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Rule 497(c)
File No. 811-6082
STATEMENT OF ADDITIONAL INFORMATION
THE RIVERFRONT FUNDS, INC.
THE RIVERFRONT U.S. GOVERNMENT SECURITIES MONEY MARKET FUND
THE RIVERFRONT U.S. GOVERNMENT INCOME FUND
THE RIVERFRONT INCOME EQUITY FUND
THE RIVERFRONT OHIO TAX-FREE BOND FUND
THE RIVERFRONT FLEXIBLE GROWTH FUND
THE RIVERFRONT STOCK APPRECIATION FUND
April 30, 1996
This Statement of Additional Information is not a prospectus but
relates to, and should be read in conjunction with the prospectuses (the
"Prospectuses"), of The Riverfront U.S. Government Securities Money Market (the
"Money Market Fund"), The Riverfront U.S. Government Income Fund (the "Income
Fund"), The Riverfront Income Equity Fund (the "Income Equity Fund"), The
Riverfront Ohio Tax-Free Bond Fund (the "Ohio Tax-Free Fund"), The Riverfront
Stock Appreciation Fund (the "Stock Appreciation Fund") and The Riverfront
Flexible Growth Fund (the "Flexible Growth Fund") (the Money Market Fund, the
Income Fund, the Income Equity Fund, the Ohio Tax-Free Fund, the Stock
Appreciation Fund and the Flexible Growth Fund are hereinafter collectively
referred to as the "Portfolios" and individually as a "Portfolio") dated the
date hereof. The Portfolios are currently six series or portfolios of The
Riverfront Funds, Inc. (the "Company"). On January 9, 1995, the Ohio Tax-Free
Fund changed its name from The Riverfront Municipal Bond Fund to The Riverfront
Ohio Tax-Free Bond Fund. This Statement of Additional Information is
incorporated in its entirety into the Prospectuses. A copy of the Prospectuses
may be obtained from BISYS Fund Services Limited Partnership, 3435 Stelzer Road,
Columbus, Ohio 43219.
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TABLE OF CONTENTS
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THE COMPANY AND ITS PORTFOLIOS......................................... B-1
INVESTMENT OBJECTIVES AND POLICIES..................................... B-2
DIVIDENDS AND TAXES.................................................... B-23
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION......................... B-30
VALUATION OF SECURITIES................................................ B-30
DIRECTORS AND OFFICERS................................................. B-33
MANAGEMENT OF THE PORTFOLIOS........................................... B-35
SECURITIES TRANSACTIONS................................................ B-41
ADMINISTRATOR.......................................................... B-44
DISTRIBUTOR............................................................ B-46
DISTRIBUTION PLANS..................................................... B-47
CAPITAL STOCK.......................................................... B-49
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS......................... B-50
ADDITIONAL INFORMATION................................................. B-54
FINANCIAL STATEMENTS................................................... B-59
APPENDIX .............................................................. A-1
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THE COMPANY AND ITS PORTFOLIOS
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The Riverfront Funds, Inc. (the "Company") is an open-end management
investment company, commonly known as a mutual fund, which currently issues six
series of shares of capital stock which are described in this Statement of
Additional Information (the "Portfolios"). Each Portfolio of the Company, other
than the Ohio Tax-Free Fund, is diversified. The Ohio Tax-Free Fund is a
non-diversified Portfolio.
The Company was incorporated in Maryland on March 27, 1990. The
Provident Bank ("Provident") serves as investment adviser, either directly or
through a subadviser, to each Portfolio, and BISYS Fund Services Limited
Partnership (the "Distributor") serves as Administrator and Distributor.
Provident also serves as custodian and transfer agent for each of the
Portfolios, and provides certain fund accounting and recordkeeping services for
the Company. BISYS Fund Services Ohio, Inc., an affiliate of the Distributor,
provides sub-transfer agency services for the Investor B Shares of each
Portfolio. DePrince, Race & Zollo, Inc. ("DRZ") serves as the subadviser to the
Income Equity Fund. James Investment Research, Inc. ("JIR") serves as the
subadviser to the Flexible Growth Fund.
As of September 30, 1995, pursuant to an Agreement and Plan of
Reorganization and Liquidation with MIM Mutual Funds, Inc. ("MIM"), the Company
acquired all of the assets and liabilities of MIM as follows: the Money Market
Fund acquired all of the assets and liabilities of the MIM Money Market Fund;
(b) the Income Equity Fund acquired all of the assets and liabilities of the MIM
Bond Income Fund, the MIM Stock Income Fund and the AFA Equity Income Fund; and
(c) the Stock Appreciation Fund acquired all of the assets and liabilities of
the MIM Stock Growth Fund and the MIM Stock Appreciation Fund (collectively, the
"Reorganization"). In exchange for such assets and liabilities, the respective
Portfolio of the Company issued a number of its Investor A shares equal in value
to the net assets of the corresponding MIM Fund acquired in the Reorganization.
For accounting and performance purposes, the MIM Stock Appreciation Fund is
considered to be the successor of the Stock Appreciation Fund; therefore, the
performance and financial information included in this Statement of Additional
Information prior to September 30, 1995, relates to the operations of the MIM
Stock Appreciation Fund prior to the Reorganization.
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The essential information about the Company and its Portfolios is
contained in the Prospectuses. This Statement of Additional Information provides
additional information about the Company and each of the Portfolios that may be
of interest to investors.
Much of the information contained in this Statement of Additional
Information expands upon subjects discussed in the Prospectuses of the
Portfolios. Capitalized terms not defined herein are defined in such
Prospectuses. No investment in shares of a Portfolio should be made without
first reading such Portfolio's Prospectus.
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INVESTMENT OBJECTIVES AND POLICIES
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THE RIVERFRONT U.S. GOVERNMENT SECURITIES MONEY MARKET FUND
The Riverfront U.S. Government Securities Money Market Fund (the "Money
Market Fund") is a series of shares of the Company which seeks current income
from U.S. Government short-term securities while preserving capital and
maintaining liquidity.
The Money Market Fund is designed for investors who wish to keep
temporary cash balances in a fund invested in short-term securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
THE RIVERFRONT U.S. GOVERNMENT INCOME FUND
The Riverfront U.S. Government Income Fund (the "Income Fund") seeks a
high level of current income, consistent with preservation of capital, by
investing primarily in securities issued or guaranteed by the U.S. Government,
its agencies and instrumentalities, and in high quality fixed rate and
adjustable rate mortgage-backed securities and other asset-backed securities.
The Income Fund intends to invest in securities with dollar-weighted average
durations of between three and seven years. The dollar-weighted average life of
the Income Fund's securities is expected to be in the range of four to ten
years.
The Income Fund is designed for investors seeking to provide for
near-term income needs by investing in a fund which seeks to provide higher
returns than those offered by certificates of deposits or U.S. Government money
market funds.
THE RIVERFRONT INCOME EQUITY FUND
The Riverfront Income Equity Fund (the "Income Equity Fund") seeks a
high level of investment income, with capital appreciation
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as a secondary objective, through investment primarily in income-producing
equity securities of U.S. issuers. To provide investment advisory services to
the Income Equity Fund, Provident has entered into a sub-investment advisory
agreement with SunBank.
The Income Equity Fund is designed for investors seeking to invest for
retirement, educational and other long-term needs.
THE RIVERFRONT OHIO TAX-FREE BOND FUND
The Riverfront Ohio Tax-Free Bond Fund (the "Ohio Tax-Free Fund") seeks
as its investment objectives (1) income which is exempt from federal income tax
and Ohio state income taxes and (2) preservation of capital.
The Ohio Tax-Free Fund is designed for investors seeking to invest in a
fund which generates income exempt from federal and Ohio state income taxes and
is not a preference item for individuals for purposes of the federal alternative
minimum tax.
THE RIVERFRONT STOCK APPRECIATION FUND
The Riverfront Stock Appreciation Fund (the "Stock Appreciation Fund")
seeks as its investment objective capital growth.
The Stock Appreciation Fund is designed for investors who wish to seek
growth of capital.
THE RIVERFRONT FLEXIBLE GROWTH FUND
The Riverfront Flexible Growth Fund (the "Flexible Growth Fund") seeks
as its primary investment objective long-term growth of capital with some
current income as a secondary objective. To provide investment advisory services
to the Flexible Growth Fund, Provident has entered into a sub-investment
advisory agreement with JIR.
The Flexible Growth Fund is designed for investors seeking to invest in
a fund which generates long-term growth of capital with some current income.
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
The following policies supplement the investment objectives and
policies of each Portfolio as set forth in the Prospectus for such Portfolio.
Bank Obligations. Each Portfolio may invest in bank obligations such as
bankers' acceptances, certificates of deposit, and demand and time deposits.
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Bankers' acceptances are negotiable drafts or bills of exchange
typically drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Bankers' acceptances invested in by such Portfolios will be those guaranteed by
U.S. commercial banks having, at the time of investment, capital, surplus, and
undivided profits in excess of $1,500,000,000 (as of the date of their most
recently published financial statements).
Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return. Certificates of deposit
will be those of domestic and foreign branches of U.S. banks which are members
of the Federal Reserve System or the Federal Deposit Insurance Corporation, if
at the time of investment the depository institution has capital, surplus, and
undivided profits in excess of $1,500,000,000 (as of the date of its most
recently published financial statements).
The Income Fund, the Income Equity Fund, the Ohio Tax-Free Fund and the
Stock Appreciation Fund may also each invest in Eurodollar Certificates of
Deposit, which are U.S. dollar denominated certificates of deposit issued by
offices of foreign and domestic banks located outside the United States
("ECDs"); and Yankee Certificates of Deposit, which are certificates of deposit
issued by a U.S. branch of a foreign bank denominated in U.S.
dollars and held in the United States.
ECDs may be general obligations of the parent bank in addition to the
issuing branch, or may be limited by the terms of a specific obligation and by
government regulation. Payment of interest and principal upon these obligations
may also be affected by governmental action in the country of domicile of the
branch (generally referred to as sovereign risk). In addition, evidences of
ownership of such obligations may be held outside the U.S. and a Portfolio may
be subject to the risks associated with the holding of such property overseas.
Examples of governmental actions would be the imposition of currency controls,
interest limitations, withholding taxes, seizure of assets or the declaration of
a moratorium. Various provisions of federal law governing domestic branches do
not apply to foreign branches of domestic or foreign banks.
Commercial Paper. Commercial paper consists of unsecured promissory
notes issued by corporations. Except as noted below with respect to variable
amount master demand notes, issues of commercial paper normally have maturities
of less than nine months and fixed rates of return.
The Income Fund, the Income Equity Fund, the Ohio Tax-Free Fund, the
Stock Appreciation Fund and the Flexible Growth Fund may
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invest in commercial paper which is rated by applicable nationally recognized
statistical rating organizations ("NRSROs") in the highest rating category, or
if unrated, is deemed by that Portfolio's investment adviser to be of comparable
quality to commercial paper so rated.
Variable Amount Master Demand Notes. Variable amount master demand
notes, in which the Income Fund, the Income Equity Fund, the Ohio Tax-Free Fund,
the Stock Appreciation Fund and the Flexible Growth Fund may invest, are
unsecured demand notes that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate according to the terms of
the instrument. Because master demand notes are direct lending arrangements
between a Portfolio and the issuer, they are not normally traded. Although there
is no secondary market in the notes, a Portfolio may demand payment of principal
and accrued interest at any time within 30 days. While such notes are not
typically rated by credit rating agencies, issuers of variable amount master
demand notes (which are normally manufacturing, retail, financial and other
business concerns), must satisfy the same criteria as set forth above for
commercial paper for such Portfolio. The Portfolio's investment adviser or
sub-adviser, as the case may be, will consider the earning power, cash flow, and
other liquidity ratios of the issuers of such notes and will continuously
monitor their financial status and ability to meet payment on demand. In
determining average weighted portfolio maturity, a variable amount master demand
note will be deemed to have a maturity equal to the longer of the period of time
remaining until the next interest rate adjustment or the period of time
remaining until the principal amount can be recovered from the issuer through
demand.
Foreign Investment. Investments in securities issued by foreign
branches of U.S. banks, foreign banks, or other foreign issuers, including ADRs,
may subject a Portfolio to investment risks that differ in some respects from
those related to investment in obligations of U.S. domestic issuers or in U.S.
securities markets. Such risks include future adverse political and economic
developments, possible seizure, nationalization, or expropriation of foreign
investments, less stringent disclosure requirements, the possible establishment
of exchange controls or taxation at the source, or the adoption of other foreign
governmental restrictions. The Income Equity Fund, the Stock Appreciation Fund
and the Flexible Growth Fund will acquire such securities only when such
Portfolio's investment adviser or sub-adviser, as the case may be, believes the
risks associated with such investments are minimal.
U.S. Government Obligations. Each Portfolio may invest in obligations
issued or guaranteed as to principal and interest by the U.S. Government or its
agencies or instrumentalities. Obligations of certain agencies and
instrumentalities of the U.S. Government are supported by the full faith and
credit of the U.S.
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Treasury; others are supported by the right of the issuer to borrow from the
Treasury; others are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government would provide financial support to U.S. Government-sponsored
agencies or instrumentalities if it is not obligated to do so by law.
Exempt Securities. As stated in the Prospectus of the Ohio Tax-Free
Fund, under normal market conditions at least 80% of the net assets of the Ohio
Tax-Free Fund will be invested in bonds, notes, debentures, commercial paper and
other obligations of the State of Ohio or any county, municipality, political
subdivision, instrumentality, agency or authority thereof (collectively,
"agencies"), the interest on which, in the opinion of bond counsel to the
issuer, is exempt from federal income tax, is not a preference item for purposes
of the federal alternative minimum tax and is exempt from Ohio state income tax
("Ohio Exempt Securities") and in debt obligations issued by the Government of
Puerto Rico and such other governmental entities whose debt obligations, either
by law or by treaty, generate interest income which is exempt from federal
income tax, is not a preference item for individuals for the federal alternative
minimum tax, and is exempt from Ohio state income taxes (together with Ohio
Exempt Securities called "Exempt Securities"). Under normal market conditions,
at least 65% of the total assets of the Ohio Tax-Free Fund will be invested in
Ohio Exempt Securities.
Exempt Securities include debt obligations issued by governmental
entities to obtain funds for various public purposes, such as the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to other
public institutions and facilities. Private activity bonds that are issued by or
on behalf of public authorities to finance various privately-operated facilities
are included within the term Exempt Securities if the interest paid thereon is
exempt from federal income tax and is not treated as a preference item for
purposes of the federal alternative minimum tax. However, if such interest is
subject to the federal alternative minimum tax, such securities will not be
considered as Exempt Securities for purposes of complying with the Ohio Tax-Free
Fund's 80% required investment in Exempt Securities as described above.
Among other types of Exempt Securities, the Ohio Tax-Free Fund may
purchase short-term General Obligation Notes, Tax Anticipation Notes, Bond
Anticipation Notes, Revenue Anticipation Notes, Project Notes, Tax-Exempt
Commercial Paper, Construction Loan Notes and other forms of short-term
tax-exempt loans. Such instruments are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements or
other revenues. In
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addition, the Ohio Tax-Free Fund may invest in other types of tax-exempt
instruments, such as municipal bonds, private activity bonds, and pollution
control bonds.
Project Notes are issued by a state or local housing agency and are
sold by the Department of Housing and Urban Development. While the issuing
agency has the primary obligation with respect to its Project Notes, they are
also secured by the full faith and credit of the United States through
agreements with the issuing authority which provide that, if required, the
federal government will lend the issuer an amount equal to the principal of and
interest on the Project Notes.
As described in the Prospectus of the Ohio Tax-Free Fund, the two
principal classifications of Exempt Securities consist of "general obligation"
and "revenue" issues. The Ohio Tax-Free Fund may also acquire "moral obligation"
issues, which are normally issued by special purpose authorities. There are, of
course, variations in the quality of Exempt Securities, both within a particular
classification and between classifications, and the yields on Exempt Securities
depend upon a variety of factors, including the financial condition of the
issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
Ratings represent the opinion of an NRSRO as to the quality of Exempt
Securities. It should be emphasized, however, that ratings are general and are
not absolute standards of quality, and Exempt Securities with the same maturity,
interest rate and rating may have different yields, while Exempt Securities of
the same maturity and interest rate with different ratings may have the same
yield. Subsequent to purchase, an issue of Exempt Securities may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase. Provident will consider such an event in determining whether the Ohio
Tax-Free Fund should continue to hold the obligation.
An issuer's obligations under its Exempt Securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the federal bankruptcy code, and laws, if any,
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
the enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Exempt Securities may be materially
adversely affected by litigation or other conditions.
Variable and Floating Rate Notes. Each Portfolio may acquire variable
and floating rate notes, subject to such Portfolio's investment objective,
policies and restrictions. A variable rate note is one whose terms provide for
the adjustment of its interest
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rate on set dates and which, upon such adjustment, can reasonably be expected to
have a market value that approximates its par value. A floating rate note is one
whose terms provide for the adjustment of its interest rate whenever a specified
interest rate changes and which, at any time, can reasonably be expected to have
a market value that approximates its par value. Such notes are frequently not
rated by credit rating agencies; however, unrated variable and floating rate
notes purchased by such Portfolios will be determined by Provident or the
applicable sub-adviser, as the case may be, to be of comparable quality at the
time of purchase to rated instruments eligible for purchase under that
particular Portfolio's investment policies. In making such determinations,
Provident or the applicable sub-adviser, as the case may be, will consider the
earning power, cash flow and other liquidity ratios of the issuers of such notes
(such issuers include financial, merchandising, bank holding and other
companies) and will continuously monitor their financial condition. Although
there may be no active secondary market with respect to a particular variable or
floating rate note purchased by a Portfolio, the Portfolio may resell the note
at any time to a third party. The absence of an active secondary market,
however, could make it difficult for a Portfolio to dispose of a variable or
floating rate note in the event the issuer of the note defaulted on its payment
obligations and the Portfolio could, as a result or for other reasons, suffer a
loss to the extent of the default.
When-Issued Securities. As discussed in the Prospectuses, each of the
Portfolios, other than the Stock Appreciation Fund, may purchase securities on a
"when-issued" basis (i.e., for delivery beyond the normal settlement date at a
stated price and yield). When such a Portfolio agrees to purchase securities on
a "when- issued" basis, the Portfolio's custodian will set aside cash or high
quality liquid debt securities equal to the amount of the commitment in a
separate account. Normally, the Portfolio's custodian will set aside portfolio
securities to satisfy the purchase commitment, and in such a case, the Portfolio
may be required subsequently to place additional assets in the separate account
in order to assure that the value of the account remains equal to the amount of
the Portfolio's commitment. It may be expected that the Portfolio's net assets
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash. In addition,
because a Portfolio will set aside cash or high quality liquid debt securities
to satisfy its purchase commitments in the manner described above, such
Portfolio's liquidity and the ability of Provident or the applicable
sub-adviser, as the case may be, to manage it might be affected in the event its
commitments to purchase "when-issued" securities ever exceeded 25% of its
total assets. Under normal market conditions, however, a Portfolio's
commitment to purchase "when-issued" or "delayed- delivery" securities will not
exceed 25% of its assets.
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When a Portfolio engages in "when-issued" transactions, it relies on
the seller to consummate the trade. Failure of the seller to do so may result in
such Portfolio's incurring a loss or missing the opportunity to obtain a price
considered to be advantageous. Such Portfolios will engage in "when-issued"
delivery transactions only for the purpose of acquiring portfolio securities
consistent with the Portfolios' investment objectives and policies and not for
investment leverage. If the Ohio Tax-Free Fund sells a "when-issued" or
"delayed-delivery" security before delivery, any gain would not be tax-exempt.
Repurchase Agreements. Securities held by each of the Portfolios may be
subject to repurchase agreements. Under the terms of a repurchase agreement, a
Portfolio would acquire securities from member banks of the Federal Deposit
Insurance Corporation and registered broker-dealers which the investment adviser
deems creditworthy under guidelines approved by the Company's Board of
Directors, subject to the seller's agreement to repurchase such securities at a
mutually agreed-upon date and price. The repurchase price would generally equal
the price paid by the Portfolio plus interest negotiated on the basis of current
short-term rates, which may be more or less than the rate on the underlying
portfolio securities. The seller under a repurchase agreement will be required
to maintain continually the value of collateral held pursuant to the agreement
at not less than the repurchase price (including accrued interest). This
requirement will be continually monitored by Provident or the applicable sub-
adviser, as the case may be. If the seller were to default on its repurchase
obligation or become insolvent, the Portfolio holding such obligation would
suffer a loss to the extent that the proceeds from a sale of the underlying
portfolio securities were less than the repurchase price under the agreement, or
to the extent that the disposition of such securities by the Portfolio were
delayed pending court action. Additionally, there is no controlling legal
precedent confirming that a Portfolio would be entitled, as against a claim by
such seller or its receiver or trustee in bankruptcy, to retain the underlying
securities, although the Board of Directors of the Company believes that, under
the regular procedures normally in effect for custody of a Portfolio's
securities subject to repurchase agreements and under federal laws, a court of
competent jurisdiction would rule in favor of the Company if presented with the
question. Securities subject to repurchase agreements will be held by that
Portfolio's custodian or another qualified custodian or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered to be
loans by a Portfolio under the 1940 Act.
Reverse Repurchase Agreements. As discussed in the Prospectuses, each
of the Portfolios, other than the Money Market Fund, may borrow funds for
temporary purposes by entering into reverse repurchase agreements in accordance
with that Portfolio's investment restrictions. Pursuant to such agreements, a
Portfolio
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would sell portfolio securities to financial institutions such as banks and
broker-dealers, and agree to repurchase the securities at a mutually agreed-upon
date and price. Each Portfolio intends to enter into reverse repurchase
agreements only to avoid otherwise selling securities during unfavorable market
conditions to meet redemptions. At the time a Portfolio enters into a reverse
repurchase agreement, it will place in a segregated custodial account assets
such as U.S. Government securities or other liquid, high grade debt securities
consistent with the Portfolio's investment restrictions having a value equal to
the repurchase price (including accrued interest), and will subsequently
continually monitor the account to ensure that such equivalent value is
maintained at all times. Reverse repurchase agreements involve the risk that the
market value of the securities sold by a Portfolio may decline below the price
at which a Portfolio is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowings by a Portfolio under the
1940 Act.
Except as otherwise disclosed to the shareholders of the particular
Portfolio, the Company will not acquire portfolio securities issued by, make
savings deposits in, or enter into repurchase agreements with Provident, any
sub-adviser, the Distributor, or their affiliates, and will not give preference
to Provident's correspondents with respect to such transactions, securities,
savings deposits and repurchase agreements. In addition, while the Stock
Appreciation Fund's investment restrictions permit it to engage in reverse
repurchase agreements without prior shareholder approval, the Stock Appreciation
Fund does not currently intend to enter into such agreements.
Hedging Transactions. Hedging transactions, including the use of
options and futures, in which a Portfolio may be authorized to engage as
described in its Prospectus or below, have risks associated with them including
possible default by the other party to the transaction, illiquidity and, to the
extent the investment adviser's view as to certain market movements is
incorrect, the risk that the use of such hedging transactions could result in
losses greater than if they had not been used.
Use of put and call options may result in losses to a Portfolio, force
the sale or purchase of portfolio securities at inopportune times or for prices
higher than (in the case of put options) or lower than (in the case of call
options) current market values, limit the amount of appreciation a Portfolio can
realize on its investments or cause the Portfolio to hold a security it might
otherwise sell. The use of currency transactions can result in a Portfolio
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of
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correlation between price movements of futures contracts and price movements in
the related portfolio position of the Portfolio create the possibility that
losses on the hedging instrument may be greater than gains in the value of such
Portfolio's position. In addition, futures and options markets may not be liquid
at all circumstances and certain over-the-counter options may have no markets.
As a result, in certain markets, a Portfolio might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of hedging transactions would reduce net
asset value, and possible income, and such losses can be greater than if the
hedging transactions had not been utilized.
Writing Covered Call and Put Options. Each of the Income, Income
Equity, Ohio Tax-Free and the Flexible Growth Funds may write covered call and
covered put options on securities, or futures contracts regarding securities, in
which the particular Fund may invest, in an effort to realize additional income.
A put option gives the purchaser the right to sell the underlying security at
the stated exercise price at any time prior to the expiration date of the
option, regardless of the market price of the security. A call option gives the
purchaser of the option the right to buy, and a writer has the obligation to
sell, the underlying security at the stated exercise price at any time prior to
the expiration of the option, regardless of the market price of the security.
The premium paid to the writer is consideration for undertaking the obligations
under the option contract. Put and call options purchased by a Fund will be
valued at the last sale price, or in the absence of such a price, at the mean
between bid and asked price. Such options will be listed on national securities
or futures exchanges or be available in the over-the-counter market through
pricing reports of broker-dealers. A Fund may write covered call options as a
means of seeking to enhance its income through the receipt of premiums in
instances in which the adviser determines that the underlying securities or
futures contracts are not likely to increase in value above the exercise price.
A Fund also may seek to earn additional income through the receipt of premiums
by writing put options. Covered call options give the purchaser the right, for a
stated period, to buy the underlying securities from a Fund at a stated price,
while put options give the purchaser the right, for a stated period, to sell the
underlying securities to a Fund at a stated price. By writing a call option, a
Fund limits its opportunity to profit from any increase in the market value of
the underlying security above
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the exercise price of the option; by writing a put option, a Fund assumes the
risk that it may be required to purchase the underlying security at a price in
excess of its then current market value.
When a Fund writes an option, an amount equal to the net premium (the
premium less the commission) received by the Fund is included in the liability
section of the Fund's statement of assets and liabilities as a deferred credit.
The amount of the deferred credit will be subsequently marked-to-market to
reflect the current value of the option written. The current value of the traded
option is the last sale price or, in the absence of a sale, the mean between bid
and asked price. If an option expires on the stipulated expiration date or if
the Fund enters into a closing purchase transaction, it will realize a gain (or
a loss if the cost of a closing purchase transaction exceeds the net premium
received when the option is sold) and the deferred credit related to such option
will be eliminated. If an option is exercised, the Fund may deliver the
underlying security in the open market. In either event, the proceeds of the
sale will be increased by the net premium originally received and the Fund will
realize a gain or loss.
The Ohio Tax-Free Fund may acquire "puts" with respect to Exempt
Securities held in its portfolio. A put is a right to sell a specified security
(or securities) within a specified period of time at a specified exercise price.
The Ohio Tax-Free Fund may sell, transfer, or assign a put only in conjunction
with the sale, transfer, or assignment of the underlying security or securities.
The amount payable to the Ohio Tax-Free Fund upon its exercise of a
"put" is normally (i) the Ohio Tax-Free Fund's acquisition cost of the Exempt
Securities (excluding any accrued interest which the Ohio Tax-Free Fund paid on
the acquisition), less any amortized market premium or plus any amortized market
or original issue discount during the period the Ohio Tax-Free Fund owned the
securities, plus (ii) all interest accrued on the securities since the last
interest payment date during that period.
Puts may be acquired by the Ohio Tax-Free Fund to facilitate the
liquidity of its portfolio assets. Puts may also be used to facilitate the
reinvestment of the Ohio Tax-Free Fund's assets at a rate of return more
favorable than that of the underlying security. Puts may, under certain
circumstances, also be used to shorten the maturity of underlying variable rate
or floating rate securities for purposes of calculating the remaining maturity
of those securities.
The Ohio Tax-Free Fund expects that it will generally acquire puts only
where the puts are available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the Ohio Tax-Free Fund may
pay for puts either separately in cash or by paying a higher price for portfolio
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<PAGE> 14
securities which are acquired subject to the puts (thus reducing the yield to
maturity otherwise available for the same securities).
The Ohio Tax-Free Fund intends to enter into puts only with dealers,
banks, and broker-dealers which, in Provident's opinion, present minimal credit
risks.
Options and Futures Strategies. In addition, each of the Income, Income
Equity, Ohio Tax-Free and Flexible Growth Funds may purchase put and call
options written by third parties covering those types of financial instruments
in which such Fund may invest to attempt to provide protection against adverse
price effects from anticipated changes in prevailing prices for such
instruments. The purchase of a put option is intended to protect the value of a
Fund's holdings in a falling market while the purchase of a call option is
intended to protect the value of a Fund's positions in a rising market.
In purchasing a call option, a Fund would be in a position to realize a
gain if, during the option period, the price of the underlying security, index
or futures contract increased by an amount in excess of the premium paid for the
call option. It would realize a loss if the price of the underlying security,
index or futures contract declined or remained the same or did not increase
during the period by more than the amount of the premium. By purchasing a put
option, a Fund would be in a position to realize a gain if, during the option
period, the price of the security, index or futures contract declined by an
amount in excess of the premium paid. It would realize a loss if the price of
the security, index or futures contract increased or remained the same or did
not decrease during that period by more than the amount of the premium. If a put
or call option purchased by a Fund were permitted to expire without being sold
or exercised, its premium would represent a realized loss to a Fund.
General Characteristics of Options. Put options and call options
typically have similar structural characteristics and operational mechanics
regardless of the underlying instrument on which they are purchased or sold.
Thus, the following general discussion relates to each of the particular types
of options discusses in greater detail below. In addition, many hedging
transactions involving options require segregation of a Portfolio's assets in
special accounts, as described further below.
With certain exception, OTC-issued and exchange-listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options are
cash settled for the net amount, if any, by which the option is "in-the-money"
(i.e., where the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently,
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<PAGE> 15
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option. A Portfolio's ability to close out its position as a purchase of
seller of a put or call option is dependent in part, upon the liquidity of the
option market. In addition, the hours of trading for listed options may not
coincide with the hours during which the underlying financial instruments are
traded. To the extent that the option markets close before the markets for the
underlying financial instruments, significant price and rate movements can take
place in the underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreements with the Counterparty. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium guarantees and security, are set by negotiation of the parties. The
Flexible Growth Fund will only sell OTC options (other than OTC currency
options) that are subject to a buy-back provision permitting the Flexible Growth
Fund to require the Counterparty to sell the option back to such Fund at a
formula price within seven days. The Portfolios expect generally to enter into
OTC options that have cash settlement provisions, although they are not required
to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Portfolio or fails to make a cash
settlement payment due in accordance with the terms of that option, such
Portfolio will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Accordingly, the investment adviser must
assess the creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. A Portfolio will engage in OTC option
transactions only with United States Government securities dealers recognized by
the Federal Reserve Bank of New York as "primary dealers' or broker dealers,
domestic or foreign banks or other financial institutions which have received
(or the guarantors of the obligations of which have received) a short-term
credit rating to "A-1" from Standard & Poor's Corporation ("S&P") or "P-1" from
Moody's Investor Services ("Moody's") or an equivalent rating from another NRSRO
or, if unrated, determined by the investment adviser to be of comparable
quality. The staff of the Commission currently takes the position that OTC
options purchased by a Portfolio and portfolio securities "covering" the amount
of such
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<PAGE> 16
Portfolio's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
such Portfolio's limitation on investing in illiquid securities.
All options written by a Portfolio must be "covered" (i.e., the
Portfolio must own the securities or futures contract subject to a call option
or must meet the asset segregation requirements) as long as the call is
outstanding. Even though a Portfolio will receive the option premium to help
protect it against loss, a call option written by a Portfolio exposes the
Portfolio during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security or
instrument and may require the Portfolio to hold a security or instrument which
it might otherwise have sold. With respect to put options written by a
Portfolio, such Portfolio will place high quality liquid debt securities in a
segregated account to cover its obligations under such put option and will
monitor the value of the assets in such account and its obligations under the
put option daily.
Futures Contracts. Each of the Income, Income Equity, Ohio Tax-Free and
Flexible Growth Funds may purchase or sell contracts for the future delivery of
the specific financial instruments in which the particular Fund may invest, and
indices based upon the types of securities in which the particular Fund may
invest (collectively, "Futures Contracts"). A Fund may use this investment
technique to hedge against anticipated future changes in market interest rates,
which otherwise might adversely affect either the value of the Fund's securities
or the prices of securities which the Fund intends to purchase at a later date.
Alternatively, the Funds may purchase or sell futures contracts to hedge against
changes in market interest rates which may result in the premature call at par
value of certain securities which the Fund has purchased at a premium.
The Income Equity Fund may purchase or sell futures contracts based
upon an equity index, commonly referred to as "equity index futures contracts."
This type of futures contract is an agreement by the Fund to buy or sell by a
specified date and at a specified price the market value of equity securities
included in a particular equity index. No payment is made for the index or
securities when the Fund buys an equity index futures contract and neither the
index nor any securities are delivered when the Fund sells an equity index
futures contract. Instead, the Fund makes a deposit of "initial margin" equal to
a percentage of the value of the futures contract. Payment or delivery is made
upon the closing out of the futures position or the expiration of the equity
index futures contract. Equity index futures contracts will be used only as a
hedge against anticipated changes in the level of stock prices.
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<PAGE> 17
The Income Fund may purchase or sell futures contracts based upon fixed
income securities, commonly referred to as "interest rate futures contracts." An
interest rate futures contract is an agreement by the Fund to buy or sell, by a
specified date and at a specified price, the market value of fixed income
securities included in a particular fixed income index. As with the futures
contracts, no payment is made for securities when the Fund buys an interest rate
futures contract and no securities are delivered when the Fund sells an interest
rate futures contract; instead, the Fund makes an initial margin deposit and
payment or delivery is made upon the closing out of the futures position or the
expiration of the interest rate futures contract. Interest rate futures
contracts will be used only as a hedge against anticipated changes in the level
of interest rates.
In general, the value of futures contracts sold by a Fund to offset
declines in its portfolio securities will not exceed the total market value of
the portfolio securities to be hedged, and futures contracts purchased by the
Fund will be covered by a segregated account consisting of cash or liquid
securities in an amount equal to the total market value of such futures
contracts, less the initial margin deposited therefor.
When selling futures contracts short, when buying futures contracts and
when writing put options, a Fund will be required to segregate in a separate
account cash and/or U.S. government securities in an amount sufficient to meets
its obligations. When writing call options, a Fund will be required to own the
financial instrument or futures contract underlying the option or segregate cash
and/or U.S. government securities in an amount sufficient to meet its
obligations under written calls.
This investment technique is designed primarily to hedge against
anticipated future changes in market conditions or foreign exchange rates which
otherwise might adversely affect the value of securities which such a Portfolio
holds or intends to purchase. For example, when interest rates are expected to
rise or market values of portfolio securities are expected to fall, a Portfolio
can seek through the sale of futures contracts to offset a decline in the value
of its portfolio securities. When interest rates are expected to fall or market
values are expected to rise, a Portfolio, through the purchase of such
contracts, can attempt to secure better rates or prices for the Portfolio than
might later be available in the market when it effects anticipated purchases.
The acquisition of put and call options on futures contracts will,
respectively, give a Portfolio the right (but not the obligation), for a
specified price, to sell or to purchase the underlying futures contract, upon
exercise of the option, at any time during the option period.
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<PAGE> 18
Futures transactions involve brokerage costs and require a Portfolio to
segregate liquid assets, such as cash, U.S. Government securities or other
liquid high grade debt obligations, to cover its performance under such
contracts. A Portfolio may lose the expected benefit of futures transactions if
interest rates, securities prices or foreign exchange rates move in an
unanticipated manner. Such unanticipated changes may also result in poorer
overall performance than if the Portfolio had not entered into any futures
transactions. In addition, the value of a Portfolio's futures positions may not
prove to be perfectly or even highly correlated with the value of its portfolio
securities and foreign currencies, limiting the Portfolio's ability to hedge
effectively against interest rate, foreign exchange rate and/or market risk and
giving rise to additional risks. There is no assurance of liquidity in the
secondary market for purposes of closing out futures positions.
Forward Foreign Currency Exchange Contracts. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days (the "Term") from the
date of the contract agreed upon by the parties, at a price set at the time of
the contract. These contracts are traded directly between currency traders
(usually large commercial banks) and their customers.
The Flexible Growth Fund does not intend to enter into such forward
contracts if such Portfolio would have more than 5% of the value of its total
assets committed to such contracts on a regular or continuous basis. The
Flexible Growth Fund also will not enter into such forward contracts or maintain
a net exposure in such contracts where such Portfolio would be obligated to
deliver an amount of foreign currency in excess of the value of such Portfolio's
portfolio securities or other assets denominated in that currency. JIR believes
that it is important to have the flexibility to enter into such forward
contracts when it determines that to do so is in the best interests of the
Flexible Growth Fund. The Flexible Growth Fund's custodian segregates cash or
liquid high-grade securities in an amount not less than the value of such
Portfolio's total assets committed to forward foreign currency exchange
contracts entered into for the purchase of a foreign security. If the value of
the securities segregated declines, additional cash or securities are added so
that the segregated amount is not less than the amount of such Portfolio's
commitments with respect to such contracts. The Flexible Growth Fund generally
does not enter into a forward contract with a Term longer than one year.
Foreign Currency Options. A foreign currency option provides the option
buyer with the right to buy or sell a stated amount of foreign currency at the
exercise price at a specified date or during the option period. A call option
gives its owner the right, but not the obligation, to buy the currency, while a
put option
B - 17
<PAGE> 19
gives its owner the right, but not the obligation, to sell the currency. The
option seller (writer) is obligated to fulfill the terms of the option sold if
it is exercised. However, either seller or buyer may close its position during
the option period in the secondary market for such options any time prior to
expiration.
A call rises in value if the underlying currency appreciates.
Conversely, a put rises in value if the underlying currency depreciates. While
purchasing a foreign currency option can protect the Flexible Growth Fund
against an adverse movement in the value of a foreign currency, it does not
limit the gain which might result from a favorable movement in the value of such
currency. For example, if the Flexible Growth Fund were holding securities
denominated in an appreciating foreign currency and had purchased a foreign
currency put to hedge against a decline in the value of the currency, it would
not have to exercise its put. Similarly, if the Flexible Growth Fund has entered
into a contract to purchase a security denominated in a foreign currency and had
purchased a foreign currency call to hedge against a rise in the value of the
currency but instead the currency had depreciated in value between the date of
purchase and the settlement date, such Portfolio would not have to exercise its
call but could acquire in the spot market the amount of foreign currency needed
for settlement.
Foreign Currency Futures Transactions. As part of its financial futures
transactions, the Flexible Growth Fund may use foreign currency futures
contracts and options on such futures contracts. Through the purchase or sale of
such contracts, the Flexible Growth Fund may be able to achieve many of the same
objectives as through forward foreign currency exchange contracts more
effectively and possibly at a lower cost.
Unlike forward foreign currency exchange contracts, foreign currency
futures contracts and options on foreign currency futures contracts are
standardized as to amount and delivery period and may be traded on boards of
trade and commodities exchanges or directly with a dealer which makes a market
in such contracts and options. It is anticipated that such contracts may provide
greater liquidity and lower cost than forward foreign currency exchange
contracts.
Regulatory Restrictions. To the extent required to comply with
Securities and Exchange Commission Release No. IC-10666, when purchasing a
futures contract or writing a put option or entering into a forward foreign
currency exchange purchase, a Portfolio will maintain in a segregated account
cash or liquid high-grade securities equal to the value of such contracts.
To the extent required to comply with Commodity Futures Trading
Commission Regulation 4.5 and thereby avoid being classified as a "commodity
pool operator," a Portfolio will not enter into a futures contract or purchase
an option thereon if immediately thereafter the initial margin deposits for
futures
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<PAGE> 20
contracts held by such Portfolio plus premiums paid by it for open options on
futures would exceed 5% of the liquidation value of such Portfolio's total
assets after taking into account unrealized profits and unrealized losses on any
contracts entered into. Such Portfolio will not engage in transactions in
futures contracts or options thereon for speculation, but only to attempt to
hedge against changes in market conditions affecting the values of securities
which such Portfolio holds or intends to purchase. When futures contracts or
options thereon are purchased to protect against a price increase on securities
intended to be purchased later, it is anticipated that at least 25% of such
intended purchases will be completed.
Combined Transactions. The Flexible Growth Fund may enter into multiple
transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts) and any combination of futures, options and currency transaction,
instead of a single hedging transaction, as part of a single or combined
strategy when, in the opinion of JIR, it is in the best interests of the
Flexible Growth Fund to do so. A combined transaction will usually contain
elements of risk that are present in each of its component transactions.
Although combined transactions are normally entered into based on JIR's judgment
that the combined strategies will reduce risk or otherwise more effectively
achieve the desired portfolio management goal, it is possible that the
combination will instead increase such risks or hider achievement of the
portfolio management objective.
Swaps, Caps, Floors and Collars. Among the hedging transactions into
which the Flexible Growth Fund may enter are interest rate, currency and index
swaps and the purchase or sale of related caps, floors and collars. The Flexible
Growth Fund expects to enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its portfolio, to
protect against currency fluctuations, as a duration management technique or to
protect against any increase in the price of securities the Flexible Growth Fund
anticipates purchasing at a later date. The Flexible Growth Fund intends to use
those transactions as hedges and not as speculative investments and will not
sell interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Flexible Growth Fund may be
obligated to pay. Interest rate swaps involve the exchange by the Flexible
Growth Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an agreement
to exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchase to receive
payments on
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<PAGE> 21
a notional principal amount from the party selling such cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase of
a floor entitles the purchaser to receive payments on a notional principal
amount from the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is a combination
of a cap and a floor that preserves a certain return within a predetermined
range of interest rates or values.
The Flexible Growth Fund will usually enter into swaps on a net basis,
i.e., the two payment streams are netted out in a cash settlement on the payment
date or dates specified in the instrument, with the Flexible Growth Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these swaps, caps, floors, and collars are entered into
for good faith hedging purposes, JIR and the Flexible Growth Fund believe such
obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to its borrowing restrictions.
The Flexible Growth Fund will not enter into any swap, cap, floor or collar
transaction unless, at the time of entering into such transaction, the unsecured
long-term debt of the Counterparty, combined with any credit enhancements, is
rated at least "A" by S&P or Moody's or has an equivalent rating from an NRSRO
or is determined to be of equivalent credit quality by JIR. If there is a
default by the Counterparty, the Flexible Growth Fund may have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market for which
standardized documentation has become relatively liquid. Caps, floors and
collars are more recent innovations for which standardized documentation has not
yet been fully developed and, accordingly, they are less liquid than swaps.
FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVES
The investment objective of each of the Portfolios is fundamental and
may not be changed without approval of the holders of a majority of such
Portfolio's outstanding voting shares (which means the lesser of (1) 67% of the
shares represented at a meeting at which more than 50% of the outstanding shares
are represented or (2) more than 50% of the outstanding shares).
In addition to the investment restrictions set forth in the
Prospectuses, the Money Market Fund may not:
1. Invest more than 5% of its total assets in securities of any company
having a record, together with its predecessors, of less than three years of
continuous operation;
2. Make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns
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<PAGE> 22
an equal amount of such securities or of securities which, without payment of
any further consideration, are convertible into or exchangeable for securities
of the same issue as, and equal in amount to, the securities sold short; and
3. Underwrite securities of other issuers, except that the Money Market
Fund may purchase securities from the issuer or others and dispose of such
securities in a manner consistent with its investment objective.
Each of the Income Fund and the Income Equity Fund may not:
1. Invest in securities of an issuer (other than an agency or
instrumentality of the U.S. Government) which, together with any predecessor of
the issuer, has been in operation for less than three years if, immediately
after and as a result of such investment, more than 5% of the value of the
Fund's total assets would then be invested in the securities of such issuer; and
2. Invest more than 10% of the value of the Fund's net assets in fixed
time deposits which are non-negotiable and/or which impose a penalty for early
withdrawal and which have maturities of more than 7 days.
Finally, each of the Ohio Tax-Free Fund, the Stock Appreciation Fund
and the Flexible Growth Fund may not:
1. Purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases of portfolio securities and except as may
be necessary to make margin payments in connection with derivative securities
transactions;
2. Underwrite the securities issued by other persons, except to the
extent that a Portfolio may be deemed to be an underwriter under certain
securities laws in the disposition of "restricted securities";
3. Purchase or sell commodities or commodity contracts, except to the
extent disclosed in the current Prospectus of the Portfolio; and
4. Purchase or sell real estate (although investments in marketable
securities of companies engaged in such activities and securities secured by
real estate or interests therein are not prohibited by this restriction).
In addition to the investment restrictions contained in the
Prospectuses, each Portfolio has adopted the following additional restrictions,
which may be changed by the Board of Directors without the vote of a Portfolio's
shareholders:
1. A Portfolio may not purchase or retain securities of an issuer if,
to the knowledge of the Company, officers, Trustees or
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<PAGE> 23
Directors of the Company, Provident, any sub-adviser or the Distributor, each
owning beneficially more than 1/2 of 1% of the securities of such issuer, own in
the aggregate more than 5% of the securities of such issuer, or such persons or
management personnel of the Company, Provident, any sub-adviser or the
Distributor have a substantial beneficial interest in the securities of such
issuer. Provident, any sub-adviser, the Distributor or any affiliates thereof or
any of their Trustees, Directors, officers or employees may not purchase or sell
as principal any securities of the Portfolios. Nor may securities of any of the
Portfolios be loaned to Provident, any sub-adviser, the Distributor or any
affiliates or any of their Trustees, Directors, officers or employees.
In addition, each of the Ohio Tax-Free Fund, the Stock Appreciation
Fund and the Flexible Growth Fund may not:
1. Engage in any short sales, except to the extent disclosed in the
current Prospectus of the Portfolio;
2. Invest more than 10% of total assets in the securities of issuers,
which together with any predecessors, have a record of less than three years of
continuous operation;
3. Purchase participation or direct interests in oil, gas or other
mineral exploration or development programs (although investments by such Funds
in marketable securities of companies engaged in such activities are not
prohibited by this restriction);
4. Purchase securities of other investment companies, except (a) in
connection with a merger, consolidation, acquisition or reorganization, and (b)
to the extent permitted by the 1940 Act or pursuant to any exemptions therefrom;
and
5. Mortgage or hypothecate the Fund's assets in excess of one third of
the Fund's total assets.
In order to permit the sale of a Portfolio's shares in certain states,
the Company may make commitments more restrictive than the investment
restrictions described in the applicable Prospectus. Should the Company
determine that any such commitment is no longer in the best interests of a
Portfolio, it will revoke the commitment by terminating sales of a Portfolio's
shares in the state involved.
If a percentage limit is satisfied at the time of investment or
borrowing, a later increase or decrease resulting from a change in asset value
is not a violation of the limit.
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<PAGE> 24
PORTFOLIO TURNOVER
The portfolio turnover rate for each of the Portfolios is calculated by
dividing the lesser of a Portfolio's purchases or sales of portfolio securities
for the year by the monthly average value of the portfolio securities. The
calculation excludes all securities whose remaining maturities at the time of
acquisition were one year or less.
Because of Money Market Fund intends to invest entirely in securities
with maturities of less than one year and because the Commission requires such
securities to be excluded from the calculation of portfolio turnover rate, the
portfolio turnover with respect to the Money Market Fund is expected to be zero
percent for regulatory purposes.
The portfolio turnover rate for each of the Portfolios (other than the
Money Market Fund and the Stock Appreciation Fund) for the two most recent
fiscal years are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
Fund 1995 1994
---- ---- ----
<S> <C> <C>
Income Fund 75% 83%
Income Equity Fund 180% 119%
Ohio Tax-Free Fund(1) 34% 29%
Flexible Growth Fund(2) 13% 1%
</TABLE>
- - --------------------
1 Commenced operations August 1, 1994
2 Commenced operations September 1, 1994
The portfolio turnover rates for the Stock Appreciation Fund for the
fiscal period ended December 31, 1995, and the two fiscal years ended September
30, 1995 and 1994 were 46%, 197% and 254%,
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<PAGE> 25
respectively. The portfolio turnover rate for each Portfolio may vary greatly
from year to year as well as within a particular year, and may also be affected
by cash requirements for redemptions of shares. High portfolio turnover rates
will generally result in higher transaction costs, including brokerage
commissions to a Portfolio, and may result in additional tax consequences to
such Portfolio's shareholders. Portfolio turnover will not be a limiting factor
in making investment decisions.
- - -------------------------------------------------------------------------------
DIVIDENDS AND TAXES
- - -------------------------------------------------------------------------------
Each Portfolio intends to distribute to its shareholders dividends from
net investment income monthly and all net realized long-term capital gains
annually in shares of the Portfolio or, at the option of the shareholder, in
cash. Shareholders who have not opted prior to the record date for any
distribution to receive cash will have the number of such shares determined on
the basis of the Portfolio's net asset value per share computed at the end of
the next business day following the record date. Net asset value is used in
computing the number of shares in both gains and income distribution
reinvestments. Account statements and/or checks as appropriate will be mailed to
shareholders within seven days after a Portfolio pays the distribution. Unless a
Portfolio receives instructions to the contrary from a shareholder before the
record date, it will assume that the shareholder wishes to receive that
distribution and all future gains and income distributions in shares.
Instructions continue in effect until changed in writing.
It is not expected that the Income Fund's, the Money Market Fund's or
the Ohio Tax-Free Fund's income dividends will be eligible for the corporate
dividends received deduction. It is expected that a portion of the Income Equity
Fund's, the Stock Appreciation Fund's and the Flexible Growth Fund's income
distributions will be eligible for the 70% corporate dividends received
deduction.
ADDITIONAL TAX INFORMATION
Each of the Portfolios of the Company is treated as a separate entity
for federal income tax purposes and intends to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code") for so long as such qualification is in the best interest of that
Portfolio's shareholders. In order to qualify as a regulated investment company,
each Portfolio must, among other things: derive at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of stock or securities or foreign currencies,
or other income derived with respect to its
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<PAGE> 26
business of investing in such stock, securities, or currencies; derive less than
30% of its gross income from the sale or other disposition of stock, securities,
options, futures, forward contracts or foreign currencies held less than three
months; and diversify its investments within certain prescribed limits. In
addition, to utilize the tax provisions specially applicable to regulated
investment companies, each Portfolio must distribute to its shareholders at
least 90% of its investment company taxable income for the year and 90% of its
interest income which is excludable from income under Section 103(a) of the
Code. In general, a Portfolio's investment company taxable income will be its
taxable income subject to certain adjustments and excluding the excess of any
net long-term capital gain for the taxable year over the net short-term capital
loss, if any, for such year.
A non-deductible 4% excise tax is imposed on regulated investment
companies that do not distribute in each calendar year (regardless of whether
they otherwise have a non-calendar taxable year) an amount equal to 98% of their
ordinary income for the calendar year plus 98% of their capital gain net income
for the one-year period ending on October 31 of such calendar year. The balance
of such income must be distributed during the next calendar year. Dividends
declared in October, November and December in any year and distributed in
January of the following year will be treated as having been paid in the prior
year. If distributions during a calendar year were less than the required
amount, a Portfolio would be subject to a non-deductible excise tax equal to 4%
of the deficiency.
Although each such Portfolio expects to qualify as a "regulated
investment company" and to be relieved of all or substantially all federal
income taxes, depending upon the extent of its activities in states and
localities in which its offices are maintained, in which its agents or
independent contractors are located, or in which it is otherwise deemed to be
conducting business, a Portfolio may be subject to the tax laws of such states
or localities. In addition, if for any taxable year a Portfolio does not qualify
for the special tax treatment afforded regulated investment companies, all of
its taxable income will be subject to federal tax at regular corporate rates
(without any deduction for distributions to its shareholders). In such event,
dividend distributions would be taxable to shareholders to the extent of
earnings and profits, and would be eligible for the dividends received deduction
for corporations.
The Money Market Fund, the Income Fund, the Income Equity Fund, the
Stock Appreciation Fund and the Flexible Growth Fund. It is expected that each
Portfolio will distribute annually to shareholders all or substantially all of
the Portfolio's net ordinary income and net realized capital gains and that such
distributed net ordinary income and distributed net realized capital gains will
be taxable income to shareholders for federal
B-25
<PAGE> 27
income tax purposes, even if paid in additional shares of the Portfolio and not
in cash.
Distribution by a Portfolio of the excess of net long-term capital gain
over net short-term capital loss is taxable to shareholders as long-term capital
gain in the year in which it is received, regardless of how long the shareholder
has held the shares. Such distributions are not eligible for the
dividends-received deduction.
Federal taxable income of individuals is subject to graduated tax rates
of 15%, 28%, 31%, 36% and 39.6%. Further, the marginal tax rate may be in excess
of 39.6%, because adjustments reduce or eliminate the benefit of the personal
exemption and itemized deductions for individuals with gross income in excess of
certain threshold amounts.
Capital gains of individuals are subject to tax at the same rates
applicable to ordinary income; however, the tax rate on capital gains of
individuals cannot exceed 28%. Capital losses may be used to offset capital
gains. In addition, individuals may deduct up to $3,000 of net capital loss each
year to offset ordinary income. Excess net capital loss may be carried forward
to future years.
Federal taxable income of corporations in excess of $75,000 up to $10
million is subject to a 34% tax rate; however, because the benefit of lower tax
rates on a corporation's taxable income of less than $75,000 is phased out for
corporations with income in excess of $100,000 but lower than $335,000, a
maximum marginal tax rate of 39% may result. Federal taxable income of
corporations in excess of $10 million is subject to a tax rate of 35%. Further,
a corporation's federal taxable income in excess of $15 million is subject to an
additional tax equal to 3% of taxable income over $15 million, but not more than
$100,000.
Capital gains of corporations are subject to tax at the same rates
applicable to ordinary income. Capital losses may be used only to offset capital
gains and excess net capital loss may be carried back three years and forward
five years.
Certain corporations are entitled to a 70% dividends received deduction
for distributions from certain domestic corporations. Each Portfolio will
designate the portion of any distributions which qualify for the 70% dividends
received deduction. The amount so designated may not exceed the amount received
by the Portfolio for its taxable year that qualifies for the dividends received
deduction. Because all of the Money Market Fund's and Income Fund's net
investment income is expected to be derived from earned interest, it is
anticipated that no distributions from those Portfolios will qualify for the 70%
dividends received deduction.
B - 26
<PAGE> 28
Foreign taxes may be imposed on a Fund by foreign countries with
respect to its income from foreign securities, if any. Since less than 50% of
the value of any Fund's total assets at the end of its fiscal year is expected
to be invested in stock or securities of foreign corporations, a Fund will not
be entitled under the Code to pass through to its shareholders their pro rata
share of the foreign taxes paid by the Fund, if any. These taxes will be taken
as a deduction by such Fund.
The Ohio Tax-Free Fund. The Code permits a regulated investment company
which invests in Exempt Securities to pay to its shareholders "exempt-interest
dividends," which are excluded from gross income for federal income tax
purposes, if at the close of each quarter at least 50% of the value of its total
assets consist of Exempt Securities.
An exempt-interest dividend is any dividend or part thereof (other than
a capital gain dividend) paid by the Ohio Tax-Free Fund that is derived from
interest received by the Ohio Tax-Free Fund that is excluded from gross income
for federal income tax purposes, net of certain deductions, provided the
dividend is designated as an exempt-interest dividend in a written notice mailed
to shareholders not later than sixty days after the close of the Ohio Tax- Free
Fund's taxable year. The percentage of the total dividends paid by the Ohio
Tax-Free Fund during any taxable year that qualifies as exempt-interest
dividends will be the same for all shareholders receiving dividends during such
year. Exempt-interest dividends shall be treated by the Ohio Tax-Free Fund's
shareholders as items of interest excludable from their gross income for Federal
income tax purposes under Section 103(a) of the Code. However, a shareholder is
advised to consult his tax adviser with respect to whether exempt-interest
dividends retain the exclusion under Section 103(a) of the Code if such
shareholder is a "substantial user" or a "related person" to such user under
Section 147(a) of the Code with respect to any of the Exempt Securities held by
the Ohio Tax-Free Fund. If a shareholder receives an exempt-interest dividend
with respect to any share and such share is held by the shareholder for six
months or less, any loss on the sale or exchange of such share shall be
disallowed to the extent of the amount of such exempt-interest dividend.
In general, interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares is not deductible for federal income tax
purposes if the Ohio Tax-Free Fund distributes exempt-interest dividends during
the shareholder's taxable year. A shareholder of the Ohio Tax-Free Fund that is
a financial institution may not deduct interest expense attributable to
indebtedness incurred or continued to purchase or carry shares of the Ohio
Tax-Free Fund if the Ohio Tax-Free Fund distributes exempt-interest dividends
during the shareholder's taxable year. Certain federal income tax deductions of
property and casualty insurance companies holding shares of the Ohio Tax-Free
Fund and receiving exempt-interest dividends may also be adversely affected.
B - 27
<PAGE> 29
In certain limited instances, the portion of Social Security benefits received
by a shareholder which may be subject to federal income tax may be affected by
the amount of tax-exempt interest income, including exempt-interest dividends
received by shareholders of the Ohio Tax-Free Fund.
In the unlikely event the Ohio Tax-Free Fund realizes long-term capital
gains, the Ohio Tax-Free Fund intends to distribute any realized net long-term
capital gains annually. If the Ohio Tax-Free Fund distributes such gains, the
Ohio Tax-Free Fund will have no tax liability with respect to such gains, and
the distributions will be taxable to shareholders as long-term capital gains
regardless of how long the shareholders have held shares. Any such distributions
will be designated as a capital gain dividend in a written notice mailed by the
Ohio Tax-Free Fund to the shareholders not later than sixty days after the close
of the Ohio Tax-Free Fund's taxable year. It should be noted, however, that
capital gains are taxed like ordinary income except that net capital gains of
individuals are subject to a maximum federal income tax rate of 28%. Net capital
gains are the excess of net long-term capital gains over net short-term capital
losses. Any net short-term capital gains are taxed at ordinary income tax rates.
If a shareholder receives a capital gain dividend with respect to any share and
then sells the share before he has held it for more than six months, any loss on
the sale of the share is treated as long-term capital loss to the extent of the
capital gain dividend received.
Although it is expected that under normal market conditions at least
80% of the net assets of the Ohio Tax-Free Fund will be invested in bonds,
notes, debentures, commercial paper and other obligations, the interest on which
is not a preference item for individuals for the federal alternative minimum
tax, exempt- interest dividends attributable to interest on certain municipal
obligations in which the Ohio Tax-Free Fund may invest, including those issued
on or after August 8, 1986 to finance certain private activities, will be
treated as tax preference items in computing an individual's alternative minimum
tax. For individuals, the alternative minimum tax rate is 26% on alternative
minimum taxable income up to $175,000 and 28% on the excess of $175,000.
Also, all exempt-interest dividends of the Ohio Tax-Free Fund may
subject corporations to alternative minimum tax as a result of the inclusion of
such dividends in alternative minimum taxable income of 75% of the excess of the
adjusted current earnings over pre-adjustment alternative minimum taxable
income. Adjusted current earnings would include exempt-interest dividends of the
Ohio Tax-Free Fund. For corporations the alternative minimum tax rate is 20%.
For taxable years of corporations beginning before 1996, the Superfund
Revenue Act of 1986 imposes an additional tax (which is deductible for federal
income tax purposes) on a corporation at a
B - 28
<PAGE> 30
rate of 0.12 of one percent on the excess over $2,000,000 of such corporation's
"modified alternative minimum taxable income", which would include a portion of
the exempt-interest dividends distributed by the Ohio Tax-Free Fund to such
corporation. In addition, exempt-interest dividends distributed to certain
foreign corporations doing business in the United States could be subject to a
branch profits tax imposed by Section 884 of the Code.
As indicated in its Prospectus, the Ohio Tax-Free Fund may acquire
rights regarding specified portfolio securities under puts. See "INVESTMENT
OBJECTIVES AND POLICIES -- Additional Information on Portfolio Instruments -
Puts" in this Statement of Additional Information. The policy of the Ohio
Tax-Free Fund is to limit its acquisition of puts to those under which it will
be treated for federal income tax purposes as the owner of the Exempt Securities
acquired subject to the put and the interest on the Exempt Securities will be
tax-exempt to it. Although the Internal Revenue Service has issued a published
ruling that provides some guidance regarding the tax consequences of the
purchase of puts, there is currently no guidance available from the Internal
Revenue Service that definitively establishes the tax consequences of many of
the types of puts that the Ohio Tax-Free Fund could acquire under the 1940 Act.
Therefore, although the Ohio Tax-Free Fund will only acquire a put after
concluding that it will have the tax consequences described above, the Internal
Revenue Service could reach a different conclusion.
Distributions of exempt-interest dividends by the Ohio Tax- Free Fund
may be subject to local taxes even though a substantial portion of such
distributions may be derived from interest on obligations which, if received
directly, would be exempt from such taxes. The Ohio Tax-Free Fund will report to
its shareholders annually after the close of its taxable year the percentage and
source of interest income earned on municipal obligations held by the Ohio
Tax-Free Fund during the preceding year. Shareholders are advised to consult
their tax advisers concerning the application of state and local taxes.
GENERAL
Each Portfolio may be required by federal law to withhold and remit to
the U.S. Treasury 31% of taxable dividends, if any, and capital gain
distributions to any shareholder, and the proceeds of redemption or the values
of any exchanges of shares of the Portfolio, if such shareholder (1) fails to
furnish the Portfolio with a correct taxpayer identification number, (2)
under-reports dividend or interest income, or (3) fails to certify to the
Portfolio that he or she is not subject to such withholding. An individual's
taxpayer identification number is his or her Social Security number.
Information set forth in the Prospectuses and this Statement of
Additional Information which relates to federal taxation is only
B - 29
<PAGE> 31
a summary of some of the important federal tax considerations generally
affecting purchasers of shares of a Portfolio. No attempt has been made to
present a detailed explanation of the federal income tax treatment of a
Portfolio or its shareholders and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential purchasers of shares
of a Portfolio are urged to consult their tax advisers with specific reference
to their own tax situation. In addition, the tax discussion in the Prospectuses
and this Statement of Additional Information is based on tax laws and
regulations which are in effect on the date of the Prospectuses and this
Statement of Additional Information; such laws and regulations may be changed by
legislative or administrative action. As of the date hereof, several proposals
have been introduced by the 104th Congress, which if enacted, could affect much
of the information contained in this section. However, it is not possible at
this time to assess which, if any, of such proposals will be acted upon and the
effect thereof, if any, on this information.
Information as to the federal income tax status of all distributions
will be mailed annually to each shareholder.
FISCAL YEAR
Each Fund's fiscal year ends December 31.
- - --------------------------------------------------------------------------------
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
- - --------------------------------------------------------------------------------
Shares of each of the Company's Portfolios are sold on a continuous
basis by the Distributor, and the Distributor has agreed to use appropriate
efforts to solicit all purchase orders. In addition to purchasing shares
directly from the Distributor, shares may be purchased through procedures
established by the Distributor in connection with the requirements of accounts
at Provident or Provident's affiliated entities (collectively, "Entities").
Customers purchasing shares of the Portfolios may include officers, directors,
or employees of Provident or the Entities.
The Company may suspend the right of redemption or postpone the date of
payment for shares during any period when (a) trading on the New York Stock
Exchange (the "Exchange") is restricted by applicable rules and regulations of
the Commission, (b) the Exchange is closed for other than customary weekend and
holiday closings, (c) the Commission has by order permitted such suspension, or
(d) an emergency exists as a result of which (i) disposal by the Company of
securities owned by it is not reasonably
B - 30
<PAGE> 32
practical, or (ii) it is not reasonably practical for the Company to determine
the fair value of its net assets.
- - --------------------------------------------------------------------------------
VALUATION OF SECURITIES
- - --------------------------------------------------------------------------------
THE RIVERFRONT U.S. GOVERNMENT SECURITIES MONEY MARKET FUND
The Directors have determined that the amortized cost method for
valuing the Money Market Fund's securities is the best method currently
available. The Directors review this method of valuation to ensure that such
Portfolio's securities are valued at their fair value, as determined by the
Directors in good faith. The Directors are obligated, as a particular
responsibility within the overall duty of care owed to shareholders, to
establish procedures reasonably designed, taking into account current market
conditions and the Money Market Fund's investment objective, to stabilize the
net asset value per share as computed for the purposes of distribution and
redemption at $1.00 per share.
The Directors' procedures include periodically monitoring, as
appropriate and at such intervals as are reasonable in light of current market
conditions, the relationship between the amortized cost value per share and a
net asset value per share based upon available indications of market value. The
Directors will consider what steps should be taken, if any, in the event of a
difference of more than one-half of one percent between the two. The Directors
will take such steps as they consider appropriate including (1) the sale of the
Money Market Fund's instruments prior to maturity to realize capital gains or
losses or to shorten the average portfolio maturity; (2) withholding dividends
or payment of distributions from capital or capital gains; (3) redemptions of
shares in kind; or (4) establishing a net asset value per share by using
available market quotations or equivalents in order to minimize any material
dilution or other unfair results which might arise from differences between the
two.
The Money Market Fund limits its investments to instruments which the
Directors have determined present minimal credit risk and which are "Eligible
Securities" as defined by Rule 2a-7 of the 1940 Act. The Money Market Fund is
also required to maintain a dollar weighted average portfolio maturity (not more
than 90 days) appropriate to its objective of maintaining a stable net asset
value of $1.00 per share, and this precludes the purchase of any security with a
remaining maturity of more than 397 days. Should the disposition of a security
result in a dollar weighted average portfolio maturity of more than 90 days, the
Money Market Fund will invest its available cash in such a manner as to reduce
such maturity to 90 days or less as soon as practicable. For the pur-
B - 31
<PAGE> 33
pose of determining the dollar weighted average, any instrument with a stated
maturity of six months or less which has a coupon (or yield) which is subject to
renegotiation at designated periods of time (e.g., every 30 days), or any
instrument having a coupon (or yield) which fluctuates with the change in a
predetermined standard (e.g., the so-called "Prime Rate"), shall be deemed to
have a maturity equivalent to the time remaining to the next date of
renegotiation or the next date on which the predetermined standard may change.
It is the normal practice of the Money Market Fund to hold securities
to maturity and realize par therefor, unless a sale or other disposition is
mandated by redemption requirements or other extraordinary circumstances. Under
the amortized cost method of valuation traditionally employed by institutions
for valuation of money market instruments, neither the amount of daily income
nor the net asset value is affected by any unrealized appreciation or
depreciation of the Money Market Fund. In periods of declining interest rates,
the indicated daily yield on shares of the Money Market Fund, computed by
dividing its annualized daily income by the net asset value computed as above,
may tend to be lower than similar computations made by utilizing a method of
valuation based upon market prices and estimates. In periods of rising interest
rates, the daily yield of shares at the value computed as described
above may tend to be higher than a similar computation made by utilizing a
method of calculation based upon market prices and estimates.
Since the net income of the Money Market Fund is declared as a dividend
each time net income is determined, the net asset value per share remains at
$1.00 per share immediately after each dividend declaration. The Money Market
Fund expects to have net income at the time of each dividend determination made
at the close of the Exchange. If for any reason there is a net loss which would
result in the Money Market Fund's not being able to price its shares at $1.00
per share, the Money Market Fund will first offset such amount pro rata against
dividends accrued during the month in each shareholder account. To the extent
that such a net loss would exceed such accrued dividends, the Money Market Fund
will reduce the number of its outstanding shares by having each shareholder
contribute to the Money Market Fund's capital his pro rata portion of the total
number of shares required to be cancelled in order to maintain a net asset value
of $1.00. EACH SHAREHOLDER WILL BE DEEMED TO HAVE AGREED TO SUCH A CONTRIBUTION
IN THESE CIRCUMSTANCES BY HIS INVESTMENT IN THE MONEY MARKET FUND.
THE RIVERFRONT U.S. GOVERNMENT INCOME FUND, THE RIVERFRONT INCOME
EQUITY FUND, THE RIVERFRONT OHIO TAX-FREE BOND FUND, THE RIVERFRONT
STOCK APPRECIATION FUND AND THE RIVERFRONT FLEXIBLE GROWTH FUND
Current values for such Portfolios' securities are determined as
follows:
B - 32
<PAGE> 34
(1) Securities that are traded on a national securities exchange or the
over-the-counter National Market System (NMS) are valued on the basis of the
last sales price on the exchange where primarily traded or NMS prior to the time
of the valuation, provided that a sale has occurred and that this price reflects
current market value according to procedures established by the Board of
Directors;
(2) Securities traded in the over-the-counter market, other than on
NMS, for which market quotations are readily available, or in the event no sale
has occurred under (1) above, are valued at the mean of the bid and asked prices
at the time of valuation;
(3) Short-term instruments which are purchased with maturities of sixty
days or less are valued at amortized cost (original purchase cost as adjusted
for amortization of premium or accretion of discount) which, when combined with
accrued interest, approximates market; short-term instruments maturing in more
than sixty days when purchased which are held on the sixtieth day prior to
maturity are valued at amortized cost (market value on the sixtieth day adjusted
for amortization of premium or accretion of discount) which, when combined with
accrued interest, approximates market; and which in either case reflects fair
value as determined by the Board of Directors;
(4) Short-term money market instruments having maturities of more than
sixty days for which market quotations are readily available are valued at
current market value; where market quotations are not available, such
instruments are valued at fair value as determined by the Board of Directors;
and
(5) The following are valued at prices deemed in good faith to be fair
under procedures established by the Board of Directors: (a) securities,
including restricted securities, for which complete quotations are not readily
available, (b) listed securities or those on NMS if, in the Company's opinion,
the last sales price does not reflect a current market value or if no sale
occurred, and (c) other assets.
- - --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
- - --------------------------------------------------------------------------------
The Directors and officers of the Company are:
J. VIRGIL EARLY, Age 58, Director; Principal in J. Virgil
Early & Associates and former Executive Vice President of
Huntington Bankshares, Inc. Mr. Early's business address is J.
Virgil Early & Associates, 11 Bliss Lane, Jekyll Island, Georgia
31527.
B - 33
<PAGE> 35
WILLIAM M. HIGGINS, Age 51, Director; President and Director
of Sena Weller Rohs Williams Inc.; former President and Director of
Reynolds DeWitt Advisers, Inc. and former Vice President of
Reynolds DeWitt Securities Co. Mr. Higgins' business address is
Sena Weller Rohs Williams, Inc., 300 Main Street, 4th Fl.,
Cincinnati, OH 45202.
STEPHEN G. MINTOS, Age 41, Director and President of the
Company; Executive Vice President, BISYS Fund Services Limited
Partnership (formerly The Winsbury Company).*
HARVEY M. SALKIN, PH.D., Age 50, Director; Retired; former President
and major shareholder of Mathematical Investing Systems, Inc.* Dr. Salkin's
business address is Case Western Reserve University, Department of Operations
Research, 10900 Euclid Avenue, Cleveland, Ohio 44106-7235.
GEORGE O. MARTINEZ, Age 37, Vice President; employee of BISYS Fund
Services Limited Partnership (formerly The Winsbury Company) since April, 1995;
prior to April, 1995, he was Vice President and Associate General Counsel of
Alliance Capital Management L.P.
(investment firm).
WALTER B. GRIMM, Age 50, Vice President; employee of BISYS Fund
Services Limited Partnership (formerly The Winsbury Company) since June, 1992;
prior to June, 1992, he was the President of Leigh Investments Consulting
(investment firm).
JAMES E. WHITE, Age 41, Secretary; employee of BISYS Fund Services
Limited Partnership since December, 1995; prior to December, 1995, he was a
Sales Director/Variable Products at Financial Horizons Distributors Agency, Inc.
(third party products
marketer to banks).
ALAINA V. METZ, Age 28, Assistant Secretary; employee of BISYS Fund
Services Limited Partnership since June, 1995; prior to June, 1995, she was a
supervisor at Alliance Capital Management, L.P.
(investment firm).
*These Directors are interested persons of the Company as
defined under the 1940 Act.
Except as set forth above, the address of all Directors and officers of
the Company is 3435 Stelzer Road, Columbus, Ohio 43219.
During the fiscal year ended December 31, 1995, no Director or officer
affiliated with Provident, SunBank, DRZ, JIR, the Distributor or BISYS Fund
Services Ohio, Inc. received any direct remuneration from the Company.
B - 34
<PAGE> 36
The following table sets forth information regarding all compensation
paid by the Company to its directors for their services as directors during the
fiscal year ended December 31, 1995. The Company has no pension or retirement
plans.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Total Compensation
Name and Position Compensation From The Company
With The Company From The Company and the Fund Complex*
- - ---------------- ---------------- ---------------------
<S> <C> <C>
J. Virgil Early $5,500 $5,500
Director
William M. Higgins $5,500 $5,500
Director
Harvey M. Salkin $1,750 $1,750
Director
Stephen G. Mintos $ 0 $ 0
Director
</TABLE>
- - ----------
*For purposes of this Table, Fund Complex means one or more mutual
funds, including the Portfolios, which have a common investment adviser or
affiliated investment advisers or which hold themselves out to the public as
being related.
- - --------------------------------------------------------------------------------
MANAGEMENT OF THE PORTFOLIOS
- - --------------------------------------------------------------------------------
INVESTMENT ADVISER
Subject to the general supervision of the Company's Board of Directors
and in accordance with the Portfolios' investment objectives, policies and
restrictions, investment advisory services are provided to the Portfolios of the
Company by The Provident Bank, One East Fourth Street, Cincinnati, Ohio 45202
("Provident") pursuant to the Investment Advisory Agreement dated as of August
1, 1994, as amended as of August 15, 1995 (the "Investment Advisory Agreement").
Prior to August 1, 1994, such services were provided to the Money Market Fund,
the Income Fund and the Income Equity Fund pursuant to a Management Agreement
dated August 6, 1992, between the
B - 35
<PAGE> 37
Company and Provident (the "Prior Management Agreement"), an Investment Advisory
Agreement between the Company and Provident with respect to the Income Fund
dated April 30, 1993 (the "Provident Advisory Agreement"), and an Investment
Advisory Agreement between the Company and SunBank Capital Management, N.A.
("SunBank") with respect to the Income Equity Fund dated August 1, 1992 (the
"SunBank Agreement").
Provident's services as investment adviser are provided through its
Trust and Financial Services Group. Provident's Trust and Financial Services
Group currently manages assets of approximately $300 million. The Company is
the first registered investment company for which Provident has provided
investment advisory services.
Provident is an Ohio banking corporation which, with its affiliates, on
December 31, 1995, provided commercial lending, lease financing, consumer
credit, credit card, discount brokering, data processing, personal loan
financing and trust and asset management services through over 70 branch
offices located in Ohio and Kentucky. Provident is a subsidiary of Provident
Bancorp, Inc., a bank holding company headquartered in Cincinnati, Ohio, with
approximately $6.2 billion in total consolidated assets as of December 31, 1995.
Through its Ohio and Kentucky banking subsidiaries, Provident Bancorp, Inc.
provides a wide range of banking services to individuals and businesses.
Provident's Trust and Financial Services Group employs an experienced
staff of professional investment analysts, portfolio managers and traders and
uses several proprietary computer-based systems in conjunction with fundamental
analysis to identify investment opportunities.
Under the Investment Advisory Agreement, Provident has agreed to
provide, either directly or through one or more subadvisers, investment advisory
services for each of the Company's Portfolios as described in their respective
Prospectuses. For the services provided and expenses assumed pursuant to the
Investment Advisory Agreement, each of the Company's Portfolios pays Provident a
fee, computed daily and paid monthly, at an annual rate calculated as a
percentage of the average daily net assets of that Portfolio. The annual rates
for the Portfolios are as follows: fifteen one-hundredths of one percent (.15%)
for the Money Market Fund; forty one-hundredths of one percent (.40%) for the
Income Fund; ninety-five one-hundredths of one percent (.95%) for the Income
Equity Fund; fifty one-hundredths of one percent (.50%) for the Ohio Tax-Free
Fund; eighty one-hundredths of one percent (.80%) for the Stock Appreciation
Fund; and ninety one-hundredths of one percent (.90%) for the Flexible Growth
Fund. Provident may periodically voluntarily reduce all or a portion of its
advisory fee with respect to a Portfolio to increase the net income of that
Portfolio available for distribution as dividends.
Under the Prior Management Agreement, for the fiscal year ended
December 31, 1993, and the period from January 1, 1994 to July 31, 1994, the
Income Fund incurred $82,342 and $58,055, respectively, in
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<PAGE> 38
management fees; the Income Equity Fund incurred $83,536 and $69,030,
respectively, in management fees; and the Money Market Fund incurred $156,711
and $130,493, respectively, in management fees. Under the Investment Advisory
Agreement, for the period August 1, 1994 to December 31, 1994, and the fiscal
year ended December 31, 1995, the Portfolios incurred the following investment
advisory fees:
<TABLE>
<CAPTION>
Year Ended August 31, 1994 to
Fund December 31, 1995 December 31, 1994
---- ----------------- -----------------
<S> <C> <C>
Money Market $221,912 $ 96,715
Income $144,461 68,703
Income Equity $407,229 59,054
Tax-Free $ 56,114 20,864
Stock Appreciation $ 83,982(1) N/A(1)
Flexible Growth $ 76,231 2,255
</TABLE>
- - ----------
(1) Commenced operations September 30, 1995.
For the fiscal period January 1, 1993 through April 30, 1993, Keystone
Custodian Funds, Inc. ("Keystone") served as adviser to the Income Fund. For
that period, the Company paid Keystone $8,288 in advisory fees. The Agreement
between Keystone and the Company, on behalf of the Income Fund was terminated by
mutual agreement on April 30, 1993.
For the fiscal period May 1, 1993 through December 31, 1993, the
Company, on behalf of the Income Fund, paid Provident $19,159 in advisory fees.
The Directors of Provident are Allen L. Davis, Jack M. Cook,
Thomas D. Grote, Jr., S. Paul Mathews, Philip R. Myers, Joseph A.
Pedoto, Sidney A. Peerless and Joseph A. Steger.
The principal executive officers of Provident are Allen L.
Davis, President and Chief Executive Officer; Philip R. Myers,
B - 37
<PAGE> 39
Senior Executive Vice President; Robert L. Hoverson, Executive Vice President;
John R. Farrenkopf, Senior Vice President and Chief Financial Officer; Mark E.
Magee, Senior Vice President, General Counsel and Secretary; John S. Catlin,
Richard J. Deyhle, Geoffrey R. Glick, Jerry L. Grace, Roy L. Hiles, Drew T.
Kagan, Noel Knox, Roland E. Koch, John R. Mirlisena, John E. Rubenbauer and
Bradley J. Smith, Senior Vice Presidents.
For the fiscal year ended December 31, 1993, the Income Fund paid
$293,437 in expenses, of which amount Provident reimbursed such Portfolio
$115,029, and the Income Equity Fund paid $337,251 in expenses, of which amount
Provident reimbursed such Portfolio $35,381. For the fiscal year ended December
31, 1994, Provident waived investment advisory fees or reimbursed the Portfolios
for certain expenses in the following amounts: the Flexible Growth Fund -
$16,264; and the Ohio Tax-Free Fund - $4,394, respectively. For the fiscal year
ended December 31, 1995, Provident waived investment advisory fees or reimbursed
the Portfolios for certain expenses in the following amounts: the Income Fund -
$548; the Income Equity Fund - $73,635; the Tax Free Fund - $11,778; the
Flexible Growth Fund - $69,745; and the Stock Appreciation Fund - $900.
Unless sooner terminated, the Investment Advisory Agreement and each of
the Sub-Investment Advisory Agreements (as described below) continued in effect
as to a particular Portfolio until December 31, 1995 (except for the
Sub-Investment Advisory Agreement with DRZ which will continue in effect until
December 31, 1996), and thereafter for successive one-year periods ending
December 31 of each year if such continuance is approved at least annually by
the Company's Board of Directors or by vote of a majority of the outstanding
shares of such Portfolio (as defined under "Fundamental Nature of Investment
Objectives" in the Prospectuses), and a majority of the Directors who are not
parties to the Investment Advisory Agreement or the Sub-Investment Advisory
Agreements or interested persons (as defined in the 1940 Act) of any party to
the Investment Advisory Agreement or the Sub-Investment Advisory Agreements by
votes cast in person at a meeting called for such purpose. The Investment
Advisory Agreement and each of the Sub- Investment Advisory Agreements are
terminable as to a particular Portfolio at any time on 60 days' written notice
without penalty by the Portfolio, by vote of a majority of the outstanding
shares of that Portfolio, or by Provident or, in the case of a subadviser, on
60 days' prior written notice from such subadviser. Such Agreements also
terminate automatically in the event of any assignment, as defined in the 1940
Act.
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<PAGE> 40
The Investment Advisory Agreement and each of the Sub- Investment
Advisory Agreements provide that the respective investment advisers or
sub-investment advisers shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Company in connection with the
performance of their duties, except a loss resulting from a breach of fiduciary
duty with respect to the receipt of compensation for services or a loss
resulting from willful misfeasance, bad faith, or gross negligence on the part
of the respective investment advisers or sub-investment advisers in the
performance of their duties, or from reckless disregard of their duties and
obligations thereunder.
SUBADVISERS
Pursuant to the terms of the Investment Advisory Agreement, Provident
has entered into a Sub-Investment Advisory Agreement dated as of August 15,
1995, with DePrince, Race & Zollo, Inc., 201 South Orange Avenue, Suite 850,
Orlando, Florida 32801 ("DRZ"). Pursuant to the terms of such Sub-Investment
Advisory Agreement, DRZ has been retained by Provident to manage the investment
and reinvestment of the assets of the Income Equity Fund, subject to the
direction and control of the Company's Board of Directors.
Under this arrangement, DRZ is responsible for the day-to-day
management of the Income Equity Fund's assets, investment performance, policies
and guidelines, and maintaining certain books and records, and Provident is
responsible for selecting and monitoring the performance of DRZ, and for
reporting the activities of DRZ in managing the Income Equity Fund to the
Company's Board of Directors.
For its services provided and expenses assumed pursuant to its
Sub-Investment Advisory Agreement with Provident, DRZ receives from Provident, a
fee computed daily and paid monthly, at the annual rate of fifty one-hundredths
of one percent (0.50%) of the Income Equity Fund's average daily net assets of
up to $55 million and fifty-five one-hundredths of one percent (0.55%) of the
Income Equity Fund's average daily net assets of $55 million and above. However,
DRZ has agreed with the Company and Provident to waive a portion of such fee
until January 1, 1997. Until January 1, 1997, DRZ will receive such fee at an
annual rate of 0.45% of the Income Equity Fund's average daily net assets of up
to $55 million and 0.50% of the Income Equity Fund's average daily net assets of
$55 million and above. In addition, DRZ has indicated a willingness to manage
net assets of the Income Equity Fund up to $75 million, but not beyond. Should
the Income Equity Fund's net assets approach or reach $75 million, the Company's
Board of Directors will be required to determine what action, including the
hiring of an additional sub-investment adviser, is necessary and appropriate
under the circumstances.
DRZ is owned jointly by Gregory M. DePrince, John D. Race and Victor A.
Zollo, Jr. DRZ was established on March 1, 1995, to
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<PAGE> 41
provide mutual funds and other institutional investors with investment
management services. Messrs. DePrince, Race and Zollo prior to April 1995 were
officers and directors of SunBank Capital Management, N.A., 200 South Orange
Avenue, Orlando, Florida 32801 ("SunBank"), and now serve as the directors and
officers of DRZ.
From August 1, 1994, to August 14, 1995, SunBank served as the
sub-investment adviser to the Income Equity Fund pursuant to a Sub- Investment
Advisory Agreement dated August 1, 1994 (the "SunBank Sub-Advisory Agreement")
and from August 1, 1992 to July 31, 1994, SunBank served as investment adviser
to the Income Equity Fund pursuant to the SunBank Agreement. Pursuant to the
SunBank Sub- Advisory Agreement and the SunBank Agreement, SunBank received a
fee computed daily and paid monthly, at the annual rate of thirty-five
one-hundredths of one percent (0.35%) of the Income Equity Fund's average daily
net assets.
For the fiscal year ended December 31, 1993, and the period of January
1, 1994 to July 31, 1994, the Income Equity Fund paid SunBank $73,097 and
$67,502, respectively, in advisory fees. Pursuant to the terms of the SunBank
Sub-Advisory Agreement, for the period of August 1, 1994, to December 31, 1994,
and for the period of January 1, 1995, to August 14, 1995, Provident paid
$51,630 and $92,579, respectively, to SunBank in sub-investment advisory fees.
For the period August 15, 1995 to December 31, 1995, Provident paid $77,303 to
DRZ in sub-investment advisory fees.
In addition, pursuant to the terms of the Investment Advisory
Agreement, Provident has entered into a Sub-Investment Advisory Agreement dated
as of August 1, 1994, with James Investment Research, Inc., 1349 Fairground
Road, Beavercreek, Ohio 45385 ("JIR"). Pursuant to the terms of such
Sub-Investment Advisory Agreement, JIR has been retained by Provident to manage
the investment and reinvestment of the assets of the Flexible Growth Fund,
subject to the direction and control of the Company's Board of Directors.
Under this arrangement, JIR is responsible for the day-to-day
management of the Flexible Growth Fund's assets, reviewing investment
performance, policies and guidelines and maintaining certain books and records,
and Provident is responsible for selecting and monitoring the performance of JIR
and reporting the activities of JIR in managing the Flexible Growth Fund to the
Company's Board of Directors.
For its services provided and expenses assumed pursuant to the
Sub-Investment Advisory Agreement with Provident, JIR receives from Provident a
fee, computed daily and paid monthly, at the annual rate of fifty one-hundredths
of one percent (.50%) of the Flexible Growth Fund's average daily net assets.
Pursuant to the terms of this Sub-Investment Advisory Agreement, for the fiscal
year ended December 31, 1995 and the period of September 1, 1994, to
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<PAGE> 42
December 31, 1994, Provident paid $25,332 and $2,819, respectively, to JIR in
sub-investment advisory fees.
JIR is owned by Frank James, Ph.D., who established it in 1972. JIR
provides advice to institutional as well as individual clients, including NYSE
listed companies, colleges, banks, hospitals, foundations, trusts, endowment
funds and individuals. The principal executive officers and directors of JIR are
Frank E. James, Ph.D. - President and Director; Barry R. James - Vice President;
Suzie Smith - Treasurer; Francis E. James III - Vice President; Ann Marie Shaw -
Vice President Operations; Jerome G. Peppers - Director; and Robert G. Hawkins -
Director.
CUSTODIAN, TRANSFER AGENT AND FUND ACCOUNTANT
In addition to serving as investment adviser, Provident has entered
into an Amended and Restated Custodian, Fund Accounting and Recordkeeping
Agreement with the Company to provide custody and certain fund accounting
services to Portfolios. Under the Amended and Restated Custodian, Fund
Accounting and Recordkeeping Agreement dated as of August 1, 1994, Provident
receives an annual fee from each Portfolio, computed daily and paid monthly, at
an annual rate calculated as a percentage of the average daily net assets of
that Portfolio. The annual rates for the Portfolios are as follows: .05% for the
Money Market Fund; .10% for the Income Fund; .15% for each of the Income Equity
Fund, the Flexible Growth Fund and the Stock Appreciation Fund; and .14% for the
Ohio Tax-Free Fund. Provident as custodian is responsible for safeguarding all
securities and cash of the Portfolios. For the year ended December 31, 1995, the
Money Market Fund, the Income Fund, the Income Equity Fund, the Flexible Growth
Fund, the Stock Appreciation Fund and the Ohio Tax-Free Fund incurred $73,973,
$36,115, $72,596, $12,666, $15,578 and $15,708, respectively, for such custody
and fund accounting services.
Under the Master Transfer and Recordkeeping Agreement, Provident
receives from each Portfolio a fee, computed daily and paid monthly. Such fee
is calculated by adding the sum of (i) 0.04% of the Portfolio's average daily
net assets attributable to its Investor A shares and (ii) $20,000 annual fee
plus $23 per shareholder account and certain other fixed fees and out-of-pocket
expenses attributable to its Investor B Shares. Pursuant to a Sub-Transfer
Agency Agreement dated as of January 1, 1995, between Provident and BISYS Fund
Services Ohio, Inc., an affiliate of the Distributor ("BISYS"), BISYS provides
sub-transfer agency services for the Investor B shares of each of the
Portfolios. For such services, BISYS receives from Provident an annual fee of
$20,000 plus $25 per Investor B shareholder account and certain other fixed
fees and out-of-pocket expenses.
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<PAGE> 43
SECURITIES TRANSACTIONS
- - --------------------------------------------------------------------------------
Each adviser, under policies established by the Board of Directors,
selects broker-dealers to execute transactions for the Portfolios. It is the
policy of the Company, in effecting transactions in portfolio securities, to
seek best execution of and best price for orders. The determination of what may
constitute best execution and price in the execution of a transaction by a
broker involves a number of considerations, including, without limitation, the
overall direct net economic result to a Portfolio, involving both price paid or
received and any commissions and other costs paid, the breadth of the market
where executed, the efficiency with which the transaction is effected, the
ability to effect the transaction at all where a large block is involved, the
availability of the broker to stand ready to execute potentially difficult
transactions in the future and the financial strength and stability of the
broker. Such considerations are judgmental and are weighed by the Board of
Directors in determining the overall reasonableness of brokerage commissions
paid. In determining best execution and selecting brokers to execute
transactions, the advisers may consider brokerage and research services, such as
analyses and reports concerning issuers, industries, securities, economic
factors and trends and other statistical and factual information provided to the
Portfolios or to any other account over which the advisers or their affiliates
exercise investment discretion. Each adviser is authorized to pay a
broker-dealer who provides such brokerage and research services a commission for
executing each such Portfolio's transactions which is in excess of the amount of
commission another broker would have charged for effecting that transaction if,
but only if, the adviser determines in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker viewed in terms of that particular transaction or in
terms of all of the accounts over which it exercises investment discretion. Any
such research and other statistical and factual information provided by brokers
to a Portfolio or to the adviser is considered to be in addition to and not in
lieu of services required to be performed by such adviser under its agreement
with the Company. The cost, value and specific application of such information
are indeterminable and hence are not practicably allocable among the Portfolios
and other clients of the adviser who may indirectly benefit from the
availability of such information. Similarly, the Portfolios may indirectly
benefit from information made available as a result of transactions effected for
such other clients. Under the Investment Advisory Agreements, the advisers are
permitted to pay higher brokerage commissions for brokerage and research
services in accordance with Section 28(e) of the Securities Exchange Act of
1934. In the event the advisers do follow such a practice, they will do so on a
basis which is fair and equitable to the Company, and its Portfolios.
B - 42
<PAGE> 44
DRZ may direct some brokerage transactions to large brokerage firms in
return for research regarding equity securities. In addition, DRZ, on behalf of
the Income Equity Fund, intends to direct brokerage transactions to one or more
brokerage firms which participate in fee recapture programs whereby such
brokerage firms refund a portion of the Income Equity Fund's brokerage
commissions to the Income Equity Fund. For the fiscal year ended December 31,
1995, the total amount of brokerage transactions directed by such Fund's
sub-adviser and commissions paid to First Boston Corp. under such an arrangement
were $29,487,974 and $50,199, respectively.
Provident, on behalf of the Stock Appreciation Fund, may from time to
time direct brokerage transactions to Autranet, a subsidiary of Donaldson,
Lufkin & Jenrette, William O'Neill & Company and Kalb Vorrhis & Company in
return for research regarding fundamental and technical research on equity
securities. For the fiscal period ended December 31, 1995, Provident directed
brokerage transactions to such firms in the following principal amounts:
$9,939,693, $659,945 and $552,401, respectively, and paid to such brokers on
behalf of the Stock Appreciation Fund the following brokerage commissions for
those transactions: $22,160, $2,220 and $1,080, respectively.
The Money Market Fund, the Income Fund and the Ohio Tax-Free Fund
expect that purchases and sales of income securities usually will be principal
transactions. Such securities are normally purchased directly from the issuer or
from an underwriter or market maker for the securities. There usually will be no
brokerage commissions paid by such Portfolio for such purchases. Purchases from
underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark up
or reflect a dealer's mark down. Where transactions are made in the
over-the-counter market, the Portfolio will deal with primary market makers
unless more favorable prices are otherwise obtainable.
The Income Fund may seek to maximize the rate of return on its
portfolio by engaging in short-term trading consistent with its investment
objective. Trading will occur primarily in anticipation of or in response to
market developments or to take advantage of a market decline (a rise in interest
rates) or to purchase in anticipation of a market rise (a decline in interest
rates) and later sell. In addition, a security may be sold and another purchased
at approximately the same time to take advantage of what the adviser believes to
be a temporary disparity in the normal yield relationship between the two
securities. Yield disparities may occur for reasons not directly related to the
investment quality of particular issues or the general movement of interest
rates, due to such things as changes in the overall demand for, or supply of,
various types of U.S. government securities and other eligible securities or
changes in the investment objectives of
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<PAGE> 45
investors. This policy of short-term trading may result in a higher portfolio
turnover and increased expenses.
The Income Equity Fund, the Stock Appreciation Fund and the Flexible
Growth Fund expect that purchases and sales of securities usually will be
effected through brokerage transactions for which commissions are payable.
Purchases from underwriters will include the underwriting commission or
concession, and purchases from dealers serving as market makers will include a
dealer's mark up or mark down. Where transactions are made in the
over-the-counter market, such Portfolio will deal with primary market makers
unless more favorable prices are otherwise obtainable.
The Income Equity Fund may participate, if and when practicable, in
group bidding for the purchase directly from an issuer of certain securities for
such Fund in order to take advantage of the lower purchase price available to
members of such a group.
The Company's Board of Directors has determined that each Portfolio may
follow a policy of considering sales of shares as a factor in the selection of
broker-dealers to execute portfolio transactions, subject to the requirements of
best execution, including best price, described above.
The policy of the Company with respect to brokerage is and will be
reviewed by the Board of Directors from time to time. Because of the possibility
of further regulatory developments affecting the securities exchanges and
brokerage practices generally, the foregoing practices may be changed, modified
or eliminated.
Investment decisions for the Portfolios are made independently from
similar accounts managed by the advisers. Such similar accounts may also invest
in the same securities as the Portfolios. When a purchase or sale of the same
security is made at substantially the same time on behalf of a Portfolio and
such accounts managed by the advisers, the transaction will be averaged as to
price and available investments allocated as to amount in the manner which each
adviser believes to be equitable to a Portfolio and such accounts. In some
instances, these investment procedures may adversely affect the price paid or
received by a Portfolio or the size of the position obtained by a Portfolio. To
the extent permitted by law, each adviser may aggregate the securities to be
sold or purchased for a Portfolio with those to be sold or purchased for its
similar accounts in order to obtain best execution.
For the fiscal years ended December 31, 1993, 1994 and 1995, no
brokerage commissions were paid by the Money Market Fund, the Income Fund or the
Ohio Tax-Free Fund. For the same periods, the Income Equity Fund paid $36,297,
$93,502 and $269,007, respectively, in brokerage commissions. Of such amount
paid for the year ended
B - 44
<PAGE> 46
December 31, 1995, $67,723 were paid to Provident Securities & Investment
Company, an affiliate of Provident. For the fiscal year ended December 31, 1995
and the fiscal period ended December 31, 1994, the Flexible Growth Fund paid
$15,465 and $2,217, respectively, in brokerage commissions, none of which were
paid to an affiliated broker-dealer. For the fiscal years ended September 30,
1993, 1994 and 1995 and for the fiscal period ended December 31, 1995, the Stock
Appreciation Fund paid $484,148, $557,458, $339,168 and $107,648, respectively,
in brokerage commissions, none of which were paid to an affiliated
broker-dealer.
Each of the Money Market Fund, the Income Fund and the Stock
Appreciation Fund from time to time during the fiscal year ended December 31,
1995, held securities of its regular brokers or dealers, as defined in Rule
10b-1 under the 1940 Act, or their parent companies, consisting of those of
Prudential, Dean Witter and Merrill, Lynch, Pierce, Fenner & Smith, with respect
to the Money Market Fund; Lehman Brothers, with respect to the Income Fund; and
Donaldson, Lufkin & Jenrette, with respect to the Stock Appreciation Fund. At
December 31, 1995, the Money Market Fund held $7,000,000 of commercial paper of
Merrill, Lynch, Pierce, Fenner & Smith, and had repurchase agreements in the
following amounts with Prudential and Dean Witter: $35,000,000 and $24,137,000,
respectively. At December 31, 1995, the Income Fund held corporate bonds in the
aggregate amount of $1,000,000 of Lehman Brothers. And, as of that date, the
Stock Appreciation Fund held 5,000 shares of Donaldson, Lufkin & Jenrette at a
value of approximately $156,250. None of the other Portfolios held securities of
its regular brokers or dealers during such year.
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ADMINISTRATOR
- - --------------------------------------------------------------------------------
BISYS Fund Services Limited Partnership (formerly The Winsbury Company)
serves as administrator (the "Administrator") to the Company and each Portfolio
pursuant to the Administration Agreement dated February 1, 1994, as amended as
of July 6, 1995 (the "Administration Agreement"). The Administrator assists in
supervising all operations of each Portfolio (other than those performed by
Provident, DRZ and JIR under the Investment Advisory Agreements and
Sub-Investment Advisory Agreements, as applicable, and by Provident under the
Custodian, Fund Accounting and Recordkeeping Agreements and under the Master
Transfer and Recordkeeping Agreement). The Administrator is a broker-dealer
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<PAGE> 47
registered with the Commission, and is a member of the National Association of
Securities Dealers, Inc. The Administrator provides financial services to
institutional clients.
Under the Administration Agreement, the Administrator has agreed to
maintain office facilities for the Company, furnish statistical and research
data, clerical and certain bookkeeping services and stationery and office
supplies; prepare the periodic reports to the Commission on Form N-SAR or any
replacement forms therefor; compile data for, prepare for execution by the
Portfolios and file all the Portfolios' federal and state tax returns and
required tax filings other than those required to be made by the Portfolios'
custodian and transfer agent; prepare compliance filings pursuant to state
securities laws; assist to the extent requested by the Company with the
Company's preparation of its Annual and Semi-Annual Reports to Shareholders and
its Registration Statements (on Form N-1A or any replacement therefor); compile
data for, prepare and file timely Notices to the Commission required pursuant to
Rule 24f-2 under the 1940 Act; keep and maintain the financial accounts and
records of the Portfolios, including calculation of daily expense accruals; in
the case of the Money Market Fund, periodic review of the amount of the
deviation, if any, of the current net asset value per share (calculated using
available market quotations or an appropriate substitute that reflects current
market conditions) from the Money Market Fund's amortized cost price per share;
and generally assist in all aspects of the Company's operations other than those
performed by Provident, DRZ and JIR under the Investment Advisory Agreements and
Sub-Investment Advisory Agreements, and by Provident under the Custodian, Fund
Accounting and Recordkeeping Agreement and under the Master Transfer and
Recordkeeping Agreement. Under the Administration Agreement, the Administrator
may delegate all or any part of its responsibilities thereunder.
The Administrator receives a fee from each Portfolio for its services
as Administrator and expenses assumed pursuant to the Administration Agreement,
calculated daily and paid periodically, equal a fee calculated at the annual
rate of 0.20% of that Portfolio's average daily net assets. The Administrator
may voluntarily reduce all or a portion of its fee with respect to any Portfolio
in order to increase the net income of one or more of the Portfolios available
for distribution as dividends.
Unless sooner terminated as provided therein, the Administration
Agreement will continue in effect until December 31, 1997. The Administration
Agreement thereafter shall be renewed automatically for successive two-year
terms, unless written notice not to renew is given by the non-renewing party to
the other party at least 60 days prior to the expiration of the then-current
term. The Administrative Agreement is terminable with respect to a particular
Portfolio only upon mutual agreement of the parties to the Administration
Agreement and for cause (as defined in the Administration Agreement) by the
party alleging cause, on no less
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<PAGE> 48
than 60 days' written notice by the Company's Board of Directors or by the
Administrator.
The Administration Agreement provides that the Administrator shall not
be liable for any error or judgment or mistake of law or any loss suffered by
the Company in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
the Administrator of its obligations and duties thereunder.
For the fiscal year ended December 31, 1995, the Administrator received
$296,225, $72,231, $96,796, $22,439, $20,771 and $16,888, respectively, from the
Money Market Fund, the Income Fund, the Income Equity Fund, the Ohio Tax-Free
Fund, the Stock Appreciation Fund and the Flexible Growth Fund, for
administrative services. For the period February 1, 1994, to December 31, 1994,
the Administrator received $282,711, $53,444 and $59,369, respectively, from the
Money Market Fund, the Income Fund and the Income Equity Fund, for
administration services. For the fiscal period ended December 31, 1994, the
Administrator received $8,346 and $1,113, respectively, from the Ohio Tax-Free
Fund and the Flexible Growth Fund, for administration services. For the fiscal
year ended December 31, 1993, and the one-month period ended January 31, 1994,
Keystone Custodian Funds, Inc., 200 Berkeley Street, Boston, Massachusetts 02116
("Keystone") provided administrative services for the Company. For the fiscal
year ended December 31, 1993, and the one-month period ended January 31, 1994,
the Income Fund paid Keystone an administration fee of $100,000 and $8,178,
respectively; the Income Equity Fund paid Keystone an administration fee of
$100,000 and $8,904, respectively; and the Money Market Fund paid to or accrued
for the account of Keystone an administration fee of $116,552 and $12,019,
respectively.
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DISTRIBUTOR
- - --------------------------------------------------------------------------------
The Distributor serves as distributor to the Company and each of the
Portfolios pursuant to the Distribution Agreement dated February 1, 1994, as
amended July 6, 1995 (the "Distribution Agreement"). Unless otherwise
terminated, the Distribution Agreement continues for successive one-year periods
ending December 31 of each year if approved at least annually by the Company's
Board of Directors or by the vote of a majority of the outstanding shares of the
Company, and by the vote of a majority of the Directors of the Company who are
not parties to the Distribution Agreement or interested persons (as defined in
the
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<PAGE> 49
1940 Act) of any party to the Distribution Agreement, cast in person at a
meeting called for the purpose of voting on such approval. The Distribution
Agreement may be terminated in the event of any assignment, as defined in the
1940 Act.
For the fiscal year ended December 31, 1995 and the period of February
1, 1994 to December 31, 1994, commissions paid to the Distributor under the
Distribution Agreement with respect to the sale of shares of the Company, after
discounts to dealers, were $314,870 and $311,412, respectively. For such
periods, $190,064 and $276,225 were reallowed by the Distributor to Provident
Securities & Investment Company, an affiliate of Provident.
For the fiscal year ended December 31, 1993, and for the one-month
period of January 1, 1994 to January 31, 1994, Fiduciary Investment Company,
Inc. ("FICO") served as principal underwriter for the Company pursuant to a
Principal Underwriting Agreement (the "Underwriting Agreement") between the
Company and FICO. For the fiscal year ended December 31, 1993, and for the
one-month period of January 1, 1994 to January 31, 1994, FICO received no
payments from the Money Market Fund, the Income Fund or the Income Equity Fund.
- - --------------------------------------------------------------------------------
DISTRIBUTION PLANS
- - --------------------------------------------------------------------------------
Each Portfolio has adopted a Distribution and Shareholder Service Plan
and Agreement relating to its Investor A class of shares (the "Investor A
Plans") pursuant to Rule 12b-1 under the 1940 Act. In addition, each of the
Income Fund, the Income Equity Fund, the Ohio Tax-Free Fund, the Stock
Appreciation Fund and the Flexible Growth Fund has adopted a Distribution and
Shareholder Service Plan and Agreement pursuant to Rule 12b-1 under the 1940 Act
relating to its Investor B Class of Shares (the "Investor B Plans"). The
Investor A Plans and the Investor B Plans are hereinafter referred to as the
"Plans." Rule 12b-1 regulates circumstances under which an investment company
may bear expenses associated with the distribution of its shares. Each Portfolio
adopted both its Investor A Plan and Investor B Plan prior to the public
offering of its shares of that class. Each Investor A Plan provides that a
Portfolio may incur certain expenses which may not exceed a maximum amount up to
0.25% of such Portfolio's average daily net assets for any fiscal year occurring
after the inception of that Investor A Plan. Amounts paid under each Investor A
Plan are to be paid to the Distributor in order to pay costs of
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<PAGE> 50
distribution of a Portfolio's Investor A shares, including payment to the
Distributor for efforts expended in respect of or in furtherance of sales of
Investor A shares of the Portfolio and to enable the Distributor to pay or to
have paid to others who sell or have sold Portfolio Investor A shares a
maintenance or other fee, at such intervals as the Distributor may determine in
respect of Portfolio Investor A shares previously sold by any such others at any
time and remaining outstanding during the period in respect of which such fee is
or has been paid. Such payments would be made through the Distributor to
compensate broker-dealers and others whose clients invest in Investor A shares
of a Portfolio for continuing services to their clients based on the average
daily net asset value of such accounts remaining outstanding on the books of the
Portfolio for specified periods.
The Investor B Plan authorizes a Portfolio to make payments to the
Distributor in an amount not in excess, on an annual basis, of 1.00% of the
average daily net asset value of the Investor B shares of that Portfolio.
Pursuant to the Investor B Plan, a Portfolio is authorized to pay or reimburse
the Distributor (a) a distribution fee in an amount not to exceed on an annual
basis .75% of the average daily net asset value of Investor B shares of that
Portfolio (the "Distribution Fee") and (b) a service fee in an amount not to
exceed on an annual basis .25% of the average daily net asset value of the
Investor B shares of such Portfolio (the "Service Fee"). Payments of the
Distribution Fee to the Distributor pursuant to the Investor B Plan will be used
(i) to compensate Participating Organizations (as defined below) for providing
distribution assistance relating to Investor B shares, and (ii) for promotional
activities intended to result in the sale of Investor B shares such as to pay
for the preparation, printing and distribution of prospectuses to other than
current shareholders, and payments of the Service Fee to the Distributor
pursuant to the Investor B Plan will be used to compensate Participating
Organizations for providing shareholder services with respect to their customers
who are, from time to time, beneficial and record holders of Investor B shares.
Participating Organizations include banks (including Provident and its
affiliates), broker-dealers and other institutions.
The Portfolios make no payments in connection with the sales of their
shares other than the fees paid to the Distributor under the respective Plans.
As a result, the Portfolios do not pay for unreimbursed expenses of the
Distributor, including amounts expended by the Distributor in excess of amounts
received by it from the Portfolios, or interest, carrying or other financing
charges in connection with excess amounts expended.
All persons authorized to direct the disposition of monies paid or
payable by a Portfolio pursuant to a Plan or any related agreement must provide
to the Company's Board of Directors at least quarterly a written report of the
amounts so expended and the purposes for which such expenditures were made.
Representatives,
B - 49
<PAGE> 51
brokers, dealers or others receiving payments from the Distributor pursuant to a
Plan must determine that such payments and the services provided in connection
with such payments are appropriate for such persons and are not in violation of
regulatory limitations applicable to such persons.
While each Plan is in effect, the selection and nomination of Directors
of the Company who are not "interested persons" as defined by the 1940 Act
("Independent Directors") is committed to the discretion of the Independent
Directors then in office.
Each Plan was approved by the Board of Directors and by those
Independent Directors who have no direct or indirect financial interest in the
operation of each Plan or any agreements of the Company or any other person
related to a Plan ("Rule 12b-1 Directors"), cast in person at a meeting called
for the purpose of voting on such Plan. Each Plan may be continued annually if
approved by a majority vote of the Directors, and by a majority of the Rule
12b-1 Directors, cast in person at a meeting called for that purpose. Each Plan
may not be amended in order to increase materially the amount of distribution
expenses permitted under a Plan without being approved by a majority vote of the
outstanding voting shares of that class of the Portfolio. Each Plan may be
terminated at any time by a majority vote of the Rule 12b-1 Directors or a
majority of the outstanding voting shares of the effected class of the
Portfolio.
For the fiscal year ended December 31, 1995, the following amounts were
payable by the Portfolios to the Distributor and waived by the Distributor,
respectively, under the Plans.
<TABLE>
<CAPTION>
Investor A Plan Investor B Plan
--------------- ---------------
Fund Payable Waived Payable Waived
---- ------- ------ ------- ------
<S> <C> <C> <C> <C>
Money Market Fund $369,910 $369,910 N/A(1)
Income Fund $ 89,106 $ 33,246 $ 4,833 $ 36
Income Equity Fund $117,603 $ 30,381 $14,271 $ 40
Ohio Tax-Free Fund $ 26,953 $ 4,699 $ 4,410 $ 8
Stock Appreciation Fund $ 26,239 $ 281 $ 21 $ 2
Flexible Growth Fund $ 15,101 $ 5,552 $24,218 $ 79
</TABLE>
- - ---------------------------
(1) The Money Market Fund does not offer Investor B shares and therefore does
not make payments under the Investor B Plan.
B - 50
<PAGE> 52
- - --------------------------------------------------------------------------------
CAPITAL STOCK
- - --------------------------------------------------------------------------------
The Company has authorized capital of 3,000,000,000 shares, $.001 par
value. The Company's Articles of Incorporation authorizes the Board of Directors
to divide the Company's capital stock into unlimited series and classes. The
Company presently has six series of shares which represent interests in the
Portfolios of the Company. The shares of each Portfolio, other than the Money
Market Fund, are offered in two separate Classes: Investor A shares and Investor
B shares. Shares of the Money Market Fund are only offered in the Investor A
class of shares. Each share of the Company is entitled to one vote. Fractional
shares have proportionate voting rights and participate pro rata in dividends
and distributions. Shares are fully paid and non-assessable when issued and have
no preemptive, conversion or exchange rights except as otherwise described in
the Prospectuses. Shareholders are entitled to redeem their shares as set forth
under "How to Redeem Shares" in the Prospectuses. The shares are transferable
without restriction. The Company does not issue certificates for fractional
shares.
Company shares have non-cumulative rights, which means that the holders
of more than 50% of shares voting for the election of Directors can elect 100%
of the Directors if they choose to do so and, in such event, the holders of the
remaining shares so voting are not able to elect any Directors.
- - --------------------------------------------------------------------------------
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
- - --------------------------------------------------------------------------------
TOTAL RETURN
Total return quotations for each of the Income Fund, the Income Equity
Fund, the Ohio Tax-Free Fund, the Stock Appreciation Fund and the Flexible
Growth Fund as they may appear from time to time in advertisements are
calculated by finding the average annual compounded rates of return over one,
five and ten year periods, or the time periods for which a Portfolio has had
operations, whichever is relevant, on a hypothetical $1,000 investment that
would equate the initial amount invested to the ending redeemable value. To the
initial investment all dividends and distributions are added, and all recurring
fees charged to all shareholder accounts are deducted. The ending redeemable
value assumes a complete redemption at the end of the relevant periods.
Aggregate total return is a measure of the change in value of an investment in a
Portfolio over the relevant period and is calculated similarly
B - 51
<PAGE> 53
to average annual total return except that the result is not annualized.
The average annual total returns of each of the Portfolios are as
follows:
Investor A Shares
<TABLE>
<CAPTION>
With Sales Loads Without Sales Loads
---------------- -------------------
One Year Five Years Inception One Year Five Years Inception
Ended Ended to Ended Ended to
Fund 12/31/95 12/31/95 12/31/95(1) 12/31/95 12/31/95 12/31/95(1)
---- -------- -------- ----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Money Market 5.52% N/A 4.00% 5.52% N/A 4.00%
Income 10.04% N/A 3.32% 15.22% N/A 4.80%
Income Equity 25.52% N/A 15.17% 31.45% N/A 16.81%
Ohio Tax-Free 6.00% N/A 3.84% 10.96% N/A 7.26%
Stock
Appreciation(2) 22.09% 17.73% 9.40% 27.89% 18.92% 9.99%
Flexible
Growth 15.41% N/A 10.67% 20.83% N/A 14.56%
</TABLE>
- - ------------------------
(1) Dates of Inception: Money Market and Income Funds -- 10/1/92; Income
Equity Fund -- 10/8/92; Ohio Tax-Free Fund -- 8/1/94; Stock Appreciation
Fund -- 7/23/87; and the Flexible Growth Fund -- 9/1/94.
B - 52
<PAGE> 54
(2) The performance for the Stock Appreciation Fund includes the performance
of the MIM Stock Appreciation Fund, the Stock Appreciation Fund's
predecessor.
Investor B Shares
<TABLE>
<CAPTION>
Fund One Year Ended 12/31/95(3) Inception to 12/31/95(4)
---- -------------------------- ------------------------
<S> <C> <C>
Income 13.96% 7.60%
Income Equity 29.28% 20.54%
Ohio Tax-Free 10.10% 9.58%
Stock Appreciation 28.27% 14.04%
Flexible Growth 20.53% 15.46%
</TABLE>
- - ----------
(3) Includes the total return for the Investor A Shares from January 1, 1995 to
January 16, 1995
(4) Dates of Inception -- the Income, Income Equity, Tax-Free and Flexible
Growth Fund -- 1/15/95; and the Stock Appreciation Fund -- 10/1/95.
Without reimbursement of expenses and/or waiver of fees by Provident,
the average annual total returns of the Money Market Fund, the Income Fund, the
Income Equity Fund, the Ohio Tax-Free Fund and the Flexible Growth Fund for such
periods would have been lower.
30-DAY YIELD
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of a Portfolio, computed by dividing the
net investment income per share earned during the period by the maximum offering
price per share on the last day of the base period.
The current yields of the Investor A shares of the Income Fund, the
Income Equity Fund, the Ohio Tax-Free Fund and the Flexible Growth Fund were
4.85%, 1.38%, 3.40% and 2.96%, respectively, for the 30-day period ended
December 31, 1995, assuming the imposition of a sales load, and 5.12%, 1.45%,
3.57% and 3.11%, respectively, without the imposition of a sales load. For such
period, the current yields of the Investor B Shares of the Income Fund, the
Income Equity Fund, the Ohio Tax-Free Fund and the Flexible Growth Fund were
4.33%, 0.72%, 2.86% and 2.33%, respectively. Without reimbursement of expenses
and/or waiver of fees by Provident, the current yields of the Income Fund, the
Income Equity Fund, the Ohio
B - 53
<PAGE> 55
Tax-Free Fund and the Flexible Growth Fund for the same period would have been
lower.
In addition, with respect to the Ohio Tax-Free Fund, tax equivalent
yields will be computed by dividing that portion of the Ohio Tax-Free Fund's
yield (as computed above) which is tax-exempt by one minus a stated income tax
rate and adding that result to that portion, if any, of the yield of the Ohio
Tax-Free Fund which is not tax-exempt. For the 30-day period ended December 31,
1995, the tax-equivalent yield for the Investor A shares of the Ohio Tax- Free
Fund (assuming a 39.6% federal tax rate) were 3.63%, assuming the imposition of
the maximum sales charge, and 3.91%, excluding the effect of a sales charge. For
that same period, the tax- equivalent yield for the Investor B shares of the
Ohio Tax-Free Fund (assuming a 39.6% federal tax rate) was 4.74%.
SEVEN-DAY YIELD
The yield for the Money Market Fund as it may appear from time to time
in advertisements will be calculated by determining the net change, exclusive of
capital changes (all realized and unrealized gains and losses), in the value of
a hypothetical pre-existing account having a balance of one share at the
beginning of the period, dividing the net change in account value by the value
of the account at the beginning of the base period to obtain the base period
return, multiplying the base period return by (365/7) and carrying the resulting
yield figure to the nearest hundredth of one percent. The determination of net
change in account value will reflect the value of additional shares purchased
with dividends from the original share and dividends declared on both the
original share and any such additional shares and all fees charged to all
shareholder accounts in proportion to the length of the base period and the
Money Market Fund's average account size.
If realized and unrealized gains and losses were included in the yield
calculation, the yield of the Money Market Fund might vary materially from that
reported in advertisements. For the seven-day period ended December 31, 1995,
the current yield of the Money Market Fund was 4.74%.
In addition to the yield of the Money Market Fund, its effective yield
may appear from time to time in advertisements. The effective yield will be
calculated by compounding the unannualized base period return by adding 1 to the
quotient, raising the sum to a power equal to 365 divided by 7, subtracting 1
from the result and carrying the resulting effective yield figure to the nearest
hundredth of one percent. For the seven-day period ended December 31, 1995, the
effective yield of the Money Market Fund was 4.85%.
The yield and effective yield as quoted in such advertisements will not
be based on information as of a date more than fourteen days prior to the date
of their publication. Each yield will vary
B - 54
<PAGE> 56
depending on market conditions and principal. Each yield also depends on the
quality, maturity and type of instruments held and operating expenses. The
advertisements will include, among other things, the length of the base period
and the date of the last day in the base period used in computing the quotation.
DISTRIBUTION RATES
Each of the Income Fund, the Income Equity Fund, the Ohio Tax- Free
Fund and the Flexible Growth Fund may from time to time advertise current
distribution rates which are calculated in accordance with the method disclosed
in the Prospectus. For the year ended December 31, 1995, the distribution rates
for the Investor A shares of the Income Fund, the Income Equity Fund, the Ohio
Tax-Free Fund and the Flexible Growth Fund assuming the imposition of the
maximum sales charge, were 5.32%, 12.17%, 3.60% and 3.93%, respectively,
including capital gains, and 5.32%, 1.87%, 3.60% and 3.03%, respectively,
excluding capital gains. For the year ended December 31, 1995, the distribution
rates for the Investor B shares of the Income Fund, the Income Equity Fund, the
Ohio Tax-Free Fund and the Flexible Growth Fund were 4.59%, 8.40%, 2.92% and
2.30%, respectively, including capital gains, and 4.59%, 0.98%, 2.42% and 3.17%,
respectively, excluding capital gains.
GENERAL
The yield and total return of any investment are generally a function
of quality and maturity, type of investment and operating expenses. A
Portfolio's yields and total return will fluctuate from time to time and are not
necessarily representative of future results.
Yield and total return information is useful in reviewing a Portfolio's
performance, but because yield and total return will fluctuate, such information
may not provide a basis for comparison with bank deposits or other investments
that pay a fixed yield for a stated period of time. An investor's principal is
not guaranteed by the Portfolio.
From time to time, the Company may include the following types of
information in advertisements, supplemental sales literature and reports to
shareholders: (a) discussions of general economic or financial principals (such
as the effects of inflation, the power of compounding and the benefits of
dollar-cost averaging); (b) discussions of general economic trends; (c)
presentations of statistical data to supplement such discussions; (d)
descriptions of past or anticipated portfolio holdings for one or more of the
Portfolios within the Company; (e) descriptions of investment strategies for one
or more of the Portfolios within the Company; (f) descriptions of investment
strategies for one or more of such Portfolios; (g) descriptions or comparisons
of various investment products, which may or may not include the Portfolios;
B - 55
<PAGE> 57
(h) comparisons of investments products (including the Portfolios) with relevant
market or industry indices or other appropriate benchmarks; (i) discussions of
fund rankings or ratings by recognized rating organizations; and (j)
testimonials describing the experience of persons that have invested in one or
more of the Portfolios.
- - --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- - --------------------------------------------------------------------------------
To the knowledge of the Company, as of April 8, 1996: The Provident
Bank, One East Fourth Street, Cincinnati, Ohio 45202, owned of record 69.03% of
the outstanding Investor A shares of the Income Fund, 70.86% of the outstanding
Investor A shares of the Money Market Fund and 96.98% of the outstanding
Investor A shares of the Ohio Tax-Free Fund; Provident Bank Trust Department
Employee Benefit Plan, 3 East Fourth Street, Cincinnati, Ohio 45207 owned of
record 14.68% of the outstanding Investor A shares of the Income Fund, 6.75% of
the outstanding Investor A shares of the Income Equity Fund and 9.34% of the
outstanding Investor A shares of the Flexible Growth Fund; The Provident Bank
Trust Department, 3 East Fourth Street, Cincinnati, Ohio 45202, owned of record
7.26% of the outstanding Investor A shares of the Income Fund, and 5.00% of the
outstanding Investor A shares of the Flexible Growth Fund; The Chase Manhattan
Bank as Trustee for The General Cable Corporation, 4 Tesseneer Drive, Highland
Heights, Kentucky 41076, owned of record 41.95% of the outstanding Investor A
shares of the Income Equity Fund; Provident Bank TTEE FBO Provident Bancorp 401K
Equity, 3 East Fourth Street, Cincinnati, Ohio 45202, owned of record 8.61% of
the outstanding Investor A shares of the Flexible Growth Fund; and Frank E.
James Jr. Trust and The Provident Bank Custodian FBO Iris R. James IRA, each
with the address P.O. Box 8, Alpha, Ohio 45301-0008, owned 5.08% and 2.88%,
respectively, of the outstanding Investor A shares of the Flexible Growth Fund.
As of April 8, 1996, The Fifth Third Bank, FBO Cincinnati Institute of
Fine Arts, P. O. Box 63074, Cincinnati, Ohio 45263, owned beneficially 19.92% of
the outstanding Investor B Shares of the Income Fund. As of such date, BHC
Securities, Inc., One Commerce Square, 2005 Market Street, Suite 1200,
Philadelphia, Pennsylvania 19103, to the knowledge of the Company, is the only
other person who owns of record or beneficially 5% or more of the outstanding
Investor B shares of the Income Fund -
B - 56
<PAGE> 58
12.98%; of the Ohio Tax-Free Fund - 76.89%; and the Stock Appreciation Fund -
61.29%. BHC Securities, Inc. holds such shares as recordholder for various
underlying beneficial owners.
As of such date, the Company knows of no one investor who owns 5% or
more of the outstanding Investor B shares of the Income Equity Fund or the
Flexible Growth Fund.
AUDITORS
The financial statements for each of the Portfolios, other than the
Stock Appreciation Fund, at and for the fiscal year ended December 31, 1995, and
for the Stock Appreciation Fund at and for the three months ended December 31,
1995, appearing in this Statement of Additional Information have been audited
by Ernst & Young LLP, 1300 Chiquita Center, 250 East Fifth Street, Cincinnati,
Ohio 45202, independent certified public accountants, as set forth in their
report appearing elsewhere herein and are included in reliance upon such
report given on their authority as experts in auditing and accounting.
LEGAL COUNSEL
Baker & Hostetler, 65 East State Street, Columbus, Ohio 43215, is
counsel to the Company and will pass upon the legality of the shares offered
hereby.
GENERAL
Except as otherwise stated in the Prospectuses, this Statement of
Additional Information, or required by law, the Company reserves the right to
change the terms of the offer stated in its Prospectuses or this Statement of
Additional Information without shareholder approval, including the right to
impose or change fees for services provided.
B - 57
<PAGE> 59
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Company's
Prospectuses, this Statement of Additional Information or in supplemental sales
literature issued by the Company or the Distributor, and no person is entitled
to rely on any information or representation not contained therein.
The Company's Prospectuses and this Statement of Additional Information
omit certain information contained in the registration statement filed with the
Securities and Exchange Commission which may be obtained from the Commission's
principal office in Washing- ton, D.C. upon payment of the fee prescribed by the
Rules and Regulations promulgated by the Commission.
B - 58
<PAGE> 60
- - --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
B - 59
<PAGE> 61
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Directors
The Riverfront Funds, Inc.
We have audited the accompanying statements of assets and liabilities, including
the schedules of portfolio investments of The Riverfront Funds, Inc.
(comprising, respectively, U.S. Government Securities Money Market Fund, U.S.
Government Income Fund, Income Equity Fund, Ohio Tax-Free Bond Fund, Flexible
Growth Fund, and Stock Appreciation Fund) as of December 31, 1995, and the
related statements of operations, and changes in net assets and the financial
highlights for the year then ended of U.S. Government Securities Money Market
Fund, U.S. Government Income Fund, Income Equity Fund, Ohio Tax-Free Bond Fund,
and Flexible Growth Fund, and from October 1, 1995 to December 31, 1995 of Stock
Appreciation Fund. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial statements and financial highlights of the U.S. Government
Securities Money Market Fund, U.S. Government Income Fund, Income Equity Fund,
Ohio Tax-Free Bond Fund, and Flexible Growth Fund for the periods prior to
January 1, 1995, were audited by other auditors whose report dated January 20,
1995, expressed an unqualified opinion on those statements and financial
highlights. The financial statements and financial highlights of the Stock
Appreciation Fund for the years ended prior to October 1, 1995, were audited by
other auditors whose report dated October 11, 1995, expressed an unqualified
opinion on those statements and financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statements
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 respective portfolios constituting The Riverfront Funds, Inc. at December
31, 1995, the results of their operations, the changes in their net assets and
the financial highlights for the respective periods ended December 31, 1995 in
conformity with generally accepted accounting principles.
/s/ Ernst and Young LLP
Cincinnati, Ohio
January 15, 1996
B-60
<PAGE> 62
THE RIVERFRONT FUNDS, INC.
Statement of Assets and Liabilities
December 31, 1995
<TABLE>
<CAPTION>
U.S. Government
Securities Money U.S. Government Income
Market Fund Income Fund Equity Fund
------------- ------------- -------------
ASSETS:
<S> <C> <C> <C>
Investments, at value $ 99,079,165 $ 37,305,693 $ 62,969,968
Repurchase agreements 59,137,000
------------- ------------- -------------
Total Investments 158,216,165 37,305,693 62,969,968
Interest receivable 32,077 495,240 218,178
Receivable for capital shares issued 1,883 19,306
Receivable from brokers for investments sold 1,123,881
Receivable from investment adviser 42,403 69,570
Prepaid expenses and other assets 14,492 1,487 6,924
------------- ------------- -------------
Total Assets 158,262,734 37,846,706 64,407,827
------------- ------------- -------------
LIABILITIES:
Dividends payable 668,431 4,750 219,989
Payable for capital shares redeemed 13,933
Payable to brokers for investments purchased 404,849
Accrued expenses and other payables:
Investment advisory fees 24,438 12,899 48,471
Administration fees 29,047 6,450 10,203
Audit and legal fees 22,846 7,142 7,299
Other 22,473 14,290 24,694
------------- ------------- -------------
Total Liabilities 767,235 45,531 729,438
------------- ------------- -------------
NET ASSETS:
Capital 157,497,789 38,263,873 58,269,402
Undistributed net investment income 7,806
Net unrealized appreciation from investments 1,436,834 5,381,996
Accumulated undistributed net realized gains (losses) from investment
transactions (2,290) (1,907,338) 26,991
------------- ------------- -------------
Net Assets $ 157,495,499 $37,801,175 $ 63,678,389
============= ============= =============
Net Assets
Investor A Shares $ 157,495,499 $ 36,538,296 $ 60,845,149
Investor B Shares 1,262,879 2,833,240
------------- ------------- -------------
Total $ 157,495,499 $37,801,175 $ 63,678,389
============= ============= =============
Shares of capital stock
Investor A Shares 157,497,789 3,762,748 5,199,892
Investor B Shares 115,283 239,090
------------- ------------- -------------
Total 157,497,789 3,878,031 5,438,982
============= ============= =============
Net asset value
Investor A Shares--redemption price per share $ 1.00 $ 9.71 11.70
Investor B Shares--offering price per share* 10.95 11.85
============= ============= =============
Maximum Sales Charge (Investor A) 4.50% 4.50%
============= =============
Maximum Offering Price (100%/(100%--Maximum Sales Charge) of net asset
value adjusted to nearest cent) per share (Investor A) $ 1.00(a) $ 10.17 12.25
============= ============= =============
Investments, at cost $ 158,216,165 $ 35,868,859 $ 57,587,972
============= ============= =============
<FN>
(a) Offering price and redemption price are the same for the U.S. Government
Securities Money Market Fund.
* Redemption price of Investor B Shares varies based on length of time shares
are held.
</TABLE>
See notes to financial statements
B-61
<PAGE> 63
THE RIVERFRONT FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
Ohio Tax-Free Flexible Growth Stock Appreciation
Bond Fund Fund Fund
----------- ----------- ------------------
<S> <C> <C> <C>
ASSETS:
Investments, at value $11,650,714 $14,811,639 $39,420,991
Repurchase agreements 1,579,159
----------- ----------- -----------
Total Investments 11,650,714 14,811,639 41,000,150
Interest receivable 76,834 122,851 26,709
Receivable for capital shares issued 22,430 44,007
Receivable from investment adviser 612 58,705
Unamortized organization costs 5,825 2,049 48,231
Prepaid expenses and other assets 620 4,372 3,943
----------- ----------- -----------
Total Assets 11,734,605 15,022,046 41,123,040
----------- ----------- -----------
LIABILITIES:
Dividends payable 1,449 51,444
Payable for capital shares redeemed 17,633
Payable to brokers for investments purchased 474,680
Accrued expenses and other payables:
Investment advisory fees 3,976 7,238 27,648
Administration fees 1,988 2,413 6,912
Audit and legal fees 3,299 2,945 279
Other 6,852 8,799 21,029
----------- ----------- -----------
Total Liabilities 17,564 565,152 55,868
----------- ----------- -----------
NET ASSETS:
Capital 11,153,013 13,247,718 33,949,349
Undistributed net investment income 5,459 9,166
Net unrealized appreciation from investments 558,379 1,200,010 7,117,823
Accumulated undistributed net realized gains from
investment transactions 190
----------- ----------- -----------
Net Assets $11,717,041 $14,456,894 $41,067,172
=========== =========== ===========
Net Assets
Investor A Shares $11,090,807 $ 9,426,863 $40,994,847
Investor B Shares 626,234 5,030,031 72,325
----------- ----------- -----------
Total $11,717,041 $14,456,894 $41,067,172
=========== =========== ===========
Shares of capital stock
Investor A Shares 1,055,522 829,894 4,315,611
Investor B Shares 58,358 430,077 7,299
----------- ----------- -----------
Total 1,113,880 1,259,971 4,322,910
=========== =========== ===========
Net asset value
Investor A Shares--redemption price per share $ 10.51 11.36 9.50
Investor B Shares--offering price per share* 10.73 11.70 9.91
=========== =========== ===========
Maximum Sales Charge (Investor A) 4.50% 4.50% 4.50%
=========== =========== ===========
Maximum Offering Price (100%/(100%--Maximum Sales Charge) of net
asset value adjusted to nearest cent) per share (Investor A) $ 11.01 $ 11.90 9.95
=========== =========== ===========
Investments, at cost $11,092,335 $13,611,629 $33,882,327
=========== =========== ===========
<FN>
* Redemption price of Investor B Shares varies based on length of time shares
are held.
</TABLE>
See notes to financial statements.
B-62
<PAGE> 64
THE RIVERFRONT FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
U.S. Government
Securities Money U.S. Government Income Equity
Market Fund Income Fund Fund
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest income $ 8,763,797 $ 2,465,709 $ 111,565
Dividend income 1,705,653
------------ ------------ ------------
Total Income 8,763,797 2,465,709 1,817,218
------------ ------------ ------------
EXPENSES:
Investment advisory fees 221,912 144,461 407,229
Administration fees 296,225 72,231 96,796
12b-1 fees (Investor A) 369,910 89,106 117,603
12b-1 fees (Investor B) 4,833 14,271
Custodian and accounting fees 73,973 36,115 72,596
Audit and legal fees 133,254 29,458 59,767
Trustees' fees and expenses 16,050 3,364 4,765
Transfer agent fees 59,257 37,402 42,860
Registration and filing fees 13,235 4,600 7,802
Printing costs 26,680 6,282 11,066
Other 16,925 3,827 4,406
Expenses voluntarily reduced (369,910) (33,246) (41,897)
------------ ------------ ------------
Total expenses before reimbursement by investment
adviser 857,511 398,433 797,264
Reimbursement of expenses by investment adviser (548) (62,119)
------------ ------------ ------------
Total Expenses 857,511 397,885 735,145
------------ ------------ ------------
Net Investment Income 7,906,286 2,067,824 1,082,073
------------ ------------ ------------
REALIZED/UNREALIZED GAINS (LOSSES) FROM INVESTMENTS:
Net realized gains (losses) from investment transactions (1,415) (517,451) 6,655,045
Net change in unrealized appreciation from investments 3,520,908 5,311,784
------------ ------------ ------------
Net realized/unrealized gains (losses) from investments (1,415) 3,003,457 11,966,829
------------ ------------ ------------
Change in net assets resulting from operations $ 7,904,871 $ 5,071,281 $ 13,048,902
============ ============ ============
</TABLE>
See notes to financial statements.
B-63
<PAGE> 65
THE RIVERFRONT FUNDS, INC.
STATEMENTS OF OPERATIONS
Year Ended December 31, 1995
<TABLE>
<CAPTION>
Flexible Stock Stock
Ohio Tax-Free Growth Appreciation Appreciation
Bond Fund Fund Fund (a) Fund (b)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income $ 590,027 $ 311,142 $ 93,734 $ 368,293
Dividend income 91,106 39,950 384,381
----------- ---------- ---------- ----------
Total Income 590,027 402,248 133,684 752,674
----------- ---------- ---------- ----------
EXPENSES:
Investment advisory fees 56,114 76,231 83,982 439,627
Administration fees 22,439 16,888 20,771
12b-1 fees (Investor A) 26,953 15,101 26,239 279,882
12b-1 fees (Investor B) 4,410 24,218 21
Custodian and accounting fees 15,708 12,666 15,578 48,947
Audit and legal fees 18,656 10,249 8,306 36,163
Organization costs 8,823 4,078 6,704
Trustees' fees and expenses 1,096 365 2,005 2,779
Transfer agent fees 25,445 22,857 9,834 75,871
Registration and filing fees 4,266 5,423 6,303 18,296
Printing costs 1,776 13,439 5,080
Other 1,043 441 1,173 143,379
Expenses voluntarily reduced (15,933) (31,119) (1,181)
----------- ---------- ---------- ----------
Total expenses before reimbursement by
investment adviser 170,796 170,837 184,815 1,044,944
Reimbursement of expenses by investment
adviser (544) (44,178)
----------- ---------- ---------- ----------
Total Expenses 170,252 126,659 184,815 1,044,944
----------- ---------- ---------- ----------
Net Investment Income (Loss) 419,775 275,589 (51,131) (292,270)
----------- ---------- ---------- ----------
REALIZED/UNREALIZED GAINS (LOSSES) FROM
INVESTMENTS:
Net realized gains from investment transactions 8,848 131,879 1,556,383 3,024,858
Net change in unrealized appreciation (depreciation)
from investments 713,315 1,230,202 (2,070,853) 5,538,265
----------- ---------- ---------- ----------
Net realized/unrealized gains (losses) from investments 722,163 1,362,081 (514,470) 8,563,123
----------- ---------- ---------- ----------
Change in net assets resulting from operations $ 1,141,938 $1,637,670 $ (565,601) $8,270,853
=========== ========== ========== ==========
<FN>
- - --------
(a) Period from October 1, 1995 (date acquired by Riverfront Stock Appreciation
Fund) through December 31, 1995.
(b) Represents statement of operations for the MIM Stock Appreciation Fund for
the year ended September 30, 1995 (prior fiscal year end). Audited by other
auditors.
</TABLE>
See notes to financial statements.
B-64
<PAGE> 66
THE RIVERFRONT FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
U.S. Government Securities U.S. Government Income Equity
Money Market Fund Income Fund Fund
---------------------------- --------------------------- --------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
December 31, December 31, December 31, December 31, December 31, December 31,
1995 1994 (a) 1995 1994 (a) 1995 1994 (a)
------------- ------------ ------------ ----------- ----------- ------------
FROM INVESTMENT ACTIVITIES:
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income $7,906,286 $5,452,996 $ 2,067,824 $ 1,797,395 $ 1,082,073 $ 936,433
Net realized gains (losses) from
investment transactions (1,415) (875) (517,451) (1,525,031) 6,655,045 1,673,314
Net change in unrealized appreciation
(depreciation) from investments 3,520,908 (1,773,015) 5,311,784 (1,806,498)
------------ ------------ ----------- ----------- ----------- -----------
Change in net assets resulting from
operations 7,904,871 5,452,121 5,071,281 (1,500,651) 13,048,902 803,249
------------ ------------ ----------- ----------- ----------- -----------
DISTRIBUTIONS TO INVESTOR A
SHAREHOLDERS:
From net investment income (7,906,286) (5,452,996) (2,032,120) (1,797,395) (1,065,510) (936,243)
In excess of net investment income (3,474) (6,742)
From net realized gains from
investments (6,293,075) (1,694,627)
DISTRIBUTIONS TO INVESTOR B
SHAREHOLDERS:
From net investment income (22,977) (16,563)
In excess of net investment income (105)
From net realized gains from
investments (222,170)
------------ ------------ ----------- ----------- ----------- -----------
Change in net assets from shareholder
distributions (7,906,286) (5,452,996) (2,055,097) (1,800,869) (7,604,165) (2,630,870)
------------ ------------ ----------- ----------- ----------- -----------
CAPITAL TRANSACTIONS:
Proceeds from shares issued 331,872,719 252,936,958 5,670,500 7,849,466 12,155,416 13,962,314
Proceeds from shares issued in
connection with acquisition 4,865,634 9,727,219
Dividends reinvested 1,518,099 569,500 578,837 333,435 8,648,647 900,398
Cost of shares redeemed (330,133,820) (237,338,519) (4,185,229) (2,238,879) (7,262,834) (2,457,054)
------------ ------------ ----------- ----------- ----------- -----------
Change in net assets from capital
transactions 8,122,632 16,167,939 2,064,108 5,944,022 23,268,448 12,405,658
------------ ------------ ----------- ----------- ----------- -----------
Change in net assets 8,121,217 16,167,064 5,080,292 2,642,502 28,713,185 10,578,037
NET ASSETS:
Beginning of period 149,374,282 133,207,218 32,720,883 30,078,381 34,965,204 24,387,167
------------ ------------ ----------- ----------- ----------- -----------
End of period $ 157,495,499 $ 149,374,282 $ 37,801,175 $ 32,720,883 $63,678,389 $34,965,204
============ ============ =========== =========== =========== ===========
SHARE TRANSACTIONS:
Issued 331,872,719 252,936,958 592,903 838,911 1,069,857 1,295,899
Issued in connection with
acquisition 4,865,634 793,942
Reinvested 1,518,099 569,500 61,636 36,232 764,131 84,342
Redeemed (330,133,820) (237,338,519) (444,444) (243,620) (634,159) (230,101)
------------ ------------ ----------- ----------- ----------- -----------
Change in shares 8,122,632 16,167,939 210,095 631,523 1,993,771 1,150,140
============ ============ =========== =========== =========== ===========
</TABLE>
[FN]
- - --------
(a) Audited by other auditors
See notes to financial statements.
B-65
<PAGE> 67
THE RIVERFRONT FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Ohio Tax-Free Bond Fund Flexible Growth Fund
----------------------------------------- ------------------------------------
Period Period
Year ended from August 1, Year ended from September 1,
December 31, 1994 through December 31, 1994 through
1995 December 31, 1994 (a) 1995 December 31, 1994(a)
------------ -------------------- ------------ --------------------
<S> <C> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income $ 419,775 $ 121,843 $ 275,589 $ 22,610
Net realized gains (losses) from investment
transactions 8,848 (8,658) 131,879 (2,876)
Net change in unrealized appreciation
(depreciation) from investments 713,315 (154,936) 1,230,202 (30,192)
------------ ------------ ----------- -----------
Change in net assets resulting from operations 1,141,938 (41,751) 1,637,670 (10,458)
------------ ------------ ----------- -----------
Distributions to Investor A Shareholders:
From net investment income (401,164) (123,784) (202,502) (27,057)
From net realized gains from investments (85,787)
Distributions to Investor B Shareholders:
From net investment income (13,152) (63,921)
From net realized gains from investments (43,216)
------------ ------------ ----------- -----------
Change in net assets from shareholder
distributions (414,316) (123,784) (395,426) (27,057)
------------ ------------ ----------- -----------
Capital Transactions:
Proceeds from shares issued 895,943 10,355,088 11,076,750 2,833,344
Dividends reinvested 18,208 27 334,888 13,957
Cost of shares redeemed (114,312) (906,216) (100,558)
------------ ------------ ----------- -----------
Change in net assets from capital transactions 799,839 10,355,115 10,505,422 2,746,743
------------ ------------ ----------- -----------
Change in net assets 1,527,461 10,189,580 11,747,666 2,709,228
Net Assets:
Beginning of period 10,189,580 2,709,228
------------ ------------ ----------- -----------
End of period $ 11,717,041 $ 10,189,580 $14,456,894 $ 2,709,228
============ ============ =========== ===========
Share Transactions:
Issued 87,181 1,036,159 1,035,102 285,468
Reinvested 1,760 3 30,561 1,408
Redeemed (11,223) (82,394) (10,174)
------------ ------------ ----------- -----------
Change in shares 77,718 1,036,162 983,269 276,702
============ ============ =========== ===========
<FN>
(a) Period from commencement of operations. Audited by other auditors.
</TABLE>
See notes to financial statements.
B-66
<PAGE> 68
THE RIVERFRONT FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Stock Appreciation Fund
-----------------------------------------------------------------------
Period Period Period
from October 1, from October 1, from October 1,
1995 through 1994 through 1993 through
December 31, 1995 (a) September 30, 1995(b) September 30, 1994 (b)
--------------------- --------------------- ----------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment loss $ (51,131) $ (292,270) (725,732)
Net realized gains from investment transactions 1,556,383 3,024,858 715,333
Net change in unrealized appreciation (depreciation)
from investments (2,070,853) 5,538,265 (8,468,657)
------------ ---------------- ------------
Change in net assets resulting from operations (565,601) 8,270,853 (8,479,056)
------------ ---------------- ------------
Distributions to Investor A Shareholders:
From net investment income (1,166,721) (1,869,901)
From net realized gains from investments (1,556,383) (1,566,848)
Tax return of capital (6,824)
------------ ---------------- ------------
Change in net assets from shareholder distributions (1,563,207) (1,166,721) (3,436,749)
------------ ---------------- ------------
Capital Transactions:
Proceeds from shares issued 810,508
Dividends reinvested 1,542,781
Cost of shares redeemed (3,611,887)
------------ ---------------- ------------
Change in net assets from capital transactions (1,258,598) (10,529,141) 463,566
------------ ---------------- ------------
Change in net assets (3,387,406) (3,425,009) (11,452,239)
Net Assets:
Beginning of period 44,454,578 47,879,587 59,331,826
------------ ---------------- ------------
End of period $ 41,067,172 $ 44,454,578 $ 47,879,587
============ ================ ============
Share Transactions:
Issued 83,381
Reinvested 164,279
Redeemed (370,208)
------------ ---------------- ------------
Change in shares (122,548)
============ ================ ============
<FN>
(a) Period from date acquired by Riverfront Stock Appreciation Fund.
(b) Represents statements of changes in net assets for the MIM Stock
Appreciation Fund. Audited by other auditors.
</TABLE>
See notes to financial statements.
B-67
<PAGE> 69
THE RIVERFRONT FUNDS, INC.
U.S. GOVERNMENT SECURITIES MONEY MARKET FUND
Schedule of Portfolio Investments
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL Security Amortized
AMOUNT Description Cost
- - --------------- ------------------------------ -------------
<S> <C>
U.S. Government Agencies (35.2%):
Federal Farm Credit Bank:
3,000,000 Discount Note, 1/19/96 $ 2,991,585
3,000,000 Discount Note, 2/21/96 2,976,540
Federal Home Loan Mortgage Corp.:
7,825,000 Discount Note, 1/2/96 7,823,783
2,000,000 Discount Note, 2/26/96 1,982,764
3,000,000 Discount Note, 4/1/96 2,959,050
Federal National Mortgage Assoc.:
100,000 9.35%, 2/12/96 100,306
5,000,000 Discount Note, 1/3/96 4,998,447
6,000,000 Discount Note, 1/5/96 5,996,270
3,000,000 Discount Note, 1/16/96 2,993,025
6,770,000 Discount Note, 2/2/96 6,736,575
3,000,000 Discount Note, 2/22/96 2,975,714
3,000,000 Discount Note, 3/8/96 2,969,515
3,000,000 Discount Note, 3/14/96 2,966,846
4,000,000 Discount Note, 3/28/96 3,948,573
World Bank:
3,000,000 Discount Note, 3/4/96 2,971,020
-------------
Total U.S. Government Agencies 55,390,013
-------------
Commercial Paper (27.7%):
British Commercial Paper (4.4%):
4,000,000 Glaxo PLC, Discount Note,
1/23/96 3,986,067
3,000,000 Hanson PLC, Discount
Note, 3/6/96 2,969,829
-------------
6,955,896
-------------
Energy (1.9%):
3,000,000 Mid American Energy Co.,
Discount Note, 3/26/96 2,960,688
-------------
Financial Services (5.6%):
2,000,000 International Lease Finance
Corp., Discount Note,
2/23/96 1,983,393
4,000,000 Merrill Lynch, Discount
Note, 1/17/96 3,989,867
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL Security Amortized
AMOUNT Description Cost
- - ----------------- --------------------------- -------------
<S> <C>
Commercial Paper, continued:
Financial Services, continued:
3,000,000 Merrill Lynch, Discount
Note, 2/29/96 $ 2,972,172
----------
8,945,432
----------
German Commercial Paper (2.5%):
4,000,000 Daimler--Benz North
America Corp., Discount
Note, 1/30/96 3,981,601
----------
Japanese Commercial Paper (4.4%):
3,000,000 Mitsubishi Corp., Discount
Note, 3/15/96 2,965,343
4,000,000 Mitsui & Co., Discount
Note, 4/17/96 3,934,611
----------
6,899,954
----------
Manufacturing (1.9%):
3,000,000 Case Equipment Corp.,
Discount Note, 1/12/96 2,994,729
----------
Pharmaceutical (1.9%):
3,000,000 Allergan Co., Discount
Note, 1/9/96 2,996,173
----------
Telecommunication (5.1%):
4,000,000 AT&T Corp., Discount
Note, 1/23/96 3,986,067
4,000,000 MCI Communications
Corp., Discount Note,
2/20/96 3,968,612
----------
7,954,679
----------
Total Commercial Paper 43,689,152
----------
Total Investments 99,079,165
----------
</TABLE>
Continued
B-68
<PAGE> 70
THE RIVERFRONT FUNDS, INC.
U.S. Government Securities Money Market Fund
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL Security Amortized
AMOUNT Description Cost
- - ------------ --------------------- ---------
<S> <C> <C>
Repurchase Agreements (37.5%):
24,137,000 Dean Witter, 5.70%, dated
12/29/95, due 1/2/96
(Collateralized by
various U.S. Government
Agency Securities,
0.00%-7.99%, 2/6/95-
6/1/24, market value-
$24,619,742) $ 24,137,000
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL Security Amortized
AMOUNT Description Cost
- - ------------ --------------------- ---------
<S> <C>
Repurchase Agreements, continued:
35,000,000 Prudential, 5.83%, dated
12/29/95, due 1/2/96
(Collateralized by
various U.S. Treasury
and U.S. Government
Agency Securities,
0.00%-8.50%, 5/15/04-
12/1/25, market value--
$35,700,146) $ 35,000,000
-------------
Total Repurchase Agreements 59,137,000
-------------
Total (Cost--$158,216,165)(a) $158,216,165
=============
<FN>
- - ----------
Percentages indicated are based on net assets of $157,495,499.
(a) Cost for federal income tax and financial reporting purposes are the same.
</TABLE>
See notes to financial statements.
B-69
<PAGE> 71
THE RIVERFRONT FUNDS, INC.
U.S. Government Securities Money Market Fund
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
Shares or
Principal Security Market
Amount Description Value
--------- ---------------- ------------
<S> <C>
Corporate Bonds (25.0%):
Automotive (1.3%):
500,000 Ford Motor Credit Corp.,
6.25%, 12/8/05 $ 498,125
---------
Financial (18.3%):
1,000,000 Chemical Bank, 8.50%,
2/15/02 1,126,250
1,000,000 Chemical Master Credit Card
Trust I, 6.23%, 6/15/03,
Series 1995-2 1,018,680
1,000,000 Comerica, Inc., 7.25%,
8/1/07 1,060,000
1,000,000 First Chicago Master Trust II,
Series 1994L, 7.15%,
4/15/01 1,055,260
500,000 Grand Metropolitan
Investment, 7.45%,
4/15/35 548,750
500,000 Lehman Brothers Holdings,
7.13%, 9/15/03 513,125
500,000 Lehman Brothers Holdings,
8.50%, 5/1/07 562,500
1,000,000 MBNA Master Credit Card
Trust, 6.05%, 11/15/02 1,012,010
---------
6,896,575
---------
Telecommunication (2.7%):
1,000,000 U.S. West Capital Corp.,
6.31%, 11/1/05 1,020,000
---------
Tobacco (2.7%):
1,000,000 Philip Morris Cos., Inc.,
7.50%, 3/15/97 1,021,250
---------
Total Corporate Bonds 9,435,950
---------
U.S. GOVERNMENT AGENCIES (62.2%):
Federal Home Loan Bank:
1,000,000 5.60%, 7/24/97 1,004,240
500,000 8.07%, 2/27/02 534,675
875,000 6.38%, 4/29/03 883,470
</TABLE>
<TABLE>
<CAPTION>
Shares or
Principal Security Market
Amount Description Value
--------- ---------------- ------------
<S> <C>
U.S. Government Agencies, continued:
Federal Home Loan Mortgage Corp.:
1,000,000 6.55%, 1/4/00 $ 1,032,760
500,000 6.33%, 2/16/00 500,430
1,000,000 6.78%, 3/28/01 1,002,220
1,000,000 7.68%, 5/23/01 1,034,610
1,000,000 7.35%, 5/16/05 1,055,430
500,000 7.50%, 3/15/15 508,105
1,000,000 7.00%, 10/15/17 1,019,230
1,000,000 6.00%, 1/15/18 1,003,930
1,000,000 7.20%, 6/15/18 1,016,100
1,250,000 5.85%, 1/25/19 1,231,675
Federal National Mortgage Association:
1,000,000 5.33%, 6/26/98 995,160
500,000 9.05%, 4/10/00 564,235
625,000 6.38%, 6/25/03 630,481
625,000 6.05%, 6/30/03 637,400
888,146 6.75%, 8/25/04 888,769
1,050,000 8.50%, 2/1/05 1,144,332
1,000,000 7.00%, 9/25/05 1,014,200
1,000,000 7.00%, 9/25/19 1,009,700
600,000 9.50%, 11/10/20 639,966
Government National Mortgage Association:
885,6378.00%, 5/15/23
Pool #351752 921,355
Student Loan Marketing Association:
1,000,0006.05%, 9/14/00 1,019,500
1,000,0007.20%, 11/9/00 1,066,250
Tennessee Valley Authority:
1,050,0007.88%, 9/15/01 1,147,125
----------
Total U.S. Government Agencies 23,505,348
----------
U.S. TREASURY BONDS (2.6%):
410,0006.50%, 4/30/99 425,039
500,0007.25%, 5/15/04 555,215
----------
Total U.S. Treasury Bonds 980,254
----------
</TABLE>
Continued
B-70
<PAGE> 72
THE RIVERFRONT FUNDS, INC.
U.S. Government Income Fund
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
Shares or
Principal Security Market
Amount Description Value
--------- ---------------- ------------
<S> <C>
U.S. TREASURY NOTES (5.5%):
500,0005.88%, 3/31/99 $ 508,870
250,0005.88%, 2/15/04 255,242
1,000,0006.50%, 5/15/05 1,064,190
250,006.25%, 8/15/23 257,170
-----------
Total U.S. Treasury Notes 2,085,472
-----------
YANKEE DOLLAR BONDS (1.1%):
365,000 Montreal Urban Community,
9.13%, 3/15/01 414,275
-----------
Total Yankee Dollar Bonds 414,275
-----------
Shares or
Principal Security Market
Amount Description Value
------ ---------------- ------------
Investment Companies (2.3%):
884,394 Dreyfus Treasury Prime
Fund $ 884,394
-----------
Total Investment Companies 884,394
-----------
Total (Cost--$35,868,859)(a) $37,305,693
===========
<FN>
- - -------------
Percentages indicated are based on net assets of $37,801,175
(a) Represents cost for the federal income tax purposes and differs value by net
unrealized appreciation of securities as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Unrealized appreciation $1,459,613
Unrealized depreciation (22,779)
----------
Net unrealized appreciation $1,436,834
==========
</TABLE>
See notes to financial statements.
B-71
<PAGE> 73
THE RIVERFRONT FUNDS, INC.
U.S. GOVERNMENT INCOME FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (97.0%):
Aerospace-Aircraft (0.8%):
800 B.F. Goodrich Co. $ 54,500
3,000 Raytheon Co. 141,750
2,000 Rockwell International Corp. 105,750
2,000 United Technologies Corp. 189,750
------------
491,750
------------
Apparel (2.2%):
51,700 Intimate Brands, Inc. 775,500
11,600 V F Corp. 611,900
------------
1,387,400
------------
Automobile & Parts (2.2%):
15,100 Eaton Corp. 809,737
800 Genuine Parts Co. 32,800
7,100 TRW, Inc. 550,250
------------
1,392,787
------------
Banks (8.9%):
11,500 AmSouth Bancorporation 464,313
12,000 Bank of Boston Corp. 555,000
5,500 BayBanks, Inc. 540,375
23,100 Central Fidelity Banks, Inc. 739,200
12,400 Crestar Financial Corp. 733,150
11,500 First American Corp. 544,812
1,000 First Virginia Banks, Inc. 41,750
24,200 Jefferson Bankshares, Inc. 490,050
30,100 Magna Group, Inc. 714,875
27,600 Summit Bancorp 869,400
------------
5,692,925
------------
Building Materials (2.0%):
37,200 Masco Corp. 1,167,150
2,000 Sherwin Williams Co. 81,500
------------
1,248,650
------------
Chemicals (7.9%):
11,700 Betz Laboratories, Inc. 479,700
42,300 Crompton & Knowles Corp. 560,475
900 Dexter Corp. 21,263
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Chemicals, continued:
3,500 E.I. du Pont deNemours &
Co. $ 244,563
91,400 Ethyl Corp. 1,142,500
2,000 Great Lakes Chemical Corp. 144,000
26,500 Lawter International, Inc. 308,062
17,500 Nalco Chemical Co. 527,187
3,000 PPG Industries, Inc. 137,250
11,000 Rohm & Haas Co. 708,125
25,600 Witco Corp. 748,800
------------
5,021,925
------------
Chemicals & Drugs (0.2%):
1,600 Bristol Myers Squibb Co. 137,400
------------
Consumer Products (1.3%):
23,000 Corning, Inc. 736,000
2,000 Gillette Co. 104,250
------------
840,250
------------
Cosmetics (0.2%):
2,000 International Flavors 96,000
------------
Commercial Services (2.5%):
20,300 Kelly Services, Inc.-Class A 563,325
47,500 Ogden Corp. 1,015,312
------------
1,578,637
------------
Department Stores (4.1%):
27,600 May Department Stores Co. 1,166,100
16,600 Mercantile Stores Co., Inc. 767,750
11,800 J.C. Penney Co. 561,975
3,000 Sears Roebuck & Co. 117,000
------------
2,612,825
------------
Electrical (2.3%):
6,000 AMP, Inc. 230,250
15,100 Thomas & Betts Corp. 1,113,625
1,500 WW Grainger, Inc. 99,375
------------
1,443,250
------------
</TABLE>
Continued
B-72
<PAGE> 74
THE RIVERFRONT FUNDS, INC.
INCOME EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - ---------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Electronics (2.7%):
4,000 General Electric Co. $ 288,000
39,800 General Signal Corp. 1,288,525
3,000 Loral Corp. 106,125
1,500 National Service Industries,
Inc. 48,563
-----------
1,731,213
-----------
Energy & Oil (0.2%):
1,000 British Petroleum, PLC-ADR 102,125
-----------
Financial Services (2.6%):
39,700 ITT Industries, Inc. 952,800
5,500 J.P. Morgan & Co. 441,375
4,000 Norwest Corp. 132,000
2,000 Student Loan Marketing
Assoc. 131,750
-----------
1,657,925
-----------
Food Processing (0.8%):
15,100 Dean Foods Co. 415,250
9,500 Tasty Baking Co. 115,188
-----------
530,438
-----------
Foreign (2.2%):
90,500 Hanson Trust, PLC 1,380,125
-----------
Holding Company (1.7%):
7,800 Unilever N.V. 1,097,850
-----------
Household Products/Wares (1.1%):
8,600 Colgate-Palmolive Co. 604,150
1,000 Procter & Gamble Co. 83,000
-----------
687,150
-----------
Industrial Machinery (2.0%):
29,400 Cooper Industries, Inc. 1,080,450
7,900 Goulds Pumps, Inc. 197,500
-----------
1,277,950
-----------
Insurance (5.3%):
2,781 Allstate Corp. 114,369
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - ---------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Insurance, continued:
13,800 American Financial Group $ 422,625
26,400 American General Corp. 920,700
1,500 American International Group 138,750
22,500 ITT Hartford Group, Inc.(b) 1,088,437
15,500 Torchmark Corp. 701,375
-----------
3,386,256
-----------
Manufacturing--Miscellaneous (0.4%):
3,500 Minnesota Mining &
Manufacturing Co. 231,875
-----------
Medical Services & Supplies (0.2%):
1,500 Becton Dickinson & Co. 112,500
-----------
Metals (1.4%):
15,500 Reynolds Metals Co. 877,687
-----------
Oil--International (0.5%):
5,000 Chevron Corp. 262,500
1,000 Exxon Corp. 80,125
-----------
342,625
-----------
Oil Equipment, Wells & Services (1.7%):
45,100 Dresser Industries, Inc. 1,099,312
-----------
Oil & Gas Production (10.4%):
10,800 Amoco Corp. 776,250
19,200 Ashland, Inc. 674,400
9,800 Atlantic Richfield Co. 1,085,350
50,400 Occidental Petroleum Corp. 1,077,300
34,000 Repsol, S.A.-ADR 1,117,750
42,800 USX-Marathon Group 834,600
38,500 Unocal Corp. 1,121,312
-----------
6,686,962
-----------
Packaged Food (3.9%):
4,500 Flower's Industries, Inc. 54,563
11,800 General Mills, Inc. 681,450
39,400 Grand Metropolitan, PLC-
ADR 1,132,750
33,000 Lance, Inc. 540,375
</TABLE>
Continued
B-73
<PAGE> 75
THE RIVERFRONT FUNDS, INC.
INCOME EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - ------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Packaged Food, continued:
2,500 Sara Lee Corp. $ 79,688
------------
2,488,826
------------
Pharmaceuticals (4.2%):
3,000 Abbott Laboratories 125,250
9,000 Merck & Co., Inc. 591,750
3,000 Pfizer, Inc. 189,000
6,000 Schering-Plough 328,500
14,600 Warner-Lambert Co. 1,418,025
------------
2,652,525
------------
Photography (0.6%):
5,500 Eastman Kodak Co. 368,500
------------
Pipelines (2.1%):
27,500 Tenneco, Inc. 1,364,687
------------
Printing & Publishing (1.8%):
17,900 Dun & Bradstreet Corp. 1,159,025
------------
Real Estate Investment Trusts (0.2%):
3,000 Federal Realty Investment
Trust 68,250
3,200 New Plan Realty Trust 70,000
------------
138,250
------------
Restaurants (0.1%):
1,800 Luby's Cafeterias, Inc. 40,050
------------
Retail (0.4%):
5,000 Winn Dixie Stores, Inc. 184,375
5,000 Woolworth Corp. 65,000
------------
249,375
------------
Savings & Loan (0.9%):
30,000 Roosevelt Financial Group,
Inc. 581,250
------------
Tobacco (1.2%):
5,000 American Brands, Inc. 223,125
5,000 Philip Morris Cos., Inc. 452,500
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - ------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Tobacco, continued:
1,300 UST, Inc. $ 43,388
------------
719,013
------------
Tools (0.6%):
4,000 Illinois Tool Works 236,000
3,600 Snap-On, Inc. 162,900
------------
398,900
------------
Transportation (1.1%):
5,800 Canadian National Railway
Co.(b) 87,000
2,500 Illinois Central Corp. 95,938
2,500 Norfolk Southern Corp. 198,438
13,500 Ryder System, Inc. 334,125
------------
715,501
------------
Utilities--Electric (4.2%):
27,191 Cinergy Corp. 832,724
1,000 KU Energy Corp. 30,000
22,000 Peco Energy Co. 662,750
18,300 Public Services Enterprise
Group 560,437
14,400 Texas Utilities Co. 592,200
------------
2,678,111
------------
Utilities--Gas (0.1%):
1,500 Consolidated Natural Gas Co. 68,063
1,000 Washington Gas & Light Co. 20,500
------------
88,563
------------
Utilities--Telecommunications (7.8%):
17,600 ALLTEL Corp. 519,200
46,800 Frontier Corp. 1,404,000
15,600 GTE Corp. 686,400
1,200 Pacific Telesis Group 40,350
30,200 Southern New England
Telecommunications Corp. 1,200,450
26,400 Sprint Corp. 1,052,700
</TABLE>
Continued
B-74
<PAGE> 76
THE RIVERFRONT FUNDS, INC.
INCOME EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - ----------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Utilities--Telecommunications, continued:
1,500 US West, Inc. $ 53,625
------------
4,956,725
------------
Total Common Stocks 61,745,093
------------
CONVERTIBLE CORPORATE BONDS (1.9%):
Financial (0.4%):
50,000 Chubb Capital Corp., 6.00%,
5/15/98 57,250
50,000 Cincinnati Financial Corp.,
5.50%, 5/1/02 69,500
50,000 South Carolina National Corp.,
6.50%, 5/15/01 118,375
------------
245,125
------------
Industrial (0.3%):
50,000 Hazleton Labs, 6.50%,
5/15/06 123,250
50,000 Liebert Corp., 8.00%,
11/15/10 145,500
------------
268,750
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - ----------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE CORPORATE BONDS, CONTINUED:
Manufacturing (0.2%):
100,000 Allegheny Ludlum Corp.,
5.88%, 3/15/02 $ 103,625
------------
Oil & Gas--Domestic (0.2%):
100,000 Pennzoil Co., 6.50%, 1/15/03 128,500
------------
Restaurant (0.1%):
85,000 Cooker Restaurant, 6.75%,
10/1/02 68,000
------------
Retail (0.5%):
300,000 Federated Department Stores,
5.00%, 10/1/03 300,375
------------
Toys (0.2%):
100,000 Hasbro, Inc., 6.00%,
11/15/98 110,500
------------
Total Convertible Corporate Bonds 1,224,875
------------
Total (Cost--$57,587,972)(a) $62,969,968
============
</TABLE>
- - ----------------
Percentages indicated are based on net assets of $63,678,389.
(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 purposes in excess of federal income tax reporting
of $96,134. Cost for federal income tax purposes differs from value by net
unrealized appreciation of securities as follows:
Unrealized appreciation $ 6,388,955
Unrealized depreciation (1,103,093)
-----------
Net unrealized appreciation $ 5,285,862
===========
(b) Represents non-income producing securities.
See notes to financial statements.
B-75
<PAGE> 77
THE RIVERFRONT FUNDS, INC.
OHIO TAX-FREE BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C>
OHIO MUNICIPAL BONDS (93.3%):
100,000 Aurora, City School District, 5.40%, 12/1/06 $ 105,000
100,000 Bowling Green, City School District, 5.70%, 12/1/11 102,375
230,000 Butler County, Hospital Facilities, 6.00%, 11/15/10, Callable 5/15/04 240,925
250,000 Butler County, Sewer System Revenue, Series B, 6.20%, 12/1/09 265,937
250,000 Canton, Waterworks System, 5.75%, 12/1/10 262,187
100,000 Chillicothe, Water System Revenue, 5.10%, 12/1/05 101,625
200,000 Cincinnati, GO, 4.50%, 12/1/97 202,250
250,000 Cincinnati, GO, 5.25%, 12/1/01 262,813
250,000 Clermont County, Waterworks Revenue, 6.63%, 12/1/16 284,062
250,000 Columbus, GO, 5.90%, 1/1/01 267,812
250,000 Columbus, GO, 5.50%, 5/15/08, Callable 5/15/06 263,125
250,000 Columbus, Sewer Revenue, 6.13%, 6/1/03 277,812
250,000 Columbus, Sewer Revenue, 8.00%, 6/1/08 259,275
200,000 Columbus, GO, 5.65%, 6/15/11 207,750
100,000 Delaware County, GO, 5.60%, 12/1/10 102,625
100,000 Dover, Municipal Electric System Revenue, 5.35%, 12/1/06 104,125
250,000 Franklin County, Hospital Revenue, Riverside United Methodist-A, 5.30%, 5/15/02 257,813
250,000 Franklin County, Hospital Revenue, 5.25%, 6/1/08 250,938
250,000 Fremont, GO, 5.45%, 12/15/07 259,688
250,000 Gahanna, GO, 5.85%, 6/1/08 267,812
250,000 Hamilton County, Building Improvement & Refunding Museum Center, 5.75%,
12/1/00 265,625
80,000 Hamilton County, Sewer Systems, Series A, 6.40%, 12/1/04 89,100
170,000 Hamilton County, Sewer System Unrefunded, Series A, 6.40%, 12/1/04 188,488
250,000 Hilliard, School District, 5.35%, 12/1/04 261,875
250,000 Kings Local School District, 5.75%, 12/1/10 260,625
100,000 Lake County, Human Services Building, GO, 5.70%, 12/1/15 103,500
250,000 Lakota, Local School District, 6.00%, 12/1/07, Callable 12/1/02 265,313
250,000 Mahoning County, 5.60%, 12/1/02 265,938
250,000 Mahoning County, GO, 5.70%, 12/1/08 263,125
100,000 Marysville, School District, 5.30%, 12/1/09 101,250
200,000 Mason, City School District, GO, 5.20%, 12/1/08 203,750
250,000 Middletown, Capital Facilities Improvement Refunding, 5.60%, 12/1/05 261,250
100,000 Montgomery County, 5.40%, 9/1/09 101,625
250,000 State Building Authority, 5.70%, 9/1/01 265,938
250,000 State Building Authority, 6.00%, 10/1/07 271,250
</TABLE>
Continued
B-76
<PAGE> 78
THE RIVERFRONT FUNDS, INC.
OHIO TAX-FREE BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
OHIO MUNICIPAL BONDS, CONTINUED:
245,000 State Building Authority, 6.13%, 10/1/09 $ 265,825
95,000 State Building Authority, 6.25%, 6/1/11 100,106
100,000 State, GO, 5.60%, 8/1/02 107,000
250,000 State Public Facilities Commission, Higher Education Capital Facilities-Series II-B,
5.70%, 11/1/03 268,437
200,000 State Public Facilities Commission, Higher Education Capital Facilities-Series II-A,
5.20%, 5/1/05 206,500
250,000 State Public Facilities Commission, Park & Recreations Facilities, Series II-A, 5.25%,
6/1/06 255,000
250,000 State Special Obligation, 5.45%, 6/1/99 260,625
250,000 State Water Development Authority Revenue, 5.75%, 6/1/03 266,875
250,000 State Water Development Authority Revenue, 5.75%, 12/1/05, Callable 12/1/02 265,937
150,000 State Water Development Authority Revenue, 5.70%, 12/1/11 155,063
250,000 Olentangy Local School District-Series A, 5.70%, 12/1/05 270,312
100,000 Solon, GO, 5.25%, 12/1/07 102,375
250,000 University of Cincinnati, Series R3, 5.80%, 6/1/04 267,500
250,000 Warren County, Waterworks Revenue, 5.75%, 12/1/09 259,688
100,000 West Clermont, Local School District, 5.55%, 12/1/06 105,250
250,000 Woodridge, Local School District, 5.75%, 12/1/07, Callable 12/1/04 265,625
------------
Total Ohio Municipal Bonds 10,936,719
------------
INVESTMENT COMPANIES (6.1%):
375,000 Dreyfus Municipal Money Market Fund 375,000
338,995 Goldman Tax-Free Fund 338,995
------------
Total Investment Companies 713,995
------------
Total (Cost--$11,092,335)(a) $11,650,714
============
</TABLE>
- - ------------
Percentages indicated are based on net assets of $11,717,041.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
Unrealized appreciation $ 562,460
Unrealized depreciation (4,081)
-----------
Net unrealized appreciation $ 558,379
===========
GO--General Obligation
See notes to financial statements.
B-77
<PAGE> 79
THE RIVERFRONT FUNDS, INC.
FLEXIBLE GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - -----------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (45.1%):
Aerospace--Aircraft (1.8%):
2,200 Lockheed Martin Corp. $ 173,800
1,900 Watkin-Johnson Co. 83,125
-----------
256,925
-----------
Banks (1.2%):
2,500 Citicorp 168,125
-----------
Beverages (0.9%):
2,000 Anheuser-Busch Cos., Inc. 133,750
-----------
Chemicals & Drugs (3.6%):
4,000 Bristol Myers Squibb Co. 343,500
2,500 E.I. du Pont deNemours &
Co. 174,687
-----------
518,187
-----------
Computers & Software (2.2%):
2,000 Compaq Computer Corp.(b) 96,000
4,800 Seagate Technology, Inc.(b) 228,000
-----------
324,000
-----------
Electronics (2.9%):
3,500 Arrow Electronics, Inc.(b) 150,937
2,000 Tektronix, Inc. 98,250
3,200 Texas Instruments, Inc. 165,600
-----------
414,787
-----------
Energy--Oil (2.1%):
2,000 British Petroleum PLC-ADR 204,250
1,300 Exxon Corp. 104,163
-----------
308,413
-----------
Food Processing (3.0%):
4,400 Archer Daniels Midland Co. 79,200
4,500 H.J. Heinz Co. 149,062
4,000 IBP, Inc. 202,000
-----------
430,262
-----------
Forest Products (0.5%):
2,000 International Paper Co. 75,750
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - -----------------------------------------------------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Grocery (1.6%):
6,000 Kroger Co.(b) $ 225,000
------------
Household Products/Wares (1.3%):
2,700 Clorox Co. 193,388
------------
Insurance--Fire & Casualty (1.5%):
3,000 Transatlantic Holdings, Inc. 220,125
------------
Leisure Time (0.8%):
5,000 Brunswick Corp. 120,000
------------
Manufacturing (0.8%):
4,000 TRINOVA Corp. 114,500
------------
Metals (1.3%):
8,000 Placer Dome, Inc. 193,000
------------
Mining (2.5%):
5,000 Barrick Gold Corp. 131,875
4,000 Homestake Mining Co. 62,500
14,000 Santa Fe Pacific Gold
Corp.(b) 169,750
------------
364,125
------------
Natural Gas (3.6%):
3,500 Enron Corp. 133,438
6,000 Pacific Enterprises 169,500
8,000 Panhandle Eastern Corp. 223,000
------------
525,938
------------
Oil & Gas Producers (2.3%):
1,200 Mobil Corp. 134,400
9,000 YPF Sociedad Anonima-
Sponsored-ADR 194,625
------------
329,025
------------
Retail (1.9%):
6,000 Walgreen Co. 179,250
3,000 Albertson's, Inc. 98,625
------------
277,875
------------
</TABLE>
Continued
B-78
<PAGE> 80
THE RIVERFRONT FUNDS, INC.
FLEXIBLE GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - ----------------------------------------------------------------
<S> <C>
COMMON STOCKS, CONTINUED:
Tobacco (2.1%):
3,300 Philip Morris Cos., Inc. $ 298,650
-----------
Utilities--Electric (4.0%):
3,000 Chilgener S.A.-ADR(b) 75,000
7,000 Consolidated Edison of New
York 224,000
3,500 Duke Power Co. 165,812
1,900 Northern States Power Co. 93,338
-----------
558,150
-----------
Utilities--Telecommunications (3.2%):
4,500 Ameritech Corp. 265,500
5,000 Telefonica De Argentina-
ADR(b) 136,250
2,000 Telefonos De Mexico, S.A.-
ADR 63,750
-----------
465,500
-----------
Total Common Stocks 6,515,475
-----------
U.S. GOVERNMENT AGENCIES (3.5%):
Federal Home Loan Bank:
100,000 5.97%, 12/14/98 100,076
400,000 5.78%, 1/8/99 400,000
-----------
Total U.S. Government Agencies 500,076
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - ------------------------------------------------------
<S> <C> <C>
U.S. TREASURY BILLS (8.1%):
1,200,000 5/30/96 $ 1,174,752
------------
U.S. TREASURY BONDS (28.3%):
2,250,000 6.25%, 2/15/03 2,348,032
950,000 7.25%, 5/15/04 1,054,909
550,000 8.13%, 8/15/19 691,251
------------
Total U.S. Treasury Bonds 4,094,192
------------
U.S. TREASURY NOTES (15.1%):
300,000 7.50%, 1/31/96 300,567
300,000 6.88%, 4/30/97 306,372
700,000 6.50%, 5/15/97 711,914
200,000 6.25%, 5/31/00 206,774
400,000 7.25%, 5/15/16 456,508
200,000 6.25%, 8/15/23 205,736
------------
Total U.S. Treasury Notes 2,187,871
------------
U.S. TREASURY STRIPS (1.0%):
460,000 2/15/15 145,273
------------
INVESTMENT COMPANIES (1.3%):
194,000 Dreyfus Treasury Prime
Fund 194,000
------------
Total Investment Companies 194,000
------------
Total (Cost--$13,611,629)(a) $14,811,639
============
</TABLE>
- - --------------
Percentages indicated are based on net assets of $14,456,894.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
Unrealized appreciation $ 1,256,995
Unrealized depreciation (56,985)
-----------
Net unrealized appreciation $ 1,200,010
===========
(b) Represents non-income producing securities.
See notes to financial statements.
B-79
<PAGE> 81
THE RIVERFRONT FUNDS, INC.
STOCK APPRECIATION FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (91.0%):
Aerospace--Aircraft (0.3%):
1,500 Lockheed Martin Corp. $ 118,500
------------
Apparel (7.6%):
30,000 Donnkenny, Inc.(b) 543,750
15,000 Jones Apparel Group(b) 590,625
24,000 The Men's Wearhouse,
Inc.(b) 618,000
12,000 Nike, Inc.-Class B 835,500
10,000 St. John's Knits, Inc. 531,250
------------
3,119,125
------------
Banks (3.2%):
15,000 Bank of Boston Corp. 693,750
14,000 Corestates Financial Corp. 530,250
2,500 Norwest Corp. 82,500
------------
1,306,500
------------
Beverages (0.3%):
2,000 PepsiCo, Inc. 111,750
------------
Brokerage (2.9%):
20,000 Raymond James Financial,
Inc. 422,500
10,000 Charles Schwab Corp. 201,250
5,000 Donaldson Lufkin & Jenrette 156,250
16,875 Waterhouse Investor Services,
Inc. 417,656
------------
1,197,656
------------
Chemicals (0.9%):
10,000 Union Carbide Holding
Corp. 375,000
------------
Commercial Services (3.1%):
12,500 Checkpoint Systems, Inc.(b) 467,187
15,000 CUC International, Inc.(b) 511,875
10,000 Franklin Quest Co.(b) 195,000
2,000 Reuters Holdings-PLC ADR 110,250
------------
1,284,312
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - --------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Computer Services (3.1%):
10,000 HBO & Co. $ 766,250
20,000 National Data Corp. 495,000
------------
1,261,250
------------
Computers & Peripherals (3.0%):
15,000 Gateway 2000, Inc.(b) 367,500
10,000 Read-Rite Corp.(b) 232,500
7,000 U.S. Robotics Corp.(b) 614,250
------------
1,214,250
------------
Computers & Software (16.7%):
12,500 Active Voice Corp.(b) 343,750
20,250 Bay Networks, Inc.(b) 832,780
10,000 Cisco Systems, Inc.(b) 746,250
12,000 Cognos, Inc.(b) 535,500
10,000 Dialogic Corp.(b) 385,000
20,000 Global Village
Communication, Inc.(b) 387,500
12,300 In Focus Systems, Inc.(b) 444,338
7,000 Microsoft Corp.(b) 614,250
10,000 Oracle Corp.(b) 423,750
15,000 Quarterdeck Corp.(b) 412,500
10,000 Seagate Technology, Inc.(b) 475,000
10,000 Sybase, Inc.(b) 360,000
13,500 Synopsys, Inc.(b) 513,000
9,000 3 Com Corp.(b) 419,625
------------
6,893,243
------------
Construction (1.7%):
10,000 Centex Corp. 347,500
14,900 Toll Brothers, Inc.(b) 342,700
------------
690,200
------------
Drugs (3.4%):
10,000 Amgen, Inc.(b) 593,750
1,500 Bristol Myers Squibb Co. 128,813
10,000 Glaxo Holdings-ADR 282,500
</TABLE>
Continued
B-80
<PAGE> 82
THE RIVERFRONT FUNDS, INC.
STOCK APPRECIATION FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - --------------------------------------------------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Drugs, continued:
6,000 Merck & Co., Inc. $ 394,500
------------
1,399,563
------------
Electronics (4.4%):
15,000 Alliance Semiconductor
Corp.(b) 174,375
15,000 Analog Devices, Inc.(b) 530,625
14,000 Linear Technology Corp. 549,500
14,000 Maxim Integrated Products,
Inc.(b) 539,000
------------
1,793,500
------------
Environmental Control (0.7%):
11,400 Imco Recycling, Inc. 279,300
------------
Financial Services (3.6%):
10,000 Aames Financial Corp. 278,750
12,000 Green Tree Financial Corp. 316,500
27,500 The Money Store, Inc. 429,688
20,000 Olympic Financial Ltd.(b) 325,000
10 Transport Holdings, Inc.-
Class A(b) 408
2,000 Travelers Group, Inc. 125,750
------------
1,476,096
------------
Food Services (3.1%):
19,000 Daka International, Inc.(b) 522,500
20,000 Starbucks Corp.(b) 420,000
15,000 Wendy's International, Inc. 318,750
------------
1,261,250
------------
Healthcare Services (8.1%):
12,500 Columbia HCA Healthcare
Corp. 634,375
20,000 HEALTHSOUTH Corp.(b) 582,500
10,000 Integrated Health Services,
Inc. 250,000
22,000 Maxicare Health Plans,
Inc.(b) 591,250
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - ---------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Healthcare Services, continued:
7,000 Pacificare Health Systems,
Inc. Class B(b) $ 609,000
10,000 United Healthcare Corp. 655,000
-----------
3,322,125
-----------
Household Products/Wares (0.3%):
1,500 Clorox Co. 107,438
-----------
Insurance (2.8%):
7,354 Allstate Corp. 302,433
10,000 W.R. Berkley Corp. 537,500
2,000 CNA Financial Corp.(b) 227,000
2,500 Providian Corp. 101,875
-----------
1,168,808
-----------
Medical Supplies & Services (9.1%):
20,000 Amsco International, Inc.(b) 297,500
15,000 Boston Scientific Corp.(b) 735,000
15,000 Idexx Laboratories, Inc.(b) 705,000
14,000 Medtronic, Inc. 782,250
25,000 Mentor Corp. 575,000
20,000 Steris Corp.(b) 645,000
-----------
3,739,750
-----------
Oil Equipment, Wells & Services (1.2%):
2,000 Halliburton Co. 101,250
12,500 Tidewater, Inc. 393,750
-----------
495,000
-----------
Retail-Office Supplies (2.7%):
15,000 Corporate Express, Inc.(b) 451,875
15,000 Officemax, Inc.(b) 335,625
12,500 Staples, Inc.(b) 304,688
-----------
1,092,188
-----------
Retail-Specialty (2.5%):
26,000 Sunglass Hut International(b) 617,500
10,000 Fastenal Co. 422,500
-----------
1,040,000
-----------
</TABLE>
Continued
B-81
<PAGE> 83
THE RIVERFRONT FUNDS, INC.
STOCK APPRECIATION FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - ---------------------------------------------------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Savings & Loan (2.1%):
15,000 Coast Savings Financial,
Inc.(b) $ 519,375
20,000 Glendale Federal Bank(b) 350,000
-----------
869,375
-----------
Telecommunications (3.0%):
10,000 Aspect Telecommunications
Corp.(b) 335,000
12,500 DSC Communications
Corp.(b) 460,937
12,500 Worldcom, Inc.(b) 440,625
-----------
1,236,562
-----------
Textiles (0.9%):
15,000 G&K Services, Inc.-Class A 382,500
-----------
Tobacco (0.3%):
1,500 Philip Morris Cos., Inc. 135,750
-----------
Total Common Stocks 37,370,991
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
- - ----------------------------------------------------------
<S> <C> <C>
INVESTMENT COMPANIES (5.0%):
2,050,000 Dreyfus Treasury Prime
Fund $ 2,050,000
-----------
Total Investment Companies 2,050,000
-----------
Total Investments 39,420,991
-----------
REPURCHASE AGREEMENTS (3.8%):
1,579,159 Provident, 5.50%, dated
12/29/95, due 1/2/96
(Collateralized
by 4,604,823 Federal
National Mortgage Association,
6.24%, 2/25/23, market
value--$4,596,189)(c) 579,159
-----------
Total Repurchase Agreements 1,579,159
-----------
Total (Cost--$33,882,327)(a) $41,000,150
===========
</TABLE>
- - --------------
Percentages indicated are based on net assets of $41,067,172.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
Unrealized appreciation $ 8,076,748
Unrealized depreciation (958,925)
-----------
Net unrealized appreciation $ 7,117,823
===========
(b) Represents non-income producing securities.
(c) Provident Bank and The Riverfront Funds, Inc. are affiliated parties.
See notes to financial statements.
B-82
<PAGE> 84
THE RIVERFRONT FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION:
The Riverfront Funds, Inc. (the "Fund"), was organized as a Maryland
Corporation on March 27, 1990, and is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company. The Fund is authorized to issue six series
of shares of capital stock, representing interests in different portfolios
of securities as follows: The Riverfront U.S. Government Securities Money
Market Fund, The Riverfront U.S. Government Income Fund, The Riverfront
Income Equity Fund, The Riverfront Ohio Tax-Free Bond Fund, The Riverfront
Flexible Growth Fund and The Riverfront Stock Appreciation Fund (each, a
"Portfolio"; and collectively, the "Portfolios"). During the year, the
Fund acquired all six of the investment portfolios of MIM Mutual Funds,
Inc. and combined them with three of the Fund's Portfolios including the
newly created Stock Appreciation Fund.
The Fund is authorized to issue 3,000,000,000 shares with a par value of
$0.001. Sales of shares of the Portfolios may be made to customers of The
Provident Bank ("Provident") and its affiliates, to all accounts of
correspondent banks of Provident and to the general public.
The U.S. Government Income Fund, the Income Equity Fund, the Ohio Tax-Free
Bond Fund, the Flexible Growth Fund and the Stock Appreciation Fund
(collectively, "the variable net asset value funds") each offers two share
classes: Investor A Shares and Investor B Shares. The U.S. Government
Securities Money Market Fund (the "money market fund") offers only
Investor A Shares. Investor A shares of the variable net asset value funds
are subject to initial sales charges imposed at the time of purchase, in
accordance with the Portfolios' prospectuses. Certain redemptions of
Investor B shares of the variable net asset value funds made within six
years of purchase are subject to varying contingent deferred sales charges
in accordance with the Portfolios' prospectuses. Each share class has
identical rights and privileges, except with respect to distribution and
services (12b-1) fees paid by each share class, voting rights on matters
affecting a single share class, and the exchange privileges of each share
class.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The policies are
in conformity with generally accepted accounting principles.
SECURITIES VALUATION:
Investments of the money market fund are valued at either amortized cost,
which approximates market value, or at original cost which, combined with
accrued interest, approximates market value. Under the amortized cost
method, discount or premium is amortized on a constant basis to the
maturity of the security. In addition, the money market fund may not (a)
purchase any instrument with a remaining maturity greater than 397 days
unless such investment is subject to a demand feature, or (b) maintain a
dollar-weighted-average portfolio maturity which exceeds 90 days.
Investments in common and preferred stocks, corporate bonds, municipal
securities, commercial paper and U.S. Government securities of the
variable net asset value funds are valued at their market values
determined on the basis of the mean of the latest available bid and asked
quotations on the principal exchange
Continued
B-83
<PAGE> 85
THE RIVERFRONT FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1995
(closing sales prices if the over-the-counter National Market System) in
which such securities are normally traded. Short-term investments maturing
in 60 days or less are valued at amortized cost which, combined with
accrued interest, approximates market value. Investments in investment
companies are valued at their net asset values as reported by such
investment companies. Other securities for which quotations are not
readily available are valued at their fair value by the investment adviser
under the supervision of the Fund's Board of Directors. The differences
between the cost and market values of investments held by the variable net
asset value funds are reflected as either unrealized appreciation or
depreciation.
SECURITY TRANSACTIONS AND RELATED INCOME:
Security transactions are accounted for on the date the security is
purchased or sold (trade date). Interest income is recognized on the
accrual basis and includes, where applicable, the pro rata amortization of
premium or discount. Dividend income is recorded on the ex-dividend date.
Realized gains or losses from sales of securities are determined by
comparing the identified cost of the security lot sold with the net sales
proceeds.
REPURCHASE AGREEMENTS:
The Portfolios may acquire repurchase agreements from financial
institutions such as banks and broker dealers which Provident, as
investment adviser, or the Portfolio's sub-investment adviser deems
creditworthy under guidelines approved by the Board of Directors, subject
to the seller's agreement to repurchase such securities at a mutually
agreed-upon date and price. The repurchase price generally equals the
price paid by each Portfolio plus interest negotiated on the basis of
current short-term rates, which may be more or less than the rate on the
underlying portfolio securities. The seller, under a repurchase agreement,
is required to maintain the value of collateral held pursuant to the
agreement at not less than the repurchase price (including accrued
interest). Securities subject to repurchase agreements are held by each
Portfolio's custodian or another qualified custodian or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered
to be loans by the Portfolios under the 1940 Act.
DIVIDENDS TO SHAREHOLDERS:
Dividends from net investment income are declared daily and paid monthly
for the money market fund. Dividends from net investment income are
declared and paid monthly for the variable net asset value funds.
Distributable net realized capital gains, if any, are declared and
distributed at least annually. Any taxable distributions declared in
December and paid in the following fiscal year will be taxable to
shareholders in the year declared.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. Timing differences relating to shareholder
distributions are reflected in the components of net assets and permanent
book and tax basis differences relating to shareholder distributions have
been reclassified to additional paid-in capital. These differences are
primarily due to differing treatments for dollar roll transactions,
deferral of certain losses and expiring capital loss carryforwards.
Continued
B-84
<PAGE> 86
THE RIVERFRONT FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1995
FEDERAL INCOME TAXES:
It is the policy of each Portfolio to qualify or continue to qualify as a
regulated investment company by complying with the provisions available to
certain investment companies, as defined in applicable sections of the
Internal Revenue Code, and to make distributions of net investment income
and net realized capital gains sufficient to relieve it from all, or
substantially all, Federal income taxes.
ESTIMATES:
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.
3. REORGANIZATION
On June 26, 1995, the Fund entered into an Agreement and Plan of
Reorganization and Liquidation (the "Plan") with MIM Mutual Funds, Inc.
("MIM"), a Maryland corporation. Pursuant to the Plan, the money market
fund acquired all or substantially all of the assets of the Money Market
Fund of MIM and the Income Equity Fund acquired all or substantially all
of the assets of each of the Bond Income Fund, AFA Equity Income Fund and
Stock Income Fund of MIM (collectively, the "Acquired Funds"), in exchange
for the assumption of such Acquired Funds' stated liabilities and a number
of full and fractional Investor A shares of the Money Market Fund or the
Income Equity Fund, having an aggregate net asset value equal to such
Acquired Funds' net assets (the "Reorganization"). Additionally, the MIM
Stock Appreciation Fund and MIM Stock Growth Fund were acquired by the
newly created Riverfront Stock Appreciation Fund. At a Special Meeting,
held September 27, 1995, the shareholders of MIM approved the
Reorganization which took effect September 30, 1995. The following is a
summary of shares outstanding, net asset value per share and unrealized
appreciation immediately before and after the Reorganization:
<TABLE>
<CAPTION>
Before Reorganization After Reorganization
------------------------------ --------------------
Riverfront Riverfront
MIM U.S. Government U.S. Government
Money Market Securities Money Securities Money
Fund Market Fund Market Fund
------------ ---------------- ----------------
<S> <C> <C> <C>
Shares 4,865,634 139,885,336 144,750,970
Net Assets $4,865,634 $139,883,045 $144,748,679
Net Asset Value $1.00 $1.00 $1.00
</TABLE>
<TABLE>
<CAPTION>
Before Reorganization After Reorganization
------------------------------------------------------------------ --------------------
MIM Bond MIM Stock MIM AFA Equity Riverfront Income Riverfront Income
Income Fund Income Fund Income Fund Equity Fund Equity Fund
----------- ------------ -------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C>
Shares 175,098 555,565 66,038 4,174,301 4,968,243
Net Assets $1,911,667 $7,001,927 $813,625 $51,090,349 $60,817,568
Net Asset Value: $10.92* $12.60* $12.32*
Investor A Shares $12.25 $12.25
Investor B Shares $12.00 $12.00
Unrealized Appreciation $ 254,298 $1,425,640 $ 70,$83 $ 2,235,485 $ 3,985,706
</TABLE>
--------
* Prior to the reorganization, MIM offered only one class of shares of
each Acquired Fund.
Continued
B-85
<PAGE> 87
THE RIVERFRON FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1995
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares for the Fund were as follows:
<TABLE>
<CAPTION>
U.S. Government Securities U.S. Government
Money Market Fund Income Fund Income Equity Fund
----------------------------- ----------------------------- ----------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31, December 31,
1995 1994 (a) 1995 1994 (a) 1995 1994 (a)
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
INVESTOR A SHARES:
Proceeds from shares issued $ 331,872,719 $ 252,936,958 $ 4,352,572 $ 7,849,466 $ 9,389,60 $13,962,314
Proceeds from shares issued
in connection with
acquisition 4,865,634 9,727,219
Dividends reinvested 1,518,099 569,500 569,125 333,435 8,635,353 900,398
Cost of shares redeemed (330,133,820) (237,338,519) (4,089,227) (2,238,879) (7,219,484) (2,457,054)
------------- ------------- ----------- ----------- ----------- -----------
Change in net assets from
Investor A share
transactions $ 8,122,632 $ 16,167,939 $ 832,470 $ 5,944,022 $20,532,690 $12,405,658
============= ============= =========== =========== =========== ===========
INVESTOR B SHARES:
Proceeds from shares issued $ 1,317,928 $ 2,765,814
Dividends reinvested 9,712 13,294
Cost of shares redeemed (96,002) (43,350)
----------- -----------
Change in net assets from
Investor B share
transactions $ 1,231,638 $ 2,735,758
=========== ===========
SHARE TRANSACTIONS:
INVESTOR A SHARES:
Issued 331,872,719 252,936,958 469,561 838,911 828,287 1,295,899
Issued in connection with
acquisition 4,865,634 793,942
Reinvested 1,518,099 569,500 60,733 36,232 763,006 84,342
Redeemed (330,133,820) (237,338,519) (435,482) (243,620) (630,554) (230,101)
------------- ------------- ----------- ----------- ----------- -----------
Change in Investor A Shares 8,122,632 16,167,939 94,812 631,523 1,754,681 1,150,140
============= ============= =========== =========== =========== ===========
INVESTOR B SHARES:
Issued 123,342 241,570
Reinvested 903 1,125
Redeemed (8,962) (3,605)
---------- ----------
Change in Investor B Shares 115,283 239,090
=========== ===========
</TABLE>
--------
(a) Audited by other auditors.
Continued
B-86
<PAGE> 88
THE RIVERFRONT FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
Flexible Growth Stock Appreciation
Ohio Tax-Free Bond Fund Fund Fund
----------------------------- ----------------------------- ------------------
Period from Period from
August 1, 1994 August 1, 1994
Year Ended through Year Ended through October 1, 1995
December 31, December 31, December 31, December 31, December 31,
1995 1994(a) 1995 1994(a) 1995(b)
------------ -------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
INVESTOR A SHARES:
Proceeds from shares issued $297,450 $10,355,0088 $6,257,968 $2,833,344 $ 738,522
Dividends reinvested 8,453 27 282,271 13,957 1,542,781
Cost of shares redeemed (109,278) (717,635) (100,558) (3,611,887)
-------- ------------ ---------- ---------- -----------
Change in net assets from Investor A
share transactions $196,625 $10,355,115 $5,822,604 $2,746,743 $(1,330,584)
======== ============ ========== ========== ===========
INVESTOR B SHARES:
Proceeds from shares issued $598,493 $4,818,782 $ 71,986
Dividends reinvested 9,755 52,617
Cost of shares redeemed (5,034) (188,581)
-------- ---------- -----------
Change in net assets from Investor B
share transactions $603,214 $4,682,818 $ 71,986
======== ========== ===========
SHARE TRANSACTIONS:
INVESTOR A SHARES:
Issued 29,259 1,036,159 593,056 285,468 76,082
Reinvested 833 3 25,863 1,408 164,279
Redeemed (10,732) (65,727) - (10,174) (370,208)
-------- ------------ ---------- ---------- -----------
Change in Investor A Shares 19,360 1,036,162 553,192 276,702 (129,847)
======== ============ ========== ========== ===========
INVESTOR B SHARES:
Issued 57,922 442,046 7,299
Reinvested 927 4,698
Redeemed (491) (16,667)
-------- ---------- -----------
Change in Investor B Shares 58,358 430,077 7,299
======== ========== ===========
</TABLE>
--------
(a) Period from commencement of operations. Audited by other auditors.
(b) Period from date acquired by Riverfront Stock Appreciation Fund.
5. RELATED PARTY TRANSACTIONS
Provident has entered into an Investment Advisory Agreement with the Fund
whereby Provident supervises and manages the investment and reinvestment
of the assets of the U.S. Government Securities Money Market Fund, the
U.S. Government Income Fund, the Ohio Tax-Free Bond Fund and the Stock
Appreciation Fund. Under the terms of the Investment Advisory Agreement,
Provident is entitled to receive fees based on a percentage of the average
net assets of each Portfolio.
At meetings held on May 19, 1995 and June 26, 1995, the Board of Directors
of the Fund approved an increase from 0.75% to 0.95% in the investment
advisory fee paid to Provident by the Income Equity Fund. In addition, the
Board approved a new sub-investment advisory agreement between Provident
and DePrince, Race & Zollo, Inc. on behalf of the Income Equity Fund which
also increased the sub-investment advisory fees paid by Provident to the
new sub-investment adviser. At a Special Meeting, held July 31, 1995, the
Continued
B-87
<PAGE> 89
THE RIVERFRONT FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1995
shareholders of the Income Equity Fund approved the proposed amendments to
the investment advisory agreement to increase the investment advisory fees
and to enter into the agreement with the new sub-investment adviser. The
amendments took effect August 15, 1995.
Pursuant to the terms of the Investment Advisory Agreement with the Fund,
Provident has entered into Sub-Investment Advisory Agreements with
DePrince, Race & Zollo, Inc. ("DePrince"), for the Income Equity Fund and
with James Investment Research ("JIR") for the Flexible Growth Fund.
DePrince and JIR provide investment advice to and supervise the investment
program of the Income Equity Fund and the Flexible Growth Fund,
respectively. Under the terms of the Sub-Investment Advisory Agreements,
JIR receives from Provident fees calculated at 0.50% of the average daily
net assets of the Flexible Growth Fund, and DePrince receives from
Provident fees calculated at 0.50% of average daily net assets up to $55
million and 0.55% of average daily net assets up to $75 million of the
Income Equity Fund.
In addition to serving as Investment Adviser, Provident serves as
custodian and fund accountant to the Portfolios. Under the terms of the
Custodian, Fund Accounting and Recordkeeping Agreement, Provident is
entitled to receive fees based on a percentage of the average daily net
assets of each Portfolio.
During the year ended December 31, 1995, Provident Securities Investor,
Inc. ("PSI"), an affiliate of Provident which is a registered broker
dealer, executed transactions to purchase and sell portfolio investments
on behalf of the Fund. The Fund paid PSI approximately $85,000 that has
been included in investments at cost, as commissions for such
transactions.
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
("BISYS"), an Ohio limited partnership, and BISYS Fund Services Ohio, Inc.
("BISYS Ohio") are subsidiaries of the BISYS Group, Inc.
BISYS, with whom certain officers and a director of the Fund are
affiliated, serves the Fund as Administrator, principal underwriter and
distributor. Such officers and director are paid no fees directly by the
Portfolios for serving as officers and as director of the Fund. Under the
terms of the Administration Agreement, BISYS' fees are computed at 0.20%
of the average daily net assets of each Portfolio.
Provident also serves as Transfer Agent and Shareholder Servicing Agent to
the Fund, and BISYS Ohio serves as Sub-Transfer Agent for the Investor B
Shares. Under the terms of the Master Transfer and Record-keeping
Agreement, Provident is entitled to receive fees based on the number of
shareholders of each Portfolio and certain out-of-pocket expenses. Under
the terms of the Shareholder Servicing Agreement, Provident may receive a
fee computed daily at an annual rate of up to 0.25% of the average daily
net assets of certain shares of each Portfolio. This fee may be used to
reimburse BISYS or other providers of Record keeping and/or administrative
support services. As of December 31, 1995, there were no shareholder
servicing agreements entered into on behalf of any of the Portfolios.
The Fund has adopted an Investor A Distribution and Shareholder Service
Plan ("Investor A Plan") and an Investor B Distribution and Shareholder
Service Plan ("Investor B Plan"), each in accordance with Rule 12b-1 under
the Investment Company Act of 1940. Pursuant to the Investor A Plan, each
Portfolio is
Continued
B-88
<PAGE> 90
THE RIVERFRONT FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1995
authorized to pay or reimburse BISYS, as distributor of Investor A shares,
a periodic amount, calculated at an annual rate not to exceed 0.25% of the
average daily net assets of Investor A Shares of each Portfolio. Pursuant
to the Investor B Plan, each variable net asset value fund is authorized
to pay or reimburse BISYS, as distributor of Investor B shares, (a) a
distribution fee in an amount not to exceed, on an annual basis, 0.75% of
the average daily net assets of Investor B shares of that Portfolio and
(b) a service fee in an amount not to exceed 0.25% of the average daily
net asset value of Investor B Shares of that Portfolio. These fees may be
used by BISYS to pay banks, broker dealers and other institutions,
including Provident, DePrince and JIR, or to reimburse BISYS or its
affiliates, to finance any activity which is principally intended to
result in the sale of shares or to compensate for providing shareholder
services. For the year ended December 31, 1995, BISYS received $214,820
from commissions on sales of capital shares, of which $190,064 was
reallowed to dealers of the Fund's shares including $186,048 to affiliates
of the Fund.
Provident and certain of its affiliates own shares of Portfolios of the
Fund. As of December 31, 1995, the aggregate values of Capital shares owned
by Provident and its affiliates were as follows (amounts in thousands):
<TABLE>
<S> <C>
U.S. Government Income Fund $31,623
Income Equity Fund 5,273
Ohio Tax-Free Bond Fund 10,510
Flexible Growth Fund 2,055
</TABLE>
Fees may be voluntarily reduced or reimbursed to assist the Portfolios in
maintaining competitive expense ratios.
Information regarding these transactions is as follows for the year ended
December 31, 1995:
<TABLE>
<CAPTION>
U.S. Government Income
Securities Money U.S. Government Equity
Market Fund Income Fund Fund
---------------- --------------- -------
<S> <C> <C> <C>
INVESTMENT ADVISORY FEES:
Annual fee before voluntary fee reductions (percentage of
average daily net assets) 0.15% 0.40% 0.95%
Voluntary fee reductions $11,516
12b-1 FEES (INVESTOR A):
Voluntary fee reductions $369,910 $33,246 $30,381
CUSTODIAN AND ACCOUNTING FEES: $ 73,973 $36,115 $72,596
TRANSFER AGENT FEES: $ 59,257 $37,402 $42,860
REIMBURSED FEES: $ 548 $62,119
</TABLE>
Continued
B-89
<PAGE> 91
THE RIVERFRONT FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1995
<TABLE>
<CAPTION>
Ohio Tax-Free Flexible Stock Appreciation
Bond Fund Growth Fund Fund (a)
------------- ----------- ------------------
<S> <C> <C> <C>
INVESTMENT ADVISORY FEES:
Annual fee before voluntary fee reductions
(percentage of average daily net assets) 0.50% 0.90% 0.80%
Voluntary fee reductions $11,234 $25,567 $ 900
12b-1 FEES (INVESTOR A):
Voluntary fee reductions $ 4,699 $ 5,552 $ 281
CUSTODIAN AND ACCOUNTING FEES: $15,708 $12,666 $15,578
TRANSFER AGENT FEES: $25,445 $22,857 $ 9,834
REIMBURSED FEES: $ 544 $44,178
</TABLE>
--------
(a) For the period from October 1, 1995 (date acquired by Riverfront Stock
Appreciation Fund) through December 31, 1995.
6. PURCHASES AND SALES OF SECURITIES:
Purchases and sales of securities (excluding short-term securities) for the
year ended December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Purchases Sales
----------- -----------
<S> <C> <C>
U.S. Government Income Fund $26,035,286 $23,842,104
Income Equity Fund 90,884,221 83,829,266
Ohio Tax-Free Bond Fund 6,043,089 3,396,960
Flexible Growth Fund 10,928,467 891,684
Stock Appreciation Fund 23,560,396(a) 17,024,763(a)
</TABLE>
--------
(a) For the period from October 1, 1995 (date acquired by Riverfront Stock
Appreciation Fund) to December 31, 1995.
7. FEDERAL INCOME TAXES:
For federal income tax purposes, the following Portfolios have capital loss
carryforwards as of December 31, 1995, which are available to offset future
capital gains, if any:
<TABLE>
<CAPTION>
Expires Amount
------- ----------
<S> <C> <C>
U.S. Government Securities Money Market Fund...... 2002 $ 875
U.S. Government Securities Money Market Fund...... 2003 $ 1,415
U.S. Government Income Fund....................... 2002 $1,393,386
U.S. Government Income Fund....................... 2003 $ 513,952
Ohio Tax-Free Bond Fund........................... 2002 $ 8,658
</TABLE>
Continued
B-90
<PAGE> 92
THE RIVERFRONT FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1995
8. ELIGIBLE DISTRIBUTIONS (UNAUDITED):
The Fund designated the following eligible distributions for the dividends
1995:
<TABLE>
<CAPTION>
Income Flexible
Equity Fund Growth Fund
----------- -----------
<S> <C> <C>
Dividend Income $1,590,886 $89,366
Dividend Income Per Share--Investor A Shares $ 0.235 $ 0.075
Dividend Income Per Share--Investor B Shares $ 0.113 $ 0.054
</TABLE>
9. EXEMPT-INTEREST INCOME DESIGNATION (UNAUDITED):
The Fund designated the following exempt-interest income for the Ohio
Tax-Free Bond Fund for the year ended December 31, 1995:
<TABLE>
<CAPTION>
Investor A Share Investor B Shares
---------------- -----------------
<S> <C> <C>
Exempt-interest distributions $395,917 $12,980
Exempt-interest distribution per share $ 0.376 $ 0.267
</TABLE>
The percentage break-down of the exempt-interest by state for the Ohio
Tax-Free Bond Fund for the year ended December 31, 1995 was as follows:
<TABLE>
<S> <C>
Florida 0.9%
Georgia 0.5%
Louisiana 1.5%
Ohio 94.6%
Tennessee 0.6%
Texas 1.9%
-----
100.0%
</TABLE>
10. CAPITAL GAIN DISTRIBUTIONS (UNAUDITED)
The Fund declared and distributed capital gains to shareholders in the
following amounts per share for the taxable year ended December 31, 1995:
<TABLE>
<CAPTION>
Long-term Short-term
<S> <C> <C>
Income Equity Fund 0.1210 1.2140
Flexible Growth Fund 0.0162 0.0885
Stock Appreciation Fund(a) 0.0585 0.3158
</TABLE>
(a) For the period from October 1, 1995 (date acquired by Riverfront Stock
Appreciation Fund) through December 31, 1995.
B-91
<PAGE> 93
THE RIVERFRONT FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1995
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
U.S. Government Securities Money Market Fund
October 1,
Years ended December 31, 1992 to
-------------------------------------- December 31,
1995 1994 (d) 1993 (d) 1992 (a)(d)
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ----------
INVESTMENT ACTIVITIES
Net investment income 0.05 0.04 0.03 0.01
---------- ---------- ---------- ----------
Total from Investment Activities 0.05 0.04 0.03 0.01
---------- ---------- ---------- ----------
DISTRIBUTIONS
Net investment income (0.05) (0.04) (0.03) (0.01)
Total Distributions (0.05) (0.04) (0.03) (0.01)
---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ==========
Total Return 5.52% 3.78% 2.90% 0.80%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $ 157,495 $ 149,374 $ 133,207 $ 37,083
Ratio of expenses to average net assets 0.58% 0.51% 0.32% 0.01%(c)
Ratio of net investment income to average net assets 5.34% 3.70% 2.85% 3.09%(c)
Ratio of expenses to average net assets* 0.83% 0.80% 0.42% 0.68%(c)
Ratio of net investment income to average net assets* 5.09% 3.41% 2.75% 2.42%(c)
</TABLE>
- - --------
* During the period, certain fees were voluntarily reduced. In addition, the
manager or investment adviser reimbursed expenses to the Portfolio. If
such voluntary fee reductions and expense reimbursements had not occurred,
the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Audited by other auditors.
See notes to financial statements.
B-92
<PAGE> 94
THE RIVERFRONT FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
U.S. GOVERNMENT INCOME FUND
--------------------------------------------------------------------------
JANUARY 17,
YEAR ENDED 1995 TO YEARS ENDED DECEMBER 31,
DECEMBER 31, DECEMBER 31, -----------------------------------------
1995 1995(a) 1994(f) 1993(f) 1992(b)(f) 1991(f)
------------ ------------ --------- --------- ---------- -------
INVESTOR A INVESTOR B
------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.92 $10.00 $ 9.91 $ 9.76 $ 10.00 $10.00
------- ------ ------- ------- ------- ------
INVESTMENT ACTIVITIES
Net investment income 0.54 0.43 0.54 0.51 0.10 0.73
Net realized and unrealized gains (losses) from
investments 0.79 0.94 (0.99) 0.20 (0.23)
------- ------ ------- ------- ------- ------
Total from Investment Activities 1.33 1.37 (0.45) 0.71 (0.13) 0.73
------- ------ ------- ------- ------- ------
DISTRIBUTIONS
Net investment income (0.54) (0.42) (0.54) (0.50) (0.10) (0.73)
In excess of net investment income (0.06) (0.01)
------- ------ ------- ------- ------- ------
Total Distributions (0.54) (0.42) (0.54) (0.56) (0.11) (0.73)
------- ------ ------- ------- ------- ------
NET ASSET VALUE, END OF PERIOD $ 9.71 $10.95 $ 8.92 $ 9.91 $ 9.76 $10.00
======= ====== ======= ======= ======= ======
Total Return (excludes sales charge) 15.22% 13.96%(e) (4.64)% 7.38% (1.31)% NA
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $36,538 $1,263 $32,721 $30,078 $24,588 $ 33
Ratio of expenses to average net assets 1.09% 1.90%(c) 0.86% 0.65% 0.66% 0.00%
Ratio of net investment income to average net assets 5.74% 4.80%(c) 5.78% 5.05% 4.00% 7.34%
Ratio of expenses to average net assets* 1.18% 1.90%(c) 1.14% 1.08% 1.06%
Ratio of net investment income to average net assets* 5.65% 4.80%(c) 5.49% 4.62% 3.60%
Portfolio Turnover 75%(d) 75%(d) 83% 220% 117% 0%
</TABLE>
- - --------
* During the period, certain fees were voluntarily reduced. In addition,
the manager or investment adviser reimbursed expenses to the Portfolio.
If such voluntary fee reductions and expense reimbursements had not
occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Investment operations and sales of shares to the public began on
October 1, 1992.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(e) Represents total return for the Investor A Shares from January 1, 1995 to
January 16, 1995 plus the total return for the Investor B Shares from
January 17, 1995 to December 31, 1995.
(f) Audited by other auditors.
See notes to financial statements.
B-93
<PAGE> 95
THE RIVERFRONT FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
INCOME EQUITY FUND
--------------------------------------------------------------------------
JANUARY 17,
YEAR ENDED 1995 TO YEARS ENDED DECEMBER 31,
DECEMBER 31, DECEMBER 31, -----------------------------------------
1995 1995(a) 1994(f) 1993(f) 1992(b)(f) 1991(f)
------------ ------------ --------- -------- ---------- -------
INVESTOR A INVESTOR B
------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.15 $10.00 $ 10.63 $ 10.78 $ 10.00 $10.00
------- ------ ------- ------- ------- ------
INVESTMENT ACTIVITIES
Net investment income 0.27 0.13 0.32 0.28 0.08 0.73
Net realized and unrealized gains from investments 2.89 2.78 1.01 0.80
------- ------ ------- ------- ------- ------
Total from Investment Activities 3.16 2.91 0.32 1.29 0.88 0.73
------- ------ ------- ------- ------- ------
DISTRIBUTIONS
Net investment income (0.27) (0.13) (0.31) (0.27) (0.08) (0.73)
In excess of net investment income (0.03) (0.01)
Net realized gains (1.34) (0.93) (0.49) (1.14)
In excess of net realized gains (0.01)
Total Distributions (1.61) (1.06) (0.80) (1.44) (0.10) (0.73)
------- ------ ------- ------- ------- ------
NET ASSET VALUE, END OF PERIOD $ 11.70 $11.85 $ 10.15 $ 10.63 $ 10.78 $10.00
======= ====== ======= ======= ======= ======
Total Return (excludes sales charge) 31.45% 29.28%(e) 3.08% 12.11% 8.74% NA
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $60,845 $2,833 $34,965 $24,387 $12,262 $ 43
Ratio of expenses to average net assets 1.49% 2.46%(c) 1.30% 1.47% 1.48% 0.00%
Ratio of net investment income to average net assets 2.27% 1.12%(c) 2.93% 2.55% 3.16% 7.34%
Ratio of expenses to average net assets* 1.74% 2.51%(c) 1.58% 1.64% 2.02%
Ratio of net investment income to average net assets* 2.02% 1.07%(c) 2.65% 2.38% 2.62%
Portfolio Turnover 180%(d) 180%(d) 119% 145% 12% 0%
</TABLE>
- - --------
* During the period, certain fees were voluntarily reduced. In addition,
the manager or investment adviser reimbursed expenses to the Portfolio.
If such voluntary fee reductions and expense reimbursements had not
occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Investment operations and sales of shares to the public began on
October 1, 1992.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(e) Represents total return for the Investor A Shares from January 1, 1995 to
January 16, 1995 plus the total return for the Investor B Shares from
January 17, 1995 to December 31, 1995.
(f) Audited by other auditors.
See notes to financial statements.
B-94
<PAGE> 96
THE RIVERFRONT FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
OHIO TAX-FREE BOND FUND FLEXIBLE GROWTH FUND
------------------------------------------------ ----------------------------------------------------
JANUARY 17, FROM AUGUST 1, JANUARY 17, FROM SEPTEMBER 1,
YEAR ENDED 1995 TO 1994 THROUGH YEAR ENDED 1995 TO 1994 THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995(a) 1994(a)(f) 1995 1995(a) 1994(a)(f)
------------ ------------ -------------- ------------ ------------ -----------------
INVESTOR A INVESTOR B INVESTOR A INVESTOR B
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.83 $10.00 $ 10.00 $ 9.79 $10.00 $10.00
------- ------ ------- ------ ------ ------
INVESTMENT ACTIVITIES
Net investment income 0.39 0.27 0.12 0.35 0.25 0.10
Net realized and
unrealized gains
(losses) from
investments 0.67 0.73 (0.17) 1.66 1.79 (0.18)
------- ------ ------- ------ ------ ------
Total from Investment
Activities 1.06 1.00 (0.05) 2.01 2.04 (0.08)
------- ------ ------- ------ ------ ------
DISTRIBUTIONS
Net investment income (0.38) (0.27) (0.12) (0.34) (0.24) (0.13)
Net realized gains (0.10) (0.10)
------- ------ ------- ------ ------ ------
Total Distributions (0.38) (0.27) (0.12) (0.44) (0.34) (0.13)
------- ------ ------- ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $ 10.51 $10.73 $ 9.83 $11.36 $11.70 $ 9.79
======= ====== ======= ====== ====== ======
Total Return (excludes
sales charge) 10.96% 10.10%(e) (0.47)%(e) 20.83% 20.53%(c) (0.82)%(e)
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period
(000) $11,091 $ 626 $10,190 $9,427 $5,030 $2,709
Ratio of expenses to
average net assets 1.49% 2.27%(d) 1.08%(d) 1.28% 2.04%(d) 1.48%(d)
Ratio of net investment
income to average net
assets 3.77% 3.01%(d) 2.92%(d) 3.48% 2.69%(d) 4.01%(d)
Ratio of expenses to
average net assets* 1.64% 2.41%(d) 1.44%(d) 1.67% 2.84%(d) 4.61%(d)
Ratio of net investment
income to average net
assets* 3.62% 2.87%(d) 2.56%(d) 3.09% 1.89%(d) 0.88%(d)
Portfolio Turnover 34%(b) 34%(b) 29% 13%(b) 13%(b) 1%
</TABLE>
- - --------
* During the period, certain fees were voluntarily reduced. In addition, the
manager or investment adviser reimbursed expenses to the Portfolios. If
such voluntary fee reductions and expense reimbursements had not occurred,
the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(c) Represents total return for the Investor A Shares from January 1, 1995 to
January 16, 1995 plus the total return for the Investor B Shares from
January 17, 1995 to December 31, 1995.
(d) Annualized.
(e) Not annualized.
(f) Audited by other auditors.
See notes to financial statements.
B-95
<PAGE> 97
THE RIVERFRONT FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
STOCK APPRECIATION FUND
------------------------------------------------------------------------------------------
FROM OCTOBER 1, FROM OCTOBER 1,
1995 THROUGH 1995 THROUGH
DECEMBER 31, DECEMBER 31, YEARS ENDED SEPTEMBER 30,
--------------- --------------- ----------------------------------------------------
1995(b) 1995(a)(b) 1995(f) 1994(f) 1993(f) 1992(f) 1991(f)
--------------- --------------- --------- --------- --------- --------- --------
INVESTOR A INVESTOR B
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.00 $10.00 $ 8.25 $ 10.18 $ 7.98 $ 7.70 $ 4.64
------- ------ ------- ------- ------- ------- -------
INVESTMENT ACTIVITIES
Net investment loss (0.01) (0.01) (0.07) (0.12) (0.17) (0.08) (0.11)
Net realized and unrealized gains
(losses) from investments..... (0.12) (0.08) 2.14 (1.26) 2.57 1.41 3.17
------- ------ ------- ------- ------- ------- -------
Total from Investment Activities (0.13) (0.09) 2.07 (1.38) 2.40 1.33 3.06
------- ------ ------- ------- ------- ------- -------
DISTRIBUTIONS
Net realized gains (0.37) (0.32) (0.55) (0.20) (1.05)
------- ------ ------- ------- ------- ------- -------
Total Distributions (0.37) (0.32) (0.55) (0.20) (1.05)
------- ------ ------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.50 $ 9.91 $ 10.00 $ 8.25 $ 10.18 $ 7.98 $ 7.70
======= ====== ======= ======= ======= ======= =======
Total Return (excludes sales charge) (1.20)%(c) (0.90)%(c) 25.12% (13.91)% 30.61% 16.69% 66.04%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at end of period (000) $40,995 $ 72 $44,500 $47,880 $59,330 $28,750 $9,600
Ratio of expenses to average net assets 1.76%(d) 2.30%(d) 2.61% 2.44% 2.47% 2.70% 2.89%
Ratio of net investment income to
average net assets (0.49)%(d) (1.69)%(d) (0.73)% (1.35)% (1.85)% (1.00)% (1.72)%
Ratio of expenses to average net
assets* 1.77%(d) 2.39%(d)
Ratio of net investment income to
average net assets* (0.50)%(d) (1.78)%(d)
Portfolio turnover 46%(e) 46%(e) 197% 254% 216% 288% 240%
</TABLE>
* During the period, certain fees were voluntarily reduced. In addition,
the investment adviser reimbursed expenses to the Portfolios. If such
voluntary fee reductions and expense reimbursements had not occurred, the
ratios would have been as indicated.
(a) Period from commencement of operations.
(b) As of September 30, 1995, the Stock Appreciation Fund acquired all of the
assets of the MIM Stock Appreciation Fund and the MIM Stock Growth Fund.
Financial highlights for periods prior to September 30, 1995 represent
the performance of the MIM Stock Appreciation Fund. The per share data
for the periods prior to September 30, 1995 have been restated to reflect
the impact of the change of the net asset value of the Stock Appreciation
Fund on September 30, 1995 from $17.34 to $10.00.
(c) Not annualized.
(d) Annualized.
(e) Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(f) Audited by other auditors.
See notes to financial statements.
B-96
<PAGE> 98
- - --------------------------------------------------------------------------------
APPENDIX
- - --------------------------------------------------------------------------------
The nationally recognized statistical rating organizations
(individually, an "NRSRO") that may be utilized by the Fund with regard to
portfolio investments for the Portfolios including Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc.
("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA Limited and its
affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson BankWatch, Inc.
("Thomson"). Set forth below is a description of the relevant ratings of each
such NRSRO. The NRSROs that may be utilized by the Fund and the description of
each NRSRO's ratings is as of the date of this Statement of Additional
Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and
municipal bonds)
Description of the six highest long-term debt ratings by Moody's
(Moody's applies numerical modifiers (1, 2, and 3) in each rating category to
indicate the security's ranking within the category):
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
or protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa Bonds are considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such
A-1
<PAGE> 99
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba Bonds which are rate Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Description of the six highest long-term debt ratings by S&P (S&P may
apply a plus (+) or minus (-) to a particular rating classification to show
relative standing within that classification):
AAA Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only
in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated circumstances.
BBB Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB Bonds which are rated BB have less near-term vulnerability to
default than other speculative issues. However, they face
major ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied BBB rating.
A-2
<PAGE> 100
B Bonds rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and
principal repayments. Adverse business, financial, or
economic conditions will likely impair capacity or willingness
to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is
assigned an actual or implied BB or BB- rating.
Description of six highest long-term debt ratings by Duff:
AAA Highest credit quality. The risk factors are negligible being
only slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong.
AA Risk is modest but may vary slightly from time to time
A- because of economic conditions.
A+ Protection factors are average but adequate. However,
A risk factors are more variable and greater in periods
A- of economic stress.
BBB Debt has below average protection factors but is still
considered sufficient for prudent investment. However, there
is considerable variability in risk during economic cycles.
Description of the six highest long-term debt ratings by Fitch (plus
or minus signs are used with a rating symbol to indicate the relative position
of the credit within the rating category):
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issues is generally rated "[-]+."
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
A-3
<PAGE> 101
BBB Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment. The likelihood
that the ratings for these bonds will fall below investment
grade is higher than for bonds with higher ratings.
BB Bonds rated BB are considered speculative. The obligor's
ability to pay interest and repay principal may be affected
over time by adverse economic changes. However, business and
financial alternatives can be identified which could assist
the obligor in satisfying its debt service requirements.
B Bonds rated B are considered highly speculative. While bonds
in this class are currently meeting debt service requirements,
the probability of continued timely payments of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
IBCA's description of its six highest long-term debt ratings:
AAA Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal
and interest is substantial such that adverse changes in
business, economic or financial conditions are unlikely to
increase investment risk significantly.
AA Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal
and interest is substantial. Adverse changes in business,
economic, or financial conditions may increase investment risk
albeit not very significantly.
A Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest
is strong, although adverse changes in business, economic or
financial conditions may lead to increased investment risk.
BBB Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal
and interest is adequate, although adverse changes in
business, economic, or financial conditions are more likely to
lead to increased investment risk than for obligations in
other categories.
A-4
<PAGE> 102
BB Obligations for which there is a possibility of investment
risk developing. Capacity for timely repayment of principal
and interest exists, but is susceptible over time to adverse
changes in business, economic, or financial conditions.
B Obligations for which investment risk exists. Timely
repayment of principal and interest is not sufficiently
protected against adverse changes in business, economic or
financial conditions.
Thomson's description of its six highest long-term debt ratings
(Thomson may include a plus (+) or minus (-) designation to indicated where
within the respective category the issue is placed):
AAA The highest category; indicates ability to repay principal and
interest on a timely basis is very high.
AA The second highest category; indicates a superior ability to
repay principal and interest on a timely basis with limited
incremental risk versus issues rated in the highest category.
A The third highest category; indicates the ability to repay
principal and interest is strong. Issues rated "A" could be
more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
BBB The lowest investment grade category and indicates an
acceptable capacity to repay principal and interest. Issues
rated BBB are, however, more vulnerable to adverse
developments (both internal and external) than obligations
with higher ratings.
BB While not investment grade, the BB rating suggests that the
likelihood of default is considerably less than for
lower-rated issues. However, there are significant
uncertainties that could affect the ability to adequately
service debt obligations.
B Issues rated B show a higher degree of uncertainty and
therefore greater likelihood of default than higher-rated
issues. Adverse developments could well negatively affect the
payment of interest and principal on a timely basis.
Short-Term Debt Ratings (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit)
A-5
<PAGE> 103
Moody's description of its three highest short-term debt ratings:
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term
promissory obligations. Prime-1 repayment capacity will
normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established
industries.
- High rates of return on funds employed.
- Conservative capitalization structures with
moderate reliance on debt and ample asset
protection.
- Broad margins in earnings coverage of fixed
financial charges and high internal cash
generation.
- Well-established access to a range of financial
markets and assured sources of alternate
liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and
market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively
high financial leverage. Adequate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1 This designation indicates that the degree of safety regarding
timely payment is strong. Those issues
A-6
<PAGE> 104
determined to have extremely strong safety characteristics
are denoted with a plus sign (+).
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not
as high as for issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
Duff's description of its three highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection
factors. Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors.
Risk factors are very small.
Duff 2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to
capital markets is good. Risk factors are small.
Duff 3 Satisfactory liquidity and other protection factors qualify
issue as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
Fitch's description of its three highest short-term debt ratings:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
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F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned F-1+
or F-1 ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate, however, near-term adverse changes
could cause these securities to be rated below investment
grade.
IBCA's description of its three highest short-term debt ratings:
A+ Obligations supported by the highest capacity for timely
repayment.
A1 Obligations supported by a very strong capacity for timely
repayment.
A2 Obligations supported by a strong capacity for timely
repayment, although such capacity may be susceptible to
adverse changes in business, economic or financial conditions.
Thomson's description of its three highest short-term ratings:
TBW-1 The highest category; indicates a very high degree of
likelihood that principal and interest will be paid on a
timely basis.
TBW-2 The second highest category; while the degree of safety
regarding timely repayment of principal and interest is
strong, the relative degree of safety is not as high as for
issues rated "TBW-1".
TBW-3 The lowest investment grade category; indicates that while
more susceptible to adverse developments (both internal and
external) than obligations with higher ratings, capacity to
service principal and interest in a timely fashion is
considered adequate.
Municipal Obligations Ratings
The following summarizes the three highest ratings used by Moody's for
state and municipal short-term obligations. Obligations bearing MIG-1 or
VMIG-1 designations are of the best quality, enjoying strong protection by
established cash flows, superior
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liquidity support or demonstrated broad-based access to the market for
refinancing. Obligations rated MIG-2 or VMIG-2 denote high quality with ample
margins of protection although not so large as in the preceding rating group.
Obligations bearing MIG-3 or VMIG-3 denote favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
S&P SP-1, SP-2, and SP-3 municipal note ratings (the three highest
ratings assigned) are described as follows:
"SP-1": Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation.
"SP-2": Satisfactory capacity to pay principal and interest.
"SP-3": Speculative capacity to pay principal and interest.
The following summarizes the four highest ratings used by Moody's for
state and municipal bonds:
"Aaa": Bonds judged to be of the best quality. They carry
the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by
a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa": Bonds judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
securities.
"A": Bonds which possess many favorable investment attributes
and are to be considered as upper medium-grade obligations.
Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest
a susceptibility to impairment sometime in the future.
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"Baa": Bonds which are considered as medium grade
obligations, i.e, they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics
as well.
The following summarizes the four highest ratings used by S&P for
state and municipal bonds:
"AAA": Debt which has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
"AA": Debt which has a very strong capacity to pay interest
and repay principal and differs from the highest rated issues
only in small degree.
"A": Debt which has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
"BBB": Debt which has adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity
to pay interest and repay principal for debt in this category
then in higher rated categories.
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