions imposed by law on registered mutual funds. If the
commingled accounts had been registered, the commingled accounts' performance
may have been adversely affected. The performance also reflects reinvestment
of dividend and capital gain distributions.
The Fund's performance is compared to the Standard & Poor's 500 Stock Index, a
broad measure of stock market as a whole. The index is unmanaged and does not
reflect the expenses associated with a mutual fund, such as investment
management and fund accounting fees. The Fund's performance reflects the
deduction of fees for these value-added services. Investors cannot invest
directly in an index, although they can invest in the underlying securities.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
108
<PAGE>
ISG Capital Growth Fund
(as of December 31, 1999)
- --------------------------------------------------------------------------------
[CHART]
Sector Profile*
Consumer Cyclicals 11.6%
Capital Goods-Industry 12.1%
Health Care 13.6%
Utilities/Telecommunications 5.0%
Consumer Services 2.9%
Consumer Staples 6.3%
Cash and Cash Equivalents 6.4%
S&P MidCap Depositary Receipts 1.7%
Financial Services 7.5%
Transportation 0.6%
Capital Goods-Technology 30.2%
Basic Materials 2.1%
Top 10 Equity Holdings*
<TABLE>
<CAPTION>
Percent of
Total Investments**
-------------------
<C> <S> <C>
1. Microsoft Corp. .................................. 3.6%
2. Home Depot, Inc. ................................. 3.3%
3. General Electric Co. ............................. 3.3%
4. Oracle Corp. ..................................... 3.0%
5. General Instruments Corp. ........................ 2.8%
6. Corning Glass..................................... 2.7%
7. Wal-Mart Stores, Inc. ............................ 2.7%
8. Procter & Gamble.................................. 2.6%
9. Sun Microsystems, Inc. ........................... 2.5%
10. Cisco Systems, Inc. .............................. 2.4%
</TABLE>
* The Fund's portfolio composition is subject to change.
** Total investments excluding short-term securities held as
collateral.
109
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Capital Growth Fund December 31, 1999
Common Stocks (91.9%)
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
----------- -------------
<S> <C> <C>
Advertising (2.9%)
The Interpublic Group of Companies, Inc............ 83,500 $ 4,816,906
Young & Rubicam, Inc............................... 37,500 2,653,125
-------------
7,470,031
-------------
Air Transportation (0.6%)
Southwest Airlines Co.............................. 100,250 1,622,797
-------------
Banking (2.9%)
Fifth Third Bancorp................................ 50,000 3,668,750
Firstar Corp....................................... 120,000 2,535,000
Wells Fargo & Co. ................................. 30,000 1,213,125
-------------
7,416,875
-------------
Business Equipment & Services (3.3%)
Electronic Data Systems Corp....................... 75,000 5,020,312
Pitney Bowes, Inc.................................. 75,000 3,623,438
-------------
8,643,750
-------------
Computer Software and Services (5.5%)
Cisco Systems, Inc. (b)............................ 58,000 6,213,250
Dell Computer Corp. (b)............................ 56,500 2,881,500
EMC Corp. (b)...................................... 47,500 5,189,375
-------------
14,284,125
-------------
Containers & Packaging (1.5%)
Sealed Air Corp. (b)............................... 75,000 3,885,938
-------------
Cosmetics & Toiletries (2.1%)
Colgate-Palmolive Co. ............................. 85,000 5,525,000
-------------
Data Processing (2.4%)
Automatic Data Processing, Inc..................... 115,000 6,195,625
-------------
Electrical Equipment (4.9%)
General Electric Co................................ 55,000 8,511,250
Honeywell International, Inc. ..................... 71,875 4,146,289
-------------
12,657,539
-------------
Electronic Components (2.3%)
LSI Logic Corp. (b)................................ 41,500 2,801,250
Micron Technology, Inc. (b)........................ 16,500 1,282,875
Texas Instruments, Inc............................. 18,500 1,792,188
-------------
5,876,313
-------------
Financial Services (3.2%)
American Express Co. .............................. 25,000 4,156,250
Citigroup, Inc. ................................... 75,000 4,167,188
-------------
8,323,438
-------------
Health Care -- Drugs (8.0%)
Amgen, Inc. (b).................................... 96,000 5,765,999
Bristol Myers Squibb Co. .......................... 75,000 4,814,063
Pfizer, Inc........................................ 143,500 4,654,781
Warner-Lambert Co.................................. 66,800 5,473,425
-------------
20,708,268
-------------
Household -- General Products (2.6%)
Procter & Gamble Co. .............................. 62,000 6,792,875
-------------
Industrial Goods & Services (0.9%)
IBM Corp........................................... 22,500 2,430,000
-------------
</TABLE>
Common Stocks, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
----------- -------------
<S> <C> <C>
Insurance -- Property & Casualty (1.4%)
American International Group, Inc. .................. 34,500 $ 3,730,313
-------------
Manufacturing (4.3%)
Corning, Inc......................................... 54,000 6,962,625
Tyco International, Ltd. ............................ 108,020 4,199,278
-------------
11,161,903
-------------
Medical Equipment & Supplies (5.6%)
Biomet, Inc.......................................... 40,000 1,600,000
Medtronic, Inc....................................... 110,000 4,008,125
Stryker Corp. ....................................... 50,000 3,481,250
Sybron International Corp. (b)....................... 225,000 5,554,688
-------------
14,644,063
-------------
Oil & Gas Exploration & Production (2.4%)
Enron Corp........................................... 140,000 6,212,500
-------------
Paper and Forest (2.1%)
Weyerhaeuser Co. .................................... 25,000 1,795,313
Willamette Industries, Inc........................... 80,000 3,715,000
-------------
5,510,313
-------------
Retail (7.6%)
Abercrombie & Fitch Co. (b).......................... 140,000 3,736,250
Dayton Hudson Corp................................... 21,500 1,578,906
Dollar General Stores................................ 175,000 3,981,250
Gap (The), Inc....................................... 75,000 3,450,000
Wal-Mart Stores, Inc. ............................... 100,000 6,912,500
-------------
19,658,906
-------------
Retail-Specialty Stores (5.6%)
Best Buy Co., Inc. (b)............................... 35,000 1,756,563
Home Depot, Inc...................................... 125,250 8,587,452
Walgreen Co. ........................................ 140,000 4,095,000
-------------
14,439,015
-------------
Technology (11.4%)
Applied Materials, Inc. (b).......................... 30,000 3,800,625
Intel Corp........................................... 32,000 2,634,000
Microsoft Corp. (b).................................. 80,000 9,339,999
Oracle Corp. (b)..................................... 68,000 7,620,250
Sun Microsystems, Inc. (b)........................... 82,500 6,388,594
-------------
29,783,468
-------------
Telecommunications (5.7%)
General Instrument Corp. (b)......................... 85,000 7,224,999
Lucent Technologies, Inc. ........................... 80,000 5,985,000
Tellabs, Inc. (b).................................... 25,000 1,604,688
-------------
14,814,687
-------------
Utilities-Telephone (2.7%)
AT&T Corp............................................ 60,000 3,045,000
MCI WorldCom, Inc. (b)............................... 72,900 3,868,256
-------------
6,913,256
-------------
TOTAL COMMON STOCKS (Cost $187,493,721).............. 238,700,998
-------------
</TABLE>
Continued
110
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Capital Growth Fund December 31, 1999
Investment Companies (7.1%)
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
----------- -------------
<S> <C> <C>
AIM Liquid Assets Money Market Fund................. 1,620,278 $ 1,620,278
ISG Prime Money Market Fund......................... 12,471,050 12,471,050
S&P 400 Mid-Cap Depositary Receipts................. 55,000 4,461,875
-------------
TOTAL INVESTMENT COMPANIES (Cost $18,337,441)....... 18,553,203
-------------
Cash Equivalents (0.0%)
Bank of New York Cash Reserve....................... $ 1,000 1,000
-------------
TOTAL CASH EQUIVALENTS (Cost $1,000)................ 1,000
-------------
Short-Term Securities+ (45.8%)
Commercial Paper (37.2%)
Asset Backed--Miscellaneous (4.0%)
Enterprise Funding Corp., 5.95%, 1/13/00............ 2,009,228 1,989,636
Falcon Asset Securitization Corp., 6.10%, 1/24/00... 3,178,153 3,126,994
Preferred Receivables Funding Corp., 6.05%,
1/10/00............................................ 1,802,013 1,781,723
Receivables Capital Corp., 6.07%, 1/28/00........... 3,639,303 3,582,236
-------------
10,480,589
-------------
Finanacial Services (15.9%)
Golden Funding Corp., 6.10%, 1/28/00................ 7,627,567 7,509,658
Liberty Street Funding Corp., 6.07%-6.13%, 1/31/00-
2/17/00............................................ 5,561,768 5,462,250
Moat Funding Corp., 5.98%-6.07%, 1/14/00-2/11/00.... 8,650,297 8,529,488
Orix Corp., 6.47%-6.50%, 1/10/00-1/14/00............ 13,463,610 13,316,784
Superior Funding Corp., 6.00%-6.14%, 1/18/00-
1/31/00............................................ 6,484,227 6,397,733
-------------
41,215,913
-------------
Miscellaneous (17.3%)
ConAgra, Inc., 6.25%-6.33%, 1/18/00-2/4/00.......... 11,900,594 11,774,013
MCI WorldCom, 6.11%, 1/18/00........................ 2,383,615 2,358,533
Moriarity, 12.75%, 1/4/00........................... 15,890,765 15,868,253
Norfolk Southern Corp., 6.30%, 1/14/00.............. 6,356,306 6,289,565
Tyco International, Ltd., 6.43%-6.65%, 1/10/00-
1/31/00............................................ 8,739,921 8,644,099
-------------
44,934,463
-------------
Total Commercial Paper.............................. 96,630,965
-------------
</TABLE>
Short-Term Securities+, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
----------- -------------
<S> <C> <C>
Floating Rates Notes (2.9%)
Financial Services (2.0%)
General Motors Acceptance Corp., 4.49%*, 11/13/00.. $ 1,906,892 $ 1,906,892
KeyCorp, 6.42%*, 10/23/00.......................... 1,589,077 1,589,077
Textron Financial Corp., 5.92%*, 5/12/00........... 1,589,077 1,588,139
-------------
5,084,108
-------------
Miscellaneous (0.9%)
Tyco International, Ltd., 6.72%*, 9/5/00........... 2,383,615 2,383,026
-------------
Total Floating Rate Notes.......................... 7,467,134
-------------
Investment Companies (5.7%)
AIM Liquid Asset Money Market Fund................. 14,827,958 14,827,958
-------------
TOTAL SHORT-TERM SECURITIES
(Cost $118,926,057)............................... 118,926,057
-------------
TOTAL INVESTMENTS (Cost $324,758,219) (a) --
(144.8%)......................................... 376,181,258
Liabilities in excess of other assets -- (-44.8%).. (116,356,636)
-------------
TOTAL NET ASSETS -- (100.0%)....................... $ 259,824,622
=============
</TABLE>
- ---------
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting in excess of federal income tax reporting of
$724,330. Cost for federal income tax purposes differs from value by net
unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation........................................ $58,126,128
Unrealized depreciation........................................ (7,427,419)
-----------
Net unrealized appreciation ................................... $50,698,709
===========
</TABLE>
(b) Non-income producing security.
* Variable rate security. Rate represents rate in effect at December 31,
1999.
+ Represents securities purchased with cash collateral received on securities
loaned.
See notes to financial statements
111
<PAGE>
ISG FUNDS
Capital Growth Fund
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $324,758,219)........... $376,181,258
Cash................................................ 397,268
Interest and dividends receivable................... 221,089
Receivable for capital shares issued................ 13,805
Receivable for investments sold..................... 2,516,293
Receivable from investment adviser.................. 231
Deferred organization costs......................... 2,991
Prepaid expenses and other assets................... 28,694
------------
Total Assets....................................... 379,361,629
Liabilities:
Payable for return of collateral held for securities
on loan............................................ $119,323,325
Payable for capital shares redeemed................. 620
Accrued expenses and other payables:
Investment advisory fees........................... 133,407
Administration fees................................ 4,181
Distribution fees.................................. 37,985
Other.............................................. 37,489
------------
Total Liabilities.................................. 119,537,007
------------
Net Assets:
Capital............................................. 200,004,430
Undistributed (distributions in excess of) net
investment income.................................. (3,697)
Undistributed (distributions in excess of) net
realized gains..................................... 8,400,850
Net unrealized appreciation (depreciation) from
investments........................................ 51,423,039
------------
Net Assets.......................................... $259,824,622
============
Class A Shares
Net Assets......................................... $ 10,310,289
Shares outstanding................................. 717,698
Redemption price per share......................... $ 14.37
============
Class A Shares -- Maximum Sales Charge.............. 4.75%
------------
Maximum Offering Price Per Share (100%/(100% --
Maximum Sales Charge) of net asset value adjusted
to the nearest cent).............................. $ 15.09
============
Class B Shares
Net Assets......................................... $ 7,704,347
Shares outstanding................................. 552,901
Offering price per share*.......................... $ 13.93
============
Institutional Shares
Net Assets......................................... $241,809,986
Shares outstanding................................. 16,939,638
Offering and redemption price per share............ $ 14.27
============
</TABLE>
- ---------
* Redemption price per share varies by length of time shares are held.
Statement of Operations
For the year ended December 31, 1999
<TABLE>
<S> <C> <C>
Investment Income:
Interest income....................................... $ 105,143
Dividend income....................................... 1,889,671
Income from securities lending........................ 229,454
-----------
Total Investment Income.............................. 2,224,268
Expenses:
Investment advisory fees.............................. $1,476,060
Administration fees................................... 340,631
Distribution fees -- Class A Shares................... 18,891
Distribution fees -- Class B Shares................... 40,157
Shareholder servicing fees -- Class A Shares.......... 11,335
Shareholder servicing fees -- Class B Shares.......... 13,385
Shareholder servicing fees -- Institutional Shares.... 321,264
Custodian fees........................................ 59,648
Accounting fees....................................... 25,127
Transfer agent fees................................... 75,866
Directors' fees....................................... 5,733
Other fees............................................ 126,809
----------
Total expenses before voluntary fee
reductions/reimbursements........................... 2,514,906
Expenses voluntarily reduced/reimbursed.............. (25,586)
-----------
Net expenses......................................... 2,489,320
-----------
Net Investment Income................................. (265,052)
-----------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment
transactions......................................... 46,657,019
Net change in unrealized appreciation (depreciation)
from investments..................................... 465,568
-----------
Net realized/unrealized gains (losses) from
investments.......................................... 47,122,587
-----------
Change in net assets resulting from operations........ $46,857,535
===========
</TABLE>
See notes to financial statements
112
<PAGE>
ISG FUNDS
Capital Growth Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income (loss).................. $ (265,052) $ 86,749
Net realized gains (losses) from investment
transactions................................. 46,657,019 31,139,357
Net change in unrealized appreciation
(depreciation) from investments.............. 465,568 13,755,998
------------ ------------
Change in net assets resulting from
operations.................................... 46,857,535 44,982,104
------------ ------------
Distributions to Class A Shareholders:
From net realized gains on investment
transactions................................. (1,689,814) (660,055)
Distributions to Class B Shareholders:
From net realized gains on investment
transactions................................. (1,261,201) (355,976) (a)
Distributions to Institutional Shareholders:
From net investment income.................... -- (86,749)
In excess of net investment income............ -- (1,592)
From net realized gains on investment
transactions................................. (39,425,521) (25,873,606)
------------ ------------
Change in net assets from shareholder
distributions................................. (42,376,536) (26,977,978)
------------ ------------
Change in net assets from capital
transactions.................................. 74,316,381 20,403,758
------------ ------------
Change in net assets........................... 78,797,380 38,407,884
Net Assets:
Beginning of period........................... 181,027,242 142,619,358
------------ ------------
End of period................................. $259,824,622 $181,027,242
============ ============
</TABLE>
- ---------
(a) For the period from February 5, 1998 (commencement of operations) through
December 31, 1998.
See notes to financial statements
113
<PAGE>
ISG FUNDS
Capital Growth Fund
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
1999 1998 1997 1996(a)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $ 14.20 $12.80 $11.32 $ 10.00
------- ------ ------ -------
Investment Activities
Net investment income
(loss)................. (0.04) (0.01) 0.06 --
Net realized and
unrealized gains
(losses) from
investments............ 2.97 3.89 3.40 1.32
------- ------ ------ -------
Total from Investment
Activities............. 2.93 3.88 3.46 1.32
------- ------ ------ -------
Distributions
Net investment income... -- -- (0.06) --
Net realized gains...... (2.76) (2.48) (1.92) --
------- ------ ------ -------
Total Distributions..... (2.76) (2.48) (1.98) --
------- ------ ------ -------
Net change in asset
value................... 0.17 1.40 1.48 1.32
------- ------ ------ -------
Net Asset Value, End of
Period.................. $ 14.37 $14.20 $12.80 $ 11.32
======= ====== ====== =======
Total Return (excludes
sales charge)........... 21.85% 32.05% 30.79% 13.20% (b)
Ratios/Supplementary
Data:
Net Assets at end of
period (000)............ $10,310 $4,631 $ 858 $49,008
Ratio of expenses to
average net assets...... 1.32% 1.28% 0.93% 1.20% (c)
Ratio of net investment
income (loss) to average
net assets.............. (0.33)% (0.19)% 0.42% (0.02)%(c)
Ratio of expenses to
average net assets*..... 1.33% 1.29% 1.18% 1.39% (c)
Portfolio turnover**..... 178% 152% 116% 69%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from April 1, 1996 (commencement of operations) through
December 31, 1996.
(b) Not annualized.
(c) Annualized.
Financial Highlights, Class B Shares
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1999+ 1998(a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period............... $13.92 $13.10
------ ------
Investment Activities
Net investment income (loss)...................... (0.14) (0.05)
Net realized and unrealized gains (losses) from
investments...................................... 2.91 3.35
------ ------
Total from Investment Activities.................. 2.77 3.30
------ ------
Distributions
Net realized gains................................ (2.76) (2.48)
------ ------
Total Distributions............................... (2.76) (2.48)
------ ------
Net change in asset value.......................... 0.01 0.82
------ ------
Net Asset Value, End of Period..................... $13.93 $13.92
====== ======
Total Return (excludes redemption charge).......... 21.11% 26.86% (b)
Ratios/Supplementary Data:
Net Assets at end of period (000).................. $7,704 $2,854
Ratio of expenses to average net assets............ 1.92% 2.04% (c)
Ratio of net investment income (loss) to average
net assets........................................ (0.93)% (0.95)%(c)
Ratio of expenses to average net assets*........... 1.93% (d)
Portfolio turnover**............................... 178% 152%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
+ Net investment income (loss) is based on average shares outstanding during
the period.
(a) For the period from February 5, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
(d) There were no fee reductions in this period.
See notes to financial statements
114
<PAGE>
ISG FUNDS
Capital Growth Fund
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
1999 1998 1997(a)
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.. $ 14.09 $ 12.69 $ 14.51
-------- -------- --------
Investment Activities
Net investment income (loss)......... (0.01) 0.01 0.02
Net realized and unrealized gains
(losses) from investments........... 2.95 3.88 0.10
-------- -------- --------
Total from Investment Activities..... 2.94 3.89 0.12
-------- -------- --------
Distributions
Net investment income................ -- (0.01) (0.02)
Net realized gains................... (2.76) (2.48) (1.92)
-------- -------- --------
Total Distributions.................. (2.76) (2.49) (1.94)
-------- -------- --------
Net change in asset value............. 0.18 1.40 (1.82)
-------- -------- --------
Net Asset Value, End of Period........ $ 14.27 $ 14.09 $ 12.69
======== ======== ========
Total Return.......................... 22.09% 32.40% 0.88%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)..... $241,810 $173,542 $141,761
Ratio of expenses to average net
assets............................... 1.07% 1.02% 0.58%(c)
Ratio of net investment income (loss)
to average net assets................ (0.09)% 0.07% 0.80%(c)
Ratio of expenses to average net
assets*.............................. 1.08% 1.03% 0.99%(c)
Portfolio turnover**.................. 178% 152% 116%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from October 3, 1997 (commencement of operations) through
December 31, 1997.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
115
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
116
<PAGE>
Bennett Lawrence Management, LLC
Investment Team
ISG Mid-Cap Fund
- --------------------------------------------------------------------------------
Investment Goal
The Fund seeks to provide investors with the potential to achieve significant
capital appreciation by investing primarily in mid-capitalization stocks
(median market cap of approximately $5.5 billion). This Fund is suitable for
investors who are investing for the long-term and are willing to assume the
additional risk of investing in growth stocks in return for potentially higher
total returns.
- --------------------------------------------------------------------------------
Q. How did the Fund perform during the period?
A. The Fund commenced operations on May 4, 1999. From inception through the
period ending December 31, 1999, the Fund's total return was 73.30% (Class A
Shares at NAV).+ In comparison, the Russell Midcap Growth Index gained 39.92%.
It is our contention that the market has broadened beyond the handful of large-
cap stocks that drove many indices during the last three to four years. As a
result, many mid-sized companies--comprising the sector in which we do most of
our investing--outperformed the S&P 500 Index/1/ in 1999. Last year was a
wonderful year for our investment strategy. We remain optimistic about 2000,
but at the same time we realize that duplicating 1999 is very unlikely.
Q. Where did you make your money?
A. Our investment process for buying stocks has two steps. The first step is to
identify major trends that present powerful investment opportunities. The next
step is to select
only those companies best positioned to benefit from these trends.
There were several drivers that helped us post strong performance numbers. The
first area in which we had great success was e-commerce. This was also one of
the ways we
decided to play the Internet sector. We invested in a number of data storage
companies--including Veritas Software (3.45% of the Fund's net assets), BEA
Systems (4.68%) and QLogic (2.76%). These are all companies that are benefiting
from the use of the Internet as a means for conducting commerce. With each
company demonstrating substantial profit growth, while simultaneously having
excellent future prospects, this was just a very, very successful group of
stocks.*
Our communications related holdings comprised another group of companies that
really boosted our performance. This, too, was an indirect play on the
Internet. Here, we invested in bandwidth providers--such as Comcast (1.45%),
NTL, Inc. (2.71%) and Broadcom (2.61%). We also invested in a new breed of
wireless service providers, including Echostar (3.04%), a leader in the
satellite television broadcasting business, and Qualcomm (3.38%), a wildly
successful company that has developed a new protocol for wireless
communications. We are not invested in "dot.com" Internet companies. To
participate in the explosive growth of the Internet, we have invested in the
companies that provide backbone services and telecommunications equipment.
These are companies that are enabling the Internet revolution to take place,
and they have very profitable operating businesses.*
Outside of technology, we have investments in biotechnology companies--such as
IDEC Pharmaceuticals (1.88%) and Medimmune (1.59%).
Q. What is your outlook for 2000?
A. We believe that interest rates will probably trend higher. The economy could
continue to grow and corporate profit growth, as measured by the S&P 500,
should slow. In our opinion, the market will continue to take on a "have/have
not" personality. Investors will be preoccupied with companies that have strong
earnings visibility. It should be more of a stockpicker's market, and we feel
very good about the stocks we own.*
- ---------
+ Including the 4.75% sales load, the Fund's return was 65.05% for the period.
/1/The Standard & Poor's 500 Stock Index is an unmanaged index generally
representative of the stock market as a whole. The index does not reflect
expenses associated with a mutual fund, such as investment management and
fund accounting fees. The Fund's performance reflects the deduction of fees
for these value-added services. Investors cannot invest directly in an index,
although they can invest in the underlying securities.
* The Fund's portfolio composition is subject to change.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
117
<PAGE>
ISG Mid-Cap Fund
Performance (as of December 31, 1999)
- -------------------------------------------------------------------------------
[CHART]
Class A Shares
Mid-Cap Fund Mid-Cap Fund Russell Mid-Cap
with Sales Charge without Sales Charge Growth Index
5/4/99 9,525 10,000 10,000
12/31/99 16,505 17,330 13,992
[CHART]
Class B Shares
Mid-Cap Fund Mid-Cap Fund Russell Mid-Cap
with CDSC Without CDSC Growth Index
5/4/99 10,000 10,000 10,000
12/31/99 16,880 17,280 13,992
[CHART]
Institutional Shares
Mid-Cap Fund Russell Mid-Cap Growth Index
5/4/99 10,000 10,000
12/31/99 17,370 13,992
<TABLE>
<CAPTION>
Cumulative Total Return
------------------------
Without Sales With Sales
Charge Charge*
Class A Shares ------------- ----------
<S> <C> <C>
Since Inception 5/4/99................................ 73.30% 65.05%
</TABLE>
*Reflects the maximum sales charge of 4.75%.
<TABLE>
<CAPTION>
Cumulative Total Return
------------------------
Without CDSC With CDSC**
Class B Shares ------------ -----------
<S> <C> <C>
Since Inception 5/4/99................................ 72.80% 68.80%
</TABLE>
**Reflects the applicable contingent deferred sales charge
(maximum 4.00%).
<TABLE>
<CAPTION>
Cumulative Total Return
Institutional Shares -----------------------
<S> <C>
Since Inception 5/4/99................................. 73.70%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment
in the indicated share class versus a similar investment in the Fund's
benchmark.
The Russell Mid-Cap Growth Index is an unmanaged index representative of the
performance of a basket of more than 430 mid-cap growth stocks. The index does
not reflect expenses associated with a mutual fund, such as investment
management and fund accounting fees. The Fund's performance reflects the
deduction of fees for these value-added services. Investors cannot invest
directly in an index, although they can invest in the underlying securities.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
118
<PAGE>
ISG Mid-Cap Fund
(as of December 31, 1999)
- --------------------------------------------------------------------------------
[CHART]
Sector Profile*
Cash & Cash Equivalents 18.0%
Basic Materials 3.2%
Consumer Cyclical 21.2%
Consumer Non-Cyclical 1.9%
Health Care 3.5%
Technology 52.2%
Top 10 Equity Holdings*
<TABLE>
<CAPTION>
Percent of
Total Investments**
-------------------
<C> <S> <C>
1. BEA Systems, Inc. ................................ 4.5%
2. Veritas Software Corp. ........................... 3.3%
3. Qualcomm, Inc. ................................... 3.3%
4. Peregrine Systems, Inc. .......................... 3.0%
5. Emmis Communications.............................. 3.0%
6. Echostar Communications........................... 2.9%
7. Doubleclick, Inc. ................................ 2.9%
8. Genentech, Inc. .................................. 2.9%
9. Macromedia, Inc. ................................. 2.8%
10. Microstrategy, Inc. .............................. 2.8%
</TABLE>
* The Fund's portfolio composition is subject to change.
** Total investments excluding short-term securities held as collateral.
119
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Mid-Cap Fund December 31, 1999
Common Stocks (83.5%)
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- -----------
<S> <C> <C>
Cable Television (2.9%)
AT&T Corp. -- Liberty Media Group, Class A (b).......... 10,900 $ 618,575
Comcast Corp., Special Class A.......................... 12,000 606,750
-----------
1,225,325
-----------
Computer Software and Services (25.3%)
Adobe Systems, Inc. .................................... 8,800 591,800
BEA Systems, Inc. (b)................................... 27,900 1,951,255
Citrix Systems, Inc. (b)................................ 9,000 1,107,000
Electronic Arts, Inc. (b)............................... 7,500 630,000
Macromedia, Inc. (b).................................... 16,700 1,221,188
MicroStrategy Inc. (b).................................. 5,650 1,186,500
Peregrine Systems, Inc. (b)............................. 15,500 1,304,906
Veritas Software Corp. (b).............................. 10,050 1,438,406
Visual Networks, Inc. (b)............................... 14,000 1,109,500
-----------
10,540,555
-----------
Electronic Components (6.9%)
Altera Corp. (b)........................................ 13,000 644,313
Broadcom Corp., Class A (b)............................. 4,000 1,089,500
QLogic Corp. (b)........................................ 7,200 1,151,100
-----------
2,884,913
-----------
Entertainment (2.1%)
International Speedway Corp., Class A................... 17,000 856,375
-----------
Financial Services (1.9%)
Concord EFS, Inc. (b)................................... 31,325 806,619
-----------
Industrial Goods & Services (1.4%)
SPX Corp. (b)........................................... 7,150 577,809
-----------
Internet Services (5.0%)
DoubleClick, Inc. (b)................................... 5,000 1,265,312
RealNetworks, Inc. (b).................................. 6,700 806,094
-----------
2,071,406
-----------
Media (3.1%)
Emmis Communications Corp. (b).......................... 10,250 1,277,566
-----------
Oil & Gas Exploration & Production (3.2%)
Anadarko Petroleum Corp. ............................... 20,000 682,500
Forest Oil Corp. (b).................................... 50,000 659,375
-----------
1,341,875
-----------
Pharmaceuticals (6.5%)
Genentech, Inc. (b)..................................... 9,400 1,264,300
IDEC Pharmaceuticals Corp. (b).......................... 8,000 786,000
MedImmune, Inc. (b)..................................... 4,000 663,500
-----------
2,713,800
-----------
Retail (1.3%)
Abercrombie & Fitch Co. (b)............................. 20,000 533,750
-----------
Retail-Specialty Stores (4.6%)
Best Buy Co., Inc. (b).................................. 7,000 351,313
Tandy Corp. ............................................ 12,000 590,250
Tiffany & Co............................................ 11,000 981,750
-----------
1,923,313
-----------
Technology (2.1%)
Applied Materials, Inc. (b)............................. 7,000 886,813
-----------
</TABLE>
Common Stocks, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- -----------
<S> <C> <C>
Telecommunications (15.2%)
Echostar Communications, Class A (b)................... 13,000 $ 1,267,500
Metromedia Fiber Network, Inc., Class A (b)............ 19,500 934,781
Nextel Communications, Inc., Series A (b).............. 10,500 1,082,813
NTL, Inc. (b).......................................... 9,062 1,130,485
QUALCOMM, Inc. (b)..................................... 8,000 1,409,999
Tellabs, Inc. (b)...................................... 8,000 513,500
-----------
6,339,078
-----------
Utilities -- Telephone (2.0%)
NEXTLINK Communications, Inc., Class A (b)............. 10,000 830,625
-----------
TOTAL COMMON STOCKS (Cost $22,401,486)................. 34,809,822
-----------
Cash Equivalents (20.0%)
Bank of New York Cash Reserve.......................... $8,350,761 8,350,761
-----------
TOTAL CASH EQUIVALENTS (Cost $8,350,761)............... 8,350,761
-----------
Short-Term Securities+(4.6%)
Commercial Paper (3.7%)
Asset Backed--Miscellaneous (0.4%)
Enterprise Funding Corp., 5.95%, 1/13/00............... 32,684 32,366
Falcon Asset Securitization Corp., 6.10%, 1/24/00...... 51,699 50,867
Preferred Receivables Funding Corp., 6.05%, 1/10/00.... 29,314 28,983
Receivables Capital Corp., 6.07%, 1/28/00.............. 59,201 58,273
-----------
170,489
-----------
Finanacial Services (1.6%)
Golden Funding Corp., 6.10%, 1/28/00................... 124,078 122,160
Liberty Street Funding Corp., 6.07%-6.13%, 1/31/00-
2/17/00............................................... 90,474 88,855
Moat Funding Corp., 5.98%-6.07%, 1/14/00-2/11/00....... 140,715 138,750
Orix Corp., 6.47%-6.50%, 1/10/00-1/14/00............... 219,014 216,625
Superior Funding Corp., 6.00%-6.14%, 1/18/00-1/31/00... 105,479 104,072
-----------
670,462
-----------
Miscellaneous (1.7%)
ConAgra, Inc., 6.25%-6.33%, 1/18/00-2/4/00............. 193,588 191,529
MCI WorldCom, 6.11%, 1/18/00........................... 38,774 38,366
Moriarity, 12.75%, 1/4/00.............................. 258,496 258,130
Norfolk Southern Corp., 6.30%, 1/14/00................. 103,399 102,313
</TABLE>
Continued
120
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Mid-Cap Fund December 31, 1999
Short-Term Securities+, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- -----------
<S> <C> <C>
Commercial Paper, continued
Miscellaneous, continued
Tyco International, Ltd., 6.43%-6.65%, 1/10/00-
1/31/00............................................... $ 142,173 $ 140,614
-----------
730,952
-----------
Total Commercial Paper................................. 1,571,903
-----------
Floating Rate Notes (0.3%)
Financial Services (0.2%)
General Motors Acceptance Corp., 4.49%*, 11/13/00...... 31,020 31,020
KeyCorp., 6.42%*, 10/23/00............................. 25,850 25,850
Textron Financial Corp., 5.92%*, 5/12/00............... 25,850 25,834
-----------
82,704
-----------
Miscellaneous (0.1%)
Tyco International, Ltd., 6.72%*, 9/5/00............... 38,774 38,765
-----------
Total Floating Rate Notes.............................. 121,469
-----------
</TABLE>
Short-Term Securities+, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- -----------
<S> <C> <C>
Investment Companies (0.6%)
AIM Liquid Asset Money Market Fund..................... 241,208 $ 241,208
-----------
TOTAL SHORT-TERM SECURITIES
(Cost $1,934,580)..................................... 1,934,580
-----------
TOTAL INVESTMENTS (Cost $32,686,827) (a) -- (108.1%)... 45,095,163
Liabilities in excess of other assets -- (-8.1%)....... (3,374,573)
-----------
TOTAL NET ASSETS -- (100.0%)........................... $41,720,590
===========
</TABLE>
- ---------
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation........................................ $13,238,818
Unrealized depreciation........................................ (830,482)
-----------
Net unrealized appreciation.................................... $12,408,336
===========
</TABLE>
(b) Non-income producing security.
* Variable rate security. Rate represents rate in effect at December 31, 1999.
+ Represents securities purchased with cash collateral received on securities
loaned.
See notes to financial statements
121
<PAGE>
ISG FUNDS
Mid-Cap Fund
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $32,686,827)............... $45,095,163
Cash................................................... 6,462
Interest and dividends receivable...................... 19,207
Receivable for capital shares issued................... 71,344
Prepaid expenses and other assets...................... 140
-----------
Total Assets.......................................... 45,192,316
Liabilities:
Payable for return of collateral held for securities on
loan.................................................. $1,941,042
Payable for investments purchased...................... 1,446,451
Payable for capital shares redeemed.................... 3,500
Investment advisory fees.............................. 26,991
Administration fees................................... 642
Distribution fees..................................... 5,575
Custodian fees........................................ 1,364
Other................................................. 46,161
----------
Total Liabilities..................................... 3,471,726
-----------
Net Assets:
Capital................................................ 29,882,160
Accumulated net realized losses from investment
transactions.......................................... (569,906)
Net unrealized appreciation (depreciation) from
investments........................................... 12,408,336
-----------
Net Assets............................................. $41,720,590
===========
Class A Shares
Net Assets............................................ $ 2,357,139
Shares outstanding.................................... 136,001
Redemption price per share............................ $ 17.33
===========
Class A Shares -- Maximum Sales Charge................. 4.75%
===========
Maximum Offering Price Per Share (100%/(100% --
Maximum Sales Charge) of net asset value adjusted to
the nearest cent).................................... $ 18.19
===========
Class B Shares
Net Assets............................................ $ 2,177,430
Shares outstanding.................................... 126,040
Offering price per share*............................. $ 17.28
===========
Institutional Shares
Net Assets............................................ $37,186,021
Shares outstanding.................................... 2,140,968
Offering and redemption price per share............... $ 17.37
===========
</TABLE>
- ---------
* Redemption price per share varies by length of time shares are held.
Statement of Operations
For the period ended December 31, 1999 (a)
<TABLE>
<S> <C> <C>
Investment Income:
Interest income......................................... $ 62,704
Dividend income......................................... 8,848
Income from securities lending.......................... 1,089
-----------
Total Investment Income................................ 72,641
Expenses:
Investment advisory fees................................ $102,115
Administration fees..................................... 15,317
Distribution fees -- Class A Shares..................... 1,503
Distribution fees -- Class B Shares..................... 2,945
Shareholder servicing fees -- Class A Shares............ 902
Shareholder servicing fees -- Class B Shares............ 982
Shareholder servicing fees -- Institutional Shares...... 13,827
Custodian fees.......................................... 3,465
Accounting fees......................................... 14,503
Transfer agent fees..................................... 28,214
Directors' fees......................................... 274
Registration and filing fees............................ 23,550
Audit fees.............................................. 13,149
Other fees.............................................. 8,083
--------
Total expenses before voluntary fee reductions......... 228,829
Expenses voluntarily reduced........................... (745)
-----------
Net expenses........................................... 228,084
-----------
Net Investment Income (Loss)............................ (155,443)
-----------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment
transactions........................................... (569,906)
Net change in unrealized appreciation (depreciation)
from investments....................................... 12,408,336
-----------
Net realized/unrealized gains (losses) from
investments............................................ 11,838,430
-----------
Change in net assets resulting from operations.......... $11,682,987
===========
</TABLE>
- ---------
(a) For the period from May 4, 1999 (commencement of operations) through
December 31, 1999.
See notes to financial statements
122
<PAGE>
ISG FUNDS
Mid-Cap Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Period Ended
December 31,
1999(a)
------------
<S> <C>
From Investment Activities:
Operations:
Net Investment income (loss)..................................... $ (155,443)
Net realized gains (losses) from investment transactions......... (569,906)
Net change in unrealized appreciation (depreciation) from
investments..................................................... 12,408,336
-----------
Change in net assets resulting from operations.................... 11,682,987
-----------
Change in net assets from capital transactions.................... 30,037,603
-----------
Change in net assets.............................................. 41,720,590
Net Assets:
Beginning of period.............................................. --
-----------
End of period.................................................... $41,720,590
===========
</TABLE>
- ---------
(a) For the period from May 4, 1999 (commencement of operations) through
December 31, 1999.
See notes to financial statements
123
<PAGE>
ISG FUNDS
Mid-Cap Fund
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999(a)+
------------
<S> <C>
Net Asset Value, Beginning of Period............................. $10.00
------
Investment Activities
Net investment income (loss).................................... (0.14)
Net realized and unrealized gains (losses) from investments..... 7.47
------
Total from Investment Activities................................ 7.33
------
Net change in asset value........................................ 7.33
------
Net Asset Value, End of Period................................... $17.33
======
Total Return (excludes sales charge)............................. 73.30% (b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................................ $2,357
Ratio of expenses to average net assets.......................... 2.28% (c)
Ratio of net investment income (loss) to average net assets...... (1.62)%(c)
Ratio of expenses to average net assets*......................... 2.29% (c)
Portfolio turnover**............................................. 20%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
+ Net investment income (loss) is based on average shares outstanding during
the period.
(a) For the period from May 4,1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
Financial Highlights, Class B Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999(a)+
------------
<S> <C>
Net Asset Value, Beginning of Period............................. $10.00
------
Investment Activities
Net investment income (loss).................................... (0.19)
Net realized and unrealized gains (losses) from investments..... 7.47
------
Total from Investment Activities................................ 7.28
------
Net change in asset value........................................ 7.28
------
Net Asset Value, End of Period................................... $17.28
======
Total Return (excludes redemption charge)........................ 72.80% (b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................................ $2,177
Ratio of expenses to average net assets.......................... 2.86% (c)
Ratio of net investment income (loss) to average net assets...... (2.17)%(c)
Ratio of expenses to average net assets*......................... 2.86% (c)
Portfolio turnover**............................................. 20%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
+ Net investment income (loss) is based on average shares outstanding during
the period.
(a) For the period from May 4, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
124
<PAGE>
ISG FUNDS
Mid-Cap Fund
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999 (a)+
------------
<S> <C>
Net Asset Value, Beginning of Period............................ $ 10.00
-------
Investment Activities
Net investment income (loss)................................... (0.12)
Net realized and unrealized gains (losses) from investments.... 7.49
-------
Total from Investment Activities............................... 7.37
-------
Net change in asset value....................................... 7.37
-------
Net Asset Value, End of Period.................................. $ 17.37
=======
Total Return.................................................... 73.70% (b)
Ratios/Supplementary Data:
Net Assets at end of period (000)............................... $37,186
Ratio of expenses to average net assets......................... 2.18% (c)
Ratio of net investment income (loss) to average net assets..... (1.47)%(c)
Ratio of expenses to average net assets*........................ 2.18% (c)
Portfolio turnover**............................................ 20%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
+ Net investment income (loss) is based on average shares outstanding during
the period.
(a) For the period from May 4, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
125
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
126
<PAGE>
William A. Womack
[PHOTO] Portfolio Manager
ISG Small-Cap Opportunity Fund+
- -------------------------------------------------------------------------------
Investment Goal
The Fund aggressively seeks to provide investors with the potential to achieve
a high level of total return through investments in smaller, domestic, high-
growth companies with small capitalizations. The Fund is most suitable for
investors who are investing for the long term and are comfortable assuming the
additional risk of investing in stocks in exchange for potentially higher
total returns.
- -------------------------------------------------------------------------------
Q. How did the Fund perform during the period?
A. For the 12 months ended December 31, 1999, the Fund's total return was
4.72% (Class A Shares at NAV)./1/ In comparison, the Russell 2000 Index rose
21.26%.
Q. What factors affected your performance?
A. Nineteen-ninety-nine was a year in which large-cap stocks dominated the
market; investors chased big growth stocks and generally ignored the smaller
names we favored. Only during the April-July period did investors recognize
the value of the type of stocks that comprise most of our portfolio.
We found it tough to find technology companies with capitalizations under $1.5
billion--our usual target--and even tougher to find such companies with
earnings. Although not all of the stocks in our portfolio have measurable
earnings, most have, and we feel more comfortable owning stocks that provide
consistent earnings growth.
However, in the fourth quarter, we bought into some technology stocks that
appeared unusually attractive, despite the sector's high valuations. At the
end of the period, we had more than 32% of the Fund invested in the tech
sector, a fairly high percentage for us.*
Q. What other steps did you take to actively manage the portfolio in a market
with such narrow focus?
A. For one thing, we moved out of stocks that had proven disappointing--names
such as Cracker Barrel, which bottomed out unexpectedly. We also decreased our
exposure to the energy sector toward the end of the period. Earlier in the
year, as the price of oil rose sharply, we profited from our energy holdings.
We concluded that further gains in this area were dependent upon actions
within OPEC, and we were not willing to commit capital based on those
circumstances.*
In the communications and technology arena, we made money with such names as
Cree Research (4.32% of the Fund's net assets), which develops semiconductor
devices; eSoft (2.33%) and Critical Path (3.72%), both Internet-related
businesses; and Power-One, which manufactures computer memory devices.*
We also did fairly well in the restaurant area, where we continue to have a
heavy presence. We also moved into health care; this was our biggest shift
during the year. We now own such names as Health Management Associates (3.22%)
and ATS Medical (1.72%).*
Q. What is your outlook for 2000?
A. We believe that the technology and communications sectors will remain the
driving forces in the market. We believe anything to do with the Internet
backbone should do well, with the emphasis more on business-to-business
activity than on serving individual customers. On a larger level, we
anticipate that productivity will keep inflation in check, which will enable
many growth stocks to continue to prosper, though not without significant
volatility.
- ---------
+ Small-capitalization funds typically carry additional risks since smaller
companies generally have a higher risk of failure. Historically, smaller
companies' stocks have experienced a greater degree of market volatility
than large-company stocks on average.
/1/Including the 4.75% sales load, the Fund's return was -0.22% for the
period.
* The Fund's portfolio composition is subject to change.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
127
<PAGE>
ISG Small-Cap Opportunity Fund
Performance (as of December 31, 1999)
- -------------------------------------------------------------------------------
[CHART]
Class A Shares
Small-Cap Small-Cap
Opportunity Fund Opportunity Fund
with Sales Charge without Sales Charge Russell 2000 Stock Index
1989 9,530 10,000 10,000
1990 8,900 9,339 8,049
1991 14,163 14,861 11,758
1992 17,699 18,571 13,920
1993 23,328 24,477 16,552
1994 21,647 22,713 16,251
1995 27,812 29,182 20,873
1996 34,761 36,473 24,315
1997 43,247 45,377 29,752
1998 40,134 42,111 28,995
1999 42,027 44,098 35,158
[CHART]
Class B Shares
Small-Cap Opportunity Fund Russell 2000 Stock Index
1989 10,000 10,000
1990 9,339 8,049
1991 14,861 11,756
1992 18,571 13,920
1993 24,477 18,552
1994 22,713 16,251
1995 29,182 20,873
1996 36,473 24,315
1997 45,377 29,752
1998 42,143 28,995
1999 43,577 35,158
The Class B contingent deferred
sales charge (CDSC) is not
included in the above graph, since
the performance is for more than 6
years and the CDSC would no longer
apply.
[CHART]
Institutional Shares
Small-Cap Opportunity Fund Russell 2000 Stock Index
1989 10,000 10,000
1990 9,339 8,049
1991 14,861 11,758
1992 18,571 13,920
1993 24,477 16,552
1994 22,713 16,251
1995 29,182 20,873
1996 36,473 24,315
1997 45,377 29,752
1998 42,111 28,995
1999 43,967 35,158
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without Sales With Sales
Charge Charge*
Class A Shares ------------- ----------
<S> <C> <C>
1-Year................................................. 4.72% -0.22%
5-Year................................................. 14.19% 13.08%
10-Year................................................ 16.00% 15.44%
</TABLE>
*Reflects the maximum sales charge of 4.75%.
<TABLE>
<CAPTION>
Average Annual
Total Return
--------------
Without With
CDSC CDSC**
Class B Shares ------- ------
<S> <C> <C>
1-Year........................................................... 3.40% 0.40%
5-Year........................................................... 13.92% 13.80%
10-Year.......................................................... 15.86% 15.86%
</TABLE>
**Reflects the applicable contingent deferred sales charge
(maximum 4.00%).
The data for Class B Shares primarily represents the results of the Class A
Shares. Actual Class B Shares average annual total return and hypothetical
growth results would have been lower. See notes below.
<TABLE>
<CAPTION>
Average Annual
Total Return
Institutional Shares --------------
<S> <C>
1-Year........................................................... 4.41%
5-Year........................................................... 14.12%
10-Year.......................................................... 15.96%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment
in the indicated share class versus a similar investment in the Fund's
benchmark.
The quoted returns reflect the performance from 8/1/94 to 12/14/98 of the DG
Opportunity Fund (the "Predecessor Fund"), an open-end investment company that
was the predecessor fund to the ISG Small-Cap Opportunity Fund.
Performance for the Class B Shares, which commenced operations on 12/21/98, is
based on the historical performance of the Class A Shares (without sales
charge) prior to that date. Class A Shares performance does not reflect the
higher 12b-1 fees or the contingent deferred sales charge (CDSC). Had the CDSC
and higher 12b-1 fees been incorporated, total return and hypothetical growth
figures would have been lower.
The Institutional Share class was initially offered on 12/14/98 and reflects
the historical performance of the Class A Shares (without sales charge) prior
to that date.
The Predecessor Fund commenced operations on 8/1/94 through a transfer of
assets from certain collective trust fund ("commingled") accounts managed by
Deposit Guaranty Corp., using materially equivalent investment objectives,
policies and methodologies as the Fund. The quoted performance of the Fund
includes performance of the commingled accounts for periods prior to the
Fund's commencement of operations, as adjusted to reflect the expenses
associated with the Fund. The commingled accounts were not registered with the
Securities and Exchange Commission and, therefore, were not subject to the
investment restrictions imposed by law on registered mutual funds. If the
commingled accounts had been registered, the commingled accounts' performance
may have been adversely affected. The performance also reflects reinvestment
of dividends and capital gain distributions.
The Fund's performance is compared to the Russell 2000 Stock Index, an
unmanaged index generally representative of the performance of small-
capitalization stocks. The index does not reflect expenses associated with a
mutual fund, such as investment management and fund accounting fees. The
Fund's performance reflects the deduction of fees for these value-added
services. Investors cannot invest directly in an index, although they can
invest in the underlying securities.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
128
<PAGE>
ISG Small-Cap Opportunity Fund
(as of December 31, 1999)
- --------------------------------------------------------------------------------
[CHART]
Sector Profile*
Retail 12.3%
Restaurant 15.7%
Health Care 8.7%
Transportation 3.3%
Telecommunications 10.4%
Cash 1.7%
Capital Goods 3.8%
Financial Services 2.7%
Leisure 0.5%
Oil Field Services 2.1%
Business Equipment & Services 2.7%
Oil & Gas Exploration 0.7%
Consumer Non-Durables 1.1%
Technology 34.3%
Top 10 Equity Holdings*
<TABLE>
<CAPTION>
Percent of
Total Investments**
-------------------
<C> <S> <C>
1. Power-One, Inc. .................................. 5.9%
2. Cree Research, Inc. .............................. 4.3%
3. World Access, Inc. ............................... 4.2%
4. Carrier Access Corp. ............................. 3.8%
5. Critical Path, Inc. .............................. 3.7%
6. Outback Steakhouse, Inc .......................... 3.4%
7. Health Mgmt. Associates........................... 3.2%
8. Terex Corp. ...................................... 3.1%
9. Rare Hospitality International, Inc. ............. 2.9%
10. PF Changs China Bistro, Inc. ..................... 2.8%
</TABLE>
* The Fund's portfolio composition is subject to change.
** Total investments excluding short-term securities held as collateral.
129
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Small-Cap Opportunity Fund December 31, 1999
Common Stocks (98.5%)
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
--------- -----------
<S> <C> <C>
Air Transportation (0.8%)
AirTran Holdings, Inc. (b)............................... 171,000 $ 774,844
-----------
Business Equipment & Services (2.9%)
Acxiom Corp. (b)......................................... 8,000 192,000
MasTec, Inc. (b)......................................... 46,000 2,047,000
OfficeMax, Inc. (b)...................................... 80,000 440,000
-----------
2,679,000
-----------
Capital Goods (3.8%)
AGCO Corp................................................ 49,500 665,156
Terex Corp. (b).......................................... 101,000 2,802,750
-----------
3,467,906
-----------
Computer Hardware (2.7%)
eSoft, Inc. (b).......................................... 73,000 2,126,125
Rainbow Technologies, Inc. (b)........................... 15,000 348,750
-----------
2,474,875
-----------
Computer Software and Services (2.7%)
Computer Network Technology Corp. (b).................... 26,000 596,375
Eclipsys Corp. (b)....................................... 36,000 922,500
IONA Technologies PLC--ADR (b)........................... 17,000 926,500
-----------
2,445,375
-----------
Consumer Non-Durables (1.1%)
Hain Food Group, Inc. (b)................................ 44,700 1,000,163
-----------
Data Warehousing (1.8%)
MTI Technology Corp. (b)................................. 45,000 1,659,375
-----------
Electronic Components (5.9%)
Power-One, Inc. (b)...................................... 117,000 5,360,063
-----------
Entertainment (2.4%)
Hollywood Entertainment Corp. (b)........................ 151,000 2,189,500
-----------
Fiber-optics (2.3%)
MRV Communications, Inc. (b)............................. 33,000 2,074,875
-----------
Financial Services (2.7%)
Morgan Keegan, Inc. ..................................... 85,000 1,429,062
T. Rowe Price Associates................................. 29,000 1,071,188
-----------
2,500,250
-----------
Health Care (1.6%)
McKesson HBOC, Inc. ..................................... 23,000 518,938
Neotherapeutics, Inc. (b)................................ 71,000 940,750
-----------
1,459,688
-----------
Internet Services (9.5%)
Critical Path, Inc. (b).................................. 36,000 3,397,499
Digital River, Inc. (b).................................. 51,400 1,712,263
e-Net, Inc. (b).......................................... 15,500 192,781
iXL Enterprises, Inc. (b)................................ 41,000 2,275,500
MessageMedia Inc. (b).................................... 42,000 588,000
Netzee, Inc. (b)......................................... 33,000 548,625
-----------
8,714,668
-----------
Leisure (0.5%)
Action Performance Companies, Inc. (b)................... 41,600 478,400
-----------
Medical-Hospital Management Services (3.2%)
Health Management Associates, Inc. (b)................... 220,000 2,942,500
-----------
</TABLE>
Common Stocks, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- -----------
<S> <C> <C>
Medical Equipment & Supplies (2.9%)
ATS Medical, Inc. (b)................................. 105,000 $ 1,568,438
Laser Vision Centers, Inc. (b)........................ 98,000 1,035,125
-----------
2,603,563
-----------
Oil & Gas Exploration (0.7%)
Ocean Energy, Inc. (b)................................ 82,000 635,500
-----------
Oil Field Services (2.1%)
Gulf Island Fabrication, Inc. (b)..................... 148,000 1,387,500
TransCoastal Marine Services, Inc. (b)................ 175,000 503,125
-----------
1,890,625
-----------
Restaurants (15.8%)
CBRL Group, Inc. ..................................... 141,000 1,368,141
CEC Entertainment, Inc. (b)........................... 84,000 2,383,500
Outback Steakhouse, Inc. (b).......................... 120,000 3,112,499
P.F. Chang's China Bistro, Inc. (b)................... 102,000 2,537,250
RARE Hospitality International,
Inc. (b)............................................. 120,000 2,596,875
Tricon Global Restaurants, Inc. (b)................... 60,000 2,317,500
-----------
14,315,765
-----------
Retail (9.9%)
Ames Department Stores, Inc. (b)...................... 78,000 2,247,374
Goody's Family Clothing, Inc. (b)..................... 124,300 668,113
Horizon Pharmacies, Inc. (b).......................... 76,300 200,288
JAKKS Pacific, Inc. (b)............................... 30,500 569,969
Micro Warehouse, Inc. (b)............................. 110,000 2,035,000
Pier 1 Imports, Inc. ................................. 355,000 2,263,124
Rainbow Rentals, Inc. (b)............................. 31,100 223,531
THQ, Inc. (b)......................................... 37,800 876,488
-----------
9,083,887
-----------
Technology (3.8%)
Datastream Systems, Inc. (b).......................... 71,500 1,756,219
Insight Enterprises, Inc. (b)......................... 43,000 1,746,875
-----------
3,503,094
-----------
Telecommunications (16.9%)
Carrier Access Corp. (b).............................. 51,900 3,493,519
Cree Research, Inc. (b)............................... 46,500 3,949,593
ITC DeltaCom, Inc. (b)................................ 77,000 2,127,125
Paradyne Networks, Inc. (b)........................... 70,000 1,907,500
World Access, Inc. (b)................................ 200,000 3,850,000
-----------
15,327,737
-----------
Transportation (2.5%)
Hunt (J.B.) Transport Services, Inc. ................. 164,500 2,277,297
-----------
TOTAL COMMON STOCKS
(Cost $76,467,749)................................... 89,858,950
-----------
Cash Equivalents (1.4%)
Bank of New York Cash Reserve......................... $1,320,041 1,320,041
-----------
TOTAL CASH EQUIVALENTS
(Cost $1,320,041).................................... 1,320,041
-----------
</TABLE>
Continued
130
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Small-Cap Opportunity Fund December 31, 1999
Short-Term Securities+ (8.1%)
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
--------- ---------
<S> <C> <C>
Commercial Paper (6.6%)
Asset Backed-Miscellaneous (0.7%)
Enterprise Funding Corp., 5.95%, 1/13/00.................. $ 125,348 $ 124,125
Falcon Asset Securitization Corp., 6.10%, 1/24/00......... 198,272 195,081
Preferred Receivables Funding Corp., 6.05%, 1/10/00....... 112,420 111,155
Receivables Capital Corp., 6.07%, 1/28/00................. 227,042 223,481
---------
653,842
---------
Financial Services (2.8%)
Golden Funding Corp., 6.10%, 1/28/00...................... 475,854 468,498
Liberty Street Funding Corp., 6.07% -- 6.13%, 1/31/00-
2/17/00.................................................. 346,977 340,768
Moat Funding Corp., 5.98% -- 6.07%, 1/14/00 -- 2/11/00.... 539,658 532,121
Orix Corp., 6.47% -- 6.50%, 1/10/00 -- 1/14/00............ 839,941 830,781
Superior Funding Corp., 6.00% -- 6.14%, 1/18/00 --
1/31/00................................................. 404,525 399,129
---------
2,571,297
---------
Miscellaneous (3.1%)
ConAgra, Inc., 6.25% -- 6.33%, 1/18/00 -- 2/4/00.......... 742,431 734,534
MCI WorldCom, 6.11%, 1/18/00.............................. 148,704 147,139
Moriarity, 12.75%, 1/4/00................................. 991,362 989,957
Norfolk Southern Corp., 6.30%, 1/14/00.................... 396,545 392,381
Tyco International, Ltd., 6.43% -- 6.65%, 1/10/00 --
1/31/00................................................. 545,249 539,271
---------
2,803,282
---------
Total Commercial Paper.................................... 6,028,421
---------
</TABLE>
Short-Term Securities+, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
--------- -----------
<S> <C> <C>
Floating Rate Notes (0.5%)
Finanacial Services (0.3%)
General Motors Acceptance Corp., 4.49%*, 11/13/00........ $118,963 $ 118,963
KeyCorp, 6.42%*, 10/23/00................................ 99,136 99,136
Textron Financial Corp., 5.92%*, 5/12/00................. 99,136 99,078
-----------
317,177
-----------
Miscellaneous (0.2%)
Tyco International, Ltd., 6.72%*, 9/5/00................. 148,704 148,668
-----------
Total Floating Rate Notes................................ 465,845
-----------
Investment Companies (1.0%)
AIM Liquid Asset Money Market Fund....................... 925,057 925,057
-----------
TOTAL SHORT-TERM SECURITIES
(Cost $7,419,323)....................................... 7,419,323
-----------
TOTAL INVESTMENTS
(Cost $85,207,113) (a) -- (108.0%)...................... 98,598,314
Liabilities in excess of other assets --
(-8.0%)................................................. (7,263,319)
-----------
TOTAL NET ASSETS -- (100.0%)............................. $91,334,995
===========
</TABLE>
- ---------
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting in excess of federal income tax reporting of
$1,029,017. Cost for federal income tax purposes differs from value by net
unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation....................................... $ 20,967,989
Unrealized depreciation....................................... (8,605,805)
------------
Net unrealized appreciation................................... $ 12,362,184
============
</TABLE>
(b) Non-income producing security.
* Variable rate security. Rate represents rate in effect at December 31, 1999.
+ Represents securities purchased with cash collateral received on securities
loaned.
ADR -- American Depository Receipt
PLC -- Public Limited Company
See notes to financial statements
131
<PAGE>
ISG FUNDS
Small-Cap Opportunity Fund
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $85,207,113)............... $98,598,314
Cash................................................... 24,784
Interest and dividends receivable...................... 17,462
Receivable for capital shares issued................... 4,994
Receivable for investments sold........................ 1,020,636
Receivable from investment adviser..................... 23,442
Prepaid expenses and other assets...................... 15,697
-----------
Total Assets.......................................... 99,705,329
Liabilities:
Payable for return of collateral held for securities on
loan.................................................. $7,444,107
Payable for investments purchased...................... 816,265
Accrued expenses and other payables:
Investment advisory fees.............................. 73,560
Administration fees................................... 1,499
Distribution fees..................................... 11,874
Custodian fees........................................ 64
Other................................................. 22,965
----------
Total Liabilities..................................... 8,370,334
-----------
Net Assets:
Capital................................................ 83,962,967
Accumulated net realized losses from investment
transactions.......................................... (6,019,173)
Net unrealized appreciation (depreciation) from
investments........................................... 13,391,201
-----------
Net Assets............................................. $91,334,995
===========
Class A Shares
Net Assets............................................ $ 8,205,380
Shares outstanding.................................... 605,820
Redemption price per share............................ $ 13.54
===========
Class A Shares -- Maximum Sales Charge................. 4.75%
-----------
Maximum Offering Price Per Share (100%/(100% --
Maximum Sales Charge) of net asset value adjusted to
the nearest cent).................................... $ 14.22
===========
Class B Shares
Net Assets............................................ $ 385,296
Shares outstanding.................................... 28,791
Offering price per share*............................. $ 13.38
===========
Institutional Shares
Net Assets............................................ $82,744,319
Shares outstanding.................................... 6,127,282
Offering and redemption price per share............... $ 13.50
===========
</TABLE>
- ---------
* Redemption price per share varies by length of time shares are held.
Statement of Operations
For the year ended December 31, 1999
<TABLE>
<S> <C> <C>
Investment Income:
Interest income.......................................... $ 478,759
Dividend income.......................................... 131,433
Income from securities lending........................... 49,467
----------
Total Investment Income................................. 659,659
Expenses:
Investment advisory fees................................. $937,481
Administration fees...................................... 148,024
Distribution fees -- Class A Shares...................... 29,091
Distribution fees -- Class B Shares...................... 1,942
Shareholder servicing fees -- Class A Shares............. 17,443
Shareholder servicing fees -- Class B Shares............. 648
Shareholder servicing fees -- Institutional Shares....... 131,936
Custodian fees........................................... 30,951
Accounting fees.......................................... 25,085
Transfer agent fees...................................... 70,090
Directors' fees.......................................... 2,892
Other fees............................................... 83,296
--------
Total expenses before voluntary fee
reductions/reimbursements.............................. 1,478,879
Expenses voluntarily reduced/reimbursed................. (164,026)
----------
Net expenses............................................ 1,314,853
----------
Net Investment Income (Loss)............................. (655,194)
----------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment
transactions............................................ 5,374,037
Net change in unrealized appreciation (depreciation) from
investments............................................. (762,714)
----------
Net realized/unrealized gains (losses) from investments.. 4,611,323
----------
Change in net assets resulting from operations........... $3,956,129
==========
</TABLE>
See notes to financial statements
132
<PAGE>
ISG FUNDS
Small-Cap Opportunity Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Period Ended Year Ended
December 31, December 31, February 28,
1999 1998(a) 1998
------------ ------------ ------------
<S> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income (loss)........ $ (655,194) $ (387,203) $ (398,934)
Net realized gains (losses) from
investment transactions............ 5,374,037 (11,393,210) 24,232,586
Net change in unrealized
appreciation (depreciation) from
investments........................ (762,714) (3,912,574) 8,351,884
------------ ------------ ------------
Change in net assets resulting from
operations.......................... 3,956,129 (15,692,987) 32,185,536
------------ ------------ ------------
Distributions to Class A
Shareholders:
From net realized gains on
investment transactions............ -- (7,316,799) (16,352,806)
------------ ------------ ------------
Change in net assets from shareholder
distributions....................... -- (7,316,799) (16,352,806)
------------ ------------ ------------
Change in net assets from capital
transactions........................ (20,074,662) 7,591,804 26,511,632
------------ ------------ ------------
Change in net assets................. (16,118,533) (15,417,982) 42,344,362
Net Assets:
Beginning of period................. 107,453,528 122,871,510 80,527,148
------------ ------------ ------------
End of period....................... $ 91,334,995 $107,453,528 $122,871,510
============ ============ ============
</TABLE>
- ---------
(a) For the period from March 1, 1998 through December 31, 1998.
See notes to financial statements
133
<PAGE>
ISG FUNDS
Small-Cap Opportunity Fund
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Year Ended Period Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, February 28, February 28, February 28, February 28,
1999+ 1998 (d) 1998 1997 1996 1995 (a)
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $12.93 $ 15.84 $ 13.53 $ 12.79 $ 11.15 $ 10.00
------ ------- -------- ------- ------- -------
Investment Activities
Net investment income
(loss)................ (0.08) (0.42) (0.05) (0.03) -- 0.02
Net realized and
unrealized gains
(losses) from
investments........... 0.69 (1.61) 4.90 1.60 3.30 1.17
------ ------- -------- ------- ------- -------
Total from Investment
Activities............ 0.61 (2.03) 4.85 1.57 3.30 1.19
------ ------- -------- ------- ------- -------
Distributions
Net investment income.. -- -- -- -- -- (0.02)
Net realized gains..... -- (0.88) (2.54) (0.83) (1.66) (0.02)
------ ------- -------- ------- ------- -------
Total Distributions.... -- (0.88) (2.54) (0.83) (1.66) (0.04)
------ ------- -------- ------- ------- -------
Net change in asset
value.................. 0.61 (2.91) 2.31 0.74 1.64 1.15
------ ------- -------- ------- ------- -------
Net Asset Value, End of
Period................. $13.54 $ 12.93 $ 15.84 $ 13.53 $ 12.79 $ 11.15
====== ======= ======== ======= ======= =======
Total Return (excludes
sales charge).......... 4.72% (13.00)%(b) 37.81% 12.08% 31.42% 11.84%(b)
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $8,205 $11,145 $122,872 $80,527 $53,477 $36,664
Ratio of expenses to
average net assets..... 1.33% 1.38% (c) 1.20% 1.14% 1.17% 0.79%(c)
Ratio of net investment
income (loss) to
average net assets..... (0.65)% (0.42)%(c) (0.39)% (0.24)% 0.00% 0.06%(c)
Ratio of expenses to
average net assets*.... 1.71% 1.39% (c) 1.31% 1.30% 1.52% 2.13%(c)
Portfolio turnover**.... 220% 110% 180% 116% 154% 45%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If such
voluntary fee reductions/reimbursements had not occurred, the ratios would
have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
+ Net investment income (loss) is based on average shares outstanding during
the period.
(a) For the period from August 1, 1994 (commencement of operations) through
February 28, 1995.
(b) Not annualized.
(c) Annualized.
(d) For the period March 1, 1998 through December 31, 1998. In conjunction with
the reorganization of the ISG Funds, the Fund changed its fiscal year end
to December 31.
Financial Highlights, Class B Shares
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1999+ 1998(a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period............... $12.94 $12.38
------ ------
Investment Activities
Net investment income (loss)...................... (0.20) --
Net realized and unrealized gains (losses) from
investments...................................... 0.64 0.56
------ ------
Total from Investment Activities.................. 0.44 0.56
------ ------
Net change in asset value.......................... 0.44 0.56
------ ------
Net Asset Value, End of Period..................... $13.38 $12.94
====== ======
Total Return (excludes redemption charge).......... 3.40% 4.52% (b)
Ratios/Supplementary Data:
Net Assets at end of period (000).................. $ 385 $ 8
Ratio of expenses to average net assets............ 2.31% 1.36% (c)
Ratio of net investment income (loss) to average
net assets........................................ (1.61)% (0.45)%(c)
Ratio of expenses to average net assets*........... 2.33% 2.35% (c)
Portfolio turnover**............................... 220% 110%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If such
voluntary fee reductions/reimbursements had not occurred, the ratios would
have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
+ Net investment income (loss) is based on average shares outstanding during
the period.
(a) For the period from December 21, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
134
<PAGE>
ISG FUNDS
Small-Cap Opportunity Fund
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1999+ 1998 (a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period............... $ 12.93 $ 11.85
------- -------
Investment Activities
Net investment income (loss)...................... (0.08) --
Net realized and unrealized gains (losses) from
investments...................................... 0.65 1.08
------- -------
Total from Investment Activities.................. 0.57 1.08
------- -------
Net change in asset value.......................... 0.57 1.08
------- -------
Net Asset Value, End of Period..................... $ 13.50 $ 12.93
======= =======
Total Return....................................... 4.41% 9.11% (b)
Ratios/Supplementary Data:
Net Assets at end of period (000).................. $82,744 $96,301
Ratio of expenses to average net assets............ 1.33% 1.33% (c)
Ratio of net investment income (loss) to average
net assets........................................ (0.66)% (0.54)%(c)
Ratio of expenses to average net assets*........... 1.47% 1.48% (c)
Portfolio turnover**............................... 220% 110%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If such
voluntary fee reductions/reimbursements had not occurred, the ratios would
have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
+ Net investment income (loss) is based on average shares outstanding during
the period.
(a) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
135
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
136
<PAGE>
Lazard International Equity Investment Team
ISG International Equity Fund+
- --------------------------------------------------------------------------------
Investment Goal
The Fund seeks to provide investors
with capital appreciation. The Fund
invests primarily in the equity
securities of foreign issuers that
the Fund manager considers
attractive based on their return on
total capital or equity. The Fund
expects to invest primarily in
stocks of companies located in
developed foreign countries.
However, the Fund may invest up to
25% of its assets in companies
located or doing significant
business in emerging markets.
- --------------------------------------------------------------------------------
Q. How did the Fund perform during the period?
A. For the 12 months ended December 31, 1999, the Fund's total return was
26.77% (Class A Shares at NAV)./1/ In comparison, the MSCI EAFE Index rose
26.96%.
Q. What factors affected your performance?
A. If there was a single key factor during the year that helped our
performance, it was our stockpicking success in Japan. Japanese stocks as a
group advanced sharply, and we enhanced these returns by picking what turned
out to be the best of the best: The portfolio's Japanese holdings were up an
average of 92% for the year. Our Japanese stocks included such winners as NTT
Mobile (2.59% of the Fund's net assets) and Sumitomo Trust Bank (1.24%), both
of which more than doubled in price; Orix (2.42%), a leasing company that more
than doubled; and Sony (3.38%), which rose by more than 300%.*
We also did very well with our international telecommunications stocks, which
returned more than 100% as a group. Along with NTT and NTT Mobile, we profited
from holdings in Spain's Telefonica (2.89%) and Deutsche Telekom (0.50%).*
Q. How did you feel about opportunities in Europe?
A. There were positive themes in Europe, particularly corporate restructuring
and an unprecedented level of merger-and-acquisition activity. European
companies are now doing the tough things that American corporations did
throughout the 1990s: cut costs; grow earnings; enhance shareholder value. Some
of the European stocks we favored were Alcatel (2.37%), the French telephone
equipment company; Phillips (1.17%), the Dutch electronics company; and Siemens
(1.77%), the German electronics firm.*
Q. Along with strong performance, did the Fund succeed in reducing volatility
for U.S. investors?
A. For investors who were only invested in U.S. stocks, 1999 was the year that
demonstrated how international diversification can work--in terms of both
return enhancement and lowered volatility. This is why investors diversify into
foreign issues: They hope that, in the long run, such asset allocation will
help to increase overall returns and decrease short-term fluctuations.
As of December 31, 1999, approximately 21.9% of the Fund's net assets were
invested in Japan, 16.7% in the United Kingdom, 12.4% in France, 8.1% in
Germany, 4.1% in Spain, 3.5% in the Netherlands, 3.1% in Switzerland, 2.4% in
Sweden, 2.0% in Mexico and 2.0% in Italy. Our remaining assets were invested in
Denmark, Finland, Hong Kong, Hungary, India, Portugal, Singapore, South Africa
and South Korea.*
Q. What is your outlook for 2000?
A. In the European sector, we look for a continuation of the corporate
restructuring and industry consolidation that has worked so well to this point.
We believe this process should produce rising earnings and healthy returns on
capital within individual companies. In Japan, we look forward to a progression
of the new trends of consolidation and banking reforms. We hope to see more
economic growth as Japan recovers from its terrible recession of 1997-98. These
are all exciting developments, along with events in many emerging countries. So
much of that part of the world was in recession, but now many of those
countries are recovering nicely.
- ---------
+International investing involves increased risk and volatility.
/1/Including the 4.75% sales load, the Fund's return was 20.73% for the period.
* The Fund's portfolio composition is subject to change.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
137
<PAGE>
ISG International Equity Fund
Performance (as of December 31, 1999)
- -------------------------------------------------------------------------------
[GRAPH]
Class A Shares
International International
Equity Fund Equity Fund MSCI
with Sales Charge without Sales Charge EAFE Index
8/97 9,680 10,000 10,000
12/97 9,238 9,700 9,472
12/98 10,114 10,619 11,723
12/99 12,821 13,462 14,884
[GRAPH]
Class B Shares
International International
Equity Fund Equity Fund MSCI
with CDSC without CDSC EAFE Index
8/97 10,000 10,000 10,000
12/97 9,238 9,700 9,472
12/98 10,319 10,619 11,723
12/99 13,078 13,378 14,884
[GRAPH]
Institutional Shares
International MSCI
Equity Fund EAFE Index
8/97 10,000 10,000
12/97 9,700 9,472
12/98 10,619 11,723
12/99 13,457 14,884
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without Sales With Sales
Charge Charge*
------------- ----------
<S> <C> <C>
Class A Shares
1-Year..................... 26.77% 20.73%
Since Inception 8/15/97.... 13.37% 11.06%
</TABLE>
*Reflects the maximum sales charge of
4.75%.
<TABLE>
<CAPTION>
Average Annual
Total Return
------------------------
Without CDSC With CDSC**
------------ -----------
<S> <C> <C>
Class B Shares
1-Year..................... 25.98% 22.98%
Since Inception 8/15/97.... 13.07% 11.99%
</TABLE>
**Reflects the applicable contingent
deferred sales charge (maximum
4.00%).
The data for Class B Shares primarily
represents the results of the Class A
Shares. Actual Class B Shares average
annual total return and hypothetical
growth results would have been lower.
See notes below.
<TABLE>
<CAPTION>
Average Annual
Total Return
--------------
<S> <C>
Institutional Shares
1-Year................................ 26.72%
Since Inception 8/15/97............... 13.35%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment
in the indicated share class versus a similar investment in the Fund's
benchmark.
Performance for the Class B Shares, which commenced operations on 2/2/99, is
based on the historical performance of the Class A Shares, (without sales
charge) prior to that date. Class A Shares performance does not reflect the
higher 12b-1 fees or the contingent deferred sales charge (CDSC). Had the CDSC
and higher 12b-1 fees been incorporated, total return and hypothetical growth
figures would have been lower.
The quoted returns reflect the performance from 8/15/97 to 12/14/98 of the DG
International Equity Fund, an open-end investment company that was the
predecessor fund to the ISG International Equity Fund.
The Institutional Share class was initially offered on 12/14/98 and reflects
the historical performance of the Class A Shares (without sales charge) prior
to that date.
The Fund's performance is compared to the Morgan Stanley Capital International
(MSCI) Europe, Australasia and Far East (EAFE) Index, which is unmanaged and
is generally representative of the performance of stock markets in those
regions. The index does not reflect the expenses associated with a mutual
fund, such as investment management and fund accounting fees. The Fund's
performance reflects the deduction of fees for these value-added services.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
138
<PAGE>
ISG International Equity Fund
(as of December 31, 1999)
- --------------------------------------------------------------------------------
[CHART]
Country Weightings*
Hungary 0.3%
Japan 24.4%
Australia 1.7%
Denmark 1.6%
Germany 9.0%
Switzerland 3.5%
Sweden 2.7%
Spain 4.5%
Netherlands 3.8%
Italy 2.2%
Mexico 2.2%
South Africa 0.5%
India 0.8%
Brazil 1.6%
South Korea 2.9%
Portugal 1.0%
Finland 1.3%
France 13.8%
Hong Kong/Singapore 3.7%
United Kingdom 18.5%
Top 10 Equity Holdings*
<TABLE>
<CAPTION>
Percent of
Total Investments**
-------------------
<C> <S> <C>
1. Sony Corp. ....................................... 3.3%
2. Telefonica de Espana.............................. 2.9%
3. NTT Mobile Com NPV................................ 2.6%
4. Orix Corp. ....................................... 2.4%
5. Alcatel........................................... 2.3%
6. Aventis........................................... 2.2%
7. TDK Corp. ........................................ 2.0%
8. Siemens AG NPV.................................... 1.8%
9. Canon, Inc. ...................................... 1.7%
10. Total SA.......................................... 1.6%
</TABLE>
* The Fund's portfolio composition is subject to change.
** Total investments excluding short-term securities held as collateral.
139
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
International Equity Fund December 31, 1999
Common Stocks (90.3%)
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- -----------
<S> <C> <C>
Australia (1.5%)
Materials & Commodities (1.5%)
Broken Hill Proprietary Co., Ltd........................ 54,217 $ 709,465
-----------
Brazil (1.4%)
Beverages (0.7%)
Companhia Cervejaria Brahma - ADR....................... 23,300 326,200
-----------
Telecommunications (0.7%)
Telebras Brasileiras S.A. - ADR, Preferred Block........ 2,700 346,950
-----------
673,150
-----------
Denmark (1.5%)
Telecommunications (1.5%)
Tele Danmark A/S........................................ 9,400 699,093
-----------
Finland (1.2%)
Banking (0.3%)
Merita Nordbanken OYJ................................... 26,700 157,421
-----------
Forest Products & Paper (0.9%)
UPM-Kymmene OYJ......................................... 10,400 419,266
-----------
576,687
-----------
France (11.4%)
Automobile (0.4%)
Michelin, Class B....................................... 4,800 188,670
-----------
Banking (1.4%)
Banque Nationale de Paris............................... 7,200 664,697
-----------
Chemicals (1.3%)
Aventis S.A. ........................................... 10,400 604,795
-----------
Electrical & Electronics (2.3%)
Alcatel Alsthom......................................... 4,880 1,121,375
-----------
Insurance (1.2%)
AXA..................................................... 4,140 577,474
-----------
Materials & Commodities (0.9%)
Compagnie de Saint Gobain............................... 2,210 415,846
-----------
Multi-Industry (2.3%)
Suez Lyonnaise des Eaux................................. 2,390 383,234
Vivendi................................................. 7,738 699,157
-----------
1,082,391
-----------
Oil & Gas Production & Services (1.6%)
Total Fina SA-B......................................... 5,601 747,958
-----------
5,403,206
-----------
Germany (9.1%)
Airline Services (0.9%)
Deutsche Lufthansa AG................................... 19,300 449,330
-----------
Automobile (1.0%)
DaimlerChrysler AG...................................... 5,818 452,675
-----------
Chemicals (1.0%)
Aventis S.A. ........................................... 7,952 462,435
-----------
Insurance (1.2%)
Allianz AG.............................................. 1,672 561,989
-----------
</TABLE>
Common Stocks, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- -----------
<S> <C> <C>
Germany, continued
Multi-Industry (3.5%)
Siemens AG.............................................. 6,600 $ 840,124
Thyssen Krupp AG........................................ 13,200 402,435
Veba AG................................................. 8,900 432,796
-----------
1,675,355
-----------
Retail (1.0%)
Metro AG................................................ 8,844 475,977
-----------
Telecommunications (0.5%)
Deutsche Telekom AG..................................... 3,306 235,569
-----------
4,313,330
-----------
Hong Kong (1.3%)
Banking (1.3%)
HSBC Holdings PLC....................................... 42,400 594,468
-----------
Hungary (0.3%)
Oil & Gas Production & Services (0.3%)
MOL Magyar Olaj-es Gazipari Rt. GDR..................... 5,800 119,873
-----------
India (0.7%)
Telecommunications (0.7%)
Mahanager Telephone Nigam, Ltd. - GDR (c)............... 29,300 332,555
-----------
Italy (2.0%)
Banking (0.8%)
San Paolo - IMI SpA..................................... 27,300 371,168
-----------
Energy Sources (0.8%)
ENI SpA................................................. 68,500 376,946
-----------
Telecommunications (0.4%)
Telecom Italia SpA...................................... 33,300 203,047
-----------
951,161
-----------
Japan (21.9%)
Automobile (0.9%)
Nissan Motor Co., Ltd. (b).............................. 111,000 436,017
-----------
Banking (2.8%)
Fuji Bank, Ltd.......................................... 37,000 359,009
Industrial Bank of Japan, Ltd........................... 42,000 404,241
Sumitomo Trust & Banking, Ltd........................... 87,000 586,574
-----------
1,349,824
-----------
Beverages (0.9%)
Asahi Breweries, Ltd.................................... 38,000 415,126
-----------
Electrical & Electronics (5.4%)
Sony Corp. ............................................. 5,400 1,598,788
TDK Corp. .............................................. 7,000 965,116
-----------
2,563,904
-----------
Finanacial Services (3.0%)
Orix Corp............................................... 5,100 1,147,177
Promise Co., Ltd. ...................................... 5,300 269,298
-----------
1,416,475
-----------
Food & Household Products (1.1%)
Kao Corp. .............................................. 18,000 512,703
-----------
</TABLE>
Continued
140
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
International Equity Fund December 31, 1999
Common Stocks, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- -----------
<S> <C> <C>
Japan, continued
Office Equipment (1.8%)
Canon, Inc. ........................................... 21,000 $ 833,105
-----------
Pharmaceutical (0.6%)
Sankyo Co., Ltd. ...................................... 15,000 307,798
-----------
Recreation & Other Consumer Goods (0.7%)
Nintendo Co., Ltd...................................... 2,100 348,427
-----------
Telecommunications (4.0%)
Nippon Telegraph & Telephone Corp. .................... 38 649,795
NTT Mobile Communications Network, Inc. ............... 32 1,228,844
-----------
1,878,639
-----------
Tobacco (0.7%)
Japan Tobacco, Inc..................................... 45 343,854
-----------
10,405,872
-----------
Mexico (2.0%)
Beverages (0.7%)
Fomento Economico Mexicano, SA de CV - ADR............. 7,900 351,550
-----------
Finanacial Services (1.3%)
Grupo Financiero Banamex Accival, SA de CV, Class O
(b)................................................... 146,800 586,891
-----------
938,441
-----------
Netherlands (3.5%)
Beverages (1.0%)
Heineken NV............................................ 9,325 455,061
-----------
Electrical & Electronics (1.2%)
Philips Electronics NV................................. 4,074 554,308
-----------
Finanacial Services (1.3%)
ING Groep NV........................................... 10,400 628,269
-----------
1,637,638
-----------
Portugal (0.9%)
Telecommunications (0.9%)
Portugal Telecom SA.................................... 39,900 437,922
-----------
Singapore (2.1%)
Banking (2.1%)
Oversea-Chinese Banking Corp., Ltd..................... 58,050 533,321
United Overseas Bank, Ltd. ............................ 53,632 473,408
-----------
1,006,729
-----------
South Africa (0.5%)
Insurance (0.5%)
Liberty Life Association of Africa, Ltd................ 20,500 236,474
-----------
South Korea (2.7%)
Electrical & Electronics (1.4%)
Samsung Electronics Co. - GDR (c)...................... 5,250 641,813
-----------
Telecommunications (1.3%)
Korea Telecom Corp. - ADR.............................. 8,300 620,425
-----------
1,262,238
-----------
</TABLE>
Common Stocks, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- -----------
<S> <C> <C>
Spain (4.1%)
Energy Sources (1.2%)
Endesa SA............................................... 28,600 $ 568,131
-----------
Telecommunications (2.9%)
Telefonica de Espana (b)................................ 54,734 1,368,059
-----------
1,936,190
-----------
Sweden (2.4%)
Appliances & Household Durables (1.1%)
Electrolux AB, Class B.................................. 20,500 516,384
-----------
Automobile (0.3%)
Volvo AB, Class B....................................... 6,000 155,375
-----------
Banking (1.0%)
Nordbanken Holding AB................................... 22,900 134,776
Svenska Handelsbanken AB, Class A....................... 26,700 336,280
-----------
471,056
-----------
1,142,815
-----------
Switzerland (3.1%)
Insurance (0.9%)
Zurich Allied AG........................................ 725 413,349
-----------
Machinery & Engineering (1.2%)
ABB Ltd. (b)............................................ 4,934 603,352
-----------
Pharmaceutical (1.0%)
Roche Holding AG........................................ 40 474,695
-----------
1,491,396
-----------
United Kingdom (16.7%)
Aerospace & Military Technology (1.1%)
British Aerospace PLC................................... 76,500 506,576
-----------
Banking (1.7%)
Halifax Group PLC....................................... 37,600 416,895
National Westminster Bank PLC........................... 19,000 408,136
-----------
825,031
-----------
Beverages (0.7%)
Diageo PLC.............................................. 41,368 332,731
-----------
Chemicals (1.0%)
Imperial Chemical Industries PLC........................ 42,800 453,123
-----------
Electrical & Electronics (0.8%)
Invensys PLC............................................ 65,600 357,053
-----------
Energy Sources (1.3%)
BP Amoco PLC............................................ 59,200 595,196
-----------
Food & Household Products (1.3%)
Cadbury Schweppes PLC................................... 43,500 262,761
Unilever PLC............................................ 45,696 336,175
-----------
598,936
-----------
Food Retailer (0.4%)
Tesco PLC............................................... 67,800 206,141
-----------
Industrial Services (0.4%)
GKN PLC................................................. 11,500 181,093
-----------
</TABLE>
Continued
141
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
International Equity Fund December 31, 1999
Common Stocks, continued
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- -----------
<S> <C> <C>
United Kingdom, continued
Insurance (2.3%)
Allied Zurich PLC....................................... 23,500 $ 276,881
Prudential Corp. PLC.................................... 24,100 474,870
Royal & Sun Alliance Insurance Group PLC................ 48,818 371,758
-----------
1,123,509
-----------
Leisure & Tourism (1.2%)
Granada Group PLC....................................... 57,900 586,802
-----------
Pharmaceutical (1.8%)
AstraZeneca Group PLC................................... 14,860 616,329
SmithKline Beecham PLC.................................. 21,000 267,945
-----------
884,274
-----------
Publishing (1.0%)
Reed International PLC.................................. 62,800 470,120
-----------
Retail (0.6%)
Great Universal Stores PLC.............................. 49,800 291,164
-----------
Tobacco (0.6%)
British American Tobacco PLC............................ 46,600 264,740
-----------
Utilities--Electrical & Gas (0.5%)
British Energy PLC...................................... 37,597 215,566
-----------
7,892,055
-----------
TOTAL COMMON STOCKS
(Cost $33,189,880)..................................... 42,760,758
-----------
</TABLE>
Cash Equivalents (10.7%)
<TABLE>
<CAPTION>
Shares or Market
Principal Value
Amount (Note 2)
---------- -----------
<S> <C> <C>
Bank of New York Cash Reserve........................... $5,062,005 $ 5,062,005
-----------
TOTAL CASH EQUIVALENTS
(Cost $5,062,005)...................................... 5,062,005
-----------
TOTAL INVESTMENTS
(Cost $38,251,885) (a) -- (101.0%)..................... 47,822,763
Liabilities in excess of other
assets -- (-1.0%)...................................... (459,057)
-----------
TOTAL NET ASSETS -- (100.0%)............................ $47,363,706
===========
</TABLE>
- ---------
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting in excess of federal income tax reporting of
$152,083 and by the amount of mark to market adjustment for passive foreign
investment companies of $754,539. Cost for federal income tax purposes
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation........................................ $10,120,127
Unrealized depreciation........................................ (1,455,871)
-----------
Net unrealized appreciation.................................... $ 8,664,256
===========
</TABLE>
(b) Non-income producing security.
(c) Represents a restricted security purchased under Rule 144A which is exempt
from registration under the Security Act of 1933, as amended. These
securities have been deemed liquid under guidelines established by the
Board of Directors.
ADR -- American Depository Receipt
GDR -- Global Depository Receipt
PLC -- Public Limited Company
See notes to financial statements
142
<PAGE>
ISG FUNDS
International Equity Fund
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $38,251,885)................. $47,822,763
Interest and dividends receivable........................ 24,726
Receivable for capital shares issued..................... 5,336
Receivable from investment adviser....................... 853
Reclaim receivable....................................... 51,596
Prepaid expenses and other assets........................ 12,771
-----------
Total Assets............................................ 47,918,045
Liabilities:
Distributions payable.................................... $488,186
Accrued expenses and other payables:
Investment advisory fees................................ 25,185
Administration fees..................................... 740
Distribution fees....................................... 5,376
Custodian fees.......................................... 17,540
Other................................................... 17,312
--------
Total Liabilities........................................ 554,339
-----------
Net Assets:
Capital.................................................. 38,135,236
Undistributed (distributions in excess of) net investment
income.................................................. (301,925)
Accumulated net realized gains (losses) from investments
and foreign currency transactions....................... (36,893)
Net unrealized appreciation (depreciation) from
investments and translation of assets and liabilities
denominated in foreign currencies....................... 9,567,288
-----------
Net Assets............................................... $47,363,706
===========
Class A Shares
Net Assets.............................................. $ 1,032,562
Shares outstanding...................................... 77,800
Redemption price per share.............................. $ 13.27
===========
Class A Shares -- Maximum Sales Charge................... 4.75%
===========
Maximum Offering Price Per Share (100%/(100% -- Maximum
Sales Charge) of net asset value adjusted to the
nearest cent).......................................... $ 13.93
===========
Class B Shares
Net Assets.............................................. $ 227,519
Shares outstanding...................................... 17,223
Offering price per share*............................... $ 13.21
===========
Institutional Shares
Net Assets.............................................. $46,103,625
Shares outstanding...................................... 3,474,359
Offering and redemption price per share................. $ 13.27
===========
</TABLE>
- ---------
* Redemption price per share varies by length of time shares are held.
Statement of Operations
For the year ended December 31, 1999
<TABLE>
<S> <C> <C>
Investment Income:
Interest income........................................... $ 38,436
Dividend income........................................... 786,299
Foreign withholding tax expense........................... (54,611)
----------
Total Investment Income.................................. 770,124
Expenses:
Investment advisory fees.................................. $326,970
Administration fees....................................... 49,045
Distribution fees -- Class A Shares....................... 1,031
Distribution fees -- Class B Shares....................... 416
Shareholder servicing fees -- Class A Shares.............. 623
Shareholder servicing fees -- Class B Shares.............. 138
Shareholder servicing fees -- Institutional Shares........ 48,339
Custodian fees............................................ 44,507
Accounting fees........................................... 29,743
Transfer agent fees....................................... 41,495
Directors' fees........................................... 955
Other fees................................................ 62,548
--------
Total expenses before voluntary fee
reductions/reimbursements 605,810
Expenses voluntarily reduced/reimbursed................. (93,435)
----------
Net expenses............................................ 512,375
----------
Net Investment Income..................................... 257,749
----------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investments and foreign
currency transactions.................................... 1,721,466
Net change in unrealized appreciation (depreciation) from
investments and translation of assets and liabilities
denominated in foreign currencies........................ 6,623,611
----------
Net realized/unrealized gains (losses) from investments... 8,345,077
----------
Change in net assets resulting from operations............ $8,602,826
==========
</TABLE>
See notes to financial statements
143
<PAGE>
ISG FUNDS
International Equity Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Period Ended Period Ended
December 31, December 31, February 28,
1999 1998 (b) 1998 (a)
------------ ------------ ------------
<S> <C> <C> <C>
From Investment Activities:
Operations:
Net Investment income............... $ 257,749 $ 143,332 $ (45,719)
Net realized gains (losses) from
investment and foreign currency
transactions....................... 1,721,466 (1,608,869) (240,297)
Net change in unrealized
appreciation (depreciation) from
investments and translation of
assets and liabilities in foreign
currencies......................... 6,623,611 1,521,825 1,421,852
----------- ----------- -----------
Change in net assets resulting from
operations.......................... 8,602,826 56,288 1,135,836
----------- ----------- -----------
Distributions to Class A
Shareholders:
From net investment income.......... (5,861) (71,392) --
In excess of net investment income.. (5,240) -- (20,145)
Distributions to Class B
Shareholders:
From net investment income.......... (1,081)(c) -- --
In excess of net investment income.. (967)(c)
Distributions to Institutional
Shareholders:
From net investment income.......... (250,807) -- --
In excess of net investment income.. (224,230) -- --
----------- ----------- -----------
Change in net assets from shareholder
distributions....................... (488,186) (71,392) (20,145)
----------- ----------- -----------
Change in net assets from capital
transactions........................ 11,123,143 1,607,816 25,417,520
----------- ----------- -----------
Change in net assets................. 19,237,783 1,592,712 26,533,211
Net Assets:
Beginning of period................. 28,125,923 26,533,211 --
----------- ----------- -----------
End of period....................... $47,363,706 $28,125,923 $26,533,211
=========== =========== ===========
</TABLE>
- ---------
(a) For the period from August 15, 1997 (commencement of operations) through
February 28, 1998.
(b) For the period from March 1, 1998 through December 31, 1998.
(c) For the period from February 2, 1999 (commencement of operations) through
December 31, 1999.
See notes to financial statements
144
<PAGE>
ISG FUNDS
International Equity Fund
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Year Ended Period Ended Period Ended
December 31, December 31, February 28,
1999 1998 (a) 1998 (b)
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period.............................. $10.58 $10.46 $ 10.00
------ ------ -------
Investment Activities
Net investment income (loss)........ 0.02 0.03 (0.02)
Net realized and unrealized gains
(losses) from investments and
foreign currencies................. 2.81 0.12 0.49
------ ------ -------
Total from Investment Activities.... 2.83 0.15 0.47
------ ------ -------
Distributions
Net investment income............... (0.07) (0.03) --
In excess of net investment income.. (0.07) -- (0.01)
------ ------ -------
Total Distributions................. (0.14) (0.03) (0.01)
------ ------ -------
Net change in asset value............ 2.69 0.12 0.46
------ ------ -------
Net Asset Value, End of Period....... $13.27 $10.58 $ 10.46
====== ====== =======
Total Return (excludes sales
charge)............................. 26.77% 1.42%(c) 4.71% (c)
Ratios/Supplementary Data:
Net Assets at end of period (000).... $1,033 $ 149 $26,533
Ratio of expenses to average net
assets.............................. 1.59% 1.81%(d) 1.77% (d)
Ratio of net investment income (loss)
to average net assets............... 0.26% 0.71%(d) (0.48)%(d)
Ratio of expenses to average net
assets*............................. 2.12% 2.16%(d) 2.27% (d)
Portfolio turnover**................. 40% 62% 21%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from March 1, 1998 through December 31, 1998. In
conjunction with the reorganization of the ISG Funds, the Fund changed its
year end to December 31.
(b) For the period from August 15, 1997 (commencement of operations) through
February 28, 1998.
(c) Not annualized.
(d) Annualized.
Financial Highlights, Class B Shares
<TABLE>
<CAPTION>
Year Ended
December 31,
1999 (a)
------------
<S> <C>
Net Asset Value, Beginning of Period............................ $10.66
------
Investment Activities
Net investment income (loss)................................... (0.02)
Net realized and unrealized gains (losses) from investments and
foreign currencies............................................ 2.69
------
Total from Investment Activities............................... 2.67
------
Distributions
Net investment income.......................................... (0.06)
In excess of net investment income............................. (0.06)
------
Total Distributions............................................ (0.12)
------
Net change in asset value....................................... 2.55
------
Net Asset Value, End of Period.................................. $13.21
======
Total Return (excludes redemption charge)....................... 25.98% (b)
Ratios/Supplementary Data:
Net Assets at end of period (000)............................... $ 228
Ratio of expenses to average net assets......................... 2.45% (c)
Ratio of net investment income (loss) to average net assets..... (0.54)%(c)
Ratio of expenses to average net assets*........................ 2.73% (c)
Portfolio turnover**............................................ 40%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from February 2, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
145
<PAGE>
ISG FUNDS
International Equity Fund
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1999 1998 (a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period............... $ 10.58 $ 10.05
------- -------
Investment Activities
Net investment income (loss)...................... 0.08 (0.01)
Net realized and unrealized gains (losses) from
investments and foreign currencies............... 2.75 0.54
------- -------
Total from Investment Activities.................. 2.83 0.53
------- -------
Distributions
Net investment income............................. (0.07) --
In excess of net investment income................ (0.07) --
------- -------
Total Distributions............................... (0.14) --
------- -------
Net change in asset value.......................... 2.69 0.53
------- -------
Net Asset Value, End of Period..................... $ 13.27 $ 10.58
======= =======
Total Return....................................... 26.72% 5.27% (b)
Ratios/Supplementary Data:
Net Assets at end of period (000).................. $46,104 $27,977
Ratio of expenses to average net assets............ 1.56% 1.61% (c)
Ratio of net investment income (loss) to average
net assets........................................ 0.80% (1.47)%(c)
Ratio of expenses to average net assets*........... 1.84% 1.89% (c)
Portfolio turnover**............................... 40% 62%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
146
<PAGE>
ISG Investment Management Team
Portfolio Manager
ISG Strategic Portfolio
Current Income Portfolio
- --------------------------------------------------------------------------------
Investment Goal
The Strategic Portfolios seek to provide investors with the potential to
achieve a variety of long- and short-term goals, commensurate with investors'
specific time horizons and tolerance for risk. Each of the five Strategic
Portfolios invests in a combination of underlying mutual funds from the ISG
family. Based on each Portfolio's asset-allocation target, the managers
periodically rebalance stock, bond and money market holdings--based on analysis
of economic and market trends.
- -------------------------------------------------------------------------------
Q. How did the Fund perform during the period?
A. For the periods ended December 31, 1999, the Fund's total returns and
comparative benchmark returns were as follows:
ISG Current Income from its inception on 2/23/99 to 12/31/99
(Class A shares at NAV)+: -1.63%
Lipper Income Funds Index/1/: 6.88%
Merrill Lynch Government/Corporate Master Index: -0.24%
Q. What factors affected the Funds' performance?
A. The stock market had a fairly terrific year, while bonds languished.
Consequently, our more aggressive Portfolios (which held higher concentrations
of underlying stock funds) did much better than the more conservative
Portfolios.
The successes of the Aggressive Growth Portfolio and Growth Portfolio, in
particular, were due in large measure to their allocations in the ISG Mid-Cap
Fund, which produced outsized returns.
The strategy of owning more than one style of fund--for example, having stakes
in such diverse sectors as large-cap growth, small-cap value and international
equities--proved beneficial. Volatility was pervasive, not just in the stock
market, but also in the fixed-income arena. With the markets making big moves,
it can be difficult for individual investors to stay abreast of new trends.
Shareholders in our Strategic Portfolios enjoyed the advantage of usually
having some of their money invested in whatever style was currently
fashionable. This diversification is one of the primary benefits offered by
the Strategic Portfolio concept.
Q. Going forward, what strategies are the fund managers employing?
A. Each Portfolio has a target range for how much of its assets should be
invested in different types of underlying funds. This "road map" guides our
team in its asset-allocation decisions. At least once a month, the managers
review each Portfolio's current allocation, and based on a Portfolio's target,
our valuation discipline and the team's assessment of market conditions, new
monies may be invested in various sectors.
As we enter 2000, all of the Portfolios hold a somewhat lower-than-average
allocation in equities. This reflects our strong belief that bonds currently
offer more relative value. Given the high current valuations of many
individual stocks, and equity indices as a whole, we feel that stocks are a
bit riskier than bonds at this time.
Q. How can shareholders use the Portfolios to take advantage of changing
market conditions in the future?
A. The real strength of these Portfolios is that an investor can implement an
asset-allocation strategy supporting his or her individual needs--with a
single investment in the most suitable Strategic Portfolio. Rather than worry
about macroeconomic events or sector rotation, an investor can simply choose
the Portfolio that offers the appropriate measure of potential risk and
reward. If this is done correctly, we believe that, over time, shareholders
will earn returns that are proportionate with the level of risk they have
selected.
- ---------
+ Including the 3.00% sales load, the ISG Current Income Portfolio's return
would have been -4.62%.
/1/ The Lipper Income Funds Index is an index of managed funds that normally
seek a high level of current income through investing in income-producing
stocks, bonds and money market instruments.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investor's shares, when
redeemed, may be worth more or less than their original purchase price.
147
<PAGE>
ISG Current Income Portfolio
Performance (as of December 31, 1999)
- --------------------------------------------------------------------------------
[GRAPH]
Class A Shares
Current Income Current Income Merrill Lynch
Portfolio with Portfolio without Government
Sales Charge Sales Charge Corporate Index
2/3/99 9,700 10,000 10,000
12/31/99 9,538 9,837 9,976
[GRAPH]
Class B Shares
Current Income Current Income Merrill Lynch
Porfolio Portfolio Government/
with CDSC without CDSC Corporate Index
3/17/99 10,000 10,000 10,000
12/31/99 9,451 9,834 9,913
[GRAPH]
Institutional Shares
Merrill Lynch
Current Income Government/
Porfolio Corporate Index
1/25/99 10,000 10,000
12/31/99 9,859 9,724
<TABLE>
<CAPTION>
Cumulative
Total Return
---------------
Without With
Sales Sales
Charge Charge*
Class A Shares ------- -------
<S> <C> <C>
Since Inception 2/23/99......................................... -1.63% -4.62%
</TABLE>
*Reflects the maximum sales charge of 3.00%.
<TABLE>
<CAPTION>
Cumulative
Total Return
--------------
Without With
CDSC CDSC**
Class B Shares ------- ------
<S> <C> <C>
Since Inception 3/17/99.......................................... -1.66% -5.49%
</TABLE>
**Reflects the applicable contingent deferred sales charge (maximum 4.00%).
<TABLE>
<CAPTION>
Cumulative
Total Return
Institutional Shares ------------
<S> <C>
Since Inception 1/25/99............................................ -1.41%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment in
the indicated share class versus a similar investment in the Fund's benchmark.
The Fund's performance is compared to the Merrill Lynch Government/Corporate
Master Index that is generally representative of the performance of corporate
and U.S. Government bonds. The index is unmanaged and does not reflect the
expenses associated with a mutual fund, such as investment management and fund
accounting fees. The Fund's performance reflects the deduction of fees for
these value-added services. Investors cannot invest directly in an index,
although they can invest in the underlying securities.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
148
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Current Income Portfolio December 31, 1999
Investment Companies (100.4%)
<TABLE>
<CAPTION>
Market
Value
Shares (Note 2)
------ ---------
<S> <C> <C>
ISG Income Fund, Institutional Shares......................... 32,537 $ 310,080
ISG Limited Term Income Fund, Institutional Shares............ 34,351 331,147
ISG Prime Money Market Fund, Institutional Shares............. 9,325 9,325
---------
TOTAL INVESTMENT COMPANIES
(Cost $659,440).............................................. 650,552
TOTAL INVESTMENTS IN AFFILIATES
(Cost $659,440) (a) -- (100.4%).............................. 650,552
Liabilities in excess of
other assets -- (-0.4%)...................................... (2,521)
---------
TOTAL NET ASSETS -- (100.0%).................................. $ 648,031
=========
</TABLE>
- ---------
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting in excess of federal income tax reporting of $792.
Cost for federal income tax purposes differs from value by net unrealized
depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation........................................... $ --
Unrealized depreciation........................................... (9,680)
-------
Net unrealized depreciation....................................... $(9,680)
=======
</TABLE>
[CHART]
Sector Profile*
ISG Income Fund 47.7%
Prime Money Market Fund 1.4%
ISG Limited Term Income Fund 50.9%
*Portfolio composition is subject to change.
See notes to financial statements
149
<PAGE>
ISG FUNDS
Current Income Portfolio
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments in affiliates, at value
(cost $659,440)............................................. $650,552
Interest and dividends receivable............................ 3,067
Receivable for capital shares issued......................... 7,194
Receivable from investment adviser........................... 11,395
--------
Total Assets................................................. 672,208
Liabilities:
Distributions payable........................................ $ 2,760
Accrued expenses and other payables:
Investment advisory fees.................................... 54
Administration fees......................................... 93
Distribution fees........................................... 120
Custodian fees.............................................. 494
Other....................................................... 20,656
-------
Total Liabilities.......................................... 24,177
--------
Net Assets:
Capital...................................................... 673,636
Accumulated net realized losses from investment
transactions................................................ (16,717)
Net unrealized appreciation (depreciation) from investments.. (8,888)
--------
Net Assets................................................... $648,031
========
Class A Shares
Net Assets.................................................. $ 3,145
Shares outstanding.......................................... 334
Redemption price per share.................................. $ 9.40
========
Class A Shares -- Maximum Sales Charge....................... 3.00%
--------
Maximum Offering Price Per Share (100%/(100% -- Maximum
Sales Charge) of net asset value adjusted to the nearest
cent)...................................................... $ 9.69
========
Class B Shares**
Net Assets.................................................. $ 10
Shares outstanding.......................................... 1
Offering price per share*................................... $ 9.44
========
Institutional Shares
Net Assets.................................................. $644,876
Shares outstanding.......................................... 68,263
Offering and redemption price per share..................... $ 9.45
========
</TABLE>
- ---------
* Redemption price per share varies by length of time shares are held.
** Net assets are actually $9.69 and shares outstanding are 1.027 shares.
Statement of Operations
For the period ended December 31, 1999(a)
<TABLE>
<S> <C> <C>
Investment Income:
Dividend income from affiliates............................ $ 23,061
---------
Expenses:
Investment advisory fees................................... $ 826
Administration fees........................................ 622
Distribution fees -- Class A Shares........................ 5
Distribution fees -- Class B Shares........................ 167
Shareholder servicing fees -- Class A Shares............... 2
Shareholder servicing fees -- Class B Shares............... 56
Shareholder servicing fees -- Institutional Shares......... 577
Custodian fees............................................. 605
Accounting fees............................................ 18,602
Transfer agent fees........................................ 40,532
Directors' fees............................................ 11
Registration and filing fees............................... 32,949
Audit fees................................................. 12,321
Legal fees................................................. 8,599
Other fees................................................. 848
-------
Total expenses before voluntary fee
reductions/reimbursements............................... 116,722
Expenses voluntarily reduced/reimbursed.................. (113,703)
---------
Net expenses............................................. 3,019
---------
Net Investment Income...................................... 20,042
---------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment transactions
with affiliates........................................... (16,717)
Net change in unrealized appreciation (depreciation) from
investments............................................... (8,888)
---------
Net realized/unrealized gains (losses) from investments.... (25,605)
---------
Change in net assets resulting from operations............. $ (5,563)
=========
</TABLE>
- ---------
(a) For the period from January 25, 1999 (commencement of operations) through
December 31, 1999.
See notes to financial statements
150
<PAGE>
ISG FUNDS
Current Income Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Period Ended
December 31,
1999(a)
------------
<S> <C>
From Investment Activities:
Operations:
Net investment income.......................................... $ 20,042
Net realized gains (losses) from investment transactions with
affiliates.................................................... (16,717)
Net change in unrealized appreciation (depreciation) from
investments................................................... (8,888)
--------
Change in net assets resulting from operations.................. (5,563)
--------
Distributions to Class A Shareholders:
From net investment income...................................... (99)(b)
Distributions to Class B Shareholders:
From net investment income...................................... (812)(c)
Distributions to Institutional Shareholders:
From net investment income..................................... (19,131)
--------
Change in net assets from shareholder distributions............. (20,042)
--------
Change in net assets from capital transactions.................. 673,636
--------
Change in net assets............................................ 648,031
Net Assets:
Beginning of period............................................ --
--------
End of period.................................................. $648,031
========
</TABLE>
- ---------
(a) For the period from January 25, 1999 (commencement of operations) through
December 31, 1999.
(b) For the period from February 23, 1999 (commencement of operations) through
December 31, 1999.
(c) For the period from March 17, 1999 (commencement of operations) through
December 31, 1999.
See notes to financial statements
151
<PAGE>
ISG FUNDS
Current Income Portfolio
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999(a)
------------
<S> <C>
Net Asset Value, Beginning of Period............................ $ 9.88
------
Investment Activities
Net investment income (loss)................................... 0.32
Net realized and unrealized gains (losses) from investments
with affiliates............................................... (0.48)
------
Total from Investment Activities............................... (0.16)
------
Distributions
Net investment income.......................................... (0.32)
------
Total Distributions............................................ (0.32)
------
Net change in asset value....................................... (0.48)
------
Net Asset Value, End of Period.................................. $ 9.40
======
Total Return (excludes sales charge)............................ (1.63)%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)............................... $ 3
Ratio of expenses to average net assets......................... 1.01%(c)
Ratio of net investment income to average net assets............ 4.66%(c)
Ratio of expenses to average net assets*........................ 28.50%(c)
Portfolio turnover**............................................ 96%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from February 23, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
Financial Highlights, Class B Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999 (a)
------------
<S> <C>
Net Asset Value, Beginning of Period............................ $ 9.87
------
Investment Activities
Net investment income (loss)................................... 0.27
Net realized and unrealized gains (losses) from investments
with affiliates............................................... (0.43)
------
Total from Investment Activities............................... (0.16)
------
Distributions
Net investment income.......................................... (0.27)
------
Total Distributions............................................ (0.27)
------
Net change in asset value....................................... (0.43)
------
Net Asset Value, End of Period.................................. $ 9.44
======
Total Return (excludes redemption charge)....................... (1.66)%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)............................... $ --
Ratio of expenses to average net assets......................... 1.51%(c)
Ratio of net investment income to average net assets............ 4.07%(c)
Ratio of expenses to average net assets*........................ 31.04%(c)
Portfolio turnover**............................................ 96%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from March 17, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
152
<PAGE>
ISG FUNDS
Current Income Portfolio
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999(a)
------------
<S> <C>
Net Asset Value, Beginning of Period............................ $10.00
------
Investment Activities
Net investment income (loss)................................... 0.41
Net realized and unrealized gains (losses) from investments
with affiliates............................................... (0.55)
------
Total from Investment Activities............................... (0.14)
------
Distributions
Net investment income.......................................... (0.41)
------
Total Distributions............................................ (0.41)
------
Net change in asset value....................................... (0.55)
------
Net Asset Value, End of Period.................................. $ 9.45
======
Total Return.................................................... (1.41)%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)............................... $ 645
Ratio of expenses to average net assets......................... 0.68%(c)
Ratio of net investment income to average net assets............ 4.88%(c)
Ratio of expenses to average net assets*........................ 27.99%(c)
Portfolio turnover**............................................ 96%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from January 25, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
153
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
154
<PAGE>
ISG Investment Management Team
Portfolio Manager
ISG Strategic Portfolio
Moderate Growth & Income Portfolio
- -------------------------------------------------------------------------------
Investment Goal
The Strategic Portfolios seek to
provide investors with the potential
to achieve a variety of long- and
short-term goals, commensurate with
investors' specific time horizons
and tolerance for risk. Each of the
five Strategic Portfolios invests in
a combination of underlying mutual
funds from the ISG family. Based on
each Portfolio's asset-allocation
target, the managers periodically
rebalance stock, bond and money
market holdings--based on analysis
of economic and market trends.
- -------------------------------------------------------------------------------
Q. How did the Fund perform during the period?
A. For the periods ended December 31, 1999 the Fund's total returns and
comparative benchmark returns were as follows:
ISG Moderate Growth & Income Portfolio from its inception on 2/9/99 to
12/31/99
(Class A shares at NAV)+: 3.37%
S&P 1500 Index: 20.49%
Merrill Lynch Government/Corporate Master Index: -0.24%
Lipper Balanced Fund Index/1/: 9.90%
Q. What factors affected the Funds' performance?
A. The stock market had a fairly terrific year, while bonds languished.
Consequently, our more aggressive Portfolios (which held higher concentrations
of underlying stock funds) did much better than the more conservative
Portfolios.
The successes of the Aggressive Growth Portfolio and Growth Portfolio, in
particular, were due in large measure to their allocations in the ISG Mid-Cap
Fund, which produced outsized returns.
The strategy of owning more than one style of fund--for example, having stakes
in such diverse sectors as large-cap growth, small-cap value and international
equities--proved beneficial. Volatility was pervasive, not just in the stock
market, but also in the fixed-income arena. With the markets making big moves,
it can be difficult for individual investors to stay abreast of new trends.
Shareholders in our Strategic Portfolios enjoyed the advantage of usually
having some of their money invested in whatever style was currently
fashionable. This diversification is one of the primary benefits offered by
the Strategic Portfolio concept.
Q. Going forward, what strategies are the fund managers employing?
A. Each Portfolio has a target range for how much of its assets should be
invested in different types of underlying funds. This "road map" guides our
team in its asset-allocation decisions. At least once a month, the managers
review each Portfolio's current allocation, and based on a Portfolio's target,
our valuation discipline and the team's assessment of market conditions, new
monies may be invested in various sectors.
As we enter 2000, all of the Portfolios hold a somewhat lower-than-average
allocation in equities. This reflects our strong belief that bonds currently
offer more relative value. Given the high current valuations of many
individual stocks, and equity indices as a whole, we feel that stocks are a
bit riskier than bonds at this time.
Q. How can shareholders use the Portfolios to take advantage of changing
market conditions in the future?
A. The real strength of these Portfolios is that an investor can implement an
asset-allocation strategy supporting his or her individual needs--with a
single investment in the most suitable Strategic Portfolio. Rather than worry
about macroeconomic events or sector rotation, an investor can simply choose
the Portfolio that offers the appropriate measure of potential risk and
reward. If this is done correctly, we believe that, over time, shareholders
will earn returns that are proportionate with the level of risk they have
selected.
- ---------
+ Including the 4.75% sales load, the ISG Moderate Growth & Income
Portfolio's return would have been -1.53%.
/1/ The Lipper Balanced Fund Index is an index of managed funds whose primary
objective is to conserve principal by maintaining at all times a balanced
portfolio of both stocks and bonds. Typically, the stock/bond ratio ranges
around 60%/40%.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
155
<PAGE>
ISG Moderate Growth & Income Portfolio
Performance (as of December 31, 1999)
- -------------------------------------------------------------------------------
[GRAPH]
Class A Shares
Moderate Growth Moderate Growth Merrill Lynch
& Income & Income S&P Government/
Portfolio with Portfolio without 1500 Corporate
Sales Charge Sales Charge Index Master Index
2/9/99 9,525 10,000 10,000 10,000
12/31/99 9,847 10,337 12,049 9,976
[GRAPH]
Class B Shares
Moderate Growth Moderate Growth Merrill Lynch
& Income & Income S&P Government/
Portfolio Portfolio 1500 Corporate
with CDSC without CDSC IDEX Master Index
1/28/99 10,000 10,000 10,000 10,000
12/31/99 9,751 10,150 11,634 9,724
[GRAPH]
Institutional Shares
Merrill Lynch
Government/
Moderate Growth Corporate Master
& Income Portfolio S&P 1500 Index Index
2/10/99 10,000 10,000 10,000
12/31/99 10,364 12,049 9,976
<TABLE>
<CAPTION>
Cumulative
Total Return
---------------
Without With
Sales Sales
Charge Charge*
------- -------
<S> <C> <C>
Class A Shares
Since Inception 2/9/99......................................... 3.37% -1.53%
</TABLE>
*Reflects the maximum sales charge of 4.75%
<TABLE>
<CAPTION>
Cumulative
Total Return
--------------
Without With
CDSC CDSC**
------- ------
<S> <C> <C>
Class B Shares
Since Inception 1/28/99.......................................... 1.50% -2.49%
</TABLE>
**Reflects the applicable contingent deferred sales charge (maximum 4.00%).
<TABLE>
<CAPTION>
Cumulative
Total
Return
----------
<S> <C>
Institutional Shares
Since Inception 2/10/99.............................................. 3.64%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment
in the indicated share class versus a similar investment in the Fund's
benchmark.
The Fund's performance is compared to the Merrill Lynch Government/Corporate
Master Index, which is generally representative of the performance of
corporate and U.S. Government bonds and the S&P 1500 Index, which is generally
representative of the performance of large and small companies in the U.S.
stock market. The indices are unmanaged and do not reflect the expenses
associated with a mutual fund, such as investment management and fund
accounting fees. The Fund's performance reflects the deduction of fees for
these value-added services. Investors cannot invest directly in an index,
although they can invest in the underlying securities.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that Investors' shares, when
redeemed, may be worth more or less than their original purchase price.
156
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Moderate Growth & Income Portfolio December 31, 1999
Investment Companies (100.6%)
<TABLE>
<CAPTION>
Market
Value
Shares (Note 2)
--------- -----------
<S> <C> <C>
ISG Capital Growth Fund, Institutional Shares........... 42,243 $ 602,811
ISG Equity Income Fund, Institutional Shares............ 61,651 580,750
ISG Government Income Fund, Institutional Shares........ 1,095,398 10,504,865
ISG Large-Cap Equity Fund, Institutional Shares......... 207,607 5,815,072
ISG Limited Term Income Fund, Institutional Shares...... 464,526 4,478,031
ISG Prime Money Market Fund, Institutional Shares....... 644,012 644,012
-----------
TOTAL INVESTMENT COMPANIES
(Cost $22,995,114)..................................... 22,625,541
-----------
TOTAL INVESTMENTS IN AFFILIATES
(Cost $22,995,114) (a) -- (100.6%)..................... 22,625,541
Liabilities in excess of
other assets -- (-0.6%)................................ (128,333)
-----------
TOTAL NET ASSETS -- (100.0%)............................ $22,497,208
===========
</TABLE>
- ---------
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting in excess of federal income tax reporting of
$123,148. Cost for federal income tax purposes differs from value by net
unrealized depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation......................................... $ 24,597
Unrealized depreciation......................................... (517,318)
---------
Net unrealized depreciation..................................... $(492,721)
=========
</TABLE>
[CHART]
Sector Profile*
Prime Money Market Fund 2.9%
ISG Government Income Fund 46.4%
ISG Large-Cap Equity Fund 25.6%
ISG Limited Term Income Fund 19.8%
ISG Equity Income Fund 2.6%
ISG Capital Growth 2.7%
*Portfolio composition is subject to change.
See notes to financial statements
157
<PAGE>
ISG FUNDS
Moderate Growth & Income Portfolio
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments in affiliates, at value
(cost $22,995,114)...................................... $22,625,541
Interest and dividends receivable........................ 82,385
Receivable for capital shares issued..................... 50,043
Receivable from investment adviser....................... 13,345
Prepaid expenses and other assets........................ 62
-----------
Total Assets............................................ 22,771,376
Liabilities:
Distributions payable.................................... $241,154
Accrued expenses and other payables:
Investment advisory fees................................ 1,897
Administration fees..................................... 372
Distribution fees....................................... 3,601
Custodian fees.......................................... 954
Other................................................... 26,190
--------
Total Liabilities....................................... 274,168
-----------
Net Assets:
Capital.................................................. 22,084,096
Undistributed (distributions in excess of) net investment
income.................................................. (7)
Undistributed (distributions in excess of) net realized
gains................................................... 782,692
Net unrealized appreciation (depreciation) from
investments............................................. (369,573)
-----------
Net Assets............................................... $22,497,208
===========
Class A Shares
Net Assets.............................................. $ 172,337
Shares outstanding...................................... 17,298
Redemption price per share.............................. $ 9.96
===========
Class A Shares -- Maximum Sales Charge................... 4.75%
-----------
Maximum Offering Price Per Share (100%/(100% -- Maximum
Sales Charge) of net asset value
adjusted to the nearest cent).......................... $ 10.46
===========
Class B Shares
Net Assets.............................................. $ 941,032
Shares outstanding...................................... 94,463
Offering price per share*............................... $ 9.96
===========
Institutional Shares
Net Assets.............................................. $21,383,839
Shares outstanding...................................... 2,143,050
Offering and redemption price per share................. $ 9.98
===========
</TABLE>
- ---------
* Redemption price per share varies by length of time shares are held.
Statement of Operations
For the period ended December 31, 1999 (a)
<TABLE>
<S> <C> <C>
Investment Income:
Dividend income from affiliates............................ $ 326,318
---------
Expenses:
Investment advisory fees................................... $12,700
Administration fees........................................ 9,525
Distribution fees -- Class A Shares........................ 291
Distribution fees -- Class B Shares........................ 4,809
Shareholder servicing fees -- Class A Shares............... 175
Shareholder servicing fees -- Class B Shares............... 1,603
Shareholder servicing fees -- Institutional Shares......... 8,389
Custodian fees............................................. 2,210
Accounting fees............................................ 18,333
Transfer agent fees........................................ 42,014
Directors' fees............................................ 124
Registration and filing fees............................... 37,581
Audit fees................................................. 12,858
Legal fees................................................. 9,220
Other fees................................................. 1,918
-------
Total expenses before voluntary fee
reductions/reimbursements................................ 161,750
Expenses voluntarily reduced/reimbursed................... (109,443)
---------
Net expenses.............................................. 52,307
---------
Net Investment Income...................................... 274,011
---------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment transactions
with affiliates........................................... (40,432)
Realized gain distributions from underlying funds.......... 896,909
Net change in unrealized appreciation (depreciation) from
investments............................................... (369,573)
---------
Net realized/unrealized gains (losses) from investments.... 486,904
---------
Change in net assets resulting from operations............. $ 760,915
=========
</TABLE>
- ---------
(a) For the period from January 28, 1999 (commencement of operations) through
December 31, 1999.
See notes to financial statements
158
<PAGE>
ISG FUNDS
Moderate Growth & Income Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Period Ended
December 31,
1999(a)
------------
<S> <C>
From Investment Activities:
Operations:
Net investment income......................................... $ 274,011
Net realized gains (losses) from investment transactions with
affiliates................................................... (40,432)
Realized gain distributions from underlying funds............. 896,909
Net change in unrealized appreciation (depreciation) from
investments.................................................. (369,573)
-----------
Change in net assets resulting from operations................. 760,915
-----------
Distributions to Class A Shareholders:
From net investment income.................................... (2,663)(b)
From net realized gains on investment transactions............ (827)(b)
Distributions to Class B Shareholders:
From net investment income.................................... (11,236)
From net realized gains on investment transactions............ (5,466)
Distributions to Institutional Shareholders:
From net investment income.................................... (260,119)(c)
From net realized gains on investment transactions............ (67,492)(c)
-----------
Change in net assets from shareholder distributions............ (347,803)
-----------
Change in net assets from capital transactions................. 22,084,096
-----------
Change in net assets........................................... 22,497,208
Net Assets:
Beginning of period........................................... --
-----------
End of period................................................. $22,497,208
===========
</TABLE>
- ---------
(a) For the period from January 28, 1999 (commencement of operations) through
December 31, 1999.
(b) For the period from February 9, 1999 (commencement of operations) through
December 31, 1999.
(c) For the period from February 10, 1999 (commencement of operations) through
December 31, 1999.
See notes to financial statements
159
<PAGE>
ISG FUNDS
Moderate Growth & Income Portfolio
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999 (a)
------------
<S> <C>
Net Asset Value, Beginning of Period............................. $ 9.86
------
Investment Activities
Net investment income (loss).................................... 0.17
Net realized and unrealized gains (losses) from investments with
affiliates..................................................... 0.16
------
Total from Investment Activities................................ 0.33
------
Distributions
Net investment income........................................... (0.17)
Net realized gains.............................................. (0.06)
------
Total Distributions............................................. (0.23)
------
Net change in asset value........................................ 0.10
------
Net Asset Value, End of Period................................... $ 9.96
======
Total Return (excludes sales charge)............................. 3.37%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................................ $ 172
Ratio of expenses to average net assets.......................... 0.93%(c)
Ratio of net investment income to average net assets............. 3.32%(c)
Ratio of expenses to average net assets*......................... 9.78%(c)
Portfolio turnover**............................................. 124%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from February 9, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
Financial Highlights, Class B Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999 (a)
------------
<S> <C>
Net Asset Value, Beginning of Period............................. $10.00
------
Investment Activities
Net investment income (loss).................................... 0.13
Net realized and unrealized gains (losses) from investments with
affiliates..................................................... 0.02
------
Total from Investment Activities................................ 0.15
------
Distributions
Net investment income........................................... (0.13)
Net realized gains.............................................. (0.06)
------
Total Distributions............................................. (0.19)
------
Net change in asset value........................................ (0.04)
------
Net Asset Value, End of Period................................... $ 9.96
======
Total Return (excludes redemption charge)........................ 1.50%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................................ $ 941
Ratio of expenses to average net assets.......................... 1.54%(c)
Ratio of net investment income to average net assets............. 2.80%(c)
Ratio of expenses to average net assets*......................... 6.90%(c)
Portfolio turnover**............................................. 124%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from January 28, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
160
<PAGE>
ISG FUNDS
Moderate Growth & Income Portfolio
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999 (a)
------------
<S> <C>
Net Asset Value, Beginning of Period............................. $ 9.88
-------
Investment Activities
Net investment income (loss).................................... 0.20
Net realized and unrealized gains (losses) from investments with
affiliates..................................................... 0.16
-------
Total from Investment Activities................................ 0.36
-------
Distributions
Net investment income........................................... (0.20)
Net realized gains.............................................. (0.06)
-------
Total Distributions............................................. (0.26)
-------
Net change in asset value........................................ 0.10
-------
Net Asset Value, End of Period................................... $ 9.98
=======
Total Return..................................................... 3.64%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................................ $21,384
Ratio of expenses to average net assets.......................... 0.73%(c)
Ratio of net investment income to average net assets............. 4.46%(c)
Ratio of expenses to average net assets*......................... 1.87%(c)
Portfolio turnover**............................................. 124%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from February 10, 1999 (commencement of operations)
through December 31, 1999.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
161
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
162
<PAGE>
ISG Investment Management Team
Portfolio Manager
ISG Strategic Portfolio
Growth & Income Portfolio
- -------------------------------------------------------------------------------
Investment Goal
The Strategic Portfolios seek to provide investors with the potential to
achieve a variety of long- and short-term goals, commensurate with investors'
specific time horizons and tolerance for risk. Each of the five Strategic
Portfolios invests in a combination of underlying mutual funds from the ISG
family. Based on each Portfolio's asset-allocation target, the managers
periodically rebalance stock, bond and money market holdings--based on analysis
of economic and market trends.
- -------------------------------------------------------------------------------
Q. How did the Fund perform during the period?
A. For the periods ended December 31, 1999 the Fund's total returns and
comparative benchmark returns were as follows:
ISG Growth & Income Portfolio from its inception on 3/8/99 to 12/31/99
(Class A shares at NAV)+: 5.21%
S&P 1500 Index: 16.03%
Merrill Lynch Government/Corporate Master Index: -0.87%.
MSCI EAFE Index: 25.46%
Lipper Balanced Fund Index/1/: 6.83%
Q. What factors affected the Funds' performance?
A. The stock market had a fairly terrific year, while bonds languished.
Consequently, our more aggressive Portfolios (which held higher concentrations
of underlying stock funds) did much better than the more conservative
Portfolios.
The successes of the Aggressive Growth Portfolio and Growth Portfolio, in
particular, were due in large measure to their allocations in the ISG Mid-Cap
Fund, which produced outsized returns.
The strategy of owning more than one style of fund--for example, having stakes
in such diverse sectors as large-cap growth, small-cap value and international
equities--proved beneficial. Volatility was pervasive, not just in the stock
market, but also in the fixed-income arena. With the markets making big moves,
it can be difficult for individual investors to stay abreast of new trends.
Shareholders in our Strategic Portfolios enjoyed the advantage of usually
having some of their money invested in whatever style was currently
fashionable. This diversification is one of the primary benefits offered by
the Strategic Portfolio concept.
Q. Going forward, what strategies are the fund managers employing?
A. Each Portfolio has a target range for how much of its assets should be
invested in different types of underlying funds. This "road map" guides our
team in its asset-allocation decisions. At least once a month, the managers
review each Portfolio's current allocation, and based on a Portfolio's target,
our valuation discipline and the team's assessment of market conditions, new
monies may be invested in various sectors.
As we enter 2000, all of the Portfolios hold a somewhat lower-than-average
allocation in equities. This reflects our strong belief that bonds currently
offer more relative value. Given the high current valuations of many
individual stocks, and equity indices as a whole, we feel that stocks are a
bit riskier than bonds at this time.
Q. How can shareholders use the Portfolios to take advantage of changing
market conditions in the future?
A. The real strength of these Portfolios is that an investor can implement an
asset-allocation strategy supporting his or her individual needs--with a
single investment in the most suitable Strategic Portfolio. Rather than worry
about macroeconomic events or sector rotation, an investor can simply choose
the Portfolio that offers the appropriate measure of potential risk and
reward. If this is done correctly, we believe that, over time, shareholders
will earn returns that are proportionate with the level of risk they have
selected.
- ---------
+ Including the 4.75% sales load, the ISG Growth & Income Portfolio's return
would have been 0.25%.
/1/ The Lipper Balanced Fund Index is an index of managed funds whose primary
objective is to conserve principal by maintaining at all times a balanced
portfolio of both stocks and bonds. Typically, the stock/bond ratio ranges
around 60%/40%.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
163
<PAGE>
ISG Growth & Income Portfolio
Performance (as of December 31, 1999)
- -------------------------------------------------------------------------------
[GRAPH]
Class A Shares
Growth Growth Merrill Lynch
& Income & Income S&P Government/ MSCI
Portfolio with Portfolio without 1500 Corporate EAFE
Sales Charge Sales Charge Index Master Index Index
2/9/99 9,525 10,000 10,000 10,000 10,000
12/31/99 10,025 10,521 11,603 9,913 12,546
[GRAPH]
<TABLE>
<CAPTION>
Class B Shares
Growth Growth Merrill Lynch
& Income & Income S&P Government/ MSCI
Portfolio Portfolio 1500 Corporate EAFE
with CDSC without CDSC INDEX Master Index Index
<S> <C> <C> <C> <C> <C>
1/28/99 10,000 10,000 10,000 10,000 10,000
12/31/99 10,210 10,610 11,634 9,724 12,765
</TABLE>
[GRAPH]
Institutional Shares
<TABLE>
<CAPTION>
Merrill Lynch
Government/ MSCI
Growth Corporate Master EAFE
& Income Portfolio S&P 1500 Index Index Index
<S> <C> <C> <C> <C>
2/10/99 10,000 10,000 10,000 10,000
12/31/99 10,840 12,049 9,976 13,073
</TABLE>
<TABLE>
<CAPTION>
Cumulative
Total Return
---------------
Without With
Sales Sales
Charge Charge*
------- -------
<S> <C> <C>
Class A Shares
Since Inception 3/8/99......................................... 5.21% 0.25%
</TABLE>
* Reflects the maximum sales charge of 4.75%.
<TABLE>
<CAPTION>
Cumulative
Total Return
--------------
Without With
CDSC CDSC**
------- ------
<S> <C> <C>
Class B Shares
Since Inception 1/27/99.......................................... 6.10% 2.10%
</TABLE>
** Reflects the applicable contingent deferred sales charge (maximum 4.00%).
<TABLE>
<CAPTION>
Cumulative
Total
Return
----------
<S> <C>
Institutional Shares
Since Inception 2/8/99.............................................. 8.40%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment
in the indicated share class versus a similar investment in the Fund's
benchmark.
The Fund's performance is compared to the MSCI Europe, Australasia and Far
East (EAFE) Index, which is generally representative of stock markets in those
regions; the Merrill Lynch Government/Corporate Master Index, which is
generally representative of the performance of corporate and U.S. Government
bonds and the S&P 1500 Index, which is generally representative of the
performance of large and small companies in the U.S. stock market. These
indices are unmanaged and do not reflect the expenses associated with a mutual
fund, such as investment management and fund accounting fees. The Fund's
performance reflects the deduction of fees for these value-added services.
Investors cannot invest directly in an index, although they can invest in the
underlying securities.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
164
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Growth & Income Portfolio December 31, 1999
Investment Companies (100.6%)
<TABLE>
<CAPTION>
Market
Value
Shares (Note 2)
--------- -----------
<S> <C> <C>
Investment Companies (100.6%)
ISG Capital Growth Fund, Institutional Shares.......... 171,907 $ 2,453,111
ISG Equity Income Fund, Institutional Shares........... 238,815 2,249,638
ISG Government Income Fund, Institutional Shares....... 3,446,293 33,049,948
ISG International Equity Fund, Institutional Shares.... 84,897 1,126,588
ISG Large-Cap Equity Fund, Institutional Shares........ 1,179,139 33,027,695
ISG Limited Term Income Fund, Institutional Shares..... 643,081 6,199,297
ISG Mid-Cap Fund, Institutional Shares (b)............. 83,113 1,443,665
ISG Prime Money Market Fund, Institutional Shares...... 8,625,777 8,625,777
ISG Small-Cap Opportunity Fund, Institutional Shares
(b)................................................... 100,007 1,350,092
-----------
TOTAL INVESTMENT COMPANIES
(Cost $90,754,694).................................... 89,525,811
-----------
TOTAL INVESTMENTS IN AFFILIATES
(Cost $90,754,694) (a) -- (100.6%).................... 89,525,811
Liabilities in excess of
other assets -- (-0.6%)............................... (565,656)
-----------
TOTAL NET ASSETS -- (100.0%)........................... $88,960,155
===========
</TABLE>
- ---------
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting in excess of federal income tax reporting of
$77,179. Cost for federal income tax purposes differs from value by net
unrealized depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation........................................... $ 790,303
Unrealized depreciation........................................... (2,096,365)
-----------
Net unrealized depreciation....................................... $(1,306,062)
===========
</TABLE>
(b) Non-income producing security.
[CHART]
Sector Profile*
Prime Money Market Fund 9.7%
ISG Government Income Fund 36.9%
ISG International Equity Fund 1.3%
ISG Mid-Cap Fund 1.6%
ISG Small-Cap Opportunity Fund 1.5%
ISG Large-Cap Equity Fund 36.9%
ISG Limited Term Income Fund 6.9%
ISG Equity Income Fund 2.5%
ISG Capital Growth 2.7%
*Portfolio composition is subject to change.
See notes to financial statements
165
<PAGE>
ISG FUNDS
Growth & Income Portfolio
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments in affiliates, at value (cost $90,754,694)... $89,525,811
Interest and dividends receivable........................ 268,982
Receivable for capital shares issued..................... 13,228
Receivable from investment adviser....................... 11,978
Prepaid expenses and other assets........................ 112
-----------
Total Assets............................................ 89,820,111
Liabilities:
Distributions payable.................................... $790,064
Accrued expenses and other payables:
Investment advisory fees................................ 7,551
Administration fees..................................... 1,482
Distribution fees....................................... 12,796
Custodian fees.......................................... 2,486
Other................................................... 45,577
--------
Total Liabilities....................................... 859,956
-----------
Net Assets:
Capital.................................................. 84,959,432
Undistributed (distributions in excess of) net investment
income.................................................. 15
Undistributed (distributions in excess of) net realized
gains................................................... 5,229,591
Net unrealized appreciation (depreciation) from
investments............................................. (1,228,883)
-----------
Net Assets............................................... $88,960,155
-----------
Class A Shares
Net Assets.............................................. $ 535,191
Shares outstanding...................................... 51,048
Redemption price per share.............................. $ 10.48
===========
Class A Shares--Maximum Sales Charge..................... 4.75%
-----------
Maximum Offering Price Per Share (100%/(100%--Maximum
Sales Charge) of net asset value adjusted to the
nearest cent).......................................... $ 11.00
===========
Class B Shares
Net Assets.............................................. $ 1,725,006
Shares outstanding...................................... 164,290
Offering price per share*............................... $ 10.50
===========
Institutional Shares
Net Assets.............................................. $86,699,958
Shares outstanding...................................... 8,250,072
Offering and redemption price per share................. $ 10.51
===========
</TABLE>
- ---------
* Redemption price per share varies by length of time shares are held.
Statement of Operations
For the period ended December 31, 1999 (a)
<TABLE>
<S> <C> <C>
Investment Income:
Dividend income from affiliates.......................... $ 1,024,399
-----------
Expenses:
Investment advisory fees................................. $49,765
Administration fees...................................... 37,323
Distribution fees--Class A Shares........................ 755
Distribution fees--Class B Shares........................ 8,688
Shareholder servicing fees--Class A Shares............... 453
Shareholder servicing fees--Class B Shares............... 2,896
Shareholder servicing fees--Institutional Shares......... 35,133
Custodian fees........................................... 7,284
Accounting fees.......................................... 18,333
Transfer agent fees...................................... 45,417
Directors' fees.......................................... 497
Registration and filing fees............................. 50,902
Audit fees............................................... 13,569
Other fees............................................... 16,749
-------
Total expenses before voluntary fee
reductions/reimbursements.............................. 287,764
Expenses voluntarily reduced/reimbursed................. (102,660)
-----------
Net expenses............................................ 185,104
-----------
Net Investment Income.................................... 839,295
-----------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment transactions
with affiliates......................................... 362,820
Realized gain distributions from underlying funds........ 4,970,532
Net change in unrealized appreciation (depreciation) from
investments............................................. (1,228,883)
-----------
Net realized/unrealized gains (losses) from investments.. 4,104,469
-----------
Change in net assets resulting from operations........... $ 4,943,764
===========
</TABLE>
- ---------
(a) For the period from January 27, 1999 (commencement of operations) through
December 31, 1999.
See notes to financial statements
166
<PAGE>
ISG FUNDS
Growth & Income Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Period Ended
December 31,
1999 (a)
------------
<S> <C>
From Investment Activities:
Operations:
Net Investment income......................................... $ 839,295
Net realized gains (losses) from investment transactions with
affiliates................................................... 362,820
Realized gain distributions from underlying funds............. 4,970,532
Net change in unrealized appreciation (depreciation) from
investments.................................................. (1,228,883)
-----------
Change in net assets resulting from operations................. 4,943,764
-----------
Distributions to Class A Shareholders:
From net investment income.................................... (5,128)(b)
From net realized gains on investment transactions............ (1,615)(b)
Distributions to Class B Shareholders:
From net investment income.................................... (12,322)
From net realized gains on investment transactions............ (4,753)
Distributions to Institutional Shareholders:
From net investment income.................................... (821,830)(c)
From net realized gains on investment transactions............ (97,393)(c)
-----------
Change in net assets from shareholder distributions............ (943,041)
-----------
Change in net assets from capital transactions................. 84,959,432
-----------
Change in net assets........................................... 88,960,155
Net Assets:
Beginning of period........................................... --
-----------
End of period................................................. $88,960,155
===========
</TABLE>
- ---------
(a) For the period from January 27, 1999 (commencement of operations) through
December 31, 1999.
(b) For the period from March 8, 1999 (commencement of operations) through
December 31, 1999.
(c) For the period from February 8, 1999 (commencement of operations) through
December 31, 1999.
See notes to financial statements
167
<PAGE>
ISG FUNDS
Growth & Income Portfolio
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999 (a)
------------
<S> <C>
Net Asset Value, Beginning of Period............................. $10.10
------
Investment Activities
Net investment income (loss).................................... 0.11
Net realized and unrealized gains (losses) from investments with
affiliates..................................................... 0.41
------
Total from Investment Activities................................ 0.52
------
Distributions
Net investment income........................................... (0.11)
Net realized gains.............................................. (0.03)
------
Total Distributions............................................. (0.14)
------
Net change in asset value........................................ 0.38
------
Net Asset Value, End of Period................................... $10.48
======
Total Return (excludes sales charge)............................. 5.21%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................................ $ 535
Ratio of expenses to average net assets.......................... 0.95%(c)
Ratio of net investment income to average net assets............. 2.44%(c)
Ratio of expenses to average net assets*......................... 2.27%(c)
Portfolio turnover**............................................. 57%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If such
voluntary fee reductions/reimbursements had not occurred, the ratios would
have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from March 8, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
Financial Highlights, Class B Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999 (a)
------------
<S> <C>
Net Asset Value, Beginning of Period............................. $10.00
------
Investment Activities
Net investment income (loss).................................... 0.08
Net realized and unrealized gains (losses) from investments with
affiliates..................................................... 0.53
------
Total from Investment Activities................................ 0.61
------
Distributions
Net investment income........................................... (0.08)
Net realized gains.............................................. (0.03)
------
Total Distributions............................................. (0.11)
------
Net change in asset value........................................ 0.50
------
Net Asset Value, End of Period................................... $10.50
======
Total Return (excludes redemption charge)........................ 6.10%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................................ $1,725
Ratio of expenses to average net assets.......................... 1.52%(c)
Ratio of net investment income to average net assets............. 1.74%(c)
Ratio of expenses to average net assets*......................... 4.26%(c)
Portfolio turnover**............................................. 57%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If such
voluntary fee reductions/reimbursements had not occurred, the ratios would
have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from January 27, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
168
<PAGE>
ISG FUNDS
Growth & Income Portfolio
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999 (a)
------------
<S> <C>
Net Asset Value, Beginning of Period............................. $ 9.85
-------
Investment Activities
Net investment income (loss).................................... 0.13
Net realized and unrealized gains (losses) from investments with
affiliates..................................................... 0.69
-------
Total from Investment Activities................................ 0.82
-------
Distributions
Net investment income........................................... (0.13)
Net realized gains.............................................. (0.03)
-------
Total Distributions............................................. (0.16)
-------
Net change in asset value........................................ 0.66
-------
Net Asset Value, End of Period................................... $ 10.51
=======
Total Return..................................................... 8.40%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................................ $86,700
Ratio of expenses to average net assets.......................... 0.70%(c)
Ratio of net investment income to average net assets............. 3.43%(c)
Ratio of expenses to average net assets*......................... 0.98%(c)
Portfolio turnover**............................................. 57%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If such
voluntary fee reductions/reimbursements had not occurred, the ratios would
have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from February 8, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
169
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
170
<PAGE>
ISG Investment Management Team
Portfolio Manager
ISG Strategic Portfolio
Growth Portfolio
- -------------------------------------------------------------------------------
Investment Goal
The Strategic Portfolios seek to provide investors with the potential to
achieve a variety of long- and short-term goals, commensurate with investors'
specific time horizons and tolerance for risk. Each of the five Strategic
Portfolios invests in a combination of underlying mutual funds from the ISG
family. Based on each Portfolio's asset-allocation target, the managers
periodically rebalance stock, bond and money market holdings--based on analysis
of economic and market trends.
- -------------------------------------------------------------------------------
Q. How did the Funds perform during the period?
A. For the period ended December 31, 1999 the Fund's total returns and
comparative benchmark returns were as follows:
ISG Growth Portfolio from its inception on 2/11/99 to 12/31/99
(Class A shares at NAV)+: 8.85%
S&P 1500 Index: 20.49%
Merrill Lynch Government/Corporate Master Index: -0.24%
MSCI EAFE Index: 30.73%
Lipper Balanced Fund Index/1/: 9.90%
Q. What factors affected the Funds' performance?
A. The stock market had a fairly terrific year, while bonds languished.
Consequently, our more aggressive Portfolios (which held higher concentrations
of underlying stock funds) did much better than the more conservative
Portfolios.
The successes of the Aggressive Growth Portfolio and Growth Portfolio, in
particular, were due in large measure to their allocations in the ISG Mid-Cap
Fund, which produced outsized returns.
The strategy of owning more than one style of fund--for example, having stakes
in such diverse sectors as large-cap growth, small-cap value and international
equities--proved beneficial. Volatility was pervasive, not just in the stock
market, but also in the fixed-income arena. With the markets making big moves,
it can be difficult for individual investors to stay abreast of new trends.
Shareholders in our Strategic Portfolios enjoyed the advantage of usually
having some of their money invested in whatever style was currently
fashionable. This diversification is one of the primary benefits offered by
the Strategic Portfolio concept.
Q. Going forward, what strategies are the fund managers employing?
A. Each Portfolio has a target range for how much of its assets should be
invested in different types of underlying funds. This "road map" guides our
team in its asset-allocation decisions. At least once a month, the managers
review each Portfolio's current allocation, and based on a Portfolio's target,
our valuation discipline and the team's assessment of market conditions, new
monies may be invested in various sectors.
As we enter 2000, all of the Portfolios hold a somewhat lower-than-average
allocation in equities. This reflects our strong belief that bonds currently
offer more relative value. Given the high current valuations of many
individual stocks, and equity indices as a whole, we feel that stocks are a
bit riskier than bonds at this time.
Q. How can shareholders use the Portfolios to take advantage of changing
market conditions in the future?
A. The real strength of these Portfolios is that an investor can implement an
asset-allocation strategy supporting his or her individual needs--with a
single investment in the most suitable Strategic Portfolio. Rather than worry
about macroeconomic events or sector rotation, an investor can simply choose
the Portfolio that offers the appropriate measure of potential risk and
reward. If this is done correctly, we believe that, over time, shareholders
will earn returns that are proportionate with the level of risk they have
selected.
- ---------
+ Including the 4.75% sales load, the ISG Growth Portfolio's return would
have been 3.63%.
/1/ The Lipper Balanced Fund Index is an index of managed funds whose primary
objective is to conserve principal by maintaining at all times a balanced
portfolio of both stocks and bonds. Typically, the stock/bond ratio ranges
around 60%/40%.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
171
<PAGE>
ISG Growth Portfolio
Performance (as of December 31, 1999)
- -------------------------------------------------------------------------------
[GRAPH]
Class A Shares
Merrill Lynch
Growth Growth S&P Government/ MSCI
Portfolio with Portfolio without 500 Corporate EAFE
Sales Charge Sales Charge Index Master Index Index
2/11/99 9,525 10,000 10,000 10,000 10,000
12/31/99 10,363 10,885 12,049 9,976 13,073
[GRAPH]
Class B Shares
Merrill Lynch
Growth Growth Government
Portfolio Portfolio S&P 1500 Corporate MSCI EAFE
with CDSC without CDSC Index Master Index Index
1/27/99 10,000 10,000 10,000 10,000 10,000
12/31/99 10,548 10,948 12,049 9,976 13,073
[GRAPH]
Institutional Shares
Merrill Lynch
S&P Government/ MSCI
Growth 1500 Corporate EAFE
Portfolio Index Master Index Index
1/28/99 10,000 10,000 10,000 10,000
12/31/99 10,859 12,049 9,976 13,073
<TABLE>
<CAPTION>
Cumulative Total Return
------------------------
Without Sales With Sales
Charge Charge*
------------- ----------
<S> <C> <C>
Class A Shares
Since Inception 2/11/99................................ 8.85% 3.63%
</TABLE>
*Reflects the maximum sales charge of 4.75%.
<TABLE>
<CAPTION>
Cumulative Total Return
------------------------
Without CDSC With CDSC**
------------ -----------
<S> <C> <C>
Class B Shares
Since Inception 2/15/99................................ 9.48% 5.48%
</TABLE>
**Reflects the applicable contingent deferred sales charge (maximum 4.00%).
<TABLE>
<CAPTION>
Cumulative
Total Return
------------
<S> <C>
Institutional Shares
Since Inception 2/1/99............................................ 8.59%
</TABLE>
The charts above represent a comparison of a hypothetical $10,000 investment
in the indicated share class versus a similar investment in the Fund's
benchmark.
The Fund's performance is compared to the MSCI Europe, Australasia and Far
East (EAFE) Index, which is generally representative of stock markets in those
regions; the Merrill Lynch Government/Corporate Master Index, which is
generally representative of the performance of corporate and U.S. Government
bonds and the S&P 1500 Index, which is generally representative of the
performance of large and small companies in the U.S. stock market. These
indices are unmanaged and do not reflect the expenses associated with a mutual
fund, such as investment management and fund accounting fees. The Fund's
performance reflects the deduction of fees for these value-added services.
Investors cannot invest directly in an index, although they can invest in the
underlying securities.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
172
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Growth Portfolio December 31, 1999
Investment Companies (101.1%)
<TABLE>
<CAPTION>
Market Value
Shares (Note 2)
--------- ------------
<S> <C> <C>
ISG Capital Growth Fund, Institutional Shares.......... 101,120 $ 1,442,983
ISG Equity Income Fund, Institutional Shares........... 133,190 1,254,647
ISG Government Income Fund, Institutional Shares....... 306,138 2,935,865
ISG International Equity Fund, Institutional Shares.... 57,231 759,450
ISG Large-Cap Equity Fund, Institutional Shares........ 116,775 3,270,864
ISG Mid-Cap Fund, Institutional Shares (b)............. 47,375 822,902
ISG Prime Money Market Fund, Institutional Shares...... 1,404,303 1,404,303
ISG Small-Cap Opportunity Fund, Institutional Shares
(b)................................................... 57,575 777,268
-----------
TOTAL INVESTMENT COMPANIES (Cost $12,505,193).......... 12,668,282
-----------
TOTAL INVESTMENTS IN AFFILIATES
(Cost $12,505,193) (a) -- (101.1%).................... 12,668,282
Liabilities in excess of
other assets -- (.1%)................................. (133,911)
-----------
TOTAL NET ASSETS -- (100.0%)........................... $12,534,371
===========
</TABLE>
- ---------
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized for
financial reporting in excess of federal income tax reporting of $16,817.
Cost for federal income tax purposes differs from value by net unrealized
appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation......................................... $ 426,325
Unrealized depreciation......................................... (280,053)
----------
Net unrealized appreciation..................................... $ 146,272
==========
</TABLE>
(b) Non-income producing security.
[CHART]
Sector Profile*
ISG Government Income Fund 23.2%
ISG International Equity Fund 6.0%
ISG Mid-Cap Fund 6.5%
ISG Small-Cap Opportunity Fund 6.1%
ISG Large-Cap Equity Fund 25.8%
ISG Equity Income Fund 9.9%
ISG Capital Growth 11.4%
Prime Money Market Fund 11.1%
*Portfolio composition is subject to change.
See notes to financial statements
173
<PAGE>
ISG FUNDS
Growth Portfolio
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments in affiliates, at value (cost $12,505,193).... $12,668,282
Interest and dividends receivable......................... 32,858
Receivable for capital shares issued...................... 2,903
Receivable from investment adviser........................ 13,229
Prepaid expenses and other assets......................... 29
-----------
Total Assets............................................. 12,717,301
Liabilities:
Distributions payable..................................... $155,721
Accrued expenses and other payables:
Investment advisory fees................................. 1,014
Administration fees...................................... 204
Distribution fees........................................ 2,245
Custodian fees........................................... 665
Other.................................................... 23,081
--------
Total Liabilities........................................ 182,930
-----------
Net Assets:
Capital................................................... 11,782,497
Undistributed (distributions in excess of) net realized
gains.................................................... 588,785
Net unrealized appreciation (depreciation) from
investments.............................................. 163,089
-----------
Net Assets................................................ $12,534,371
===========
Class A Shares
Net Assets............................................... $ 164,375
Shares outstanding....................................... 15,535
Redemption price per share............................... $ 10.58
===========
Class A Shares -- Maximum Sales Charge.................... 4.75%
-----------
Maximum Offering Price Per Share (100%/(100% -- Maximum
Sales Charge) of net asset value adjusted to the nearest
cent).................................................... $ 11.11
===========
Class B Shares
Net Assets............................................... $ 998,015
Shares outstanding....................................... 94,429
Offering price per share*................................ $ 10.57
===========
Institutional Shares
Net Assets............................................... $11,371,981
Shares outstanding....................................... 1,071,484
Offering and redemption price per share.................. $ 10.61
===========
</TABLE>
- ---------
* Redemption price per share varies by length of time shares are held.
Statement of Operations
For the period ended December 31, 1999 (a)
<TABLE>
<S> <C> <C>
Investment Income:
Dividend income from affiliates.............................. $194,960
--------
Expenses:
Investment advisory fees..................................... $7,396
Administration fees.......................................... 5,547
Distribution fees -- Class A Shares.......................... 266
Distribution fees -- Class B Shares.......................... 3,954
Shareholder servicing fees -- Class A Shares................. 160
Shareholder servicing fees -- Class B Shares................. 1,318
Shareholder servicing fees -- Institutional Shares........... 4,596
Custodian fees............................................... 1,447
Accounting fees.............................................. 18,333
Transfer agent fees.......................................... 42,016
Directors' fees.............................................. 85
Registration and filing fees................................. 35,021
Audit fees................................................... 12,551
Legal fees................................................... 8,951
Other fees................................................... 1,413
------
Total expenses before voluntary fee
reductions/reimbursements................................. 143,054
Expenses voluntarily reduced/reimbursed.................... (111,327)
--------
Net expenses............................................... 31,727
--------
Net Investment Income........................................ 163,233
--------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment transactions with
affiliates.................................................. 6,299
Realized gain distributions from underlying funds............ 623,542
Net change in unrealized appreciation (depreciation) from
investments................................................. 163,089
--------
Net realized/unrealized gains (losses) from investments...... 792,930
--------
Change in net assets resulting from operations............... $956,163
========
</TABLE>
- ---------
(a) For the period from February 1, 1999 (commencement of operations) through
December 31, 1999.
See notes to financial statements
174
<PAGE>
ISG FUNDS
Growth Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Period Ended
December 31,
1999 (a)
------------
<S> <C>
From Investment Activities:
Operations:
Net investment income......................................... $ 163,233
Net realized gains (losses) from investment transactions with
affiliates................................................... 6,299
Realized gain distributions from underlying funds............. 623,542
Net change in unrealized appreciation (depreciation) from
investments.................................................. 163,089
-----------
Change in net assets resulting from operations................. 956,163
-----------
Distributions to Class A Shareholders:
From net investment income.................................... (2,168)(b)
From net realized gains on investment transactions............ (1,061)(b)
Distributions to Class B Shareholders:
From net investment income.................................... (10,994)(c)
From net realized gains on investment transactions............ (5,651)(c)
Distributions to Institutional Shareholders:
From net investment income.................................... (148,768)
From net realized gains on investment transactions............ (35,647)
-----------
Change in net assets from shareholder distributions............ (204,289)
-----------
Change in net assets from capital transactions................. 11,782,497
-----------
Change in net assets........................................... 12,534,371
Net Assets:
Beginning of period........................................... --
-----------
End of period................................................. $12,534,371
===========
</TABLE>
- ---------
(a) For the period from February 1, 1999 (commencement of operations) through
December 31, 1999.
(b) For the period from February 11, 1999 (commencement of operations) through
December 31, 1999.
(c) For the period from February 15, 1999 (commencement of operations) through
December 31, 1999.
See notes to financial statements
175
<PAGE>
ISG FUNDS
Growth Portfolio
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999(a)
------------
<S> <C>
Net Asset Value, Beginning of Period............................. $ 9.93
------
Investment Activities
Net investment income (loss).................................... 0.14
Net realized and unrealized gains (losses) from investments with
affiliates..................................................... 0.73
------
Total from Investment Activities................................ 0.87
------
Distributions
Net investment income........................................... (0.14)
Net realized gains.............................................. (0.08)
------
Total Distributions............................................. (0.22)
------
Net change in asset value........................................ 0.65
------
Net Asset Value, End of Period................................... $10.58
======
Total Return (excludes sales charge)............................. 8.85%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................................ $ 164
Ratio of expenses to average net assets.......................... 0.94%(c)
Ratio of net investment income to average net assets............. 2.44%(c)
Ratio of expenses to average net assets*......................... 9.41%(c)
Portfolio turnover**............................................. 76%
</TABLE>
- ---------
* During the period, certain fees were voluntarily reduced/reimbursed. If such
voluntary fee reductions/reimbursements had not occurred, the ratios would
have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from February 11, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
Financial Highlights, Class B Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999(a)
------------
<S> <C>
Net Asset Value, Beginning of Period............................. $ 9.84
------
Investment Activities
Net investment income (loss).................................... 0.12
Net realized and unrealized gains (losses) from investments with
affiliates..................................................... 0.81
------
Total from Investment Activities................................ 0.93
------
Distributions
Net investment income........................................... (0.12)
Net realized gains.............................................. (0.08)
------
Total Distributions............................................. (0.20)
------
Net change in asset value........................................ 0.73
------
Net Asset Value, End of Period................................... $10.57
======
Total Return (excludes redemption charge)........................ 9.48%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................................ $ 998
Ratio of expenses to average net assets.......................... 1.55%(c)
Ratio of net investment income to average net assets............. 2.14%(c)
Ratio of expenses to average net assets*......................... 6.75%(c)
Portfolio turnover**............................................. 76%
</TABLE>
- ---------
* During the period, certain fees were voluntarily reduced/reimbursed. If such
voluntary fee reductions/reimbursements had not occurred, the ratios would
have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from February 15, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
176
<PAGE>
ISG FUNDS
Growth Portfolio
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999 (a)
------------
<S> <C>
Net Asset Value, Beginning of Period............................ $ 10.00
-------
Investment Activities
Net investment income (loss)................................... 0.16
Net realized and unrealized gains (losses) from investments
with affiliates............................................... 0.69
-------
Total from Investment Activities............................... 0.85
-------
Distributions
Net investment income.......................................... (0.16)
Net realized gains............................................. (0.08)
-------
Total Distributions............................................ (0.24)
-------
Net change in asset value....................................... 0.61
-------
Net Asset Value, End of Period.................................. $ 10.61
=======
Total Return.................................................... 8.59% (b)
Ratios/Supplementary Data:
Net Assets at end of period (000)............................... $11,372
Ratio of expenses to average net assets......................... 0.73% (c)
Ratio of net investment income to average net assets............ 4.82% (c)
Ratio of expenses to average net assets*........................ 3.14% (c)
Portfolio turnover**............................................ 76%
</TABLE>
- ---------
* During the period, certain fees were voluntarily reduced/reimbursed. If such
voluntary fee reductions/reimbursements had not occurred, the ratios would
have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) For the period from February 1, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
177
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
178
<PAGE>
ISG Investment Management Team
Portfolio Manager
ISG Strategic Portfolio
Aggressive Growth Portfolio
- -------------------------------------------------------------------------------
Investment Goal
The Strategic Portfolios seek to
provide investors with the potential
to achieve a variety of long- and
short-term goals, commensurate with
investors' specific time horizons
and tolerance for risk. Each of the
five Strategic Portfolios invests in
a combination of underlying mutual
funds from the ISG family. Based on
each Portfolio's asset-allocation
target, the managers periodically
rebalance stock, bond and money
market holdings--based on analysis
of economic and market trends.
- -------------------------------------------------------------------------------
Q. How did the Fund perform during the period?
A. For the periods ended December 31, 1999 the Fund's total returns and
comparative benchmark returns were as follows:
ISG Aggressive Growth Portfolio from its inception on 1/13/99 to 12/31/99
(Class A shares at NAV)+: 16.92%
S&P 1500 Index: 16.34%
Merrill Lynch Government/Corporate Master Index: -2.76%
MSCI EAFE Index: 27.65%
Lipper Growth Funds Index/1/: 27.16%
Q. What factors affected the Funds' performance?
A. It was heartening for shareholders to see that, for the period as a whole,
the Portfolios performed exactly as expected. The stock market had a fairly
terrific year, while bonds languished. Consequently, our more aggressive
Portfolios (which held higher concentrations of underlying stock funds) did
much better than the more conservative Portfolios.
The successes of the Aggressive Growth Portfolio and Growth Portfolio, in
particular, were due in large measure to their allocations in the ISG Mid-Cap
Fund, which produced outsized returns.
The strategy of owning more than one style of fund--for example, having stakes
in such diverse sectors as large-cap growth, small-cap value and international
equities--proved beneficial. Volatility was pervasive, not just in the stock
market, but also in the fixed-income arena. With the markets making big moves,
it can be difficult for individual investors to stay abreast of new trends.
Shareholders in our Strategic Portfolios enjoyed the advantage of usually
having some of their money invested in whatever style was currently
fashionable. This diversification is one of the primary benefits offered by
the Strategic Portfolio concept.
Q. Going forward, what strategies are the fund managers employing?
A. Each Portfolio has a target range for how much of its assets should be
invested in different types of underlying funds. This "road map" guides our
team in its asset-allocation decisions. At least once a month, the managers
review each Portfolio's current allocation, and based on a Portfolio's target,
our valuation discipline and the team's assessment of market conditions, new
monies may be invested in various sectors.
As we enter 2000, all of the Portfolios hold a somewhat lower-than-average
allocation in equities. This reflects our strong belief that bonds currently
offer more relative value. Given the high current valuations of many
individual stocks, and equity indices as a whole, we feel that stocks are a
bit riskier than bonds at this time.
Q. How can shareholders use the Portfolios to take advantage of changing
market conditions in the future?
A. The real strength of these Portfolios is that an investor can implement an
asset-allocation strategy supporting his or her individual needs--with a
single investment in the most suitable Strategic Portfolio. Rather than worry
about macroeconomic events or sector rotation, an investor can simply choose
the Portfolio that offers the appropriate measure of potential risk and
reward. If this is done correctly, we believe that, over time, shareholders
will earn returns that are proportionate with the level of risk they have
selected.
- ---------
+ Including the 4.75% sales load, the ISG Aggressive Growth Portfolio's
return would have been 11.36%.
/1/ The Lipper Growth Funds Average is an average of funds that normally seeks
growth of principal through equity investments.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investor's shares, when
redeemed, may be worth more or less than their original purchase price.
179
<PAGE>
ISG Aggressive Growth Portfolio
Performance (as of December 31, 1999)
- -------------------------------------------------------------------------------
[GRAPH]
Class A Shares
Merrill Lynch
Aggressive Growth Aggressive Growth S&P Government/ MSCI
Portfolio with Portfolio without 1500 Corporate EAFE
Sales Charge Sales Charge Index Master Index Index
1/13/99 9,525 10,000 10,000 10,000 10,000
12/31/99 11,136 11,692 11,634 9,724 12,765
[GRAPH]
Class B Shares
Aggressive Aggressive Merrill Lynch
Growth Growth Government
Portfolio Portfolio S&P 1500 Corporate MSCI EAFE
with CDSC without CDSC Index Master Index Index
1/27/99 10,000 10,000 10,000 10,000 10,000
12/31/99 11,170 11,570 11,634 9,724 12,765
[GRAPH]
Institutional Shares
Merrill Lynch
Aggressive Government
Growth S&P 1500 Corporate MSCI EAFE
Portfolio Index Master Index Index
1/27/99 10,000 10,000 10,000 10,000
12/31/99 11,631 11,634 9,724 12,765
<TABLE>
<CAPTION>
Cumulative
Total Return
---------------
Without With
Sales Sales
Charge Charge*
------- -------
<S> <C> <C>
Class A Shares
Since Inception 1/13/99......................................... 16.92% 11.36%
</TABLE>
* Reflects the maximum sales charge of 4.75%.
<TABLE>
<CAPTION>
Cumulative
Total Return
--------------
Without With
CDSC CDSC**
------- ------
<S> <C> <C>
Class B Shares
Since Inception 1/27/99.......................................... 15.70% 11.70%
</TABLE>
** Reflects the applicable contingent deferred sales charge (maximum 4.00%).
<TABLE>
<CAPTION>
Cumulative
Total Return
------------
<S> <C>
Institutional Shares
Since Inception 1/28/99............................................ 16.31%
</TABLE>
The charts above represent a comparison to a hypothetical $10,000 investment
in the indicated share class versus a similar investment in the Fund's
benchmark.
The Fund's performance is compared to the MSCI Europe, Australasia and Far
East Index, which is generally representative of stock markets in those
regions; the Merrill Lynch Government/Corporate Master Index, which is
generally representative of the performance of corporate and U.S. Government
bonds and the S&P 1500 Index, which is generally representative of the
performance of large and small companies in the U.S. stock market. These
indices are unmanaged and do not reflect the expenses associated with a mutual
fund, such as investment management and fund accounting fees. The Fund's
performance reflects the deduction of fees for these value-added services.
Investors cannot invest directly in an index, although they can invest in the
underlying securities.
Past performance is not a prediction of future results. The Fund's investment
return and principal value will fluctuate, so that investors' shares, when
redeemed, may be worth more or less than their original purchase price.
180
<PAGE>
ISG FUNDS Schedule of Portfolio Investments
Aggressive Growth Portfolio December 31, 1999
Investment Companies (101.1%)
<TABLE>
<CAPTION>
Market
Value
Shares (Note 2)
--------- -----------
<S> <C> <C>
ISG Capital Growth Fund, Institutional Shares.......... 260,661 $ 3,719,637
ISG International Equity Fund, Institutional Shares.... 124,140 1,647,333
ISG Large-Cap Equity Fund, Institutional Shares........ 292,613 8,196,083
ISG Mid-Cap Fund, Institutional Shares (b)............. 99,256 1,724,069
ISG Prime Money Market Fund, Institutional Shares...... 2,853,405 2,853,405
ISG Small-Cap Opportunity Fund, Institutional Shares
(b)................................................... 135,454 1,828,624
-----------
TOTAL INVESTMENT COMPANIES
(Cost $19,446,107).................................... 19,969,151
-----------
TOTAL INVESTMENTS IN AFFILIATES
(Cost $19,446,107) (a) -- (101.1%).................... 19,969,151
Liabilities in excess of
other assets -- (-1.1%)............................... (216,047)
-----------
TOTAL NET ASSETS -- (100.0%)........................... $19,753,104
===========
</TABLE>
- ---------
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized for
financial reporting in excess of federal income tax reporting of $70,472.
Cost for federal income tax purposes differs from value by net unrealized
appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.......... $ 877,391
Unrealized depreciation.......... (424,819)
---------
Net unrealized appreciation...... $ 452,572
=========
</TABLE>
(b) Non-income producing security.
[CHART]
Sector Profile*
ISG International Equity Fund 8.3%
ISG Mid-Cap Fund 8.6%
ISG Small-Cap Opportunity Fund 9.2%
ISG Large-Cap Equity Fund 41.0%
ISG Capital Growth 18.6%
Prime Money Market Fund 14.3%
*Portfolio composition is subject to change.
See notes to financial statements
181
<PAGE>
ISG FUNDS
Aggressive Growth Portfolio
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments in affiliates, at value (cost $19,446,107).... $19,969,151
Interest and dividends receivable......................... 32,128
Receivable for capital shares issued...................... 8,159
Receivable from investment adviser........................ 13,503
Prepaid expenses and other assets......................... 80
-----------
Total Assets............................................. 20,023,021
Liabilities:
Distributions payable..................................... $199,271
Payable for capital shares redeemed....................... 38,965
Accrued expenses and other payables:
Investment advisory fees................................. 1,631
Administration fees...................................... 325
Distribution fees........................................ 2,927
Custodian fees........................................... 955
Other.................................................... 25,843
--------
Total Liabilities........................................ 269,917
-----------
Net Assets:
Capital................................................... 17,533,419
Undistributed (distributions in excess of) net investment
income................................................... 5
Undistributed (distributions in excess of) net realized
gains.................................................... 1,696,636
Net unrealized appreciation (depreciation) from
investments.............................................. 523,044
-----------
Net Assets................................................ $19,753,104
===========
Class A Shares
Net Assets............................................... $ 449,723
Shares outstanding....................................... 38,958
Redemption price per share............................... $ 11.54
===========
Class A Shares -- Maximum Sales Charge.................... 4.75%
-----------
Maximum Offering Price Per Share (100%/(100% -- Maximum
Sales Charge) of net asset value adjusted to the nearest
cent)................................................... $ 12.12
===========
Class B Shares
Net Assets............................................... $ 455,919
Shares outstanding....................................... 39,761
Offering price per share*................................ $ 11.47
===========
Institutional Shares
Net Assets............................................... $18,847,462
Shares outstanding....................................... 1,635,333
Offering and redemption price per share.................. $ 11.53
===========
</TABLE>
- ---------
* Redemption price per share varies by length of time shares are held.
Statement of Operations
For the period ended December 31, 1999 (a)
<TABLE>
<S> <C> <C>
Investment Income:
Dividend income from affiliates........................... $ 249,939
Expenses:
Investment advisory fees.................................. $12,875
Administration fees....................................... 9,656
Distribution fees -- Class A Shares....................... 524
Distribution fees -- Class B Shares....................... 2,179
Shareholder servicing fees -- Class A Shares.............. 315
Shareholder servicing fees -- Class B Shares.............. 727
Shareholder servicing fees -- Institutional Shares........ 8,905
Custodian fees............................................ 2,318
Accounting fees........................................... 19,247
Transfer agent fees....................................... 44,107
Directors' fees........................................... 160
Registration and filing fees.............................. 36,749
Audit fees................................................ 12,497
Legal fees................................................ 9,321
Other fees................................................ 2,026
-------
Total expenses before voluntary fee
reductions/reimbursements............................... 161,606
Expenses voluntarily reduced/reimbursed.................. (111,354)
----------
Net expenses............................................. 50,252
----------
Net Investment Income..................................... 199,687
----------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment transactions
with affilliates......................................... 190,100
Realized gain distributions from underlying funds......... 1,545,393
Net change in unrealized appreciation (depreciation) from
investments.............................................. 523,044
----------
Net realized/unrealized gains (losses) from investments... 2,258,537
----------
Change in net assets resulting from operations............ $2,458,224
==========
</TABLE>
- ---------
(a) For the period from January 13, 1999 (commencement of operations) through
December 31, 1999.
See notes to financial statements
182
<PAGE>
ISG FUNDS
Aggressive Growth Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Period Ended
December 31,
1999(a)
------------
<S> <C>
From Investment Activities:
Operations:
Net investment income......................................... $ 199,687
Net realized gains (losses) from investment transactions with
affiliates................................................... 190,100
Realized gain distributions from underlying funds............. 1,545,393
Net change in unrealized appreciation (depreciation) from
investments.................................................. 523,044
-----------
Change in net assets resulting from operations................. 2,458,224
-----------
Distributions to Class A Shareholders:
From net investment income.................................... (4,353)
From net realized gains on investment transactions............ (1,148)
Distributions to Class B Shareholders:
From net investment income.................................... (3,743)(b)
From net realized gains on investment transactions............ (1,143)(b)
Distributions to Institutional Shareholders:
From net investment income.................................... (191,586)(c)
From net realized gains on investment transactions............ (36,566)(c)
-----------
Change in net assets from shareholder distributions............ (238,539)
-----------
Change in net assets from capital transactions................. 17,533,419
-----------
Change in net assets........................................... 19,753,104
Net Assets:
Beginning of period........................................... --
-----------
End of period................................................. $19,753,104
===========
</TABLE>
- ---------
(a) For the period from January 13, 1999 (commencement of operations) through
December 31, 1999.
(b) For the period from January 27, 1999 (commencement of operations) through
December 31, 1999.
(c) For the period from January 28, 1999 (commencement of operations) through
December 31, 1999.
See notes to financial statements
183
<PAGE>
ISG FUNDS
Aggressive Growth Portfolio
Financial Highlights, Class A Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999(a)
------------
<S> <C>
Net Asset Value, Beginning of Period............................. $10.00
------
Investment Activities
Net investment income (loss).................................... 0.09
Net realized and unrealized gains (losses) from investments with
affiliates..................................................... 1.60
------
Total from Investment Activities................................ 1.69
------
Distributions
Net investment income........................................... (0.11)
Net realized gains.............................................. (0.04)
------
Total Distributions............................................. (0.15)
------
Net change in asset value........................................ 1.54
------
Net Asset Value, End of Period................................... $11.54
======
Total Return (excludes sales charge)............................. 16.92%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................................ $ 450
Ratio of expenses to average net assets.......................... 0.96%(c)
Ratio of net investment income to average net assets............. 1.65%(c)
Ratio of expenses to average net assets*......................... 6.10%(c)
Portfolio turnover**............................................. 95%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from January 13, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
Financial Highlights, Class B Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999(a)
------------
<S> <C>
Net Asset Value, Beginning of Period............................. $10.03
------
Investment Activities
Net investment income (loss).................................... 0.07
Net realized and unrealized gains (losses) from investments with
affiliates..................................................... 1.50
------
Total from Investment Activities................................ 1.57
------
Distributions
Net investment income........................................... (0.09)
Net realized gains.............................................. (0.04)
------
Total Distributions............................................. (0.13)
------
Net change in asset value........................................ 1.44
------
Net Asset Value, End of Period................................... $11.47
======
Total Return (excludes redemption charge)........................ 15.70%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................................ $ 456
Ratio of expenses to average net assets.......................... 1.52%(c)
Ratio of net investment income to average net assets............. 0.92%(c)
Ratio of expenses to average net assets*......................... 7.86%(c)
Portfolio turnover**............................................. 95%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from January 27, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
184
<PAGE>
ISG FUNDS
Aggressive Growth Portfolio
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
Period Ended
December 31,
1999(a)
------------
<S> <C>
Net Asset Value, Beginning of Period............................. $ 10.05
-------
Investment Activities
Net investment income (loss).................................... 0.12
Net realized and unrealized gains (losses) from investments with
affiliates..................................................... 1.52
-------
Total from Investment Activities................................ 1.64
-------
Distributions
Net investment income........................................... (0.12)
Net realized gains.............................................. (0.04)
-------
Total Distributions............................................. (0.16)
-------
Net change in asset value........................................ 1.48
-------
Net Asset Value, End of Period................................... $ 11.53
=======
Total Return..................................................... 16.31%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................................ $18,847
Ratio of expenses to average net assets.......................... 0.73%(c)
Ratio of net investment income to average net assets............. 3.23%(c)
Ratio of expenses to average net assets*......................... 2.10%(c)
Portfolio turnover**............................................. 95%
</TABLE>
* During the period, certain fees were voluntarily reduced/reimbursed. If
such voluntary fee reductions/reimbursements had not occurred, the ratios
would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) For the period from January 28, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
185
<PAGE>
ISG FUNDS
Notes to Financial Statements
December 31, 1999
Note 1 -- Organization
ISG Funds are a separate series of The Infinity Mutual Funds, Inc. (the
"Company") which was organized as a Maryland corporation on March 6, 1990 and
is registered under the Investment Company Act of 1940, as amended (the "Act"),
as an open-end, management investment company. The Company operates as a series
of twenty-three funds. The accompanying financial statements and notes relate
to the ISG Treasury Money Market Fund, the ISG Prime Money Market Fund, the ISG
Tax-Exempt Money Market Fund (collectively the "Money Market Funds"), the ISG
Limited Term U.S. Government Fund, the ISG Government Income Fund, the ISG
Municipal Income Fund, the ISG Limited Term Tennessee Tax-Exempt Fund, the ISG
Tennessee Tax-Exempt Fund, the ISG Limited Term Income Fund, the ISG Income
Fund, the ISG Equity Income Fund, the ISG Large-Cap Equity Fund, the ISG
Capital Growth Fund, the ISG Mid-Cap Fund, the ISG Small-Cap Opportunity Fund,
the ISG International Equity Fund, the ISG Current Income Portfolio, the ISG
Moderate Growth & Income Portfolio, the Growth & Income Portfolio, the Growth
Portfolio and the Aggressive Growth Portfolio (collectively, the "Variable Net
Asset Value Funds") (individually, a "Fund" and collectively, the "Funds").
On October 1, 1999, First American Corporation, the parent company of First
American National Bank ("First American"), completed its merger with AmSouth
Bancorporation. As a result of the merger, First American is now a wholly-owned
subsidiary of AmSouth Bancorporation.
The TREASURY MONEY MARKET FUND seeks to provide investors with as high a
level of current income as is consistent with the preservation of capital and
the maintenance of liquidity. This Fund will invest only in U.S. Treasury
securities and in other securities guaranteed as to principal and interest by
the U.S. Government, and repurchase agreements in respect thereof.
The PRIME MONEY MARKET FUND seeks to provide investors with as high a level
of current income as is consistent with the preservation of capital and the
maintenance of liquidity. This Fund will invest in short-term money market
instruments.
The TAX-EXEMPT MONEY MARKET FUND seeks to provide investors with as high a
level of current income exempt from Federal income tax as is consistent with
the preservation of capital and the maintenance of liquidity. This Fund will
invest primarily in short-term municipal obligations.
The LIMITED TERM U.S. GOVERNMENT FUND seeks to provide investors with high
current income without assuming undue risk. This Fund will invest primarily in
a portfolio of U.S. government securities that, under normal market conditions,
has an effective duration that approximates that of the Merrill Lynch
Government 1 to 5 Year Bond Index.
The GOVERNMENT INCOME FUND seeks to provide investors with current income.
This Fund will invest primarily in securities guaranteed as to payment of
principal and interest by the U.S. government, its agencies or
instrumentalities.
The MUNICIPAL INCOME FUND seeks to provide investors with dividend income
exempt from Federal income tax. This Fund will invest primarily in investment
grade municipal obligations.
The LIMITED TERM TENNESSEE TAX-EXEMPT FUND seeks to provide investors with
current income exempt from Federal and Tennessee income taxes without assuming
undue risk. This Fund will invest primarily in a portfolio of investment grade
Tennessee municipal obligations that, under normal market conditions, has a
duration of under five years and an effective average portfolio maturity
ranging between three and five years.
The TENNESSEE TAX-EXEMPT FUND seeks to provide investors with current income
exempt from Federal and Tennessee income taxes without assuming undue risk.
This Fund will invest primarily in investment grade Tennessee municipal
obligations without regard to maturity.
The LIMITED TERM INCOME FUND seeks to provide investors with current income
without assuming undue risk. This Fund will invest primarily in a portfolio of
investment grade, U.S. dollar denominated fixed-income securities of domestic
and foreign issuers, which, under normal market conditions, has a duration of
under four years.
The INCOME FUND seeks to provide investors with current income without
assuming undue risk. This Fund will invest primarily in a portfolio of
investment grade, U.S. dollar denominated fixed-income securities of domestic
and foreign issuers, which, under normal market conditions, has an effective
duration of 50% to 150% of that of the Merrill Lynch Government Corporate
Master Index.
Continued
186
<PAGE>
ISG FUNDS
Notes to Financial Statements, Continued
December 31, 1999
The EQUITY INCOME FUND seeks to provide investors with current income and
capital appreciation. This Fund will invest primarily in dividend-paying equity
securities of domestic issuers which are expected to provide reasonable income
and may have capital appreciation potential.
The LARGE-CAP EQUITY FUND seeks to provide investors with long-term capital
appreciation and, as a secondary objective, current income. This Fund will
invest primarily in equity securities of large capitalization (over $1 billion)
domestic issuers that have the potential to provide capital appreciation and
income.
The CAPITAL GROWTH FUND seeks to provide investors with capital growth. This
Fund will invest primarily in the equity securities of domestic issuers.
The MID-CAP FUND seeks to provide investors with capital appreciation. This
Fund will invest primarily in equity securities of moderate capitalization
($500 million to $5 billion) domestic issuers.
The SMALL-CAP OPPORTUNITY FUND seeks to provide investors with capital
appreciation. This Fund will invest primarily in equity securities of small
capitalization (under $1 billion) domestic issuers.
The INTERNATIONAL EQUITY FUND seeks to provide investors with capital
appreciation. This Fund will invest primarily in equity securities of foreign
issuers which are established companies in economically developed countries.
The CURRENT INCOME PORTFOLIO seeks to provide investors with current income.
This Fund will allocate its assets among the Underlying ISG Funds within a
predetermined strategy range which invest primarily in fixed income securities.
The MODERATE GROWTH & INCOME PORTFOLIO seeks to provide investors with
current income and a moderate level of capital growth. This Fund will allocate
its assets among the Underlying ISG Funds within a predetermined strategy range
which invest primarily in equity and fixed income securities.
The GROWTH & INCOME PORTFOLIO seeks to provide investors with long-term
capital growth and a moderate level of current income. This Fund will allocate
its assets among the Underlying ISG Funds within a predetermined strategy range
which invest primarily in equity securities.
The GROWTH PORTFOLIO seeks to provide investors with long-term capital
growth. The Fund will allocate its assets among the Underlying ISG Funds within
a predetermined strategy range which invest primarily in equity securities.
The AGGRESSIVE GROWTH PORTFOLIO seeks to provide investors with capital
growth. The Fund will allocate its assets among the Underlying ISG Funds within
a predetermined strategy range which invest primarily in equity securities.
The Funds are authorized to issue three classes of shares as follows:
Institutional Shares, Class A Shares and Class B Shares (except for the
Treasury Money Market Fund and Tax-Exempt Money Market Fund which do not offer
Class B Shares and the Limited Term Tennessee Tax-Exempt Fund which does not
offer Institutional Shares). Class A Shares are subject to an initial sales
charge imposed at the time of purchase and Class B Shares are subject to a
contingent deferred sales charge at the time of redemption, as described in the
Funds' prospectus. Class A (except for the Money Market Funds) and Class B
Shares bear distribution (12b-1) fees. Class A, Class B and Institutional
Shares bear shareholder servicing fees. Each class has identical rights and
privileges except with respect to the distribution (12b-1) fees paid by Class A
and Class B Shares, the shareholder servicing fees paid by each respective
class, voting matters affecting a single class of shares and the exchange
privileges of each class of shares.
At December 31, 1999, there were 27 billion shares of the Funds' $0.001 par
value common stock authorized, of which each Fund's shares are classified into
Class A Shares, Class B Shares and Institutional Shares, except as noted above.
Note 2 -- Significant Accounting Policies
The following is a summary of significant accounting policies followed by the
Funds in preparation of their financial statements. The policies are in
conformity with generally accepted accounting principles (GAAP). The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of income and
expenses for the period. Actual results could differ from those estimates.
Continued
187
<PAGE>
ISG FUNDS
Notes to Financial Statements, Continued
December 31, 1999
A) Security Valuation:
The Money Market Funds' securities are valued at amortized cost, which
approximates market value. The amortized cost method involves valuing a
security at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of the difference between the principal amount due at
maturity and cost.
The Variable Net Asset Value Funds' investments are valued each business day
using available market quotations or at fair value as determined by one or more
independent pricing services (collectively, the "Service") approved by the
Board of Directors. The Service may use available market quotations, employ
electronic data processing techniques and/or a matrix system to determine
valuations. Investments in foreign securities of the International Equity Fund
are valued based on quotations from the primary market in which they are
traded. Investment companies are valued at the published net asset value per
share. Debt securities with remaining maturities of 60 days or less are
normally valued at amortized cost, which approximates market value. Restricted
securities and securities for which market quotations are not readily
available, if any, are valued at fair value using methods approved by the Board
of Directors. The differences between cost and market values of such
investments are reflected as unrealized appreciation or depreciation.
B) Security Transactions and Investment Income:
Security transactions are recorded on trade date. Realized gains and losses
from sales of investments are calculated on the identified cost basis. Interest
income, including accretion of discount and amortization of premium on
investments (when applicable), is accrued daily. Dividend income is recorded on
the ex-dividend date.
C) Repurchase Agreements:
The Funds may invest in repurchase agreements from financial institutions,
such as banks and broker-dealers approved by the Board of Directors. The Funds'
custodian and other banks acting in a sub-custodian capacity take possession of
the collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily on a mark-to-market basis to determine that the
value, including accrued interest, exceeds the repurchase price. In the event
of the seller's default on the obligation to repurchase, the Funds have the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings. Accordingly, the Funds could
receive less than the carrying value upon the sale of the underlying collateral
securities.
D) Securities Purchased on a When-Issued Basis:
Each Fund may purchase securities on a "when-issued" basis. When-issued
securities are securities purchased for delivery beyond the normal settlement
date at a stated price and/or yield, thereby, involving the risk that the price
and/or yield obtained may be more or less than those available in the market
when delivery takes place. At the time a Fund makes the commitment to purchase
a security on a when-issued basis, the Fund records the transaction and
reflects the value of the security in determining net asset value. Normally,
the settlement date occurs within one month of the purchase. A segregated
account is established and the Funds maintain cash and marketable securities at
least equal in value to commitments for when-issued securities. Securities
purchased on a when-issued basis do not earn income until settlement date.
There were no when-issued securities outstanding as of December 31, 1999.
E) Foreign Currency Translation:
The market value of investment securities, other assets and liabilities of
the International Equity Fund denominated in a foreign currency are translated
into U.S. dollars at the current exchange rate. Purchases and sales of
securities, income receipts and expense payments are translated into U.S.
dollars at the exchange rate on the dates of the transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gains or losses from investments.
Reported net realized foreign exchange gains or losses arise from sales and
maturities of fund securities, sales of foreign currencies, currency exchange
fluctuations between the trade and settlement dates of securities transactions,
and the difference
Continued
188
<PAGE>
ISG FUNDS
Notes to Financial Statements, Continued
December 31, 1999
between the amounts of assets and liabilities recorded and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of assets and
liabilities, including investments in securities, resulting from changes in
currency exchange rates.
F) Risks Associated with Foreign Securities and Currencies:
Investments in securities of foreign issuers carry certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include future political and economic developments and the possible
imposition of exchange controls or other foreign governmental laws and
restrictions. In addition, with respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
Certain countries may also impose substantial restrictions on investments in
their capital markets by foreign entities, including restrictions on
investments in issuers or industries deemed sensitive to relevant national
interests. These factors may limit the investment opportunities available to
the International Equity Fund or result in a lack of liquidity and high price
volatility with respect to securities of issuers from developing countries.
G) Forward Currency Contracts:
The International Equity Fund may enter into a forward currency contract
("forward") which is an agreement between two parties to buy and sell a
currency at a set price on a future date. The market value of the forward
fluctuates with changes in currency exchange rates. The forward is marked-to-
market daily and the change in market value is recorded by the Fund as
unrealized appreciation or depreciation. When the forward is closed, the Fund
records a realized gain or loss equal to the difference between the value at
the time it was opened and the value at the time it was closed. The Fund could
be exposed to risk if a counterparty is unable to meet the terms of a forward
or if the value of the currency changes unfavorably.
Forwards may involve market or credit risk in excess of the amounts reflected
on the Fund's statement of assets and liabilities. The gain or loss from the
difference between the cost of original contracts and the amount realized upon
the closing of such contracts is included in net realized gains/losses from
investment and foreign currency transactions. Fluctuations in the value of
forwards held are recorded for financial reporting purposes as unrealized gains
and losses by the Fund. There were no forwards open at December 31, 1999.
H) Securities Lending:
To generate additional income, the Funds may lend up to 33 1/3% of total
assets pursuant to agreements requiring that the loan be continuously secured
by cash, U.S. government or U.S. government agency securities, shares of an
investment trust or mutual fund, or any combination of cash and such securities
as collateral equal at all times to at least 100% of the market value plus
accrued interest on the securities lent. The Funds continue to earn interest
and dividends on securities lent while simultaneously seeking to earn interest
on the investment of collateral.
When cash is received as collateral for securities loaned, the Funds may
invest such cash in short-term U.S. government securities, repurchase
agreements, or other short-term corporate securities. The cash or subsequent
short-term investments are recorded as assets of the Funds, offset by a
corresponding liability to repay the cash at the termination of the loan. In
addition, the short-term securities purchased with the cash collateral are
included in the accompanying schedules of portfolio investments. Fixed income
securities received as collateral are not recorded as an asset or liability of
the Fund because the Fund does not have effective control of such securities.
There may be risks of delay in recovery of the securities or even loss of
rights in the collateral should the borrower of the securities fail
financially. However, loans will be made only to borrowers deemed by the
adviser to be of good standing and creditworthy under guidelines established by
the Board of Directors and when, in the judgment of the adviser, the
consideration which can be earned currently from such securities loaned
justifies the attendant risks. Loans are subject to termination by the Funds or
the borrower at any time, and are, therefore, not considered to be illiquid
investments. As of December 31, 1999, the following Funds had securities with
the following market values on loan:
Continued
189
<PAGE>
ISG FUNDS
Notes to Financial Statements, Continued
December 31, 1999
<TABLE>
<CAPTION>
Cash
Uninvested Collateral Total Market Market Value Average
Cash Invested in Value of of Loaned Market Value
Collateral Securities Collateral Securities on Loan
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Treasury Money Market
Fund................... $ -- $ 61,867,500 $ 61,867,500 $ 61,390,390 $69,570,358
Government Income Fund.. 626,960 187,686,275 188,313,235 183,197,500 89,190,363
Limited Term Income
Fund................... 10,156 3,040,159 3,050,315 2,967,450 2,098,229
Income Fund............. 11,890 3,559,473 3,571,363 3,474,345 239,819
Equity Income Fund...... 71,593 21,432,001 21,503,594 20,919,425 22,190,038
Large-Cap Equity Fund... 1,350,883 404,399,412 405,750,295 394,727,638 130,967,358
Capital Growth Fund..... 397,268 118,926,057 119,323,325 116,081,775 76,283,574
Mid-Cap Fund............ 6,462 1,934,580 1,941,042 1,888,313 328,757
Small-Cap Opportunity
Fund................... 24,784 7,419,323 7,444,107 7,241,880 9,197,593
</TABLE>
The loaned securities were fully collateralized by cash, of which, the
majority was invested in U.S. government securities, commercial paper,
investment companies and repurchase agreements at December 31, 1999.
I) Expenses:
The Funds incurred certain costs in connection with their organization. These
costs were deferred and are being amortized on a straight-line basis over five
years from their commencement of operations.
On June 30, 1998, the Company adopted Statement of Position (SOP)98-5,
"Reporting on the Costs of Start-Up Activities". Under the provisions of SOP
98-5, costs associated with organizing a portfolio which commences operations
subsequent to June 30, 1998 must be expensed as incurred and may not be
amortized over future periods. Accordingly, costs incurred in connection with
the organization of the Tax-Exempt Money Market Fund, Mid-Cap Fund, Current
Income Portfolio, Moderate Growth & Income Portfolio, Growth & Income
Portfolio, Growth Portfolio and Aggressive Growth Portfolio were paid by First
American.
ISG accounts separately for the assets, liabilities and operations of each
Fund. Direct expenses of a Fund are charged to that Fund while general ISG or
Company expenses are allocated among the ISG Funds' or Company's respective
Funds based on the relative net assets of each Fund.
Continued
190
<PAGE>
ISG FUNDS
Notes to Financial Statements, Continued
December 31, 1999
J) Federal Income Taxes:
For federal income tax purposes, each Fund is treated as a separate entity
for the purpose of determining its qualification as a regulated investment
company under the Internal Revenue Code (the "Code"). It is the policy of each
Fund to meet the requirements of the Code applicable to regulated investment
companies, including the requirement that they distribute substantially all of
their income and capital gains to shareholders. Therefore, no federal income
tax provision is required.
For federal income tax purposes, the following Funds have capital loss
carryovers as of December 31, 1999, which are available to offset future
capital gains, if any, on securities transactions to the extent provided for in
the Code:
<TABLE>
<CAPTION>
Fund Amount Expires
- ---- ---------- -------
<S> <C> <C>
Treasury Money Market Fund................................... $ 15,528 2000
122 2001
479 2002
6,387 2003
----------
$ 22,516
==========
Prime Money Market Fund...................................... $ 889 2002
149 2004
9 2005
3,675 2006
51,855 2007
----------
$ 56,577
==========
Tax-Exempt Money Market Fund................................. $ 121,429 2007
==========
Limited Term U.S. Government Fund............................ $1,212,357 2001
1,040,337 2002
758,580 2003
378,938 2004
----------
$3,390,212
==========
Government Income Fund....................................... $ 68,026 2002
467,764 2003
498,409 2004
763,279 2005
151,172 2006
----------
$1,948,650
==========
Tennessee Tax-Exempt Fund.................................... $ 831,455 2007
==========
Limited-Term Income Fund..................................... $ 117,290 2007
==========
Income Fund.................................................. $ 144,677 2007
==========
Mid-Cap Fund................................................. $ 315,451 2007
==========
Small-Cap Opportunity Fund................................... $4,812,644 2006
==========
Current Income Portfolio..................................... $ 15,457 2007
==========
</TABLE>
Under current tax law, capital losses realized after October 31 may be
deferred and treated as occurring on the first day of the next fiscal year. As
of December 31, 1999, Tax-Exempt Money Market Fund, Limited Term Tennessee Tax-
Exempt Fund, Tennessee Tax-Exempt Fund, Limited Term Income Fund, Income Fund,
Mid-Cap Fund, Small-Cap Opportunity Fund and Current Income Portfolio elected
to defer such losses of $92,271, $91,256, $454,072, $232,076, $386,001,
$254,455, $177,512 and $468, respectively.
Continued
191
<PAGE>
ISG FUNDS
Notes to Financial Statements, Continued
December 31, 1999
K) Dividends and Distributions to Shareholders:
Dividends are declared daily to shareholders of record at the close of
business on the day of declaration and are paid monthly for the Treasury Money
Market Fund, Prime Money Market Fund, Tax-Exempt Money Market Fund, Limited
Term U.S. Government Fund, Limited Term Tennessee Tax-Exempt Fund, Tennessee
Tax-Exempt Fund, Limited Term Income Fund and Income Fund. Dividends are
declared and paid monthly for the Government Income Fund, Municipal Income
Fund, Equity Income Fund and Current Income Portfolio. Dividends, if any, are
declared and paid quarterly for the Large-Cap Equity Fund, Capital Growth Fund,
Mid-Cap Fund, Small-Cap Opportunity Fund, Moderate Growth & Income Portfolio,
Growth & Income Portfolio, Growth Portfolio and Aggressive Growth Portfolio.
Dividends, if any, are declared and distributed annually for International
Equity Fund. For all Funds, distributions of net realized gains, if any, will
be paid at least annually. The Large-Cap Equity Fund utilizes equalization
accounting for tax purposes and designates $39,738,473 of earnings and profits
distributed to shareholders on redemptions of shares as a long-term capital
gain dividend for income tax purposes.
Dividends and distributions are recorded on the ex-dividend date.
Distributions from net investment income and from net realized gains are
determined in accordance with federal income tax regulations that may differ
from GAAP. These "book/tax" differences are either considered temporary or
permanent in nature. To the extent these differences are permanent in nature,
such amounts are reclassified within the composition of net assets based on
their federal tax-basis treatment; temporary differences do not require
reclassification.
As of December 31, 1999, the following reclassifications have been made to
increase (decrease) such amounts with offsetting adjustments made to capital:
<TABLE>
<CAPTION>
Undistributed
Undistributed (distributions in excess of)
(distributions in excess of) Net Realized Gains (Losses)
Net Investment Income (Loss) on Investment Transactions
---------------------------- ----------------------------
<S> <C> <C>
Tax-Exempt Money Market
Fund................... $ 23,831 $ --
Limited Term U.S.
Government Fund........ (12,530) 12,530
Government Income Fund.. 37,200 (37,200)
Municipal Income Fund... -- 97,979
Limited Term Income
Fund................... (8,820) 8,820
Income Fund............. (18,740) 18,740
Equity Income Fund...... 13,667 (13,667)
Large-Cap Equity Fund... 13,277 (39,767,930)
Capital Growth Fund..... 265,054 (265,054)
Mid-Cap Fund............ 155,443 --
Small-Cap Opportunity
Fund................... 655,194 834
International Equity
Fund................... (32,499) 32,499
Growth Portfolio........ (1,303) 1,303
</TABLE>
Note 3 -- Related Party Transactions
First American serves as the Funds' investment adviser. Bennett Lawrence
Management, LLC serves as the sub-investment adviser to the ISG Mid-Cap Fund.
Womack Asset Management, Inc. serves as the sub-investment adviser to the ISG
Small-Cap Opportunity Fund. Lazard Asset Management serves as the sub-
investment adviser to the ISG International Equity Fund. Under the terms of the
sub-investment advisory agreements, Bennett Lawrence, Womack and Lazard are
entitled to receive fees from First American based on a percentage of the
average daily net assets of their respective funds. The agreements stipulate
Bennet Lawrence to receive 0.75% on the first $25 million, 0.625% on the next
$50 million, and 0.50% on assets in excess of $75 million of the value of the
Mid-Cap Fund's average daily net assets, Womack to receive a monthly fee of
0.35% of the value of Small-Cap Opportunity Fund's average daily net assets and
Lazard to receive a monthly fee of 0.50% of the value of International Equity
Fund's average daily net assets.
Effective April 1, 1999, First American began serving the Funds, with the
exception of the International Equity Fund, as Custodian. First American
receives an annual fee of .00275% of the average daily net assets of each fund.
Continued
192
<PAGE>
ISG FUNDS
Notes to Financial Statements, Continued
December 31, 1999
As investment adviser, First American manages the investments of each Fund,
supervises the sub-investment advisers with respect to the ISG Mid-Cap Fund,
the ISG Small-Cap Opportunity Fund and the ISG International Equity Fund and is
responsible for all purchases and sales of each Fund's investment securities.
BISYS Fund Services Ohio, Inc. ("BISYS") serves as the Funds' administrator
and BISYS Fund Services Limited Partnership ("BISYS LP") serves as the Funds'
distributor. BISYS and BISYS LP are subsidiaries of The BISYS Group, Inc.
Pursuant to the Shareholder Service Plan, the Funds pay BISYS LP for the
provision of certain services at an annual rate of 0.15% of the value of the
average daily net assets represented by Institutional Shares (except for the
Limited Term Tennessee Tax-Exempt Fund which does not offer Institutional
Shares) and Class A Shares (0.25% in the case of Class A Shares of the Money
Market Funds) and at an annual rate of 0.25% 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 and services related to the
maintenance of such shareholder accounts. BISYS LP may pay financial
institutions, including the investment adviser, broker/dealers and other
institutions in respect to these services.
Pursuant to the Distribution Plan, each Fund pays BISYS LP for advertising,
marketing and distributing Class A Shares (other than the Money Market Funds)
and Class B Shares (other than the Treasury Money Market Fund and Tax-Exempt
Money Market Fund which do not offer Class B Shares) at an annual rate of 0.25%
of the average daily net assets represented by Class A Shares and at an annual
rate of 0.75% of the average daily net assets represented by Class B Shares.
BISYS LP may pay financial institutions, broker/dealers and other institutions,
in respect of these services.
For the year ended December 31, 1999, BISYS LP realized $529,655 from
commissions on the sales of Class A Shares and Class B Shares, of which,
$37,976 was reallowed to affiliated broker/dealers of the Funds.
BISYS Fund Services Ohio, Inc., a subsidiary of The BISYS Group, Inc., serves
the Funds as Transfer Agent and Mutual Fund Accountant. The Mutual Fund
Accountant fees are included in the Administration Agreement, plus out of
pocket costs. The Transfer Agent Fees are based on a fixed fee per class, plus
out of pocket costs.
BISYS Fund Services Ohio, Inc., also serves the Funds as administrator for
Securities Lending, and for the year ended December 31, 1999, received $512,736
in fees for its services.
Certain officers and Directors of the Company are "affiliated persons" (as
defined in the Act) of BISYS and therefore do not receive compensation. Prior
to the August 12, 1999 board meeting, each "non-affiliated" director received
an annual fee of $12,000 (paid quarterly) and a meeting fee of $1,500 per
meeting for services relating to the Fund. Effective with the August 12, 1999
board meeting, each "non-affiliated" director received an annual fee of $14,000
(paid quarterly), a meeting fee of $2,500 per meeting and $1,000 for each
telephonic meeting for services relating to the Fund.
Continued
193
<PAGE>
ISG FUNDS
Notes to Financial Statements, Continued
December 31, 1999
Information regarding these transactions for the year ended December 31,1999
is as follows:
Related Party Transactions
<TABLE>
<CAPTION>
Distribution
Administration Fees --
Investment Advisory Fees Fees Class A Shares Reimbursements
--------------------------- -------------- -------------- ------------------------------
Annual Fee Voluntary Voluntary Voluntary
Before Voluntary Fee Fee Fee Class A Class B Institutional
Fee Reductions Reductions Reductions Reductions Shares Shares Shares
---------------- ---------- -------------- -------------- -------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Treasury Money Market
Fund................... 0.25% $ 20,051 $ -- $ -- $158,146 $ -- $ 37,286
Prime Money Market
Fund................... 0.25% 31,409 -- -- 205,934 26 9,256
Tax-Exempt Money Market
Fund................... 0.35% 6,617 -- -- 97 -- 1,332
Limited Term U.S.
Government Fund........ 0.50% 76,077 1,485 7,305 -- -- --
Government Income Fund.. 0.60% 37,855 -- 4,719 1,742 -- 316,394
Municipal Income Fund... 0.60% 196,737 -- 7,092 132 -- 1,499
Limited Term Tennessee
Tax-Exempt Fund........ 0.50% 22,677 22,218 48,523 -- -- --
Tennessee Tax-Exempt
Fund................... 0.50% 7,254 -- -- 3 -- --
Limited Term Income
Fund................... 0.50% 8,606 -- -- 186 21 2,604
Income Fund............. 0.50% 8,529 -- -- 24 11 801
Equity Income Fund...... 0.65% 10,218 -- -- 120 165 1,657
Large-Cap Equity Fund... 0.75% 96,866 -- 172,705 66,267 46 646,108
Capital Growth Fund..... 0.65% 25,355 -- -- 9 6 216
Mid-Cap Fund............ 1.00% 745 -- -- -- -- --
Small-Cap Opportunity
Fund................... 0.95% 9,418 -- 29,091 14,850 6 110,661
International Equity
Fund................... 1.00% 91,551 -- 1,031 18 -- 835
Current Income
Portfolio.............. 0.20% 413 -- -- 537 6,532 106,221
Moderate Growth & Income
Portfolio.............. 0.20% 6,350 -- -- 10,237 33,877 58,979
Growth & Income
Portfolio.............. 0.20% 24,882 -- -- 3,723 30,782 43,273
Growth Portfolio........ 0.20% 3,698 -- -- 8,948 27,060 71,621
Aggressive Growth
Portfolio.............. 0.20% 6,437 -- -- 10,653 18,213 76,051
</TABLE>
Continued
194
<PAGE>
ISG FUNDS
Notes to Financial Statements, Continued
December 31, 1999
Note 4 -- Purchases and Sales of Investment Securities
For the year ended December 31, 1999, the cost of purchases and the proceeds
from sales of fund securities (excluding short-term investments) were as
follows:
<TABLE>
<CAPTION>
Purchases Sales
------------ ------------
<S> <C> <C>
Limited Term U.S. Government Fund.................... $ 9,233,639 $ 7,128,494
Government Income Fund............................... 75,618,059 16,508,000
Municipal Income Fund................................ 134,622,902 161,971,757
Limited Term Tennessee Tax-Exempt Fund............... 13,610,980 8,872,640
Tennessee Tax-Exempt Fund............................ 55,418,133 67,485,771
Limited Term Income Fund............................. 34,222,203 26,670,868
Income Fund.......................................... 46,499,555 31,588,304
Equity Income Fund................................... 106,711,679 104,804,286
Large-Cap Equity Fund................................ 109,705,891 286,759,487
Capital Growth Fund.................................. 399,815,446 376,146,178
Mid-Cap Fund......................................... 25,731,948 2,760,555
Small-Cap Opportunity Fund........................... 196,481,005 209,542,556
International Equity Fund............................ 18,221,239 12,739,248
Current Income Portfolio............................. 1,097,291 430,460
Moderate Growth & Income Portfolio................... 31,003,741 8,612,207
Growth & Income Portfolio............................ 96,510,900 14,744,803
Growth Portfolio..................................... 13,896,648 2,802,058
Aggressive Growth Portfolio.......................... 21,822,709 5,420,106
</TABLE>
Note 5 -- Concentration of Credit Risk
The Tennessee Tax-Exempt Fund and Limited Term Tennessee Tax-Exempt Fund
invest substantially all of their assets in a non-diversified portfolio of tax-
exempt debt obligations primarily consisting of securities issued by the State
of Tennessee, its municipalities, counties and other taxing districts. The
issuers' abilities to meet their obligations may be affected by Tennessee
economic, regional and political developments.
The Tax-Exempt Money Market Fund, Municipal Income Fund, Limited Term
Tennessee Tax-Exempt Fund and Tennessee Tax-Exempt Fund had the following
concentrations by sector at December 31, 1999 (as a percentage of total
investments):
<TABLE>
<CAPTION>
Limited
Term
Tennessee
Tax-Exempt Municipal Tax- Tennessee
Money Market Income Exempt Tax-Exempt
Fund Fund Fund Fund
------------ --------- --------- ----------
<S> <C> <C> <C> <C>
General Obligation.................. 21.0% 19.4% 52.1% 34.8%
Utilities........................... 5.6% 18.7% 7.1% 23.3%
Health & Medical.................... 21.7% 26.2% 12.3% 22.8%
Educational......................... 19.7% 17.2% 13.7% 1.8%
Transportation...................... 2.1% -- -- 2.4%
Others.............................. 23.0% 15.4% 12.8% 7.4%
Cash and Cash Equivalents........... 5.0% -- 2.0% --
Housing............................. 1.9% 3.1% -- 7.5%
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
</TABLE>
Continued
195
<PAGE>
ISG FUNDS
Notes to Financial Statements, Continued
December 31, 1999
Note 6 -- Capital Shares Transactions
Transactions in shares in the multi-class Funds are summarized below:
<TABLE>
<CAPTION>
Treasury Money Market Fund Prime Money Market Fund
---------------------------- ----------------------------
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Class A Shares:
Proceeds from shares
issued................ $ 541,860,074 $ 451,868,071 $ 825,933,924 $ 570,797,942
Dividends reinvested... 892,884 394,398 14,493,051 1,864,545
Cost of shares
redeemed.............. (567,019,868) (361,844,685) (662,848,078) (318,621,139)
------------- ------------- ------------- -------------
(24,266,910) 90,417,784 177,578,897 254,041,348
------------- ------------- ------------- -------------
Class B Shares:
Proceeds from shares
issued................ -- -- 1,265,421 232,471 (a)
Dividends reinvested... -- -- 7,066 1,499 (a)
Cost of shares
redeemed.............. -- -- (727,367) (47,165)(a)
------------- ------------- ------------- -------------
-- -- 545,120 186,805
------------- ------------- ------------- -------------
Institutional Shares:
Proceeds from shares
issued................ 605,137,473 382,986,334 669,888,655 190,307,006
Dividends reinvested... 277,188 10,935 794,216 1
Cost of shares
redeemed.............. (573,589,899) (187,178,191) (485,071,062) (149,980,261)
------------- ------------- ------------- -------------
31,824,762 195,819,078 185,611,809 40,326,746
------------- ------------- ------------- -------------
Total net increase
(decrease) from capital
transactions........... $ 7,557,852 $ 286,236,862 $ 363,735,826 $ 294,554,899
============= ============= ============= =============
SHARE TRANSACTIONS:
Class A Shares:
Issued................. 541,860,074 451,868,071 825,933,924 570,797,942
Reinvested............. 892,884 394,398 14,493,051 1,864,545
Redeemed............... (567,019,868) (361,844,685) (662,848,078) (318,621,139)
------------- ------------- ------------- -------------
(24,266,910) 90,417,784 177,578,897 254,041,348
------------- ------------- ------------- -------------
Class B Shares:
Issued................. -- -- 1,265,421 232,471 (a)
Reinvested............. -- -- 7,066 1,499 (a)
Redeemed............... -- -- (727,367) (47,165)(a)
------------- ------------- ------------- -------------
-- -- 545,120 186,805
------------- ------------- ------------- -------------
Institutional Shares:
Issued................. 605,137,473 382,986,334 669,888,655 190,307,006
Reinvested............. 277,188 10,935 794,216 1
Redeemed............... (573,589,899) (187,178,191) (485,071,062) (149,980,261)
------------- ------------- ------------- -------------
31,824,762 195,819,078 185,611,809 40,326,746
------------- ------------- ------------- -------------
Total net increase
(decrease) from share
transactions........... 7,557,852 286,236,862 363,735,826 294,554,899
============= ============= ============= =============
</TABLE>
- ---------
(a) For the period from July 23, 1998 (commencement of operations) through
December 31, 1998.
Continued
196
<PAGE>
ISG FUNDS
Notes to Financial Statements, Continued
December 31, 1999
<TABLE>
<CAPTION>
Tax-Exempt
Money Market Limited Term U.S.
Fund Government Fund
------------- --------------------------
Period Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 (a) 1999 1998
------------- ------------ ------------
<S> <C> <C> <C>
CAPITAL TRANSACTIONS:
Class A Shares:
Proceeds from shares issued.... $ 35,150,280 $ 2,402,871 $ 33,332,277
Dividends reinvested........... 55,925 95,161 52,770
Cost of shares redeemed........ (27,280,876) (1,248,458) (52,018,890)
------------- ------------ ------------
7,925,329 1,249,574 (18,633,843)
------------- ------------ ------------
Class B Shares:
Proceeds from shares issued.... -- 379,165 428,519 (b)
Dividends reinvested........... -- 13,512 5,919 (b)
Cost of shares redeemed........ -- (340,926) (7,611)(b)
------------- ------------ ------------
-- 51,751 426,827
------------- ------------ ------------
Institutional Shares:
Proceeds from shares issued.... 240,681,269 8,314,722 47,242,730 (c)
Dividends reinvested........... 26,001 765,408 -- (c)
Cost of shares redeemed........ (136,037,895) (11,376,881) (764,822)(c)
------------- ------------ ------------
104,669,375 (2,296,751) 46,477,908
------------- ------------ ------------
Total net increase (decrease)
from capital transactions...... $ 112,594,704 $ (995,426) $ 28,270,892
============= ============ ============
SHARE TRANSACTIONS:
Class A Shares:
Issued......................... 35,150,280 240,159 3,245,674
Reinvested..................... 55,925 9,471 5,139
Redeemed....................... (27,280,876) (124,742) (4,999,183)
------------- ------------ ------------
7,925,329 124,888 (1,748,370)
------------- ------------ ------------
Class B Shares:
Issued......................... -- 37,634 42,105 (b)
Reinvested..................... -- 1,342 577 (b)
Redeemed....................... -- (34,081) (749)(b)
------------- ------------ ------------
-- 4,895 41,933
------------- ------------ ------------
Institutional Shares:
Issued......................... 240,681,269 825,932 4,594,333 (c)
Reinvested..................... 26,001 76,205 -- (c)
Redeemed....................... (136,037,895) (1,129,450) (74,494)(c)
------------- ------------ ------------
104,669,375 (227,313) 4,519,839
------------- ------------ ------------
Total net increase (decrease)
from share transactions........ 112,594,704 (97,530) 2,813,402
============= ============ ============
</TABLE>
- ---------
(a) For the period from May 3, 1999 (commencement of operations) through
December 31, 1999.
(b) For the period from March 3, 1998 (commencement of operations) through
December 31, 1998.
(c) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
Continued
197
<PAGE>
ISG FUNDS
Notes to Financial Statements, Continued
December 31, 1999
<TABLE>
<CAPTION>
Government Income Fund Municipal Income Fund
------------------------------------------------ ----------------------------------------------
Year Ended Period Ended Year Ended Year Ended Period Ended Year Ended
December 31, December 31, February 28, December 31, December 31, February 28,
1999 1998(a) 1998 1999 1998(a) 1998
------------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Class A Shares:
Proceeds from shares
issued................ $ 2,165,262 $ 100,273,406 $ 97,746,058 $ 2,234,827 $ 16,018,219 $ 12,400,013
Dividends reinvested... 62,741 4,696,756 5,515,899 103,360 18,913 26,535
Cost of shares
redeemed.............. (1,149,284) (383,504,573) (92,600,823) (1,878,446) (63,292,954) (12,157,682)
------------- ------------- ------------ ------------ ------------ ------------
1,078,719 (278,534,411) 10,661,134 459,741 (47,255,822) 268,866
------------- ------------- ------------ ------------ ------------ ------------
Class B Shares:
Proceeds from shares
issued................ 678,220 (b) -- -- 410,050 (d) -- --
Dividends reinvested... 12,586 (b) -- -- 9,415 (d) -- --
Cost of shares
redeemed.............. (111,194)(b) -- -- (152,573)(d) -- --
------------- ------------- ------------ ------------ ------------ ------------
579,612 -- -- 266,892 -- --
------------- ------------- ------------ ------------ ------------ ------------
Institutional Shares:
Proceeds from shares
issued................ 239,878,120 299,288,856 (c) -- 38,546,091 55,260,352 (c) --
Dividends reinvested... 9,562,010 -- (c) -- 131,316 -- (c) --
Cost of shares
redeemed.............. (158,797,118) (3,700,206)(c) -- (52,674,748) (417,507)(c) --
------------- ------------- ------------ ------------ ------------ ------------
90,643,012 295,588,650 -- (13,997,341) 54,842,845 --
------------- ------------- ------------ ------------ ------------ ------------
Total net increase
(decrease) from capital
transactions........... $ 92,301,343 $ 17,054,239 $ 10,661,134 $(13,270,708) $ 7,587,023 $ 268,866
============= ============= ============ ============ ============ ============
SHARE TRANSACTIONS:
Class A Shares:
Issued................. 219,423 9,822,777 9,911,035 206,192 1,473,050 1,162,205
Reinvested............. 6,319 460,321 561,104 9,981 1,731 2,485
Redeemed............... (116,827) (37,005,291) (9,367,967) (176,441) (5,756,013) (1,136,101)
------------- ------------- ------------ ------------ ------------ ------------
108,915 (26,722,193) 1,104,172 39,732 (4,281,232) 28,589
------------- ------------- ------------ ------------ ------------ ------------
Class B Shares:
Issued................. 67,915 (b) -- -- 37,676 (d) -- --
Reinvested............. 1,282 (b) -- -- 912 (d) -- --
Redeemed............... (11,427)(b) -- -- (14,420)(d) -- --
------------- ------------- ------------ ------------ ------------ ------------
57,770 -- -- 24,168 -- --
------------- ------------- ------------ ------------ ------------ ------------
Institutional Shares:
Issued................. 24,073,265 28,716,929 (c) -- 3,615,199 5,018,064 (c) --
Reinvested............. 964,947 -- (c) -- 12,532 -- (c) --
Redeemed............... (16,084,501) (355,731)(c) -- (5,126,602) (37,974)(c) --
------------- ------------- ------------ ------------ ------------ ------------
8,953,711 28,361,198 -- (1,498,871) 4,980,090 --
------------- ------------- ------------ ------------ ------------ ------------
Total net increase
(decrease) from share
transactions........... 9,120,396 1,639,005 1,104,172 (1,434,971) 698,858 28,589
============= ============= ============ ============ ============ ============
</TABLE>
- ---------
(a) For the period from March 1, 1998 through December 31, 1998.
(b) For the period from January 21, 1999 (commencement of operations) through
December 31, 1999.
(c) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
(d) For the period from February 3, 1999 (commencement of operations) through
December 31, 1999.
Continued
198
<PAGE>
ISG FUNDS
Notes to Financial Statements, Continued
December 31, 1999
<TABLE>
<CAPTION>
Limited Term Tennessee
Tax-Exempt Fund Tennessee Tax-Exempt Fund
------------------------ --------------------------
Year Ended Year Ended
December December Year Ended Year Ended
31, 31, December 31, December 31,
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Class A Shares:
Proceeds from shares
issued................ $ 5,159,145 $ 3,962,167 $ 1,949,725 $ 1,752,569
Dividends reinvested... 31,879 12,988 44,208 50,304
Cost of shares
redeemed.............. (4,445,588) (7,373,121) (1,381,506) (552,522)
----------- ----------- ------------ ------------
745,436 (3,397,966) 612,427 1,250,351
----------- ----------- ------------ ------------
Class B Shares:
Proceeds from shares
issued................ 205,008 755,289 (a) 287,733 1,466,601 (b)
Dividends reinvested... 10,954 8,566 (a) 20,584 11,439 (b)
Cost of shares
redeemed.............. (301,322) (30,613)(a) (321,912) (85,460)(b)
----------- ----------- ------------ ------------
(85,360) 733,242 (13,595) 1,392,580
----------- ----------- ------------ ------------
Institutional Shares:
Proceeds from shares
issued................ -- -- 5,061,236 7,579,865
Dividends reinvested... -- -- 106,736 362,424
Cost of shares
redeemed.............. -- -- (15,822,051) (17,158,922)
----------- ----------- ------------ ------------
-- -- (10,654,079) (9,216,633)
----------- ----------- ------------ ------------
Total net increase
(decrease) from capital
transactions........... $ 660,076 $(2,664,724) $(10,055,247) $ (6,573,702)
=========== =========== ============ ============
SHARE TRANSACTIONS:
Class A Shares:
Issued................. 517,875 390,602 196,037 171,828
Reinvested............. 3,243 1,281 4,459 4,932
Redeemed............... (445,945) (727,402) (138,707) (54,274)
----------- ----------- ------------ ------------
75,173 (335,519) 61,789 122,486
----------- ----------- ------------ ------------
Class B Shares:
Issued................. 20,390 74,613 (a) 28,773 144,107 (b)
Reinvested............. 1,103 844 (a) 2,077 1,117 (b)
Redeemed............... (30,797) (2,987)(a) (32,980) (8,459)(b)
----------- ----------- ------------ ------------
(9,304) 72,470 (2,130) 136,765
----------- ----------- ------------ ------------
Institutional Shares:
Issued................. -- -- 503,378 746,499
Reinvested............. -- -- 10,783 35,452
Redeemed............... -- -- (1,598,994) (1,681,956)
----------- ----------- ------------ ------------
-- -- (1,084,833) (900,005)
----------- ----------- ------------ ------------
Total net increase
(decrease) from share
transactions........... 65,869 (263,049) (1,025,174) (640,754)
=========== =========== ============ ============
</TABLE>
- ---------
(a) For the period from February 3, 1998 (commencement of operations) through
December 31, 1998.
(b) For the period from February 24, 1998 (commencement of operations) through
December 31, 1998.
Continued
199
<PAGE>
ISG FUNDS
Notes to Financial Statements, Continued
December 31, 1999
<TABLE>
<CAPTION>
Limited Term Income Fund Income Fund
-------------------------- --------------------------
Year Year Year Year
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Class A Shares:
Proceeds from shares
issued................ $ 1,801,566 $ 4,247,501 $ 1,449,926 $ 2,623,611
Dividends reinvested... 310,141 356,704 109,570 67,401
Cost of shares
redeemed.............. (2,594,506) (3,059,492) (831,537) (166,568)
------------ ------------ ------------ ------------
(482,799) 1,544,713 727,959 2,524,444
------------ ------------ ------------ ------------
Class B Shares:
Proceeds from shares
issued................ 198,387 596,723 (a) 517,448 1,212,642 (a)
Dividends reinvested... 20,418 12,488 (a) 49,280 36,013 (a)
Cost of shares
redeemed.............. (109,833) (10,782)(a) (419,705) (11,721)(a)
------------ ------------ ------------ ------------
108,972 598,429 147,023 1,236,934
------------ ------------ ------------ ------------
Institutional Shares:
Proceeds from shares
issued................ 34,775,308 17,402,254 41,059,479 13,962,624
Dividends reinvested... 1,923,696 1,814,546 1,839,165 1,919,389
Cost of shares
redeemed.............. (25,128,463) (19,236,804) (21,800,738) (10,810,920)
------------ ------------ ------------ ------------
11,570,541 (20,004) 21,097,906 5,071,093
------------ ------------ ------------ ------------
Total net increase
(decrease) from capital
transactions........... $ 11,196,714 $ 2,123,138 $ 21,972,888 $ 8,832,471
============ ============ ============ ============
SHARE TRANSACTIONS:
Class A Shares:
Issued................. 182,341 423,480 142,839 252,785
Reinvested............. 31,492 35,505 11,043 6,446
Redeemed............... (263,126) (304,615) (84,841) (15,901)
------------ ------------ ------------ ------------
(49,293) 154,370 69,041 243,330
------------ ------------ ------------ ------------
Class B Shares:
Issued................. 20,198 59,685 (a) 51,763 117,222 (a)
Reinvested............. 2,079 1,241 (a) 4,960 3,447 (a)
Redeemed............... (11,208) (1,067)(a) (42,665) (1,125)(a)
------------ ------------ ------------ ------------
11,069 59,859 14,058 119,544
------------ ------------ ------------ ------------
Institutional Shares:
Issued................. 3,531,290 1,734,900 4,146,651 1,349,996
Reinvested............. 195,622 180,765 185,712 184,826
Redeemed............... (2,561,370) (1,918,236) (2,224,431) (1,041,209)
------------ ------------ ------------ ------------
1,165,542 (2,571) 2,107,932 493,613
------------ ------------ ------------ ------------
Total net increase
(decrease) from share
transactions........... 1,127,318 211,658 2,191,031 856,487
============ ============ ============ ============
</TABLE>
- ---------
(a) For the period from February 4, 1998 (commencement of operations) through
December 31, 1998.
Continued
200
<PAGE>
ISG FUNDS
Notes to Financial Statements, Continued
December 31, 1999
<TABLE>
<CAPTION>
Equity Income Fund Large-Cap Equity Fund
-------------------------- ----------------------------------------------
Year Year Year Period Year
Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, February 28,
1999 1998 1999 1998(b) 1998
------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Class A Shares:
Proceeds from shares
issued................ $ 3,379,649 $ 3,518,621 $ 22,544,195 $ 114,374,074 $ 146,010,215
Dividends reinvested... 530,538 544,283 8,795,883 27,316,773 4,620,893
Cost of shares
redeemed.............. (1,524,157) (448,062) (11,008,678) (882,188,167) (124,793,931)
------------ ----------- ------------- ------------- -------------
2,386,030 3,614,842 20,331,400 (740,497,320) 25,837,177
------------ ----------- ------------- ------------- -------------
Class B Shares:
Proceeds from shares
issued................ 4,684,230 4,390,413 (a) 17,649,998 96,706 (c) --
Dividends reinvested... 676,079 503,786 (a) 2,255,131 -- (c) --
Cost of shares
redeemed.............. (1,485,889) (330,052)(a) (991,801) -- (c) --
------------ ----------- ------------- ------------- -------------
3,874,420 4,564,147 18,913,328 96,706 --
------------ ----------- ------------- ------------- -------------
Institutional Shares:
Proceeds from shares
issued................ 19,211,155 9,946,074 170,115,274 740,608,981 (d) --
Dividends reinvested... 6,622,704 9,267,437 69,491,623 -- (d) --
Cost of shares
redeemed.............. (18,753,846) (9,579,278) (335,885,518) (12,333,131)(d) --
------------ ----------- ------------- ------------- -------------
7,080,013 9,634,233 (96,278,621) 728,275,850 --
------------ ----------- ------------- ------------- -------------
Total net increase
(decrease) from capital
transactions........... $ 13,340,463 $17,813,222 $ (57,033,893) $ (12,124,764) $ 25,837,177
============ =========== ============= ============= =============
SHARE TRANSACTIONS:
Class A Shares:
Issued................. 333,465 313,892 791,312 4,798,706 7,924,532
Reinvested............. 55,103 55,085 319,799 1,053,720 234,089
Redeemed............... (151,536) (42,400) (381,052) (34,859,881) (6,448,544)
------------ ----------- ------------- ------------- -------------
237,032 326,577 730,059 (29,007,455) 1,710,077
------------ ----------- ------------- ------------- -------------
Class B Shares:
Issued................. 460,063 396,049 (a) 617,757 3,648 (c) --
Reinvested............. 70,381 51,347 (a) 82,757 -- (c) --
Redeemed............... (150,497) (30,243)(a) (34,493) -- (c) --
------------ ----------- ------------- ------------- -------------
379,947 417,153 666,021 3,648 --
------------ ----------- ------------- ------------- -------------
Institutional Shares:
Issued................. 1,913,482 907,955 5,915,561 29,010,448 (d) --
Reinvested............. 689,285 936,932 2,526,584 -- (d) --
Redeemed............... (1,869,974) (856,372) (11,783,682) (454,578)(d) --
------------ ----------- ------------- ------------- -------------
732,793 988,515 (3,341,537) 28,555,870 --
------------ ----------- ------------- ------------- -------------
Total net increase
(decrease) from share
transactions........... 1,349,772 1,732,245 (1,945,457) (447,937) 1,710,077
============ =========== ============= ============= =============
</TABLE>
- ---------
(a) For the period from February 3, 1998 (commencement of operations) through
December 31, 1998.
(b) For the period from March 1, 1998 through December 31, 1998.
(c) For the period from December 15, 1998 (commencement of operations) through
December 31, 1998.
(d) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
Continued
201
<PAGE>
ISG FUNDS
Notes to Financial Statements, Continued
December 31, 1999
<TABLE>
<CAPTION>
Mid-Cap
Capital Growth Fund Fund
-------------------------- ------------
Year Year Period
Ended Ended Ended
December 31, December 31, December 31,
1999 1998 1999(b)
------------ ------------ ------------
<S> <C> <C> <C>
CAPITAL TRANSACTIONS:
Class A Shares:
Proceeds from shares issued...... $ 6,306,757 $ 3,357,975 $ 1,819,641
Dividends reinvested............. 1,521,154 629,861 --
Cost of shares redeemed.......... (2,148,634) (390,437) (177,224)
------------ ------------ -----------
5,679,277 3,597,399 1,642,417
------------ ------------ -----------
Class B Shares:
Proceeds from shares issued...... 4,808,425 2,770,518 (a) 1,737,688
Dividends reinvested............. 1,079,288 321,359 (a) --
Cost of shares redeemed.......... (938,520) (255,741)(a) (27,934)
------------ ------------ -----------
4,949,193 2,836,136 1,709,754
------------ ------------ -----------
Institutional Shares:
Proceeds from shares issued...... 79,575,275 14,229,454 27,414,442
Dividends reinvested............. 37,171,459 25,469,627 --
Cost of shares redeemed.......... (53,058,823) (25,728,858) (729,010)
------------ ------------ -----------
63,687,911 13,970,223 26,685,432
------------ ------------ -----------
Total net increase (decrease) from
capital transactions............. $ 74,316,381 $ 20,403,758 $30,037,603
============ ============ ===========
SHARE TRANSACTIONS:
Class A Shares:
Issued........................... 427,939 238,241 150,301
Reinvested....................... 110,576 48,319 --
Redeemed......................... (147,073) (27,381) (14,300)
------------ ------------ -----------
391,442 259,179 136,001
------------ ------------ -----------
Class B Shares:
Issued........................... 332,521 198,308 (a) 128,198
Reinvested....................... 80,786 25,125 (a) --
Redeemed......................... (65,389) (18,450)(a) (2,158)
------------ ------------ -----------
347,918 204,983 126,040
------------ ------------ -----------
Institutional Shares:
Issued........................... 5,481,834 1,020,991 2,193,288
Reinvested....................... 2,719,184 1,969,036 --
Redeemed......................... (3,581,284) (1,842,736) (52,320)
------------ ------------ -----------
4,619,734 1,147,291 2,140,968
------------ ------------ -----------
Total net increase (decrease) from
share transactions............... 5,359,094 1,611,453 2,403,009
============ ============ ===========
</TABLE>
- ---------
(a) For the period from February 5, 1998 (commencement of operations) through
December 31, 1998.
(b) For the period from May 4, 1999 (commencement of operations) through
December 31, 1999.
Continued
202
<PAGE>
ISG FUNDS
Notes to Financial Statements, Continued
December 31, 1999
<TABLE>
<CAPTION>
Small-Cap Opportunity Fund International Equity Fund
--------------------------------------------- ----------------------------------------------
Year Period Year Year Period Period
Ended Ended Ended Ended Ended Ended
December 31, December 31, February 28, December 31, December 31, February 28,
1999 1998(a) 1998 1999 1998(a) 1998(d)
------------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Class A Shares:
Proceeds from shares
issued................ $ 197,182,879 $ 77,866,066 $ 47,226,667 $ 926,102 $ 7,649,448 $26,266,042
Dividends reinvested... -- 4,840,922 10,900,651 -- 48,021 17,816
Cost of shares
redeemed.............. (201,235,880) (163,322,368) (31,615,686) (185,147) (32,664,626) (866,338)
------------- ------------- ------------ ----------- ------------ -----------
(4,053,001) (80,615,380) 26,511,632 740,955 (24,967,157) 25,417,520
------------- ------------- ------------ ----------- ------------ -----------
Class B Shares:
Proceeds from shares
issued................ 366,947 8,011 (b) -- 206,388 (e) -- --
Dividends reinvested... -- -- (b) -- -- (e) -- --
Cost of shares
redeemed.............. (14,655) -- (b) -- (15)(e) -- --
------------- ------------- ------------ ----------- ------------ -----------
352,292 8,011 -- 206,373 -- --
------------- ------------- ------------ ----------- ------------ -----------
Institutional Shares:
Proceeds from shares
issued................ 20,094,241 89,048,532 (c) -- 16,408,255 26,755,898 (c) --
Dividends reinvested... -- -- (c) -- -- -- (c) --
Cost of shares
redeemed.............. (36,468,194) (849,359)(c) -- (6,232,440) (180,925)(c) --
------------- ------------- ------------ ----------- ------------ -----------
(16,373,953) 88,199,173 -- 10,175,815 26,574,973 --
------------- ------------- ------------ ----------- ------------ -----------
Total net increase
(decrease) from capital
transactions........... $ (20,074,662) $ 7,591,804 $ 26,511,632 $11,123,143 $ 1,607,816 $25,417,520
============= ============= ============ =========== ============ ===========
SHARE TRANSACTIONS:
Class A Shares:
Issued................. 15,829,005 6,023,495 3,050,510 80,379 693,655 2,623,705
Reinvested............. -- 360,456 759,627 -- 4,764 1,867
Redeemed............... (16,085,105) (13,280,164) (2,003,613) (16,714) (3,221,732) (88,124)
------------- ------------- ------------ ----------- ------------ -----------
(256,100) (6,896,213) 1,806,524 63,665 (2,523,313) 2,537,448
------------- ------------- ------------ ----------- ------------ -----------
Class B Shares:
Issued................. 29,298 647 (b) -- 17,224 (e) -- --
Reinvested............. -- -- (b) -- -- (e) -- --
Redeemed............... (1,154) -- (b) -- (1)(e) -- --
------------- ------------- ------------ ----------- ------------ -----------
28,144 647 -- 17,223 -- --
------------- ------------- ------------ ----------- ------------ -----------
Institutional Shares:
Issued................. 1,614,189 7,515,579 (c) -- 1,371,304 2,661,813 (c) --
Reinvested............. -- -- (c) -- -- -- (c) --
Redeemed............... (2,932,950) (69,536)(c) -- (541,466) (17,292)(c) --
------------- ------------- ------------ ----------- ------------ -----------
(1,318,761) 7,446,043 -- 829,838 2,644,521 --
------------- ------------- ------------ ----------- ------------ -----------
Total net increase
(decrease) from share
transactions........... (1,546,717) 550,477 1,806,524 910,726 121,208 2,537,448
============= ============= ============ =========== ============ ===========
</TABLE>
- ---------
(a) For the period from March 1, 1998 through December 31, 1998.
(b) For the period from December 21, 1998 (commencement of operations) through
December 31, 1998.
(c) For the period from December 14, 1998 (commencement of operations) through
December 31, 1998.
(d) For the period from August 15, 1997 (commencement of operations) through
February 28, 1998.
(e) For the period from February 2, 1999 (commencement of operations) through
December 31, 1999.
Continued
203
<PAGE>
ISG FUNDS
Notes to Financial Statements, Continued
December 31, 1999
<TABLE>
<CAPTION>
Moderate Aggressive
Current Income Growth & Income Growth & Income Growth Growth
Portfolio Portfolio Portfolio Portfolio Portfolio
-------------- --------------- --------------- ------------ ------------
Period Period Period Period Period
Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31,
1999(c) 1999(e) 1999(h) 1999(l) 1999(m)
-------------- --------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Class A Shares:
Proceeds from shares
issued................ $ 3,191 (a) $ 170,793 (d) $ 542,061 (g) $ 161,940 (j) $ 412,812
Dividends reinvested... 80 (a) 352 (d) 2,321 (g) 843 (j) 1,148
Cost of shares
redeemed.............. -- (a) (45)(d) (31,313)(g) (8,906)(j) (8,292)
--------- ----------- ----------- ----------- -----------
3,271 171,100 513,069 153,877 405,668
--------- ----------- ----------- ----------- -----------
Class B Shares:
Proceeds from shares
issued................ 60,554 (b) 1,027,370 1,974,771 987,524 (k) 503,807 (h)
Dividends reinvested... 812 (b) 7,844 4,350 5,544 (k) 1,123 (h)
Cost of shares
redeemed.............. (60,225)(b) (99,913) (317,670) (54,455)(k) (116,920)(h)
--------- ----------- ----------- ----------- -----------
1,141 935,301 1,661,451 938,613 388,010
--------- ----------- ----------- ----------- -----------
Institutional Shares:
Proceeds from shares
issued................ 1,050,892 27,551,659 (f) 88,892,920 (i) 12,018,934 21,606,213 (e)
Dividends reinvested... 16,380 93,399 (f) 140,079 (i) 40,856 36,977 (e)
Cost of shares
redeemed.............. (398,048) (6,667,363)(f) (6,248,087)(i) (1,369,783) (4,903,449)(e)
--------- ----------- ----------- ----------- -----------
669,224 20,977,695 82,784,912 10,690,007 16,739,741
--------- ----------- ----------- ----------- -----------
Total net increase (de-
crease) from capital
transactions........... $ 673,636 $22,084,096 $84,959,432 $11,782,497 $17,533,419
========= =========== =========== =========== ===========
SHARE TRANSACTIONS:
Class A Shares:
Issued................. 326 (a) 17,266 (d) 53,841 (g) 16,355 (j) 39,622
Reinvested............. 8 (a) 36 (d) 231 (g) 85 (j) 110
Redeemed............... -- (a) (4)(d) (3,024)(g) (905)(j) (774)
--------- ----------- ----------- ----------- -----------
334 17,298 51,048 15,535 38,958
--------- ----------- ----------- ----------- -----------
Class B Shares:
Issued................. 6,132 (b) 103,772 195,266 99,270 (k) 50,632 (h)
Reinvested............. 84 (b) 796 434 561 (k) 108 (h)
Redeemed............... (6,215)(b) (10,105) (31,410) (5,402)(k) (10,979)(h)
--------- ----------- ----------- ----------- -----------
1 94,463 164,290 94,429 39,761
--------- ----------- ----------- ----------- -----------
Institutional Shares:
Issued................. 108,215 2,817,833 (f) 8,839,986 (i) 1,205,058 2,101,100 (e)
Reinvested............. 1,700 9,421 (f) 13,971 (i) 4,120 3,539 (e)
Redeemed............... (41,652) (684,204)(f) (603,885)(i) (137,694) (469,306)(e)
--------- ----------- ----------- ----------- -----------
68,263 2,143,050 8,250,072 1,071,484 1,635,333
--------- ----------- ----------- ----------- -----------
Total net increase
(decrease) from share
transactions........... 68,598 2,254,811 8,465,410 1,181,448 1,714,052
========= =========== =========== =========== ===========
</TABLE>
Continued
204
<PAGE>
ISG FUNDS
Notes to Financial Statements, Continued
December 31, 1999
- ---------
(a) For the period from February 23, 1999 (commencement of operations) through
December 31, 1999.
(b) For the period from March 17, 1999 (commencement of operations) through
December 31, 1999.
(c) For the period from January 25, 1999 (commencement of operations) through
December 31, 1999.
(d) For the period from February 9, 1999 (commencement of operations) through
December 31, 1999.
(e) For the period from January 28, 1999 (commencement of operations) through
December 31, 1999.
(f) For the period from February 10, 1999 (commencement of operations) through
December 31, 1999.
(g) For the period from March 8, 1999 (commencement of operations) through
December 31, 1999.
(h) For the period from January 27, 1999 (commencement of operations) through
December 31, 1999.
(i) For the period from February 8, 1999 (commencement of operations) through
December 31, 1999.
(j) For the period from February 11, 1999 (commencement of operations) through
December 31, 1999.
(k) For the period from February 15, 1999 (commencement of operations) through
December 31, 1999.
(l) For the period from February 1, 1999 (commencement of operations) through
December 31, 1999.
(m) For the period from January 13, 1999 (commencement of operations) through
December 31, 1999.
Note 7 -- Common Trust Conversion
On September 10, 1999 the Municipal Income Fund issued shares to acquire all
of the assets and liabilities of a certain common trust fund of First American
National Bank. The following is a summary of shares issued, net assets
converted, net asset value per share and unrealized appreciation as of the
conversion date (amount in thousands, except per share amounts):
<TABLE>
<CAPTION>
Net Asset
Net Value Per Unrealized
Shares Assets Share Appreciation
------ ------- --------- ------------
<S> <C> <C> <C> <C>
Municipal Income Fund ................... 1,517 $15,439 $10.18 $854
</TABLE>
205
<PAGE>
Independent Auditors' Report
The Shareholders and Board of Directors of
The Infinity Mutual Funds, Inc. --
ISG Funds:
We have audited the accompanying statements of assets and liabilities of The
Infinity Mutual Funds, Inc. -- ISG Funds (ISG Treasury Money Market Fund, ISG
Prime Money Market Fund, ISG Tax-Exempt Money Market Fund, ISG Limited Term
U.S. Government Fund, ISG Government Income Fund, ISG Municipal Income Fund,
ISG Limited Term Tennessee Tax-Exempt Fund, ISG Tennessee Tax-Exempt Fund, ISG
Limited Term Income Fund, ISG Income Fund, ISG Equity Income Fund, ISG Large-
Cap Equity Fund, ISG Capital Growth Fund, ISG Mid-Cap Fund, ISG Small-Cap
Opportunity Fund, ISG International Equity Fund, ISG Current Income Portfolio,
ISG Moderate Growth & Income Portfolio, ISG Growth & Income Portfolio, ISG
Growth Portfolio, and ISG Aggressive Growth Portfolio) including the schedules
of portfolio investments, as of December 31, 1999, and the related statements
of operations, statements of changes in net assets and the financial highlights
for each of the periods indicated herein. These financial statements and the
financial highlights are the responsibility of the management of The Infinty
Mutual Funds, Inc. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included verification of securities
owned as of December 31, 1999 by examination, correspondence with brokers and
other appropriate audit procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the aforementioned funds comprising The Infinity Mutual Funds, Inc. -- ISG
Funds as of December 31, 1999, the results of their operations, the changes in
their net assets and the financial highlights for each of the periods indicated
herein, in conformity with generally accepted accounting principles.
KPMG LLP
Columbus, Ohio
February 22, 2000
206
<PAGE>
ISG FUNDS
SUPPLEMENTAL INFORMATION
RESULTS OF SHAREHOLDER MEETING
(UNAUDITED)
Proxy:
On February 11, 2000, a Special Meeting of Shareholders of the ISG Funds was
held to consider various proposals. The actual vote tabulations for the various
issues are as follows:
Issue 1:
To approve an Agreement and Plan of Reorganization pursuant to which each ISG
Fund will transfer all of its assets to a corresponding AmSouth Fund as listed
below in exchange for Trust, Class A and Class B shares (collectively,
"Shares") of such AmSouth Fund and the assumption by such AmSouth Fund of all
of the liabilities of such ISG Fund, followed by the liquidation of such ISG
Fund, the distribution of Shares of such AmSouth Fund to the shareholders of
such ISG Fund and the dissolution of The Infinity Mutual Funds, Inc. (the
"Company"):
<TABLE>
<CAPTION>
ISG Funds AmSouth Funds
- --------- -------------
<S> <C>
ISG Treasury Money
Market Fund AmSouth Treasury Reserve Money Market Fund
ISG Prime Money Market
Fund AmSouth Prime Money Market Fund
ISG Tax-Exempt Money
Market Fund AmSouth Tax-Exempt Money Market Fund
ISG Limited Term U.S.
Government Fund AmSouth Limited Term U.S. Government Fund
ISG Government Income
Fund AmSouth Government Income Fund
ISG Municipal Income
Fund AmSouth Municipal Bond Fund
ISG Limited Term
Tennessee Tax-Exempt
Fund AmSouth Limited Term Tennessee Tax-Exempt Fund
ISG Tennessee Tax-Exempt
Fund AmSouth Tennessee Tax-Exempt Fund
ISG Limited Term Income
Fund AmSouth Limited Term Bond Fund
ISG Income Fund AmSouth Bond Fund
ISG Equity Income Fund AmSouth Equity Income Fund
ISG Large-Cap Equity
Fund AmSouth Large Cap Fund
ISG Capital Growth Fund AmSouth Capital Growth Fund
ISG Mid-Cap Fund AmSouth Mid Cap Fund
ISG Small-Cap
Opportunity Fund AmSouth Small Cap Fund
ISG International Equity
Fund AmSouth International Equity Fund
ISG Current Income
Portfolio AmSouth Strategic Portfolios: Current Income Portfolio
ISG Moderate Growth &
Income Portfolio AmSouth Strategic Portfolios: Moderate Growth and Income Portfolio
ISG Growth & Income
Portfolio AmSouth Strategic Portfolios: Growth and Income Portfolio
ISG Growth Portfolio AmSouth Strategic Portfolios: Growth Portfolio
ISG Aggressive Growth
Portfolio AmSouth Strategic Portfolios: Aggressive Growth Portfolio
</TABLE>
<TABLE>
<CAPTION>
Broker
Fund Affirmative Against Abstain Non-Vote
- ---- ----------- --------- --------- -----------
<S> <C> <C> <C> <C>
ISG Treasury Money Market Fund.... 324,365,366 249,081 731,601 17,984,832
ISG Prime Money Market Fund....... 395,408,792 2,281,002 3,023,296 284,249,402
ISG Tax-Exempt Money Market Fund.. 105,017,635 10,826 90,196 4,494,175
ISG Limited Term U.S. Government
Fund............................. 4,576,882 -- -- 98,706
ISG Government Income Fund........ 37,163,645 -- 520 156,537
ISG Municipal Income Fund......... 95,210 -- -- 44,623
ISG Limited Term Tennessee Tax-
Exempt Fund...................... 1,801,380 -- -- 83,054
ISG Tennessee Tax-Exempt Fund..... 8,380,667 -- 5,691 202,884
ISG Limited Term Income Fund...... 9,914,345 -- 2,137 225,445
ISG Income Fund................... 9,530,740 1,482 531 113,683
ISG Equity Income Fund............ 8,466,867 8,300 1,872 899,055
ISG Large-Cap Equity Fund......... 23,369,532 26,936 11,996 2,093,584
ISG Capital Growth Fund........... 14,532,224 180 4,557 647,558
ISG Mid-Cap Fund.................. 1,556,472 162 -- 137,506
ISG Small-Cap Opportunity Fund.... 6,881,983 222,291 -- 463,883
ISG International Equity Fund..... 1,885,740 -- -- 95,566
ISG Current Income Portfolio...... 41,232 -- -- 24,772
ISG Moderate Growth & Income
Portfolio........................ 1,818,026 -- -- 381,659
ISG Growth & Income Portfolio..... 6,966,034 -- 687 1,479,557
ISG Growth Portfolio.............. 638,582 -- -- 475,040
ISG Aggressive Growth Portfolio... 993,349 -- -- 729,604
</TABLE>
<PAGE>
Issue 2:
To approve a new Investment Advisory Agreement between the Company, with
respect to the ISG Funds, and First American National Bank, the terms of which
are identical in all material respects to the prior investment advisory
agreement for the ISG Funds.
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
- ---- ----------- --------- ---------
<S> <C> <C> <C>
ISG Treasury Money Market Fund................. 342,409,541 236,734 684,605
ISG Prime Money Market Fund.................... 679,779,284 2,053,418 3,129,790
ISG Tax-Exempt Money Market Fund............... 109,522,181 10,826 79,825
ISG Limited Term U.S. Government Fund.......... 4,674,000 -- 1,588
ISG Government Income Fund..................... 37,320,182 -- 520
ISG Municipal Income Fund...................... 139,833 -- --
ISG Limited Term Tennessee Tax-Exempt Fund..... 1,884,434 -- --
ISG Tennessee Tax-Exempt Fund.................. 8,588,532 -- 710
ISG Limited Term Income Fund................... 10,139,790 -- 2,137
ISG Income Fund................................ 9,644,954 1,482 --
ISG Equity Income Fund......................... 9,365,922 8,300 1,872
ISG Large-Cap Equity Fund...................... 25,463,438 26,103 12,507
ISG Capital Growth Fund........................ 15,179,534 8 4,977
ISG Mid-Cap Fund............................... 1,693,978 162 --
ISG Small-Cap Opportunity Fund................. 7,345,651 222,506 --
ISG International Equity Fund.................. 1,981,306 -- --
ISG Current Income Portfolio................... 66,004 -- --
ISG Moderate Growth & Income Portfolio......... 2,199,685 -- --
ISG Growth & Income Portfolio.................. 8,445,591 -- 687
ISG Growth Portfolio........................... 1,113,622 -- --
ISG Aggressive Growth Portfolio................ 1,722,953 -- --
Issue 3(A):
To approve a new Sub-Investment Advisory Agreement between Lazard Asset
Management, the present sub-adviser to the ISG International Equity Fund, and
First American National Bank, on behalf of the ISG International Equity Fund,
the terms of which are identical in all material respects to the prior sub-
advisory agreement for ISG International Equity Fund.
<CAPTION>
Fund Affirmative Against Abstain
- ---- ----------- --------- ---------
<S> <C> <C> <C>
ISG International Equity Fund.................. 1,981,306 -- --
Issue 3(B):
To approve a new Sub-Investment Advisory Agreement between Bennett Lawrence
Management, LLC, the present sub-adviser to the ISG Mid-Cap Fund, and First
American National Bank, on behalf of the ISG Mid-Cap Fund, the terms of which
are identical in all material respects to the prior sub-advisory agreement for
ISG Mid-Cap Fund.
<CAPTION>
Fund Affirmative Against Abstain
- ---- ----------- --------- ---------
<S> <C> <C> <C>
ISG Mid-Cap Fund............................... 1,693,978 162 --
Issue 3(C):
To approve a new Sub-Investment Advisory Agreement between Womack Asset
Management, Inc., the present sub-adviser to the ISG Small-Cap Opportunity
Fund, and First American National Bank, on behalf of the ISG Small-Cap
Opportunity Fund, the terms of which are identical in all material respects to
the prior sub-advisory agreement for ISG Small-Cap Opportunity Fund.
<CAPTION>
Fund Affirmative Against Abstain
- ---- ----------- --------- ---------
<S> <C> <C> <C>
ISG Small-Cap Opportunity Fund................. 7,567,453 704 --
</TABLE>
<PAGE>
ISG FUNDS
3435 Stelzer Road . Columbus, OH 43219
INVESTMENT ADVISER/CUSTODIAN
First American National Bank
315 Deaderick Street . Nashville, TN 37237-0401
ADMINISTRATOR
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road . Columbus, OH 43219
DISTRIBUTOR
BISYS Fund Services Limited Partnership
3435 Stelzer Road . Columbus, OH 43219
TRANSFER AGENT &
DIVIDEND DISBURSING AGENT
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road . Columbus, OH 43219
BISYS Fund Services Limited Partnership is the Funds' distributor and is
unaffiliated with First American National Bank, the Funds' adviser.
Investments in the Funds are neither guaranteed by nor obligations of First
American National Bank or any other bank and are not insured by the FDIC or any
other government agency. Investments in mutual funds involve risk, including the
possible loss of principal. This material must be preceded or accompanied by a
current prospectus.
<PAGE>
BULK RATE
U.S. POSTAGE
PAID
LANCASTER, PA
PERMIT 1793
ISG-0012-0200
