PROSPECTUS
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FIRST PRIORITY EQUITY FUND
INVESTMENT SHARES
(A PORTFOLIO OF FIRST PRIORITY FUNDS)
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The Investment Shares (the "Shares") offered by this prospectus represent
interests in the diversified portfolio known as First Priority Equity Fund (the
"Fund"). The Fund is one of a series of investment portfolios in First Priority
Funds (the "Trust"), an open-end, management investment company (a mutual fund).
The investment objective of the Fund is to provide growth of capital and income.
The Fund pursues this objective by investing principally in a
professionally-managed and diversified portfolio of common stocks of companies
with market capitalization of at least $250 million.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF FIRST
ALABAMA BANK, ARE NOT ENDORSED OR GUARANTEED BY FIRST ALABAMA BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT
RISKS INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Combined Statement of Additional Information for
Investment Shares and Trust Shares dated January 31, 1994 with the Securities
and Exchange Commission. The information contained in the Combined Statement of
Additional Information is incorporated by reference into this prospectus. You
may request a copy of the Combined Statement of Additional Information free of
charge, obtain other information, or make inquiries about the Fund by writing or
calling toll-free 1-800-433-2829.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated January 31, 1994
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES 1
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FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 2
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GENERAL INFORMATION 3
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INVESTMENT INFORMATION 3
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Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Common Stocks 3
Other Corporate Securities 4
U.S. Government Securities 4
Temporary Investments 4
Repurchase Agreements 4
When-Issued and Delayed Delivery
Transactions 4
Put and Call Options 4
Financial Futures and Options
on Futures 4
Risks 5
Investing in Securities of Other
Investment Companies 5
Lending of Portfolio Securities 6
Securities of Foreign Issuers 6
Portfolio Turnover 6
Investment Limitations 6
FIRST PRIORITY FUNDS INFORMATION 7
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Management of the First Priority Funds 7
Board of Trustees 7
Investment Adviser 7
Advisory Fees 7
Adviser's Background 7
Distribution of Investment Shares 8
Distribution Plan 8
Administrative Arrangements 9
Administration of the Fund 9
Administrative Services 9
Transfer Agent, Dividend Disbursing
Agent and Portfolio Accounting
Services 9
Legal Counsel 9
Independent Auditors 9
Expenses of the Fund and Investment
Shares 10
Brokerage Transactions 10
NET ASSET VALUE 10
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INVESTING IN INVESTMENT SHARES 11
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Minimum Investment Required 11
What Shares Cost 11
Purchases at Net Asset Value 11
Dealer Concessions 11
Share Purchases 12
Through FAII 12
Reducing the Sales Charge 12
Quantity Discounts and Accumulated
Purchases 12
Letter of Intent 12
Reinvestment Privilege 13
Purchases with Proceeds from
Redemptions of Unaffiliated Mutual
Fund Shares 13
Systematic Investment Plan 13
Shareholder Accounts 13
Dividends and Capital Gains 13
EXCHANGE PRIVILEGE 13
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REDEEMING INVESTMENT SHARES 14
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By Telephone 14
By Mail 15
Signatures 15
Receiving Payment 15
Redemption Before Purchase
Instruments Clear 15
Systematic Withdrawal Plan 16
Accounts With Low Balances 16
Redemption in Kind 16
SHAREHOLDER INFORMATION 16
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Voting Rights 16
Massachusetts Partnership Law 17
EFFECT OF BANKING LAWS 17
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TAX INFORMATION 18
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Federal Income Tax 18
PERFORMANCE INFORMATION 18
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OTHER CLASSES OF SHARES 19
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FINANCIAL HIGHLIGHTS--TRUST SHARES 20
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FINANCIAL STATEMENTS 21
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INDEPENDENT AUDITORS' REPORT 31
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ADDRESSES Inside Back Cover
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SUMMARY OF FUND EXPENSES
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<TABLE>
<S> <C>
INVESTMENT SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)............................ 2.00%
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)................. None
Deferred Sales Load (as a percentage of original purchase
price or redemption proceeds, as applicable)......................................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)..................................... None
Exchange Fee........................................................................................... None
ANNUAL INVESTMENT SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (1)...................................................................... 0.50%
12b-1 Fee.............................................................................................. 0.30%
Other Expenses......................................................................................... 0.29%
Total Investment Shares Operating Expenses................................................... 1.09%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.80%.
The Annual Investment Shares Operating Expenses were 1.14% for the fiscal
year ended November 30, 1993. The Annual Investment Shares Operating Expenses in
the table above are based on estimated expenses expected during fiscal year
ending November 30, 1994. The Total Investment Shares Operating Expenses are
anticipated to be 1.39% absent the voluntary waiver of a portion of the
management fee.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF INVESTMENT SHARES OF THE FUND
WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "FIRST PRIORITY FUNDS INFORMATION" AND
"INVESTING IN INVESTMENT SHARES."
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGE PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return; (2) redemption at the end of each time period;
and payment of the maximum sales load. The Fund charges no redemption
fees for Investment Shares............................................ $31 $54 $79 $150
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the foregoing table and Example relates only
to Investment Shares of the Fund. The Fund also offers another class of shares
called Trust Shares. Trust Shares are subject to certain of the same expenses
except they bear no sales load or 12b-1 fee. See "Other Classes of Shares."
FIRST PRIORITY EQUITY FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 31.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1993 1992*
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.66 $ 9.86
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INCOME FROM INVESTMENT OPERATIONS
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Net investment income 0.16 0.10
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Net realized and unrealized gain (loss) on investments (0.04) 0.79
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Total from investment operations 0.12 0.89
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LESS DISTRIBUTIONS
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Dividends to shareholders from net investment income (0.15) (0.09)
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Dividends to shareholders from net realized gain on
investment transactions (0.12) --
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Total distributions (0.27) (0.09)
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NET ASSET VALUE, END OF PERIOD $ 10.51 $ 10.66
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TOTAL RETURN** 1.13% 9.14%
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RATIOS TO AVERAGE NET ASSETS
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Expenses 1.14% 1.07%(a)
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Net investment income 1.59% 1.85%(a)
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Expense waiver/reimbursement (b) 0.30% 0.35%
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SUPPLEMENTAL DATA
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Net assets, end of period (000 omitted) $ 7,004 $ 3,132
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Portfolio turnover rate*** 74% 30%
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</TABLE>
* Reflects operations for the period from April 20, 1992 (date of initial
public investment) to November 30, 1992.
** Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
*** Represents portfolio turnover for the entire fund.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
Further information about the Fund's performance is contained in the Fund's
annual report dated November 30, 1993, which can be obtained free of charge.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
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First Priority Funds was established as a Massachusetts business trust under a
Declaration of Trust dated October 15, 1991.
The Declaration of Trust permits First Priority Funds to offer separate series
of shares of beneficial interest representing interests in separate portfolios
of securities. The shares of beneficial interest in any one portfolio may be
offered in separate classes. As of the date of this prospectus, the Board of
Trustees (the "Trustees") have established two classes of shares, Investment
Shares and Trust Shares. This prospectus relates only to Investment Shares of
First Priority Equity Fund.
The Fund is designed as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio of common stock of companies with
market capitalization of at least $250 million. A minimum initial investment of
$1,000 is required.
Except as otherwise noted in this prospectus, Shares are sold at net asset value
plus an applicable sales charge and redeemed at net asset value.
INVESTMENT INFORMATION
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INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide growth of capital and income.
This investment objective cannot be changed without approval of shareholders.
While there is no assurance that the Fund will achieve its investment objective,
it endeavors to do so by following the investment policies described in this
prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing principally in a
professionally-managed and diversified portfolio of common stock of companies
with market capitalization of at least $250 million. Under normal market
conditions, the Fund intends to invest at least 65% of its assets in equity
securities. As a general matter, the Fund expects these investments to generate
income. Unless indicated otherwise, the investment policies may be changed by
the Trustees without approval of shareholders. Shareholders will be notified
before any material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund's investment approach is based on the
conviction that over the long term the economy will continue to expand and
develop and that this economic growth will be reflected in the growth of the
revenues and earnings of major corporations.
COMMON STOCKS. The Fund invests primarily in common stocks of companies
selected by the Fund's investment adviser on the basis of traditional
research techniques and technical factors, including assessment of earnings
and dividend growth prospects and of the risk and volatility of the
company's industry. Other factors, such as product position or market
share, will also be considered by the Fund's investment adviser.
OTHER CORPORATE SECURITIES. The Fund may invest in preferred stocks,
convertible securities, notes rated A or better by Moody's Investors
Service, Inc., Standard & Poor's Corporation, or Fitch Investors Service,
Inc., and warrants of these companies.
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. government
securities.
TEMPORARY INVESTMENTS. In such proportions as, in the judgement of its
investment adviser, prevailing market conditions warrant, the Fund may, for
temporary defensive purposes, invest in:
short-term money market instruments;
securities issued and/or guaranteed as to payment of principal and
interest by the U.S. government, its agencies, or instrumentalities; and
repurchase agreements.
REPURCHASE AGREEMENTS. The U.S. government securities in which the Fund
invests may be purchased pursuant to repurchase agreements. Repurchase
agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities (limited
to those with remaining maturities of five years or less) to the Fund and
agree at the time of sale to repurchase them at a mutually agreed upon time
and price. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase
price on any sale of such securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. In when-issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Fund to miss a price
or yield considered to be advantageous.
PUT AND CALL OPTIONS. The Fund may purchase put options on its portfolio
securities. These options will be used as a hedge to attempt to protect
securities which the Fund holds against decreases in value. The Fund may also
write covered call options on all or any portion of its portfolio to generate
income for the Fund. The Fund will write call options on securities either held
in its portfolio or which it has the right to obtain without payment of further
consideration, or for which it has segregated cash or U.S. government securities
in the amount of any additional consideration.
The Fund may purchase and write over-the-counter options on portfolio securities
in negotiated transactions with the buyers or writers of the options when
options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Fund's adviser.
Over-the-counter options are two party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not. The Fund will not buy call
options or write put options without further notification to shareholders.
FINANCIAL FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell
financial futures contracts to hedge all or a portion of its portfolio against
changes in stock prices. The Fund will not
engage in futures transactions for speculative purposes. Financial futures
contracts call for the delivery of particular debt instruments at a certain time
in the future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.
Stock index futures contracts are based on indexes that reflect the market value
of common stock of the firms included in the indexes. An index futures contract
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the differences between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and, thereby, insure
that the use of such futures contract is unleveraged.
RISKS. When the Fund uses financial futures and options on financial
futures as hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly
with the prices of the securities in the Fund's portfolio. This may cause
the futures contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Fund's investment
adviser could be incorrect in its expectations about the direction or
extent of market factors such as stock price movements. In these events,
the Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the investment
adviser will consider liquidity before entering into options transactions,
there is no assurance that a liquid secondary market on an exchange or
otherwise will exist for any particular futures contract or option at any
particular time. The Fund's ability to establish and close out futures and
options positions depends on this secondary market.
The Fund may also hold cash in such proportions as the Fund's adviser may
determine necessary.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general. The Fund will invest
in other investment companies primarily for the purpose of investing short-term
cash which has not yet
been invested in other portfolio instruments. The adviser will waive its
investment advisory fee on assets invested in securities of open-end investment
companies.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or a long-term basis up to
one-third of the value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions that the
investment adviser has determined are creditworthy under guidelines established
by the Trustees and will receive collateral in the form of cash or U.S.
government securities equal to at least 100% of the value of the securities
loaned.
SECURITIES OF FOREIGN ISSUERS. The Fund may invest in the securities of foreign
issuers which are freely traded on United States securities exchanges or in the
over-the-counter market in the form of depository receipts. Securities of a
foreign issuer may present greater risks in the form of nationalization,
confiscation, domestic marketability, or other national or international
restrictions. As a matter of practice, the Fund will not invest in the
securities of a foreign issuer if any such risk appears to the investment
adviser to be substantial.
PORTFOLIO TURNOVER. Although the Fund does not intend to invest for the purpose
of seeking short-term profits, securities in its portfolio will be sold whenever
the Fund's investment adviser believes it is appropriate to do so in light of
the Fund's investment objective, without regard to the length of time a
particular security may have been held. It is not anticipated that the portfolio
trading engaged in by the Fund will result in its annual rate of portfolio
turnover exceeding 100%.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money or pledge securities except, under certain circumstances,
the Fund may borrow up to one-third of the value of its total assets and
pledge up to 10% of the value of those assets to secure such borrowings;
with respect to 75% of the value of its total assets, invest more than 5%
in securities of any one issuer other than cash, cash items, or
securities issued or guaranteed by the government of the United States or
its agencies or instrumentalities, and repurchase agreements
collateralized by such securities; or
acquire more than 10% of the voting securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
The Fund will not:
invest more than 5% of its total assets in securities of issuers that
have records of less than three years of continuous operations including
the operation of any predecessor;
invest more than 10% of its total assets in securities subject to
restrictions on resale under the Securities Act of 1933 (except for
commercial paper issued under Section 4(2) of the Securities Act of 1933
and certain other restricted securities which meet the criteria for
liquidity as established by the Board of Trustees); or
invest more than 15% of the value of its net assets in illiquid
securities, including repurchase agreements providing for settlement more
than seven days after notice, over-the-counter options, and certain
securities determined by the Trustees not to be liquid.
FIRST PRIORITY FUNDS INFORMATION
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MANAGEMENT OF FIRST PRIORITY FUNDS
BOARD OF TRUSTEES. The Trustees are responsible for managing the business
affairs of the Trust and for exercising all of the powers of the Trust except
those reserved for the shareholders. The Executive Committee of the Board of
Trustees handles the Trustees' responsibilities between meetings of the
Trustees.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by First Alabama Bank ("First
Alabama" or "the Adviser"), subject to direction by the Trustees. The Adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the assets of the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to 0.80% of the Fund's average daily net assets. The fee paid by the
Fund, while higher than the advisory fee paid by other mutual funds in
general, is comparable to fees paid by many mutual funds with similar
objectives and policies. The Adviser has undertaken to reimburse the Fund
up to the amount of the advisory fee, for operating expenses in excess of
limitations established by certain states. The Adviser may voluntarily
choose to waive a portion of its fee or reimburse other expenses of the
Fund. The Adviser can terminate such waiver or reimbursement policy at any
time at its sole discretion.
ADVISER'S BACKGROUND. The Adviser is a wholly-owned subsidiary of First
Alabama Bancshares, Inc., a bank holding company organized during 1971
under the laws of the State of Delaware. (A proposal is currently pending
to change the name of the holding company to "Regions Financial
Corporation.") Operating out of more than 200 offices, it provides a wide
range of banking and fiduciary services to its customers. As of June 30,
1993, First Alabama Bancshares was one of the 100 largest bank holding
companies in the United States with total assets in excess of $8 billion.
First Alabama Bank is recognized as one of the strongest banks in America
by U.S. Banker Magazine, Keefe, Bruyette & Woods, and Thomson Bankwatch.
During 1992, these organizations rated First Alabama as one of the top
quality banks in the United States. First Alabama's common stock is
currently included among those in the Dow Jones Equity Market Index, as
well as Standard & Poor's Midcap Index.
Charles A. Murray, CFA, Vice President and Trust Investment Officer, is
responsible for the equity funds portfoio management of the Trust
Investment Group, and contributes to the formation of equity and fixed
income strategies for First Alabama Bank. Mr. Murray serves as an active
member of the Trust Investment Group in the capacity of a portfolio manager
and analyst, and has been responsible for the management of the First
Priority Equity Fund since its inception. He has 18 years of investment
analysis and portfolio management experience; 21 years with First
Alabama Bank. Mr. Murray received his B.S. in Marketing from the University
of Alabama in 1970 and graduated from Southern Trust School in 1982. He
went on to become a Chartered Financial Analyst in 1993.
John E. Steiner, Vice President and Trust Investment Officer, serves as
Director of Research for the Trust Investment Division, and is also First
Alabama's primary analyst for the beverage and office equipment industries.
He has contributed to the formulation of the First Priority Equity Fund's
strategy since its inception. Mr. Steiner received his B.S. in Industrial
Management from Auburn University in 1981.
As fiduciary, First Alabama managed over $2.3 billion in discretionary
assets as of December 31, 1992. It manages eight common trust funds and
collective investment funds having a market value in excess of $200
million, as of September 30, 1993. First Alabama has been adviser to the
First Priority Funds since inception. As of September 30, 1993, the market
value of the First Priority Funds was in excess of $400 million.
DISTRIBUTION OF INVESTMENT SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund
will pay to Federated Securities Corp. an amount computed at an annual rate of
up to .30 of 1% of the average daily net asset value of the Shares to finance
any activity which is principally intended to result in the sale of Shares
subject to the Plan.
Federated Securities Corp. may, from time to time, and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the Shares exceed such lower expense
limitation as the distributor may, by notice to the Trust, voluntarily declare
to be effective.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to provide
sales and/or administrative services as agents for their clients or customers
who beneficially own Shares of the Fund. Administrative services may include,
but are not limited to, the following functions: providing office space,
equipment, telephone facilities, and various personnel including clerical,
supervisory, and computer as necessary or beneficial to establish and maintain
shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding the Fund; assisting clients in
changing dividend options, account designations, and addresses; and providing
such other services as the Fund reasonably requests.
Financial institutions will receive fees from the distributor based upon Shares
owned by their clients or customers. The schedules of such fees and the basis
upon which such fees will be paid will be determined, from time to time, by the
distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the
distributor, including amounts expended by the distributor in excess of amounts
received by it from the Fund, interest, carrying or other financing charges in
connection with excess amounts expended, or the distributor's overhead expenses.
However, the distributor may be able to recover such amounts or may earn a
profit from future payments made by the Fund under the Plan.
ADMINISTRATIVE ARRANGEMENTS. _The distributor may also pay financial
institutions a fee based upon the average net asset value of shares of their
customers invested in the Fund for providing administrative services. This fee
is in addition to the amounts paid under the distribution plan for
administrative services, and, if paid, will be reimbursed by the Adviser and not
the Fund.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
<C> <S>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may voluntarily reimburse a portion
of its fee.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTING SERVICES.
Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of Federated
Investors, is transfer agent for the Shares of the Fund and dividend disbursing
agent for the Fund. It also provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania and Dickstein, Shapiro and Morin, Washington, D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche, Pittsburgh, Pennsylvania.
EXPENSES OF THE FUND AND INVESTMENT SHARES
Holders of Shares pay their allocable portion of Fund and Trust expenses.
The Trust expenses for which holders of Shares pay their allocable portion
include, but are not limited to the following: the cost of organizing the Trust
and continuing its existence; registering the Trust with federal and state
securities authorities; Trustees' fees; auditors' fees; the cost of meetings of
Trustees; legal fees of the Trust; association membership dues; and such
non-recurring and extraordinary items as may arise.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to the following: registering the Fund and Shares
of the Fund; investment advisory services; taxes and commissions; custodian
fees; insurance premiums; auditors' fees; and such non-recurring and
extraordinary items as may arise.
At present, the only expenses allocated to the Shares as a class are expenses
under the Fund's Rule
12b-1 Plan that relate to the Shares. In addition, the Trustees reserve the
right to allocate certain other expenses to holders of Shares as it deems
appropriate ("Class Expenses"). In any case, Class Expenses would be limited to
the following: distribution fees; transfer agent fees as identified by the
transfer agent as attributable to holder of Shares; printing and postage
expenses related to preparing and distributing materials such as shareholder
reports, prospectuses and proxies to current shareholders; registration fees
paid to the Securities and Exchange Commission and registration fees paid to
state securities commissions; expenses related to administrative personnel and
services as required to support holders of Shares; legal fees relating solely to
Shares; and Trustees' fees incurred as a result of issues relating solely to
Shares.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling shares of the Fund. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Fund, subtracting the interest of the Shares
in the liabilities of the Fund and those attributable to Shares, and dividing
the remainder by the total number of Shares outstanding. The net asset value for
Shares will be lower than that of Trust Shares due to the variance in daily net
income realized by each class. Such variance will reflect only accrued net
income to which the shareholders of a particular class are entitled.
INVESTING IN INVESTMENT SHARES
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares of the Fund by an investor is $1,000.
Subsequent investments may be made in any amounts. The Fund may waive the
initial minimum investment from time to time.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
A PERCENTAGE A PERCENTAGE
OF PUBLIC OF NET
AMOUNT OF TRANSACTION OFFERING PRICE AMOUNT INVESTED
<S> <C> <C>
Less than $100,000 2.00% 2.04%
$100,000 but less than $250,000 1.50% 1.52%
$250,000 but less than $500,000 1.00% 1.01%
$500,000 but less than $750,000 0.50% 0.50%
$750,000 but less than $1 million 0.25% 0.25%
$1 million or more 0.00% 0.00%
</TABLE>
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; or (iii) the following
holidays: New Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
PURCHASES AT NET ASSET VALUE. Shares of the Fund may be purchased at net asset
value, without a sales charge, by officers, directors, employees and retired
employees of First Alabama or its subsidiaries, and their spouses and dependent
children.
DEALER CONCESSIONS. For sales of Shares of the Fund, a dealer will normally
receive up to 85% of the applicable sales charge. Any portion of the sales
charge which is not paid to a dealer will be retained by the distributor.
However, from time to time, and at the sole discretion of the distributor, all
or part of that portion may be paid to a dealer.
The sales charge for Shares sold other than through registered broker/dealers
will be retained by the distributor. The distributor may pay fees to banks out
of the sales charge in exchange for sales, and/or administrative services
performed on behalf of the bank's customers in connection with the initiation of
customer accounts and purchases of Shares.
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange and the Federal
Reserve Wire System are open for business. A customer may purchase Shares of the
Fund through First Alabama Investments, Inc. ("FAII"). Texas residents should
purchase shares through Federated Securities Corp. at
1-800-356-2805. In connection with the sale of Shares, the distributor may, from
time to time, offer certain items of nominal value to any shareholder or
investor. The Fund reserves the right to reject any purchase request.
THROUGH FAII. To place an order to purchase Shares, a customer may contact
their local FAII office or telephone FAII at 1-800-456-3244.
Payment may be made by either check or federal funds or by debiting a customer's
account at First Alabama. Purchase orders must be received by 3:00 p.m. (Central
time) in order to be credited on the same day. For settlement of an order,
payment must be received within five business days of receipt of the order.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
purchases with proceeds from redemptions of unaffiliated mutual fund
shares.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales charge paid. The Fund will combine purchases
of Shares made on the same day by the investor, his spouse, and his children
under age 21 when it calculates the sales charge.
If an additional purchase of Shares is made, the Fund will consider the previous
purchases still invested in the Fund. For example, if a shareholder already owns
Shares having a current value at the public offering price of $90,000 and
purchases $10,000 more at the current public offering price, the sales charge on
the additional purchase according to the schedule now in effect would be 1.50%,
not 2.00%.
To receive the sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing at the time the purchase is made that
Shares are already owned or that purchases are being combined. The Fund will
reduce the sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
Shares in the Fund over the next 13 months, the sales charge may be reduced by
signing a letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to hold
up to 2.00% of the total amount intended to be purchased in escrow (in Shares)
until such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at the
end of the 13-month period unless the amount specified in the letter of intent
is not purchased. In this event, an appropriate number of escrowed Shares may be
redeemed in order to realize the difference in the sales charge.
This letter of intent will not obligate the shareholder to purchase Shares, but
if he does, each purchase during the period will be at the sales charge
applicable to the total amount intended to be purchased. This letter may be
dated as of a prior date to include any purchases made within the past 90 days.
REINVESTMENT PRIVILEGE. If Shares in the Fund have been redeemed, the
shareholder has a one-time right, within 30 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales charge.
Federated Securities Corp. must be notified by the shareholder in writing or by
his financial institution of the reinvestment in order to eliminate a sales
charge. If the shareholder redeems Shares in the Fund, there may be tax
consequences, and exercise of the reinvestment privilege may result in
additional tax considerations. Shareholders contemplating such transactions
should consult their own tax advisers.
PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED MUTUAL FUND SHARES.
_Investors may purchase shares of the Fund at net asset value, without a sales
charge, with the proceeds from the redemption of Shares of a mutual fund which
was sold with a sales charge or commission. The purchase must be made within 60
days of the redemption, and FAII must be notified by the investor in writing, or
by his financial institution, at the time the purchase is made.
SYSTEMATIC INVESTMENT PLAN
Holders of Shares may arrange for systematic monthly investments in their
accounts in amounts of $100 or more. Once proper authorization is given, a
shareholder's bank account will be debited to purchase Shares in the Fund.
SHAREHOLDER ACCOUNTS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting the Fund.
DIVIDENDS AND CAPITAL GAINS
Dividends are declared and paid quarterly. Dividends are declared just prior to
determining net asset value. Capital gains realized by the Fund, if any, will be
distributed at least once every 12 months. Dividends and capital gains will be
reinvested in additional Shares on payment dates at the ex-dividend date net
asset value, without a sales charge, unless cash payments are requested by
shareholders by writing to the Fund or First Alabama as appropriate.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
A shareholder may exchange shares of one fund for the appropriate class of
shares of any other fund in the Trust by calling or by writing to First Alabama.
Shares purchased by check are eligible for exchange after 10 days. The exchange
feature applies to shares of each fund as of the effective offering date of each
fund's shares.
Orders to exchange shares of one fund for shares of any of the other First
Priority Funds will be executed by redeeming the shares owned at net asset value
and purchasing shares of any of the other First Priority Funds at the offering
price determined after the proceeds from such redemption become available.
Orders for exchanges received by the fund prior to 3:00 p.m. (Central time) on
any day the
funds are open for business will be executed as of the close of business that
day. Orders for exchanges received after 3:00 p.m. (Central time) on any
business day will be executed at the close of the next business day.
Shares of funds with a sales charge may be exchanged at net asset value for
shares of other funds with an equal sales charge or no sales charge. Shares of
funds with a sales charge may be exchanged for shares of funds with a higher
sales charge at net asset value, plus the additional sales charge. Shares of
funds with no sales charge, whether acquired by direct purchase, reinvestment of
dividends on such shares, or otherwise, may be exchanged for shares of funds
with a sales charge at net asset value, plus the applicable sales charge. When
an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends or capital gains on such shares retain the character of
the exchanged shares for purposes of exercising further exchange privileges;
thus, an exchange of such shares for shares of a fund with a sales charge would
be at net asset value.
An excessive number of exchanges may be disadvantageous to the Trust. Therefore
the Trust, in addition to its right to reject any exchange, reserves the right
to terminate the exchange privilege of any shareholder who makes more than five
exchanges of shares of the funds in a year or three in a calendar quarter.
An exchange order must comply with the requirements for a redemption and
purchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements of
each fund being acquired. An exchange constitutes a sale for federal income tax
purposes.
The exchange privilege is only available in states where shares of the fund
being acquired may legally be sold. Before the exchange, a shareholder must
receive a prospectus of the fund for which the exchange is being made.
Telephone exchange instructions may be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
REDEEMING INVESTMENT SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at its net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes the net asset value of Shares. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on Federal
holidays when wire transfers are restricted. Requests for redemption can be made
in person, by telephone, or by mail through FAII.
BY TELEPHONE
A shareholder may redeem Shares by telephoning their local FAII office. For
calls received by First Alabama before 3:00 p.m. (Central time), proceeds will
normally be wired within five business days to the shareholder's account at
First Alabama Bank or a check will be sent to the address of record. In no event
will proceeds be wired more than seven days after a proper request for
redemption has been received.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from First Alabama.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming Shares by telephone. If such a case should occur,
another method of redemption, such as a written request to Federated Services
Company or FAII should be considered.
If at any time, the Fund shall determine it necessary to terminate or modify
this method of redemption, shareholders shall be promptly notified.
Telephone redemption instructions may be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
BY MAIL
A shareholder may redeem Shares by sending a written request to FAII. The
written request should include the shareholder's name, the Fund name, the
account number, and the Share or dollar amount requested. Shareholders should
call FAII for assistance in redeeming by mail.
SIGNATURES. _Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record, must
have signatures on written redemption requests guaranteed by:
a trust company or commercial bank whose deposits are insured by Bank
Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation ("FDIC");
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
a savings and loan association or a savings bank whose deposits are
insured by the Savings Association Insurance Fund, which is administered
by the FDIC; or
any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT. Normally, a check for the proceeds is mailed to the
shareholder within one business day, but in no event more than seven days, after
receipt of a proper written redemption request.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check, the proceeds from the redemption of those
Shares are not available, and the Shares may not be exchanged, until First
Alabama is reasonably certain that the purchase check has cleared, which could
take up to ten calendar days.
SYSTEMATIC WITHDRAWAL PLAN
Under a Systematic Withdrawal Plan, accounts having a value of at least $10,000
may arrange for regular monthly or quarterly fixed withdrawal payments. Each
payment must be at least $100 and may be as much as 1.5% per month or 4.5% per
quarter of the total net asset value of the Shares in the account when the
Systematic Withdrawal Plan is opened. Excessive withdrawals may deplete or
decrease the value of an account.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000. This
requirement does not apply, however, if the balance falls below $1,000 because
of changes in the Fund's net asset value. Before Shares are redeemed to close an
account, the shareholder is notified in writing and allowed 30 days to purchase
additional Shares to meet the minimum requirement.
REDEMPTION IN KIND
The Trust is obligated to redeem Shares solely in cash up to $250,000, or 1% of
any class's net asset value, whichever is less, for any one shareholder within a
90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Trust will pay
all or a portion of the remainder of the redemption in portfolio instruments,
valued in the same way as net asset value is determined. The portfolio
instruments will be selected in a manner that the Trustees deem fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur transaction costs.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of all classes of
each portfolio in the Trust have equal voting rights, except that in matters
affecting only a particular Fund or class, only shareholders of that Fund or
class are entitled to vote. As a Massachusetts business trust, the Trust is not
required to hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in the Trust's or the Fund's operation and for
the election of Trustees under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust itself cannot meet its obligations to indemnify shareholders
and pay judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling, or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of their customer. First Alabama is subject to such
banking laws and regulations.
First Alabama believes, based on the advice of its counsel, that First Alabama
may perform the services for the Fund contemplated by its advisory agreement
with the Trust without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of such or future statutes and regulations, could
prevent the Adviser from continuing to perform all or a part of the above
services for its customers and/or the Fund. If it were prohibited from engaging
in these customer-related activities, the Trustees would consider alternative
advisers and means of continuing available investment services. In such event,
changes in the operation of the Fund may occur, including possible termination
of any automatic or other Fund share investment and redemption services that are
being provided by First Alabama. It is not expected that existing shareholders
would suffer any adverse financial consequences (if another adviser with
equivalent abilities to First Alabama is found) as a result of any of these
occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional Shares.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its total return and yield for Shares.
Advertisements and other sales literature may also refer to total return. Total
return represents the change, over a specified period of time, in the value of
an investment in Shares of the Fund after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Shares of the Fund is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by Shares over a thirty-day period by the maximum offering price per Share on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
Shares and, therefore, may not correlate to the dividends or other distributions
paid to shareholders.
The performance information reflects the use of the maximum sales load which, if
excluded, would increase the total return and yield.
Total return and yield will be calculated separately for Investment Shares and
Trust Shares. Because Investment Shares are subject to a sales load and a 12b-1
fee, the total return and yield for Trust Shares, for the same period, will
exceed that of Investment Shares.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Trust Shares of First Priority Equity Fund are sold to accounts for which First
Alabama or other financial institutions act in a fiduciary or agency capacity at
net asset value without a sales charge at a minimum initial investment of
$25,000. Trust Shares are not sold pursuant to a Rule 12b-1 Plan.
The amount of dividends payable to Trust Shares will exceed those payable to
Investment Shares by the difference between Class Expenses and distribution
expenses borne by shares of each respective class.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation with respect to one class of shares
than with respect to another class of shares of the same Fund.
The stated advisory fee is the same for both classes of the Fund.
FIRST PRIORITY EQUITY FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 31.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
----------------------
1993 1992*
<S> <C> <C>
- ------------------------------------------------------------------------------------ --------- -----------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.66 $ 9.86
- ------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------
Net investment income 0.18 0.14
- ------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.03) 0.77
- ------------------------------------------------------------------------------------ --------- -----------
Total from investment operations 0.15 0.91
- ------------------------------------------------------------------------------------ --------- -----------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.18) (0.11)
- ------------------------------------------------------------------------------------
Dividends to shareholders from net realized gain on
investment transactions (0.12) --
- ------------------------------------------------------------------------------------ --------- -----------
Total distributions (0.30) (0.11)
- ------------------------------------------------------------------------------------ --------- -----------
NET ASSET VALUE, END OF PERIOD $ 10.51 $ 10.66
- ------------------------------------------------------------------------------------ --------- -----------
TOTAL RETURN** 1.43% 9.28%
- ------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------
Expenses 0.84% 0.76%(a)
- ------------------------------------------------------------------------------------
Net investment income 1.85% 2.28%(a)
- ------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.30% 0.35%
- ------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------
Net assets, end of period (000 omitted)
$154,185
$102,822
- ------------------------------------------------------------------------------------
Portfolio turnover rate*** 74% 30 %
- ------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from April 20, 1992 (date of initial
public investment) to November 30, 1992.
** Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
*** Represents portfolio turnover for the entire Fund.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY EQUITY FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- -------------- -------------------------------------------------------------------------------- ---------------
COMMON STOCKS--74.6%
- ------------------------------------------------------------------------------------------------
BASIC INDUSTRY--2.9%
--------------------------------------------------------------------------------
120,000 Kenametal, Inc. $ 4,695,000
-------------------------------------------------------------------------------- ---------------
BEVERAGES--2.4%
--------------------------------------------------------------------------------
80,000 Anheuser Busch Company, Inc. 3,960,000
-------------------------------------------------------------------------------- ---------------
BROADCASTING/ENTERTAINMENT/PUBLISHING--7.2%
--------------------------------------------------------------------------------
8,000 Capital Cities ABC 5,060,000
--------------------------------------------------------------------------------
40,000 McGraw Hill, Inc. 2,790,000
--------------------------------------------------------------------------------
120,000 Times Mirror Corp. 3,750,000
-------------------------------------------------------------------------------- ---------------
Total 11,600,000
-------------------------------------------------------------------------------- ---------------
CAPITAL GOODS--7.5%
--------------------------------------------------------------------------------
160,000 Boeing Co. 6,180,000
--------------------------------------------------------------------------------
60,000 General Electric Co. 5,895,000
-------------------------------------------------------------------------------- ---------------
Total 12,075,000
-------------------------------------------------------------------------------- ---------------
CREDIT-CYCLICAL--1.7%
--------------------------------------------------------------------------------
80,000 Masco Corp. 2,720,000
-------------------------------------------------------------------------------- ---------------
ELECTRONICS--3.8%
--------------------------------------------------------------------------------
100,000 Raytheon Co. 6,125,000
-------------------------------------------------------------------------------- ---------------
ENERGY--1.8%
--------------------------------------------------------------------------------
50,000 Schlumberger, Ltd. 2,875,000
-------------------------------------------------------------------------------- ---------------
FINANCE--3.1%
--------------------------------------------------------------------------------
160,000 American Express 5,020,000
-------------------------------------------------------------------------------- ---------------
HEALTHCARE--3.3%
--------------------------------------------------------------------------------
100,000 American Cyanamid 5,250,000
-------------------------------------------------------------------------------- ---------------
HOSPITAL SUPPLIES--1.4%
--------------------------------------------------------------------------------
50,000 Johnson & Johnson 2,181,250
-------------------------------------------------------------------------------- ---------------
</TABLE>
FIRST PRIORITY EQUITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- -------------- -------------------------------------------------------------------------------- ---------------
COMMON STOCKS--CONTINUED
- ------------------------------------------------------------------------------------------------
INSURANCE--2.5%
--------------------------------------------------------------------------------
160,000 Liberty Corp. $ 3,960,000
-------------------------------------------------------------------------------- ---------------
MACHINERY--2.1%
--------------------------------------------------------------------------------
140,000 Giddings & Lewis 3,395,000
-------------------------------------------------------------------------------- ---------------
OIL--3.3%
--------------------------------------------------------------------------------
100,000 Amoco Corp. 5,337,500
-------------------------------------------------------------------------------- ---------------
PHARMACEUTICAL--9.6%
--------------------------------------------------------------------------------
60,000 Bristol Myers Squibb Co. 3,592,500
--------------------------------------------------------------------------------
20,000 Eli Lilly & Co. 1,147,500
--------------------------------------------------------------------------------
160,000 Merck & Co., Inc. 5,480,000
--------------------------------------------------------------------------------
80,000 Pfizer Corp. 5,320,000
-------------------------------------------------------------------------------- ---------------
Total 15,540,000
-------------------------------------------------------------------------------- ---------------
RESTAURANTS--4.0%
--------------------------------------------------------------------------------
140,000 Luby's Cafeteria 3,062,500
--------------------------------------------------------------------------------
200,000 International Dairy Queen 3,350,000
-------------------------------------------------------------------------------- ---------------
Total 6,412,500
-------------------------------------------------------------------------------- ---------------
RETAIL--11.5%
--------------------------------------------------------------------------------
140,000 K Mart 3,290,000
--------------------------------------------------------------------------------
120,000 J.C. Penney, Inc. 6,405,000
--------------------------------------------------------------------------------
80,000 The Limited, Inc. 1,820,000
--------------------------------------------------------------------------------
80,000 Melville Corp. 3,280,000
--------------------------------------------------------------------------------
205,000 Stride Rite Corp. 3,792,500
-------------------------------------------------------------------------------- ---------------
Total 18,587,500
-------------------------------------------------------------------------------- ---------------
TEXTILE/APPAREL--4.8%
--------------------------------------------------------------------------------
100,000 Gap, Inc. $ 4,000,000
--------------------------------------------------------------------------------
160,000 Liz Claiborne 3,780,000
-------------------------------------------------------------------------------- ---------------
Total 7,780,000
-------------------------------------------------------------------------------- ---------------
</TABLE>
FIRST PRIORITY EQUITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
<C> <S> <C>
- -------------- -------------------------------------------------------------------------------- ---------------
COMMON STOCKS--CONTINUED
- ------------------------------------------------------------------------------------------------
TOBACCO--1.7%
--------------------------------------------------------------------------------
100,000 UST, Inc. 2,687,500
-------------------------------------------------------------------------------- ---------------
TOTAL COMMON STOCKS (IDENTIFIED COST $117,461,347) 120,201,250
-------------------------------------------------------------------------------- ---------------
PREFERRED STOCKS--5.4%
- ------------------------------------------------------------------------------------------------
GOLD MANUFACTURING--2.2%
--------------------------------------------------------------------------------
60,000 Battle Mountain Gold 3,570,000
--------------------------------------------------------------------------------
TRANSPORTATION--3.2%
--------------------------------------------------------------------------------
50,000 Ford Motor Co. 5,125,000
-------------------------------------------------------------------------------- ---------------
TOTAL PREFERRED STOCKS (IDENTIFIED COST $7,057,973) 8,695,000
-------------------------------------------------------------------------------- ---------------
MUTUAL FUND ISSUES--0.2%
- ------------------------------------------------------------------------------------------------
14,549 Fidelity U.S. Treasury Income Portfolio 14,549
--------------------------------------------------------------------------------
261,197 Goldman Sachs I.L.A. Treasury Portfolio 261,197
-------------------------------------------------------------------------------- ---------------
TOTAL MUTUAL FUND ISSUES (AT NET ASSET VALUE) 275,746
-------------------------------------------------------------------------------- ---------------
*REPURCHASE AGREEMENT--19.2%
- ------------------------------------------------------------------------------------------------
30,990,000 Paine Webber Co., 3.20%, dated 11/30/93, due 12/1/93
(at amortized cost) (Note 2B) 30,990,000
-------------------------------------------------------------------------------- ---------------
TOTAL INVESTMENTS (IDENTIFIED COST $155,785,066) $ 160,161,996\
-------------------------------------------------------------------------------- ---------------
</TABLE>
* Repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at November 30, 1993.
\ The cost of investments for federal income tax purposes amounts to
$155,785,066. The net unrealized appreciation of investments on a federal
income tax basis amounts to $4,376,930, which is comprised of $10,787,424
appreciation and $6,410,494 depreciation at November 30, 1993.
Note: The categories of investments are shown as a percentage of net assets
($161,189,450) at November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------------------------
Investments in securities $ 129,171,996
- ----------------------------------------------------------------------------------
Investment in repurchase agreement (Note 2B) 30,990,000
- ---------------------------------------------------------------------------------- --------------
Total investments, at value (Note 2A) (identified and tax cost $155,785,066) $ 160,161,996
- --------------------------------------------------------------------------------------------------
Cash 631
- --------------------------------------------------------------------------------------------------
Receivable for investments sold 599,280
- --------------------------------------------------------------------------------------------------
Dividends and interest receivable 480,940
- --------------------------------------------------------------------------------------------------
Receivable for fund shares sold 62,574
- --------------------------------------------------------------------------------------------------
Prepaid/Deferred expenses (Note 2G) 22,779
- -------------------------------------------------------------------------------------------------- --------------
Total assets 161,328,200
- --------------------------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------------------------
Payable for fund shares redeemed 35,137
- ----------------------------------------------------------------------------------
Accrued expenses 103,613
- ---------------------------------------------------------------------------------- --------------
Total liabilities 138,750
- -------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 15,330,375 shares of beneficial interest outstanding $ 161,189,450
- -------------------------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------------------------
Paid-in capital $ 155,282,468
- --------------------------------------------------------------------------------------------------
Unrealized appreciation of investments 4,376,930
- --------------------------------------------------------------------------------------------------
Accumulated undistributed net realized gain on investments 1,035,511
- --------------------------------------------------------------------------------------------------
Undistributed net investment income 494,541
- -------------------------------------------------------------------------------------------------- --------------
Total $ 161,189,450
- -------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE, and Redemption Price Per Share:
Trust Shares (net assets of $154,185,169 / 14,664,133 SHARES OF BENEFICIAL INTEREST OUTSTANDING)
$10.51
- -------------------------------------------------------------------------------------------------- --------------
INVESTMENT SHARES (NET ASSETS OF $7,004,281 / 666,242 SHARES OF BENEFICIAL INTEREST OUTSTANDING)
$10.51
- -------------------------------------------------------------------------------------------------- --------------
OFFERING PRICE PER SHARE:
- --------------------------------------------------------------------------------------------------
Trust Shares $10.51
- -------------------------------------------------------------------------------------------------- --------------
Investment Shares (100/97 of $10.51)* $10.84
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
*On sales of $100,000 or more, the offering price is reduced as stated under
"What Shares Costs" in the prospectus. The offering price presented reflects a
maximum sales charge of 3.00%. As of January 31, 1994, the maximum sales charge
was reduced to 2.00%, as a percentage of offering price.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY EQUITY FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------
Dividend income $ 3,031,722
- ---------------------------------------------------------------------------------------------------
Interest income 664,740
- --------------------------------------------------------------------------------------------------- ------------
Total investment income (Note 2C) 3,696,462
- ---------------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 1,097,771
- -------------------------------------------------------------------------------------
Administrative personnel and services (Note 5) 193,025
- -------------------------------------------------------------------------------------
Trustees' fees 3,373
- -------------------------------------------------------------------------------------
Custodian fees 49,438
- -------------------------------------------------------------------------------------
Auditing fees 15,469
- -------------------------------------------------------------------------------------
Recordkeeper and transfer agent fees (Note 5) 91,814
- -------------------------------------------------------------------------------------
Legal fees 4,535
- -------------------------------------------------------------------------------------
Printing and postage 21,067
- -------------------------------------------------------------------------------------
Insurance premiums 8,525
- -------------------------------------------------------------------------------------
Distribution services fees (Note 5) 16,875
- -------------------------------------------------------------------------------------
Registration fees 72,386
- -------------------------------------------------------------------------------------
Miscellaneous 7,269
- ------------------------------------------------------------------------------------- ------------
Total expenses 1,581,547
- -------------------------------------------------------------------------------------
Deduct--
- -------------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 5) 411,664
- ------------------------------------------------------------------------------------- ------------
Net expenses 1,169,883
- --------------------------------------------------------------------------------------------------- ------------
Net investment income 2,526,579
- --------------------------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------------
Net realized gain on investments (identified cost basis) 1,036,882
- ---------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (896,428)
- --------------------------------------------------------------------------------------------------- ------------
Net realized and unrealized gain on investments 140,454
- --------------------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ 2,667,033
- --------------------------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1993 1992*
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------------------------------------
OPERATIONS--
- ----------------------------------------------------------------------------------
Net investment income $ 2,526,579 $ 1,242,743
- ----------------------------------------------------------------------------------
Net realized gain on investment transactions ($1,036,882 net gain and $1,206,705
net gain, respectively, as computed for federal income tax purposes) 1,036,882 1,206,705
- ----------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (896,428) 5,273,358
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from operations 2,667,033 7,722,806
- ---------------------------------------------------------------------------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- ----------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- ----------------------------------------------------------------------------------
Trust Shares (2,250,065) (927,809)
- ----------------------------------------------------------------------------------
Investment Shares (79,302) (17,605)
- ----------------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment transactions:
- ----------------------------------------------------------------------------------
Trust Shares (1,172,020) --
- ----------------------------------------------------------------------------------
Investment Shares (36,056) --
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets from distributions to shareholders (3,537,443) (945,414)
- ---------------------------------------------------------------------------------- -------------- --------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- ----------------------------------------------------------------------------------
Proceeds from sales of shares 62,546,377 100,998,998
- ----------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 112,462 17,013
- ----------------------------------------------------------------------------------
Cost of shares redeemed (6,552,484) (1,839,898)
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets from Fund share transactions 56,106,355 99,176,113
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets 55,235,945 105,953,505
- ----------------------------------------------------------------------------------
NET ASSETS:
- ----------------------------------------------------------------------------------
Beginning of period 105,953,505 --
- ---------------------------------------------------------------------------------- -------------- --------------
End of period (including undistributed net investment income
of $494,541 and $297,329, respectively) $ 161,189,450 $ 105,953,505
- ---------------------------------------------------------------------------------- -------------- --------------
</TABLE>
* Reflects operations for the period from April 20, 1992 (date of initial public
investment) to November 30, 1992.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
First Priority Funds (the "Trust") is an open-end, management investment
company, established as a Massachusetts business trust under the Declaration of
Trust dated October 15, 1991. The Trust currently consists of three portfolios.
The financial statements included herein present only those of First Priority
Equity Fund (the "Fund"), one of the diversified portfolios of the Trust. The
financial statements of the other portfolios in the Trust are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held. The Declaration
of Trust permits the Trust to offer separate series of shares of beneficial
interest representing interests in the separate portfolios of securities. The
Trustees have established two classes of shares, Trust Shares and Investment
Shares, in each portfolio of the Trust. Effective December 7, 1993, the Trust
added a fourth portfolio; First Priority Limited Maturity Government Fund, which
offers only one class of shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Listed equity securities are valued at last sale
prices reported on national securities exchanges. Unlisted securities, or
listed securities in which there were no sales, and private placement
securities are valued at the mean between bid and asked prices. Bonds and
other fixed income securities are valued at the last sale price on a
national securities exchange, if available. Otherwise, they are valued on
the basis of prices furnished by independent pricing services. Short-term
obligations are ordinarily valued at the mean between bid and asked prices
as furnished by an independent pricing service. Investments in other
regulated investment companies are valued at net asset value. All other
securities are appraised at fair value as determined in good faith by the
Trustees.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System or to have segregated within the
custodian bank's vault, all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of
each repurchase agreement's underlying securities to ensure the existence
of a proper level of collateral.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Trust's adviser to be creditworthy pursuant to guidelines
established by the Trustees. Risks may arise from the potential inability
of
counterparties to honor the terms of a repurchase agreement. Accordingly,
the Fund could receive less than the repurchase price on the sale of
collateral securities.
C. INCOME--Dividend income is recorded on the ex-dividend date. Interest
income is recorded on the accrual basis. Interest income includes interest
and discount earned (net of premium) on short-term obligations, and
interest earned on all other debt securities including original issue
discount as required by the Internal Revenue Code, as amended. Dividends to
shareholders and capital gain distributions, if any, are recorded on the
ex-dividend date.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Internal Revenue Code, as amended, applicable to regulated investment
companies and to distribute to shareholders each year substantially all of
their net income, including any net realized gain on investments.
Accordingly, no provision for federal tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. To the extent the Fund
engages in such transactions, it will do so for the purpose of acquiring
portfolio securities consistent with its investment objective and policies
and not for the purpose of investment leverage. The Fund will record a
when-issued security and the related liability on the trade date. Until the
securities are received and paid for, the Fund will maintain security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
F. EXPENSES--Expenses of the Fund, other than distribution services fees, and
related waivers and reimbursements, if any, are allocated to each class of
shares based on its relative average net assets for the period.
G. DEFERRED EXPENSES--Costs incurred by the Trust with respect to registration
of its shares in its first fiscal year, excluding the inital expense of
registering the shares, have been deferred and are being amortized using
the straight line method through February 28, 1997.
H. OTHER--Investment transactions are accounted for on the date of the
transaction.
(3) DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid quarterly to all shareholders invested in the
Fund on the record date. Dividends are paid from the net investment income of
the Fund. Net investment income consists of all dividends or interest received
by the Fund less its expenses. Capital gains realized by the Fund, if any, are
distributed at least once every twelve months.
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1993 1992*
SHARES DOLLARS SHARES DOLLARS
------------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
TRUST SHARES
- ------------------------------------------------
Shares outstanding, beginning of period 9,649,763 $ 96,252,589 -- $ --
- ------------------------------------------------
Shares sold 5,550,553 57,774,890 9,813,417 97,875,905
- ------------------------------------------------
Shares redeemed (536,183) (5,555,250) (163,654) (1,623,316)
- ------------------------------------------------ ------------- --------------- ----------- --------------
Shares outstanding, end of period 14,664,133 $ 148,472,229 9,649,763 $ 96,252,589
- ------------------------------------------------ ------------- --------------- ----------- --------------
<CAPTION>
YEAR ENDED NOVEMBER 30,
1993 1992*
SHARES DOLLARS SHARES DOLLARS
------------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES
- ------------------------------------------------
Shares outstanding, beginning of period 293,912 $ 2,923,524 -- $ --
- ------------------------------------------------
Shares sold 458,429 4,771,487 313,730 3,123,093
- ------------------------------------------------
Shares issued to shareholders electing to
receive payment of dividends in Fund shares 10,837 112,462 1,724 17,013
- ------------------------------------------------
Shares redeemed (96,936) (997,234) (21,542) (216,582)
- ------------------------------------------------ ------------- --------------- ----------- --------------
Shares outstanding, end of period 666,242 $ 6,810,239 293,912 $ 2,923,524
- ------------------------------------------------ ------------- --------------- ----------- --------------
</TABLE>
* For the period from April 20, 1992 (date of initial public investment) to
November 30, 1992.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
First Alabama Bank, the Trust's investment adviser ("Adviser"), receives for its
services an annual investment advisory fee equal to .80 of 1% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive a portion
of its fee or reimburse certain operating expenses of the Fund. For the year
ended November 30, 1993, the investment advisory fee amounted to $1,097,771, of
which $411,664 was voluntarily waived, in accordance with such undertaking.
Federated Administrative Services ("FAS") provides administrative personnel and
services at an annual rate of .150 of 1% on the first $250 million of the
average aggregate daily net assets of the Trust; .125 of 1% on the next $250
million; .100 of 1% on the next $250 million; and .075 of 1% of the average
aggregate daily net assets of the Trust in excess of $750 million. For the year
ended November 30, 1993, FAS earned administrative fees of $193,025.
Expenses of organizing the Fund ($49,934) were borne initially by FAS. The Fund
has agreed to reimburse FAS for the organization expenses borne by FAS during
the five year period following the date the Trust's portfolio became effective.
Pursuant to this agreement, the Fund reimbursed $6,128 in organization expenses
during the year ended November 30, 1993.
Federated Services Company ("FSC") is the Fund's transfer agent and dividend
disbursing agent. It also provides certain accounting and recordkeeping services
with respect to the Fund's portfolio of investments. For the year ended November
30, 1993, FSC earned transfer and dividend disbursing agent fees and
recordkeeping fees of $91,814.
Effective December 1, 1993, First Alabama Bank became the custodian for the
securities and cash of the Trust.
The Trust has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Trust will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the assets of
Investment Shares of the Fund to finance activities principally intended to
result in the sale of Investment Shares subject to the Plan. The Plan provides
that the Fund will pay up to .30 of 1% of the average daily net assets of
Investment Shares, annually, to pay commissions, maintenance fees and to
compensate the distributor. For the year ended November 30, 1993, FSC earned
$16,875 in distribution services fees.
(6) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended November 30, 1993, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------
PURCHASES $ 115,473,744
- ------------------------------------------------------------------------------------------------- ---------------
SALES $ 86,037,274
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of FIRST PRIORITY FUNDS
and the Shareholders of FIRST PRIORITY EQUITY FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of First Priority Equity Fund (a portfolio of
First Priority Funds) as of November 30, 1993, the related statement of
operations for the year then ended, and the statement of changes in net assets
and financial highlights (see pages 2 and 20) for the years ended November 30,
1993 and 1992. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
November 30, 1993, 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 statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of First Priority
Equity Fund as of November 30, 1993, the results of its operations, the changes
in its net assets and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
Deloitte & Touche
Pittsburgh, Pennsylvania
January 17, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
First Priority Equity Fund Federated Investors Tower
Investment Shares Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Investment Adviser and Custodian
First Alabama Bank P.O. Box 10247
Birmingham, Alabama 35202
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent
and Portfolio Accounting Services Federated Investors Tower
Federated Services Company Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin 2101 L Street, N.W.
Washington, D.C. 20037
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
FIRST PRIORITY
EQUITY FUND
INVESTMENT SHARES
PROSPECTUS
A Diversified Portfolio of
First Priority Funds, an Open-End,
Management Investment Company
Prospectus dated January 31, 1994
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
2021107A-R (1/94)
PROSPECTUS
- --------------------------------------------------------------------------------
FIRST PRIORITY EQUITY FUND
TRUST SHARES
(A PORTFOLIO OF FIRST PRIORITY FUNDS)
- --------------------------------------------------------------------------------
The Trust Shares (the "Shares") offered by this prospectus represent interests
in the diversified portfolio known as First Priority Equity Fund (the "Fund").
The Fund is one of a series of investment portfolios in First Priority Funds
(the "Trust"), an open-end, management investment company (a mutual fund).
The investment objective of the Fund is to provide growth of capital and income.
The Fund pursues this objective by investing principally in a
professionally-managed and diversified portfolio of common stock of companies
with market capitalization of at least $250 million.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF FIRST
ALABAMA BANK, ARE NOT ENDORSED OR GUARANTEED BY FIRST ALABAMA BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT
RISKS INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Combined Statement of Additional Information for Trust
Shares and Investment Shares dated January 31, 1994 with the Securities and
Exchange Commission. The information contained in the Combined Statement of
Additional Information is incorporated by reference into this prospectus. You
may request a copy of the Combined Statement of Additional Information free of
charge, obtain other information, or make inquiries about the Fund by writing or
calling toll-free 1-800-433-2829.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated January 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--TRUST SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Common Stocks 3
Other Corporate Securities 4
U.S. Government Securities 4
Temporary Investments 4
Repurchase Agreements 4
When-Issued and Delayed Delivery
Transactions 4
Put and Call Options 4
Financial Futures and Options on
Futures 4
Risks 5
Investing in Securities of Other
Investment Companies 5
Lending of Portfolio Securities 6
Securities of Foreign Issuers 6
Portfolio Turnover 6
Investment Limitations 6
FIRST PRIORITY FUNDS INFORMATION 7
- ------------------------------------------------------
Management of First Priority Funds 7
Board of Trustees 7
Investment Adviser 7
Advisory Fees 7
Adviser's Background 7
Distribution of Trust Shares 8
Administration of the Fund 8
Administrative Services 8
Transfer Agent, Dividend Disbursing
Agent and Portfolio Accounting
Services 8
Legal Counsel 8
Independent Auditors 9
Expenses of the Fund and Trust Shares 9
Brokerage Transactions 9
NET ASSET VALUE 9
- ------------------------------------------------------
INVESTING IN TRUST SHARES 10
- ------------------------------------------------------
Minimum Investment Required 10
What Shares Cost 10
Share Purchases 10
Through First Alabama Bank 10
Shareholder Accounts 10
Dividends and Capital Gains 10
EXCHANGE PRIVILEGE 11
- ------------------------------------------------------
REDEEMING TRUST SHARES 11
- ------------------------------------------------------
By Telephone 11
Redemption Before Purchase
Instruments Clear 12
Accounts with Low Balances 12
Redemption in Kind 12
SHAREHOLDER INFORMATION 13
- ------------------------------------------------------
Voting Rights 13
Massachusetts Partnership Law 13
EFFECT OF BANKING LAWS 13
- ------------------------------------------------------
TAX INFORMATION 14
- ------------------------------------------------------
Federal Income Tax 14
PERFORMANCE INFORMATION 14
- ------------------------------------------------------
OTHER CLASSES OF SHARES 15
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 16
- ------------------------------------------------------
FINANCIAL STATEMENTS 17
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 27
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
TRUST SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)........................... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)............................................................... None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, as applicable)............................................. None
Redemption Fee (as a percentage of amount redeemed, if applicable).................................... None
Exchange Fee.......................................................................................... None
ANNUAL TRUST SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (1)..................................................................... 0.50%
12b-1 Fee............................................................................................. None
Other Expenses........................................................................................ 0.29%
Total Trust Shares Operating Expenses....................................................... 0.79%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.80%.
The Annual Trust Shares Operating Expenses were 0.84% for the fiscal year
ended November 30, 1993. The Annual Trust Shares Operating Expenses in the table
above are based on estimated expenses expected during the fiscal year ending
November 30, 1994. The Total Trust Shares Operating Expenses are anticipated to
be 1.09% absent the voluntary waiver of a portion of the management fee.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF TRUST SHARES OF THE FUND WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "FIRST PRIORITY FUNDS INFORMATION" AND
"INVESTING IN TRUST SHARES."
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time
period. The Fund charges no redemption fees for Trust Shares.......... $8 $25 $44 $98
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the foregoing table and Example relates only
to Trust Shares of the Fund. The Fund also offers another class of shares called
Investment Shares. Investment Shares are subject to certain of the same expenses
with the addition of a maximum sales load of 2.00% and a 12b-1 fee of 0.30 of
1%. See "Other Classes of Shares."
FIRST PRIORITY EQUITY FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 27.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1993 1992*
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.66 $ 9.86
- ------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------
Net investment income 0.18 0.14
- ------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.03) 0.77
- ------------------------------------------------------------------------------------ --------- ---------
Total from investment operations 0.15 0.91
- ------------------------------------------------------------------------------------ --------- ---------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.18) (0.11)
- ------------------------------------------------------------------------------------
Dividends to shareholders from net realized gain on
investment transactions (0.12) --
- ------------------------------------------------------------------------------------ --------- ---------
Total distributions (0.30) (0.11)
- ------------------------------------------------------------------------------------ --------- ---------
NET ASSET VALUE, END OF PERIOD $ 10.51 $ 10.66
- ------------------------------------------------------------------------------------ --------- ---------
TOTAL RETURN** 1.43% 9.28%
- ------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------
Expenses 0.84% 0.76%(a)
- ------------------------------------------------------------------------------------
Net investment income 1.85% 2.28%(a)
- ------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.30% 0.35%
- ------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------
Net assets, end of period (000 omitted)
$154,185
$102,822
- ------------------------------------------------------------------------------------
Portfolio turnover rate*** 74% 30%
- ------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from April 20, 1992 (date of initial
public investment) to
November 30, 1992.
** Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
*** Represents portfolio turnover for the entire Fund.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
Further information about the Fund's performance is contained in the Fund's
annual report dated November 30, 1993, which can be obtained free of charge.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
First Priority Funds was established as a Massachusetts business trust under a
Declaration of Trust dated October 15, 1991.
The Declaration of Trust permits First Priority Funds to offer separate series
of shares of beneficial interest representing interests in separate portfolios
of securities. The shares of beneficial interest in any one portfolio may be
offered in separate classes. As of the date of this prospectus, the Board of
Trustees (the "Trustees") have established two classes of shares, Trust Shares
and Investment Shares. This prospectus relates only to Trust Shares of First
Priority Equity Fund.
The Fund is designed as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio of common stock of companies with
market capitalization of at least $250 million. A minimum initial investment of
$25,000 is required.
Except as otherwise noted in this prospectus, Shares are sold and redeemed at
net asset value.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide growth of capital and income.
This investment objective cannot be changed without approval of shareholders.
While there is no assurance that the Fund will achieve its investment objective,
it endeavors to do so by following the investment policies described in this
prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing principally in a
professionally-managed and diversified portfolio of common stock of companies
with market capitalization of at least $250 million. Under normal market
conditions, the Fund intends to invest at least 65% of its assets in equity
securities. As a general matter, the Fund expects these investments to generate
income. Unless indicated otherwise, the investment policies may be changed by
the Trustees without approval of shareholders. Shareholders will be notified
before any material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund's investment approach is based on the
conviction that over the long term the economy will continue to expand and
develop and that this economic growth will be reflected in the growth of the
revenues and earnings of major corporations.
COMMON STOCKS. The Fund invests primarily in common stocks of companies
selected by the Fund's investment adviser on the basis of traditional
research techniques and technical factors, including assessment of earnings
and dividend growth prospects and of the risk and volatility of the
company's industry. Other factors, such as product position or market
share, will also be considered by the Fund's investment adviser.
OTHER CORPORATE SECURITIES. The Fund may invest in preferred stocks,
convertible securities, notes rated A or better by Moody's Investors
Service, Inc., Standard & Poor's Corporation, or Fitch Investors Service,
Inc., and warrants of these companies.
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. government
securities.
TEMPORARY INVESTMENTS. In such proportions as, in the judgement of its
investment adviser, prevailing market conditions warrant, the Fund may, for
temporary defensive purposes, invest in:
short-term money market instruments;
securities issued and/or guaranteed as to payment of principal and
interest by the U.S. government, its agencies, or instrumentalities; and
repurchase agreements.
REPURCHASE AGREEMENTS. The U.S. government securities in which the Fund
invests may be purchased pursuant to repurchase agreements. Repurchase
agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities (limited
to those with remaining maturities of five years or less) to the Fund and
agree at the time of sale to repurchase them at a mutually agreed upon time
and price. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase
price on any sale of such securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. In when-issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Fund to miss a price
or yield considered to be advantageous.
PUT AND CALL OPTIONS. The Fund may purchase put options on its portfolio
securities. These options will be used as a hedge to attempt to protect
securities which the Fund holds against decreases in value. The Fund may also
write covered call options on all or any portion of its portfolio to generate
income for the Fund. The Fund will write call options on securities either held
in its portfolio or which it has the right to obtain without payment of further
consideration, or for which it has segregated cash or U.S. government securities
in the amount of any additional consideration.
The Fund may purchase and write over-the-counter options on portfolio securities
in negotiated transactions with the buyers or writers of the options when
options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Fund's adviser.
Over-the-counter options are two party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not. The Fund will not buy call
options or write put options without further notification to shareholders.
FINANCIAL FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell
financial futures contracts to hedge all or a portion of its portfolio against
changes in stock prices. The Fund will not
engage in futures transactions for speculative purposes. Financial futures
contracts call for the delivery of particular debt instruments at a certain time
in the future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.
Stock index futures contracts are based on indexes that reflect the market value
of common stock of the firms included in the indexes. An index futures contract
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the differences between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period, if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options, if
immediately thereafter, the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and, thereby, insure
that the use of such futures contract is unleveraged.
RISKS. When the Fund uses financial futures and options on financial
futures as hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly
with the prices of the securities in the Fund's portfolio. This may cause
the futures contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Fund's investment
adviser could be incorrect in its expectations about the direction or
extent of market factors such as stock price movements. In these events,
the Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the investment
adviser will consider liquidity before entering into options transactions,
there is no assurance that a liquid secondary market on an exchange or
otherwise will exist for any particular futures contract or option at any
particular time. The Fund's ability to establish and close out futures and
options positions depends on this secondary market.
The Fund may also hold cash in such proportions as the Fund's adviser may
determine necessary.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general. The Fund will invest
in other investment companies primarily for the purpose of investing short-term
cash which has not yet
been invested in other portfolio instruments. The adviser will waive its
investment advisory fee on assets invested in securities of open-end investment
companies.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or a long term basis up to
one-third of the value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions that the
investment adviser has determined are creditworthy under guidelines established
by the Trustees and will receive collateral in the form of cash or U.S.
government securities equal to at least 100% of the value of the securities
loaned.
SECURITIES OF FOREIGN ISSUERS. The Fund may invest in the securities of foreign
issuers which are freely traded on United States securities exchanges or in the
over-the-counter market in the form of depository receipts. Securities of a
foreign issuer may present greater risks in the form of nationalization,
confiscation, domestic marketability, or other national or international
restrictions. As a matter of practice, the Fund will not invest in the
securities of a foreign issuer if any such risk appears to the investment
adviser to be substantial.
PORTFOLIO TURNOVER. Although the Fund does not intend to invest for the purpose
of seeking short-term profits, securities in its portfolio will be sold whenever
the Fund's investment adviser believes it is appropriate to do so in light of
the Fund's investment objective, without regard to the length of time a
particular security may have been held. It is not anticipated that the portfolio
trading engaged in by the Fund will result in its annual rate of portfolio
turnover exceeding 100%.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money or pledge securities except, under certain circumstances,
the Fund may borrow up to one-third of the value of its total assets and
pledge up to 10% of the value of those assets to secure such borrowings;
with respect to 75% of the value of its total assets, invest more than 5%
in securities of any one issuer other than cash, cash items, or
securities issued or guaranteed by the government of the United States or
its agencies or instrumentalities, and repurchase agreements
collateralized by such securities; or
acquire more than 10% of the voting securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
The Fund will not:
invest more than 5% of its total assets in securities of issuers that
have records of less than three years of continuous operations including
the operation of any predecessor;
invest more than 10% of its total assets in securities subject to
restrictions on resale under the Securities Act of 1933 (except for
commercial paper issued under Section 4(2) of the Securities Act of 1933
and certain other restricted securities which meet the criteria for
liquidity as established by the Board of Trustees); or
invest more than 15% of the value of its net assets in illiquid
securities, including repurchase agreements providing for settlement more
than seven days after notice, over-the-counter options, and certain
securities determined by the Trustees not to be liquid.
FIRST PRIORITY FUNDS INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF FIRST PRIORITY FUNDS
BOARD OF TRUSTEES. The Trustees are responsible for managing the business
affairs of the Trust and for exercising all of the powers of the Trust except
those reserved for the shareholders. The Executive Committee of the Board of
Trustees handles the Trustees' responsibilities between meetings of the
Trustees.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by First Alabama Bank ("First
Alabama" or "the Adviser"), subject to direction by the Trustees. The Adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the assets of the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to 0.80% of the Fund's average daily net assets. The fee paid by the
Fund, while higher than the advisory fee paid by other mutual funds in
general, is comparable to fees paid by many mutual funds with similar
objectives and policies. The Adviser has undertaken to reimburse the Fund
up to the amount of the advisory fee, for operating expenses in excess of
limitations established by certain states. The Adviser may voluntarily
choose to waive a portion of its fee or reimburse other expenses of the
Fund. The Adviser can terminate such waiver or reimbursement policy at any
time at its sole discretion.
ADVISER'S BACKGROUND. The Adviser is a wholly-owned subsidiary of First
Alabama Bancshares, Inc., a bank holding company organized during 1971
under the laws of the State of Delaware. (A proposal is currently pending
to change the name of the holding company to "Regions Financial
Corporation.") Operating out of more than 200 offices, it provides a wide
range of banking and fiduciary services to its customers. As of June 30,
1993, First Alabama Bancshares was one of the 100 largest bank holding
companies in the United States with total assets in excess of $8 billion.
First Alabama Bank is recognized as one of the strongest banks in America
by U.S. Banker magazine, Keefe, Bruyette & Woods, and Thomson Bankwatch.
During 1992, these organizations rated First Alabama as one of the top
quality banks in the United States. First Alabama's common stock is
currently included among those in the Dow Jones Equity Market Index, as
well as Standard & Poor's Midcap Index.
Charles A. Murray, CFA, Vice President and Trust Investment Officer, is
responsible for the equity funds portfolio management of the Trust
Investment Group, and contributes to the formation of equity and fixed
income strategies for First Alabama Bank. Mr. Murray serves as an active
member of the Trust Investment Group in the capacity of a portfolio manager
and analyst, and has been responsible for the management of the First
Priority Equity Fund since its inception. He has 18 years of investment
analysis and portfolio management experience; 21 years with First
Alabama Bank. Mr. Murray received his B.S. in Marketing from the University
of Alabama in 1970 and graduated from Southern Trust School in 1982. He
went on to become a Chartered Financial Analyst in 1993.
John. E. Steiner, Vice President and Trust Investment Officer, serves as
Director of Research for the Trust Investment Division, and is also First
Alabama's primary analyst for the beverage and office equipment industries.
He has contributed to the formulation of the First Priority Equity Fund's
strategy since its inception. Mr. Steiner received his B.S. in Industrial
Management from Auburn University in 1981.
As fiduciary, First Alabama managed over $2.3 billion in discretionary
assets as of December 31, 1992. It manages eight common trust funds and
collective investment funds having a market value in excess of $200
million, as of September 30, 1993. First Alabama has been Adviser to the
First Priority Funds since inception. As of September 30, 1993, the market
value of the First Priority Funds was in excess of $400 million.
DISTRIBUTION OF TRUST SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
<C> <S>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may voluntarily reimburse a portion
of its fee.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTING SERVICES.
Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of Federated
Investors, is transfer agent for the Shares of the Fund and dividend disbursing
agent for the Fund. It also provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania and Dickstein, Shapiro and Morin, Washington D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche, Pittsburgh, Pennsylvania.
EXPENSES OF THE FUND AND TRUST SHARES
Holders of Shares pay their allocable portion of Fund and Trust expenses.
The Trust expenses for which holders of Shares pay their allocable portion
include, but are not limited to the following: the cost of organizing the Trust
and continuing its existence; registering the Trust with federal and state
securities authorities; Trustees' fees; auditors' fees; the cost of meetings of
Trustees; legal fees of the Trust; association membership dues; and such
non-recurring and extraordinary items as may arise.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to the following: registering the Fund and Shares
of the Fund; investment advisory services; taxes and commissions; custodian
fees; insurance premiums; auditors' fees; and such non-recurring and
extraordinary items as may arise.
In addition, the Trustees reserve the right to allocate certain other expenses
to holders of Shares as it deems appropriate ("Class Expenses"). In any case,
Class Expenses would be limited to the following: transfer agent fees as
identified by the transfer agent as attributable to holder of Shares; printing
and postage expenses related to preparing and distributing materials such as
shareholder reports, prospectuses and proxies to current shareholders;
registration fees paid to the Securities and Exchange Commission and
registration fees paid to state securities commissions; expenses related to
administrative personnel and services as required to support holders of Shares;
legal fees relating solely to Shares; and Trustees' fees incurred as a result of
issues relating solely to Shares.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling shares of the Fund. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Fund, subtracting the interest of the Shares
in the liabilities of the Fund and those attributable to Shares, and dividing
the remainder by the total number of Shares outstanding. The net asset value for
Shares will exceed those of Investment Shares due to the variance in daily net
income realized by each class. Such variance will reflect only accrued net
income to which the shareholders of a particular class are entitled.
INVESTING IN TRUST SHARES
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares of the Fund by an investor is $25,000.
Subsequent investments may be made in any amounts.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund.
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; or (iii) the following
holidays: New Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange and the Federal
Reserve Wire System are open for business. A customer may purchase Shares of the
Fund through the Trust Department of First Alabama. Texas residents should
purchase Shares through Federated Securities Corp. at 1-800-356-2805. In
connection with the sale of Shares, the distributor may, from time to time,
offer certain items of nominal value to any shareholder or investor. The Fund
reserves the right to reject to any purchase request.
THROUGH FIRST ALABAMA BANK. To place an order to purchase Shares, a customer
may contact their local Trust Administrator or telephone First Alabama.
Payment may be made by either check or federal funds or by debiting a customer's
account at First Alabama. Purchase orders must be received by 3:00 p.m. (Central
time) in order to be credited on the same day. Payment is normally required on
the next business day.
SHAREHOLDER ACCOUNTS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting the Fund.
DIVIDENDS AND CAPITAL GAINS
Dividends are declared and paid quarterly. Dividends are declared just prior to
determining net asset value. Capital gains realized by the Fund, if any, will be
distributed at least once every 12 months. Dividends and capital gains will be
reinvested in additional Shares on payment dates at the ex-dividend date net
asset value, without a sales charge, unless cash payments are requested by
shareholders by writing to the Fund or First Alabama as appropriate.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
A shareholder may exchange shares of one fund for the appropriate class of
shares of any other fund in the Trust by calling or by writing to First Alabama.
Shares purchased by check are eligible for exchange after 10 days. The exchange
feature applies to shares of each fund as of the effective offering date of each
fund's shares.
Orders to exchange shares of one fund for shares of any of the other First
Priority Funds will be executed by redeeming the shares owned at net asset value
and purchasing shares of any of the other First Priority Funds at the net asset
value determined after the proceeds from such redemption become available.
Orders for exchanges received by the fund prior to 3:00 p.m. (Central time) on
any day the funds are open for business will be executed as of the close of
business that day. Orders for exchanges received after 3:00 p.m. (Central time)
on any business day will be executed at the close of the next business day.
An excessive number of exchanges may be disadvantageous to the Trust. Therefore
the Trust, in addition to its right to reject any exchange, reserves the right
to terminate the exchange privilege of any shareholder who makes more than five
exchanges of shares of the funds in a year or three in a calendar quarter.
An exchange order must comply with the requirements for a redemption and
purchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements of
each fund being acquired. An exchange constitutes a sale for federal income tax
purposes.
The exchange privilege is only available in states where shares of the fund
being acquired may legally be sold. Before the exchange, a shareholder must
receive a prospectus of the fund for which the exchange is being made.
Telephone exchange instructions may be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
REDEEMING TRUST SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at its net asset value next determined after a Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes the net asset value of Shares. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on federal
holidays when wire transfers are restricted. Requests for redemption can be made
in person or by telephone through First Alabama.
BY TELEPHONE
A shareholder who is a customer of First Alabama may redeem Shares of the Fund
by contacting their Trust Administrator. For calls received by First Alabama
before 3:00 p.m. (Central time), proceeds will normally be wired the next day to
the shareholder's account at First Alabama or a check will be sent to
the address of record. In no event will proceeds be wired more than seven days
after a proper request for redemption has been received.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from First Alabama.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming Shares by telephone. If such a case should occur,
another method of redemption, such as a written request to Federated Services
Company or First Alabama should be considered.
If at any time the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders shall be promptly notified.
Telephone redemption instructions may be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check, the proceeds from the redemption of those
Shares are not available, and the Shares may not be exchanged, until First
Alabama is reasonably certain that the purchase check has cleared, which could
take up to ten calendar days.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $25,000. This
requirement does not apply, however, if the balance falls below $25,000 because
of changes in the Fund's net asset value. Before Shares are redeemed to close an
account, the shareholder is notified in writing and allowed 30 days to purchase
additional Shares to meet the minimum requirement.
REDEMPTION IN KIND
The Trust is obligated to redeem Shares solely in cash up to $250,000, or 1% of
any class's net asset value, whichever is less, for any one shareholder within a
90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Trust will pay
all or a portion of the remainder of the redemption in portfolio instruments,
valued in the same way as net asset value is determined. The portfolio
instruments will be selected in a manner that the Trustees deem fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur transaction costs.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of all classes of
each portfolio in the Trust have equal voting rights, except that in matters
affecting only a particular Fund or class, only shareholders of that Fund or
class are entitled to vote. As a Massachusetts business trust, the Trust is not
required to hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in the Trust's or the Fund's operation and for
the election of Trustees under certain circumstances. As of January 19, 1993,
First Alabama Bank may be deemed to control the Fund because it is the owner of
record of certain shares of the Fund. As of January 6, 1994, First Alabama Bank
of Birmingham, Birmingham, AL, acting in various capacities for numerous
accounts, was the owner of record of 14,884,979 Shares (99.31%) of the Fund, and
therefore, may for certain purposes, be deemed to control the Fund and be able
to affect the outcome of certain matters presented for vote of shareholders.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust itself cannot meet its obligations to indemnify shareholders
and pay judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling, or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of their customer. First Alabama is subject to such
banking laws and regulations.
First Alabama believes, based on the advice of its counsel, that First Alabama
may perform the services for the Fund contemplated by its advisory agreement
with the Trust without violation of the Glass-
Steagall Act or other applicable banking laws or regulations. Changes in either
federal or state statutes and regulations relating to the permissible activities
of banks and their subsidiaries or affiliates, as well as further judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent the Adviser from continuing to perform all or a part
of the above services for its customers and/or the Fund. If it were prohibited
from engaging in these customer-related activities, the Trustees would consider
alternative advisers and means of continuing available investment services. In
such event, changes in the operation of the Fund may occur, including possible
termination of any automatic or other Fund share investment and redemption
services that are being provided by First Alabama. It is not expected that
existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities to First Alabama is found) as a result
of any of these occurrences.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional Shares.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its total return and yield for Shares.
Advertisements and other sales literature may also refer to total return. Total
return represents the change, over a specified period of time, in the value of
an investment in Shares of the Fund after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Shares of the Fund is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by Shares over a thirty-day period by the offering price per Share on the last
day of the period. This number is then annualized using semi-
annual compounding. The yield does not necessarily reflect income actually
earned by Shares and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
Shares are sold without any sales load or other similar non-recurring charges.
Total return and yield will be calculated separately for Trust Shares and
Investment Shares. Because Investment Shares are subject to a sales load and a
12b-1 fee, the total return and yield for Trust Shares, for the same period,
will exceed that of Investment Shares.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Investment Shares of First Priority Equity Fund are sold to customers of First
Alabama and others at net asset value plus a maximum sales charge of 2.0% with a
minimum initial investment of $1,000. Investment Shares are distributed pursuant
to a Rule 12b-1 Plan adopted by the Trust, whereby the distributor is paid a fee
of .30 of 1%.
The amount of dividends payable to Investment Shares will be less than those
payable to Trust Shares by the difference between Class Expenses and
distribution expenses borne by shares of each respective class.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation with respect to one class of shares
than with respect to another class of shares of the same Fund.
The stated advisory fee is the same for both classes of the Fund.
FIRST PRIORITY EQUITY FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 27.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1993 1992*
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.66 $ 9.86
- -----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------
Net investment income 0.16 0.10
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.04) 0.79
- ----------------------------------------------------------------------------------------- --------- ---------
Total from investment operations 0.12 0.89
- ----------------------------------------------------------------------------------------- --------- ---------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.15) (0.09)
- -----------------------------------------------------------------------------------------
Dividends to shareholders from net realized gain on
investment transactions (0.12) --
- ----------------------------------------------------------------------------------------- --------- ---------
Total distributions (0.27) (0.09)
- ----------------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 10.51 $ 10.66
- ----------------------------------------------------------------------------------------- --------- ---------
TOTAL RETURN** 1.13% 9.14%
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 1.14% 1.07%(a)
- -----------------------------------------------------------------------------------------
Net investment income 1.59% 1.85%(a)
- -----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.30% 0.35%
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 7,004 $ 3,132
- -----------------------------------------------------------------------------------------
Portfolio turnover rate*** 74% 30%
- -----------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from April 20, 1992 (date of initial
public investment) to November 30, 1992.
** Based on net asset value which does not reflect the sales load or
redemption, fee if applicable.
*** Represents portfolio turnover for the entire Fund.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above
(Note 5).
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY EQUITY FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- -------------- -------------------------------------------------------------------------------- ---------------
COMMON STOCKS--74.6%
- ------------------------------------------------------------------------------------------------
BASIC INDUSTRY--2.9%
--------------------------------------------------------------------------------
120,000 Kenametal, Inc. $ 4,695,000
-------------------------------------------------------------------------------- ---------------
BEVERAGES--2.4%
--------------------------------------------------------------------------------
80,000 Anheuser Busch Company, Inc. 3,960,000
-------------------------------------------------------------------------------- ---------------
BROADCASTING/ENTERTAINMENT/PUBLISHING--7.2%
--------------------------------------------------------------------------------
8,000 Capital Cities ABC 5,060,000
--------------------------------------------------------------------------------
40,000 McGraw Hill, Inc. 2,790,000
--------------------------------------------------------------------------------
120,000 Times Mirror Corp. 3,750,000
-------------------------------------------------------------------------------- ---------------
Total 11,600,000
-------------------------------------------------------------------------------- ---------------
CAPITAL GOODS--7.5%
--------------------------------------------------------------------------------
160,000 Boeing Co. 6,180,000
--------------------------------------------------------------------------------
60,000 General Electric Co. 5,895,000
-------------------------------------------------------------------------------- ---------------
Total 12,075,000
-------------------------------------------------------------------------------- ---------------
CREDIT-CYCLICAL--1.7%
--------------------------------------------------------------------------------
80,000 Masco Corp. 2,720,000
-------------------------------------------------------------------------------- ---------------
ELECTRONICS--3.8%
--------------------------------------------------------------------------------
100,000 Raytheon Co. 6,125,000
-------------------------------------------------------------------------------- ---------------
ENERGY--1.8%
--------------------------------------------------------------------------------
50,000 Schlumberger, Ltd. 2,875,000
-------------------------------------------------------------------------------- ---------------
FINANCE--3.1%
--------------------------------------------------------------------------------
160,000 American Express 5,020,000
-------------------------------------------------------------------------------- ---------------
HEALTHCARE--3.3%
--------------------------------------------------------------------------------
100,000 American Cyanamid 5,250,000
-------------------------------------------------------------------------------- ---------------
HOSPITAL SUPPLIES--1.4%
--------------------------------------------------------------------------------
50,000 Johnson & Johnson 2,181,250
-------------------------------------------------------------------------------- ---------------
</TABLE>
FIRST PRIORITY EQUITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- -------------- -------------------------------------------------------------------------------- ---------------
COMMON STOCKS--CONTINUED
- ------------------------------------------------------------------------------------------------
INSURANCE--2.5%
--------------------------------------------------------------------------------
160,000 Liberty Corp. $ 3,960,000
-------------------------------------------------------------------------------- ---------------
MACHINERY--2.1%
--------------------------------------------------------------------------------
140,000 Giddings & Lewis 3,395,000
-------------------------------------------------------------------------------- ---------------
OIL--3.3%
--------------------------------------------------------------------------------
100,000 Amoco Corp. 5,337,500
-------------------------------------------------------------------------------- ---------------
PHARMACEUTICAL--9.6%
--------------------------------------------------------------------------------
60,000 Bristol Myers Squibb Co. 3,592,500
--------------------------------------------------------------------------------
20,000 Eli Lilly & Co. 1,147,500
--------------------------------------------------------------------------------
160,000 Merck & Co., Inc. 5,480,000
--------------------------------------------------------------------------------
80,000 Pfizer Corp. 5,320,000
-------------------------------------------------------------------------------- ---------------
Total 15,540,000
-------------------------------------------------------------------------------- ---------------
RESTAURANTS--4.0%
--------------------------------------------------------------------------------
140,000 Luby's Cafeteria 3,062,500
--------------------------------------------------------------------------------
200,000 International Dairy Queen 3,350,000
-------------------------------------------------------------------------------- ---------------
Total 6,412,500
-------------------------------------------------------------------------------- ---------------
RETAIL--11.5%
--------------------------------------------------------------------------------
140,000 K Mart 3,290,000
--------------------------------------------------------------------------------
120,000 J.C. Penney, Inc. 6,405,000
--------------------------------------------------------------------------------
80,000 The Limited, Inc. 1,820,000
--------------------------------------------------------------------------------
80,000 Melville Corp. 3,280,000
--------------------------------------------------------------------------------
205,000 Stride Rite Corp. 3,792,500
-------------------------------------------------------------------------------- ---------------
Total 18,587,500
-------------------------------------------------------------------------------- ---------------
</TABLE>
FIRST PRIORITY EQUITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
<C> <S> <C>
- -------------- -------------------------------------------------------------------------------- ---------------
COMMON STOCKS--CONTINUED
- ------------------------------------------------------------------------------------------------
TEXTILE/APPAREL--4.8%
--------------------------------------------------------------------------------
100,000 Gap, Inc. $ 4,000,000
--------------------------------------------------------------------------------
160,000 Liz Claiborne 3,780,000
-------------------------------------------------------------------------------- ---------------
Total 7,780,000
-------------------------------------------------------------------------------- ---------------
TOBACCO--1.7%
--------------------------------------------------------------------------------
100,000 UST, Inc. 2,687,500
-------------------------------------------------------------------------------- ---------------
TOTAL COMMON STOCKS (IDENTIFIED COST $117,461,347) 120,201,250
-------------------------------------------------------------------------------- ---------------
PREFERRED STOCKS--5.4%
- ------------------------------------------------------------------------------------------------
GOLD MANUFACTURING--2.2%
--------------------------------------------------------------------------------
60,000 Battle Mountain Gold 3,570,000
--------------------------------------------------------------------------------
TRANSPORTATION--3.2%
--------------------------------------------------------------------------------
50,000 Ford Motor Co. 5,125,000
-------------------------------------------------------------------------------- ---------------
TOTAL PREFERRED STOCKS (IDENTIFIED COST $7,057,973) 8,695,000
-------------------------------------------------------------------------------- ---------------
MUTUAL FUND ISSUES--0.2%
- ------------------------------------------------------------------------------------------------
14,549 Fidelity U.S. Treasury Income Portfolio 14,549
--------------------------------------------------------------------------------
261,197 Goldman Sachs I.L.A. Treasury Portfolio 261,197
-------------------------------------------------------------------------------- ---------------
TOTAL MUTUAL FUND ISSUES (AT NET ASSET VALUE) 275,746
-------------------------------------------------------------------------------- ---------------
*REPURCHASE AGREEMENT--19.2%
- ------------------------------------------------------------------------------------------------
30,990,000 Paine Webber Co., 3.20%, dated 11/30/93, due 12/1/93
(at amortized cost) (Note 2B) 30,990,000
-------------------------------------------------------------------------------- ---------------
TOTAL INVESTMENTS (IDENTIFIED COST $155,785,066) $ 160,161,996\
-------------------------------------------------------------------------------- ---------------
</TABLE>
* Repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at November 30, 1993.
\ The cost of investments for federal income tax purposes amounts to
$155,785,066. The net unrealized appreciation of investments on a federal
income tax basis amounts to $4,376,930, which is comprised of $10,787,424
appreciation and $6,410,494 depreciation at November 30, 1993.
Note: The categories of investments are shown as a percentage of net assets
($161,189,450) at November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------------------------
Investments in securities $ 129,171,996
- ----------------------------------------------------------------------------------
Investment in repurchase agreement (Note 2B) 30,990,000
- ---------------------------------------------------------------------------------- --------------
Total investments, at value (Note 2A) (identified and tax cost $155,785,066) $ 160,161,996
- --------------------------------------------------------------------------------------------------
Cash 631
- --------------------------------------------------------------------------------------------------
Receivable for investments sold 599,280
- --------------------------------------------------------------------------------------------------
Dividends and interest receivable 480,940
- --------------------------------------------------------------------------------------------------
Receivable for fund shares sold 62,574
- --------------------------------------------------------------------------------------------------
Prepaid/Deferred expenses (Note 2G) 22,779
- -------------------------------------------------------------------------------------------------- --------------
Total assets 161,328,200
- --------------------------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------------------------
Payable for fund shares redeemed 35,137
- ----------------------------------------------------------------------------------
Accrued expenses 103,613
- ---------------------------------------------------------------------------------- --------------
Total liabilities 138,750
- -------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 15,330,375 shares of beneficial interest outstanding $ 161,189,450
- -------------------------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------------------------
Paid-in capital $ 155,282,468
- --------------------------------------------------------------------------------------------------
Unrealized appreciation of investments 4,376,930
- --------------------------------------------------------------------------------------------------
Accumulated undistributed net realized gain on investments 1,035,511
- --------------------------------------------------------------------------------------------------
Undistributed net investment income 494,541
- -------------------------------------------------------------------------------------------------- --------------
Total $ 161,189,450
- -------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE, and Redemption Price Per Share:
Trust Shares (net assets of $154,185,169 / 14,664,133 SHARES OF BENEFICIAL INTEREST OUTSTANDING)
$10.51
- -------------------------------------------------------------------------------------------------- --------------
INVESTMENT SHARES (NET ASSETS OF $7,004,281 / 666,242 SHARES OF BENEFICIAL INTEREST OUTSTANDING)
$10.51
- -------------------------------------------------------------------------------------------------- --------------
OFFERING PRICE PER SHARE:
- --------------------------------------------------------------------------------------------------
Trust Shares $10.51
- -------------------------------------------------------------------------------------------------- --------------
Investment Shares (100/97 of $10.51)* $10.84
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
*On sales of $100,000 or more, the offering price is reduced as stated under
"What Shares Cost" in the prospectus. The offering price presented reflects a
maximum sales charge of 3.00%. As of January 31, 1994, the maximum sales charge
was reduced to 2.00%, as a percentage of offering price.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY EQUITY FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------
Dividend income $ 3,031,722
- ---------------------------------------------------------------------------------------------------
Interest income 664,740
- --------------------------------------------------------------------------------------------------- ------------
Total investment income (Note 2C) 3,696,462
- ---------------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 1,097,771
- -------------------------------------------------------------------------------------
Administrative personnel and services (Note 5) 193,025
- -------------------------------------------------------------------------------------
Trustees' fees 3,373
- -------------------------------------------------------------------------------------
Custodian fees 49,438
- -------------------------------------------------------------------------------------
Auditing fees 15,469
- -------------------------------------------------------------------------------------
Recordkeeper and transfer agent fees (Note 5) 91,814
- -------------------------------------------------------------------------------------
Legal fees 4,535
- -------------------------------------------------------------------------------------
Printing and postage 21,067
- -------------------------------------------------------------------------------------
Insurance premiums 8,525
- -------------------------------------------------------------------------------------
Distribution services fees (Note 5) 16,875
- -------------------------------------------------------------------------------------
Registration fees 72,386
- -------------------------------------------------------------------------------------
Miscellaneous 7,269
- ------------------------------------------------------------------------------------- ------------
Total expenses 1,581,547
- -------------------------------------------------------------------------------------
Deduct--
- -------------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 5) 411,664
- ------------------------------------------------------------------------------------- ------------
Net expenses 1,169,883
- --------------------------------------------------------------------------------------------------- ------------
Net investment income 2,526,579
- --------------------------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------------
Net realized gain on investments (identified cost basis) 1,036,882
- ---------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (896,428)
- --------------------------------------------------------------------------------------------------- ------------
Net realized and unrealized gain on investments 140,454
- --------------------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ 2,667,033
- --------------------------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1993 1992*
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------------------------------------
OPERATIONS--
- ----------------------------------------------------------------------------------
Net investment income $ 2,526,579 $ 1,242,743
- ----------------------------------------------------------------------------------
Net realized gain on investment transactions ($1,036,882 net gain and $1,206,705
net gain, respectively, as computed for federal income tax purposes) 1,036,882 1,206,705
- ----------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (896,428) 5,273,358
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from operations 2,667,033 7,722,806
- ---------------------------------------------------------------------------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- ----------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- ----------------------------------------------------------------------------------
Trust Shares (2,250,065) (927,809)
- ----------------------------------------------------------------------------------
Investment Shares (79,302) (17,605)
- ----------------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment transactions:
- ----------------------------------------------------------------------------------
Trust Shares (1,172,020) --
- ----------------------------------------------------------------------------------
Investment Shares (36,056) --
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets from distributions to shareholders (3,537,443) (945,414)
- ---------------------------------------------------------------------------------- -------------- --------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- ----------------------------------------------------------------------------------
Proceeds from sales of shares 62,546,377 100,998,998
- ----------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 112,462 17,013
- ----------------------------------------------------------------------------------
Cost of shares redeemed (6,552,484) (1,839,898)
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets from Fund share transactions 56,106,355 99,176,113
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets 55,235,945 105,953,505
- ----------------------------------------------------------------------------------
NET ASSETS:
- ----------------------------------------------------------------------------------
Beginning of period 105,953,505 --
- ---------------------------------------------------------------------------------- -------------- --------------
End of period (including undistributed net investment income
of $494,541 and $297,329, respectively) $ 161,189,450 $ 105,953,505
- ---------------------------------------------------------------------------------- -------------- --------------
</TABLE>
* Reflects operations for the period from April 20, 1992 (date of initial public
investment) to November 30, 1992.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
First Priority Funds (the "Trust") is an open-end, management investment
company, established as a Massachusetts business trust under the Declaration of
Trust dated October 15, 1991. The Trust currently consists of three portfolios.
The financial statements included herein present only those of First Priority
Equity Fund (the "Fund"), one of the diversified portfolios of the Trust. The
financial statements of the other portfolios in the Trust are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held. The Declaration
of Trust permits the Trust to offer separate series of shares of beneficial
interest representing interests in the separate portfolios of securities. The
Trustees have established two classes of shares, Trust Shares and Investment
Shares, in each portfolio of the Trust. Effective December 7, 1993, the Trust
added a fourth portfolio; First Priority Limited Maturity Government Fund, which
offers only one class of shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Listed equity securities are valued at last sale
prices reported on national securities exchanges. Unlisted securities, or
listed securities in which there were no sales, and private placement
securities are valued at the mean between bid and asked prices. Bonds and
other fixed income securities are valued at the last sale price on a
national securities exchange, if available. Otherwise, they are valued on
the basis of prices furnished by independent pricing services. Short-term
obligations are ordinarily valued at the mean between bid and asked prices
as furnished by an independent pricing service. Investments in other
regulated investment companies are valued at net asset value. All other
securities are appraised at fair value as determined in good faith by the
Trustees.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System or to have segregated within the
custodian bank's vault, all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of
each repurchase agreement's underlying securities to ensure the existence
of a proper level of collateral.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Trust's adviser to be creditworthy pursuant to guidelines
established by the Trustees. Risks may arise from the potential inability
of
counterparties to honor the terms of a repurchase agreement. Accordingly,
the Fund could receive less than the repurchase price on the sale of
collateral securities.
C. INCOME--Dividend income is recorded on the ex-dividend date. Interest
income is recorded on the accrual basis. Interest income includes interest
and discount earned (net of premium) on short-term obligations, and
interest earned on all other debt securities including original issue
discount as required by the Internal Revenue Code, as amended. Dividends to
shareholders and capital gain distributions, if any, are recorded on the
ex-dividend date.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Internal Revenue Code, as amended, applicable to regulated investment
companies and to distribute to shareholders each year substantially all of
their net income, including any net realized gain on investments.
Accordingly, no provision for federal tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. To the extent the Fund
engages in such transactions, it will do so for the purpose of acquiring
portfolio securities consistent with its investment objective and policies
and not for the purpose of investment leverage. The Fund will record a
when-issued security and the related liability on the trade date. Until the
securities are received and paid for, the Fund will maintain security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
F. EXPENSES--Expenses of the Fund, other than distribution services fees, and
related waivers and reimbursements, if any, are allocated to each class of
shares based on its relative average net assets for the period.
G. DEFERRED EXPENSES--Costs incurred by the Trust with respect to registration
of its shares in its first fiscal year, excluding the inital expense of
registering the shares, have been deferred and are being amortized using
the straight line method through February 28, 1997.
H. OTHER--Investment transactions are accounted for on the date of the
transaction.
(3) DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid quarterly to all shareholders invested in the
Fund on the record date. Dividends are paid from the net investment income of
the Fund. Net investment income consists of all dividends or interest received
by the Fund less its expenses. Capital gains realized by the Fund, if any, are
distributed at least once every twelve months.
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1993 1992*
SHARES DOLLARS SHARES DOLLARS
------------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
TRUST SHARES
- ------------------------------------------------
Shares outstanding, beginning of period 9,649,763 $ 96,252,589 -- $ --
- ------------------------------------------------
Shares sold 5,550,553 57,774,890 9,813,417 97,875,905
- ------------------------------------------------
Shares redeemed (536,183) (5,555,250) (163,654) (1,623,316)
- ------------------------------------------------ ------------- --------------- ----------- --------------
Shares outstanding, end of period 14,664,133 $ 148,472,229 9,649,763 $ 96,252,589
- ------------------------------------------------ ------------- --------------- ----------- --------------
<CAPTION>
YEAR ENDED NOVEMBER 30,
1993 1992*
SHARES DOLLARS SHARES DOLLARS
------------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES
- ------------------------------------------------
Shares outstanding, beginning of period 293,912 $ 2,923,524 -- $ --
- ------------------------------------------------
Shares sold 458,429 4,771,487 313,730 3,123,093
- ------------------------------------------------
Shares issued to shareholders electing to
receive payment of dividends in Fund shares 10,837 112,462 1,724 17,013
- ------------------------------------------------
Shares redeemed (96,936) (997,234) (21,542) (216,582)
- ------------------------------------------------ ------------- --------------- ----------- --------------
Shares outstanding, end of period 666,242 $ 6,810,239 293,912 $ 2,923,524
- ------------------------------------------------ ------------- --------------- ----------- --------------
</TABLE>
* For the period from April 20, 1992 (date of initial public investment) to
November 30, 1992.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
First Alabama Bank, the Trust's investment adviser ("Adviser"), receives for its
services an annual investment advisory fee equal to .80 of 1% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive a portion
of its fee or reimburse certain operating expenses of the Fund. For the year
ended November 30, 1993, the investment advisory fee amounted to $1,097,771, of
which $411,664 was voluntarily waived, in accordance with such undertaking.
Federated Administrative Services ("FAS") provides administrative personnel and
services at an annual rate of .150 of 1% on the first $250 million of the
average aggregate daily net assets of the Trust; .125 of 1% on the next $250
million; .100 of 1% on the next $250 million; and .075 of 1% of the average
aggregate daily net assets of the Trust in excess of $750 million. For the year
ended November 30, 1993, FAS earned administrative fees of $193,025.
Expenses of organizing the Fund ($49,934) were borne initially by FAS. The Fund
has agreed to reimburse FAS for the organization expenses borne by FAS during
the five year period following the date the Trust's portfolio became effective.
Pursuant to this agreement, the Fund reimbursed $6,128 in organization expenses
during the year ended November 30, 1993.
Federated Services Company ("FSC") is the Fund's transfer agent and dividend
disbursing agent. It also provides certain accounting and recordkeeping services
with respect to the Fund's portfolio of investments. For the year ended November
30, 1993, FSC earned transfer and dividend disbursing agent fees and
recordkeeping fees of $91,814.
Effective December 1, 1993, First Alabama Bank became the custodian for the
securities and cash of the Trust.
The Trust has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Trust will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the assets of
Investment Shares of the Fund to finance activities principally intended to
result in the sale of Investment Shares subject to the Plan. The Plan provides
that the Fund will pay up to .30 of 1% of the average daily net assets of
Investment Shares, annually, to pay commissions, maintenance fees and to
compensate the distributor. For the year ended November 30, 1993, FSC earned
$16,875 in distribution services fees.
(6) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended November 30, 1993, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------
PURCHASES $ 115,473,744
- ------------------------------------------------------------------------------------------------- ---------------
SALES $ 86,037,274
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of FIRST PRIORITY FUNDS
and the Shareholders of FIRST PRIORITY EQUITY FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of First Priority Equity Fund (a portfolio of
First Priority Funds) as of November 30, 1993, the related statement of
operations for the year then ended, and the statement of changes in net assets
and financial highlights (see pages 2 and 16) for the years ended November 30,
1993 and 1992. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
November 30, 1993, 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 statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of First Priority
Equity Fund as of November 30, 1993, the results of its operations, the changes
in its net assets and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
Deloitte & Touche
Pittsburgh, Pennsylvania
January 17, 1994
ADDRESSES
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First Priority Equity Fund Federated Investors Tower
Trust Shares Pittsburgh, Pennsylvania 15222-3779
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Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Investment Adviser and Custodian
First Alabama Bank P.O. Box 10247
Birmingham, Alabama 35202
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Transfer Agent, Dividend Disbursing Agent
and Portfolio Accounting Services Federated Investors Tower
Federated Services Company Pittsburgh, Pennsylvania 15222-3779
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Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
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Legal Counsel
Dickstein, Shapiro & Morin 2101 L Street, N.W.
Washington, D.C. 20037
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Independent Auditors
Deloitte & Touche 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
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FIRST PRIORITY
EQUITY FUND
TRUST SHARES
PROSPECTUS
A Diversified Portfolio of
First Priority Funds, an Open-End,
Management Investment Company
Prospectus dated January 31, 1994
[LOGO] FEDERATED SECURITIES CORP.
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Distributor
A subsidiary of FEDERATED INVESTORS
2021107A-I (1/94)
FIRST PRIORITY EQUITY FUND
INVESTMENT SHARES
TRUST SHARES
(A PORTFOLIO OF FIRST PRIORITY FUNDS)
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus for Investment Shares or Trust Shares dated
January 31, 1994. This Statement is not a prospectus itself. To
receive a copy of either prospectus, write First Priority Equity Fund
or call toll-free 1-800-433-2829.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 31, 1994
[LOGO] FEDERATED SECURITIES CORP.
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Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
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GENERAL INFORMATION ABOUT THE FUND 1
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INVESTMENT OBJECTIVE 1
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Types of Investments 1
Other Permitted Investments 1
Temporary Investments 3
When-Issued and Delayed
Delivery Transactions 3
Restricted and Illiquid Securities 4
Repurchase Agreements 4
Lending of Portfolio Securities 4
Investment Limitations 4
FIRST PRIORITY FUNDS MANAGEMENT 7
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Officers and Trustees 7
The Funds 9
Fund Ownership 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 10
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Adviser to the Fund 10
Advisory Fees 10
ADMINISTRATIVE SERVICES 10
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CUSTODIAN 10
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BROKERAGE TRANSACTIONS 10
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PURCHASING SHARES 11
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Distribution Plan (Investment Shares) 11
Conversion to Federal Funds 11
DETERMINING NET ASSET VALUE 11
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Determining Market Value of Securities 11
REDEEMING SHARES 12
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Redemption in Kind 12
EXCHANGE PRIVILEGE 12
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Requirements for Exchanging Shares 12
TAX STATUS 12
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The Fund's Tax Status 12
Shareholders' Tax Status 12
TOTAL RETURN 13
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YIELD 13
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PERFORMANCE COMPARISONS 13
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GENERAL INFORMATION ABOUT THE FUND
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First Priority Equity Fund (the "Fund") is a portfolio in First Priority Funds
(the "Trust"), which was established as a Massachusetts business trust under a
Declaration of Trust dated October 15, 1991.
Shares of the Fund are offered in two classes, Investment Shares and Trust
Shares (individually and collectively referred to as "Shares"). This Combined
Statement of Additional Information relates to the above-mentioned Shares of the
Fund.
INVESTMENT OBJECTIVE
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The Fund's investment objective is to provide growth of capital and income. The
investment objective cannot be changed without approval of shareholders.
TYPES OF INVESTMENTS
The Fund invests principally in a professionally-managed and diversified
portfolio of common stock of companies with market capitalization of at least
$250 million. Although the Fund may invest in other securities of these
companies and in money market instruments, it is the Fund's policy under normal
market conditions to invest at least 65% of its portfolio in equity securities.
OTHER PERMITTED INVESTMENTS
CONVERTIBLE SECURITIES
Convertible securities are fixed income securities which may be exchanged
or converted into a predetermined number of the issuer's underlying
common stock at the option of the holder during a specified time period.
Convertible securities may take the form of convertible preferred stock,
convertible bonds or debentures, units consisting of "usable" bonds and
warrants, or a combination of the features of several of these
securities. The investment characteristics of each convertible security
vary widely, which allows convertible securities to be employed for
different investment objectives.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in
which, in the investment adviser's opinion, the investment
characteristics of the underlying common shares will assist the Fund in
achieving its investment objectives. Otherwise, the Fund may hold or
trade convertible securities. In selecting convertible securities for the
Fund, the Fund's adviser evaluates the investment characteristics of the
convertible security as a fixed income instrument, and the investment
potential of the underlying equity security for capital appreciation. In
evaluating these matters with respect to a particular convertible
security, the Fund's adviser considers numerous factors, including the
economic and political outlook, the value of the security relative to
other investment alternatives, trends in the determinants of the issuer's
profits, and the issuer's management capability and practices.
WARRANTS
Warrants are basically options to purchase common stock at a specific
price (usually at a premium above the market value of the optioned common
stock at issuance) valid for a specific period of time. Warrants may have
a life ranging from less than a year to twenty years or may be perpetual.
However, most warrants have expiration dates after which they are
worthless. In addition, if the market price of the common stock does not
exceed the warrant's exercise price during the life of the warrant, the
warrant will expire as worthless. Warrants have no voting rights, pay no
dividends, and have no rights with respect to the assets of the
corporation issuing them. The percentage increase or decrease in the
market price of the warrant may tend to be greater than the percentage
increase or decrease in the market price of the optioned common stock.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of
the Fund, the Fund may attempt to hedge all or a portion of its portfolio
by buying and selling financial futures contracts, buying put options on
portfolio securities and listed put options on futures contracts, and
writing call options on futures contracts. The Fund may also write
covered call options on portfolio securities to attempt to increase its
current income. The Fund will maintain its positions in securities,
option rights, and segregated cash subject to puts and calls until the
options are exercised, closed, or have expired. An option position on
financial futures contracts may be closed out only on an exchange which
provides a secondary market from options of the same series.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer who agrees to take delivery of
the security ("going long") at a certain time in the future.
Financial futures contracts call for the delivery of shares of common
stocks represented in a particular index.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in value during
the term of an option, the related futures contracts will also decrease
in value and the option will increase in value. In such an event, the
Fund will normally close out its option by selling an identical option.
If the hedge is successful, the proceeds received by the Fund upon the
sale of the second option will be large enough to offset both the premium
paid by the Fund for the original option plus the decrease in value of
the hedged securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures contract
of the type underlying the option (for a price less than the strike price
of the option) and exercise the option. The Fund would then deliver the
futures contract in return for payment of the strike price. If the Fund
neither closes out nor exercises an option, the option will expire on the
date provided in the option contract, and only the premium paid for the
contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts to hedge its portfolio. When the
Fund writes a call option on a futures contract, it is undertaking the
obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As stock prices fall, causing the
prices of futures to go down, the Fund's obligation under a call option
on a future (to sell a futures contract) costs less to fulfill, causing
the value of the Fund's call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the call,
so that the Fund keeps the premium received for the option. This premium
can substantially offset the drop in value of the Fund's fixed income or
indexed portfolio which is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be
less than the premium received by the Fund for the initial option. The
net premium income of the Fund will then substantially offset the
decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will take
prompt action to close out a sufficient number of open contracts to bring
its open futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that initial
margin in futures transactions does not involve the borrowing of funds by
the Fund to finance the transactions. Initial margin is in the nature of
a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming
all contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the
broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark to market its
open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during
the term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write covered call options to generate income. As
writer of a call option, the Fund has the obligation, upon exercise of
the option during the option period, to deliver the underlying security
upon payment of the exercise price. The Fund may only sell call options
either on securities held in its portfolio or on securities which it has
the right to obtain without payment of further consideration (or has
segregated cash in the amount of any additional consideration).
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments, from time to time, for
defensive purposes.
MONEY MARKET INSTRUMENTS
The Fund may invest in the following money market instruments:
instruments of domestic and foreign banks and savings and loans if they
have capital, surplus, and undivided profits of over $100,000,000, or if
the principal amount of the instrument is insured in full by the Bank
Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation ("FDIC"), or the Savings Association Insurance Fund, which
is administered by the FDIC; and
prime commercial paper (rated A-1 by Standard and Poor's Corporation,
Prime-1 by Moody's Investors Service, Inc., or F-1 by Fitch Investors
Service).
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed by
U.S. government agencies or instrumentalities. These securities are
backed by the following:
the full faith and credit of the U.S. Treasury;
the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which are permissible
investments which may not always receive financial support from the U.S.
government are:
Federal Farm Credit Banks;
Federal Home Loan Banks;
Federal National Mortgage Association;
Student Loan Marketing Association; and
Federal Home Loan Mortgage Corporation.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are arrangements in which the Fund purchases and sells
securities with payment and delivery scheduled for a future time. The Fund
engages in when-issued and delayed delivery transactions only for the purpose of
acquiring portfolio securities consistent with the Fund's investment objective
and policies, not for investment leverage. In when-issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Fund to miss a price
or yield considered to be advantageous.
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated on the Fund's records at the trade date. These
securities are marked to market daily and maintained until the transaction is
settled. The Fund may engage in these transactions to an extent that would cause
the segregation of an amount up to 20% of the total value of its assets.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies, but which are subject to restriction on resale under
federal securities law. However, the Fund will limit investments in illiquid
securities, including certain restricted securities not determined by the
Trustees to be liquid, non-negotiable time deposits, and repurchase agreements
providing for settlement in more than seven days after notice, to 15% of its net
assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Board of Trustees are quite liquid. The Fund
intends, therefore, to treat the restricted securities which meet the criteria
for liquidity established by the Trustees, including Section 4(2) commercial
paper, as determined by the Fund's investment adviser, as liquid and not subject
to the investment limitation applicable to illiquid securities. In addition,
because Section 4(2) commercial paper is liquid, the Fund intends to not subject
such paper to the limitation applicable to restricted securities.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities subject to
repurchase agreements, and these securities are marked to market daily. To the
extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's investment
adviser to be creditworthy pursuant to guidelines established by the Board of
Trustees (the "Trustees").
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
The Fund would not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
INVESTMENT LIMITATIONS
The Fund will not change any of the investment limitations described below
without approval of shareholders.
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of portfolio securities. The deposit or
payment by the Fund of initial or variation margin in connection with
financial futures contracts or related options transactions is not
considered as a purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money in amounts up to one-third of the value of its total assets,
including the amounts borrowed; and except to the extent that the Fund
may enter into futures contracts. The Fund will not borrow money except
as a temporary, extraordinary, or emergency measure, or to facilitate
management of the portfolio by enabling the Fund to meet redemption
requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not purchase any
securities while borrowings in excess of 5% of its total assets are
outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may pledge assets having
a market value not exceeding the lesser of the dollar amounts borrowed or
10% of the value of total assets at the time of the pledge. For purposes
of this limitation, the following are not deemed to be pledges: margin
deposits for the purchase and sale of financial futures contracts and
related options; and segregation or collateral arrangements made in
connection with options activities or the purchase of securities on a
when-issued basis.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities up
to one-third of the value of its total assets. This shall not prevent the
Fund from purchasing or holding U.S. government obligations, money market
instruments, variable rate demand notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions where permitted
by the Fund's investment objective, policies and limitations, or
Declaration of Trust.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts except that the Fund may purchase and sell
financial futures contracts and related options.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in the securities of
companies whose business involves the purchase or sale of real estate, or
in securities which are secured by real estate or which represent
interests in real estate.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items, or securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities, and
repurchase agreements collateralized by such securities) if as a result
more than 5% of the value of its total assets would be invested in the
securities of that issuer nor will the Fund acquire more than 10% of any
class of voting securities of any issuer. For these purposes, the Fund
considers common stock and all preferred stock of an issuer each as a
single class, regardless of priorities, series, designations, or other
differences. (For purposes of this limitation, the Fund considers
instruments issued by a U.S. branch of a domestic bank having capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items.")
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of its total assets in securities of
issuers having their principal business activities in the same industry.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of restricted securities which the Fund may
purchase pursuant to its investment objective, policies, and limitations.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its total assets
in securities subject to restrictions on resale under the Securities Act
of 1933, except for commercial paper issued under Section 4(2) of the
Securities Act of 1933, and certain other restricted securities which
meet the criteria for liquidity as established by the Board of Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 10% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, over-the-counter
options, and certain restricted securities determined by the Trustees not
to be liquid.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest no more than 5% of its total assets in any one investment
company, or invest more than 10% of its total assets in investment
companies in general. The Fund will purchase securities of closed-end
investment companies only in open market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
reorganization, or acquisition of assets; nor are they applicable with
respect to securities of investment companies that have been exempted
from registration under the Investment Company Act of 1940. It should be
noted that investment companies incur certain expenses such as management
fees and, therefore, any investment by the Fund in shares of another
investment company would be subject to such duplicate expenses.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
securities of issuers which have records of less than three years of
continuous operations, including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or its investment adviser, owning
individually more than 1/2 of 1% of the issuer's securities, together own
more than 5% of the issuer's securities.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except it may invest in
the securities of issuers which invest in or sponsor such programs.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for purpose of
exercising control or management.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in warrants,
including those acquired in units or attached to other securities. To
comply with certain state restrictions, the Fund will limit its
investment in such warrants not listed on the New York or American Stock
Exchanges to 2% of its net assets. (If state restrictions change, this
latter restriction may be revised without notice to shareholders.) For
purposes of this investment restriction, warrants will be valued at the
lower of cost or market value, except that warrants acquired by the Fund
in units with or attached to securities may be deemed to be without
value.
ARBITRAGE TRANSACTIONS
The Fund will not enter into transactions for the purpose of engaging in
arbitrage.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities, unless the
securities are held in the Fund's portfolio and not more than 5% of the
value of the Fund's total assets would be invested in premiums on open
put option positions.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio, or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
The Fund does not consider the issuance of separate classes of shares to
constitute an issue of "senior securities" within the meaning of the investment
limitations set forth above.
The Fund has no present intent to borrow money, pledge securities, or invest in
restricted or illiquid securities in excess of 5% of the value of its net assets
in the coming fiscal year. To comply with registration requirements in certain
states, the Fund (1) will limit the aggregate value of the assets underlying
covered call options or put options written by the Fund to not more than 25% of
its net assets; (2) will limit the premiums paid for options purchased by the
Fund to 20% of its net assets; and (3) will limit the margin deposits on futures
contracts entered into by the Fund to 5% of its net assets. (If state
requirements change, these restrictions may be revised without shareholder
notification.)
FIRST PRIORITY FUNDS MANAGEMENT
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OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, principal occupations,
and present positions, including any affiliation with First Alabama Bank,
Federated Investors, Federated Securities Corp., Federated Services Company,
Federated Administrative Services, and the Funds (as defined below).
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POSITION WITH PRINCIPAL OCCUPATION
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
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John F. Donahue*\ Chairman and Chairman and Trustee, Federated Investors; Chairman and Trustee,
Federated Investors Tower Trustee Federated Advisers, Federated Management, and Federated Research;
Pittsburgh, PA Director, AEtna Life and Casualty Company; Chief Executive Officer and
Director, Trustee, or Managing General Partner of the Funds; formerly,
Director, The Standard Fire Insurance Company. Mr. Donahue is the father
of J. Christopher Donahue, Vice President of the Trust.
John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior Vice President,
Wood/IPC Commercial John R. Wood and Associates, Inc., Realtors; President, Northgate
Department Village Development Corporation; General Partner or Trustee in private
John R. Wood and real estate ventures in Southwest Florida; Director, Trustee, or
Associates, Inc., Realtors Managing General Partner of the Funds; formerly, President, Naples
3255 Tamiami Trail North Property Management, Inc.
Naples, FL
William J. Copeland Trustee Director and Member of the Executive Committee, Michael Baker, Inc.;
One PNC Plaza-23rd Floor Director, Trustee, or Managing General Partner of the Funds; formerly,
Pittsburgh, PA Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director,
Concord, MA Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of
Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the Funds.
Pittsburgh, PA
Edward L. Flaherty, Jr.\ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat 'N Park
5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Pittsburgh, PA Trustee, or Managing General Partner of the Funds; formerly, Counsel,
Horizon Financial, F.A., Western Region.
Peter E. Madden Trustee Consultant; State Representative, Commonwealth of Massachusetts;
225 Franklin Street Director, Trustee, or Managing General Partner of the Funds; formerly,
Boston, MA President, State Street Bank & Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
5916 Penn Mall Director, Eat'N Park Restaurants Inc.; Director, Trustee, or Managing
Pittsburgh, PA General Partner of the Funds; formerly, Vice Chairman, Horizon
Financial, F.A.
Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
1202 Cathedral of Endowment for International Peace, RAND Corporation, Online Computer
Learning Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
University of Pittsburgh Management Center; Director, Trustee, or Managing General Partner of the
Pittsburgh, PA Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy & Technology.
Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee, or Managing
4905 Bayard Street General Partner of the Funds.
Pittsburgh, PA
Edward C. Gonzales* President, Vice President, Treasurer, and Trustee, Federated Investors; Vice
Federated Investors Tower Treasurer President and Treasurer, Federated Advisers, Federated Management, and
Pittsburgh, PA and Trustee Federated Research; Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Trustee, Federated Services Company;
Chairman, Treasurer, and Director, Federated Administrative Services;
Trustee or Director of some of the Funds; Vice President and Treasurer
of the Funds.
J. Christopher Donahue Vice President President and Trustee, Federated Investors; Trustee, Federated Advisers,
Federated Investors Tower Federated Management, and Federated Research; President and Director,
Pittsburgh, PA Federated Administrative Services; Trustee, Federated Services Company;
President or Vice President of the Funds; Director, Trustee or Managing
General Partner of some of the Funds. Mr. Donahue is the son of John F.
Donahue, Chairman and Trustee of the Trust.
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors; Chairman and
Federated Investors Tower Director, Federated Securities Corp.; President or Vice President of the
Pittsburgh, PA Funds; Director or Trustee of some of the Funds.
John W. McGonigle Vice President and Vice President, Secretary, General Counsel, and Trustee, Federated
Federated Investors Tower Secretary Investors; Vice President, Secretary and Trustee, Federated Advisers,
Pittsburgh, PA Federated Management, and Federated Research; Trustee, Federated
Services Company; Executive Vice President, Secretary, and Director,
Federated Administrative Services; Director and Executive Vice
President, Federated Securities Corp.; Vice President and Secretary of
the Funds.
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive Vice
Federated Investors Tower President, Federated Securities Corp.; President and Trustee, Federated
Pittsburgh, PA Advisers, Federated Management, and Federated Research; Vice President
of the Funds; Director, Trustee, or Managing General Partner of some of
the Funds; formerly, Vice President, The Standard Fire Insurance Com-
pany and President of its Federated Research Division.
Ronald M. Petnuch Vice President Vice President, Federated Administrative Services; Vice President and
Federated Investors Tower and Assistant Assistant Treasurer of some of the Funds.
Pittsburgh, PA Treasurer
</TABLE>
*This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940.
\Members of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees between
meetings of the Board.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: A.T. Ohio
Tax-Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; BankSouth
Select Funds; The Boulevard Funds; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; FT Series, Inc.; Federated ARMs Fund; Federated
Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Intermediate Government
Trust; Federated Master Trust; Federated Municipal Trust; Federated
Short-Intermediate Government Trust; Federated Short-Term U.S. Government Trust;
Federated Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond
Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress
Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.; Government Income
Securities, Inc.; High Yield Cash Trust; Insurance Management Series;
Intermediate Municipal Trust; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money Market
Trust; Liberty Term Trust, Inc.-1999; Liberty Utility Fund, Inc.; Liquid Cash
Trust; Mark Twain Funds; Money Market Management Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust; New York Municipal
Cash Trust; 111 Corcoran Funds; The Planters Funds; Portage Funds; RIMCO
Monument Funds; The Shawmut Funds; Short-Term Municipal Trust; Signet Select
Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond
Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
Trademark Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; and Trust for U.S.
Treasury Obligations.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of January 6, 1994, the following shareholders of record owned 5% or more of
the outstanding Trust Shares of the Fund: First Alabama Bank of Birmingham,
Birmingham, AL, owned approximately 14,884,979 Shares (99.31%).
As of January 6, 1994, no shareholders of record owned 5% or more of the
outstanding Investment Shares of the Fund.
TRUSTEE LIABILITY
The First Priority Funds' Declaration of Trust provides that the Trustees are
not liable for errors of judgment or mistakes of fact or law. However, they are
not protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser is First Alabama Bank ("First Alabama" or "the
Adviser"), which is a wholly-owned subsidiary of First Alabama Bancshares, Inc.
The Adviser shall not be liable to the Trust, the Fund, or any shareholder of
the Fund for any losses that may be sustained in the purchase, holding, or sale
of any security, or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, First Alabama receives an annual investment advisory
fee as described in the respective prospectus. During the fiscal year ended
November 30, 1993, the Adviser earned $1,097,771 of which $411,664 was
voluntarily waived. From the Fund's date of initial public investment, April 20,
1992, to November 30, 1992, the Adviser earned $438,007, of which $164,253 was
voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will reimburse the
Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for the fees set forth in the
respective prospectus. For the fiscal year ended November 30, 1993, Federated
Administrative Services earned $193,025 for administrative services. From the
Fund's date of initial public investment, April 20, 1992, to November 30, 1992,
Federated Administrative Services earned $81,006 for administrative services, of
which $27,772 was voluntarily waived.
John A. Staley, IV, an officer of the Fund, holds approximately 15% of the
outstanding common stock and serves as a director of Commercial Data Services,
Inc., a company which provides computer processing services to Federated
Administrative Services. For the fiscal years ended November 30, 1993, and 1992,
Federated Administrative Services paid $164,324 and $186,144, respectively, for
services provided by Commercial Data Services, Inc.
CUSTODIAN
- --------------------------------------------------------------------------------
First Alabama Bank, Birmingham, Alabama is custodian for the securities and cash
of the Fund. Under the custodian agreement, First Alabama Bank holds the Fund's
portfolio securities and keeps all necessary records and documents relating to
its duties. First Alabama Bank's fees for custody services are based upon the
market value of Fund securities held in custody plus certain securities
transaction charges.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include:
advice as to the advisability of investing in securities;
security analysis and reports;
economic studies;
industry studies;
receipt of quotations for portfolio evaluations; and
similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the Adviser in advising the
Fund and other accounts. To the extent that receipt of these services may
supplant services for which the Adviser or its affiliates might otherwise have
paid, it would tend to reduce their expenses.
For the fiscal year ended November 30, 1993, the Fund paid $327,773 in
commissions on brokerage transactions. From the Fund's date of initial public
investment, April 20, 1992, to November 30, 1992, the Fund paid $163,200 in
commissions on brokerage transactions.
As of November 30, 1993, the fund owned $5,020,000 of securities of American
Express, one of its regular broker/dealers that derives more than 15% of gross
revenues from securities-related activities.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value with a sales charge on days the New
York Stock Exchange is open for business. The procedure for purchasing Shares of
the Fund is explained in the respective prospectus under "Investing in
Investment Shares" or "Investing in Trust Shares." As used in the prospectus,
the term "dependent children" means all children under the age of 18 and
full-time students under the age of 23.
DISTRIBUTION PLAN (INVESTMENT SHARES)
With respect to the Investment Shares class of the Fund, the Trust has adopted a
Plan pursuant to Rule 12b-1 (the "Plan") which was promulgated by the Securities
and Exchange Commission under the Investment Company Act of 1940. The Plan
provides for payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of Investment
Shares. Such activities may include the advertising and marketing of Investment
Shares; preparing, printing, and distributing prospectuses and sales literature
to prospective shareholders, brokers or administrators; and implementing and
operating the Plan. Pursuant to the Plan, the distributor may pay fees to
brokers for distribution and administrative services and to administrators for
administrative services as to Investment Shares. The administrative services are
provided by a representative who has knowledge of the shareholder's particular
circumstances and goals, and include, but are not limited to: communicating
account openings; communicating account closings; entering purchase
transactions; entering redemption transactions; providing or arranging to
provide accounting support for all transactions; wiring funds and receiving
funds for Investment Share purchases and redemptions; confirming and reconciling
all transactions; reviewing the activity in Fund accounts; and providing
training and supervision of broker personnel; posting and reinvesting dividends
to Fund accounts or arranging for this service to be performed by the Fund's
transfer agent; and maintaining and distributing current copies of prospectuses
and shareholder reports to the beneficial owners of Investment Shares and
prospective shareholders.
The Trustees expect that the adoption of the Plan will result in the sale of a
sufficient number of Investment Shares so as to allow the Fund to achieve
economic viability. It is also anticipated that an increase in the size of the
Fund will facilitate more efficient portfolio management and assist the Fund in
seeking to achieve its investment objective.
For the fiscal year ended November 30, 1993, and from the Fund's date of initial
public investment, April 20, 1992, to November 30, 1992, brokers and
administrators (financial institutions) received fees in the amounts of $16,875
and $3,360, respectively, pursuant to the distribution plan.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. Federated Services Company acts as the shareholder's agent in
depositing checks and converting them to federal funds.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value generally changes each day. The days on which the net asset
value is calculated by the Fund are described in the respective prospectus.
DETERMINING MARKET VALUE OF SECURITIES
The market values of the Fund's portfolio securities, other than options, are
determined as follows:
for equity securities, according to the last sale price on a national securities
exchange, if available;
in the absence of recorded sales for listed equity securities, according to the
mean between the last closing bid and asked prices;
for unlisted equity securities, the latest bid prices;
for bonds and other fixed income securities, as determined by an independent
pricing service;
for short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service; or
for all other securities, at fair value as determined in good faith by the
Trustees.
The Fund will value futures contracts, options, and put options on futures and
financial futures at their market values established by the exchanges at the
close of option trading on such exchanges unless the Trustees determine in good
faith that another method of valuing option positions is necessary to appraise
their fair value.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
respective prospectus under "Redeeming Investment Shares" or "Redeeming Trust
Shares."
REDEMPTION IN KIND
Although the Trust intends to redeem Shares in cash, it reserves the right,
under certain circumstances, to pay the redemption price in whole or in part by
a distribution of securities from the respective Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which the Trust is obligated to redeem Shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the respective
class's net asset value during any 90-day period.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
REQUIREMENTS FOR EXCHANGING SHARES
Shareholders using the exchange privilege must exchange Shares having a net
asset value of at least $1,000 for Investment Shares or $25,000 for Trust
Shares. Before the exchange, the shareholder must receive a prospectus of the
fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
the proceeds invested in Investment or Trust Shares, respectively, of the other
fund.
Further information on the exchange privilege and prospectuses may be obtained
by calling First Alabama. Instructions for exchanges may be given in writing.
Written instructions may require a signature guarantee.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
derive at least 90% of its gross income from dividends, interest, and gains from
the sale of securities;
derive less than 30% of its gross income from the sale of securities held less
than three months;
invest in securities within certain statutory limits; and
distribute to its shareholders at least 90% of its net income earned during the
year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares. These dividends, and any short-term
capital gains, are taxable as ordinary income.
CAPITAL GAINS
Long-term capital gains distributed to shareholders will be treated as
long-term capital gains regardless of how long they have held the Shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The average annual total return for both classes of Shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the offering price per Share at the end of the period. The
number of Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000, less any applicable sales
load, adjusted over the period by any additional Shares, assuming the quarterly
reinvestment of all dividends and distributions.
The Fund's average annual total return for Investment Shares for the year ended
November 30, 1993, and for the period between April 20, 1992 (date of initial
public investment), and November 30, 1993, was (1.91%) and 4.36%, respectively.
The Fund's average annual total return for Trust Shares, for the year period
ended November 30, 1993, and for the period between April 20, 1992 (date of
initial public investment), and November 30, 1993, was 1.43% and 6.60%,
respectively.
YIELD
- --------------------------------------------------------------------------------
The yield for both classes of Shares of the Fund is determined by dividing the
net investment income per share (as defined by the Securities and Exchange
Commission) earned by either class of Shares over a thirty-day period by the
maximum offering price per Share of either class of Shares on the last day of
the period. This number is then annualized using semi-annual compounding. This
means that the amount of income generated during the thirty-day period is
assumed to be generated each month over a 12-month period and is reinvested
every six months. The yield does not necessarily reflect income actually earned
by Shares because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
Total return and yield will be calculated separately for Investment Shares and
Trust Shares. Because Investment Shares are subject to a sales load and a 12b-1
fee, the total return and net yield for Trust Shares for the same period will
exceed that of Investment Shares.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in either
class of Shares, the performance will be reduced for those shareholders paying
those fees.
For the 30-day period ended November 30, 1993, the yield for Investment Shares
was 1.56%, and the yield for Trust Shares was 1.92%.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The performance of both classes of Shares depends upon such variables as:
portfolio quality;
average portfolio maturity;
type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities;
changes in the Fund's or Share's expenses; and
various other factors.
Either class of Shares' performance fluctuates on a daily basis largely because
net earnings and offering price per Share fluctuate daily. Both net earnings and
offering price per Share are factors in the computation of yield and total
return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index
used, prevailing market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute net asset value. The
financial publications and/or indices which the Fund uses in advertising may
include:
LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "growth and income
funds" category in advertising and sales literature.
LIPPER GROWTH AND INCOME FUND AVERAGE is an average of the total returns for 251
growth and income funds tracked by Lipper Analytical Services, Inc., an
independent mutual fund rating service.
LIPPER GROWTH AND INCOME FUND INDEX is an average of the net asset-valuated
total returns for the top 30 growth and income funds tracked by Lipper
Analytical Services, Inc., an independent mutual fund rating service.
DOW JONES INDUSTRIAL AVERAGE ("DJIA") is an unmanaged index representing share
prices of major industrial corporations, public utilities, and transportation
companies. Produced by the Dow Jones & Company, it is cited as a principal
indicator of market conditions.
STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a composite
index of common stocks in industry, transportation, and financial and public
utility companies, compares total returns of funds whose portfolios are
invested primarily in common stocks. In addition, the Standard & Poor's index
assumes reinvestment of all dividends paid by stocks listed on the index. Taxes
due on any of these distributions are not included, nor are brokerage or other
fees calculated in the Standard & Poor's figures.
Investors may also consult the fund evaluation consulting universes listed
below. Consulting universes may be composed of pension, profit sharing,
commingled, endowment/foundation, and mutual funds.
FIDUCIARY CONSULTING GRID UNIVERSE, for example, is composed of over 1,000
funds, representing 350 different investment managers, divided into
subcategories based on asset mix. The funds are ranked quarterly based on
performance and risk characteristics.
SEI data base for equity funds includes approximately 900 funds, representing
361 money managers, divided into fund types based on investor groups and asset
mix. The funds are ranked every three, six, and twelve months.
MERCER MEIDINGER, INC. compiles a universe of approximately 600 equity funds,
representing about 500 investment managers, and updates their rankings each
calendar quarter as well as on a one, three, and five year basis.
MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for both classes of Shares may quote
total returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
either class of Shares, based on quarterly reinvestment of dividends over a
specified period of time.
Advertisements may quote performance information which does not reflect the
effect of a sales load.
2021107B (1/94)
PROSPECTUS
- --------------------------------------------------------------------------------
FIRST PRIORITY FIXED INCOME FUND
INVESTMENT SHARES
(A PORTFOLIO OF FIRST PRIORITY FUNDS)
- --------------------------------------------------------------------------------
The Investment Shares (the "Shares") offered by this prospectus represent
interests in the diversified portfolio known as First Priority Fixed Income Fund
(the "Fund"). The Fund is one of a series of investment portfolios in First
Priority Funds (the "Trust"), an open-end, management investment company (a
mutual fund).
The investment objective of the Fund is to achieve current income with a
secondary objective of capital appreciation by investing in a broad range of
high grade debt securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF FIRST
ALABAMA BANK, ARE NOT ENDORSED OR GUARANTEED BY FIRST ALABAMA BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT
RISKS INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Combined Statement of Additional Information for
Investment Shares and Trust Shares dated January 31, 1994 with the Securities
and Exchange Commission. The information contained in the Combined Statement of
Additional Information is incorporated by reference into this prospectus. You
may request a copy of the Combined Statement of Additional Information free of
charge, obtain other information, or make inquiries about the Fund by writing or
calling toll-free 1-800-433-2829.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated January 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
U.S. Government Securities 4
CMOs 5
When-Issued and Delayed Delivery
Transactions 5
Put and Call Options 5
Financial Futures and Options on
Futures 6
Risks 6
Repurchase Agreements 6
Restricted and Illiquid Securities 7
Investing in Securities of Other
Investment Companies 7
Lending of Portfolio Securities 7
Portfolio Turnover 7
Investment Limitations 8
FIRST PRIORITY FUNDS INFORMATION 8
- ------------------------------------------------------
Management of First Priority Funds 8
Board of Trustees 8
Investment Adviser 8
Advisory Fees 8
Adviser's Background 9
Distribution of Investment Shares 9
Distribution Plan 9
Administrative Arrangements 10
Administration of the Fund 10
Administrative Services 10
Transfer Agent, Dividend Disbursing
Agent and Portfolio Accounting
Services 11
Legal Counsel 11
Independent Auditors 11
Expenses of the Fund and
Investment Shares 11
NET ASSET VALUE 11
- ------------------------------------------------------
INVESTING IN INVESTMENT SHARES 12
- ------------------------------------------------------
Minimum Investment Required 12
What Shares Cost 12
Purchases at Net Asset Value 12
Dealer Concessions 12
Share Purchases 13
Through FAII 13
Reducing the Sales Charge 13
Quantity Discounts and Accumulated
Purchases 13
Letter of Intent 13
Reinvestment Privilege 14
Purchases with Proceeds from
Redemptions of Unaffiliated
Mutual Fund Shares 14
Systematic Investment Plan 14
Shareholder Accounts 14
Dividends and Capital Gains 14
EXCHANGE PRIVILEGE 14
- ------------------------------------------------------
REDEEMING INVESTMENT SHARES 15
- ------------------------------------------------------
By Telephone 15
By Mail 16
Signatures 16
Receiving Payment 16
Redemption Before Purchase
Instruments Clear 16
Systematic Withdrawal Plan 17
Accounts With Low Balances 17
Redemption in Kind 17
SHAREHOLDER INFORMATION 17
- ------------------------------------------------------
Voting Rights 17
Massachusetts Partnership Law 18
EFFECT OF BANKING LAWS 18
- ------------------------------------------------------
TAX INFORMATION 19
- ------------------------------------------------------
Federal Income Tax 19
PERFORMANCE INFORMATION 19
- ------------------------------------------------------
OTHER CLASSES OF SHARES 20
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--TRUST SHARES 21
- ------------------------------------------------------
FINANCIAL STATEMENTS 22
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 32
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)................................................................... 2.00%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................................................... None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, as applicable)................................................. None
Redemption Fee (as a percentage of amount redeemed, if applicable)...................................... None
Exchange Fee............................................................................................ None
ANNUAL INVESTMENT SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (1)....................................................................... 0.50%
12b-1 Fee............................................................................................... 0.30%
Other Expenses.......................................................................................... 0.28%
Total Investment Shares Operating Expenses..................................................... 1.08%
</TABLE>
(1)The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.75%.
The Annual Investment Shares Operating Expenses were 1.14% for the fiscal
year ended November 30, 1993. The Annual Investment Shares Operating Expenses in
the table above are based on estimated expenses expected during the fiscal year
ending November 30, 1994. The Total Investment Shares Operating Expenses are
anticipated to be 1.33% absent the voluntary waiver of a portion of the
management fee.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF INVESTMENT SHARES OF THE FUND
WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "FIRST PRIORITY FUNDS INFORMATION" AND
"INVESTING IN INVESTMENT SHARES."
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGE PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1)
5% annual return; (2) redemption at the end of each time period; and
payment of the maximum sales load. The Fund charges no redemption fees
for Investment Shares.................................................... $31 $54 $78 $149
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the foregoing table and Example relates only to
Investment Shares of the Fund. The Fund also offers another class of shares
called Trust Shares. Trust Shares are subject to certain of the same expenses
except they bear no sales load or 12b-1 fee. See "Other Classes of Shares."
FIRST PRIORITY FIXED INCOME FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 33.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
<S> <C> <C>
--------------------
<CAPTION>
1993 1992*
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.27 $ 9.90
- ----------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------
Net investment income 0.48 0.37
- ----------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.50 0.37
- ---------------------------------------------------------------------------------- --------- ---------
Total from investment operations 0.98 0.74
- ---------------------------------------------------------------------------------- --------- ---------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.48) (0.37)
- ----------------------------------------------------------------------------------
Dividends to shareholders from net realized gain on investment transactions (0.10) --
- ---------------------------------------------------------------------------------- --------- ---------
Total distributions (0.58) (0.37)
- ---------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 10.67 $ 10.27
- ---------------------------------------------------------------------------------- --------- ---------
TOTAL RETURN** 9.81% 7.48%
- ----------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------
Expenses 1.14% 1.07%(a)
- ----------------------------------------------------------------------------------
Net investment income 4.40% 5.33%(a)
- ----------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.25% 0.29%
- ----------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $12,519 $5,457
- ----------------------------------------------------------------------------------
Portfolio turnover rate*** 83% 44%
- ----------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from April 20, 1992 (date of initial
public investment) to November 30, 1992.
** Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
*** Represents portfolio turnover for the entire Fund.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
Further information about the Fund's performance is contained in the Fund's
annual report dated November 30, 1993, which can be obtained free of charge.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
First Priority Funds was established as a Massachusetts business trust under a
Declaration of Trust dated October 15, 1991.
The Declaration of Trust permits First Priority Funds to offer separate series
of shares of beneficial interest representing interests in separate portfolios
of securities. The shares of beneficial interest in any one portfolio may be
offered in separate classes. As of the date of this prospectus, the Board of
Trustees (the "Trustees") have established two classes of shares, Investment
Shares and Trust Shares. This prospectus relates only to Investment Shares of
First Priority Fixed Income Fund.
The Fund is designed for investors seeking current income through a
professionally managed, diversified portfolio investing primarily in a broad
range of high grade debt securities. A minimum initial investment of $1,000 is
required.
Except as otherwise noted in this prospectus, Shares are sold at net asset value
plus an applicable sales charge and redeemed at net asset value.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to achieve current income with a
secondary objective of capital appreciation by investing in a broad range of
high grade debt securities. These investment objectives cannot be changed
without approval of shareholders. While there is no assurance that the Fund will
achieve its investment objectives, it endeavors to do so by following the
investment policies described in this prospectus.
INVESTMENT POLICIES
Under normal circumstances, at least 65% of the value of the Fund's total assets
will be invested in fixed-rate bonds and debentures. The Fund intends to
maintain a dollar weighted average portfolio maturity of between three and
twelve years under normal market conditions. Unless indicated otherwise, the
investment policies may be changed by the Trustees without approval of
shareholders. Shareholders will be notified before any material change in these
policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund will only invest its assets in securities
which are rated at the time of purchase A or higher by Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), or Fitch
Investors Service, Inc. ("Fitch"), or which, if unrated, are deemed to be of
comparable quality by the Fund's investment adviser.
The Fund's debt securities may include fixed rate, adjustable rate or stripped
bonds, debentures, notes, U.S. government securities, asset backed securities
and debt securities convertible into, or exchangeable for, preferred or common
stock.
The Fund may also invest in preferred stock and units, which are debt securities
with stock or warrants to buy stock attached. In addition, the Fund may write
covered call options and put options and may
purchase call and put options. The Fund will not invest in securities judged to
be speculative or of poor quality, but may invest in high grade securities as
described above.
When the adviser selects securities for the Fund, it will consider the ratings
of Moody's, S&P, or Fitch assigned to various debt securities. In making its
investment decisions the adviser also will consider many factors other than
current yield, including the preservation of capital, the potential for
realizing capital appreciation, maturity, and yield to maturity. The adviser
will adjust its investments in particular securities or in types of debt
securities in response to its appraisal of changing economic conditions and
trends. The Fund may sell one security, and purchase another security of
comparable quality and maturity to take advantage of what it believes to be
short-term differentials in market values or yield disparities.
The permitted investments include, but are not limited to:
domestic issues of corporate debt obligations having floating or fixed
rates of interest and rated at the time of purchase in one of the three
highest categories by a nationally recognized statistical rating
organization (a "NRSRO") (rated Aaa, Aa, or A by Moody's; AAA, AA, or A
by S&P; or AAA, AA, or A by Fitch or which, if unrated, are of comparable
quality in the judgment of the adviser;
asset-backed securities, rated in one of the three highest categories by
a NRSRO, or which are of comparable quality in the judgment of the
adviser;
notes, bonds, and discount notes of the U.S. government or its agencies
or instrumentalities;
commercial paper which matures in 270 days or less that has received high
quality ratings by at least two NRSROs. Such ratings would include:
Prime-1 or Prime-2 by Moody's, A-1 or A-2 by S&P, or F-1 or F-2 by Fitch;
time and savings deposits (including certificates of deposit) in
commercial or savings banks whose accounts are insured by the Bank
Insurance Fund ("BIF") or the Savings Association Insurance Fund, both of
which are administered by the Federal Deposit Insurance Corporation
("FDIC"), including certificates of deposit and other time deposits
issued by foreign branches of FDIC insured banks, banker's acceptances;
and
repurchase agreements collateralized by eligible investments.
U.S. GOVERNMENT SECURITIES. The U.S. government securities in which the Fund
invests are either issued or guaranteed by the U.S. government, its agencies, or
instrumentalities. These securities include, but are not limited to:
direct obligations of the U.S. Treasury such as U.S. Treasury bills,
notes and bonds; and
notes, bonds, and discount notes of U.S. government agencies or
instrumentalities such as Federal Home Loan Banks, Federal National
Mortgage Association, Government National Mortgage Association, Banks for
Cooperatives, Federal Farm Credit Banks, Tennessee Valley Authority,
Export-Import Bank of the United States, Commodity Credit Corporation,
Federal Financing Bank, Student Loan Marketing Association, Federal Home
Loan Mortgage Corporation, or National Credit Union Administration.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and
credit of the U.S. Treasury. Others for which no assurances can be given that
the U.S. government will provide financial support to the agencies or
instrumentalities, since it is not obligated to do so, are supported by:
issuer's right to borrow an amount limited to a specific line of credit
from the U.S. Treasury;
discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
the credit of the agency or instrumentality.
CMOS. Collateralized Mortgage Obligations ("CMOs") are a form of
asset-backed security issued by single-purpose stand-alone finance
subsidiaries or trusts of financial institutions, government agencies,
investment bankers, or companies related to the construction industry.
The Fund will invest only in CMOs which are rated AAA by a NRSRO, and which
may be: a) collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (b) collateralized by pools of
mortgages in which payment of principal and interest is guaranteed by the
issuer and such guarantee is collateralized by U.S. government securities;
or (c) securities in which the proceeds of the issuance are invested in
mortgage securities and payment of the principal and interest are supported
by the credit of any agency or instrumentality of the U.S. government.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. In when-issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Fund to miss a price
or yield considered to be advantageous.
PUT AND CALL OPTIONS. The Fund may purchase put options on its portfolio
securities. These options will be used as a hedge to attempt to protect
securities which the Fund holds against decreases in value. The Fund may also
write covered call options and put options on all or any portion of its
portfolio to generate income for the Fund. The Fund will write call options on
securities either held in its portfolio or which it has the right to obtain
without payment of further consideration, or for which it has segregated cash or
U.S. government securities in the amount of any additional consideration. At the
time that a put option is written, the fund will segregate cash or short-term
U.S. government securities equal in value to the amount it will be obligated to
pay upon exercise of the put, and will maintain such value until the put is
either exercised or has expired, or until the Fund has purchased a "closing put"
(i.e., a put on the same securities at the same price as the one previously
written by the Fund). If the Fund does not exercise an option it has purchased,
then the Fund loses in value the price it paid for the option premium. If the
Fund writes (sells) an option which is subsequently exercised, the premium
received by the Fund from the option purchaser may not exceed the increase (in
the case of a call option) or decrease (in the case of a put option) in the
value of the securities underlying the option, in which case the difference
represents a loss for the Fund. However, if the option expires without being
exercised, the Fund realizes a gain in the amount of the premium it received.
The Fund may purchase and write over-the-counter options on portfolio securities
in negotiated transactions with the buyers or writers of the options when
options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment
dealers and other financial institutions (such as commercial banks or savings
and loan associations) deemed creditworthy by the Fund's adviser.
Over-the-counter options are two party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not. The Fund will not buy call
options without further notification to shareholders.
FINANCIAL FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell
financial futures contracts to hedge all or a portion of its portfolio against
changes in interest rates. The Fund will not engage in futures transactions for
speculative purposes. Financial futures contracts call for the delivery of
particular debt instruments at a certain time in the future. The seller of the
contract agrees to make delivery of the type of instrument called for in the
contract and the buyer agrees to take delivery of the instrument at the
specified future time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period, if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options, if
immediately thereafter, the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and, thereby, insure
that the use of such futures contract is unleveraged.
RISKS. When the Fund uses financial futures and options on financial
futures as hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly
with the prices of the securities in the Fund's portfolio. This may cause
the futures contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Fund's investment
adviser could be incorrect in its expectations about the direction or
extent of market factors such as interest rate movements. In these events,
the Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the investment
adviser will consider liquidity before entering into options transactions,
there is no assurance that a liquid secondary market on an exchange or
otherwise will exist for any particular futures contract or option at any
particular time. The Fund's ability to establish and close out futures and
options positions depends on this secondary market.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to the
Fund and agree at the time of sale to repurchase them at a mutually agreed upon
time and price. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase price
on any sale of such securities.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 10% of its net
assets in restricted securities. This restriction is not applicable to
commercial paper issued under Section 4(2) of the Securities Act of 1933.
Restricted securities are any securities in which the Fund may otherwise invest
pursuant to its investment objective and policies, but which are subject to
restriction on resale under federal securities law. The Fund will limit
investments in illiquid securities, including certain restricted securities not
determined by the Trustees to be liquid, non-negotiable time deposits,
over-the-counter options and repurchase agreements providing for settlement in
more than seven days after notice, to 15% of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general. The Fund will invest
in other investment companies primarily for the purpose of investing short-term
cash which has not yet been invested in other portfolio instruments. The adviser
will waive its investment advisory fee on assets invested in securities of
open-end investment companies.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or a long-term basis up to
one-third of the value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions that the
investment adviser has determined are creditworthy under guidelines established
by the Trustees and will receive collateral in the form of cash or U.S.
government securities equal to at least 100% of the value of the securities
loaned.
PORTFOLIO TURNOVER. The Fund may trade or dispose of portfolio securities as
considered necessary to meet its investment objective. It is not anticipated
that the portfolio trading engaged in by the Fund will result in its annual rate
of portfolio turnover exceeding 100%.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an arrangement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its total assets and pledge up
to 10% of the value of those assets to secure such borrowings;
lend any of its assets except portfolio securities up to one-third of the
value of its total assets;
sell securities short; nor
with respect to 75% of the value of its total assets, invest more than 5%
in securities of any one issuer other than cash, cash items, or
securities issued or guaranteed by the government of the United States,
its agencies or instrumentalities, and repurchase agreements
collateralized by such securities.
The above investment limitations cannot be changed without shareholder approval.
The following investment limitation, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any material
change in this investment limitation becomes effective.
The Fund will not:
invest more than 5% of the value of its total assets in securities of
issuers that have records of less than three years of continuous
operations including the operation of any predecessor. (This limitation
will be applied with respect to issuers of CMOs, or other asset-backed
securities, rather than with reference to the CMO or other asset-backed
security itself.)
FIRST PRIORITY FUNDS INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF FIRST PRIORITY FUNDS
BOARD OF TRUSTEES. The Trustees are responsible for managing the business
affairs of the Trust and for exercising all of the powers of the Trust except
those reserved for the shareholders. The Executive Committee of the Board of
Trustees handles the Trustees' responsibilities between meetings of the
Trustees.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by First Alabama Bank ("First
Alabama" or "the Adviser"), subject to direction by the Trustees. The Adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the assets of the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to 0.75% of the Fund's average daily net assets. The Adviser has
undertaken to reimburse the Fund up to the amount of the advisory fee, for
operating expenses in excess of limitations established by certain states.
The Adviser may voluntarily choose to waive a portion of its fee or
reimburse other
expenses of the Fund. The Adviser can terminate such waiver or
reimbursement policy at any time at its sole discretion.
ADVISER'S BACKGROUND. The Adviser is a wholly-owned subsidiary of First
Alabama Bancshares, Inc., a bank holding company organized during 1971
under the laws of the State of Delaware. (A proposal is currently pending
to change the name of the holding company to "Regions Financial
Corporation.") Operating out of more than 200 offices, it provides a wide
range of banking and fiduciary services to its customers. As of June 30,
1993, First Alabama Bancshares was one of the 100 largest bank holding
companies in the United States with total assets in excess of $8 billion.
First Alabama Bank is recognized as one of the strongest banks in America
by U.S. Banker magazine, Keefe, Bruyette & Woods, and Thomson Bankwatch.
During 1992, these organizations rated First Alabama as one of the top
quality banks in the United States. First Alabama's common stock is
currently included among those in the Dow Jones Equity Market Index as well
as Standard & Poor's Midcap Index.
T. Jerry Harris, Vice President and Trust Investment Officer, is
responsible for the fixed income strategy for First Alabama Bank, and
management of the fixed income common trust funds and First Priority Fixed
Income Fund, which he has managed since their inception. Mr. Harris also
serves as a member of the Trust Investment Group as a portfolio manager. He
has 17 years of investment experience, specifically investment analysis;
seven years with First Alabama Bank. Mr. Harris received his B.S. from
Western Kentucky University in 1971. He later became a Certified Financial
Planner in 1986 and a Chartered Financial Analyst in 1991.
As fiduciary, First Alabama managed over $2.3 billion in discretionary
assets as of December 31, 1992. It manages eight common trust funds and
collective investment funds having a market value in excess of $200
million, as of September 30, 1993. First Alabama has been Adviser to the
First Priority Funds since inception. As of September 30, 1993, the market
value of the First Priority Funds was in excess of $400 million.
DISTRIBUTION OF INVESTMENT SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund
will pay to Federated Securities Corp. an amount computed at an annual rate of
up to .30 of 1% of the average daily net asset value of the Shares to finance
any activity which is principally intended to result in the sale of Shares
subject to the Plan.
Federated Securities Corp. may, from time to time, and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the Shares exceed such lower expense
limitation as the distributor may, by notice to the Trust, voluntarily declare
to be effective.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to provide
sales and/or administrative services as agents for their clients or customers
who beneficially own Shares of the Fund. Administrative services may
include, but are not limited to, the following functions: providing office
space, equipment, telephone facilities, and various personnel including
clerical, supervisory, and computer as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding the Fund; assisting clients in
changing dividend options, account designations, and addresses; and providing
such other services as the Fund reasonably requests.
Financial institutions will receive fees from the distributor based upon Shares
owned by their clients or customers. The schedules of such fees and the basis
upon which such fees will be paid will be determined, from time to time, by the
distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
ADMINISTRATIVE ARRANGEMENTS. _The distributor may also pay financial
institutions a fee based upon the average net asset value of shares of their
customers invested in the Fund for providing administrative services. This fee
is in addition to the amounts paid under the distribution plan for
administrative services, and, if paid, will be reimbursed by the Adviser and not
the Fund.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Board of Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
<C> <S>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may voluntarily waive a portion of
its fee.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTING SERVICES.
Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of Federated
Investors, is transfer agent for the Shares of the Fund, and dividend disbursing
agent for the Fund. It also provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania and Dickstein, Shapiro and Morin, Washington, D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche, Pittsburgh, Pennsylvania.
EXPENSES OF THE FUND AND INVESTMENT SHARES
Holders of Shares pay their allocable portion of Fund and Trust expenses.
The Trust expenses for which holders of Shares pay their allocable portion
include, but are not limited to the following: the cost of organizing the Trust
and continuing its existence; registering the Trust with federal and state
securities authorities; Trustees' fees; auditors' fees; the cost of meetings of
Trustees; legal fees of the Trust; association membership dues; and such
non-recurring and extraordinary items as may arise.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to the following: registering the Fund and Shares
of the Fund; investment advisory services; taxes and commissions; custodian
fees; insurance premiums; auditors' fees; and such non-recurring and
extraordinary items as may arise.
At present, the only expenses allocated to the Shares as a class are expenses
under the Fund's Rule 12b-1 Plan that relate to the Shares. In addition, the
Trustees reserve the right to allocate certain other expenses to holders of
Shares as it deems appropriate ("Class Expenses"). In any case, Class Expenses
would be limited to the following: distribution fees; transfer agent fees as
identified by the transfer agent as attributable to holder of Shares; printing
and postage expenses related to preparing and distributing materials such as
shareholder reports, prospectuses and proxies to current shareholders;
registration fees paid to the Securities and Exchange Commission and
registration fees paid to state securities commissions; expenses related to
administrative personnel and services as required to support holders of Shares;
legal fees relating solely to Shares; and Trustees' fees incurred as a result of
issues relating solely to Shares.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Fund, subtracting the interest of the Shares
in the liabilities of the Fund and those attributable to Shares, and dividing
the remainder by the total number of Shares outstanding. The net asset value for
Shares will be lower than
that of Trust Shares due to the variance in daily net income realized by each
class. Such variance will reflect only accrued net income to which the
shareholders of a particular class are entitled.
INVESTING IN INVESTMENT SHARES
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares of the Fund by an investor is $1,000.
Subsequent investments may be made in any amounts. The Fund may waive the
initial minimum investment from time to time.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
A PERCENTAGE A PERCENTAGE
OF PUBLIC OF NET
AMOUNT OF TRANSACTION OFFERING PRICE AMOUNT INVESTED
<S> <C> <C>
Less than $100,000 2.00% 2.04%
$100,000 but less than $250,000 1.50% 1.52%
$250,000 but less than $500,000 1.00% 1.01%
$500,000 but less than $750,000 0.50% 0.50%
$750,000 but less than $1 million 0.25% 0.25%
$1 million or more 0.00% 0.00%
</TABLE>
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; or (iii) the following
holidays: New Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
PURCHASES AT NET ASSET VALUE. Shares of the Fund may be purchased at net asset
value, without a sales charge, by officers, directors, employees and retired
employees of First Alabama or its subsidiaries, and their spouses and dependent
children.
DEALER CONCESSIONS. For sales of Shares of the Fund, a dealer will normally
receive up to 85% of the applicable sales charge. Any portion of the sales
charge which is not paid to a dealer will be retained by the distributor.
However, from time to time, and at the sole discretion of the distributor, all
or part of that portion may be paid to a dealer.
The sales charge for Shares sold other than through registered broker/dealers
will be retained by the distributor. The distributor may pay fees to banks out
of the sales charge in exchange for sales and/or administrative services
performed on behalf of the bank's customers in connection with the initiation of
customer accounts and purchases of Shares.
SHARE PURCHASES. Shares are sold on days on which the New York Stock Exchange
and the Federal Reserve Wire System are open for business. A customer may
purchase Shares of the Fund through First Alabama Investments, Inc. ("FAII").
Texas residents should purchase Shares through Federated Securities Corp. at
1-800-356-2805. In connection with the sale of Shares, the distributor may, from
time to time, offer certain items of nominal value to any shareholder or
investor. The Fund reserves the right to reject any purchase request.
THROUGH FAII. To place an order to purchase Shares, a customer may contact
their local FAII office or telephone FAII at 1-800-456-3244.
Payment may be made by either check or federal funds or by debiting a customer's
account at First Alabama. Purchase orders must be received by 3:00 p.m. (Central
time) in order to be credited on the same day. For settlement of an order,
payment must be received within five business days of receipt of the order.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
purchases with proceeds from redemptions of unaffiliated mutual fund
shares.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales charge paid. The Fund will combine purchases
of Shares made on the same day by the investor, his spouse, and his children
under age 21 when it calculates the sales charge.
If an additional purchase of Shares is made, the Fund will consider the previous
purchases still invested in the Fund. For example, if a shareholder already owns
Shares having a current value at the public offering price of $90,000 and
purchases $10,000 more at the current public offering price, the sales charge on
the additional purchase according to the schedule now in effect would be 1.50%,
not 2.00%.
To receive the sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing at the time the purchase is made that
Shares are already owned or that purchases are being combined. The Fund will
reduce the sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
Shares in First Priority Funds over the next 13 months, the sales charge may be
reduced by signing a letter of intent to that effect. This letter of intent
includes a provision for a sales charge adjustment depending on the amount
actually purchased within the 13-month period and a provision for the custodian
to hold up to 2.00% of the total amount intended to be purchased in escrow (in
Investment Shares) until such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at the
end of the 13-month period unless the amount specified in the letter of intent
is not purchased. In this event, an appropriate number of escrowed Shares may be
redeemed in order to realize the difference in the sales charge.
This letter of intent will not obligate the shareholder to purchase Shares, but
if he does, each purchase during the period will be at the sales charge
applicable to the total amount intended to be purchased. This letter may be
dated as of a prior date to include any purchases made within the past 90 days.
REINVESTMENT PRIVILEGE. If Shares in the Fund have been redeemed, the
shareholder has a one-time right, within 30 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales charge.
Federated Securities Corp. must be notified by the shareholder in writing or by
his financial institution of the reinvestment in order to eliminate a sales
charge. If the shareholder redeems Shares in the Fund, there may be tax
consequences, and exercise of the reinvestment privilege may result in
additional tax considerations. Shareholders contemplating such transactions
should consult their own tax advisers.
PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED MUTUAL FUND SHARES.
_Investors may purchase shares of the Funds at net asset value, without a sales
charge, with the proceeds from the redemption of shares of a mutual fund which
was sold with a sales charge or commission. The purchase must be made within 60
days of the redemption, and FAII must be notified by the investor in writing or
by his financial institution, at the time the purchase is made.
SYSTEMATIC INVESTMENT PLAN
Holders of Shares may arrange for systematic monthly investments in their
accounts in amounts of $100 or more. Once proper authorization is given, a
shareholder's bank account will be debited to purchase Shares in the Fund.
SHAREHOLDER ACCOUNTS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting the Fund.
DIVIDENDS AND CAPITAL GAINS
Dividends are declared daily and paid monthly. Dividends are declared just prior
to determining net asset value. Capital gains realized by the Fund, if any, will
be distributed at least once every 12 months. Dividends and capital gains will
be reinvested in additional Shares on payment dates at the ex-dividend date net
asset value unless cash payments are requested by shareholders by writing to the
Fund or First Alabama as appropriate.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
A shareholder may exchange shares of one fund for the appropriate class of
shares of any other fund in the Trust by calling or by writing to First Alabama.
Shares purchased by check are eligible for exchange after 10 days. The exchange
feature applies to shares of each fund as of the effective offering date of each
fund's shares.
Orders to exchange shares of one fund for shares of any of the other First
Priority Funds will be executed by redeeming the shares owned at net asset value
and purchasing shares of any of the other First Priority Funds at the offering
price determined after the proceeds from such redemption become available.
Orders for exchanges received by the fund prior to 3:00 p.m. (Central time) on
any day the
funds are open for business will be executed as of the close of business that
day. Orders for exchanges received after 3:00 p.m. (Central time) on any
business day will be executed at the close of the next business day.
Shares of funds with a sales charge may be exchanged at net asset value for
shares of other funds with an equal sales charge or no sales charge. Shares of
funds with a sales charge may be exchanged for shares of funds with a higher
sales charge at net asset value, plus the additional sales charge. Shares of
funds with no sales charge, whether acquired by direct purchase, reinvestment of
dividends on such shares, or otherwise, may be exchanged for shares of funds
with a sales charge at net asset value, plus the applicable sales charge. When
an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends or capital gains on such shares retain the character of
the exchanged shares for purposes of exercising further exchange privileges;
thus, an exchange of such shares for shares of a fund with a sales charge would
be at net asset value.
An excessive number of exchanges may be disadvantageous to the Trust. Therefore
the Trust, in addition to its right to reject any exchange, reserves the right
to terminate the exchange privilege of any shareholder who makes more than five
exchanges of shares of the funds in a year or three in a calendar quarter.
An exchange order must comply with the requirements for a redemption and
purchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements of
each fund being acquired. An exchange constitutes a sale for federal income tax
purposes.
The exchange privilege is only available in states where shares of the fund
being acquired may legally be sold. Before the exchange, a shareholder must
receive a prospectus of the fund for which the exchange is being made.
Telephone exchange instructions may be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
REDEEMING INVESTMENT SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at its net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes the net asset value of Shares. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on Federal
holidays when wire transfers are restricted. Requests for redemption can be made
in person, by telephone, or by mail through FAII.
BY TELEPHONE
A shareholder may redeem Shares by telephoning their local FAII office. For
calls received by First Alabama before 3:00 p.m. (Central time), proceeds will
normally be wired within five business days to the shareholder's account at
First Alabama or a check will be sent to the address of record. Those Shares
will be entitled to the dividend declared on the day the redemption request was
received. In no
event will proceeds be wired more than seven days after a proper request for
redemption has been received.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from First Alabama.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming Shares by telephone. If such a case should occur,
another method of redemption, such as a written request to Federated Services
Company or FAII should be considered.
If at any time, the Fund shall determine it necessary to terminate or modify
this method of redemption, shareholders would be promptly notified.
Telephone redemption instructions may be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
BY MAIL
A shareholder may redeem Shares by sending a written request to FAII. The
written request should include the shareholder's name, the Fund name, the
account number, and the share or dollar amount requested. Shareholders should
call FAII for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
a trust company or commercial bank whose deposits are insured by Bank
Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation ("FDIC");
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
a savings and loan association or a savings bank whose deposits are
insured by the Savings Association Insurance Fund, which is administered
by the FDIC; or
any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT. Normally, a check for the proceeds is mailed to the
shareholder within one business day, but in no event more than seven days, after
receipt of a proper written redemption request.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check, the proceeds from the redemption of those
Shares are not available, and the shares may not be exchanged, until First
Alabama is reasonably certain that the purchase check has cleared, which could
take up to ten calendar days.
SYSTEMATIC WITHDRAWAL PLAN
Under a Systematic Withdrawal Plan, accounts having a value of at least $10,000
may arrange for regular monthly or quarterly fixed withdrawal payments. Each
payment must be at least $100 and may be as much as 1.5% per month or 4.5% per
quarter of the total net asset value of the Shares in the account when the
Systematic Withdrawal Plan is opened. Excessive withdrawals may deplete or
decrease the value of an account.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000. This
requirement does not apply, however, if the balance falls below $1,000 because
of changes in the Fund's net asset value. Before Shares are redeemed to close an
account, the shareholder is notified in writing and allowed 30 days to purchase
additional Shares to meet the minimum requirement.
REDEMPTION IN KIND
The Trust is obligated to redeem Shares solely in cash up to $250,000, or 1% of
any class's net asset value, whichever is less, for any one shareholder within a
90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Trust will pay
all or a portion of the remainder of the redemption in portfolio instruments,
valued in the same way as net asset value is determined. The portfolio
instruments will be selected in a manner that the Trustees deem fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur transaction costs.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of all classes of
each portfolio in the Trust have equal voting rights, except that in matters
affecting only a particular Fund or class, only shareholders of that Fund or
class are entitled to vote. As a Massachusetts business trust, the Trust is not
required to hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in the Trust's or the Fund's operation and for
the election of Trustees under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust itself cannot meet its obligations to indemnify shareholders
and pay judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling, or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of their customer. First Alabama Bank is subject to
such banking laws and regulations.
First Alabama believes, based on the advice of its counsel, that First Alabama
may perform the services for the Fund contemplated by its advisory agreement
with the Trust without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of such or future statutes and regulations, could
prevent the adviser from continuing to perform all or a part of the above
services for its customers and/or the Fund. If it were prohibited from engaging
in these customer-related activities, the Trustees would consider alternative
advisers and means of continuing available investment services. In such event,
changes in the operation of the Fund may occur, including possible termination
of any automatic or other Fund share investment and redemption services that are
being provided by First Alabama. It is not expected that existing shareholders
would suffer any adverse financial consequences (if another adviser with
equivalent abilities to First Alabama is found) as a result of any of these
occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional shares.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its total return and yield for Shares.
Advertisements and other sales literature may also refer to total return. Total
return represents the change, over a specified period of time, in the value of
an investment in Shares of the Fund after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Shares of the Fund is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by Shares over a thirty-day period by the maximum offering price per share of
Shares on the last day of the period. This number is then annualized using
semi-annual compounding. The yield does not necessarily reflect income actually
earned by Shares and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the use of the maximum sales load which, if
excluded, would increase the total return and yield.
Total return and yield will be calculated separately for Investment Shares and
Trust Shares. Because Investment Shares are subject to a sales load and a 12b-1
fee, the total return and yield for Trust Shares, for the same period, will
exceed that of Investment Shares.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Trust Shares of First Priority Fixed Income Fund are sold to accounts for which
First Alabama or other financial institutions act in a fiduciary or agency
capacity at net asset value without a sales charge at a minimum initial
investment of $25,000. Trust Shares are not sold pursuant to a Rule 12b-1 Plan.
The amount of dividends payable to Trust Shares will exceed those payable to
Investment Shares by the difference between Class Expenses and distribution
expenses borne by shares of each respective class.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation with respect to one class of shares
than with respect to another class of shares of the same Fund.
The stated advisory fee is the same for both classes of the Fund.
FIRST PRIORITY FIXED INCOME FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 33.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
<S> <C> <C>
--------------------
<CAPTION>
1993 1992*
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.27 $ 9.90
- ------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------
Net investment income 0.51 0.38
- ------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.50 0.37
- ------------------------------------------------------------------------------------ --------- ---------
Total from investment operations 1.01 0.75
- ------------------------------------------------------------------------------------ --------- ---------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.51) (0.38)
- ------------------------------------------------------------------------------------
Dividends to shareholders from net realized gain on
investment transactions (0.10) --
- ------------------------------------------------------------------------------------ --------- ---------
Total distributions (0.61) (0.38)
- ------------------------------------------------------------------------------------ --------- ---------
NET ASSET VALUE, END OF PERIOD $ 10.67 $ 10.27
- ------------------------------------------------------------------------------------ --------- ---------
TOTAL RETURN** 10.14% 7.66%
- ------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------
Expenses 0.84% 0.77%(a)
- ------------------------------------------------------------------------------------
Net investment income 4.80% 6.02%(a)
- ------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.25% 0.29%
- ------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $169,881 $96,354
- ------------------------------------------------------------------------------------
Portfolio turnover rate*** 83% 44%
- ------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from April 20, 1992 (date of initial
public investment) to November 30, 1992.
** Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
*** Represents portfolio turnover for the entire Fund.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY FIXED INCOME FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- -------------- -------------------------------------------------------------------------------- ---------------
CORPORATE BONDS--20.2%
- ------------------------------------------------------------------------------------------------
DIVERSIFIED--0.6%
--------------------------------------------------------------------------------
$ 1,000,000 United Technologies, 9.625%, 5/15/99 $ 1,106,650
-------------------------------------------------------------------------------- ---------------
ELECTRICAL EQUIPMENT--1.1%
--------------------------------------------------------------------------------
2,000,000 General Electric Capital Corp., 5.50%, 11/1/2001 1,945,120
-------------------------------------------------------------------------------- ---------------
ELECTRICAL POWER--1.9%
--------------------------------------------------------------------------------
1,000,000 Orange/Rockland Utilities, 9.375%, 3/15/2000 1,241,430
--------------------------------------------------------------------------------
1,000,000 Public Service Electric & Gas, 6.00%, 6/1/95 1,014,740
--------------------------------------------------------------------------------
1,000,000 Virginia Electric & Power, 8.875%, 6/1/99 1,143,420
-------------------------------------------------------------------------------- ---------------
Total 3,399,590
-------------------------------------------------------------------------------- ---------------
ELECTRONICS--0.6%
--------------------------------------------------------------------------------
1,000,000 Eastman Kodak, 9.125%, 3/1/98 1,056,990
-------------------------------------------------------------------------------- ---------------
FINANCE-AUTOMOTIVE--3.3%
--------------------------------------------------------------------------------
2,000,000 Ford Motor Credit Corporation, 5.35%, 7/24/95 2,006,540
--------------------------------------------------------------------------------
1,000,000 Ford Motor Credit Corporation, 6.35%, 2/11/98 1,021,230
--------------------------------------------------------------------------------
1,000,000 General Motors Acceptance Corporation, 7.75%, 1/15/99 1,077,640
--------------------------------------------------------------------------------
2,000,000 General Motors Acceptance Corporation, 4.625%, 10/1/99 1,993,920
-------------------------------------------------------------------------------- ---------------
Total 6,099,330
-------------------------------------------------------------------------------- ---------------
FINANCE-COMMERCIAL--0.6%
--------------------------------------------------------------------------------
1,000,000 Household Finance Corp., 9.25%, 2/15/95 1,050,070
-------------------------------------------------------------------------------- ---------------
FINANCE-RETAIL--0.6%
--------------------------------------------------------------------------------
1,000,000 American General Finance, 9.25%, 7/1/94 1,027,350
-------------------------------------------------------------------------------- ---------------
INSURANCE--1.1%
--------------------------------------------------------------------------------
2,000,000 U.S. Life Corp., 6.75%, 1/15/98 2,077,960
-------------------------------------------------------------------------------- ---------------
LEASING--2.2%
--------------------------------------------------------------------------------
4,000,000 International Lease Finance, 4.75%, 7/15/96 3,948,240
-------------------------------------------------------------------------------- ---------------
OIL & FINANCE--0.6%
--------------------------------------------------------------------------------
$ 1,000,000 Texaco Capital, Inc., 7.875%, 5/1/95 $ 1,041,830
-------------------------------------------------------------------------------- ---------------
RETAIL--0.6%
--------------------------------------------------------------------------------
1,000,000 Limited, Inc., 9.125%, 2/1/2001 1,166,350
-------------------------------------------------------------------------------- ---------------
SECURITIES--4.1%
--------------------------------------------------------------------------------
1,000,000 Bear Stearns & Co., Inc., 8.75%, 3/15/2004 1,159,870
--------------------------------------------------------------------------------
2,000,000 Merrill Lynch & Co., 6.14%, 1/26/2000 2,030,000
--------------------------------------------------------------------------------
4,000,000 Goldman Sachs & Co., 7.80%, 7/15/2002 4,352,040
-------------------------------------------------------------------------------- ---------------
Total 7,541,910
-------------------------------------------------------------------------------- ---------------
TOBACCO--1.7%
--------------------------------------------------------------------------------
2,000,000 Philip Morris Cos. Inc., 5.20%, 8/21/95 1,998,860
--------------------------------------------------------------------------------
1,000,000 Philip Morris Cos. Inc., 9.00%, 1/1/2001 1,148,360
-------------------------------------------------------------------------------- ---------------
Total 3,147,220
-------------------------------------------------------------------------------- ---------------
TRANSPORTATION--1.2%
--------------------------------------------------------------------------------
1,000,000 Ford Motor Co., Delaware, 8.875%, 4/1/2006 1,167,410
--------------------------------------------------------------------------------
1,000,000 General Motors Corp., 8.00%, 7/1/94 1,019,010
-------------------------------------------------------------------------------- ---------------
Total 2,186,420
-------------------------------------------------------------------------------- ---------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $35,573,581) 36,795,030
-------------------------------------------------------------------------------- ---------------
STRIP COUPONS--3.7%
- ------------------------------------------------------------------------------------------------
7,800,000 U.S. Treasury Strip Coupon, 11/15/96 6,787,482
-------------------------------------------------------------------------------- ---------------
TOTAL STRIP COUPONS (IDENTIFIED COST $6,705,776) 6,787,482
-------------------------------------------------------------------------------- ---------------
U.S. GOVERNMENT AGENCIES--36.0%
- ------------------------------------------------------------------------------------------------
3,000,000 Federal Home Loan Bank, 5.00%, 12/28/98 2,995,320
--------------------------------------------------------------------------------
1,000,000 Federal Home Loan Bank, 5.50%, 5/27/97 1,005,460
--------------------------------------------------------------------------------
1,000,000 Federal Home Loan Bank, 5.613%, 6/23/97 1,010,940
--------------------------------------------------------------------------------
1,000,000 Federal Home Loan Bank, 5.80%, 6/10/98 1,005,770
--------------------------------------------------------------------------------
6,751,095 Federal Home Loan Mortgage Corp, PC, 1544L, 4.17% Floater,
7/15/2008 6,744,749
--------------------------------------------------------------------------------
$ 2,040,833 Federal Home Loan Mortgage Corp, PC, 1386C, 4.48% Floater,
10/15/2007 $ 2,052,956
--------------------------------------------------------------------------------
5,000,000 Federal Home Loan Mortgage Corp, 1604FC, 4.69% Floater,
11/15/2008 4,975,000
--------------------------------------------------------------------------------
2,424,801 Federal Home Loan Mortgage Corp, PC, 1414F, 4.74% Floater,
11/15/2007 2,427,444
--------------------------------------------------------------------------------
6,000,000 Federal Home Loan Mortgage Corp, PC, 1403M, 6.50%, 12/15/2021 5,881,020
--------------------------------------------------------------------------------
1,225,000 Federal Home Loan Mortgage Corp, 7.55%, 11/27/2007 1,334,834
--------------------------------------------------------------------------------
1,250,000 Federal National Mortgage Association, REMIC, 1992-209/F, 4.72% Floater,
11/25/2007 1,253,712
--------------------------------------------------------------------------------
4,000,000 Federal National Mortgage Association, 5.82%, 11/4/2003 3,836,560
--------------------------------------------------------------------------------
8,601,615 Federal National Mortgage Association, REMIC, 1993-202/GA, 6.50%, 2/25/2022 8,323,697
--------------------------------------------------------------------------------
4,216,165 Federal National Mortgage Association, REMIC, 1993-G32/J, 6.75%,
5/25/2009 4,191,501
--------------------------------------------------------------------------------
3,000,000 Federal National Mortgage Association, REMIC, 1993-G06/J, 7.00%, 12/25/99 3,085,140
--------------------------------------------------------------------------------
2,000,000 Federal National Mortgage Association, REMIC, 1992-G40/K, 7.00%, 6/25/2002 2,058,700
--------------------------------------------------------------------------------
2,250,000 Federal National Mortgage Association, REMIC, 1992-G35/EC, 8.25%, 7/25/2005 2,420,932
--------------------------------------------------------------------------------
5,000,000 Federal National Mortgage Association, Step-up, 0/7.56%,
12/20/2001 4,292,600
--------------------------------------------------------------------------------
2,000,000 Federal National Mortgage Association, Step-up, 0/7.89%, 3/9/2002 1,701,980
--------------------------------------------------------------------------------
5,000,000 Tennessee Valley Authority, 6.125%, 7/15/2003 4,940,250
-------------------------------------------------------------------------------- ---------------
TOTAL U.S. GOVERNMENT AGENCIES (IDENTIFIED COST $65,815,714) 65,538,565
-------------------------------------------------------------------------------- ---------------
U.S. TREASURY OBLIGATIONS--35.4%
- ------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS--1.8%
--------------------------------------------------------------------------------
3,000,000 8.375%, 8/15/2000 3,220,290
-------------------------------------------------------------------------------- ---------------
U.S. TREASURY NOTES--33.6%
--------------------------------------------------------------------------------
$ 5,000,000 4.125%, 5/31/95 $ 5,010,900
--------------------------------------------------------------------------------
3,000,000 4.25%, 5/15/96 2,991,540
--------------------------------------------------------------------------------
1,000,000 4.375%, 11/15/96 995,310
--------------------------------------------------------------------------------
4,000,000 5.125%, 3/31/98 4,018,720
--------------------------------------------------------------------------------
8,000,000 5.50%, 4/15/2000 8,057,440
--------------------------------------------------------------------------------
10,000,000 5.75%, 8/15/2003 9,953,100
--------------------------------------------------------------------------------
8,000,000 6.25%, 2/15/2003 8,257,440
--------------------------------------------------------------------------------
4,000,000 6.375%, 7/15/99 4,208,720
--------------------------------------------------------------------------------
8,000,000 7.50%, 11/15/2001 8,932,480
--------------------------------------------------------------------------------
8,000,000 7.50%, 5/15/2002 8,952,480
-------------------------------------------------------------------------------- ---------------
Total 61,378,130
-------------------------------------------------------------------------------- ---------------
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST $63,542,549) 64,598,420
-------------------------------------------------------------------------------- ---------------
MUTUAL FUND ISSUES--0.4%
- ------------------------------------------------------------------------------------------------
50,000 Fidelity U.S. Treasury Income Portfolio 50,000
--------------------------------------------------------------------------------
671,246 Goldman, Sachs I.L.A. Treasury Portfolio 671,246
-------------------------------------------------------------------------------- ---------------
TOTAL MUTUAL FUND ISSUES (AT NET ASSET VALUE) 721,246
-------------------------------------------------------------------------------- ---------------
*REPURCHASE AGREEMENT--3.7%
- ------------------------------------------------------------------------------------------------
6,770,000 PaineWebber, Inc., 3.20%, dated 11/30/93, due 12/1/93
(at amortized cost) (Note 2B) 6,770,000
-------------------------------------------------------------------------------- ---------------
TOTAL INVESTMENTS (IDENTIFIED COST $179,128,866) $ 181,210,743\
-------------------------------------------------------------------------------- ---------------
</TABLE>
* Repurchase agreement is fully collateralized by U.S. government and/or agency
obligations based on market prices at November 30, 1993.
\ The cost of investments for federal tax purposes amount to $179,209,964. The
net unrealized appreciation on a federal income tax cost basis amounts to
$2,000,779 and is comprised of $3,047,006 appreciation and $1,046,227
depreciation at November 30, 1993.
Note: The categories of investments are shown as a percentage of net assets
($182,400,716) at November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY FIXED INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------------------------
Total investments at value (Notes 2A and 2B)
(Identified cost, $179,128,866; tax cost, $179,209,964) $ 181,210,743
- -------------------------------------------------------------------------------------------------
Interest receivable 1,810,749
- -------------------------------------------------------------------------------------------------
Receivable for Fund shares sold 152,401
- -------------------------------------------------------------------------------------------------
Deferred expenses (Note 2G) 22,715
- ------------------------------------------------------------------------------------------------- ---------------
Total assets 183,196,608
- -------------------------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------------------------
Dividends payable $ 634,227
- ------------------------------------------------------------------------------------
Accrued expenses and other liabilities 161,665
- ------------------------------------------------------------------------------------ -----------
Total liabilities 795,892
- ------------------------------------------------------------------------------------------------- ---------------
NET ASSETS for 17,098,362 shares of beneficial interest outstanding $ 182,400,716
- ------------------------------------------------------------------------------------------------- ---------------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------------------------
Paid-in capital $ 176,770,752
- -------------------------------------------------------------------------------------------------
Unrealized appreciation of investments 2,081,877
- -------------------------------------------------------------------------------------------------
Accumulated undistributed net realized gain on investments 3,548,087
- ------------------------------------------------------------------------------------------------- ---------------
Total $ 182,400,716
- ------------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE and Redemption Price Per Share:
Trust Shares (net assets of $169,881,417 / 15,924,792 SHARES OF BENEFICIAL
INTEREST OUTSTANDING) $10.67
- ------------------------------------------------------------------------------------------------- ---------------
INVESTMENT SHARES (NET ASSETS OF $12,519,299 / 1,173,570 SHARES OF BENEFICIAL INTEREST
OUTSTANDING) $10.67
- ------------------------------------------------------------------------------------------------- ---------------
OFFERING PRICE PER SHARE:
- -------------------------------------------------------------------------------------------------
Trust Shares $10.67
- ------------------------------------------------------------------------------------------------- ---------------
Investment Shares (100/98 of $10.67)* $10.89
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
*_See "What Shares Cost" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY FIXED INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------------
Interest income (Note 2C) $ 7,943,302
- --------------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 1,057,968
- -----------------------------------------------------------------------------------
Administrative personnel and services (Note 5) 198,298
- -----------------------------------------------------------------------------------
Trustees' fees 3,110
- -----------------------------------------------------------------------------------
Custodian fees 35,970
- -----------------------------------------------------------------------------------
Auditing fees 15,269
- -----------------------------------------------------------------------------------
Recordkeeper and transfer agent fees (Note 5) 116,675
- -----------------------------------------------------------------------------------
Legal fees 4,555
- -----------------------------------------------------------------------------------
Printing and postage 20,023
- -----------------------------------------------------------------------------------
Distribution services fees (Note 5) 28,234
- -----------------------------------------------------------------------------------
Insurance premiums 8,516
- -----------------------------------------------------------------------------------
Registration fees 69,733
- -----------------------------------------------------------------------------------
Miscellaneous 8,590
- ----------------------------------------------------------------------------------- -------------
Total expenses 1,566,941
- -----------------------------------------------------------------------------------
Deduct--
- -----------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 5) 352,656
- ----------------------------------------------------------------------------------- -------------
Net expenses 1,214,285
- -------------------------------------------------------------------------------------------------- --------------
Net investment income 6,729,017
- -------------------------------------------------------------------------------------------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, OPTIONS AND FUTURES CONTRACTS:
- --------------------------------------------------------------------------------------------------
Net realized gain on investments, options and futures contracts (identified cost basis) 3,548,872
- --------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments 1,551,202
- -------------------------------------------------------------------------------------------------- --------------
Net realized and unrealized gain on investments, options and futures contracts 5,100,074
- -------------------------------------------------------------------------------------------------- --------------
Change in net assets resulting from operations $ 11,829,091
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY FIXED INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
<S> <C> <C>
1993 1992*
-------------- --------------
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------------------------------------
OPERATIONS--
- ----------------------------------------------------------------------------------
Net investment income $ 6,729,017 $ 3,131,840
- ----------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($3,629,970 net gain and
$1,068,323 net gain, respectively, as computed for federal income tax purposes) 3,548,872 1,068,323
- ----------------------------------------------------------------------------------
Change in unrealized appreciation of investments 1,551,202 530,675
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from operations 11,829,091 4,730,838
- ---------------------------------------------------------------------------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- ----------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- ----------------------------------------------------------------------------------
Trust Shares (6,315,368) (3,012,265)
- ----------------------------------------------------------------------------------
Investment Shares (413,649) (119,575)
- ----------------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment transactions:
- ----------------------------------------------------------------------------------
Trust Shares (1,010,377) --
- ----------------------------------------------------------------------------------
Investment Shares (58,731) --
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets from distributions to shareholders (7,798,125) (3,131,840)
- ---------------------------------------------------------------------------------- -------------- --------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- ----------------------------------------------------------------------------------
Proceeds from sale of shares 85,148,712 104,324,991
- ----------------------------------------------------------------------------------
Net asset value of shares issued to shareholders
electing to receive payment of dividends in Fund shares 426,043 97,796
- ----------------------------------------------------------------------------------
Cost of shares redeemed (9,015,917) (4,210,873)
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets from Fund share transactions 76,558,838 100,211,914
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets 80,589,804 101,810,912
- ----------------------------------------------------------------------------------
NET ASSETS:
- ----------------------------------------------------------------------------------
Beginning of period 101,810,912 --
- ---------------------------------------------------------------------------------- -------------- --------------
End of period $ 182,400,716 $ 101,810,912
- ---------------------------------------------------------------------------------- -------------- --------------
</TABLE>
*Reflects operations for the period from April 20, 1992 (date of initial public
investment) to November 30, 1992.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
First Priority Funds (the "Trust") is an open-end, management investment
company, established as a Massachusetts business trust under the Declaration of
Trust dated October 15, 1991. The Trust currently consists of three portfolios.
The financial statements included herein present only those of First Priority
Fixed Income Fund (the "Fund"), one of the portfolios of the Trust. The
financial statements of the other portfolios in the Trust are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held. The Declaration
of Trust permits the Trust to offer separate series of shares of beneficial
interest representing interests in the separate portfolios of securities. The
Trustees have established two classes of shares, Trust Shares and Investment
Shares in each portfolio of the Trust. Effective December 7, 1993, the Trust
added a fourth portfolio, First Priority Limited Maturity Government Fund, which
offers only one class of shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Listed equity securities are valued at the last sale
price reported on national securities exchanges. Unlisted securities, or
listed securities in which there were no sales are valued at the mean
between bid and asked prices. Bonds and other fixed income securities are
valued at the last sale price on a national securities exchange, if
available. Otherwise, they are valued on the basis of prices furnished by
independent pricing services. Short-term obligations are ordinarily valued
at the mean between bid and asked prices as furnished by an independent
pricing service. Investments in other regulated investment companies are
valued at net asset value. All other securities are appraised at fair value
as determined in good faith by the Trustees.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System or to have segregated within the
custodian bank's vault, all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of
each repurchase agreement's underlying securities to ensure the existence
of a proper level of collateral.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers, which are deemed
by the Trust's adviser to be creditworthy pursuant to guidelines
established by the Trustees. Risks may arise from the potential inability
of counterparties to honor the terms of the repurchase agreement.
Accordingly, the Fund could receive less than the repurchase price on the
sale of collateral securities.
C. INCOME--Interest income is recorded on the accrual basis. Interest income
includes interest and discount earned (net of premium) on short-term
obligations, and interest earned on all other debt securities including
original issue discount as required by the Internal Revenue Code, as
amended.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Internal Revenue Code, as amended, applicable to regulated investment
companies and to distribute to shareholders each year substantially all of
its taxable income, including any net realized gain on investments.
Accordingly, no provision for federal income tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. To the extent the Fund
engages in such transactions, it will do so for the purpose of acquiring
portfolio securities consistent with its investment objective and policies
and not for the purpose of investment leverage. The Fund will record a
when-issued security and the related liability on the trade date. Until the
securities are received and paid for, the Fund will maintain security
positions such that sufficient liquid assets will be available to make
payment for the securities to be purchased. Securities purchased on a
when-issued or delayed delivery basis are marked to market daily and begin
earning interest on the settlement date.
F. EXPENSES--Expenses of the Fund, other than distribution services fees, and
related waivers and reimbursements, if any, are allocated to each class of
shares based on its relative average net assets for the period.
G. DEFERRED EXPENSES--Costs incurred by the Trust with respect to registration
of its shares in its first fiscal year, excluding the initial expense of
registering the shares, have been deferred and are being amortized using
the straight line method through February 28, 1997.
H. OTHER--Investment transactions are accounted for on the date of the
transaction.
(3) DIVIDENDS AND DISTRIBUTIONS
The Fund computes its net income daily and immediately prior to the calculation
of its net asset value at the close of business, declares and records dividends
to shareholders of record at the time of the previous computation of the Fund's
net asset value. Payment of dividends is made monthly in cash, or in additional
shares at the net asset value on the payable date. Capital gains realized by the
Fund are distributed at least once every 12 months and are recorded on the
ex-dividend date.
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
<S> <C> <C> <C> <C>
1993 1992*
<CAPTION>
SHARES DOLLARS SHARES DOLLARS
------------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
TRUST SHARES
- ---------------------------------------------------
Shares outstanding, beginning of period 9,378,210 $ 94,797,717 -- $ --
- ---------------------------------------------------
Shares sold 7,229,259 76,979,211 9,764,895 98,752,152
- ---------------------------------------------------
Shares redeemed (682,677) (7,233,171) (386,685) (3,954,435)
- --------------------------------------------------- ------------- --------------- ----------- --------------
Shares outstanding, end of period 15,924,792 $ 164,543,757 9,378,210 $ 94,797,717
- --------------------------------------------------- ------------- --------------- ----------- --------------
<CAPTION>
YEAR ENDED NOVEMBER 30,
1993 1992*
SHARES DOLLARS SHARES DOLLARS
------------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES
- ---------------------------------------------------
Shares outstanding, beginning of period 531,154 $ 5,414,197 -- $ --
- ---------------------------------------------------
Shares sold 769,652 8,169,501 546,307 5,572,839
- ---------------------------------------------------
Shares issued to shareholders electing to receive
payment of dividends in Fund shares 40,266 426,043 9,427 97,796
- ---------------------------------------------------
Shares redeemed (167,502) (1,782,746) (24,580) (256,438)
- --------------------------------------------------- ------------- --------------- ----------- --------------
Shares outstanding, end of period 1,173,570 $ 12,226,995 531,154 $ 5,414,197
- --------------------------------------------------- ------------- --------------- ----------- --------------
</TABLE>
* For the period from April 20, 1992 (date of initial public investment) to
November 30, 1992.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
First Alabama Bank, the Trust's investment adviser ("Adviser"), receives for its
services an annual investment advisory fee equal to .75 of 1% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive a portion
of its fee or reimburse certain operating expenses of the Fund. For the year
ended November 30, 1993, the investment advisory fee amounted to $1,057,968, of
which $352,656 was voluntarily waived, in accordance with such undertaking.
Federated Administrative Services ("FAS") provides administrative personnel and
services at an annual rate of .15 of 1% on the first $250 million of the average
aggregate daily net assets of the Trust; .125 of
1% on the next $250 million; .10 of 1% on the next $250 million; and .075 of 1%
of the average aggregate daily net assets of the Trust in excess of $750
million. For the year ended November 30, 1993, FAS earned administrative fees of
$198,298.
Expenses of organizing the Fund ($50,007) were borne initially by FAS. The Fund
has agreed to reimburse FAS for the organization expenses borne by FAS during
the five year period following the date the Trust's portfolio became effective.
Pursuant to this agreement, the Fund reimbursed $6,137 in organization expenses
during the year ended November 30, 1993.
Federated Services Company is the Fund's transfer agent and dividend disbursing
agent. It also provides certain accounting and recordkeeping services with
respect to the Fund's portfolio of investments.
Effective December 1, 1993, First Alabama Bank became custodian for the
securities and cash of the Trust.
The Trust has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Trust will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the assets of
Investment Shares of the Fund to finance activities principally intended to
result in the sale of Investment Shares subject to the Plan. The Plan provides
that the Fund will pay up to 0.30 of 1% of the average daily net assets of
Investment Shares, annually, to pay commissions, maintenance fees and to
compensate the distributor. FSC may voluntarily waive a portion of its fee. For
the year ended November 30, 1993, FSC earned $28,234 in distribution services
fees.
(6) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended November 30, 1993, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------
PURCHASES $ 173,902,888
- ------------------------------------------------------------------------------------------------- ---------------
SALES $ 106,495,192
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of FIRST PRIORITY FUNDS
and the Shareholders of FIRST PRIORITY FIXED INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of First Priority Fixed Income Fund (a portfolio
of First Priority Funds) as of November 30, 1993, the related statement of
operations for the year then ended, and the statement of changes in net assets
and financial highlights (see pages 2 and 21) for the years ended November 30,
1993 and 1992. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
November 30, 1993, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of First Priority Fixed
Income Fund as of November 30, 1993, the results of its operations, the changes
in its net assets and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Pittsburgh, Pennsylvania
January 17, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
First Priority Fixed Income Fund Federated Investors Tower
Investment Shares Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Investment Adviser and Custodian
First Alabama Bank P.O. Box 10247
Birmingham, Alabama 35202
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent
and Portfolio Accounting Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin 2101 L Street, N.W.
Washington, D.C. 20037
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche 2500 PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
FIRST PRIORITY FIXED
INCOME FUND
INVESTMENT SHARES
PROSPECTUS
A Diversified Portfolio of
First Priority Funds, an Open-End,
Management Investment Company
2021108A-R (1/94)
Prospectus dated January 31, 1994
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
PROSPECTUS
- --------------------------------------------------------------------------------
FIRST PRIORITY FIXED INCOME FUND
TRUST SHARES
(A PORTFOLIO OF FIRST PRIORITY FUNDS)
- --------------------------------------------------------------------------------
The Trust Shares (the "Shares") offered by this prospectus represent interests
in the diversified portfolio known as First Priority Fixed Income Fund (the
"Fund"). The Fund is one of a series of investment portfolios in First Priority
Funds (the "Trust"), an open-end, management investment company (a mutual fund).
The investment objective of the Fund is to achieve current income with a
secondary objective of capital appreciation by investing in a broad range of
high grade debt securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF FIRST
ALABAMA BANK, ARE NOT ENDORSED OR GUARANTEED BY FIRST ALABAMA BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT
RISKS INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Combined Statement of Additional Information for Trust
Shares and Investment Shares dated January 31, 1994 with the Securities and
Exchange Commission. The information contained in the Combined Statement of
Additional Information is incorporated by reference into this prospectus. You
may request a copy of the Combined Statement of Additional Information free of
charge, obtain other information, or make inquiries about the Fund by writing or
calling toll-free 1-800-433-2829.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated January 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--TRUST SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
U.S. Government Securities 4
CMOs 5
When-Issued and Delayed Delivery Transactions 5
Put and Call Options 5
Financial Futures and Options
on Futures 6
Risks 6
Repurchase Agreements 6
Restricted and Illiquid Securities 7
Investing in Securities of Other
Investment Companies 7
Lending of Portfolio Securities 7
Portfolio Turnover 7
Investment Limitations 7
FIRST PRIORITY FUNDS INFORMATION 8
- ------------------------------------------------------
Management of First Priority Funds 8
Board of Trustees 8
Investment Adviser 8
Advisory Fees 8
Adviser's Background 8
Distribution of Trust Shares 9
Administration of the Fund 9
Administrative Services 9
Transfer Agent, Dividend Disbursing
Agent and Portfolio Accounting
Services 9
Legal Counsel 10
Independent Auditors 10
Expenses of the Fund and Trust Shares 10
NET ASSET VALUE 10
- ------------------------------------------------------
INVESTING IN TRUST SHARES 11
- ------------------------------------------------------
Minimum Investment Required 11
What Shares Cost 11
Share Purchases 11
Through First Alabama Bank 11
Shareholder Accounts 11
Dividends and Capital Gains 11
EXCHANGE PRIVILEGE 12
- ------------------------------------------------------
REDEEMING TRUST SHARES 12
- ------------------------------------------------------
By Telephone 12
Redemption Before Purchase
Instruments Clear 13
Accounts with Low Balances 13
Redemption in Kind 13
SHAREHOLDER INFORMATION 14
- ------------------------------------------------------
Voting Rights 14
Massachusetts Partnership Law 14
EFFECT OF BANKING LAWS 14
- ------------------------------------------------------
TAX INFORMATION 15
- ------------------------------------------------------
Federal Income Tax 15
PERFORMANCE INFORMATION 15
- ------------------------------------------------------
OTHER CLASSES OF SHARES 16
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 17
- ------------------------------------------------------
FINANCIAL STATEMENTS 18
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 30
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
TRUST SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)................................................................... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................................................... None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, as applicable)................................................. None
Redemption Fee (as a percentage of amount redeemed, if applicable)...................................... None
Exchange Fee............................................................................................ None
ANNUAL TRUST SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (1)....................................................................... 0.50 %
12b-1 Fee............................................................................................... None
Other Expenses.......................................................................................... 0.28 %
Total Trust Shares Operating Expenses.......................................................... 0.78 %
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fees. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.75%.
The Annual Trust Shares Operating Expenses were 0.84% for the fiscal year
ended November 30, 1993. The Annual Trust Shares Operating Expenses in the table
above are based on estimated expenses expected during the fiscal year ending
November 30, 1994. The Total Trust Shares Operating Expenses are anticipated to
be 1.03% absent the voluntary waiver of a portion of the management fee.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF TRUST SHARES OF THE FUND WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "FIRST PRIORITY FUNDS INFORMATION" AND
"INVESTING IN TRUST SHARES."
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1)
5% annual return and (2) redemption at the end of each time period. The
Fund charges no redemption fees for Trust Shares......................... $8 $25 $43 $97
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the foregoing table and Example relates only to
Trust Shares of the Fund. The Fund also offers another class of shares called
Investment Shares. Investment Shares are subject to certain of the same expenses
with the addition of a maximum sales load of 2.00% and a 12b-1 fee of 0.30 of
1%. See "Other Classes of Shares."
FIRST PRIORITY FIXED INCOME FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 30.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
<S> <C> <C>
--------------------
<CAPTION>
1993 1992*
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.27 $ 9.90
- ------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------
Net investment income 0.51 0.38
- ------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.50 0.37
- ------------------------------------------------------------------------------------ --------- ---------
Total from investment operations 1.01 0.75
- ------------------------------------------------------------------------------------ --------- ---------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.51) (0.38)
- ------------------------------------------------------------------------------------
Dividends to shareholders from net realized gain on
investment transactions (0.10) --
- ------------------------------------------------------------------------------------ --------- ---------
Total distributions (0.61) (0.38)
- ------------------------------------------------------------------------------------ --------- ---------
NET ASSET VALUE, END OF PERIOD $ 10.67 $ 10.27
- ------------------------------------------------------------------------------------ --------- ---------
TOTAL RETURN** 10.14% 7.66%
- ------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------
Expenses 0.84% 0.77%(a)
- ------------------------------------------------------------------------------------
Net investment income 4.80% 6.02%(a)
- ------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.25% 0.29%
- ------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $169,881 $96,354
- ------------------------------------------------------------------------------------
Portfolio turnover rate*** 83% 44%
- ------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from April 20, 1992 (date of initial
public investment) to November 30, 1992.
** Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
*** Represents portfolio turnover for the entire Fund.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
Further information about the Fund's performance is contained in the Fund's
annual report dated November 30, 1993, which can be obtained free of charge.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
First Priority Funds was established as a Massachusetts business trust under a
Declaration of Trust dated October 15, 1991.
The Declaration of Trust permits First Priority Funds to offer separate series
of shares of beneficial interest representing interests in separate portfolios
of securities. The shares of beneficial interest in any one portfolio may be
offered in separate classes. As of the date of this prospectus, the Board of
Trustees (the "Trustees") have established two classes of shares, Trust Shares
and Investment Shares. This prospectus relates only to Trust Shares of First
Priority Fixed Income Fund.
The Fund is designed for investors seeking current income through a
professionally managed, diversified portfolio investing primarily in a broad
range of high grade debt securities. A minimum initial investment of $25,000 is
required.
Except as otherwise noted in this prospectus, Shares are sold and redeemed at
net asset value.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to achieve current income with a
secondary objective of capital appreciation by investing in a broad range of
high grade debt securities. These investment objectives cannot be changed
without approval of shareholders. While there is no assurance that the Fund will
achieve its investment objectives, it endeavors to do so by following the
investment policies described in this prospectus.
INVESTMENT POLICIES
Under normal circumstances, at least 65% of the value of the Fund's total assets
will be invested in fixed-rate bonds and debentures. The Fund intends to
maintain a dollar weighted average portfolio maturity of between three and
twelve years under normal market conditions. Unless indicated otherwise, the
investment policies may be changed by the Trustees without approval of
shareholders. Shareholders will be notified before any material change in these
policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund will only invest its assets in securities
which are rated at the time of purchase A or higher by Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), or Fitch
Investors Service, Inc. ("Fitch"), or which, if unrated, are deemed to be of
comparable quality by the Fund's investment adviser.
The Fund's debt securities may include fixed rate, adjustable rate or stripped
bonds, debentures, notes, U.S. government securities, asset backed securities
and debt securities convertible into, or exchangeable for, preferred or common
stock.
The Fund may also invest in preferred stock and units, which are debt securities
with stock or warrants to buy stock attached. In addition, the Fund may write
covered call options and put options and may
purchase call and put options. The Fund will not invest in securities judged to
be speculative or of poor quality, but may invest in high grade securities as
described above.
When the adviser selects securities for the Fund, it will consider the ratings
of Moody's, S&P, or Fitch assigned to various debt securities. In making its
investment decisions the adviser also will consider many factors other than
current yield, including the preservation of capital, the potential for
realizing capital appreciation, maturity, and yield to maturity. The adviser
will adjust its investments in particular securities or in types of debt
securities in response to its appraisal of changing economic conditions and
trends. The Fund may sell one security, and purchase another security of
comparable quality and maturity to take advantage of what it believes to be
short-term differentials in market values or yield disparities.
The permitted investments include, but are not limited to:
domestic issues of corporate debt obligations having floating or fixed
rates of interest and rated at the time of purchase in one of the three
highest categories by a nationally recognized statistical rating
organization (a "NRSRO") (rated Aaa, Aa, or A by Moody's; AAA, AA, or A
by S&P; or AAA, AA, or A by Fitch), or which, if unrated, are of
comparable quality in the judgment of the adviser;
asset-backed securities, rated in one of the three highest categories by
a NRSRO, or which are of comparable quality in the judgment of the
adviser;
notes, bonds, and discount notes of the U.S. government or its agencies
or instrumentalities;
commercial paper which matures in 270 days or less that has received high
quality ratings by at least two NRSROs. Such ratings would include:
Prime-1 or Prime-2 by Moody's, A-1 or A-2 by S&P, or F-1 or F-2 by Fitch;
time and savings deposits (including certificates of deposit) in
commercial or savings banks whose accounts are insured by the Bank
Insurance Fund ("BIF") or the Savings Association Insurance Fund, both of
which are administered by the Federal Deposit Insurance Corporation
("FDIC"), including certificates of deposit and other time deposits
issued by foreign branches of FDIC insured banks, banker's acceptances;
and
repurchase agreements collateralized by eligible investments.
U.S. GOVERNMENT SECURITIES. _The U.S. government securities in which the Fund
invests are either issued or guaranteed by the U.S. government, its agencies, or
instrumentalities. These securities include, but are not limited to:
direct obligations of the U.S. Treasury such as U.S. Treasury bills,
notes and bonds; and
notes, bonds, and discount notes of U.S. government agencies or
instrumentalities such as Federal Home Loan Banks, Federal National
Mortgage Association, Government National Mortgage Association, Banks for
Cooperatives, Federal Farm Credit Banks, Tennessee Valley Authority,
Export-Import Bank of the United States, Commodity Credit Corporation,
Federal Financing Bank, Student Loan Marketing Association, Federal Home
Loan Mortgage Corporation, or National Credit Union Administration.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and
credit of the U.S. Treasury. Others for which no assurances can be given that
the U.S. government will provide financial support to the agencies or
instrumentalities, since it is not obligated to do so, are supported by:
issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
the credit of the agency or instrumentality.
CMOS. Collateralized Mortgage Obligations ("CMOs") are a form of
asset-backed security issued by single-purpose stand-alone finance
subsidiaries or trusts of financial institutions, government agencies,
investment bankers, or companies related to the construction industry.
The Fund will invest only in CMOs which are rated AAA by a NRSRO, and which
may be: a) collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (b) collateralized by pools of
mortgages in which payment of principal and interest is guaranteed by the
issuer and such guarantee is collateralized by U.S. government securities;
or (c) securities in which the proceeds of the issuance are invested in
mortgage securities and payment of the principal and interest are supported
by the credit of any agency or instrumentality of the U.S. government.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. In when-issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Fund to miss a price
or yield considered to be advantageous.
PUT AND CALL OPTIONS. The Fund may purchase put options on its portfolio
securities. These options will be used as a hedge to attempt to protect
securities which the Fund holds against decreases in value. The Fund may also
write covered call options and put options on all or any portion of its
portfolio to generate income for the Fund. The Fund will write call options on
securities either held in its portfolio or which it has the right to obtain
without payment of further consideration, or for which it has segregated cash or
U.S. government securities in the amount of any additional consideration. At the
time that a put option is written, the fund will segregate cash or short-term
U.S. government securities equal in value to the amount it will be obligated to
pay upon exercise of the put, and will maintain such value until the put is
either exercised or has expired, or until the Fund has purchased a "closing put"
(i.e., a put on the same securities at the same price as the one previously
written by the Fund). If the Fund does not exercise an option it has purchased,
then the Fund loses in value the price it paid for the option premium. If the
Fund writes (sells) an option which is subsequently exercised, the premium
received by the Fund from the option purchaser may not exceed the increase (in
the case of a call option) or decrease (in the case of a put option) in the
value of the securities underlying the option, in which case the difference
represents a loss for the Fund. However, if the option expires without being
exercised, the Fund realizes a gain in the amount of the premium it received.
The Fund may purchase and write over-the-counter options on portfolio securities
in negotiated transactions with the buyers or writers of the options when
options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment
dealers and other financial institutions (such as commercial banks or savings
and loan associations) deemed creditworthy by the Fund's adviser.
Over-the-counter options are two party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not. The Fund will not buy call
options without further notification to shareholders.
FINANCIAL FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell
financial futures contracts to hedge all or a portion of its portfolio against
changes in interest rates. The Fund will not engage in futures transactions for
speculative purposes. Financial futures contracts call for the delivery of
particular debt instruments at a certain time in the future. The seller of the
contract agrees to make delivery of the type of instrument called for in the
contract and the buyer agrees to take delivery of the instrument at the
specified future time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period, if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options, if
immediately thereafter, the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and, thereby, insure
that the use of such futures contract is unleveraged.
RISKS. When the Fund uses financial futures and options on financial
futures as hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly
with the prices of the securities in the Fund's portfolio. This may cause
the futures contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Fund's investment
adviser could be incorrect in its expectations about the direction or
extent of market factors such as interest rate movements. In these events,
the Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the investment
adviser will consider liquidity before entering into options transactions,
there is no assurance that a liquid secondary market on an exchange or
otherwise will exist for any particular futures contract or option at any
particular time. The Fund's ability to establish and close out futures and
options positions depends on this secondary market.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to the
Fund and agree at the time of sale to repurchase them at a mutually agreed upon
time and price. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase price
on any sale of such securities.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 10% of its net
assets in restricted securities. This restriction is not applicable to
commercial paper issued under Section 4(2) of the Securities Act of 1933.
Restricted securities are any securities in which the Fund may otherwise invest
pursuant to its investment objective and policies, but which are subject to
restriction on resale under federal securities law. The Fund will limit
investments in illiquid securities, including certain restricted securities not
determined by the Trustees to be liquid, non-negotiable time deposits,
over-the-counter options and repurchase agreements providing for settlement in
more than seven days after notice, to 15% of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general. The Fund will invest
in other investment companies primarily for the purpose of investing short-term
cash which has not yet been invested in other portfolio instruments. The adviser
will waive its investment advisory fee on assets invested in securities of
open-end investment companies.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or a long-term basis up to
one-third of the value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions that the
investment adviser has determined are creditworthy under guidelines established
by the Trustees and will receive collateral in the form of cash or U.S.
government securities equal to at least 100% of the value of the securities
loaned.
PORTFOLIO TURNOVER. The Fund may trade or dispose of portfolio securities as
considered necessary to meet its investment objective. It is not anticipated
that the portfolio trading engaged in by the Fund will result in its annual rate
of portfolio turnover exceeding 100%.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an arrangement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may
borrow up to one-third of the value of its total assets and pledge up to
10% of the value of those assets to secure such borrowings;
lend any of its assets except portfolio securities up to one-third of the
value of its total assets;
sell securities short; nor
with respect to 75% of the value of its total assets, invest more than 5%
in securities of any one issuer other than cash, cash items, or
securities issued or guaranteed by the government of the United States,
its agencies or instrumentalities, and repurchase agreements
collateralized by such securities.
The above investment limitations cannot be changed without shareholder approval.
The following investment limitation, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any material
change in this investment limitation becomes effective.
The Fund will not:
invest more than 5% of the value of its total assets in securities of
issuers that have records of less than three years of continuous
operations including the operation of any predecessor. (This limitation
will be applied with respect to issuers of CMOs, or other asset-backed
securities, rather than with reference to the CMO or other asset-backed
security itself.)
FIRST PRIORITY FUNDS INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF FIRST PRIORITY FUNDS
BOARD OF TRUSTEES. The Trustees are responsible for managing the business
affairs of the Trust and for exercising all of the powers of the Trust except
those reserved for the shareholders. The Executive Committee of the Board of
Trustees handles the Trustee's responsibilities between meetings of the
Trustees.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by First Alabama Bank ("First
Alabama" or "the Adviser"), subject to direction by the Trustees. The Adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the assets of the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to 0.75% of the Fund's average daily net assets. The Adviser has
undertaken to reimburse the Fund up to the amount of the advisory fee, for
operating expenses in excess of limitations established by certain states.
The Adviser may voluntarily choose to waive a portion of its fee or
reimburse other expenses of the Fund. The Adviser can terminate such waiver
or reimbursement policy at any time at its sole discretion.
ADVISER'S BACKGROUND. The Adviser is a wholly-owned subsidiary of First
Alabama Bancshares, Inc., a bank holding company organized during 1971
under the laws of the State of Delaware. (A proposal is currently pending
to change the name of the holding company to "Regions Financial
Corporation.") Operating out of more than 200 offices, it provides a wide
range of banking and fiduciary services to its customers. As of June 30,
1993, First Alabama Bancshares was one of the 100 largest bank holding
companies in the United States with total assets in excess of $8 billion.
First Alabama Bank is recognized as one of the strongest banks in America
by U.S. Banker magazine, Keefe, Bruyette & Woods, and Thomson Bankwatch.
During 1992, these organizations rated First Alabama as one of the top
quality banks in the United States. First Alabama's common stock is
currently included among those in the Dow Jones Equity Market Index, as
well as Standard & Poor's Midcap Index.
T. Jerry Harris, Vice President and Trust Investment Officer, is
responsible for the fixed income strategy for First Alabama Bank, and
management of the fixed income common trust funds and First Priority Fixed
Income Fund, which he has managed since their inception. Mr. Harris also
serves as a member of the Trust Investment Group as a portfolio manager. He
has 17 years of investment experience, specifically investment analysis;
seven years with First Alabama Bank. Mr. Harris received his B.S. from
Western Kentucky University in 1971. He later became a Certified Financial
Planner in 1986 and a Chartered Financial Analyst in 1991.
As fiduciary, First Alabama managed over $2.3 billion in discretionary
assets as of December 31, 1992. It manages eight common trust funds and
collective investment funds having a market value in excess of $200
million, as of September 30, 1993. First Alabama has been Adviser to the
First Priority Funds since inception. As of September 30, 1993, the market
value of the First Priority Funds was in excess of $400 million.
DISTRIBUTION OF TRUST SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
<C> <S>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may voluntarily waive a portion of
its fee.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTING SERVICES.
Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of Federated
Investors, is transfer agent for
the Shares of the Fund and dividend disbursing agent for the Fund. It also
provides certain accounting and recordkeeping services with respect to the
Fund's portfolio investments.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania and Dickstein, Shapiro and Morin, Washington D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche, Pittsburgh, Pennsylvania.
EXPENSES OF THE FUND AND TRUST SHARES
Holders of Shares pay their allocable portion of Fund and Trust expenses.
The Trust expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost of organizing the Trust and continuing
its existence; registering the Trust with federal and state securities
authorities; Trustees' fees; auditors' fees; the cost of meetings of Trustees;
legal fees of the Trust; association membership dues; and such non-recurring and
extraordinary items as may arise.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to: registering the Fund and Shares of the Fund;
investment advisory services; taxes and commissions; custodian fees; insurance
premiums; auditors' fees; and such non-recurring and extraordinary items as may
arise.
In addition, the Trustees reserve the right to allocate certain other expenses
to holders of Shares as it deems appropriate ("Class Expenses"). In any case,
Class Expenses would be limited to the following: transfer agent fees as
identified by the transfer agent as attributable to holder of Shares; printing
and postage expenses related to preparing and distributing materials such as
shareholder reports, prospectuses and proxies to current shareholders;
registration fees paid to the Securities and Exchange Commission and
registration fees paid to state securities commissions; expenses related to
administrative personnel and services as required to support holders of Shares;
legal fees relating solely to Shares; and Trustees' fees incurred as a result of
issues relating solely to Shares.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Fund, subtracting the interest of the Shares
in the liabilities of the Fund and those attributable to Shares, and dividing
the remainder by the total number of Shares outstanding. The net asset value for
Shares will exceed that of Investment Shares due to the variance in daily net
income realized by each class. Such variance will reflect only accrued net
income to which the shareholders of a particular class are entitled.
INVESTING IN TRUST SHARES
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares of the Fund by an investor is $25,000.
Subsequent investments may be made in any amounts.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund.
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; or (iii) on the
following holidays: New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange and the Federal
Reserve Wire System are open for business. A customer may purchase Shares of a
Fund through the Trust Department of First Alabama. Texas residents should
purchase Shares through Federated Securities Corp. at 1-800-356-2805. In
connection with the sale of Shares, the distributor may from time to time offer
certain items of nominal value to any shareholder or investor. The Funds reserve
the right to reject any purchase request.
THROUGH FIRST ALABAMA BANK. To place an order to purchase Shares, a customer
may contact their local Trust Administrator or contact their FAB Trust Officer
by telephoning First Alabama.
Payment may be made by either check or federal funds or by debting a customer's
account at First Alabama. Purchase orders must be received by 3:00 p.m. (Central
time) in order to be credited on the same day. Payment is normally required on
the next business day.
SHAREHOLDER ACCOUNTS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting the Fund.
DIVIDENDS AND CAPITAL GAINS
Dividends are declared daily and paid monthly. Dividends are declared just prior
to determining net asset value. Capital gains realized by the Fund, if any, will
be distributed at least once every 12 months. Dividends and capital gains will
be reinvested in additional Shares on payment dates at the ex-dividend date net
asset value unless cash payments are requested by shareholders by writing to the
Fund or First Alabama as appropriate.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
A shareholder may exchange shares of one fund for the appropriate class of
shares of any other fund in the Trust by calling or by writing to First Alabama.
Shares purchased by check are eligible for exchange after 10 days. The exchange
feature applies to shares of each fund as of the effective offering date of each
fund's shares.
Orders to exchange shares of one fund for shares of any of the other First
Priority Funds will be executed by redeeming the shares owned at net asset value
and purchasing shares of any of the other First Priority Funds at the net asset
value determined after the proceeds from such redemption become available.
Orders for exchanges received by the fund prior to 3:00 p.m. (Central time) on
any day the funds are open for business will be executed as of the close of
business that day. Orders for exchanges received after 3:00 p.m. (Central time)
on any business day will be executed at the close of the next business day.
An excessive number of exchanges may be disadvantageous to the Trust. Therefore
the Trust, in addition to its right to reject any exchange, reserves the right
to terminate the exchange privilege of any shareholder who makes more than five
exchanges of shares of the fund in a year or three in a calendar quarter.
An exchange order must comply with the requirements for a redemption and
purchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements of
each fund being acquired. An exchange constitutes a sale for federal income tax
purposes.
The exchange privilege is only available in states where shares of the fund
being acquired may legally be sold. Before the exchange, a shareholder must
receive a prospectus of the fund for which the exchange is being made.
Telephone exchange instructions may be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
REDEEMING TRUST SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at its net asset value next determined after a Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes the net asset value of Shares. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on federal
holidays when wire transfers are restricted. Requests for redemption can be made
in person or by telephone through First Alabama.
BY TELEPHONE
A shareholder who is a customer of First Alabama may redeem Shares of the Fund
by contacting their Trust Administrator. For calls received by First Alabama
before 3:00 p.m. (Central time), proceeds will normally be wired the next day to
the shareholder's account at First Alabama or a check will be sent to the
address of record. Those shares will be entitled to the dividend if one is
declared on the day the
redemption request was received. In no event will proceeds be wired more than
seven days after a proper request for redemption has been received.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from First Alabama.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming Shares by telephone. If such a case should occur,
another method of redemption, such as a written request to Federated Services
Company or First Alabama should be considered.
If at any time, the Fund shall determine it necessary to terminate or modify
this method of redemption, shareholders would be promptly notified.
Telephone redemption instructions may be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check, the proceeds from the redemption of those
Shares are not available, and the shares may not be exchanged, until First
Alabama is reasonably certain that the purchase check has cleared, which could
take up to ten days.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $25,000. This
requirement does not apply, however, if the balance falls below $25,000 because
of changes in the Fund's net asset value. Before Shares are redeemed to close an
account, the shareholder is notified in writing and allowed 30 days to purchase
additional Shares to meet the minimum requirement.
REDEMPTION IN KIND
The Trust is obligated to redeem Shares solely in cash up to $250,000, or 1% of
any class's net asset value, whichever is less, for any one shareholder within a
90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Trust will pay
all or a portion of the remainder of the redemption in portfolio instruments,
valued in the same way as net asset value is determined. The portfolio
instruments will be selected in a manner that the Trustees deem fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur transaction costs.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of all classes of
each portfolio in the Trust have equal voting rights, except that in matters
affecting only a particular Fund or class, only shareholders of that Fund or
class are entitled to vote. As a Massachusetts business trust, the Trust is not
required to hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in the Trust's or the Fund's operation and for
the election of Trustees under certain circumstances. As of January 19, 1993,
First Alabama Bank may be deemed to control the Fund because it is the owner of
record of certain shares of the Fund. As of January 6, 1994, First Alabama Bank,
Birmingham, AL, acting in various capacities for numerous accounts, was the
owner of record of 16,117,918 shares (98.82%) of the Fund, and therefore, may,
for certain purposes, be deemed to control the Fund and be able to affect the
outcome of certain matters presented for a vote of shareholders.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust itself cannot meet its obligations to indemnify shareholders
and pay judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling, or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of their customer. First Alabama is subject to such
banking laws and regulations.
First Alabama believes, based on the advice of its counsel, that First Alabama
may perform the services for the Fund contemplated by its advisory agreement
with the Trust without violation of the Glass-
Steagall Act or other applicable banking laws or regulations. Changes in either
federal or state statutes and regulations relating to the permissible activities
of banks and their subsidiaries or affiliates, as well as further judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent the Adviser from continuing to perform all or a part
of the above services for its customers and/or the Fund. If it were prohibited
from engaging in these customer-related activities, the Trustees would consider
alternative advisers and means of continuing available investment services. In
such event, changes in the operation of the Fund may occur, including possible
termination of any automatic or other Fund share investment and redemption
services that are being provided by First Alabama. It is not expected that
existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities to First Alabama is found) as a result
of any of these occurrences.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional shares.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its total return and yield for Shares.
Advertisements and other sales literature may also refer to total return. Total
return represents the change, over a specified period of time, in the value of
an investment in Shares of the Fund after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Shares of the Fund is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by Shares over a thirty-day period by the
offering price per share of Shares on the last day of the period. This number is
then annualized using semi-annual compounding. The yield does not necessarily
reflect income actually earned by Shares and, therefore, may not correlate to
the dividends or other distributions paid to shareholders.
Shares are sold without any sales load or other similar non-recurring charges.
Total return and yield will be calculated separately for Trust Shares and
Investment Shares. Because Investment Shares are subject to a sales load and a
12b-1 fee, the total return and yield for Trust Shares, for the same period,
will exceed that of Investment Shares.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Investment Shares of First Priority Fixed Income Fund are sold to customers of
First Alabama and others at net asset value plus a maximum sales charge of 2%
with a minimum initial investment of $1,000. Investment Shares are distributed
pursuant to a Rule 12b-1 Plan adopted by the Trust, whereby the distributor is
paid a fee of .30 of 1%.
The amount of dividends payable to Investment Shares will be less than those
payable to Trust Shares by the difference between Class Expenses and
distribution expenses borne by shares of each respective class.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation with respect to one class of shares
than with respect to another class of shares of the same Fund.
The stated advisory fee is the same for both classes of the Fund.
FIRST PRIORITY FIXED INCOME FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 30.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
<S> <C> <C>
----------------------
<CAPTION>
1993 1992*
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.27 $ 9.90
- ------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------
Net investment income 0.48 0.37
- ------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.50 0.37
- ------------------------------------------------------------------------------------ --------- -----------
Total from investment operations 0.98 0.74
- ------------------------------------------------------------------------------------ --------- -----------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.48) (0.37)
- ------------------------------------------------------------------------------------
Dividends to shareholders from net realized gain on investment transactions (0.10) --
- ------------------------------------------------------------------------------------ --------- -----------
Total distributions (0.58) (0.37)
- ------------------------------------------------------------------------------------ --------- -----------
NET ASSET VALUE, END OF PERIOD $ 10.67 $ 10.27
- ------------------------------------------------------------------------------------ --------- -----------
TOTAL RETURN** 9.81% 7.48%
- ------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------
Expenses 1.14% 1.07%(a)
- ------------------------------------------------------------------------------------
Net investment income 4.40% 5.33%(a)
- ------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.25% 0.29%
- ------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $12,519 $5,457
- ------------------------------------------------------------------------------------
Portfolio turnover rate*** 83% 44 %
- ------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from April 20, 1992 (date of initial
public investment) to November 30, 1992.
** Based on net asset value, which does not reflect the sales load or
redemption fee, if applicable.
*** Represents portfolio turnover for the entire Fund.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY FIXED INCOME FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- -------------- -------------------------------------------------------------------------------- ---------------
CORPORATE BONDS--20.2%
- ------------------------------------------------------------------------------------------------
DIVERSIFIED--0.6%
--------------------------------------------------------------------------------
$ 1,000,000 United Technologies, 9.625%, 5/15/99 $ 1,106,650
-------------------------------------------------------------------------------- ---------------
ELECTRICAL EQUIPMENT--1.1%
--------------------------------------------------------------------------------
2,000,000 General Electric Capital Corp., 5.50%, 11/1/2001 1,945,120
-------------------------------------------------------------------------------- ---------------
ELECTRICAL POWER--1.9%
--------------------------------------------------------------------------------
1,000,000 Orange/Rockland Utilities, 9.375%, 3/15/2000 1,241,430
--------------------------------------------------------------------------------
1,000,000 Public Service Electric & Gas, 6.00%, 6/1/95 1,014,740
--------------------------------------------------------------------------------
1,000,000 Virginia Electric & Power, 8.875%, 6/1/99 1,143,420
-------------------------------------------------------------------------------- ---------------
Total 3,399,590
-------------------------------------------------------------------------------- ---------------
ELECTRONICS--0.6%
--------------------------------------------------------------------------------
1,000,000 Eastman Kodak, 9.125%, 3/1/98 1,056,990
-------------------------------------------------------------------------------- ---------------
FINANCE-AUTOMOTIVE--3.3%
--------------------------------------------------------------------------------
2,000,000 Ford Motor Credit Corporation, 5.35%, 7/24/95 2,006,540
--------------------------------------------------------------------------------
1,000,000 Ford Motor Credit Corporation, 6.35%, 2/11/98 1,021,230
--------------------------------------------------------------------------------
1,000,000 General Motors Acceptance Corporation, 7.75%, 1/15/99 1,077,640
--------------------------------------------------------------------------------
2,000,000 General Motors Acceptance Corporation, 4.625%, 10/1/99 1,993,920
-------------------------------------------------------------------------------- ---------------
Total 6,099,330
-------------------------------------------------------------------------------- ---------------
FINANCE-COMMERCIAL--0.6%
--------------------------------------------------------------------------------
1,000,000 Household Finance Corp., 9.25%, 2/15/95 1,050,070
-------------------------------------------------------------------------------- ---------------
FINANCE-RETAIL--0.6%
--------------------------------------------------------------------------------
1,000,000 American General Finance, 9.25%, 7/1/94 1,027,350
-------------------------------------------------------------------------------- ---------------
INSURANCE--1.1%
--------------------------------------------------------------------------------
2,000,000 U.S. Life Corp., 6.75%, 1/15/98 2,077,960
-------------------------------------------------------------------------------- ---------------
LEASING--2.2%
--------------------------------------------------------------------------------
4,000,000 International Lease Finance, 4.75%, 7/15/96 3,948,240
-------------------------------------------------------------------------------- ---------------
OIL & FINANCE--0.6%
--------------------------------------------------------------------------------
$ 1,000,000 Texaco Capital, Inc., 7.875%, 5/1/95 $ 1,041,830
-------------------------------------------------------------------------------- ---------------
RETAIL--0.6%
--------------------------------------------------------------------------------
1,000,000 Limited, Inc., 9.125%, 2/1/2001 1,166,350
-------------------------------------------------------------------------------- ---------------
SECURITIES--4.1%
--------------------------------------------------------------------------------
1,000,000 Bear Stearns & Co., Inc., 8.75%, 3/15/2004 1,159,870
--------------------------------------------------------------------------------
2,000,000 Merrill Lynch & Co., 6.14%, 1/26/2000 2,030,000
--------------------------------------------------------------------------------
4,000,000 Goldman Sachs & Co., 7.80%, 7/15/2002 4,352,040
-------------------------------------------------------------------------------- ---------------
Total 7,541,910
-------------------------------------------------------------------------------- ---------------
TOBACCO--1.7%
--------------------------------------------------------------------------------
2,000,000 Philip Morris Cos. Inc., 5.20%, 8/21/95 1,998,860
--------------------------------------------------------------------------------
1,000,000 Philip Morris Cos. Inc., 9.00%, 1/1/2001 1,148,360
-------------------------------------------------------------------------------- ---------------
Total 3,147,220
-------------------------------------------------------------------------------- ---------------
TRANSPORTATION--1.2%
--------------------------------------------------------------------------------
1,000,000 Ford Motor Co., Delaware, 8.875%, 4/1/2006 1,167,410
--------------------------------------------------------------------------------
1,000,000 General Motors Corp., 8.00%, 7/1/94 1,019,010
-------------------------------------------------------------------------------- ---------------
Total 2,186,420
-------------------------------------------------------------------------------- ---------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $35,573,581) 36,795,030
-------------------------------------------------------------------------------- ---------------
STRIP COUPONS--3.7%
- ------------------------------------------------------------------------------------------------
7,800,000 U.S. Treasury Strip Coupon, 11/15/96 6,787,482
-------------------------------------------------------------------------------- ---------------
TOTAL STRIP COUPONS (IDENTIFIED COST $6,705,776) 6,787,482
-------------------------------------------------------------------------------- ---------------
U.S. GOVERNMENT AGENCIES--36.0%
- ------------------------------------------------------------------------------------------------
3,000,000 Federal Home Loan Bank, 5.00%, 12/28/98 2,995,320
--------------------------------------------------------------------------------
1,000,000 Federal Home Loan Bank, 5.50%, 5/27/97 1,005,460
--------------------------------------------------------------------------------
1,000,000 Federal Home Loan Bank, 5.613%, 6/23/97 1,010,940
--------------------------------------------------------------------------------
1,000,000 Federal Home Loan Bank, 5.80%, 6/10/98 1,005,770
--------------------------------------------------------------------------------
6,751,095 Federal Home Loan Mortgage Corp, PC, 1544L, 4.17% Floater,
7/15/2008 6,744,749
--------------------------------------------------------------------------------
$ 2,040,833 Federal Home Loan Mortgage Corp, PC, 1386C, 4.48% Floater,
10/15/2007 $ 2,052,956
--------------------------------------------------------------------------------
5,000,000 Federal Home Loan Mortgage Corp, 1604FC, 4.69% Floater,
11/15/2008 4,975,000
--------------------------------------------------------------------------------
2,424,801 Federal Home Loan Mortgage Corp, PC, 1414F, 4.74% Floater,
11/15/2007 2,427,444
--------------------------------------------------------------------------------
6,000,000 Federal Home Loan Mortgage Corp, PC, 1403M, 6.50%, 12/15/2021 5,881,020
--------------------------------------------------------------------------------
1,225,000 Federal Home Loan Mortgage Corp, 7.55%, 11/27/2007 1,334,834
--------------------------------------------------------------------------------
1,250,000 Federal National Mortgage Association, REMIC, 1992-209/F, 4.72% Floater,
11/25/2007 1,253,712
--------------------------------------------------------------------------------
4,000,000 Federal National Mortgage Association, 5.82%, 11/4/2003 3,836,560
--------------------------------------------------------------------------------
8,601,615 Federal National Mortgage Association, REMIC, 1993-202/GA, 6.50%, 2/25/2022 8,323,697
--------------------------------------------------------------------------------
4,216,165 Federal National Mortgage Association, REMIC, 1993-G32/J, 6.75%,
5/25/2009 4,191,501
--------------------------------------------------------------------------------
3,000,000 Federal National Mortgage Association, REMIC, 1993-G06/J, 7.00%, 12/25/99 3,085,140
--------------------------------------------------------------------------------
2,000,000 Federal National Mortgage Association, REMIC, 1992-G40/K, 7.00%, 6/25/2002 2,058,700
--------------------------------------------------------------------------------
2,250,000 Federal National Mortgage Association, REMIC, 1992-G35/EC, 8.25%, 7/25/2005 2,420,932
--------------------------------------------------------------------------------
5,000,000 Federal National Mortgage Association, Step-up, 0/7.56%,
12/20/2001 4,292,600
--------------------------------------------------------------------------------
2,000,000 Federal National Mortgage Assocation, Step-up, 0/7.89%, 3/9/2002 1,701,980
--------------------------------------------------------------------------------
5,000,000 Tennessee Valley Authority, 6.125%, 7/15/2003 4,940,250
-------------------------------------------------------------------------------- ---------------
TOTAL U.S. GOVERNMENT AGENCIES (IDENTIFIED COST $65,815,714) 65,538,565
-------------------------------------------------------------------------------- ---------------
U.S. TREASURY OBLIGATIONS--35.4%
- ------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS--1.8%
--------------------------------------------------------------------------------
3,000,000 8.375%, 8/15/2000 3,220,290
-------------------------------------------------------------------------------- ---------------
U.S. TREASURY NOTES--33.6%
--------------------------------------------------------------------------------
$ 5,000,000 4.125%, 5/31/95 $ 5,010,900
--------------------------------------------------------------------------------
3,000,000 4.25%, 5/15/96 2,991,540
--------------------------------------------------------------------------------
1,000,000 4.375%, 11/15/96 995,310
--------------------------------------------------------------------------------
4,000,000 5.125%, 3/31/98 4,018,720
--------------------------------------------------------------------------------
8,000,000 5.50%, 4/15/2000 8,057,440
--------------------------------------------------------------------------------
10,000,000 5.75%, 8/15/2003 9,953,100
--------------------------------------------------------------------------------
8,000,000 6.25%, 2/15/2003 8,257,440
--------------------------------------------------------------------------------
4,000,000 6.375%, 7/15/99 4,208,720
--------------------------------------------------------------------------------
8,000,000 7.50%, 11/15/2001 8,932,480
--------------------------------------------------------------------------------
8,000,000 7.50%, 5/15/2002 8,952,480
-------------------------------------------------------------------------------- ---------------
Total 61,378,130
-------------------------------------------------------------------------------- ---------------
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST $63,542,549) 64,598,420
-------------------------------------------------------------------------------- ---------------
MUTUAL FUND ISSUES--0.4%
- ------------------------------------------------------------------------------------------------
50,000 Fidelity U.S. Treasury Income Portfolio 50,000
--------------------------------------------------------------------------------
671,246 Goldman, Sachs I.L.A. Treasury Portfolio 671,246
-------------------------------------------------------------------------------- ---------------
TOTAL MUTUAL FUND ISSUES (AT NET ASSET VALUE) 721,246
-------------------------------------------------------------------------------- ---------------
*REPURCHASE AGREEMENT--3.7%
- ------------------------------------------------------------------------------------------------
$ 6,770,000 PaineWebber, Inc., 3.20%, dated 11/30/93, due 12/1/93
(at amortized cost) (Note 2B) $ 6,770,000
-------------------------------------------------------------------------------- ---------------
TOTAL INVESTMENTS (IDENTIFIED COST $179,128,866) $ 181,210,743\
-------------------------------------------------------------------------------- ---------------
</TABLE>
* Repurchase agreement is fully collateralized by U.S. government and/or agency
obligations based on market prices at November 30, 1993.
\ The cost of investments for federal tax purposes amount to $179,209,964. The
net unrealized appreciation on a federal income tax cost basis amounts to
$2,000,779 and is comprised of $3,047,006 appreciation and $1,046,227
depreciation at November 30, 1993.
Note: The categories of investments are shown as a percentage of net assets
($182,400,716) at November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY FIXED INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------------------------
Total investments at value (Notes 2A and 2B)
(Identified cost, $179,128,866; tax cost, $179,209,964) $ 181,210,743
- -------------------------------------------------------------------------------------------------
Interest receivable 1,810,749
- -------------------------------------------------------------------------------------------------
Receivable for Fund shares sold 152,401
- -------------------------------------------------------------------------------------------------
Deferred expenses (Note 2G) 22,715
- ------------------------------------------------------------------------------------------------- ---------------
Total assets 183,196,608
- -------------------------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------------------------
Dividends payable $ 634,227
- ------------------------------------------------------------------------------------
Accrued expenses and other liabilities 161,665
- ------------------------------------------------------------------------------------ -----------
Total liabilities 795,892
- ------------------------------------------------------------------------------------------------- ---------------
NET ASSETS for 17,098,362 shares of beneficial interest outstanding $ 182,400,716
- ------------------------------------------------------------------------------------------------- ---------------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------------------------
Paid-in capital $ 176,770,752
- -------------------------------------------------------------------------------------------------
Unrealized appreciation of investments 2,081,877
- -------------------------------------------------------------------------------------------------
Accumulated undistributed net realized gain on investments 3,548,087
- ------------------------------------------------------------------------------------------------- ---------------
Total $ 182,400,716
- ------------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE and Redemption Price Per Share:
Trust Shares (net assets of $169,881,417 / 15,924,792 SHARES OF BENEFICIAL
INTEREST OUTSTANDING) $10.67
- ------------------------------------------------------------------------------------------------- ---------------
INVESTMENT SHARES (NET ASSETS OF $12,519,299 / 1,173,570 SHARES OF BENEFICIAL INTEREST
OUTSTANDING) $10.67
- ------------------------------------------------------------------------------------------------- ---------------
OFFERING PRICE PER SHARE:
- -------------------------------------------------------------------------------------------------
Trust Shares $10.67
- ------------------------------------------------------------------------------------------------- ---------------
Investment Shares (100/98 of $10.67)* $10.89
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
*See "What Shares Cost" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY FIXED INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------------
Interest income (Note 2C) $ 7,943,302
- --------------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 1,057,968
- -----------------------------------------------------------------------------------
Administrative personnel and services (Note 5) 198,298
- -----------------------------------------------------------------------------------
Trustees' fees 3,110
- -----------------------------------------------------------------------------------
Custodian fees 35,970
- -----------------------------------------------------------------------------------
Auditing fees 15,269
- -----------------------------------------------------------------------------------
Recordkeeper and transfer agent fees (Note 5) 116,675
- -----------------------------------------------------------------------------------
Legal fees 4,555
- -----------------------------------------------------------------------------------
Printing and postage 20,023
- -----------------------------------------------------------------------------------
Distribution services fees (Note 5) 28,234
- -----------------------------------------------------------------------------------
Insurance premiums 8,516
- -----------------------------------------------------------------------------------
Registration fees 69,733
- -----------------------------------------------------------------------------------
Miscellaneous 8,590
- ----------------------------------------------------------------------------------- -------------
Total expenses 1,566,941
- -----------------------------------------------------------------------------------
Deduct--
- -----------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 5) 352,656
- ----------------------------------------------------------------------------------- -------------
Net expenses 1,214,285
- -------------------------------------------------------------------------------------------------- --------------
Net investment income 6,729,017
- -------------------------------------------------------------------------------------------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, OPTIONS AND FUTURES CONTRACTS:
- --------------------------------------------------------------------------------------------------
Net realized gain on investments, options and futures contracts (identified cost basis) 3,548,872
- --------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments 1,551,202
- -------------------------------------------------------------------------------------------------- --------------
Net realized and unrealized gain on investments, options and futures contracts 5,100,074
- -------------------------------------------------------------------------------------------------- --------------
Change in net assets resulting from operations $ 11,829,091
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY FIXED INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
<S> <C> <C>
1993 1992*
-------------- --------------
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------------------------------------
OPERATIONS--
- ----------------------------------------------------------------------------------
Net investment income $ 6,729,017 $ 3,131,840
- ----------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($3,629,970 net gain and
$1,068,323 net gain, respectively, as computed for federal income tax purposes) 3,548,872 1,068,323
- ----------------------------------------------------------------------------------
Change in unrealized appreciation of investments 1,551,202 530,675
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from operations 11,829,091 4,730,838
- ---------------------------------------------------------------------------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- ----------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- ----------------------------------------------------------------------------------
Trust Shares (6,315,368) (3,012,265)
- ----------------------------------------------------------------------------------
Investment Shares (413,649) (119,575)
- ----------------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment transactions:
- ----------------------------------------------------------------------------------
Trust Shares (1,010,377) --
- ----------------------------------------------------------------------------------
Investment Shares (58,731) --
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets from distributions to shareholders (7,798,125) (3,131,840)
- ---------------------------------------------------------------------------------- -------------- --------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- ----------------------------------------------------------------------------------
Proceeds from sale of shares 85,148,712 104,324,991
- ----------------------------------------------------------------------------------
Net asset value of shares issued to shareholders
electing to receive payment of dividends in Fund shares 426,043 97,796
- ----------------------------------------------------------------------------------
Cost of shares redeemed (9,015,917) (4,210,873)
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets from Fund share transactions 76,558,838 100,211,914
- ---------------------------------------------------------------------------------- -------------- --------------
Change in net assets 80,589,804 101,810,912
- ----------------------------------------------------------------------------------
NET ASSETS:
- ----------------------------------------------------------------------------------
Beginning of period 101,810,912 --
- ---------------------------------------------------------------------------------- -------------- --------------
End of period $ 182,400,716 $ 101,810,912
- ---------------------------------------------------------------------------------- -------------- --------------
</TABLE>
*Reflects operations for the period from April 20, 1992 (date of initial public
investment) to November 30, 1992.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
First Priority Funds (the "Trust") is an open-end, management investment
company, established as a Massachusetts business trust under the Declaration of
Trust dated October 15, 1991. The Trust currently consists of three portfolios.
The financial statements included herein present only those of First Priority
Fixed Income Fund (the "Fund"), one of the portfolios of the Trust. The
financial statements of the other portfolios in the Trust are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held. The Declaration
of Trust permits the Trust to offer separate series of shares of beneficial
interest representing interests in the separate portfolios of securities. The
Trustees have established two classes of shares, Trust Shares and Investment
Shares in each portfolio of the Trust. Effective December 7, 1993, the Trust
added a fourth portfolio, First Priority Limited Maturity Government Fund, which
offers only one class of shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Listed equity securities are valued at the last sale
price reported on national securities exchanges. Unlisted securities, or
listed securities in which there were no sales are valued at the mean
between bid and asked prices. Bonds and other fixed income securities are
valued at the last sale price on a national securities exchange, if
available. Otherwise, they are valued on the basis of prices furnished by
independent pricing services. Short-term obligations are ordinarily valued
at the mean between bid and asked prices as furnished by an independent
pricing service. All other securities are appraised at fair value as
determined in good faith by the Trustees. Investments in other regulated
investment companies are valued at net asset value.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System or to have segregated within the
custodian bank's vault, all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of
each repurchase agreement's underlying securities to ensure the existence
of a proper level of collateral.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers, which are deemed
by the Trust's adviser to be creditworthy pursuant to guidelines
established by the Trustees. Risks may arise from the potential inability
of counterparties to honor the terms of the repurchase agreement.
Accordingly, the Fund could receive less than the repurchase price on the
sale of collateral securities.
C. INCOME--Interest income is recorded on the accrual basis. Interest income
includes interest and discount earned (net of premium) on short-term
obligations, and interest earned on all other debt securities including
original issue discount as required by the Internal Revenue Code, as
amended.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Internal Revenue Code, as amended, applicable to regulated investment
companies and to distribute to shareholders each year substantially all of
its taxable income, including any net realized gain on investments.
Accordingly, no provision for federal income tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. To the extent the Fund
engages in such transactions, it will do so for the purpose of acquiring
portfolio securities consistent with its investment objective and policies
and not for the purpose of investment leverage. The Fund will record a
when-issued security and the related liability on the trade date. Until the
securities are received and paid for, the Fund will maintain security
positions such that sufficient liquid assets will be available to make
payment for the securities to be purchased. Securities purchased on a
when-issued or delayed delivery basis are marked to market daily and begin
earning interest on the settlement date.
F. EXPENSES--Expenses of the Fund, other than distribution services fees, and
related waivers and reimbursements, if any, are allocated to each class of
shares based on its relative average net assets for the period.
G. DEFERRED EXPENSES--Costs incurred by the Trust with respect to registration
of its shares in its first fiscal year, excluding the initial expense of
registering the shares, have been deferred and are being amortized using
the straight line method through February 28, 1997.
H. OTHER--Investment transactions are accounted for on the date of the
transaction.
(3) DIVIDENDS AND DISTRIBUTIONS
The Fund computes its net income daily and immediately prior to the calculation
of its net asset value at the close of business, declares and records dividends
to shareholders of record at the time of the previous computation of the Fund's
net asset value. Payment of dividends is made monthly in cash, or in additional
shares at the net asset value on the payable date. Capital gains realized by the
Fund are distributed at least once every 12 months and are recorded on the
ex-dividend date.
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
<S> <C> <C> <C> <C>
1993 1992*
<CAPTION>
SHARES DOLLARS SHARES DOLLARS
------------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
TRUST SHARES
- ---------------------------------------------------
Shares outstanding, beginning of period 9,378,210 $ 94,797,717 -- $ --
- ---------------------------------------------------
Shares sold 7,229,259 76,979,211 9,764,895 98,752,152
- ---------------------------------------------------
Shares redeemed (682,677) (7,233,171) (386,685) (3,954,435)
- --------------------------------------------------- ------------- --------------- ----------- --------------
Shares outstanding, end of period 15,924,792 $ 164,543,757 9,378,210 $ 94,797,717
- --------------------------------------------------- ------------- --------------- ----------- --------------
<CAPTION>
YEAR ENDED NOVEMBER 30,
1993 1992*
SHARES DOLLARS SHARES DOLLARS
------------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES
- ---------------------------------------------------
Shares outstanding, beginning of period 531,154 $ 5,414,197 -- $ --
- ---------------------------------------------------
Shares sold 769,652 8,169,501 546,307 5,572,839
- ---------------------------------------------------
Shares issued to shareholders electing to receive
payment of dividends in Fund shares 40,266 426,043 9,427 97,796
- ---------------------------------------------------
Shares redeemed (167,502) (1,782,746) (24,580) (256,438)
- --------------------------------------------------- ------------- --------------- ----------- --------------
Shares outstanding, end of period 1,173,570 $ 12,226,995 531,154 $ 5,414,197
- --------------------------------------------------- ------------- --------------- ----------- --------------
</TABLE>
* For the period from April 20, 1992 (date of initial public investment) to
November 30, 1992.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
First Alabama Bank, the Trust's investment adviser ("Adviser"), receives for its
services an annual investment advisory fee equal to .75 of 1% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive a portion
of its fee or reimburse certain operating expenses of the Fund. For the year
ended November 30, 1993, the investment advisory fee amounted to $1,057,968, of
which $352,656 was voluntarily waived, in accordance with such undertaking.
Federated Administrative Services ("FAS") provides administrative personnel and
services at an annual rate of .15 of 1% on the first $250 million of the average
aggregate daily net assets of the Trust; .125 of
1% on the next $250 million; .10 of 1% on the next $250 million; and .075 of 1%
of the average aggregate daily net assets of the Trust in excess of $750
million. For the year ended November 30, 1993, FAS earned administrative fees of
$198,298.
Expenses of organizing the Fund ($50,007) were borne initially by FAS. The Fund
has agreed to reimburse FAS for the organization expenses borne by FAS during
the five year period following the date the Trust's portfolio became effective.
Pursuant to this agreement, the Fund reimbursed $6,137 in organization expenses
during the year ended November 30, 1993.
Federated Services Company is the Fund's transfer agent and dividend disbursing
agent. It also provides certain accounting and recordkeeping services with
respect to the Fund's portfolio of investments.
Effectively December 1, 1993, First Alabama Bank became the custodian for the
securities and cash of the Trust.
The Trust has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Trust will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the assets of
Investment Shares of the Fund to finance activities principally intended to
result in the sale of Investment Shares subject to the Plan. The Plan provides
that the Fund will pay up to 0.30 of 1% of the average daily net assets of
Investment Shares, annually, to pay commissions, maintenance fees and to
compensate the distributor. FSC may voluntarily waive a portion of its fee. For
the year ended November 30, 1993, FSC earned $28,234 in distribution services
fees.
(6) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended November 30, 1993, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------
PURCHASES $ 173,902,888
- ------------------------------------------------------------------------------------------------- ---------------
SALES $ 106,495,192
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of FIRST PRIORITY FUNDS
and the Shareholders of FIRST PRIORITY FIXED INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of First Priority Fixed Income Fund (a portfolio
of First Priority Funds) as of November 30, 1993, the related statement of
operations for the year then ended, and the statement of changes in net assets
and financial highlights (see pages 2 and 17) for the years ended November 30,
1993 and 1992. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
November 30, 1993 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of First Priority Fixed
Income Fund as of November 30, 1993, the results of its operations, the changes
in its net assets and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Pittsburgh, Pennsylvania
January 17, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
First Priority Fixed Income Fund Federated Investors Tower
Trust Shares Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Investment Adviser and Custodian
First Alabama Bank P.O. Box 10247
Birmingham, Alabama 35202
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent
and Portfolio Accounting Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin 2101 L Street, N.W.
Washington, D.C. 20037
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
FIRST PRIORITY FIXED
INCOME FUND
TRUST SHARES
PROSPECTUS
A Diversified Portfolio of
First Priority Funds, an Open-End,
Management Investment Company
Prospectus dated January 31, 1994
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
2021108A-I (1/94)
FIRST PRIORITY FIXED INCOME FUND
INVESTMENT SHARES
TRUST SHARES
(A PORTFOLIO OF FIRST PRIORITY FUNDS)
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the prospectus for Investment Shares and Trust Shares dated January
31, 1994. This Statement is not a prospectus itself. To receive a copy
of the prospectus, write First Priority Fixed Income Fund or call
1-800-433-2829.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 31, 1994
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE 1
- ---------------------------------------------------------------
Types of Investments 1
When-Issued and Delayed
Delivery Transactions 5
Restricted and Illiquid Securities 5
Repurchase Agreements 5
Lending of Portfolio Securities 5
Investment Limitations 5
FIRST PRIORITY FUNDS MANAGEMENT 7
- ---------------------------------------------------------------
Officers and Trustees 7
The Funds 9
Fund Ownership 10
Trustee Liability 10
INVESTMENT ADVISORY SERVICES 10
- ---------------------------------------------------------------
Adviser to the Fund 10
Advisory Fees 10
ADMINISTRATIVE SERVICES 11
- ---------------------------------------------------------------
CUSTODIAN 11
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 11
- ---------------------------------------------------------------
PURCHASING SHARES 11
- ---------------------------------------------------------------
Distribution Plan (Investment Shares) 12
Conversion to Federal Funds 12
DETERMINING NET ASSET VALUE 12
- ---------------------------------------------------------------
Determining Market Value of Securities 12
REDEEMING SHARES 13
- ---------------------------------------------------------------
Redemption in Kind 13
EXCHANGE PRIVILEGE 13
- ---------------------------------------------------------------
Requirements for Exchanging Shares 13
TAX STATUS 13
- ---------------------------------------------------------------
The Fund's Tax Status 13
Shareholders' Tax Status 13
TOTAL RETURN 13
- ---------------------------------------------------------------
YIELD 14
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 14
- ---------------------------------------------------------------
APPENDIX 16
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Priority Fixed Income Fund (the "Fund") is a portfolio in First Priority
Funds, which was established as a Massachusetts business trust under a
Declaration of Trust dated October 15, 1991.
Shares of the Fund are offered in two classes, Investment Shares and Trust
Shares (individually and collectively referred to as "Shares"). This Combined
Statement of Additional Information relates to the above-mentioned Shares of the
Fund.
INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
The Fund's investment objective is to achieve current income with a secondary
objective of capital appreciation by investing in a broad range of high grade
debt securities. The investment objectives stated above cannot be changed
without approval of shareholders.
TYPES OF INVESTMENTS
The Fund invests primarily in a portfolio of high grade bonds. The Fund will
only invest its assets in securities which are rated at the time of purchase in
one of the three highest categories by a nationally recognized statistical
rating organization rated Aaa, Aa, or A by Moody's Investors Service, Inc.
("Moody's"), AAA, AA, or A by Standard & Poor's Corporation ("S&P"), or AAA, AA,
or A by Fitch Investors Service, Inc. ("Fitch"). The investment portfolio
consists of the following securities:
corporate debt securities such as bonds, notes, and debentures;
asset-backed securities;
U.S. government securities, including U.S. Treasury bills, notes, and bonds, and
securities issued by agencies and instrumentalities of the U.S. government;
commercial paper; and
repurchase agreements.
ASSET-BACKED SECURITIES
Asset-backed securities are created by the grouping of certain
governmental, government related and private loans, receivables, and
other lender assets into pools. Interests in these pools are sold as
individual securities. These securities differ from other forms of debt
securities, which normally provide for periodic payment of interest in
fixed amounts with principal paid at maturity or specified call dates.
Asset-backed securities, however, provide periodic payments which
generally consist of both interest and principal payments. The estimated
life of an asset-backed security and the average maturity of a portfolio
including such assets vary with the prepayment experience with respect to
the underlying debt instruments. The credit characteristics of
asset-backed securities also differ in a number of respects from those of
traditional debt securities.
The credit quality of most asset-backed securities depends primarily upon
the credit quality of the assets underlying such securities, how well the
entity issuing the securities is insulated from the credit risk of the
originator or any other affiliated entities, and the amount and quality
of any credit support provided to such securities.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES
The Fund may invest in non-mortgage related asset-backed securities
including, but not limited to, interests in pools of receivables, such as
motor vehicle installment purchase obligations and credit card
receivables. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities, all of which are
issued by non-governmental entities and carry no direct or indirect
government guarantee, are structurally similar to collateralized mortgage
obligations and mortgage pass-through securities, which are described
below.
MORTGAGE-RELATED ASSET-BACKED SECURITIES
The Fund may also invest in various mortgage-related asset-backed
securities. These types of investments may include adjustable rate
mortgage securities, collateralized mortgage obligations ("CMOs"), real
estate mortgage investment conduits, or other securities collateralized
by or representing an interest in real estate mortgages (collectively,
"mortgage securities"). The mortgage securities primarily will have
interest rates which reset at least annually and generally will be issued
or guaranteed by government agencies.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMS are pass-through mortgage securities with adjustable rather than
fixed interest rates. The ARMS in which the Fund invests are issued by
the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA"), and the Federal Home Loan
Mortgage Corporation
("FHLMC") and are actively traded. The underlying mortgages which
collateralized ARMS issued by GNMA are fully guaranteed by the Federal
Housing Administration ("FHA") or Veterans Administration ("VA"), while
those collateralizing ARMS issued by FHLMC or FNMA are typically
conventional residential mortgages conforming to strict underwriting size
and maturity constraints.
Unlike conventional bonds, ARMS pay back principal over the life of the
ARMS rather than at maturity. Thus, a holder of the ARMS, such as the
Fund, would receive monthly scheduled payments of principal and interest,
and may receive unscheduled principal payments representing prepayments
on the underlying mortgages. At the time that a holder of the ARMS
reinvests the payments and any unscheduled prepayments of principal that
it receives, the holder may receive a rate of interest which is actually
lower than the rate of interest paid on the existing ARMS. As a
consequence, ARMS may be a less effective means of "locking in" long-term
interest rates than other types of U.S. government securities.
Like other U.S. government securities, the market value of ARMS will
generally vary inversely with changes in market interest rates. Thus, the
market value of ARMS generally declines when interest rates rise and
generally rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other similar investments (e.g. investments with
comparable maturities) because as interest rates decline, the likelihood
increases that mortgages will be prepaid. Furthermore, if ARMS are
purchased at a premium, mortgage foreclosures and unscheduled principal
payments may result in some loss of a holder's principal investment to
the extent of the premium paid. Conversely, if ARMS are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as
ordinary income when distributed to shareholders.
RESETS OF INTEREST
The interest rates paid on the ARMS and CMOs in which the Fund invests
generally are readjusted at intervals of one year or less to an increment
over some predetermined interest rate index. There are two main
categories of indices: those based on U.S. Treasury securities and those
derived from a calculated measure, such as a cost of funds index or a
moving average of mortgage rates. Commonly utilized indices include the
one-year and five-year constant maturity Treasury Note rates, the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on
longer-term Treasury securities, the National Median Cost of Funds, the
one-month or three-month London Interbank Offered Rate (LIBOR), the prime
rate of a specific bank, or commercial paper rates. Some indices, such as
the one-year constant maturity Treasury Note rate, closely mirror changes
in market interest rate levels. Others tend to lag behind changes in
market rate levels and tend to be somewhat less volatile.
CAPS AND FLOORS
The underlying mortgages which collateralize the ARMS and CMOs in which
the Fund invests will frequently have caps and floors which limit the
maximum amount by which the loan rate to the residential borrower may
change up or down: (1) per reset or adjustment interval, and (2) over the
life of the loan. Some residential mortgage loans restrict periodic
adjustments by limiting changes in the borrower's monthly principal and
interest payments rather than limiting interest rate changes. These
payment caps may result in negative amortization.
The value of mortgage securities in which the Fund invests may be
affected if market interest rates rise or fall faster and farther than
the allowable caps or floors on the underlying residential mortgage
loans. Additionally, even though the interest rates on the underlying
residential mortgages are adjustable, amortization and prepayments may
occur, thereby, causing the effective maturities of the mortgage
securities in which the Fund invests to be shorter than the maturities
stated in the underlying mortgages.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by buying
and selling financial futures contracts, buying put options on portfolio
securities and listed put options on futures contracts, and writing call
options on futures contracts. The Fund may also write covered call
options and put options on portfolio securities to attempt to increase
its current income.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer who agrees to take delivery of
the security ("going long") at a certain time in the future.
In the fixed income securities market, price moves inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in value during
the term of an option, the related futures contracts will also decrease
in value and the option will increase in value. In such an event, the
Fund will normally close out its option by selling an identical option.
If the hedge is successful, the proceeds received by the Fund upon the
sale of the second option will be large enough to offset both the premium
paid by the Fund for the original option plus the decrease in value of
the hedged securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures contract
of the type underlying the option (for a price less than the strike price
of the option) and exercise the option. The Fund would then deliver the
futures contract in return for payment of the strike price. If the Fund
neither closes out nor exercises an option, the option will expire on the
date provided in the option contract, and only the premium paid for the
contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts to hedge its portfolio. When the
Fund writes a call option on a futures contract, it is undertaking the
obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As market interest rates rise, causing
the prices of futures to go down, the Fund's obligation under a call
option on a future (to sell a futures contract) costs less to fulfill,
causing the value of the Fund's call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the call,
so that the Fund keeps the premium received for the option. This premium
can substantially offset the drop in value of the Fund's fixed income or
indexed portfolio which is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be
less than the premium received by the Fund for the initial option. The
net premium income of the Fund will then substantially offset the
decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will take
prompt action to close out a sufficient number of open contracts to bring
its open futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that initial
margin in futures transactions does not involve the borrowing of funds by
the Fund to finance the transactions. Initial margin is in the nature of
a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming
all contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking to market." Variation margin does not
represent a borrowing or loan by the Fund but is instead settlement
between the Fund and the broker of the amount one would owe the other if
the futures contract expired. In computing its daily net asset value, the
Fund will mark to market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during
the term of the option.
WRITING COVERED CALL OPTIONS AND PUT OPTIONS ON PORTFOLIO SECURITIES
From time to time, the Fund may write covered put options and call
options on portfolio securities. The Fund could realize fees (referred to
as "premiums") for granting the rights evidenced by the options. However,
in return for the premium, the Fund forfeits the right to any
appreciation in the value of the underlying security while the option is
outstanding. A put option embodies the right of its purchaser to compel
the writer of the option to purchase, from the option holder, an
underlying security at the specified price at any time during the option
period. In contrast, a call option embodies the right of its purchaser to
compel the writer of the option to sell the option holder an underlying
security at a specified price at any time during the option period.
Upon the exercise of a put option written by the Fund, the Fund may
suffer a loss equal to the difference between the price at which the Fund
is required to purchase the underlying security and its market value at
the time of the option exercise, less the premium received for writing
the option. Upon exercise of a call option written by a Fund, the Fund
may suffer a loss equal to the excess of the security's market value at
the time of the option exercise over the Fund's acquisition cost of the
security, less the premium received for writing the option.
The Fund may engage in a "closing purchase transaction" to realize a
profit, to prevent an underlying security from being called or put or, in
the case of a call option, to unfreeze an underlying security (thereby,
permitting its sale or the writing of a new option on the security prior
to the outstanding option's expiration). To effect a closing purchase
transaction, the Fund would purchase, prior to the holder's exercise of
an option that the Fund has written, an option of the same series (that
is, an option on the same underlying security having the same exercise
price and expiration date as that written by the Fund) as that on which
the Fund desires to terminate its obligation. The obligation of the Fund
under an option that it has written would be terminated by a closing
purchase transaction, but the Fund would not be deemed to own an option
as the result of the transaction. There can be no assurance that the Fund
will be able to effect closing purchase transactions, at a time when it
wishes to do so. To facilitate closing purchase transactions, however,
the Fund will ordinarily write options only if a secondary market for the
options exists on a national securities exchange or in the
over-the-counter market.
The Fund may also write covered call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of the
option during the option period to deliver the underlying security upon
payment of the exercise price. The Fund may only sell call options either
on securities held in its portfolio or on securities which it has the
right to obtain without payment of further consideration (or has
segregated cash in the amount of any additional consideration).
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include obligations issued or guaranteed by U.S. government
agencies or instrumentalities. These securities are backed by the
following:
the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which are permissible
investments which may not always receive financial support from the U.S.
government are:
Federal Farm Credit Banks;
Federal Home Loan Banks;
Federal National Mortgage Association;
Student Loan Marketing Association; and
Federal Home Loan Mortgage Corporation.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated on the Fund's records at the trade date. These
securities are marked to market daily and maintained until the transaction is
settled. The Fund may engage in these transactions to an extent that would cause
the segregation of an amount up to 20% of the total value of its assets.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Board of Trustees (the "Trustees") to determine the liquidity
of certain restricted securities is permitted under a Securities and Exchange
Commission ("SEC") Staff position set forth in the adopting release for Rule
144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive
safe-harbor for certain secondary market transactions involving securities
subject to restrictions on resale under federal securities laws. The Rule
provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to further
enhance the liquidity of the secondary market for securities eligible for resale
under Rule 144A. The Fund believes that the Staff of the SEC has left the
question of determining the liquidity of all restricted securities (eligible for
resale under Rule 144A) to the Trustees. The Trustees consider the following
criteria in determining the liquidity of certain restricted securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the number of
other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace trades.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities subject to
repurchase agreements, and these securities are marked to market daily. To the
extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that a defaulting seller files for bankruptcy or
becomes insolvent, disposition of securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Trustees.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
The Fund would not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
INVESTMENT LIMITATIONS
BUYING ON MARGIN
The Fund will not purchase any securities on margin, but may obtain such
short-term credits as are necessary for clearance of transactions. The
deposit or payment by the Fund of initial or variation margin in
connection with financial futures contracts or related options
transactions is not considered the purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money in amounts up to one-third of the value of its total assets,
including the amounts borrowed; and except to the extent that the Fund
may enter into futures contracts. The Fund will not borrow money except
as a temporary, extraordinary, or emergency measure, or to facilitate
management of the portfolio by enabling the Fund to meet redemption
requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not purchase any
securities while borrowings in excess of 5% of its total assets are
outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may pledge assets having
a market value not exceeding the lesser of the dollar amounts borrowed or
10% of the value of total assets at the time of the pledge. For purposes
of this limitation, the following are not deemed to be pledges: margin
deposits for the purchase and sale of financial futures contracts and
related options; and segregation or collateral arrangements made in
connection with options activities or the purchase of securities on a
when-issued basis.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items, or securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities, and
repurchase agreements collateralized by such securities) if as a result
more than 5% of the value of its total assets would be invested in the
securities of that issuer. (For purposes of this limitation, the Fund
considers instruments issued by a U.S. branch of a domestic bank having
capital, surplus, and undivided profits in excess of $100,000,000 at the
time of investment to be "cash items.")
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in the securities of
companies whose business involves the purchase or sale of real estate, or
in securities which are secured by real estate or interests in real
estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts except that the Fund may purchase and sell
financial futures contracts and related options.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities which the Fund may purchase
pursuant to its investment objective, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities up
to one-third of the value of its total assets. This shall not prevent the
Fund from purchasing or holding U.S. government obligations, money market
instruments, variable rate demand notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions where permitted
by the Fund's investment objective, policies and limitations.
SELLING SHORT
The Fund will not sell any securities short.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of its total assets in securities of
issuers having their principal business activities in the same industry.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its net assets in
securities subject to restrictions on resale under the Securities Act of
1933, except for commercial paper issued under Section 4(2) of the
Securities Act of 1933, and certain other restricted securities which
meet the criteria for liquidity as established by the Board of Trustees.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest no more than 5% of its total assets in any one investment
company, or invest more than 10% of its total assets in investment
companies in general. The Fund will purchase securities of closed-end
investment companies only in open market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
reorganization, or acquisition of assets; nor are they applicable with
respect to securities of investment companies that have been exempted
from registration under the Investment Company Act of 1940. It should be
noted that investment companies incur certain expenses such as management
fees and, therefore, any investment by the Fund in shares of another
investment company would be subject to such duplicate expenses.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
securities of issuers which have records of less than three years of
continuous operations, including the operation of any predecessor. The
Fund will apply this limitation by reference to the issuer of a CMO (or
other asset-backed security) rather than requiring that the CMO (or other
asset-backed security) itself have at least three years of continuous
operations.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except it may invest in
the securities of issuers which invest or sponsor such programs.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities, unless the
securities are held in the Fund's portfolio and not more than 5% of the
value of the Fund's total assets would be invested in premiums on open
put option positions.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of the investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
The Fund does not consider the issuance of separate classes of shares to
constitute an issue of "senior securities" within the meaning of the investment
limitations set forth above.
The Fund has no present intent to borrow money, pledge securities, or invest in
restricted or illiquid securities in excess of 5% of the value of its net assets
in the coming fiscal year. To comply with registration requirements in certain
states, the Fund (1) will limit the aggregate value of the assets underlying
covered call options or put options written by the Fund to not more than 25% of
its net assets; (2) will limit the premiums paid for options purchased by the
Fund to 20% of its net assets; and (3) will limit the margin deposits on futures
contracts entered into by the Fund to 5% of its net assets. (If state
requirements change, these restrictions may be revised without shareholder
notification.)
FIRST PRIORITY FUNDS MANAGEMENT
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OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, principal occupations,
and present positions, including any affiliation with First Alabama Bank,
Federated Investors, Federated Securities Corp., Federated Services Company,
Federated Administrative Services, and the Funds (as defined below).
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C>
John F. Donahue*\ Chairman and Chairman and Trustee, Federated Investors; Chairman and Trustee,
Federated Investors Tower Trustee Federated Advisers, Federated Management, and Federated Research;
Pittsburgh, PA Director, AEtna Life and Casualty Company; Chief Executive Officer and
Director, Trustee, or Managing General Partner of the Funds; formerly,
Director, The Standard Fire Insurance Company. Mr. Donahue is the father
of J. Christopher Donahue, Vice President of the Trust.
John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior Vice President,
Wood/IPC Commercial John R. Wood and Associates, Inc., Realtors, President, Northgate
Department Village Development Corporation; General Partner or Trustee in private
John R. Wood and real estate ventures in Southwest Florida; Director, Trustee or Managing
Associates, Inc. Realtors General Partner of the Funds; formerly, President, Naples Property
3255 Tamiami Trail North Management, Inc.
Naples, FL
William J. Copeland Trustee Director and Member of the Executive Committee, Michael Baker, Inc.;
One PNC Plaza-- Director, Trustee, or Managing General Partner of the Funds; formerly,
23rd Floor Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Pittsburgh, PA Director, Ryan Homes, Inc.
James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director,
Concord, MA Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D. 3471 Trustee Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of
Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the Funds.
Pittsburgh, PA
Edward L. Flaherty, Jr.\ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat 'N Park
5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Pittsburgh, PA Trustee, or Managing General Partner of the Funds; formerly, Counsel,
Horizon Financial, F.A., Western Region.
Peter E. Madden Trustee Consultant; State Representative, Commonwealth of Massachusetts;
225 Franklin Street Director, Trustee, or Managing General Partner of the Funds; formerly,
Boston, MA President, State Street Bank & Trust Company and State Street Boston
Corporation, and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
5916 Penn Mall Director Eat'N Park Restaurants Inc.; Director, Trustee, or Managing
Pittsburgh, PA General Partner of the Funds; formerly, Vice Chairman, Horizon
Financial, F.A.
Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
1202 Cathedral of Endowment for International Peace, RAND Corporation; Online Computer
Learning Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
University of Pittsburgh Management Center; Director, Trustee, or Managing General Partner of the
Pittsburgh, PA Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental
Policy & Technology.
Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee, or Managing
4905 Bayard Street General Partner of the Funds.
Pittsburgh, PA
Edward C. Gonzales* President, Vice President, Treasurer, and Trustee, Federated Investors; Vice
Federated Investors Tower Treasurer President and Treasurer, Federated Advisers, Federated Management, and
Pittsburgh, PA and Trustee Federated Research; Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Trustee, Federated Services Company;
Chairman, Treasurer, and Director, Federated Administrative Services;
Trustee or Director of some of the Funds; Vice President and Treasurer
of the Funds.
J. Christopher Donahue Vice President President and Trustee, Federated Investors; Trustee, Federated Advisers,
Federated Investors Tower Federated Management, and Federated Research; President and Director,
Pittsburgh, PA Federated Administrative Services; Trustee, Federated Services Company;
President or Vice President of the Funds; Director, Trustee or Managing
General Partner of some of the Funds. Mr. Donahue is the son of John F.
Donahue, Chairman and Trustee of the Trust.
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors; Chairman and
Federated Investors Tower Director, Federated Securities Corp.; President or Vice President of the
Pittsburgh, PA Funds; Director or Trustee of some of the Funds.
John W. McGonigle Vice President and Vice President, Secretary, General Counsel, and Trustee, Federated
Federated Investors Tower Secretary Investors; Vice President, Secretary and Trustee, Federated Advisers,
Pittsburgh, PA Federated Management, and Federated Research; Trustee, Federated
Services Company; Executive Vice President, Secretary, and Director,
Federated Administrative Services; Director and Executive Vice
President, Federated Securities Corp.; Vice President and Secretary of
the Funds.
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive Vice
Federated Investors Tower President, Federated Securities Corp.; President and Trustee, Federated
Pittsburgh, PA Advisers, Federated Management, and Federated Research; Vice President
of the Funds; Director, Trustee, or Managing General Partner of some of
the Funds; formerly, Vice President, The Standard Fire Insurance Com-
pany and President of its Federated Research Division.
Ronald M. Petnuch Vice President Vice President, Federated Administrative Services; Vice President and
Federated Investors Tower and Assistant Assistant Treasurer of some of the Funds.
Pittsburgh, PA Treasurer
</TABLE>
*This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940.
\Members of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees between
meetings of the Board.
THE FUNDS
'The Funds" and "Funds" mean the following investment companies: A.T. Ohio
Tax-Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; BankSouth
Select Funds; The Boulevard Funds; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; FT Series, Inc.;
Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA Trust;
Federated Government Trust; Federated Growth Trust; Federated High Yield Trust;
Federated Income Securities Trust; Federated Income Trust; Federated Index
Trust; Federated Intermediate Government Trust; Federated Master Trust;
Federated Municipal Trust; Federated Short-Intermediate Government Trust;
Federated Short-Term U.S. Government Trust; Federated Stock Trust; Federated
Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.;
Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S.
Government Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Insurance Management Series; Intermediate Municipal Trust; Investment
Series Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.;
Liberty High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc. - 1999;
Liberty Utility Fund, Inc.; Liquid Cash Trust; Mark Twain Funds; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust; Municipal
Securities Income Trust; New York Municipal Cash Trust; 111 Corcoran Funds; The
Planters Funds; Portage Funds; RIMCO Monument Funds; The Shawmut Funds;
Short-Term Municipal Trust; Signet Select Funds; Star Funds; The Starburst
Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; Trademark Funds; Trust for
Financial Institutions; Trust for Government Cash Reserves; Trust for Short-Term
U.S. Government Securities; and Trust for U.S. Treasury Obligations.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of January 6, 1994, the following shareholders of record owned 5% or more of
the outstanding Investment Shares of the Fund: Clarence B. Blair, Birmingham,
AL, owned approximately 80,902 Shares (6.58%).
As of January 6, 1994, the following shareholders of record owned 5% or more of
the outstanding Trust Shares of the Fund: First Alabama Bank, Birmingham, AL,
owned approximately 16,117,918 Shares (98.82%).
TRUSTEE LIABILITY
The First Priority Funds' Declaration of Trust provides that the Trustees are
not liable for errors of judgment or mistakes of fact or law. However, they are
not protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser is First Alabama Bank ("First Alabama" or "the
Adviser"), which is a wholly-owned subsidiary of First Alabama Bancshares, Inc.
The Adviser shall not be liable to the Trust, the Fund, or any shareholder of
the Fund for any losses that may be sustained in the purchase, holding, or sale
of any security, or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, First Alabama receives an annual investment advisory
fee as described in the respective prospectus.
During the fiscal year ended November 30, 1993, the Adviser earned $1,057,968,
of which $352,656 was voluntarily waived. From the Fund's date of initial public
investment, April 20, 1992, to November 30, 1992, the Adviser earned $392,397,
of which $130,799 was voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will reimburse the
Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is
exceeded, the amount to be reimbursed by the Adviser will be limited, in
any single fiscal year, by the amount of the investment advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for the fees set forth in the
respective prospectus. For the fiscal year ended November 30, 1993, Federated
Administrative Services earned $198,298 for administrative services. From the
Fund's date of initial public investment, April 20, 1992, to November 30, 1992,
Federated Administrative Services earned $77,353, of which $24,315 was
voluntarily waived.
John A. Staley, IV, an officer of the Fund, holds approximately 15% of the
outstanding common stock and serves as a director of Commercial Data Services,
Inc., a company which provides computer processing services to Federated
Administrative Services. For the fiscal years ended November 30, 1993, and 1992,
Federated Administrative Services paid approximately 164,324 and $186,144,
respectively, for services provided by Commercial Data Services, Inc.
CUSTODIAN
- --------------------------------------------------------------------------------
First Alabama Bank, Birmingham, Alabama is custodian for the securities and cash
of the Fund. Under the custodian agreement, First Alabama Bank holds the Fund's
portfolio securities and keeps all necessary records and documents relating to
its duties. First Alabama Bank's fees for custody services are based upon the
market value of Fund securities held in custody plus certain securities
transaction charges.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include:
advice as to the advisability of investing in securities;
security analysis and reports;
economic studies;
industry studies;
receipt of quotations for portfolio evaluations; and
similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the Adviser in advising the
Fund and other accounts. To the extent that receipt of these services may
supplant services for which the Adviser or its affiliates might otherwise have
paid, it would tend to reduce their expenses.
As of November 30, 1993, the Fund owned $1,159,870, $2,030,000, and $4,352,040,
respectively, of securities of Bear Stearns & Co., Inc., Merrill Lynch & Co.,
and Goldman Sachs & Co., respectively, three of its regular broker/dealers that
derive more than 15% of gross revenues from securities-related activities.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value with a sales charge on days the New
York Stock Exchange is open for business. The procedure for purchasing Shares of
the Fund is explained in the respective prospectus under "Investing in
Investment Shares" or "Investing in Trust Shares." As used in the prospectus,
the term "dependent children" means all children under the age of 19 and
full-time students under the age of 23.
DISTRIBUTION PLAN (INVESTMENT SHARES)
With respect to the Investment Shares class of the Fund, the Trust has adopted a
Plan pursuant to Rule 12b-1 (the "Plan") which was promulgated by the Securities
and Exchange Commission under the Investment Company Act of 1940. The Plan
provides for payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of Investment
Shares. Such activities may include the advertising and marketing of Investment
Shares; preparing, printing, and distributing prospectuses and sales literature
to prospective shareholders, brokers or administrators; and implementing and
operating the Plan. Pursuant to the Plan, the distributor may pay fees to
brokers for distribution and administrative services and to administrators for
administrative services as to Investment Shares. The administrative services are
provided by a representative who has knowledge of the shareholder's particular
circumstances and goals, and include, but are not limited to: communicating
account openings; communicating account closings; entering purchase
transactions; entering redemption transactions; providing or arranging to
provide accounting support for all transactions; wiring funds and receiving
funds for Investment Share purchases and redemptions; confirming and reconciling
all transactions; reviewing the activity in Fund accounts; and providing
training and supervision of broker personnel; posting and reinvesting dividends
to Fund accounts or arranging for this service to be performed by the Fund's
transfer agent; and maintaining and distributing current copies of prospectuses
and shareholder reports to the beneficial owners of Investment Shares and
prospective shareholders.
The Trustees expects that the adoption of the Plan will result in the sale of a
sufficient number of Investment Shares so as to allow the Fund to achieve
economic viability. It is also anticipated that an increase in the size of the
Fund will facilitate more efficient portfolio management and assist the Fund in
seeking to achieve its investment objective.
For the fiscal year ended November 30, 1993, and from the Fund's date of initial
public investment, April 23, 1992, to November 30, 1992, brokers and
administrators (financial institutions) received fees in the amount of $28,234
and $6,717, respectively, pursuant to the distribution plan.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. Federated Services Company acts as the shareholder's agent in
depositing checks and converting them to federal funds.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value generally changes each day. The days on which the net asset
value is calculated by the Fund are described in the respective prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's securities are determined as follows:
as provided by an independent pricing service;
for short-term obligations, according to the mean bid and asked prices, as
furnished by an independent pricing service;
at fair value as determined in good faith by the Trustees. Prices provided by
independent pricing services may be determined without relying exclusively on
quoted prices.
Pricing services may consider the following:
yield;
quality;
coupon rate;
maturity;
type of issue;
trading characteristics; and
other market data.
The Fund will value futures contracts, options, and put options on futures and
financial futures at their market values established by the exchanges at the
close of option trading on such exchanges unless the Board of Trustees
determines in good faith that another method of valuing option positions is
necessary to appraise their fair value.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
respective prospectus under "Redeeming Investment Shares" or "Redeeming Trust
Shares."
REDEMPTION IN KIND
Although the Trust intends to redeem Shares in cash, it reserves the right,
under certain circumstances, to pay the redemption price in whole or in part by
a distribution of securities from the respective Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which the Trust is obligated to redeem Shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the respective
class's net asset value during any 90-day period.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
REQUIREMENTS FOR EXCHANGING SHARES
Shareholders using the exchange privilege must exchange Shares having a net
asset value of at least $1,000 for Investment Shares and $25,000 for Trust
Shares. Before the exchange, the shareholder must receive a prospectus of the
fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
the proceeds invested in Investment or Trust Shares, respectively, of the other
fund.
Further information on the exchange privilege and prospectuses may be obtained
by calling First Alabama. Instructions for exchanges may be given in writing.
Written instructions may require a signature guarantee.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
derive at least 90% of its gross income from dividends, interest, and gains from
the sale of securities;
derive less than 30% of its gross income from the sale of securities held less
than three months;
invest in securities within certain statutory limits; and
distribute to its shareholders at least 90% of its net income earned during the
year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. No portion of any income dividend paid by
the Fund is eligible for the dividends received deduction available to
corporations.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
the Fund Shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The average annual total return for both classes of shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the offering price per share at the end of the period. The
number of Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000, less any applicable sales
load, adjusted over the period by any additional Shares, assuming the monthly
reinvestment of all dividends and distributions.
The Fund's average annual total return for Investment Shares for the one-year
period ended November 30, 1993, and for the period between April 20, 1992 (date
of initial public investment), and November 30, 1993, was 7.61%
and 9.46%, respectively. The Fund's average annual total return for Trust Shares
for the one-year period ended November 30, 1993, and for the period between
April 20, 1992 (date of initial public investment), and November 30, 1993, was
10.14% and 11.15%, respectively.
YIELD
- --------------------------------------------------------------------------------
The yield for both classes of shares of the Fund is determined by dividing the
net investment income per share (as defined by the Securities and Exchange
Commission) earned by either class of shares over a thirty-day period by the
maximum offering price per share of either class of shares on the last day of
the period. This number is then annualized using semi-annual compounding. This
means that the amount of income generated during the thirty-day period is
assumed to be generated each month over a 12-month period and is reinvested
every six months. The yield does not necessarily reflect income actually earned
by Shares because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
For the 30-day period ended November 30, 1993, the Fund's yield for Investment
Shares was 3.77%, and the yield for Trust Shares was 4.15%.
Total return and yield will be calculated separately for Investment Shares and
Trust Shares. Because Investment Shares are subject to a sales load and a 12b-1
fee, the total return and net yield for Trust Shares for the same period will
exceed that of Investment Shares.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in either
class of shares, the performance will be reduced for those shareholders paying
those fees.
PERFORMANCE COMPARISONS
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The performance of both classes of shares depends upon such variables as:
portfolio quality;
average portfolio maturity;
type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities;
changes in the Fund's or Share's expenses; and
various other factors.
Either class of shares' performance fluctuates on a daily basis largely because
net earnings and offering price per share fluctuate daily. Both net earnings and
offering price per share are factors in the computation of yield and total
return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute net asset value. The financial
publications and/or indices which the Fund uses in advertising may include:
LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "Fixed Income
Funds" category in advertising and sales literature.
SHEARSON LEHMAN GOVERNMENT/CORPORATE TOTAL INDEX is comprised of approximately
5,000 issues which include non-convertible bonds publicly issued by the U.S.
government or its agencies; corporate bonds guaranteed by the U.S. government
and quasi-federal corporations; and publicly issued, fixed-rate,
non-convertible domestic bonds of companies in industry, public utilities, and
finance. Tracked by Shearson Lehman, the index has an average maturity of nine
years. It calculates total return for one month, three month, twelve month, and
ten year periods, and year-to-date.
MERRILL LYNCH GOVERNMENT/CORPORATE INDEX is comprised of approximately 4,800
issues which include publicly placed, nonconvertible coupon-bearing domestic
debt carrying a term to maturity of at least one year, with par amounts
outstanding at no less than $10 million at the start and close of the
performance measurement period, and which must be rated by S&P or Moody's as
investment grade issues (i.e., BBB/Baa or better).
MERRILL LYNCH 1-10 YEAR GOVERNMENT INDEX is an unmanaged index comprised of U.S.
Government securities with maturities between 1 and 10 years. Index returns are
calculated as total returns for periods of one, three, six and twelve months as
well as year-to-date. The index is produced by Merrill Lynch, Pierce, Fenner &
Smith, Inc.
SHEARSON LEHMAN GOVERNMENT (LT) INDEX, for example, is an index composed of
bonds issued by the U.S. government or its agencies which have at least $1
million outstanding in principal and which have maturities of ten years or
longer. Index figures are total return figures calculated monthly.
Morningstar, Inc., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for both classes of shares may quote
total returns which are calculated on non-standardized base periods. The total
returns represent the historic change in the value of an investment in either
class of shares, based on monthly reinvestment of dividends over a specified
period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD AND POOR'S CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
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 categories.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge". Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what 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 are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS
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 issuers is generally rated "F-1+".
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.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
P-1--Issuers rated PRIME-1 (for related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. PRIME-1 repayment
capacity will normally be evidenced by the following characteristics:
Conservative capitalization structures with moderate reliance on debt and ample
asset protection; Broad margins in earning coverage of fixed financial charges
and high internal cash generation; Well established access to a range of
financial markets and assured sources of alternative liquidity.
P-2--Issuers rated PRIME-2 (for related supporting institutions) have a strong
capacity for repayment of short-term promissory 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, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
2021108B (1/94)
PROSPECTUS
- --------------------------------------------------------------------------------
FIRST PRIORITY TREASURY MONEY MARKET FUND
INVESTMENT SHARES
(A PORTFOLIO OF FIRST PRIORITY FUNDS)
- --------------------------------------------------------------------------------
The Investment Shares (the "Shares") offered by this prospectus represent
interests in the diversified portfolio known as First Priority Treasury Money
Market Fund (the "Fund"). The Fund is one of a series of investment portfolios
in First Priority Funds (the "Trust"), an open-end, management investment
company (a mutual fund).
The investment objective of the Fund is to provide current income consistent
with stability of principal and liquidity. The Fund pursues this objective by
investing primarily in a portfolio of short-term U.S. Treasury obligations which
are issued by the U.S. government, and are fully guaranteed as to payment of
principal and interest by the United States.
THE FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE; THERE
CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO SO.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF FIRST
ALABAMA BANK, ARE NOT ENDORSED OR GUARANTEED BY FIRST ALABAMA BANK, AND ARE NOT
INSURED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
This prospectus contains the information you should read and know before you
invest in Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Combined Statement of Additional Information for
Investment Shares and Trust Shares dated January 31, 1994 with the Securities
and Exchange Commission. The information contained in the Combined Statement of
Additional Information is incorporated by reference into this prospectus. You
may request a copy of the Combined Statement of Additional Information free of
charge, obtain other information, or make inquiries about the Fund by writing or
calling toll-free 1-800-433-2829.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated January 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Investing in Securities of Other
Investment Companies 3
When-Issued and Delayed Delivery
Transactions 4
Investment Limitations 4
FIRST PRIORITY FUNDS INFORMATION 4
- ------------------------------------------------------
Management of First Priority Funds 4
Board of Trustees 4
Investment Adviser 4
Advisory Fees 4
Adviser's Background 5
Distribution of Investment Shares 5
Distribution Plan 5
Administration of the Fund 6
Administrative Services 6
Transfer Agent, Dividend Disbursing
Agent and Portfolio Accounting
Services 6
Legal Counsel 6
Independent Auditors 6
Expenses of the Fund and Investment
Shares 6
NET ASSET VALUE 7
- ------------------------------------------------------
INVESTING IN INVESTMENT SHARES 7
- ------------------------------------------------------
Minimum Investment Required 7
What Shares Cost 7
Share Purchases 8
Through FAII 8
Systematic Investment Plan 8
Shareholder Accounts 8
Dividends 8
Capital Gains 8
EXCHANGE PRIVILEGE 9
- ------------------------------------------------------
REDEEMING INVESTMENT SHARES 10
- ------------------------------------------------------
By Telephone 10
By Mail 10
Signatures 10
Receiving Payment 11
Checkwriting 11
Redemption Before Purchase
Instruments Clear 11
Systematic Withdrawal Plan 11
Accounts With Low Balances 11
Redemption in Kind 11
SHAREHOLDER INFORMATION 12
- ------------------------------------------------------
Voting Rights 12
Massachusetts Partnership Law 12
EFFECT OF BANKING LAWS 12
- ------------------------------------------------------
TAX INFORMATION 13
- ------------------------------------------------------
Federal Income Tax 13
PERFORMANCE INFORMATION 13
- ------------------------------------------------------
OTHER CLASSES OF SHARES 14
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--TRUST SHARES 15
- ------------------------------------------------------
FINANCIAL STATEMENTS 16
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 24
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)............................. None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price).................. None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds as applicable).................................................. None
Redemption Fee (as a percentage of amount redeemed, if applicable)...................................... None
Exchange Fee............................................................................................ None
<CAPTION>
ANNUAL INVESTMENT SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C>
Management Fee (after waiver) (1)....................................................................... 0.25%
12b-1 Fee............................................................................................... 0.40%
Other Expenses.......................................................................................... 0.32%
Total Investment Shares Operating Expenses..................................................... 0.97%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time
at its sole discretion. The maximum management fee is 0.50%.
The Annual Investment Shares Operating Expenses were 0.78% for the fiscal
year ended November 30, 1993. The Annual Investment Shares Operating Expenses in
the table above are based on estimated expenses expected during the fiscal year
ending November 30, 1994. The Total Investment Shares Operating Expenses are
anticipated to be 1.22% absent the voluntary waiver of the management fee.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF INVESTMENT SHARES OF THE FUND
WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "FIRST PRIORITY FUNDS INFORMATION" AND
"INVESTING IN INVESTMENT SHARES."
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGE PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. ("NASD"). HOWEVER, IN ORDER FOR A FUND
INVESTOR TO EXCEED THE NASD'S MAXIMUM FRONT-END SALES CHARGE OF 6.25%, A
CONTINUOUS INVESTMENT IN THE FUND FOR 42 YEARS WOULD BE REQUIRED.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1)
5% annual return, and (2) redemption at the end of each time period. The
Fund charges no redemption fees for Investment Shares.................... $10 $31 $54 $119
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the foregoing table and Example relates only to
Investment Shares of the Fund. The Fund also offers another class of shares
called Trust Shares. Trust Shares are subject to certain of the same expenses
except they bear no 12b-1 fee. See "Other Classes of Shares."
FIRST PRIORITY TREASURY MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 24.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
<S> <C> <C>
--------------------
<CAPTION>
1993 1992*
<S> <C> <C>
- ----------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------
Net investment income 0.02 0.01
- ----------------------------------------------------------------------------------- --------- ---------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.02) (0.01)
- ----------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------- --------- ---------
TOTAL RETURN** 2.34% 1.83%
- -----------------------------------------------------------------------------------
RATIO TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------
Expenses 0.78% 0.74%(a)
- -----------------------------------------------------------------------------------
Net investment income 2.33% 2.58%(a)
- -----------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.46% 0.53%
- -----------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $23,795 $23,578
- -----------------------------------------------------------------------------------
</TABLE>
* Reflects operations from April 14, 1992 (date of initial public investment)
to November 30, 1992. For the period from January 29, 1992 (start of
business) to May 4, 1992, net investment income for Investment Shares
aggregating $0.01 per share was distributed to Federated Administrative
Services.
** Based on net asset value.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
First Priority Funds was established as a Massachusetts business trust under a
Declaration of Trust dated October 15, 1991.
The Declaration of Trust permits First Priority Funds to offer separate series
of shares of beneficial interest representing interests in separate portfolios
of securities. The shares of beneficial interest in any one portfolio may be
offered in separate classes. As of the date of this prospectus, the Board of
Trustees (the "Trustees") have established two classes of shares, Investment
Shares and Trust Shares. This prospectus relates only to Investment Shares of
First Priority Treasury Money Market Fund.
The Fund is designed as a convenient means of accumulating an interest in a
professionally managed portfolio limited to short-term U.S. Treasury
obligations. A minimum initial investment of $1,000 is required. Subsequent
investments may be made in any amounts.
The Fund attempts to stabilize the value of a Share at $1.00. Shares are
currently sold and redeemed at that price.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income consistent
with stability of principal and liquidity. This investment objective cannot be
changed without approval of shareholders. While there is no assurance that the
Fund will achieve its investment objective, it endeavors to do so by following
the investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in a portfolio
of short-term U.S. Treasury obligations which are issued by the U.S. government
and are fully guaranteed as to payment of principal and interest by the United
States. Unless indicated otherwise, the investment policies may be changed by
the Trustees without approval of shareholders. Shareholders will be notified
before any material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in U.S. Treasury obligations
maturing in thirteen months or less. The average maturity of the U.S. Treasury
obligations in the Fund's portfolio, computed on a dollar-weighted basis, will
be 90 days or less.
The Fund will primarily limit its investments to U.S. Treasury obligations, the
interest on which is exempt from personal income tax in the various states if
owned directly.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general. The Fund will only
invest in other investment companies that are money market funds having
investment objectives and policies
similar to its own, and primarily for the purpose of investing short-term cash
which has not yet been invested in other portfolio instruments. The adviser will
waive its investment advisory fee on assets invested in securities of open-end
investment companies.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase U.S.
Treasury obligations on a when-issued or delayed delivery basis. These
transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The Fund engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Fund's investment objective and
policies, not for investment leverage. In when-issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Fund to miss a price
or yield considered to be advantageous.
INVESTMENT LIMITATIONS
The Fund will not borrow money or pledge securities except, under certain
circumstances, the Fund may borrow up to one-third of the value of its total
assets and pledge up to 10% of the value of its total assets to secure such
borrowings.
The above investment limitation cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not invest more than 10% of its net assets in illiquid
obligations.
FIRST PRIORITY FUNDS INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FIRST PRIORITY FUNDS
BOARD OF TRUSTEES. The Trustees are responsible for managing the business
affairs of the Trust and for exercising all of the powers of the Trust except
those reserved for the shareholders. The Executive Committee of the Board of
Trustees handles the Trustee's responsibilities between meetings of the
Trustees.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by First Alabama Bank ("First
Alabama" or "the Adviser"), as the Fund's investment adviser, subject to
direction by the Trustees. The Adviser continually conducts investment research
and supervision for the Fund and is responsible for the purchase or sale of
portfolio instruments, for which it receives an annual fee from the assets of
the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee equal
to 0.50% of the Fund's average daily net assets. The Adviser has undertaken
to reimburse the Fund up to the amount of the advisory fee, for operating
expenses in excess of limitations established by certain states. The
Adviser may voluntarily choose to waive a portion of its fee or reimburse
other expenses of the Fund. The Adviser can terminate such waiver or
reimbursement policy at any time at its sole discretion.
ADVISER'S BACKGROUND. The Adviser is a wholly-owned subsidiary of First
Alabama Bancshares, Inc., a bank holding company organized during 1971
under the laws of the State of Delaware. (A proposal is currently pending
to change the name of the holding company to "Regions Financial
Corporation.") Operating out of more than 200 offices, it provides a wide
range of banking and fiduciary services to its customers. As of June 30,
1993, First Alabama Bancshares was one of the 100 largest bank holding
companies in the United States with total assets in excess of $8 billion.
First Alabama Bank is recognized as one of the strongest banks in America
by U.S. Banker magazine, Keefe, Bruyette & Woods, and Thomson Bankwatch.
During 1992, these organizations rated First Alabama as one of the top
quality banks in the United States. First Alabama's common stock is
currently included among those in the Dow Jones Equity Market Index, as
well as Standard and Poor's Midcap Index.
As fiduciary, First Alabama managed over $2.3 billion in discretionary
assets as of December 31, 1992. It manages eight common trust funds and
collective investment funds having a market value in excess of $200 million
as of September 30, 1993. First Alabama has been adviser to the First
Priority Funds since inception. As of September 30, 1993, the market value
of the First Priority Funds was in excess of $400 million.
DISTRIBUTION OF INVESTMENT SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the "Plan"), the Fund
will pay to Federated Securities Corp. an amount computed at an annual rate of
up to .40 of 1% of the average daily net asset value of the Shares to finance
any activity which is principally intended to result in the sale of Shares
subject to the Plan.
Federated Securities Corp. may, from time to time, and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Plan to the
extent the expenses attributable to the Shares exceed such lower expense
limitation as the distributor may, by notice to the Trust, voluntarily declare
to be effective.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to provide
sales and/or administrative services as agents for their clients or customers
who beneficially own Shares of the Fund. Administrative services may include,
but are not limited to, the following functions: providing office space,
equipment, telephone facilities, and various personnel including clerical,
supervisory, and computer as necessary or beneficial to establish and maintain
shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding the Fund; assisting clients in
changing dividend options, account designations, and addresses; and providing
such other services as the Fund reasonably requests.
Financial institutions will receive fees from the distributor based upon Shares
owned by their clients or customers. The schedules of such fees and the basis
upon which such fees will be paid will be determined, from time to time, by the
distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Funds does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Board of Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
<C> <S>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may voluntarily reimburse a portion
of its fee.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTING
SERVICES. Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of
Federated Investors, is transfer agent for the Shares of the Fund and dividend
disbursing agent for the Fund. It also provides certain accounting and
recordkeeping services with respect to the Fund's portfolio investments.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania and Dickstein, Shapiro and Morin, Washington, D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche, Pittsburgh, Pennsylvania.
EXPENSES OF THE FUND AND INVESTMENT SHARES
Holders of Shares pay their allocable portion of Fund and Trust expenses.
The Trust expenses for which holders of Shares pay their allocable portion
include, but are not limited to the following: the cost of organizing the Trust
and continuing its existence; registering the Trust with federal and state
securities authorities; Trustees' fees; auditors' fees; the cost of meetings of
Trustees; legal fees of the Trust; association membership dues; and such
non-recurring and extraordinary items as may arise.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to the following: registering the Fund and Shares
of the Fund; investment advisory services; taxes and commissions; custodian
fees; insurance premiums; auditors' fees; and such non-recurring and
extraordinary items as may arise.
At present, the only expenses allocated to the Shares as a class are expenses
under the Fund's Rule
12b-1 Plan that relate to the Shares. In addition, the Trustees reserve the
right to allocate certain other expenses to holders of Shares as it deems
appropriate ("Class Expenses"). In any case, Class Expenses would be limited to
the following: distribution fees; transfer agent fees as identified by the
transfer agent as attributable to holder of Shares; printing and postage
expenses related to preparing and distributing materials such as shareholder
reports, prospectuses and proxies to current shareholders; registration fees
paid to the Securities and Exchange Commission and registration fees paid to
state securities commissions; expenses related to administrative personnel and
services as required to support holders of Shares; legal fees relating solely to
Shares; and Trustees' fees incurred as a result of issues relating solely to
Shares.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund attempts to stabilize the net asset value of its Shares at $1.00 by
valuing the portfolio securities using the amortized cost method. The net asset
value for Shares is determined by adding the interest of the Shares in the value
of all securities and other assets of the Fund, subtracting the interest of the
Shares in the liabilities of the Fund and those attributable to Shares, and
dividing the remainder by the total number of Shares outstanding. The Fund, of
course, cannot guarantee that its net asset value will always remain at $1.00
per Share.
INVESTING IN INVESTMENT SHARES
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares of the Fund by an investor is $1,000.
Subsequent investments may be made in any amounts. The Fund may waive the
initial minimum investment from time to time.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund.
The net asset value is determined at 12:00 noon and 4:00 p.m. (Eastern time),
Monday through Friday, except on: (i) days on which there are not sufficient
changes in the value of the Fund's portfolio
securities that its net asset value might be materially affected; (ii) days
during which no Shares are tendered for redemption and no orders to purchase
Shares are received; or (iii) the following holidays: New Year's Day, Martin
Luther King Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange and the Federal
Reserve Wire System are open for business. A customer may purchase Shares
through First Alabama Investments, Inc. ("FAII"). Texas residents should
purchase Shares through Federated Securities Corp. at 1-800-356-2805. In
connection with the sale of Shares, the distributor may, from time to time,
offer certain items of nominal value to any shareholder or investor. The Fund
reserves the right to reject any purchase request.
THROUGH FAII. To place an order to purchase Shares, a customer may contact their
local FAII office or telephone FAII at 1-800-456-3244, or place the order
through FAII in person at any FAII branch location.
Payment may be made by either check or federal funds or by debiting a customer's
account at First Alabama. Purchase orders must be received by 11:00 a.m.
(Central time) in order to be credited on the same day. Payment is normally
required on the same business day.
SYSTEMATIC INVESTMENT PLAN
Holders of Shares may arrange for systematic monthly investments in their
accounts in amounts of $100 or more. Once proper authorization is given, a
shareholder's bank account will be debited to purchase Shares in the Fund.
SHAREHOLDER ACCOUNTS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting the Fund.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends will be reinvested in
additional Shares on payment dates unless cash payments are requested by writing
to the Fund or FAII as appropriate. Share purchase settlements received by First
Alabama Bank before 2:00 p.m. (Central time) earn dividends that day.
CAPITAL GAINS
Capital gains, if any, could result in an increase in dividends. Capital losses
could result in a decrease in dividends. If, for some extraordinary reason, the
Fund realizes net long-term capital gains, it will distribute them at least once
every 12 months.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
A shareholder may exchange shares of one Fund for the appropriate class of
shares of any other fund in the Trust by calling or by writing to First Alabama.
Shares purchased by check are eligible for exchange after 10 days. The exchange
feature applies to shares of each fund as of the effective offering date of each
fund's shares.
Orders to exchange shares of one fund for shares of any of the other First
Priority Funds will be executed by redeeming the shares owned at net asset value
and purchasing shares of any of the other First Priority Funds at the offering
price determined after the proceeds from such redemption become available.
Orders for exchanges received by the fund prior to 3:00 p.m. (Central time) on
any day the funds are open for business will be executed as of the close of
business that day. Orders for exchanges received after 3:00 p.m. (Central time)
on any business day will be executed at the close of the next business day.
Shares of funds with a sales charge may be exchanged at net asset value for
shares of other funds with an equal sales charge or no sales charge. Shares of
funds with a sales charge may be exchanged for shares of funds with a higher
sales charge at net asset value, plus the additional sales charge. Shares of
funds with no sales charge, whether acquired by direct purchase, reinvestment of
dividends on such shares, or otherwise, may be exchanged for shares of funds
with a sales charge at net asset value, plus the applicable sales charge. When
an exchange is made from a fund with a sales charge to a fund with no sales
charge, the shares exchanged and additional shares which have been purchased by
reinvesting dividends or capital gains on such shares retain the character of
the exchanged shares for purposes of exercising further exchange privileges;
thus, an exchange of such shares for shares of a fund with a sales charge would
be at net asset value.
An excessive number of exchanges may be disadvantageous to the Trust. Therefore,
the Trust, in addition to its right to reject any exchange, reserves the right
to terminate the exchange privilege of any shareholder who makes more than five
exchanges of shares of the funds in a year, or three in a calendar quarter.
An exchange order must comply with the requirements for a redemption and
purchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements of
each fund being acquired. An exchange constitutes a sale for federal income tax
purposes.
The exchange privilege is only available in states where shares of the fund
being acquired may legally be sold. Before the exchange, a shareholder must
receive a prospectus of the fund for which the exchange is being made.
Telephone exchange instructions may be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
REDEEMING INVESTMENT SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on Federal holidays when
wire transfers are restricted. Redemption requests can be made in person, by
telephone, or by mail through FAII.
BY TELEPHONE
A shareholder may redeem Shares by telephoning their local FAII office. For
calls received by FAII before 11:00 a.m. (Central time), proceeds will normally
be wired the same day to the shareholder's account at First Alabama Bank or a
check will be sent to the address of record. In no event will proceeds be wired
more than seven days after a proper request for redemption has been received. An
authorization from permitting the Fund to accept telephone requests must first
be completed. Authorization forms and information on this service are available
from FAII.
In the event of drastic economic or market changes, a shareholder may experience
difficultly in redeeming Shares by telephone. If such a case should occur,
another method of redemption, such as a written request to Federated Services
Company or FAII should be considered.
If at any time, the Fund shall determine it necessary to terminate or modify
this method of redemption, shareholders shall be promptly notified.
Telephone redemption instructions may be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
BY MAIL
A shareholder may redeem Shares by sending a written request to FAII. The
written request should include the shareholder's name, the Fund name, the
account number, and the Share or dollar amount requested. Shareholders should
call FAII for assistance in redeeming by mail.
SIGNATURES._Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
a trust company or commercial bank whose deposits are insured by Bank
Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation ("FDIC");
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
a savings and loan association or a savings bank whose deposits are
insured by the Savings Association Insurance Fund, which is administered
by the FDIC; or
any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions
that are members of a signature guarantee program. The Fund and its transfer
agent reserve the right to amend these standards at any time without notice.
RECEIVING PAYMENT. Normally, a check for the proceeds is mailed to the
shareholder within one business day, but in no event more than seven days, after
receipt of a proper written redemption request.
CHECKWRITING. At the shareholder's request, a checking account may be
established for redeeming Shares. For information on the availability of
checkwriting and related matters, contact First Alabama.
With a Fund checking account, Shares may be redeemed simply by writing a check
for $500 or more. The redemption will be made at the net asset value on the date
that the check is presented to the Fund. A check may not be written to close an
account. If a shareholder wishes to redeem Shares and have the proceeds
available, a check may be written and negotiated through the shareholder's bank.
Checks should never be sent to the custodian to redeem Shares. Cancelled checks
are sent to the shareholder each month.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check, the proceeds from the redemption of those
Shares are not available, and the Shares may not be exchanged, until First
Alabama is reasonably certain that the purchase check has cleared, which could
take up to ten calendar days.
SYSTEMATIC WITHDRAWAL PLAN
Under a Systematic Withdrawal Plan, accounts having a value of at least $10,000
may arrange for regular monthly or quarterly fixed withdrawal payments. Each
payment must be at least $100 and may be as much as 1.5% per month or 4.5% per
quarter of the total net asset value of the Shares in the account when the
Systematic Withdrawal Plan is opened. Excessive withdrawals may deplete or
decrease the value of an account.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000, due to
shareholder redemptions. Before Shares are redeemed to close an account, the
shareholder is notified in writing and allowed 30 days to purchase additional
Shares to meet the minimum requirement.
REDEMPTION IN KIND
The Trust is obligated to redeem Shares solely in cash up to $250,000, or 1% of
any class's net asset value, whichever is less, for any one shareholder within a
90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Trust will pay
all or a portion of the remainder of the redemption in portfolio instruments,
valued in the same way as net asset value is determined. The portfolio
instruments will be selected in a manner that the Trustees deem fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur transaction costs.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of all classes of
each portfolio in the Trust have equal voting rights, except that in matters
affecting only a particular Fund or class, only shareholders of that Fund or
class are entitled to vote. As a Massachusetts business trust, the Trust is not
required to hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in the Trust's or the Fund's operation and for
the election of Trustees under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust itself cannot meet its obligations to indemnify shareholders
and pay judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling, or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling, or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent, or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of their customer. First Alabama is subject to such
banking laws and regulations.
First Alabama believes, based on the advice of its counsel, that First Alabama
may perform the services for the Fund contemplated by its advisory agreement
with the Trust without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of such or future statutes and regulations, could
prevent the Adviser from continuing to perform all or a part of the above
services for its customers and/or the Fund. If it were prohibited from engaging
in these customer-related activities, the Trustees would consider alternative
advisers and means of continuing available investment services. In such event,
changes in the operation of the Fund may occur, including possible termination
of any automatic or other Fund share investment and redemption services that are
being provided by First Alabama. It is not expected that existing shareholders
would suffer any adverse financial consequences (if another adviser with
equivalent abilities to First Alabama is found) as a result of any of these
occurrences.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional Shares.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its yield and effective yield for Shares.
The yield of Shares represents the annualized rate of income earned on an
investment in Shares over a seven-day period. It is the annualized dividends
earned during the period on the investment, shown as a percentage of the
investment. The effective yield is calculated similarly to the yield, but, when
annualized, the income earned by an investment in Shares is assumed to be
reinvested daily. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
Advertisements and other sales literature may also refer to total return. Total
return represents the change, over a specific period of time, in the value of an
investment in Shares, after reinvesting all
income distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
Yield and effective yield will be calculated separately for Investment Shares
and Trust Shares. Because Investment Shares are subject to 12b-1 fees, the yield
and effective yield for Trust Shares, for the same period, will exceed that of
Investment Shares.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Trust Shares of First Priority Treasury Money Market Fund are sold to trust
accounts, for which First Alabama or other financial institutions act in a
fiduciary or agency capacity at net asset value at a minimum initial investment
of $25,000. Trust Shares are not sold pursuant to a Rule 12b-1 Plan.
The amount of dividends payable to Trust Shares will exceed those payable to
Investment Shares by the difference between Class Expenses and distribution
expenses borne by shares of each respective class.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation with respect to one class of shares
than with respect to another class of shares of the same Fund.
The stated advisory fee is the same for both classes of the Fund.
FIRST PRIORITY TREASURY MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 24.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
<S> <C> <C>
--------------------
<CAPTION>
1993 1992*
<S> <C> <C>
- ----------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------
Net investment income 0.03 0.02
- ----------------------------------------------------------------------------------- --------- ---------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.03) (0.02)
- ----------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------- --------- ---------
TOTAL RETURN** 2.75% 2.06%
- -----------------------------------------------------------------------------------
RATIO TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------
Expenses 0.38% 0.29%(a)
- -----------------------------------------------------------------------------------
Net investment income 2.72% 3.20%(a)
- -----------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.46% 0.53%
- -----------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $88,510 $86,616
- -----------------------------------------------------------------------------------
</TABLE>
* Reflects operations from April 14, 1992 (date of initial public investment)
to November 30, 1992. For the period from January 29, 1992 (start of
business) to April 13, 1992, net investment income for the Trust Shares
aggregating $0.01 per share was distributed to Federated Administrative
Services.
** Based on net asset value.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY TREASURY MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- --------------- ------------------------------------------------------------------------------- ---------------
U.S. TREASURY OBLIGATIONS--90.4%
- ------------------------------------------------------------------------------------------------
U.S. TREASURY NOTES--22.4%
-------------------------------------------------------------------------------
$ 25,000,000 4.875%--7.00%, 1/15/94--2/15/94 $ 25,121,769
------------------------------------------------------------------------------- ---------------
U.S. TREASURY BILLS--68.0%
-------------------------------------------------------------------------------
77,000,000 12/2/93--5/26/94 76,410,002
------------------------------------------------------------------------------- ---------------
TOTAL U.S. TREASURY OBLIGATIONS, AT AMORTIZED COST 101,531,771
------------------------------------------------------------------------------- ---------------
MUTUAL FUND ISSUES--9.3%
- ------------------------------------------------------------------------------------------------
3,485,371 Fidelity U.S. Treasury Income Portfolio 3,485,371
-------------------------------------------------------------------------------
3,532,960 Franklin U.S. Treasury Money Market Portfolio 3,532,960
-------------------------------------------------------------------------------
3,460,622 Goldman Sachs I.L.A. Treasury Portfolio 3,460,622
------------------------------------------------------------------------------- ---------------
TOTAL MUTUAL FUND ISSUES (AT NET ASSET VALUE) 10,478,953
------------------------------------------------------------------------------- ---------------
TOTAL INVESTMENTS, AT AMORTIZED COST AND VALUE $ 112,010,724\
------------------------------------------------------------------------------- ---------------
</TABLE>
\ Also represents cost for federal tax purposes.
Note: The categories of investments are shown as a percentage of net assets
($112,305,064) at November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY TREASURY MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------------------------
Investments, at amortized cost and value (Note 2A) $ 112,010,724
- -------------------------------------------------------------------------------------------------
Interest receivable 535,168
- -------------------------------------------------------------------------------------------------
Deferred expenses (Note 2F) 24,538
- ------------------------------------------------------------------------------------------------- ---------------
Total assets 112,570,430
- -------------------------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------------------------
Dividends payable $ 188,105
- ------------------------------------------------------------------------------------
Accrued expenses and other liabilities 77,261
- ------------------------------------------------------------------------------------ -----------
Total liabilities 265,366
- ------------------------------------------------------------------------------------------------- ---------------
NET ASSETS for 112,305,064 shares of beneficial interest outstanding $ 112,305,064
- ------------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE, Offering Price, and Redemption Price Per Share:
Trust Shares (net assets of $88,509,904 / 88,509,904 SHARES OF BENEFICIAL
INTEREST OUTSTANDING) $1.00
- ------------------------------------------------------------------------------------------------- ---------------
INVESTMENT SHARES (NET ASSETS OF $23,795,160 / 23,795,160 SHARES OF BENEFICIAL INTEREST
OUTSTANDING) $1.00
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY TREASURY MONEY MARKET FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------
Interest income (Note 2B) $ 3,730,304
- ---------------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 602,115
- ------------------------------------------------------------------------------------
Administrative personnel and services (Note 5) 169,558
- ------------------------------------------------------------------------------------
Trustees' fees 4,288
- ------------------------------------------------------------------------------------
Custodian fees 40,607
- ------------------------------------------------------------------------------------
Auditing fee 15,732
- ------------------------------------------------------------------------------------
Recordkeeper and transfer agent fees (Note 5) 82,076
- ------------------------------------------------------------------------------------
Legal fees 3,384
- ------------------------------------------------------------------------------------
Printing and postage 17,399
- ------------------------------------------------------------------------------------
Insurance premiums 8,779
- ------------------------------------------------------------------------------------
Distribution services fees (Note 5) 93,697
- ------------------------------------------------------------------------------------
Registration fees 54,433
- ------------------------------------------------------------------------------------
Miscellaneous 7,214
- ------------------------------------------------------------------------------------ -------------
Total expenses 1,099,282
- ------------------------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 5) 551,033
- ------------------------------------------------------------------------------------ -------------
Net expenses 548,249
- --------------------------------------------------------------------------------------------------- -------------
Net investment income $ 3,182,055
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY TREASURY MONEY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
<S> <C> <C>
1993 1992*
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------------
OPERATIONS--
- -----------------------------------------------------------------------------
Net investment income $ 3,182,055 $ 1,553,626
- ----------------------------------------------------------------------------- ---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- -----------------------------------------------------------------------------
Dividends to shareholders from net investment income
- -----------------------------------------------------------------------------
Trust Shares (2,637,494) (1,358,856)
- -----------------------------------------------------------------------------
Investment Shares (544,561) (194,770)
- ----------------------------------------------------------------------------- ---------------- ----------------
Change in net assets from distributions to shareholders (3,182,055) (1,553,626)
- ----------------------------------------------------------------------------- ---------------- ----------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- -----------------------------------------------------------------------------
Proceeds from sale of shares 312,480,913 228,663,655
- -----------------------------------------------------------------------------
Net asset value of shares issued to shareholders
in payment of dividends declared 533,106 176,969
- -----------------------------------------------------------------------------
Cost of shares redeemed (310,902,563) (118,647,016)
- ----------------------------------------------------------------------------- ---------------- ----------------
Change in net assets from Fund share transactions 2,111,456 110,193,608
- ----------------------------------------------------------------------------- ---------------- ----------------
Change in net assets 2,111,456 110,193,608
- -----------------------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------------------
Beginning of period 110,193,608 --
- ----------------------------------------------------------------------------- ---------------- ----------------
End of period $ 112,305,064 $ 110,193,608
- ----------------------------------------------------------------------------- ---------------- ----------------
</TABLE>
*Reflects operations for the period from January 29, 1992 (start of business) to
November 30, 1992.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY TREASURY MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
First Priority Funds, (the "Trust") is an open end, management investment
company, established as a Massachusetts business trust under a Declaration of
Trust dated October 15, 1991. The Trust currently consists of three portfolios.
The financial statements included herein present only those of First Priority
Treasury Money Market Fund (the "Fund"), one of the portfolios of the Trust. The
financial statements of the other portfolios in the Trust are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held. The Declaration
of Trust permits the Trust to offer separate series of shares of beneficial
interest representing interests in the separate portfolios of securities. The
Trustees have established two classes of shares, Trust Shares and Investment
Shares in each portfolio of the Trust. Effective December 7, 1993, the Trust
added a fourth portfolio, First Priority Limited Maturity Government Fund, which
offers only one class of shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--The Trustees have determined that the best method
currently available for valuing portfolio securities is amortized cost. The
Fund's use of the amortized cost method to value its portfolio securities
is conditioned on its compliance with Rule 2a-7 under the Investment
Company Act of 1940. Investments in other regulated investment companies
are valued at net asset value.
B. INCOME--Interest income is recorded on the accrual basis. Interest income
includes interest and discount earned (net of premium), including original
issue discount as required by the Internal Revenue Code, as amended, plus
realized gains, if any, on portfolio securities.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Internal Revenue Code, as amended, applicable to regulated investment
companies and to distribute to shareholders each year substantially all of
its taxable income. Accordingly, no provision for federal tax is necessary.
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. To the extent the Fund
engages in such transactions, it will do so for the purpose of acquiring
portfolio securities consistent with its investment objective and policies
and not for the purpose of investment leverage.When the Fund indicates its
interest in acquiring such portfolio securities, no liability accrues to
the Fund until the trade date of the transaction. The Fund will maintain
security positions such that sufficient liquid assets will be available to
make payment for the securities to be purchased. These securities are
marked to market daily and
maintained until the transaction is settled. Securities purchased on a
when-issued or delayed delivery basis do not earn income until the
settlment date.
E. EXPENSES--Expenses of the Fund, other than distribution services fees, and
related waivers and reimbursements, if any, are allocated to each class of
shares based on its relative average net assets for the period.
F. DEFERRED EXPENSES--Costs incurred by the Trust with respect to registration
of its shares in its first fiscal year, excluding the initial expense of
registering the shares, have been deferred and are being amortized using
the straight line method through February 28, 1997.
G. OTHER--Investment transactions are accounted for on the date of the
transaction.
(3) DIVIDENDS
The Fund computes its net income daily and, immediately prior to the calculation
of its net asset value at the close of business, declares and records dividends
to shareholders of record at the time of the previous computation of the Fund's
net asset value. Payment of dividends is made monthly in cash, or in additional
shares at the net asset value on the payable date.
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. At November 30, 1993, capital paid-in aggregated $112,305,064.
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
<S> <C> <C>
1993 1992*
<CAPTION>
---------------- --------------
TRUST SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
Shares outstanding, beginning of period 86,615,821 --
- --------------------------------------------------------------------------------
Shares sold 127,026,078 134,423,805
- --------------------------------------------------------------------------------
Shares issued to shareholders electing to receive a payment
of dividends declared in Fund shares 1,773 724
- --------------------------------------------------------------------------------
Shares redeemed (125,133,768) (47,808,708)
- -------------------------------------------------------------------------------- ---------------- --------------
Shares outstanding, end of period 88,509,904 86,615,821
- -------------------------------------------------------------------------------- ---------------- --------------
</TABLE>
* For the period from January 29, 1992 (start of business) to November 30, 1992.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
<S> <C> <C>
1993 1992*
<CAPTION>
---------------- -------------
INVESTMENT SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
Shares outstanding, beginning of period 23,577,787 --
- --------------------------------------------------------------------------------
Shares sold 185,454,835 94,239,850
- --------------------------------------------------------------------------------
Shares issued to shareholders electing to receive a payment
of dividends in Fund shares 531,333 176,245
- --------------------------------------------------------------------------------
Shares redeemed (185,768,795) (70,838,308)
- -------------------------------------------------------------------------------- ---------------- -------------
Shares outstanding, end of period 23,795,160 23,577,787
- -------------------------------------------------------------------------------- ---------------- -------------
</TABLE>
* For the period from May 5, 1992 (date of initial public investment) to
November 30, 1992.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
First Alabama Bank, the Trust's investment Adviser ("Adviser"), receives for its
services an annual investment advisory fee equal to .50 of 1% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive a portion
of its fee or reimburse certain operating expenses of the Fund. For the year
ended November 30, 1993, the investment advisory fee amounted to $602,115, of
which $551,033 was voluntarily waived in accordance with such undertaking.
Federated Administrative Services ("FAS") provides administrative personnel and
services at an annual rate of .15 of 1% on the first $250 million of average
aggregate daily net assets of the Trust; .125 of 1% on the next $250 million;
.10 of 1% on the next $250 million; and .075 of 1% of the average aggregate
daily net assets of the Trust in excess of $750 million. For the year ended
November 30, 1993, FAS earned administrative fees of $169,558.
Expenses of organizing the Fund ($50,822) were borne initially by FAS. The Fund
has agreed to reimburse FAS for the organization expenses borne by FAS during
the five year period following the date the Trust's portfolio became effective.
Pursuant to this agreement, the Fund reimbursed $6,235 in organization expenses
during the year ended November 30, 1993.
Federated Services Company is the Fund's transfer agent and dividend disbursing
agent. It also provides certain accounting and recordkeeping services with
respect to the Fund's portfolio of investments.
Effective December 1, 1993, First Alabama Bank became the custodian for the
securities and cash of the Trust.
The Trust has adopted a Distribution Plan (the "Plan"), pursuant to Rule 12b-1,
under the Investment Company Act of 1940. The Trust will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the assets of
Investment Shares of the Fund to finance activities principally intended
to result in the sale of Investment Shares subject to the Plan. The Plan
provides that the Fund will pay up to .40 of 1% of the average daily net assets
of Investment Shares, annually, to pay commissions, maintenance fees and to
compensate the distributor. FSC may voluntarily waive a portion of its fee. For
the year ended November 30, 1993, FSC earned $93,697 in distribution services
fees.
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of FIRST PRIORITY FUNDS
and the Shareholders of FIRST PRIORITY TREASURY MONEY MARKET FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of First Priority Treasury Money Market Fund (a
portfolio of First Priority Funds) as of November 30, 1993, the related
statement of operations for the year then ended, and the statement of changes in
net assets and financial highlights (see pages 2 and 15) for the years ended
November 30, 1993 and 1992. These financial statements and financial highlights
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
November 30, 1993, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of First Priority
Treasury Money Market Fund as of November 30, 1993, the results of its
operations, the changes in its net assets and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE
Pittsburgh, Pennsylvania
January 17, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
First Priority Treasury Federated Investors Tower
Money Market Fund Pittsburgh, Pennsylvania 15222-3779
Investment Shares
- ---------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Investment Adviser and Custodian
First Alabama Bank P.O. Box 10247
Birmingham, Alabama 35202
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent
and Portfolio Accounting Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin 2101 L Street, N.W.
Washington, D.C. 20037
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
FIRST PRIORITY TREASURY
MONEY MARKET FUND
INVESTMENT SHARES
PROSPECTUS
A Diversified Portfolio of
First Priority Funds, an Open-End,
Management Investment Company
Prospectus dated January 31, 1994
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
2021109A-R (1/94)
PROSPECTUS
- --------------------------------------------------------------------------------
FIRST PRIORITY TREASURY MONEY MARKET FUND
TRUST SHARES
(A PORTFOLIO OF FIRST PRIORITY FUNDS)
- --------------------------------------------------------------------------------
The Trust Shares (the "Shares") offered by this prospectus represent interests
in the diversified portfolio known as First Priority Treasury Money Market Fund
(the "Fund"). The Fund is one of a series of investment portfolios in First
Priority Funds (the "Trust"), an open-end, management investment company (a
mutual fund).
The investment objective of the Fund is to provide current income consistent
with stability of principal and liquidity. The Fund pursues this objective by
investing primarily in a portfolio of short-term U.S. Treasury obligations which
are issued by the U.S. government, and are fully guaranteed as to payment of
principal and interest by the United States.
THE FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE; THERE
CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO SO.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF FIRST
ALABAMA BANK, ARE NOT ENDORSED OR GUARANTEED BY FIRST ALABAMA BANK, AND ARE NOT
INSURED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
This prospectus contains the information you should read and know before you
invest in Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Combined Statement of Additional Information for Trust
Shares and Investment Shares dated January 31, 1994, with the Securities and
Exchange Commission. The information contained in the Combined Statement of
Additional Information is incorporated by reference into this prospectus. You
may request a copy of the Combined Statement of Additional Information free of
charge, obtain other information, or make inquiries about the Fund by writing or
calling toll-free 1-800-433-2829.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated January 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--TRUST SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Investing in Securities of Other
Investment Companies 3
When-Issued and Delayed Delivery
Transactions 4
Investment Limitations 4
FIRST PRIORITY FUNDS INFORMATION 4
- ------------------------------------------------------
Management of First Priority Funds 4
Board of Trustees 4
Investment Adviser 4
Advisory Fees 4
Adviser's Background 5
Distribution of Trust Shares 5
Administration of the Fund 5
Administrative Services 5
Transfer Agent, Dividend Disbursing
Agent and Portfolio Accounting
Services 5
Legal Counsel 5
Independent Auditors 6
Expenses of the Fund and Trust Shares 6
NET ASSET VALUE 6
- ------------------------------------------------------
INVESTING IN TRUST SHARES 6
- ------------------------------------------------------
Minimum Investment Required 6
What Shares Cost 7
Share Purchases 7
Through First Alabama Bank 7
Shareholder Accounts 7
Dividends 7
Capital Gains 7
EXCHANGE PRIVILEGE 8
- ------------------------------------------------------
REDEEMING TRUST SHARES 8
- ------------------------------------------------------
By Telephone 9
Redemption Before Purchase
Instruments Clear 9
Accounts With Low Balances 9
Redemption in Kind 9
SHAREHOLDER INFORMATION 10
- ------------------------------------------------------
Voting Rights 10
Massachusetts Partnership Law 10
EFFECT OF BANKING LAWS 10
- ------------------------------------------------------
TAX INFORMATION 11
- ------------------------------------------------------
Federal Income Tax 11
PERFORMANCE INFORMATION 11
- ------------------------------------------------------
OTHER CLASSES OF SHARES 12
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 13
- ------------------------------------------------------
FINANCIAL STATEMENTS 14
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 22
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TRUST SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)............................ None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)................. None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds as applicable)................................................. None
Redemption Fee (as a percentage of amount redeemed, if applicable)..................................... None
Exchange Fee........................................................................................... None
<CAPTION>
ANNUAL TRUST SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C>
Management Fee (after waiver) (1)...................................................................... 0.25%
12b-1 Fee.............................................................................................. None
Other Expenses......................................................................................... 0.32%
Total Trust Shares Operating Expenses........................................................ 0.57%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time
at its sole discretion. The maximum management fee is 0.50%.
The Annual Trust Shares Operating Expenses were 0.38% for the fiscal year
ended November 30, 1993. The Annual Trust Shares Operating Expenses in the table
above are based on estimated expenses expected during the fiscal year ending
November 30, 1994. The Total Trust Shares Operating Expenses are anticipated to
be 0.82% absent the voluntary waiver of the management fee.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF TRUST SHARES OF THE FUND WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "FIRST PRIORITY FUNDS INFORMATION" AND
"INVESTING IN TRUST SHARES."
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time
period. The Fund charges no redemption fees for Trust Shares.......... $6 $18 $32 $71
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the foregoing table and Example relates only
to Trust Shares of the Fund. The Fund also offers another class of shares called
Investment Shares. Investment Shares are subject to certain of the same expenses
with the addition of a 12b-1 fee of .40 of 1%. See "Other Classes of Shares."
FIRST PRIORITY TREASURY MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 22.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
<S> <C> <C>
--------------------
<CAPTION>
1993 1992*
<S> <C> <C>
- ----------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------
Net investment income 0.03 0.02
- ----------------------------------------------------------------------------------- --------- ---------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.03) (0.02)
- ----------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------- --------- ---------
TOTAL RETURN** 2.75% 2.06%
- -----------------------------------------------------------------------------------
RATIO TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------
Expenses 0.38% 0.29%(a)
- -----------------------------------------------------------------------------------
Net investment income 2.72% 3.20%(a)
- -----------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.46% 0.53%
- -----------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $88,510 $86,616
- -----------------------------------------------------------------------------------
</TABLE>
* Reflects operations from April 14, 1992 (date of initial public investment)
to November 30, 1992. For the period from January 29, 1992 (start of
business) to April 13, 1992, net investment income for the Trust Shares
aggregating $0.01 per share was distributed to Federated Administrative
Services.
** Based on net asset value.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
First Priority Funds was established as a Massachusetts business trust under a
Declaration of Trust dated October 15, 1991.
The Declaration of Trust permits First Priority Funds to offer separate series
of shares of beneficial interest representing interests in separate portfolios
of securities. The shares of beneficial interest in any one portfolio may be
offered in separate classes. As of the date of this prospectus, the Board of
Trustees (the "Trustees") have established two classes of shares, Trust Shares
and Investment Shares. This prospectus relates only to Trust Shares of First
Priority Treasury Money Market Fund.
The Fund is designed as a convenient means of accumulating an interest in a
professionally managed portfolio limited to short-term U.S. Treasury
obligations. A minimum initial investment of $25,000 is required.
The Fund attempts to stabilize the value of a Share at $1.00. Shares are
currently sold and redeemed at that price.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income consistent
with stability of principal and liquidity. This investment objective cannot be
changed without approval of shareholders. While there is no assurance that the
Fund will achieve its investment objective, it endeavors to do so by following
the investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in a portfolio
of short-term U.S. Treasury obligations which are issued by the U.S. government
and are fully guaranteed as to payment of principal and interest by the United
States. Unless indicated otherwise, the investment policies may be changed by
the Trustees without approval of shareholders. Shareholders will be notified
before any material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in U.S. Treasury obligations
maturing in thirteen months or less. The average maturity of the U.S. Treasury
obligations in the Fund's portfolio, computed on a dollar-weighted basis, will
be 90 days or less.
The Fund will primarily limit its investments to U.S. Treasury obligations, the
interest on which is exempt from personal income tax in the various states if
owned directly.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general. The Fund will invest
only in other investment companies that are money market funds having investment
objectives and policies
similar to its own, and primarily for the purpose of investing short-term cash
which has not yet been invested in other portfolio instruments. The adviser will
waive its investment advisory fee on assets invested in securities of open-end
investment companies.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase U.S.
Treasury obligations on a when-issued or delayed delivery basis. These
transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The Fund engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Fund's investment objective and
policies, not for investment leverage. In when-issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Fund to miss a price
or yield considered to be advantageous.
INVESTMENT LIMITATIONS
The Fund will not borrow money or pledge securities except, under certain
circumstances, the Fund may borrow up to one-third of the value of its total
assets and pledge up to 10% of the value of its total assets to secure such
borrowings.
The above investment limitation cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not invest more than 10% of its net assets in illiquid
obligations.
FIRST PRIORITY FUNDS INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF FIRST PRIORITY FUNDS
BOARD OF TRUSTEES. The Trustees are responsible for managing the business
affairs of the Trust and for exercising all of the powers of the Trust except
those reserved for the shareholders. The Executive Committee of the Board of
Trustees handles the Trustee's responsibilities between meetings of the
Trustees.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by First Alabama Bank ("First
Alabama" or "the Adviser"), subject to direction by the Trustees. The Adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the assets of the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to 0.50% of the Fund's average daily net assets. The Adviser has
undertaken to reimburse the Fund up to the amount of the advisory fee, for
operating expenses in excess of limitations established by certain states.
The Adviser may voluntarily choose to waive a portion of its fee or
reimburse other expenses of the Fund. The Adviser can terminate such waiver
or reimbursement policy at any time at its sole discretion.
ADVISER'S BACKGROUND. The Adviser is a wholly-owned subsidiary of First
Alabama Bancshares, Inc., a bank holding company organized during 1971
under the laws of the State of Delaware. (A proposal is currently pending
to change the name of the holding company to "Regions Financial
Corporation."). Operating out of more than 200 offices, it provides a wide
range of banking and fiduciary services to its customers. As of June 30,
1993, First Alabama Bancshares was one of the 100 largest bank holding
companies in the United States with total assets in excess of $8 billion.
First Alabama Bank is recognized as one of the strongest banks in America
by U.S. Banker magazine, Keefe, Bruyette & Woods, and Thomson Bankwatch.
During 1992, these organizations rated First Alabama as one of the top
quality banks in the United States. First Alabama's common stock is
currently included among those in the Dow Jones Equity Market Index, as
well as Standard & Poor's Midcap Index.
As fiduciary, First Alabama managed over $2.3 billion in discretionary
assets as of December 31,
1992. It manages eight common trust funds and collective investment funds
having a market
value in excess of $200 million as of September 30, 1993. First Alabama has
been adviser to the First Priority Funds since inception. As of September
30, 1993, the market value of the First Priority Funds was in excess of
$400 million.
DISTRIBUTION OF TRUST SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
<C> <S>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may voluntarily reimburse a portion
of its fee.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTING SERVICES.
Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of Federated
Investors, is transfer agent for the Shares of the Fund and dividend disbursing
agent for the Fund. It also provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania and Dickstein, Shapiro and Morin, Washington, D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche, Pittsburgh, Pennsylvania.
EXPENSES OF THE FUND AND TRUST SHARES
Holders of Shares pay their allocable portion of Fund and Trust expenses.
The Trust expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost of organizing the Trust and continuing
its existence; registering the Trust with federal and state securities
authorities; Trustees' fees; auditors' fees; the cost of meetings of Trustees;
legal fees of the Trust; association membership dues; and such non-recurring and
extraordinary items as may arise.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to: registering the Fund and Shares of the Fund;
investment advisory services; taxes and commissions; custodian fees; insurance
premiums; auditors' fees; and such non-recurring and extraordinary items as may
arise.
In addition, the Trustees reserve the right to allocate certain other expenses
to holders of Shares as it deems appropriate ("Class Expenses"). In any case,
Class Expenses would be limited to the following: distribution fees; transfer
agent fees as identified by the transfer agent as attributable to holder of
Shares; printing and postage expenses related to preparing and distributing
materials such as shareholder reports, prospectuses and proxies to current
shareholders; registration fees paid to the Securities and Exchange Commission
and registration fees paid to state securities commissions; expenses related to
administrative personnel and services as required to support holders of Shares;
legal fees relating solely to Shares; and Trustees' fees incurred as a result of
issues relating solely to Shares.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund attempts to stabilize the net asset value of its Shares at $1.00 by
valuing the portfolio securities using the amortized cost method. The net asset
value for Shares is determined by adding the interest of the Shares in the value
of all securities and other assets of the Fund, subtracting the interest of the
Shares in the liabilities of the Fund and those attributable to Shares, and
dividing the remainder by the total number of Shares outstanding. The Fund, of
course, cannot guarantee that its net asset value will always remain at $1.00
per Share.
INVESTING IN TRUST SHARES
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares of the Fund by an investor is $25,000.
Subsequent investments may be made in any amounts. An institutional investor's
minimum investment will be calculated by combining all accounts it maintains
with the Trust Shares of the Fund.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund.
The net asset value is determined at 12:00 noon and 4:00 p.m. (Eastern time),
Monday through Friday, except on: (i) days on which there are not sufficient
changes in the value of the Fund's portfolio securities that its net asset value
might be materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; or (iii) the following
holidays: New Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
SHARE PURCHASES
Shares are sold on days which the New York Stock Exchange and the Federal
Reserve Wire System are open for business. A customer may purchase Shares
through the Trust Department of First Alabama. Texas residents should purchase
Shares through Federated Securities Corp. at 1-800-356-2805. In connection with
the sale of Shares, the distributor may, from time to time, offer certain items
of nominal value to any shareholder or investor. The Fund reserves the right to
reject any purchase request.
THROUGH FIRST ALABAMA BANK. To place an order to purchase Shares, a customer may
contact their local Trust Administrator or telephone First Alabama.
Payment may be made by either check or federal funds or by debiting a customer's
account at First Alabama. Purchase orders must be received by 11:00 a.m.
(Central time) in order to be credited on the same day. Payment is normally
required on the same business day.
SHAREHOLDER ACCOUNTS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting the Fund.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends will be reinvested in
additional Shares on payment dates unless cash payments are requested by writing
to the Fund or First Alabama as appropriate. Share purchase settlements received
by First Alabama Bank before 2:00 p.m. (Central time) earn dividends that day.
CAPITAL GAINS
Capital gains, if any, could result in an increase in dividends. Capital losses
could result in a decrease in dividends. If, for some extraordinary reason, the
Fund realizes net long-term capital gains, it will distribute them at least once
every 12 months.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
A shareholder may exchange shares of one fund for the appropriate class of
shares of any other fund in the Trust by calling or by writing to First Alabama.
Shares purchased by check are eligible for exchange after 10 days. The exchange
feature applies to shares of each fund as of the effective offering date of each
fund's shares.
Orders to exchange shares of one fund for shares of any of the other First
Priority Funds will be executed by redeeming the shares owned at net asset value
and purchasing shares of any of the other First Priority Funds at the net asset
value determined after the proceeds from such redemption become available.
Orders for exchanges received by the fund prior to 3:00 p.m. (Central time) on
any day the funds are open for business will be executed as of the close of
business that day. Orders for exchanges received after 3:00 p.m. (Central time)
on any business day will be executed at the close of the next business day.
An excessive number of exchanges may be disadvantageous to the Trust. Therefore
the Trust, in addition to its right to reject any exchange, reserves the right
to terminate the exchange privilege of any shareholder who makes more than five
exchanges of shares of the funds in a year, or three in a calendar quarter.
An exchange order must comply with the requirements for a redemption and
purchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements of
each fund being acquired. An exchange constitutes a sale for federal income tax
purposes.
The exchange privilege is only available in states where Shares of the fund
being acquired may legally be sold. Before the exchange, a shareholder must
receive a prospectus of the fund for which the exchange is being made.
Telephone exchange instructions may be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
REDEEMING TRUST SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on Federal holidays when
wire transfers are restricted. Redemption requests can be made in person or by
telephone through First Alabama.
BY TELEPHONE
A shareholder who is a customer of First Alabama may redeem Shares of the Fund
by contacting their Trust Administrator. For calls received by First Alabama
before 11:00 a.m. (Central time), proceeds will normally be wired the same day
to the shareholder's account at First Alabama or a check will be sent to the
address of record. Those shares will not be entitled to a dividend declared on
the day the
redemption request was received. In no event will proceeds be wired or a check
mailed more than seven days after a proper request for redemption has been
received. An authorization form permitting the Fund to accept telephone requests
must first be completed. Authorization forms and information on this service are
available from First Alabama.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming Shares by telephone. If such a case should occur,
another method of redemption, such as a written request to Federated Services
Company or First Alabama should be considered.
If at any time, the Fund shall determine it necessary to terminate or modify
this method or redemption, shareholders shall be promptly notified.
Telephone redemption instructions may be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check, the proceeds from the redemption of those
Shares are not available, and the Shares may not be exchanged, until First
Alabama is reasonably certain that the purchase check has cleared, which could
take up to ten calendar days.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $25,000 due to
shareholder redemptions. Before Shares are redeemed to close an account, the
shareholder is notified in writing and allowed 30 days to purchase additional
Shares to meet the minimum requirement.
REDEMPTION IN KIND
The Trust is obligated to redeem Shares solely in cash up to $250,000, or 1% of
any class's net asset value, whichever is less, for any one shareholder within a
90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Trust will pay
all or a portion of the remainder of the redemption in portfolio instruments,
valued in the same way as net asset value is determined. The portfolio
instruments will be selected in a manner that the Trustees deem fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur transaction costs.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of all classes of
each portfolio in the Trust have equal voting rights, except that in matters
affecting only a particular Fund or class, only shareholders of that Fund or
class are entitled to vote. As a Massachusetts business trust, the Trust is not
required to hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in the Trust's or the Fund's operation and for
the election of Trustees under certain circumstances. As of January 19, 1993,
First Alabama Bank may be deemed to control the Fund because it is the owner of
record of certain shares of the Fund. As of January 6, 1994, First Alabama Bank
of Birmingham, Birmingham, AL, acting in various capacities for numerous
accounts, was the owner of record of 85,758,905 Shares (99.96%) of the Fund, and
therefore, may, for certain purposes, be deemed to control the Fund and be able
to affect the outcome of certain matters presented for a vote of shareholders.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust itself cannot meet its obligations to indemnify shareholders
and pay judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling, or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling, or distributing securities. However, such
banking laws and regulations do not prohibit such a holding company affiliate or
banks generally from acting as investment adviser, transfer agent, or custodian
to such an investment company or from purchasing shares of such a company as
agent for and upon the order of their customer. First Alabama is subject to such
banking laws and regulations.
First Alabama believes, based on the advice of its counsel, that First Alabama
may perform the services for the Fund contemplated by its advisory agreement
with the Trust without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of such or future statutes and regulations, could
prevent the Adviser from continuing to perform all or a part of the above
services for its customers and/or the Fund. If it were prohibited from engaging
in these customer-related activities, the Trustees would consider alternative
advisers and means of continuing available investment services. In such event,
changes in the operation of the Fund may occur, including possible termination
of any automatic or other Fund share investment and redemption services that are
being provided by First Alabama. It is not expected that existing shareholders
would suffer any adverse financial consequences (if another adviser with
equivalent abilities to First Alabama is found) as a result of any of these
occurrences.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional Shares.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its yield and effective yield for Shares.
The yield of Shares represents the annualized rate of income earned on an
investment in Shares over a seven-day period. It is the annualized dividends
earned during the period on the investment, shown as a percentage of the
investment. The effective yield is calculated similarly to the yield, but, when
annualized, the income earned by an investment in Shares is assumed to be
reinvested daily. The
effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment.
Advertisements and other sales literature may also refer to total return. Total
return represents the change, over a specific period of time, in the value of an
investment in Shares, after reinvesting all income distributions. It is
calculated by dividing that change by the initial investment and is expressed as
a percentage.
Yield and effective yield will be calculated separately for Trust Shares and
Investment Shares. Because Investment Shares are subject to 12b-1 fees, the
yield and effective yield for Trust Shares, for the same period, will exceed
that of Investment Shares.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Investment Shares of First Priority Treasury Money Market Fund are sold to
customers of First Alabama and others at net asset value at a minimum initial
investment of $1,000. Investment Shares are distributed pursuant to a Rule 12b-1
Plan adopted by First Priority Funds, whereby the distributor is paid a fee up
to .40 of 1% of the Investment Shares' average daily net assets of the Fund.
The amount of dividends payable to Investment Shares will be less than those
payable to Trust Shares by the difference between Class Expenses and
distribution expenses borne by shares of each respective class.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation with respect to one class of shares
than with respect to another class of shares of the same Fund.
The stated advisory fee is the same for both classes of the Fund.
FIRST PRIORITY TREASURY MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 22.
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
<S> <C> <C>
--------------------
<CAPTION>
1993 1992*
<S> <C> <C>
- ----------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------
Net investment income 0.02 0.01
- ----------------------------------------------------------------------------------- --------- ---------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.02) (0.01)
- ----------------------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------- --------- ---------
TOTAL RETURN** 2.34% 1.83%
- -----------------------------------------------------------------------------------
RATIO TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------
Expenses 0.78% 0.74%(a)
- -----------------------------------------------------------------------------------
Net investment income 2.33% 2.58%(a)
- -----------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.46% 0.53%
- -----------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $23,795 $23,578
- -----------------------------------------------------------------------------------
</TABLE>
* Reflects operations from April 14, 1992 (date of initial public investment)
to November 30, 1992. For the period from January 29, 1992 (start of
business) to May 4, 1992, net investment income for Investment Shares
aggregating $0.01 per share was distributed to Federated Administrative
Services.
** Based on net asset value.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY TREASURY MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- --------------- ------------------------------------------------------------------------------- ---------------
U.S. TREASURY OBLIGATIONS--90.4%
- ------------------------------------------------------------------------------------------------
U.S. TREASURY NOTES--22.4%
-------------------------------------------------------------------------------
$ 25,000,000 4.875%--7.00%, 1/15/94--2/15/94 $ 25,121,769
------------------------------------------------------------------------------- ---------------
U.S. TREASURY BILLS--68.0%
-------------------------------------------------------------------------------
77,000,000 12/2/93--5/26/94 76,410,002
------------------------------------------------------------------------------- ---------------
TOTAL U.S. TREASURY OBLIGATIONS, AT AMORTIZED COST 101,531,771
------------------------------------------------------------------------------- ---------------
MUTUAL FUND ISSUES--9.3%
- ------------------------------------------------------------------------------------------------
3,485,371 Fidelity U.S. Treasury Income Portfolio 3,485,371
-------------------------------------------------------------------------------
3,532,960 Franklin U.S. Treasury Money Market Portfolio 3,532,960
-------------------------------------------------------------------------------
3,460,622 Goldman Sachs I.L.A. Treasury Portfolio 3,460,622
------------------------------------------------------------------------------- ---------------
TOTAL MUTUAL FUND ISSUES (AT NET ASSET VALUE) 10,478,953
------------------------------------------------------------------------------- ---------------
TOTAL INVESTMENTS, AT AMORTIZED COST AND VALUE $ 112,010,724\
------------------------------------------------------------------------------- ---------------
</TABLE>
\ Also represents cost for federal tax purposes.
Note: The categories of investments are shown as a percentage of net assets
($112,305,064) at November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY TREASURY MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------------------------
Investments, at amortized cost and value (Note 2A) $ 112,010,724
- -------------------------------------------------------------------------------------------------
Interest receivable 535,168
- -------------------------------------------------------------------------------------------------
Deferred expenses (Note 2F) 24,538
- ------------------------------------------------------------------------------------------------- ---------------
Total assets 112,570,430
- -------------------------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------------------------
Dividends payable $ 188,105
- ------------------------------------------------------------------------------------
Accrued expenses and other liabilities 77,261
- ------------------------------------------------------------------------------------ -----------
Total liabilities 265,366
- ------------------------------------------------------------------------------------------------- ---------------
NET ASSETS for 112,305,064 shares of beneficial interest outstanding $ 112,305,064
- ------------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE, Offering Price, and Redemption Price Per Share:
Trust Shares (net assets of $88,509,904 / 88,509,904 SHARES OF BENEFICIAL
INTEREST OUTSTANDING) $1.00
- ------------------------------------------------------------------------------------------------- ---------------
INVESTMENT SHARES (NET ASSETS OF $23,795,160 / 23,795,160 SHARES OF BENEFICIAL INTEREST
OUTSTANDING) $1.00
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY TREASURY MONEY MARKET FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------
Interest income (Note 2B) $ 3,730,304
- ---------------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 602,115
- ------------------------------------------------------------------------------------
Administrative personnel and services (Note 5) 169,558
- ------------------------------------------------------------------------------------
Trustees' fees 4,288
- ------------------------------------------------------------------------------------
Custodian fees 40,607
- ------------------------------------------------------------------------------------
Auditing fee 15,732
- ------------------------------------------------------------------------------------
Recordkeeper and transfer agent fees (Note 5) 82,076
- ------------------------------------------------------------------------------------
Legal fees 3,384
- ------------------------------------------------------------------------------------
Printing and postage 17,399
- ------------------------------------------------------------------------------------
Insurance premiums 8,779
- ------------------------------------------------------------------------------------
Distribution services fees (Note 5) 93,697
- ------------------------------------------------------------------------------------
Registration fees 54,433
- ------------------------------------------------------------------------------------
Miscellaneous 7,214
- ------------------------------------------------------------------------------------ -------------
Total expenses 1,099,282
- ------------------------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 5) 551,033
- ------------------------------------------------------------------------------------ -------------
Net expenses 548,249
- --------------------------------------------------------------------------------------------------- -------------
Net investment income $ 3,182,055
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY TREASURY MONEY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
<S> <C> <C>
1993 1992*
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------------
OPERATIONS--
- -----------------------------------------------------------------------------
Net investment income $ 3,182,055 $ 1,553,626
- ----------------------------------------------------------------------------- ---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- -----------------------------------------------------------------------------
Dividends to shareholders from net investment income
- -----------------------------------------------------------------------------
Trust Shares (2,637,494) (1,358,856)
- -----------------------------------------------------------------------------
Investment Shares (544,561) (194,770)
- ----------------------------------------------------------------------------- ---------------- ----------------
Change in net assets from distributions to shareholders (3,182,055) (1,553,626)
- ----------------------------------------------------------------------------- ---------------- ----------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- -----------------------------------------------------------------------------
Proceeds from sale of shares 312,480,913 228,663,655
- -----------------------------------------------------------------------------
Net asset value of shares issued to shareholders
in payment of dividends declared 533,106 176,969
- -----------------------------------------------------------------------------
Cost of shares redeemed (310,902,563) (118,647,016)
- ----------------------------------------------------------------------------- ---------------- ----------------
Change in net assets from Fund share transactions 2,111,456 110,193,608
- ----------------------------------------------------------------------------- ---------------- ----------------
Change in net assets 2,111,456 110,193,608
- -----------------------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------------------
Beginning of period 110,193,608 --
- ----------------------------------------------------------------------------- ---------------- ----------------
End of period $ 112,305,064 $ 110,193,608
- ----------------------------------------------------------------------------- ---------------- ----------------
</TABLE>
*Reflects operations for the period from January 29, 1992 (start of business) to
November 30, 1992.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY TREASURY MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
First Priority Funds, (the "Trust") is an open end, management investment
company, established as a Massachusetts business trust under a Declaration of
Trust dated October 15, 1991. The Trust currently consists of three portfolios.
The financial statements included herein present only those of First Priority
Treasury Money Market Fund (the "Fund"), one of the portfolios of the Trust. The
financial statements of the other portfolios in the Trust are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held. The Declaration
of Trust permits the Trust to offer separate series of shares of beneficial
interest representing interests in the separate portfolios of securities. The
Trustees have established two classes of shares, Trust Shares and Investment
Shares in each portfolio of the Trust. Effective December 7, 1993, the Trust
added a fourth portfolio; First Priority Limited Maturity Government Fund, which
offers only one class of shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--The Trustees have determined that the best method
currently available for valuing portfolio securities is amortized cost. The
Fund's use of the amortized cost method to value its portfolio securities
is conditioned on its compliance with Rule 2a-7 under the Investment
Company Act of 1940. Investments in other regulated investment companies
are valued at net asset value.
B. INCOME--Interest income is recorded on the accrual basis. Interest income
includes interest and discount earned (net of premium), including original
issue discount as required by the Internal Revenue Code, as amended, plus
realized gains, if any, on portfolio securities.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Internal Revenue Code, as amended, applicable to regulated investment
companies and to distribute to shareholders each year substantially all of
its taxable income. Accordingly, no provision for federal tax is necessary.
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. To the extent the Fund
engages in such transactions, it will do so for the purpose of acquiring
portfolio securities consistent with its investment objective and policies
and not for the purpose of investment leverage. When the Fund indicates its
interest in acquiring such portfolio securities, no liability accrues to
the Fund until the trade date of the transaction. The Fund will maintain
security positions such that sufficient liquid assets will be available to
make payment for the securities to be purchased. These securities are
marked to market daily and
maintained until the transaction is settled. Securities purchased on a
when-issued or delayed delivery basis do not earn income until the
settlement date.
E. EXPENSES--Expenses of the Fund, other than distribution services fees, and
related waivers and reimbursements, if any, are allocated to each class of
shares based on its relative average net assets for the period.
F. DEFERRED EXPENSES--Costs incurred by the Trust with respect to registration
of its shares in its first fiscal year, excluding the initial expense of
registering the shares, have been deferred and are being amortized using
the straight line method through February 28, 1997.
G. OTHER--Investment transactions are accounted for on the date of the
transaction.
(3) DIVIDENDS
The Fund computes its net income daily and, immediately prior to the calculation
of its net asset value at the close of business, declares and records dividends
to shareholders of record at the time of the previous computation of the Fund's
net asset value. Payment of dividends is made monthly in cash, or in additional
shares at the net asset value on the payable date.
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. At November 30, 1993, capital paid-in aggregated $112,305,064.
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
<S> <C> <C>
1993 1992*
<CAPTION>
---------------- --------------
TRUST SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
Shares outstanding, beginning of period 86,615,821 --
- --------------------------------------------------------------------------------
Shares sold 127,026,078 134,423,805
- --------------------------------------------------------------------------------
Shares issued to shareholders electing to receive a payment
of dividends declared in Fund shares 1,773 724
- --------------------------------------------------------------------------------
Shares redeemed (125,133,768) (47,808,708)
- -------------------------------------------------------------------------------- ---------------- --------------
Shares outstanding, end of period 88,509,904 86,615,821
- -------------------------------------------------------------------------------- ---------------- --------------
</TABLE>
* For the period from January 29, 1992 (start of business) to November 30,1992.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
<S> <C> <C>
1993 1992*
<CAPTION>
---------------- -------------
INVESTMENT SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
Shares outstanding, beginning of period 23,577,787 --
- --------------------------------------------------------------------------------
Shares sold 185,454,835 94,239,850
- --------------------------------------------------------------------------------
Shares issued to shareholders electing to receive a payment
of dividends in Fund shares 531,333 176,245
- --------------------------------------------------------------------------------
Shares redeemed (185,768,795) (70,838,308)
- -------------------------------------------------------------------------------- ---------------- -------------
Shares outstanding, end of period 23,795,160 23,577,787
- -------------------------------------------------------------------------------- ---------------- -------------
</TABLE>
* For the period from May 5, 1992 (date of initial public investment) to
November 30, 1992.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
First Alabama Bank, the Trust's investment Adviser ("Adviser"), receives for its
services an annual investment advisory fee equal to .50 of 1% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive a portion
of its fee or reimburse certain operating expenses of the Fund. For the year
ended November 30, 1993, the investment advisory fee amounted to $602,115, of
which $551,033 was voluntarily waived in accordance with such undertaking.
Federated Administrative Services ("FAS") provides administrative personnel and
services at an annual rate of .15 of 1% on the first $250 million of average
aggregate daily net assets of the Trust; .125 of 1% on the next $250 million;
.10 of 1% on the next $250 million; and .075 of 1% of the average aggregate
daily net assets of the Trust in excess of $750 million. For the year ended
November 30, 1993, FAS earned administrative fees of $169,558.
Expenses of organizing the Fund ($50,822) were borne initially by FAS. The Fund
has agreed to reimburse FAS for the organization expenses borne by FAS during
the five year period following the date the Trust's portfolio became effective.
Pursuant to this agreement, the Fund reimbursed $6,235 in organization expenses
during the year ended November 30, 1993.
Federated Services Company is the Fund's transfer agent and dividend disbursing
agent. It also provides certain accounting and recordkeeping services with
respect to the Fund's portfolio of investments.
Effective December 1, 1993, First Alabama Bank become the custodian for the
securities and cash of the Trust.
The Trust has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Trust will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the assets of
Investment Shares of the Fund to finance activities principally intended to
result in the sale of Investment Shares subject to the Plan. The Plan provides
that the Fund will pay up to .40 of 1% of the average daily net assets of
Investment Shares, annually, to pay commissions, maintenance fees and to
compensate the distributor. FSC may voluntarily waive a portion of its fee. For
the year ended November 30, 1993, FSC earned $93,697 in distribution services
fees.
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of FIRST PRIORITY FUNDS
and the Shareholders of FIRST PRIORITY TREASURY MONEY MARKET FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of First Priority Treasury Money Market Fund (a
portfolio of First Priority Funds) as of November 30, 1993, the related
statement of operations for the year then ended, and the statement of changes in
net assets and financial highlights (see pages 2 and 13) for the years ended
November 30, 1993 and 1992. These financial statements and financial highlights
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
November 30, 1993, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of First Priority
Treasury Money Market Fund as of November 30, 1993, the results of its
operations, the changes in its net assets and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE
Pittsburgh, Pennsylvania
January 17, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
First Priority Treasury Federated Investors Tower
Money Market Fund Pittsburgh, Pennsylvania 15222-3779
Trust Shares
- ---------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Investment Adviser and Custodian
First Alabama Bank P.O. Box 10247
Birmingham, Alabama 35202
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent
and Portfolio Accounting Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin 2101 L Street, N.W.
Washington, D.C. 20037
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
FIRST PRIORITY TREASURY
MONEY MARKET FUND
TRUST SHARES
PROSPECTUS
A Diversified Portfolio of
First Priority Funds, an Open-End,
Management Investment Company
Prospectus dated January 31, 1994
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
2021109A-I (1/94)
FIRST PRIORITY TREASURY MONEY MARKET FUND
INVESTMENT SHARES
TRUST SHARES
(A PORTFOLIO OF FIRST PRIORITY FUNDS)
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus for Investment Shares or Trust Shares dated
January 31, 1994. This Statement is not a prospectus itself. To
receive a copy of either prospectus, write First Priority Treasury
Money Market Fund or call toll-free
1-800-433-2829.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 31, 1994
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE 1
- ---------------------------------------------------------------
Types of Investments 1
When-Issued and Delayed
Delivery Transactions 1
Investment Limitations 1
FIRST PRIORITY FUNDS MANAGEMENT 2
- ---------------------------------------------------------------
Officers and Trustees 2
The Funds 4
Fund Ownership 5
Trustee Liability 5
INVESTMENT ADVISORY SERVICES 5
- ---------------------------------------------------------------
Adviser to the Fund 5
Advisory Fees 5
ADMINISTRATIVE SERVICES 5
- ---------------------------------------------------------------
CUSTODIAN 6
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 6
- ---------------------------------------------------------------
PURCHASING SHARES 6
- ---------------------------------------------------------------
Distribution Plan (Investment Shares) 6
Conversion to Federal Funds 7
DETERMINING NET ASSET VALUE 7
- ---------------------------------------------------------------
Use of the Amortized Cost Method 7
REDEEMING SHARES 8
- ---------------------------------------------------------------
Redemption in Kind 8
EXCHANGE PRIVILEGE 8
- ---------------------------------------------------------------
Requirements for Exchanging Shares 8
TAX STATUS 8
- ---------------------------------------------------------------
The Fund's Tax Status 8
Shareholders' Tax Status 8
YIELD 9
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EFFECTIVE YIELD 9
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PERFORMANCE COMPARISONS 9
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Priority Treasury Money Market Fund (the "Fund") is a portfolio in First
Priority Funds (the "Trust"), which was established as a Massachusetts business
trust under a Declaration of Trust dated October 15, 1991.
Shares of the Fund are offered in two classes, Investment Shares and Trust
Shares (individually and collectively referred to as "Shares"). This Combined
Statement of Additional Information relates to the above-mentioned Shares of the
Fund.
INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income consistent with
stability of principal and liquidity. The investment objective cannot be changed
without approval of shareholders.
TYPES OF INVESTMENTS
The Fund invests primarily in short-term U.S. Treasury obligations which are
issued by the U.S. government, and are fully guaranteed as to payment of
principal and interest by the United States.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated on the Fund's records at the trade date and
maintained until the transaction is settled. These securities are marked to
market daily and maintained until the transaction is settled. The Fund may
engage in these transactions to an extent that would cause the segregation of an
amount up to 20% of the total value of its assets.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for
clearance of transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money in amounts up to one-third of the value of its total assets,
including the amounts borrowed. The Fund will not borrow money except as
a temporary, extraordinary, or emergency measure, or to facilitate
management of the portfolio by enabling the Fund to meet redemption
requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not purchase any
securities while borrowings in excess of 5% of its total assets are
outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may pledge assets having
a market value not exceeding the lesser of the dollar amounts borrowed or
10% of the value of total assets at the time of the pledge.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except that it may purchase or
hold U.S. Treasury obligations, permitted by its investment objective,
policies and limitations, or Declaration of Trust.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate including limited
partnership interests.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest no more than 5% of its total assets in any one investment
company, or invest more than 10% of its total assets in investment
companies in general. The Fund will limit its investments in the
securities of other investment companies to those of money market funds
having investment objectives and policies similar to its own. The Fund
will purchase securities of
closed-end investment companies only in open market transactions
involving only customary broker's commissions. However, these limitations
are not applicable if the securities are acquired in a merger,
consolidation, reorganization, or acquisition of assets. It should be
noted that investment companies incur certain expenses such as management
fees and, therefore, any investment by the Fund in shares of another
investment company would be subject to such duplicate expenses.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 10% of the value of its net assets in
illiquid securities.
INVESTING IN WARRANTS
The Fund will not invest in warrants.
INVESTING IN MINERALS
The Fund will not purchase or sell oil, gas, or other mineral exploration
or development programs, or leases.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
The Fund does not consider the issuance of separate classes of shares to
constitute an issue of "senior securities" within the meaning of the investment
limitations set forth above.
The Fund has no present intent to borrow money or pledge securities in excess of
5% of the value of its net assets, or invest in securities of closed-end
investment companies, in the coming fiscal year.
FIRST PRIORITY FUNDS MANAGEMENT
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OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, principal occupations,
and present positions, including any affiliation with First Alabama Bank,
Federated Investors, Federated Securities Corp., Federated Services Company,
Federated Administrative Services, and the Funds (as defined below).
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
<S> <C> <C>
John F. Donahue*\ Chairman and Chairman and Trustee, Federated Investors; Chairman and Trustee,
Federated Investors Tower Trustee Federated Advisers, Federated Management, and Federated Research;
Pittsburgh, PA Director, AEtna Life and Casualty Company; Chief Executive Officer and
Director, Trustee, or Managing General Partner of the Funds; formerly,
Director, The Standard Fire Insurance Company. Mr. Donahue is the father
of J. Christopher Donahue, Vice President of the Trust.
John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior Vice President,
Wood/IPC Commercial John R. Wood and Associates, Inc., Realtors; President, Northgate
Department Village Development Corporation; General Partner or Trustee in private
John R. Wood and real estate ventures in Southwest Florida; Director, Trustee, or
Associates, Inc., Realtors Managing General Partner of the Funds; formerly, President, Naples
3255 Tamiami Trail North Property Management, Inc.
Naples, FL
William J. Copeland Trustee Director and Member of the Executive Committee, Michael Baker, Inc.;
One PNC Plaza-23rd Floor Director, Trustee, or Managing General Partner of the Funds; formerly,
Pittsburgh, PA Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director,
Concord, MA Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D. 3471 Trustee Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of
Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the Funds.
Pittsburgh, PA
Edward L. Flaherty, Jr.\ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park
5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Pittsburgh, PA Trustee, or Managing General Partner of the Funds; formerly, Counsel,
Horizon Financial, F.A., Western Region.
Peter E. Madden Trustee Consultant; State Representative, Commonwealth of Massachusetts;
225 Franklin Street Director, Trustee, or Managing General Partner of the Funds; formerly,
Boston, MA President, State Street Bank & Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
5916 Penn Mall Director, Eat'N Park Restaurants Inc.; Director, Trustee, or Managing
Pittsburgh, PA General Partner of the Funds; formerly, Vice Chairman, Horizon
Financial, F.A.
Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
1202 Cathedral of Endowment for International Peace, RAND Corporation; Online Computer
Learning Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
University of Pittsburgh Management Center; Director, Trustee, or Managing General Partner of the
Pittsburgh, PA Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy & Technology.
Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee, or Managing
4905 Bayard Street General Partner of the Funds.
Pittsburgh, PA
Edward C. Gonzales* President, Vice President, Treasurer, and Trustee, Federated Investors; Vice
Federated Investors Tower Treasurer President and Treasurer, Federated Advisers, Federated Management, and
Pittsburgh, PA and Trustee Federated Research; Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Trustee, Federated Services Company;
Chairman, Treasurer, and Director, Federated Administrative Services;
Trustee or Director of some of the Funds; Vice President and Treasurer
of the Funds.
J. Christopher Donahue Vice President President and Trustee, Federated Investors; Trustee, Federated Advisers,
Federated Investors Tower Federated Management, and Federated Research; President and Director,
Pittsburgh, PA Federated Administrative Services; Trustee, Federated Services Company;
President or Vice President of the Funds; Director, Trustee or Managing
General Partner of some of the Funds. Mr. Donahue is the son of John F.
Donahue, Chairman and Trustee of the Trust.
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors; Chairman and
Federated Investors Tower Director, Federated Securities Corp.; President or Vice President of the
Pittsburgh, PA Funds; Director or Trustee of some of the Funds.
John W. McGonigle Vice President and Vice President, Secretary, General Counsel, and Trustee, Federated
Federated Investors Tower Secretary Investors; Vice President, Secretary and Trustee, Federated Advisers,
Pittsburgh, PA Federated Management, and Federated Research; Trustee, Federated
Services Company; Executive Vice President, Secretary, and Director,
Federated Administrative Services; Director and Executive Vice
President, Federated Securities Corp.; Vice President and Secretary of
the Funds.
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive Vice
Federated Investors Tower President, Federated Securities Corp.; President and Trustee, Federated
Pittsburgh, PA Advisers, Federated Management, and Federated Research; Vice President
of the Funds; Director, Trustee, or Managing General Partner of some of
the Funds; formerly, Vice President, The Standard Fire Insurance Com-
pany and President of its Federated Research Division.
Ronald M. Petruch Vice President Vice President, Federated Administrative Services; Vice President and
Federated Investors Tower and Assistant Assistant Treasurer of some of the Funds.
Pittsburgh, PA Treasurer
</TABLE>
*This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940.
\Members of the Trust's Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees between
meetings of the Board.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: A.T. Ohio
Tax-Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; BankSouth
Select Funds; The Boulevard Funds; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series Inc.; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; FT Series, Inc.; Federated ARMs Fund; Federated
Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Intermediate Government
Trust; Federated Master Trust; Federated Municipal Trust; Federated
Short-Intermediate Government Trust; Federated Short-Term U.S. Government Trust;
Federated Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond
Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress
Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.; Government Income
Securities, Inc.; High Yield Cash Trust; Insurance Management Series;
Intermediate Municipal Trust; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money Market
Trust; Liberty Term Trust, Inc.-1999; Liberty Utility Fund, Inc.; Liquid Cash
Trust; Mark Twain Funds; Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust; New York Municipal
Cash Trust; 111 Corcoran Funds; The Planters Funds; Portage Funds; RIMCO
Monument Funds; The Shawmut Funds; Short-Term Municipal Trust; Signet Select
Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond
Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
Trademark Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; and Trust for U.S.
Treasury Obligations.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of January 6, 1994, the following shareholders of record owned 5% or more of
the outstanding Investment Shares of the Fund: Aronov Realty Management, Inc.,
Montgomery, AL, owned approximately 1,863,405 Shares (8.26%); Aaron, Aronov &
Associates, Montgomery, AL, owned approximately 1,352,711 Shares (5.99%); and
SMA Inc. Insurance, Birmingham, AL, owned approximately 2,389,256 Shares
(10.59%).
As of January 6, 1994, the following shareholders of record owned 5% or more of
the outstanding Trust Shares of the Fund: First Alabama Bank of Birmingham,
Birmingham, AL, owned approximately 85,758,905 Shares (99.96%).
TRUSTEE LIABILITY
The First Priority Funds' Declaration of Trust provides that the Trustees are
not liable for errors of judgment or mistakes of fact or law. However, they are
not protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser is First Alabama Bank ("First Alabama" or "the
Adviser"), which is a wholly-owned subsidiary of First Alabama Bancshares, Inc.
The Adviser shall not be liable to the Trust, the Fund, or any shareholder of
the Fund for any losses that may be sustained in the purchase, holding, or sale
of any security, or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, First Alabama receives an annual investment advisory
fee as described in the respective prospectus.
During the fiscal year ended November 30, 1993, the Adviser earned $602,115, of
which $551,033 was voluntarily waived. From the Fund's start of business,
January 29, 1992, to November 30, 1992, the Adviser earned $249,435, of which
$245,692 was voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will reimburse the
Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for the fees set forth in the
respective prospectus. For the fiscal year ended November 30, 1993, Federated
Administrative Services earned $169,558 for administrative services. From the
Fund's start of business, January 29, 1992, to November 30, 1992, Federated
Administrative Services earned $73,665 for administrative services, of which
$20,916 was voluntarily waived.
John A. Staley, IV, an officer of the Fund, holds approximately 15% of the
outstanding common stock and serves as a director of Commercial Data Services,
Inc., a company which provides computer processing services to Federated
Administrative Services. For the fiscal years ended November 30, 1993, and 1992,
Federated Administrative Services paid approximately $164,324 and $186,144,
respectively, for services provided by Commercial Data Services, Inc.
CUSTODIAN
- --------------------------------------------------------------------------------
First Alabama Bank, Birmingham, Alabama is custodian for the securities and cash
of the Fund. Under the custodian agreement, First Alabama Bank holds the Fund's
portfolio securities and keeps all necessary records and documents relating to
its duties. First Alabama Bank's fees for custody services are based upon the
market value of Fund securities held in custody plus certain securities
transaction charges.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Board of Trustees.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include:
advice as to the advisability of investing in securities;
security analysis and reports;
economic studies;
industry studies;
receipt of quotations for portfolio evaluations; and
similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the Adviser in advising the
Fund and other accounts. To the extent that receipt of these services may
supplant services for which the Adviser or its affiliates might otherwise have
paid, it would tend to reduce their expenses.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value without a sales charge on days the New
York Stock Exchange is open for business. The procedure for purchasing Shares of
the Fund is explained in the respective prospectus under "Investing in
Investment Shares" or "Investing in Trust Shares." As used in the prospectus,
the term "dependent children" means all children under the age of 18 and
full-time students under the age of 23.
DISTRIBUTION PLAN (INVESTMENT SHARES)
With respect to the Investment Shares class of the Fund, the Trust has adopted a
Plan pursuant to Rule 12b-1 (the "Plan") which was promulgated by the Securities
and Exchange Commission under the Investment Company Act of 1940. The Plan
provides for payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of Investment
Shares. Such activities may include the advertising and marketing of Investment
Shares; preparing, printing, and distributing prospectuses and sales literature
to prospective shareholders, brokers or administrators; and implementing and
operating the Plan. Pursuant to the Plan, the distributor may pay fees to
brokers for distribution and administrative services and to administrators for
administrative services as to Investment Shares. The administrative services are
provided by a representative who has knowledge of the shareholder's particular
circumstances and goals, and include, but are not limited to: communicating
account openings; communicating account closings; entering purchase
transactions; entering redemption transactions; providing or arranging to
provide accounting support for all transactions; wiring funds and receiving
funds for Investment Share purchases and redemptions; confirming and reconciling
all transactions; reviewing the activity in Fund accounts; and providing
training and supervision of broker personnel; posting and reinvesting dividends
to Fund accounts or arranging for this service to be performed by the Fund's
transfer agent; and maintaining and distributing current copies of prospectuses
and shareholder reports to the beneficial owners of Investment Shares and
prospective shareholders.
The Board of Trustees expects that the adoption of the Plan will result in the
sale of a sufficient number of Investment Shares so as to allow the Fund to
achieve economic viability. It is also anticipated that an increase in the size
of the Fund will facilitate more efficient portfolio management and assist the
Fund in seeking to achieve its investment objective.
For the fiscal year ended November 30, 1993, and from the Fund's start of
business, January 29, 1992, to November 30, 1992, brokers and administrators
(financial institutions) received fees in the amount of $93,697 and $30,709,
respectively, pursuant to the distribution plan.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Federated Services Company
acts as the shareholder's agent in depositing checks and converting them to
federal funds.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund attempts to stabilize the value of a share at $1.00. The days on which
the net asset value is calculated by the Fund are described in the respective
prospectus.
USE OF THE AMORTIZED COST METHOD
The Trustees have decided that the best method for determining the value of
portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for amortization of
premium or accumulation of discount rather than at current market value.
The Fund's use of the amortized cost method of valuing portfolio instruments
depends on its compliance with certain conditions in Rule 2a-7 (the "Rule")
promulgated by the Securities and Exchange Commission under the Investment
Company Act of 1940. Under that Rule, the Trustees must establish procedures
reasonably designed to stabilize the net asset value per share, as computed for
purposes of distribution and redemption, at $1.00 per share, taking into account
current market conditions and the Fund's investment objective.
Under the Rule, the Fund is permitted to purchase instruments which are subject
to demand features or standby commitments. As defined by the Rule, a demand
feature entitles the Fund to receive the principal amount of the instrument from
the issuer or a third party on (1) no more than 30 days notice, or (2) at
specified intervals not exceeding one year, on no more than 30 days' notice. A
standby commitment entitles the Fund to achieve same day settlement, and to
receive an exercise price equal to the amortized cost of the underlying
instrument, plus accrued interest at the time of exercise.
MONITORING PROCEDURES
The Trustees' procedures include monitoring the relationship between the
amortized cost value per share and the net asset value per share based
upon available indications of market value. The Trustees will decide
what, if any, steps should be taken if there is a difference of more than
.5% between the two values. The Trustees will take any steps they
consider appropriate (such as redemption in kind or shortening the
average portfolio maturity) to minimize any material dilution or other
unfair results arising from differences between the two methods of
determining net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that the Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risk and
that, if rated, meet minimum rating standards set forth in the Rule. If
the instruments are not rated, the Trustees must determine that they are
of comparable quality. Shares of investment companies purchased by the
Fund will meet these same criteria and will have investment policies
consistent with Rule 2a-7. The Rule also requires the Fund to maintain a
dollar weighted average portfolio maturity (not more than 90 days)
appropriate to the objective of maintaining a stable net asset value of
$1.00 per share. In addition, no instrument with a remaining maturity of
more than thirteen months can be purchased by the Fund.
Should the disposition of a portfolio security result in a dollar
weighted average portfolio maturity of more than 90 days, the Fund will
invest its available cash to reduce the average maturity to 90 days or
less as soon as possible.
The Fund may attempt to increase yield by trading portfolio securities to take
advantage of short-term market variations. This policy may, from time to time,
result in high portfolio turnover. Under the amortized cost method of valuation,
neither the amount of daily income nor the net asset value is affected by any
unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on Shares of
the Fund, computed by dividing the annualized daily income on the Fund's
portfolio by the net asset value computed as above, may tend to be higher than a
similar computation made by using a method of valuation based upon market prices
and estimates.
In periods of rising interest rates, the indicated daily yield on Shares of the
Fund computed the same way may tend to be lower than a similar computation made
by using a method of calculation based upon market prices and estimates.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
respective prospectus under "Redeeming Investment Shares" or "Redeeming Trust
Shares."
REDEMPTION IN KIND
Although the Trust intends to redeem Shares in cash, it reserves the right,
under certain circumstances, to pay the redemption price in whole or in part by
a distribution of securities from the respective Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which the Trust is obligated to redeem Shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the respective
class's net asset value during any 90-day period.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
REQUIREMENTS FOR EXCHANGING SHARES
Shareholders using the exchange privilege must exchange Shares having a net
asset value of at least $1,000 for Investment Shares or $25,000 for Trust
Shares. Before the exchange, the shareholder must receive a prospectus of the
fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
the proceeds invested in Investment or Trust Shares, respectively, of the other
fund.
Further information on the exchange privilege and prospectuses may be obtained
by calling First Alabama. Instructions for exchanges may be given in writing.
Written instructions may require a signature guarantee.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
derive at least 90% of its gross income from dividends, interest, and gains from
the sale of securities;
derive less than 30% of its gross income from the sale of securities held less
than three months;
invest in securities within certain statutory limits; and
distribute to its shareholders at least 90% of its net income earned during the
year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. No portion of any income dividend paid by
the Fund is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are taxable as
ordinary income.
CAPITAL GAINS
Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If,
for some extraordinary reason, the Fund realizes net long-term capital
gains, it will distribute them once every 12 months.
YIELD
- --------------------------------------------------------------------------------
The Fund calculates the yield for both classes of Shares daily, based upon the
seven days ending on the day of the calculation, called the "base period." This
yield is computed by the following:
determining the net change in the value of a hypothetical account with a balance
of one Share at the beginning of the base period, with the net change excluding
capital changes but including the value of any additional Shares purchased with
dividends earned from the original one Share, and all dividends declared on the
original and any purchased Shares;
dividing the net change in the account's value by the value of the account at
the beginning of the base period to determine the base period return; and
multiplying the base period return by (365/7).
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in either
class of shares, the performance will be reduced for those shareholders paying
those fees.
The Fund's yield for Investment Shares for the seven-day period ended November
30, 1993, was 2.43%. The yield for Trust Shares was 2.83% for the same period.
EFFECTIVE YIELD
- --------------------------------------------------------------------------------
The Fund's effective yield for both classes of Shares is computed by compounding
the unannualized base period return by:
adding 1 to the base period return;
raising the sum to the 365/7th power; and
subtracting 1 from the result.
The effective yield for Investment Shares for the seven-day period ended
November 30, 1993, was 2.46%. The effective yield for Trust Shares was 2.87% for
the same period.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The performance of both classes of Shares depends upon such variables as:
portfolio quality;
average portfolio maturity;
type of instruments in which the portfolio is invested;
changes in interest rates on money market instruments;
changes in the Fund's or Share's expenses; and
the relative amount of Fund cash flow.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute net asset value. The financial
publications and/or indices which the Fund uses in advertising may include:
_SALOMON 30-DAY TREASURY BILL INDEX is a weekly quote of the most representative
yields for selected securities, issued by the U.S. Treasury, maturing in 30
days.
_LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the U.S. government
funds category in advertising and sales literature.
_SHEARSON LEHMAN TREASURY BOND INDEX comprised entirely of U.S. Treasury
obligations. Flower bonds and foreign issues are excluded.
_IBC/DONOGHUE'S MONEY FUND REPORT publishes annualized yields of hundreds of
money market funds on a weekly basis and through its Money Market Insight
publication reports monthly and 12-month-to-date investment results for the
same money funds.
Advertisements and other sales literature for both classes of shares may refer
to total return. Total return is the historic change in the value of an
investment in either class of shares, based on monthly reinvestment of dividends
over a specified period of time.
2021109B (1/94)
FIRST PRIORITY EQUITY FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED NOVEMBER 30, 1993
MANAGEMENT DISCUSSION AND ANALYSIS
---------------------------------------------------------------------------
For the twelve months ended November 30, 1993, the S&P 500 returned
10.1%, while the First Priority Equity Fund returned 1.4% and 1.1% for
Trust and Investment Shares, respectively, on a net asset value basis. In
addition, the Investment Shares received a (1.9%) return on a load basis.*
This has been a very challenging year for us and one in which the low
volatility of the overall market masks the significant volatility within
certain industry groups for particular stocks.
The market for the last twelve months has shown a decided preference
for smaller capitalization companies, industries that benefit from lower
interest rates, and companies whose overall quality ratings are less than
outstanding. In addition, the market has been very hard on any company
which announced a disappointing quarter regardless of the long-term company
fundamentals. Finally, certain industry groups like the drug, tobacco, and
health care groups were adversely impacted by the Clinton administration's
announced plans for health care reform.
To illustrate, for the twelve months ended November 30, 1993, the S&P
500 returned 7.06%, excluding dividend income (with dividends, the return
equals 10.1% as stated above), while other indices which, in general,
measure smaller capitalization stocks outperformed the S&P 500. Excluding
dividends, the NASDAQ Composite returned 15.57% while the AMEX Composite
returned 16.43%. We tend to own large capitalization stocks and this
impacted our performance negatively.
We also employ what we believe to be stringent quality criteria which
worked to our disadvantage this year. For example, according to Merrill
Lynch, B+or better rated stocks underperformed the S&P 500 returning only
5.55%, while B or worse rated, lower quality stocks returned 25.85%. Many
of the stocks in our portfolio carry A or better ratings which
significantly underperformed the market during this particular year.
A third factor affecting our performance was our underweighting in
utility and energy stocks which performed quite well. These stocks were
driven above reasonable valuation levels by lower interest rates and a
desire by investors to find current yield. We refused to participate
because these stocks looked expensive and their future potential was quite
limited. We believe these two sectors, which represent about 25% of the S&P
500, will experience significant corrections if interest rates rise.
Finally, our performance was negatively affected by the Clinton
administration's tax increases and plans for health care reform. For
example, we own several drug stocks which experienced a severe decline by
virtue of these planned reforms. We believe that these
companies represent extraordinarily good value and will perform well once
the uncertainty is lifted.
We have no plans to compromise our quality standards; neither will we
try to participate in the riskier small capitalization sector of the
market. We are slightly cautious about our outlook for the market as a
whole and believe that large capitalization, higher quality stocks will
outperform other types of stocks during a period of uncertainty. Short-term
interest rates will inevitably rise as the economy gains strength and this
bull market, which is quite mature, may experience a correction. There is
no reason to expect a sharp decline, but the market by many measures is
fairly valued, so caution will be exercised. We believe that our style will
return to favor in the coming year as companies of good quality with
predictable earnings and solid dividends regain favor with Wall Street.
* Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that an investors shares, when
redeemed, may be worth more or less than their original cost.
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 PURCHASE IN
FIRST PRIORITY EQUITY FUND--INVESTMENT SHARES AND S&P 500\.
"Graphic representation "A" omitted. See Appendix."
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This annual report incorporates by reference and accompanies the prospectus
dated January 31, 1994.
*Reflects operations of First Priority Equity Fund--Investment Shares from the
date of initial public investment
4/20/92 through 11/30/93.
**Represents a hypothetical investment of $10,000 in First Priority Equity
Fund--Investment Shares, after deducting the maximum sales charge of 3.00%,
($10,000 investment minus $300 sales charge = $9,700). The Fund's performance
assumes the reinvestment of all dividends and distributions. The S&P 500 IS
adjusted to reflect reinvestment of dividends on securities in the
index/indices.
\The S&P 500 IS not adjusted to reflect sales loads, expenses, or other fees
that
the SEC requires to be reflected in the Fund's performance.
PERFORMANCE COMPARISON
-------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 PURCHASE IN
FIRST PRIORITY EQUITY FUND--TRUST SHARES AND S&P 500\.
"Graphic representation "A1" omitted. See Appendix."
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This annual report incorporates by reference and accompanies the prospectus
dated January 31, 1994.
*Reflects operations of First Priority Equity Fund--Trust Shares, from the date
of initial public investment 4/20/92 through 11/30/93.
**The Fund's performance assumes the reinvestment of all dividends on securities
in the index.
\The S&P 500 IS not adjusted to reflect sales loads, expenses, or other fees
that
the SEC requires to be reflected in the Fund's performance.
[LOGO] FEDERATED SECURITIES CORP.
-------------------------------------------------------------------------
Distributor
2021107ARS (1/94)
FIRST PRIORITY FIXED INCOME FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED NOVEMBER 30, 1993
MANAGEMENT DISCUSSION AND ANALYSIS
---------------------------------------------------------------------------
For the twelve months ended November 30, 1993, the First Priority
Fixed Income Fund (the ``Fund'') returned 10.14% and 9.81% for Trust and
Investment Shares, respectively, on a net asset value basis. In addition,
the Investment Shares received a 7.61% return on a load basis.* This
compares favorably to the performance of the Merrill Lynch 1-10 year U.S.
Treasury Index which returned 9.18%. We compare our performance to this
index because we typically use a high proportion of U.S. Treasury and
Agency issues in our portfolios. In addition, we define ourselves as an
intermediate fixed income manager, since we typically do not buy bonds with
a maturity in excess of fifteen years. We do not believe, and history
confirms this, that longer term bonds offer additional return commensurate
with the additional risk one assumes by owning them.
It is important to recognize that we have adopted conservative
accounting policies which call for the amortization of premiums. In a
declining interest rate environment many securities available to us for
purchase have been priced above par value or at a premium. We have chosen
to amortize this premium which reduces current yield for the Fund.
Investors who purchase a fund primarily based on current yield should
examine the quality and maturity of the securities held and the accounting
treatment for amortization of premium. The effect of not amortizing premium
is to increase current yield by, in effect, increasing current
distributions to investors by returning a portion of their investment or
principle.
During the year, the Fund benefitted from a falling interest rate
environment. Continued economic weakness, stubborn unemployment, low
inflation, and the fiscal drag of tax increases all combined to push
interest rates lower. Longer rates fell more than short-term rates as
intermediate rates fell about 1%, while one year treasury yields fell only
.17%.
As the economy gathers strength and the business cycle matures, we
expect some increase in the general level of interest rates. We anticipate
that shorter-term securities such as Treasury Bills will be impacted more
than securities with a maturity in excess of one year. We are cautiously
optimistic that interest rates will not rise dramatically because inflation
appears to be well under control. Our caution stems from the stage of the
business cycle. At this stage in the business cycle it is difficult to
pinpoint turns in interest rates and inflation.
We do not attempt to forecast interest rates but rather follow
indentifiable trends once a trend is firmly established. Thus, while we
believe that the lows for interest rates have been seen for this business
cycle, we cannot be certain until a clear trend has developed.
Consequently, we will stay invested with neither a bearish nor bullish
portfolio profile.
* Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that an investors shares, when
redeemed, may be worth more or less than their original cost.
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 PURCHASE
IN FIRST PRIORITY FIXED INCOME FUND--TRUST SHARES,
MERRILL LYNCH U.S. TREASURY (1-9.99 YEARS)\.
"Graphic representation "B" omitted. See Appendix."
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
This annual report incorporates by reference and accompanies the prospectus
dated January 31, 1994.
*Reflects operations of First Priority Fixed Income Fund--Trust Shares from
the date of initial public investment 4/20/92 through 11/30/93.
**The Fund's performance assumes the reinvestment of all dividends and
distributions. The Merrill Lynch U.S. Treasury (1-9.99 years) is adjusted to
reflect reinvestment of dividends on securities in the index.
\The Merrill Lynch U.S. Treasury (1-9.99 years) IS not adjusted to reflect sales
loads, expenses, or other fees that the SEC requires to be reflected in the
Fund's performance.
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 PURCHASE
IN FIRST PRIORITY FIXED INCOME FUND--INVESTMENT SHARES,
MERRILL LYNCH U.S. TREASURY (1-9.99 YEARS)\.
"Graphic representation "B1" omitted. See Appendix."
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
This annual report incorporates by reference and accompanies the prospectus
dated January 31, 1994.
*Reflects operations of First Priority Fixed Income Fund--Investment Shares
from the date of initial public investment 4/20/92 through 11/30/93.
**Represents a hypothetical investment of $10,000 in First Priority Fixed
Income Fund--Investment Shares, after deducting the maximum sales charge of
2% ($10,000 investment minus $200 sales charge = $9,800). The Fund's
performance assumes the reinvestment of all dividends and distributions. The
Merrill Lynch U.S. Treasury (1-9.99 years) IS adjusted to reflect
reinvestment of dividends on securities in the index.
\The Merrill Lynch U.S. Treasury (1-9.99 years) IS not adjusted to reflect sales
loads, expenses, or other fees that the SEC requires to be reflected in the
Fund's performance.
FEDERATED SECURITIES CORP.
--------------------------------------------------------------------------
Distributor
2021108ARS (1/94)
FIRST PRIORITY FIXED INCOME FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED NOVEMBER 30, 1993
MANAGEMENT DISCUSSION AND ANALYSIS
---------------------------------------------------------------------------
For the twelve months ended November 30, 1993, the First Priority
Fixed Income Fund (the ``Fund'') returned 10.14% and 9.81% for Trust and
Investment Shares, respectively, on a net asset value basis. In addition,
the Investment Shares received a 7.61% return on a load basis.* This
compares favorably to the performance of the Merrill Lynch 1-10 year U.S.
Treasury Index which returned 9.18%. We compare our performance to this
index because we typically use a high proportion of U.S. Treasury and
Agency issues in our portfolios. In addition, we define ourselves as an
intermediate fixed income manager, since we typically do not buy bonds with
a maturity in excess of fifteen years. We do not believe, and history
confirms this, that longer term bonds offer additional return commensurate
with the additional risk one assumes by owning them.
It is important to recognize that we have adopted conservative
accounting policies which call for the amortization of premiums. In a
declining interest rate environment many securities available to us for
purchase have been priced above par value or at a premium. We have chosen
to amortize this premium which reduces current yield for the Fund.
Investors who purchase a fund primarily based on current yield should
examine the quality and maturity of the securities held and the accounting
treatment for amortization of premium. The effect of not amortizing premium
is to increase current yield by, in effect, increasing current
distributions to investors by returning a portion of their investment or
principle.
During the year, the Fund benefitted from a falling interest rate
environment. Continued economic weakness, stubborn unemployment, low
inflation, and the fiscal drag of tax increases all combined to push
interest rates lower. Longer rates fell more than short-term rates as
intermediate rates fell about 1%, while one year treasury yields fell only
.17%.
As the economy gathers strength and the business cycle matures, we
expect some increase in the general level of interest rates. We anticipate
that shorter-term securities such as Treasury Bills will be impacted more
than securities with a maturity in excess of one year. We are cautiously
optimistic that interest rates will not rise dramatically because inflation
appears to be well under control. Our caution stems from the stage of the
business cycle. At this stage in the business cycle it is difficult to
pinpoint turns in interest rates and inflation.
We do not attempt to forecast interest rates but rather follow
indentifiable trends once a trend is firmly established. Thus, while we
believe that the lows for interest rates have been seen for this business
cycle, we cannot be certain until a clear trend has developed.
Consequently, we will stay invested with neither a bearish nor bullish
portfolio profile.
* Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that an investors shares, when
redeemed, may be worth more or less than their original cost.
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 PURCHASE
IN FIRST PRIORITY FIXED INCOME FUND--TRUST SHARES,
MERRILL LYNCH U.S. TREASURY (1-9.99 YEARS)\.
"Graphic representation "B" omitted. See Appendix."
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
This annual report incorporates by reference and accompanies the prospectus
dated January 31, 1994.
*Reflects operations of First Priority Fixed Income Fund--Trust Shares from
the date of initial public investment 4/20/92 through 11/30/93.
**The Fund's performance assumes the reinvestment of all dividends and
distributions. The Merrill Lynch U.S. Treasury (1-9.99 years) is adjusted to
reflect reinvestment of dividends on securities in the index.
\The Merrill Lynch U.S. Treasury (1-9.99 years) IS not adjusted to reflect sales
loads, expenses, or other fees that the SEC requires to be reflected in the
Fund's performance.
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 PURCHASE
IN FIRST PRIORITY FIXED INCOME FUND--INVESTMENT SHARES,
MERRILL LYNCH U.S. TREASURY (1-9.99 YEARS)\.
"Graphic representation "B1" omitted. See Appendix."
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
This annual report incorporates by reference and accompanies the prospectus
dated January 31, 1994.
*Reflects operations of First Priority Fixed Income Fund--Investment Shares
from the date of initial public investment 4/20/92 through 11/30/93.
**Represents a hypothetical investment of $10,000 in First Priority Fixed
Income Fund--Investment Shares, after deducting the maximum sales charge of
2% ($10,000 investment minus $200 sales charge = $9,800). The Fund's
performance assumes the reinvestment of all dividends and distributions. The
Merrill Lynch U.S. Treasury (1-9.99 years) IS adjusted to reflect
reinvestment of dividends on securities in the index.
\The Merrill Lynch U.S. Treasury (1-9.99 years) IS not adjusted to reflect sales
loads, expenses, or other fees that the SEC requires to be reflected in the
Fund's performance.
FEDERATED SECURITIES CORP.
--------------------------------------------------------------------------
Distributor
2021108ARS (1/94)
APPENDIX
A. The graphic presentation here displayed consists of a
boxed legend in the bottom center indicating the components
of the corresponding line graph. First Priority Equity
Fund-Investment Shares (the "Fund") is represented by a
solid line. The S&P 500 is represented by a broken line.
The line graph is a visual representation of a comparison of
change in value of a hypothetical $10,000 purchase in the
Fund and the S&P 500. The "y" axis reflects the cost of the
investment. The "x" axis reflects computation periods from
the Fund's start of business, 4/20/92, through 11/30/93.
The right margin reflects the ending value of the
hypothetical investment in the Fund as compared to the S&P
500; the ending values were $10,711 and $11,657,
respectively. There is also a legend in the center quadrant
of the graphic presentation which indicates the Average
Annual Total Return for the period ended November 30, 1993,
beginning with the inception date of the Fund (4/20/92),
and the one-year period; the Average Annual Total Returns
were 4.36% and (1.91%), respectively.
A1. The graphic presentation here displayed consists of a
boxed legend in the bottom center indicating the components
of the corresponding line graph. First Priority Equity
Fund-Trust Shares (the "Fund") is represented by a solid
line. The S&P 500 is represented by a broken line. The
line graph is a visual representation of a comparison of
change in value of a hypothetical $10,000 purchase in the
Fund and the S&P 500. The "y" axis reflects the cost of the
investment. The "x" axis reflects computation periods from
the Fund's start of business, 4/20/92, through 11/30/93.
The right margin reflects the ending value of the
hypothetical investment in the Fund as compared to S&P 500;
the ending values were $11,084 and $11,657, respectively.
There is also a legend in the center quadrant of the graphic
presentation which indicates the Average Annual Total Return
for the period ended November 30, 1993, beginning with the
inception date of the Fund (4/20/92), and the one-year
period; the Average Annual Total Returns were 6.60% and
1.43%, respectively.
B. The graphic presentation here displayed consists of a
boxed legend in the bottom center indicating the components
of the corresponding line graph. First Priority Fixed
Income Fund-Trust Shares (the "Fund") is represented by a
solid line. The Merrill Lynch U.S. Treasury (1-9.99 years)
is represented by a broken line. The line graph is a visual
representation of a comparison of change in value of a
hypothetical $10,000 purchase in the Fund and the Merrill
Lynch U.S. Treasury (1-9.99 years). The "y" axis reflects
the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of business,
4/20/92, through 11/30/93. The right margin reflects the
ending value of the hypothetical investment in the Fund as
compared to the Merrill Lynch U.S. Treasury (1-9.99 years);
the ending values were $11,858 and $11,539, respectively.
There is also a legend in the upper left quadrant of the
graphic presentation which indicates the Average Annual
Total Return for the period ended November 30, 1993,
beginning with the inception date of the Fund (4/20/92), and
the one-year period; the Average Annual Total Returns were
11.15% and 10.14%, respectively.
B1. The graphic presentation here displayed consists of a
boxed legend in the bottom center indicating the components
of the corresponding line graph. First Priority Fixed
Income Fund-Investment Shares (the "Fund") is represented by
a solid line. The Merrill Lynch U.S. Treasury (1-9.99
years) is represented by a broken line. The line graph is a
visual representation of a comparison of change in value of
a hypothetical $10,000 purchase in the Fund and the Merrill
Lynch U.S. Treasury (1-9.99 years). The "y" axis reflects
the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of business,
4/20/92, through 11/30/93. The right margin reflects the
ending value of the hypothetical investment in the Fund as
compared to the Merrill Lynch U.S. Treasury (1-9.99 years);
the ending values were $11,569 and $11,539, respectively.
There is also a legend in the upper left quadrant of the
graphic presentation which indicates the Average Annual
Total Return for the period ended November 30, 1993,
beginning with the inception date of the Fund (4/20/92), and
the one-year period; the Average Annual Total Returns were
9.46% and 7.61%, respectively.
