COMBINED PROSPECTUS
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FIRST PRIORITY FUNDS
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First Priority Funds (the "Trust"), an open-end management investment company (a
mutual fund), offers investors interests in the following six investment
portfolios (collectively referred to as the "Funds" and individually as the
"Fund"), each having a distinct investment objective and policies:
First Priority Treasury Money Market Fund
Trust Shares
Investment Shares
First Priority Limited Maturity Government Fund
First Priority Fixed Income Fund
First Priority Equity Fund
First Priority Equity Income Fund
First Priority Balanced Fund
THE SHARES OFFERED BY THIS COMBINED PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS
OF FIRST ALABAMA BANK OR ANY REGIONS BANK, ARE NOT ENDORSED OR GUARANTEED BY
FIRST ALABAMA BANK OR ANY REGIONS 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.
THE TREASURY MONEY MARKET FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF
$1.00 PER SHARE, BUT THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO
SO.
This Combined Prospectus contains the information you should read and know
before you invest in any of the Funds of the Trust. Keep this Combined
Prospectus for future reference.
Additional information about the Trust is contained in the Trust's Combined
Statement of Additional Information dated January 31, 1995 ("SAI"), which has
also been filed with the Securities and Exchange Commission. The information
contained in the Combined Statement of Additional Information is incorporated by
reference into this Combined Prospectus. You may request a copy of the Combined
Statement of Additional Information free of charge, obtain other information, or
make inquiries about any of the Funds by writing to the Trust 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, 1995
TABLE OF CONTENTS
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SYNOPSIS 1
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SUMMARY OF FUND EXPENSES 3
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FINANCIAL HIGHLIGHTS 5
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OBJECTIVE OF EACH FUND 9
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Treasury Money Market Fund 9
Investment Objective and Policies 9
Acceptable Investments 9
Investment Limitations 9
Limited Maturity Government Fund 9
Investment Objective and Policies 9
Acceptable Investments 10
Investment Limitations 10
Fixed Income Fund 10
Investment Objective and Policies 10
Acceptable Investments 10
Investment Limitations 11
Equity Fund 11
Investment Objective and Policies 11
Acceptable Investments 11
Investment Limitations 12
Equity Income Fund 12
Investment Objective and Policies 12
Acceptable Investments 12
Investment Limitations 12
Balanced Fund 13
Investment Objective and Policies 13
Acceptable Investments 13
Investment Limitations 14
PORTFOLIO INVESTMENTS AND STRATEGIES 14
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Debt Securities--Ratings and Investment
Considerations 14
Asset-Backed Securities 14
Non-Mortgage Related Asset-Backed Securities 15
Mortgage Related Asset-Backed Securities 15
Adjustable Rated Mortgage Securities ("ARMS") 15
Collateralized Mortgage Obligations ("CMOs") 16
Real Estate Mortgage Investment
Conduits ("REMICs") 16
Considerations for Mortgage-Backed
and Asset-Backed Securities 16
Stripped Bonds 17
U.S. Government Securities 17
Bank Instruments 18
Equity Investment Considerations 18
Securities of Foreign Issuers 18
Convertible Securities 19
Zero Coupon Convertible Securities 20
Put and Call Options 20
Futures and Options on Futures Risks 21
Investing in Securities of New Issuers 22
Investing in Securities of Other Investment
Companies 23
When-Issued and Delayed Delivery Transactions 23
Lending of Portfolio Securities 23
Repurchase Agreements 24
Temporary Investments 24
Borrowing Money 24
Diversification 24
Restricted and Illiquid Securities 24
FIRST PRIORITY FUNDS INFORMATION 25
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Management of First Priority Funds 25
Board of Trustees 25
Investment Adviser 25
Advisory Fees 25
Adviser's Background 26
Distribution of Fund Shares 27
Distribution Plan 27
Administration of the Fund 28
Administrative Services 28
Custodian 29
Transfer Agent, Dividend Disbursing
Agent, and Portfolio Accounting Services 29
Independent Auditors 29
Brokerage Transactions 29
Expenses of the Fund 29
NET ASSET VALUE 30
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INVESTING IN THE FUNDS 30
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Minimum Investment Required 30
What Shares Cost 30
Purchases at Net Asset Value 31
Dealer Concessions 31
Other Payments to Financial Institutions 32
Share Purchases 32
Conversion to Federal Funds 32
Reducing the Sales Charge 32
Quantity Discounts and Accumulated Purchases 32
Letter of Intent 33
Reinvestment Privilege 33
Purchases with Proceeds from Redemptions
of Unaffiliated Mutual Fund Shares 33
Systematic Investment Plan 34
Exchanging Securities for Fund Shares 34
Shareholder Accounts 34
Dividends and Capital Gains 34
EXCHANGE PRIVILEGE 35
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REDEEMING SHARES 36
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By Telephone 36
By Mail 36
Signatures 36
Receiving Payment 37
Systematic Withdrawal Plan 37
Accounts with Low Balances 37
SHAREHOLDER INFORMATION 38
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Voting Rights 38
Massachusetts Partnership Law 38
EFFECT OF BANKING LAWS 38
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TAX INFORMATION 39
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Federal Income Tax 39
PERFORMANCE INFORMATION 39
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ADDRESSES 43
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SYNOPSIS
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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, shares are offered in the following six
Funds:
FIRST PRIORITY TREASURY MONEY MARKET FUND (TRUST SHARES AND INVESTMENT
SHARES) ("Treasury Money Market Fund")--seeks to provide current income
consistent with stability of principal and liquidity by investing
primarily in a diversified portfolio limited to short-term U.S. Treasury
obligations;
FIRST PRIORITY LIMITED MATURITY GOVERNMENT FUND ("Limited Maturity
Government Fund")-- seeks to provide current income by investing in a
diversified portfolio consisting primarily of securities which are
guaranteed as to payment of principal and interest by the U.S.
government, its agencies or instrumentalities;
FIRST PRIORITY FIXED INCOME FUND ("Fixed Income Fund")--seeks to achieve
current income with a secondary objective of capital appreciation by
investing primarily in a broad range of high grade debt securities;
FIRST PRIORITY EQUITY FUND ("Equity Fund")--seeks to provide growth of
capital and income by investing principally in a diversified portfolio of
common stocks of companies with market capitalization of at least $250
million;
FIRST PRIORITY EQUITY INCOME FUND ("Equity Income Fund")--seeks to
provide income and growth of capital by investing primarily in a
diversified portfolio of income-producing equity securities, including
convertible securities; and
FIRST PRIORITY BALANCED FUND ("Balanced Fund")--seeks to provide total
return through capital appreciation, dividends, and interest by investing
primarily in a diversified portfolio of common stocks, preferred stocks,
fixed-income senior securities, and convertible securities.
Each Fund is designed for institutions and individuals as a convenient means of
accumulating an interest in a professionally managed portfolio. A minimum
initial investment of $1,000 generally is required for each of the Funds; a
$25,000 minimum initial investment is required for Trust Shares of Treasury
Money Market Fund. First Alabama Bank ("Adviser") is the investment adviser to
the Funds.
Treasury Money Market Fund attempts to stabilize the value of its shares at
$1.00, and shares are sold and redeemed at that price. Shares of the other Funds
are sold at net asset value plus an applicable sales charge (except as otherwise
noted in this prospectus) and redeemed at net asset value, which will fluctuate.
RISK FACTORS. Investors should be aware of the following general
considerations. The market value of fixed-income securities, which constitute a
major part of the investments of several Funds, may vary inversely in response
to changes in prevailing interest rates. The market value of the equity
securities in which some of the Funds invest will also fluctuate, and the
possibility exists that the value of common stocks could decline over short or
even extended periods of time. The Equity Income Fund and the Balanced Fund each
may invest significantly in convertible securities that are rated below
investment grade and thus may carry additional risks. The foreign securities in
which several Funds may invest may be subject to certain risks in addition to
those inherent in U.S. investments. One or more Funds may make certain
investments and employ certain investment techniques that involve other risks,
including entering into repurchase agreements, lending portfolio securities and
entering into futures contracts and related options as hedges. These risks and
those associated with investing in mortgage-backed securities, when-issued
securities, options and variable rate securities are described under "Objective
of Each Fund" and "Portfolio Investments and Strategies," and the SAI.
SUMMARY OF FUND EXPENSES
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<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
LIMITED
TREASURY MONEY MARKET FUND MATURITY
TRUST INVESTMENT GOVERNMENT
SHARES SHARES FUND
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)................................................ None None 2.00%
Maximum Sales Load Imposed on Reinvested Dividends (as a
percentage of offering price).................................. None None None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable).......... None None None
Redemption Fee (as a percentage of amount redeemed,
if applicable)................................................. None None None
Exchange Fee..................................................... None None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C> <C>
Management Fees (after waiver) (1)............................... 0.20% 0.20% 0.25%
12b-1 Fees (2)................................................... None 0.40% 0.00%
Total Other Expenses............................................. 0.36% 0.36% 0.45%
Total Operating Expenses (3)............................. 0.56% 0.96% 0.70%
</TABLE>
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
FIXED EQUITY
INCOME EQUITY INCOME BALANCED
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering
price)................................................................. 2.00% 2.00% 2.00% 2.00%
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of
offering price)........................................................ None None None None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)........................... None None None None
Redemption Fees (as a percentage of amount redeemed, if applicable)...... None None None None
Exchange Fee............................................................. None None None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)*
<S> <C> <C> <C> <C>
Management Fees (after waiver) (1)....................................... 0.75% 0.75% 0.25% 0.25%
12b-1 Fees (2)........................................................... 0.00% 0.00% 0.00% 0.00%
Total Other Expenses..................................................... 0.32% 0.33% 0.40% 0.28%
Total Operating Expenses (3)......................................... 1.07% 1.08% 0.65% 0.53%
</TABLE>
* Annual fund operating expenses for Equity Income Fund and Balanced Fund are
calculated as a percentage of projected average net assets.
(1) The management fee has been reduced to reflect the voluntary waiver of all
or 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 0.50% for the Treasury Money Market Fund--Trust Shares and Investment
Shares, 0.70% for the Limited Maturity Government Fund, 0.75% for the Fixed
Income Fund, and 0.80% for the Equity Fund and Equity Income Fund, and
Balanced Fund.
(2) Limited Maturity Government Fund, Fixed Income Fund, Equity Fund, Equity
Income Fund, and Balanced Fund have no intention of paying or accruing 12b-1
fees during the fiscal year ending November 30, 1995. If these Funds were
paying or accruing 12b-1 fees, Limited Maturity Government Fund would be
able to pay up to 0.25% of its daily net assets, and
Fixed Income Fund, Equity Fund, Equity Income Fund, and Balanced Fund would
be able to pay up to 0.30% of their daily net assets for 12b-1 fees.
(3) The Annual Fund Operating Expenses for the fiscal year ended November 30,
1994 were: 0.32% for Trust Shares of Treasury Money Market Fund; 0.72% for
Investment Shares of the Treasury Money Market Fund; 0.38% for the Limited
Maturity Government Fund, 1.09% for the Fixed Income Fund and Equity Fund.
Absent voluntary waiver of the management fees as described in footnote
number one above, the Annual Fund Operating Expenses are estimated to be:
0.86% for Trust Shares of the Treasury Money Market Fund; 1.26% for
Investment Shares of the Treasury Money Market Fund; 1.15% for Limited
Maturity Government Fund; 1.07% for Fixed Income Fund; 1.13% for Equity
Fund; and based on expenses expected to be incurred during fiscal year
ending November 30, 1995, 1.20% for Equity Income Fund, and 1.08% for
Balanced Fund. During the course of this period, expenses may be more or
less than the average amounts shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUNDS WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "FIRST PRIORITY FUNDS INFORMATION," "INVESTING IN THE FUNDS," AND
THE SAI.
LONG-TERM INVESTORS IN INVESTMENT SHARES OF THE TREASURY MONEY MARKET FUND
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; (2) redemption at the end of each time period; and (3)
payment of a maximum sales load of 2.00%, if applicable. The Funds charge no
redemption fees.
Treasury Money Market Fund--Trust Shares.................................. $ 6 $ 18 $ 31 $ 70
Treasury Money Market Fund--Investment Shares............................. $ 10 $ 31 $ 53 $ 118
Limited Maturity Government Fund.......................................... $ 27 $ 42 $ 58 $ 105
Fixed Income Fund......................................................... $ 31 $ 53 $ 78 $ 148
Equity Fund............................................................... $ 31 $ 54 $ 78 $ 149
Equity Income Fund........................................................ $ 27 $ 40 -- --
Balanced Fund............................................................. $ 25 $ 37 -- --
</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.
FIRST PRIORITY TREASURY MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--
TRUST SHARES AND INVESTMENT SHARES
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Trust's
independent auditors. Their report dated January 17, 1995 on the Trust's
financial statements for the year ended
November 30, 1994 is included in the combined Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Trust's financial statements and notes thereto, which may be obtained free of
charge from the Trust.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
TRUST SHARES 1994 1993 1992*
<S> <C> <C> <C>
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NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.04 0.03 0.02
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LESS DISTRIBUTIONS
Dividends to shareholders from net investment income (0.04) (0.03) (0.02)
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NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00
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TOTAL RETURN** 3.59% 2.75% 2.06%
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RATIOS TO AVERAGE NET ASSETS
Expenses 0.32% 0.38% 0.29%(a)
Net investment income 3.49% 2.72% 3.20%(a)
Expense waiver/reimbursement (b) 0.50% 0.46% 0.53%(a)
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SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $91,008 $88,510 $86,616
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</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
INVESTMENT SHARES 1994 1993 1992*
<S> <C> <C> <C>
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NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.03 0.02 0.01
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LESS DISTRIBUTIONS
Dividends to shareholders from net investment income (0.03) (0.02) (0.01)
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NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00
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TOTAL RETURN** 3.18% 2.34% 1.83%
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RATIOS TO AVERAGE NET ASSETS
Expenses 0.72% 0.78% 0.74%(a)
Net investment income 3.09% 2.33% 2.58%(a)
Expense waiver/reimbursement (b) 0.50% 0.46% 0.53%(a)
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SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $16,571 $23,795 $23,578
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</TABLE>
* Reflects operations for the period from April 14, 1992 (date of initial
public investment) to November 30, 1992.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY LIMITED MATURITY GOVERNMENT FUND
FINANCIAL HIGHLIGHTS
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(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Trust's
independent auditors. Their report dated January 17, 1995 on the Trust's
financial statements for the year ended
November 30, 1994 is included in the combined Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Trust's financial statements and notes thereto, which may be obtained free of
charge from the Trust.
<TABLE>
<CAPTION>
PERIOD ENDED
NOVEMBER 30,
1994*
<S> <C>
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.42
Net realized and unrealized gain (loss) on investments (0.40)
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Total from investment operations 0.02
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LESS DISTRIBUTIONS
Dividends to shareholders from net investment income (0.42)
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NET ASSET VALUE, END OF PERIOD $9.60
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TOTAL RETURN** 0.19%
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RATIOS TO AVERAGE NET ASSETS
Expenses 0.38%(a)
Net investment income 4.45%(a)
Expense waiver/reimbursement (b) 0.70%(a)
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SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $48,526
Portfolio turnover rate 3%
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</TABLE>
* Reflects operations for the period from December 13, 1993 (date of initial
public investment) to November 30, 1994.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY FIXED INCOME FUND
FINANCIAL HIGHLIGHTS
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP the Trust's
independent auditors. Their report dated January 17, 1995 on the Trust's
financial statements for the year ended
November 30, 1994 is included in the combined Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Trust's financial statements and notes thereto, which may be obtained free of
charge from the Trust.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
INVESTMENT SHARES 1994 1993 1992*
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.67 $10.27 $9.90
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.51 0.48 0.37
Net realized and unrealized gain (loss) on investments (1.01) 0.50 0.37
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Total from investment operations (0.50) 0.98 0.74
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LESS DISTRIBUTIONS
Dividends to shareholders from net investment income (0.50) (0.48) (0.37)
Distributions to shareholders from net realized gain
on investment transactions (0.20) (0.10) --
Distributions to shareholders in excess of net realized gain
on investment transactions (0.01 (c) -- --
- ------------------------------------------------------------------------------------------------------------------
Total distributions (0.71) (0.58) (0.37)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.46 $10.67 $10.27
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN** (4.83%) 9.81% 7.48%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.09% 1.14% 1.07%(a)
Net investment income 5.14% 4.40% 5.33%(a)
Expense waiver/reimbursement (b) 0.25% 0.25% 0.29%(a)
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $9,645 $12,519 $5,457
Portfolio turnover rate 24% 83% 44%
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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
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY EQUITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Trust's
independent auditors. Their report dated January 17, 1995 on the Trust's
financial statements for the year ended
November 30, 1994 is included in the combined Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Trust's financial statements and notes thereto, which may be obtained free of
charge from the Trust.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
INVESTMENT SHARES 1994 1993 1992*
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.51 $10.66 $9.86
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.21 0.16 0.10
Net realized and unrealized gain (loss) on investments (0.09) (0.04) 0.79
- ------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.12 0.12 0.89
- ------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends to shareholders from net investment income (0.20) (0.15) (0.09)
Distributions to shareholders from net realized gain on
investment transactions (0.07) (0.12) --
- ------------------------------------------------------------------------------------------------------------------
Total distributions (0.27) (0.27) (0.09)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.36 $10.51 $10.66
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN** 1.11% 1.13% 9.14%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.09% 1.14% 1.07%(a)
Net investment income 2.02% 1.59% 1.85%(a)
Expense waiver/reimbursement (b) 0.30% 0.30% 0.35%(a)
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $6,131 $7,004 $3,132
Portfolio turnover rate 66% 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
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
OBJECTIVE OF EACH FUND
- --------------------------------------------------------------------------------
The investment objective and policies of each Fund appear below. The investment
objective of a Fund cannot be changed without the approval of holders of a
majority of that Fund's shares. While there is no assurance that a Fund will
achieve its investment objective, it endeavors to do so by following the
investment policies described in this prospectus.
Unless indicated otherwise, the investment policies of a Fund may be changed by
the Board of Trustees ("Trustees") without approval of shareholders.
Shareholders will be notified before any material change in these policies
becomes effective.
Additional information about acceptable investments, investment limitations,
strategies that one or more Funds may employ, and certain investment policies
mentioned below appears in the "Portfolio Investments and Strategies" section of
this prospectus and in the SAI.
TREASURY MONEY MARKET FUND
INVESTMENT OBJECTIVE AND POLICIES. The investment objective of Treasury Money
Market Fund is to provide current income consistent with stability of principal
and liquidity. The Fund attempts to achieve 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.
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. The Fund may also invest in securities of other investment
companies and engage in when-issued and delayed delivery transactions. See
"Portfolio Investments and Strategies."
INVESTMENT LIMITATIONS. The Fund's investment limitations are discussed below
under "Borrowing Money," and "Restricted and Illiquid Securities," and in the
SAI.
LIMITED MATURITY GOVERNMENT FUND
INVESTMENT OBJECTIVE AND POLICIES. The investment objective of Limited Maturity
Government Fund is to achieve current income. The Fund pursues its investment
objective by investing primarily in securities which are guaranteed as to
payment of principal and interest by the U.S. government or U.S. government
agencies or instrumentalities. Under normal circumstances, the Fund will invest
at least 65% of the value of its total assets in U.S. government securities. The
Fund may also invest in other types of securities, as noted below. As stated in
the Fund's name, the Fund has a policy of limiting its dollar-weighted average
portfolio maturity. Specifically, the Fund intends to maintain a dollar-weighted
average portfolio maturity between two and five years, although the Fund may
purchase individual securities with longer maturities.
The net asset value of the Fund is expected to fluctuate with changes in
interest rates and bond market conditions. However, due to the limitation on the
Fund's average maturity, this fluctuation should be more moderate than that of a
mutual fund with a longer average portfolio maturity. The Adviser will attempt
to minimize principal fluctuation through, among other things, diversification,
careful credit analysis and security selection, and adjustments of the Fund's
average portfolio maturity.
ACCEPTABLE INVESTMENTS. In addition to U.S. government securities, the
permitted investments include, but are not limited to the following: corporate
debt obligations, asset-backed securities, mortgage-backed securities (including
ARMS, CMOs, and REMICs) and bank instruments, all of which are described below
under "Portfolio Investments and Strategies."
In addition, the Fund may engage in when-issued and delayed delivery
transactions, and invest in repurchase agreements, restricted and illiquid
securities, securities of other investment companies, securities of foreign
issuers, and may lend portfolio securities on a short-term or long-term basis.
See "Portfolio Investments and Strategies."
INVESTMENT LIMITATIONS. The Fund's investment limitations are discussed below
under "Borrowing Money," "Diversification," "Restricted and Illiquid Securities"
and "Investing in Securities of New Issuers," and in the SAI.
FIXED INCOME FUND
INVESTMENT OBJECTIVE AND POLICIES. The investment objective of Fixed Income
Fund is to achieve current income with a secondary objective of capital
appreciation by investing in a broad range of high grade debt securities. 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.
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 Ratings Group ("S&P"), or Fitch
Investors Service, Inc. ("Fitch"), or which, if unrated, are deemed to be of
comparable quality by the Fund's Adviser.
The Fund's debt securities may include fixed rate, adjustable rate or stripped
bonds, debentures, notes, U.S. government securities, asset-backed (including
various mortgage-related) 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 herein.
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; and
bank instruments.
In addition, the Fund may engage in when-issued and delayed delivery
transactions, purchase put options on its portfolio securities as a hedge to
attempt to protect those securities against decreases in value, write covered
call options and put options on all or any portion of its portfolio to generate
income, write call options and purchase put options on futures, invest in
financial futures, restricted and illiquid securities, repurchase agreements,
securities of other investment companies, and may lend portfolio securities on a
short-term or long-term basis. See "Portfolio Investments and Strategies."
INVESTMENT LIMITATIONS. The Fund's investment limitations are discussed below
under "Borrowing Money," "Lending of Portfolio Securities," "Diversification,"
"Restricted and Illiquid Securities" and "Investing in Securities of New
Issuers," and in the SAI.
EQUITY FUND
INVESTMENT OBJECTIVE AND POLICIES. The investment objective of Equity Fund is
to provide growth of capital and income. 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.
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 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 Adviser.
OTHER CORPORATE SECURITIES. The Fund may invest in preferred stocks,
convertible securities, notes rated "A" or better by Moody's, S&P, or
Fitch, and warrants of these companies.
The Fund may also engage in lending of portfolio securities and when-issued and
delayed delivery transactions. The Fund may purchase put options on its
portfolio securities as a hedge to attempt to protect those securities against
decreases in value. The Fund may also write covered call options on
all or any portion of its portfolio to generate income. In addition, the Fund
may also invest in U.S. government securities, financial futures and options on
futures, temporary investments, securities of other investment companies,
securities of foreign issuers, and repurchase agreements. See "Portfolio
Investments and Strategies."
INVESTMENT LIMITATIONS. The Fund's investment limitations are discussed below
under "Borrowing Money," "Lending of Portfolio Securities," "Diversification,"
"Investing in Securities of New Issuers," and "Restricted and Illiquid
Securities," and in the SAI.
EQUITY INCOME FUND
INVESTMENT OBJECTIVE AND POLICIES. The investment objective of Equity Income
Fund is to provide income and growth of capital. The Fund pursues its investment
objective by investing primarily in a professionally managed, diversified
portfolio of income-producing equity securities. Equity securities include
common stocks, preferred stocks, warrants, and securities (including debt
securities) that are convertible into common stocks. The portion of the Fund's
total assets invested in common stocks, preferred stocks, and convertible
securities will vary according to the Adviser's assessment of market and
economic conditions and outlook, but income-producing equity securities will,
under normal market conditions, comprise at least 65% of the Fund's assets.
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 AND PREFERRED STOCKS. The Fund invests primarily in common and
preferred stocks of companies selected by the Adviser on the basis of
traditional research techniques and technical factors, including assessment
of earnings, dividend yield 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 Adviser. Common
and preferred stocks at the time of purchase will be expected to pay income
(dividends) and the issuing companies will have a market capitalization of
at least $1 billion, with the exception of common stocks acquired through
conversion of a convertible security, to which no market capitalization
threshold is applied.
The Fund may also engage in lending of portfolio securities and when-issued and
delayed delivery transactions. In addition, the Fund may invest in zero coupon
convertible securities, corporate debt securities, financial futures and options
on futures, temporary investments, put and call options (including market index
options and writing straddles), securities of other investment companies,
securities of foreign issuers, U.S. government securities, and repurchase
agreements. See "Portfolio Investments and Strategies."
INVESTMENT LIMITATIONS. The Fund's investment limitations are discussed below
under "Borrowing Money," "Diversification," "Restricted and Illiquid Securities"
and "Investing in Securities of New Issuers," and in the SAI.
BALANCED FUND
INVESTMENT OBJECTIVE AND POLICIES. The investment objective of Balanced Fund is
to provide total return through capital appreciation, dividends, and interest.
The Fund pursues its investment objective by investing primarily in a
professionally managed and diversified portfolio of common stocks, preferred
stocks, fixed-income senior securities, convertible securities, and other
investments as more fully described below. Under normal market conditions, the
Fund will maintain at least 25% of its assets in fixed-income senior securities
and at least 25% of its assets in common stocks. The remaining 50% may be
invested in debt securities, common stocks, warrants, or other investments as
described below under "Acceptable Investments" as determined by the Adviser
based on the Adviser's assessment of the economy and the markets. The Adviser
may shift between types of investments to attempt to maximize returns or reduce
risk to the Fund.
ACCEPTABLE INVESTMENTS. The Fund's acceptable investments are as follows:
COMMON AND PREFERRED STOCKS. The Fund will invest in common and preferred
stocks of companies selected by the Adviser on the basis of traditional
research techniques and technical factors, including assessment of
earnings, dividend yield 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 Adviser. Issuers
of the common and preferred stocks purchased by the Fund will have a market
capitalization of at least $250 million at the time of purchase, with the
exception of common stocks acquired through conversion of a convertible
security, to which no market capitalization threshold is applied.
DEBT SECURITIES. The Fund will only invest in debt securities which are
rated "A" or better, at the time of purchase, by Moody's, S&P, or Fitch, or
which, if unrated, are deemed to be of comparable quality by the Adviser.
The Fund's debt securities may include fixed rate or adjustable rate bonds,
debentures, notes, U.S. government securities, and asset-backed (including
various mortgage-related) securities. The Fund may also invest in preferred
stocks and units, which are debt securities with stock or warrants to buy
stock attached.
The permitted investments include, but are not limited to:
domestic issuers of corporate debt obligations having floating or
fixed rates of interest;
asset-backed (including various mortgage-related) securities rated
"A" or better by an NRSRO;
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 (i.e., Prime-1
or Prime-2 by Moody's, A-1 or A-2 by S&P, or F-1 or F-2 by Fitch);
bank instruments; and
stripped bonds.
The Fund may engage in lending of portfolio securities and when-issued and
delayed delivery transactions. In addition, the Fund may invest in securities of
other investment companies, put and call options, financial futures and options
on futures, securities of foreign issuers, and repurchase agreements. See
"Portfolio Investments and Strategies."
INVESTMENT LIMITATIONS. The Fund's investment limitations are discussed below
under "Borrowing Money," "Diversification," "Restricted and Illiquid Securities"
and "Investing in Securities of New Issuers," and in the SAI.
PORTFOLIO INVESTMENTS AND STRATEGIES
- --------------------------------------------------------------------------------
DEBT SECURITIES--RATINGS AND INVESTMENT CONSIDERATIONS
Unless noted otherwise, the Funds will only invest in debt securities which are
rated "A" or better, at the time of purchase, by a nationally recognized
statistical rating organization ("NRSRO") (i.e., Moody's, S&P, or Fitch), or
which, if unrated, are deemed to be of comparable quality by the Adviser. If a
debt security's rating falls below "A" after a Fund has purchased it, the Fund
is not required to drop the debt security from its portfolio, but will consider
appropriate action. Debt securities may include fixed rate or adjustable rate
bonds, debentures, and notes of U.S. or foreign corporations; U.S. government
securities; and asset-backed (including various mortgage-related) securities.
The prices of fixed-income securities fluctuate inversely to the direction of
interest rates.
When the Adviser selects debt securities for a Fund, it will consider the
ratings of a NRSRO assigned to various debt securities. In making its investment
decisions, the Adviser will also 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
investments in particular securities or in types of debt securities in response
to its appraisal of changing economic conditions and trends. The Funds may sell
one security and purchase another security of comparable quality and maturity to
take advantage of what the Adviser believes to be short-term differentials in
market values or yield disparities.
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. Non-mortgage related
asset-backed securities include, but are 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 CMOs and
mortgage pass-through securities, which are described below.
MORTGAGE-RELATED ASSET-BACKED SECURITIES. A number of the Funds may also
invest in various mortgage-related asset-backed securities. These types of
investments may include ARMS, CMOs, REMICs, or other securities
collateralized by or representing an interest in real estate mortgages
(collectively, "mortgage securities"). The mortgage securities may 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 a Fund may invest 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 collateralize ARMS issued
by GNMA are fully guaranteed by the Federal Housing Administration or
Veterans Administration, while those collateralized 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 a 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.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). 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 Funds will invest only in CMOs which are rated AAA by an 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.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs are offerings
of multiple class real estate mortgage-backed securities which qualify and
elect treatment as such under provisions of the Internal Revenue Code.
Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or a segregated pool of mortgages. Once REMIC
status is elected and obtained, the entity is not subject to federal income
taxation. Instead, income is passed through the entity and is taxed to the
person or persons who hold interest in the REMIC. A REMIC interest must
consist of one or more classes of "regular interests," some of which may
offer adjustable rates, and a single class of "residual interests." To
qualify as a REMIC, substantially all of the assets of the entity must be
in assets directly or indirectly secured principally by real property.
CONSIDERATIONS FOR MORTGAGE-BACKED AND ASSET-BACKED SECURITIES.
Mortgage-backed and asset-backed securities generally pay back principal
and interest over the life of the security. At the time a Fund reinvests
the payments and any unscheduled prepayments of principal received, the
Fund may receive a rate of interest which is actually lower than the rate
of interest paid on these securities ("prepayment risks"). Mortgage-backed
and asset-backed securities are subject to higher prepayment risks than
most other types of debt instruments with prepayment risks because the
underlying mortgage loans or the collateral supporting asset-backed
securities may be prepaid without penalty or premium. Prepayment risks on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are
less likely to experience substantial prepayments than are mortgage-backed
securities, certain of the factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on
asset-backed securities.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the
benefit of the same security interest in the
related collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of asset-backed securities backed by motor vehicle installment
purchase obligations permit the servicer of such receivables to retain
possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state,
and is then reregistered because the owner and obligor moves to another
state, such could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws,
the trustee for the holders of asset-backed securities backed by automobile
receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities.
STRIPPED BONDS
Fixed Income Fund and Balanced Fund may purchase debt obligations that have been
stripped of their unmatured interest coupons by the holder and the stripped
coupons are sold separately. The principal or corpus is sold at a deep discount
because the buyer receives only the right to receive a future fixed payment on
the security and does not receive any rights to periodic cash interest payments.
Once stripped or separated, the corpus and coupons may be sold separately.
Typically, the coupons are sold separately or grouped with other coupons with
like maturity dates and sold in such bundled form. Purchasers of stripped
obligations acquire, in effect, discount obligations that are economically
identical to the zero-coupon securities issued directly by the obligor.
U.S. GOVERNMENT SECURITIES
The U.S. government securities in which the Funds invest (except for the
Treasury Money Market Fund, which invests primarily in direct obligations of the
U.S. Treasury) 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; the Farm
Credit system including the National Bank for Cooperatives, Farm Credit
Banks, and Banks for Cooperatives; 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 GNMA 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:
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 an agency or instrumentality; or
the credit of the agency or instrumentality issuing the obligation.
BANK INSTRUMENTS
The bank instruments in which the Funds may invest include, but are not limited
to: 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, and banker's acceptances.
EQUITY INVESTMENT CONSIDERATIONS
With respect to the Equity Fund, Equity Income Fund, and Balanced Fund, as with
other mutual funds that invest in equity securities, the Funds are subject to
market risks. Since equity markets tend to be cyclical, the possibility exists
that common stocks could decline over short or even extended periods of time.
With respect to the Equity Fund and Balanced Fund, because these Funds may
invest in small-to-medium capitalization stocks, there are some additional risk
factors associated with investments in these Funds. In particular, although
their potential for growth may be greater, stocks in the small-to-medium
capitalization sector of the United States equity market tend to be slightly
more volatile in price than larger capitalization stocks, such as those included
in the S&P 500 Index. This is because, among other things, small-to-medium-sized
companies have less certain growth prospects than larger companies, have a lower
degree of liquidity in the equity market, and tend to have a greater sensitivity
to changing market conditions. Further, in addition to exhibiting slightly
higher volatility, the stocks of small-to-medium-sized companies may, to some
degree, fluctuate independently of the stocks of larger companies. That is, the
stocks of small-to-medium-sized companies may decline in price as the price of
large company stocks rises or vice versa. Therefore, investors should expect
that these Funds will be slightly more volatile than, and may fluctuate
independently of, broad stock market indices such and the S&P 500 Index.
SECURITIES OF FOREIGN ISSUERS
The Equity Fund, Equity Income Fund, and Balanced 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 depositary
receipts. These Funds, along with the Limited Maturity Government Fund and Fixed
Income Fund, may also invest in debt securities of foreign issuers. 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, a Fund will not invest in the securities
of a foreign issuer if any such risk appears to the Adviser to be substantial.
CONVERTIBLE SECURITIES
Convertible securities (which may be purchased only by the Fixed Income Fund,
Equity Fund, Equity Income Fund, and Balanced Fund) are 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 or warrants or some combination of the features
of several of these securities. A Fund will generally purchase only those
convertible securities that were part of an issue that had a market value of
$50,000,000 at the time of issue. Convertible securities are not held to a
specific quality standard as other debt securities purchased by a Fund except as
mentioned below, but the Adviser will assess the quality of the convertible
security before purchase. Most convertible securities pay income at a fixed rate
in the form of interest or dividends. Some convertible securities pay income at
a rate which changes over time and some convertibles do not pay current income.
(See "Zero Coupon Convertible Securities" below.)
The investment characteristics of each convertible security vary widely, which
allows convertible securities to be employed for different investment purposes.
Convertible bonds and convertible preferred stocks are fixed-income securities
that generally retain the investment characteristics of fixed-income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Convertible securities are senior to equity
securities and, therefore, have a claim to assets of the corporation prior to
the holders of common stock in the case of liquidation. However, convertible
securities are generally subordinated to similar nonconvertible securities of
the same company. The interest income and dividends from convertible bonds and
preferred stocks provide a stable stream of income with generally higher yields
than common stocks, but lower than nonconvertible securities of similar quality.
A 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
Adviser's opinion, the investment characteristics of the underlying common stock
will assist a Fund in achieving its investment objective. Otherwise, a Fund will
hold or trade the convertible securities. In selecting convertible securities
for a Fund, the 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 Adviser considers
numerous factors, including the economic and market outlook, the value of the
security relative to other investment alternatives, trends in the determinants
of the issuer's profits, and an assessment of the quality of the security.
The Equity Income Fund and Balanced Fund may each invest up to 25% of the value
of its total assets in convertible securities rated below investment grade.
These Funds will not invest in convertible securities rated below "B" by S&P or
Moody's at the time of investment or, if unrated, of comparable quality.
Securities rated "B" by S&P or Moody's either have speculative characteristics
or are predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligations. If a
convertible security rating falls below "B" after a Fund has purchased it, the
Fund is not required to drop the convertible security from its portfolio,
but will consider appropriate action. Obligations that are not determined to be
investment grade are typically subject to greater market fluctuations and
securities in the lowest rating category may be in danger of loss of income and
principal due to an issuer's default. To a greater extent than investment grade
securities, the value of lower-rated securities tends to reflect short-term
corporate, economic, and market developments, as well as investor perceptions of
the issuer's credit quality. In addition, lower-rated securities may be more
difficult to dispose of or to value than investment grade securities.
ZERO COUPON CONVERTIBLE SECURITIES. Zero coupon convertible securities are
securities which are issued at a discount to their face amount and do not
entitle the holder to any periodic payments of interest prior to maturity.
Rather, income earned on zero coupon convertible securities accretes at a
stated yield until the security reaches its face amount at maturity. Zero
coupon convertible securities are convertible into the issuer's common
stock. In addition, zero coupon convertible securities usually have put
features that provide the holder with the opportunity to sell the bonds
back to the issuer at a stated price before maturity. Generally, the prices
of zero coupon convertible securities may be more sensitive to market
interest rate fluctuations than conventional convertible securities.
Federal income tax law requires the holders of a zero coupon convertible
security to recognize income from the security prior to the receipt of cash
payments. To maintain its qualification as a regulated investment company
and avoid liability for federal income taxes, a Fund will be required to
distribute income accrued from zero coupon convertible securities which it
owns, and may have to sell portfolio securities (perhaps at disadvantageous
times) in order to generate cash to satisfy these distribution
requirements.
PUT AND CALL OPTIONS
The Fixed Income Fund, Equity Fund, Equity Income Fund, and Balanced Fund may
write (i.e., sell) covered call and put options on all or any portion of their
portfolios to generate income. By writing a call option, a Fund becomes
obligated during the term of the option to deliver the securities underlying the
option upon payment of the exercise price. By writing a put option, a Fund
becomes obligated during the term of the option to purchase the securities
underlying the option at the exercise price if the option is exercised. These
Funds may also write straddles (combinations of covered puts and calls on the
same underlying security).
The Funds may only write "covered" options. This means that, so long as a Fund
is obligated as the writer of a call option, it will own the underlying
securities subject to the option or have the right to obtain such securities
without payment of further consideration (or have segregated cash in the amount
of any additional consideration).
A Fund will be considered "covered" with respect to a put option it writes if,
so long as it is obligated as the writer of the put option, it deposits and
maintains with its custodian in a segregated account liquid assets having a
value equal to or greater than the exercise price of the option. The principal
reason for writing call or put options is to obtain, through a receipt of
premiums, a greater current return that would be realized on the underlying
securities alone. The Fund receives a premium from writing a call or put option
which it retains whether or not the option is exercised. By writing a call
option, the Fund might lose the potential for gain on the underlying security
while the
option is open, and by writing a put option, the Fund might become obligated to
purchase the underlying security for more than its current market price upon
exercise.
The Funds may purchase call and put options for the purpose of offsetting
previously written call and put options of the same series. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
dispose of assets held in a segregated account until the options expire or are
exercised. Put options may also be purchased to protect against price movements
in particular securities in the Fund's 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.
The Funds will purchase options only to the extent permitted by the policies of
state securities authorities in states where shares of the Funds are qualified
for offer and sale. A Fund will write put options only on securities which the
Fund wishes to have in its portfolio and where the Fund has determined, as an
investment consideration, that it is willing to pay the exercise price of the
option. The Funds may generally 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 Funds purchase and write options only with investment
dealers and other financial institutions (such as commercial banks or savings
associations) deemed creditworthy by the 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 Funds may purchase put options and write call options using market index
options such as the S&P 500 for the purpose of hedging to attempt to protect the
value of the Fund or to generate income.
FUTURES AND OPTIONS ON FUTURES
Each Fund (except Treasury Money Market Fund and Limited Maturity Government
Fund) may purchase and sell futures contracts to hedge all or a portion of its
portfolio against changes in stock prices, interest rates, and market
conditions. The Funds 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 indices that reflect the market value
of common stock of the firms included in the indices. An index futures contract
is an agreement by which two parties agree to take or make delivery of an amount
of cash equal to the difference 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 Funds may also write call options and purchase put options on futures
contracts as a hedge to attempt to protect securities in its portfolio against
decreases in value. When a 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 Equity Income Fund and Balanced Fund may also write put options and purchase
call options on futures contracts as hedges against rising purchase prices of
portfolio securities. These Funds will use these transactions to attempt to
protect their ability to purchase portfolio securities in the future at price
levels existing at the time they enter into the transactions. When these Funds
write a put option on a futures contract, they are undertaking to buy a
particular futures contract at a fixed price at any time during a specified
period if the option is exercised. As a purchaser of a call option on a futures
contract, these Funds are entitled (but not obligated) to purchase a futures
contract at a fixed price at any time during the life of the option.
A 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 a 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 a Fund uses futures and options on 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 Adviser could be incorrect in its expectations
about the direction or extent of market factors such as stock price
movements. In these events, a 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 Adviser will
consider liquidity before entering into these 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.
A Fund's ability to establish and close out futures and options depends on
this secondary market.
INVESTING IN SECURITIES OF NEW ISSUERS
The Funds will not invest more that 5% of their respective 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.)
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Funds may invest in securities of other investment companies, but a Fund
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 Funds 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,
although it should be noted that investment companies incur certain expenses
such as custodian and transfer agency fees and, therefore, any investment by the
Funds in shares of another investment company would be subject to such expenses.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which a Fund purchases securities with
payment and delivery scheduled for a future time. In when-issued and delayed
delivery transactions, the Funds rely on the seller to complete the transaction.
The seller's failure to complete these transactions may cause a Fund to miss a
price or yield considered to be advantageous. 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. Accordingly, the Funds
may pay more/less than the market value of the securities on the settlement
date.
The Funds may dispose of a commitment prior to settlement if the Adviser deems
it appropriate to do so. In addition, the Funds may enter into transactions to
sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. A Fund may realize short-term profits or losses upon the sale of such
commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate income, each of the Funds (except the Treasury Money Market
Fund) may lend portfolio securities on a short-term or long-term basis, up to
one-third of the value of its respective total assets to broker/dealers, banks,
or other institutional borrowers of securities. The Funds will only enter into
loan arrangements with broker/dealers, banks, or other institutions which the
Adviser has determined are creditworthy under guidelines established by the
Board of 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 at all times. This policy cannot be changed without the approval of
holders of a majority of a Fund's shares. There is the risk that when lending
portfolio securities, the securities may not be available to a Fund on a timely
basis and the Fund may, therefore, lose the opportunity to sell the securities
at a desirable price. In addition, in the event that a borrower of securities
would file for bankruptcy or become insolvent, disposition of the securities may
be delayed pending court action.
REPURCHASE AGREEMENTS
Each Fund (except the Treasury Money Market Fund) may invest in 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 a Fund (limited to those U.S. government
securities with a remaining maturity of five years or less for the Equity 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 a Fund, the Fund
could receive less than the repurchase price on any sale of such securities.
TEMPORARY INVESTMENTS
With respect to the Equity Income Fund, for temporary defensive purposes (up to
100% of its total assets) and to maintain liquidity (up to 35% of its total
assets), and, with respect to the Equity Fund, for temporary defensive purposes
in such proportions as, in the judgment of the Adviser, prevailing market
conditions warrant, the Equity Fund and Equity Income Fund may invest in cash
and cash items, including:
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.
BORROWING MONEY
The Funds will not borrow money directly or through reverse repurchase
agreements (arrangements in which a Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set date) or
pledge securities except, under certain circumstances, a Fund may borrow up to
one-third of the value of its total assets. (The Treasury Money Market Fund and
Equity Fund will not borrow through the use of reverse repurchase agreements.)
The Funds cannot pledge securities except to secure permitted borrowings. In
this regard, the Treasury Money Market Fund, Limited Maturity Government Fund,
Fixed Income Fund, and Equity Fund are limited to pledging up to 10%, of the
value of their respective total assets to secure such borrowings. This policy
cannot be changed without the approval of holders of a majority of a Fund's
shares.
DIVERSIFICATION
Each Fund will not, 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. In addition, each Fund will not acquire more than 10% of the
outstanding voting securities of any one issuer. This policy cannot be changed
without the approval of holders of a majority of a Fund's shares.
RESTRICTED AND ILLIQUID SECURITIES
Each Fund (except the Treasury Money Market Fund) may invest in restricted
securities. This restriction is not applicable to commercial paper issued under
Section 4(2) of the Securities Act of 1933. The Limited Maturity Government
Fund, Fixed Income Fund, Equity Fund, Equity Income Fund and Balanced Fund may
invest up to 10% of their total assets in such securities. Restricted securities
are any securities in which a Fund may otherwise invest pursuant to its
investment objective and policies but which are subject to restriction on resale
under federal securities law.
Each of the Funds (except the Treasury Money Market Fund and Equity Fund) will
limit investments in illiquid securities including, as applicable, certain
restricted securities not determined by the Trustees to be liquid,
non-negotiable time deposits, repurchase agreements providing for
settlement in more than seven days after notice, and over-the-counter options to
15% of their respective net assets. The Treasury Money Market Fund and Equity
Fund will limit investments in illiquid obligations to 10% of their respective
net assets.
Each of the Funds (except the Treasury Money Market 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 Funds, 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 Funds through or with the assistance of the issuer or
investment dealers who make a market in Section 4(2) commercial paper, thus
providing liquidity.
FIRST PRIORITY FUNDS INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FIRST PRIORITY FUNDS
BOARD OF TRUSTEES. The Board of Trustees is 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 Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Funds are made by First Alabama Bank ("First
Alabama" or the "Adviser"), as the Funds' Adviser, subject to direction by the
Trustees. The Adviser continually conducts investment research and supervision
for the Funds and is responsible for the purchase or sale of portfolio
instruments, for which it receives an annual fee from the assets of each Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to a Fund's average daily net assets as follows: Treasury Money
Market Fund--0.50%; Limited Maturity Government Fund--0.70%; Fixed Income
Fund--0.75%; Equity Fund, Equity Income Fund and Balanced Fund--0.80%. The
fees for Fixed Income Fund, Equity Fund, Equity Income Fund and Balanced
Fund, while higher than the advisory fees paid by other mutual funds in
general, are comparable to fees paid by many mutual funds with similar
investment objectives and policies. The Adviser has undertaken to reimburse
each Fund, up to the amount of their respective 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 waivers or
reimbursement policy at any time at its sole discretion.
ADVISER'S BACKGROUND. The Adviser is a wholly-owned subsidiary of Regions
Financial Corp., a bank holding company organized during 1971 under the
laws of the State of Delaware, and is a member of the Regions Bank
organization. Operating out of more than 250 offices, it provides a wide
range of banking and fiduciary services to its customers. As of June 30,
1994, Regions Financial Corp. was one of the 100 largest bank holding
companies in the United States with total assets in excess of $10 billion.
First Alabama is one of only 13 banks to receive
an "A" rating by Thomson BankWatch. First Alabama is also ranked in the top
ten in overall soundness by U.S. Banker Magazine. Regions Financial Corp.'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 $2.5 billion in discretionary
assets as of December 31, 1994. It manages six common trust funds and
collective investment funds having a market value in excess of $160 million
as of December 31, 1994. First Alabama has been Adviser to each of the
First Priority Funds since their inception with a market value in excess of
$480 million as of December 31, 1994.
As part of their regular banking operations, First Alabama and its
affiliates may grant loans to public companies. Thus, it may be possible,
from time to time, for a Fund to hold or acquire the securities of issuers
which are also lending clients of First Alabama or its affiliates. The
lending relationship will not be a factor in the selection of securities.
J. Kenneth Alderman has overall responsibility for the First Priority
Family of Funds and has been the portfolio manager for the Equity Income
Fund since the Fund's inception.
Mr. Alderman is a Vice President and Trust Investment Officer and serves as
an active member of the Trust Investment Group in the capacity of a
portfolio manager, strategist, and analyst. He contributes to the formation
of equity and fixed income strategies including assisting with management
of Balanced Fund. He has eleven years of investment experience, including
seven years of investment experience with the Trust Department of First
Alabama Bank. Mr. Alderman received his B.S. from Auburn University in 1973
and his M.B.A. from Florida State University in 1976. He became a Certified
Public Accountant in 1975 and a Chartered Financial Analyst in 1989.
T. Jerry Harris, Vice President and Trust Investment Officer, is
responsible for the fixed income strategy for First Alabama Bank and the
management of the fixed income common trust funds. Mr. Harris has been
primarily responsible for the management of the debt securities portion of
the Balanced Fund and the management of the Fixed Income Fund 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 Chartered Financial Planner in 1986 and a Chartered Financial
Analyst in 1991.
Charles A. Murray, CFA, Vice President and Trust Investment Officer, is
responsible for the portfolio management of Equity Fund, 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 primarily
responsible for the management of the Equity Fund and the equity securities
portion of the Balanced Fund since their 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 M. Haigler has assisted Mr. Harris in the management of the debt
securities portion of the Balanced Fund and has been responsible for the
management of the Limited Maturity Government Fund since its inception. Mr.
Haigler is Vice President and Trust Investment Officer of First Alabama
Bank, where he has 16 years of investment experience with the Trust
Department. Mr. Haigler is enrolled in the Chartered Financial Analyst
Program (Level II) and received his B.A. from Huntingdon College.
John E. Steiner, Vice President and Trust Investment Officer, serves as
portfolio manager of Treasury Money Market Fund, Director of Research for
the Trust Investment Division, and is an analyst and portfolio manager for
the Trust Investment Group. He also contributes to the formulation of
equity and fixed income strategy. Mr. Steiner received his B.S. in
Industrial Management from Auburn University in 1981, and is enrolled in
the Chartered Financial Analyst Program (Level III).
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the distributor for shares of the Funds. It is a
Pennsylvania corporation organized on November 14, 1969, and is the distributor
for a number of investment companies. Federated Securities Corp. is a subsidiary
of Federated Investors.
DISTRIBUTION PLAN. Under a distribution plan adopted in accordance with
Investment Company Act Rule 12b-1 (the "Distribution Plan"), each Fund (except
Trust Shares of the Treasury Money Market Fund) may pay to the distributor an
amount computed at an annual rate of the average daily net asset value of the
Fund to finance any activity which is principally intended to result in the sale
of shares subject to the Distribution Plan in the following amounts: Treasury
Money Market Fund-- Investment Shares 0.40%; Limited Maturity Government
Fund--0.25%; Fixed Income Fund, Equity Fund, Equity Income Fund and Balanced
Fund--0.30%.
The Funds (other than the Investment Shares of the Treasury Money Market Fund)
will not accrue or pay any distribution expenses pursuant to the Distribution
Plan until a separate class of shares has been created for certain institutional
investors.
Federated Securities Corp. may from time to time and for such periods as it
deems appropriate, voluntarily reduce its compensation under the Distribution
Plan to the extent the expenses attributable to the Funds 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 support services as agents for their clients or
customers who beneficially own shares of the Funds (except Trust Shares of the
Treasury Money Market 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 a Fund; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Funds may reasonably request.
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 Distribution Plan is a compensation-type plan. As such, the Funds make no
payments to the distributor except as described above. Therefore, the Funds do
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Funds, 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 Funds
under the Distribution Plan.
The Glass-Steagall Act limits the ability of a depository institution (such as a
commercial bank or a savings and loan association) to become an underwriter or
distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the 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 FUNDS
ADMINISTRATIVE SERVICES. Federated Administrative Services, Pittsburgh,
Pennsylvania, a subsidiary of Federated Investors, provides the Funds with
certain administrative personnel and services (including certain legal and
accounting services) necessary to operate the Funds. 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.
CUSTODIAN. First Alabama Bank, Birmingham, Alabama, serves as custodian for the
securities and cash of the Funds, and receives a fee for that service.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING SERVICES.
Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of Federated
Investors, is transfer agent and dividend disbursing agent for the Funds. It
also provides certain accounting and recordkeeping services with respect to the
Funds' portfolio investments.
INDEPENDENT AUDITORS. The independent auditors for the Trust are Deloitte &
Touche LLP, Pittsburgh, Pennsylvania.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments for each Fund, 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 a Fund.
The Adviser makes decisions on portfolio transactions and selects brokers and
dealers subject to review by the Trustees.
EXPENSES OF THE FUNDS
Each Fund pays all of its own expenses and its allocable share of Trust
expenses. These expenses include, but are not limited to, the cost of: Trustees'
fees; investment advisory and administrative services; printing prospectuses and
other Fund documents for shareholders; registering the Trust, the Funds, and
shares of the Funds with federal and state securities commissions; taxes and
commissions; issuing, purchasing, repurchasing, and redeeming shares; fees for
custodians, transfer agents, dividend disbursing agents, shareholder servicing
agents, and registrars; printing, mailing, auditing, accounting, and legal
expenses; reports to shareholders and governmental agencies; meetings of
Trustees and shareholders and proxy solicitations therefor; distribution fees;
insurance premiums; association membership dues; and such nonrecurring and
extraordinary items as may arise. However, the Adviser may voluntarily reimburse
some expenses and has, in addition, undertaken to reimburse each Fund, up to the
amount of the Funds' advisory fee, the amount by which operating expenses exceed
limitations imposed by certain states.
With respect to Treasury Money Market Fund, which currently offers two classes
of shares, certain expenses may be allocated to the separate classes. At
present, the only expenses allocated to the Investment Shares as a class are
expenses under the Fund's 12b-1 Plan that relate to the Investment Shares. In
addition, the Trustees reserve the right to allocate certain other expenses to
holders of a class 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 the
holders of a class 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 a class of shares; legal fees relating solely to a class of shares; and
Trustees' fees incurred as a result of issues relating solely to a class of
shares.
NET ASSET VALUE
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The Treasury Money Market 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 each class of shares of Treasury Money Market
Fund is determined by adding the interest of that class of shares in the value
of all securities and other assets of the Fund, subtracting the interest of that
class of shares in the liabilities of the Fund and those attributable to that
class of shares, and dividing the remainder by the total number of that class of
shares outstanding. The Treasury Money Market Fund, of course, cannot guarantee
that its net asset value will always remain at $1.00 per share.
The net asset value per share of the other Funds fluctuates, and it is
determined by dividing the sum of the market value of all securities and other
assets, less liabilities, by the number of shares outstanding.
INVESTING IN THE FUNDS
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Trust Shares of the Treasury Money Market Fund
is $25,000. Subsequent investments may be made in any amounts. Trust Shares are
sold to trust accounts for which First Alabama or another financial institution
acts in a fiduciary or agency capacity. An institutional investor's minimum
investment will be calculated by combining all accounts it maintains with the
Trust Shares of the Fund.
The minimum initial investment in shares of the other Funds (including
Investment Shares of the Treasury Money Market Fund) by an investor is $1,000.
Subsequent investments in any Fund or class may be in any amounts. The Funds may
waive the initial minimum investment from time to time. For further information,
please call First Priority Mutual Funds at 1-800-433-2829.
Officers, directors, employees, and retired employees of First Alabama and other
Regions Banks, or their affiliates, and their spouses and their dependent
children may purchase shares of any Fund (except for Trust Shares of the
Treasury Money Market Fund) with a minimum initial investment of $500, unless
they choose to participate in the systematic investment plan, in which case the
minimum initial investment is $100.
WHAT SHARES COST
Trust Shares and Investment Shares of the Treasury Money Market Fund are sold at
their net asset value next determined after an order is received. There is no
sales charge imposed by the Fund.
Shares of the other Funds 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>
On Monday through Friday, the net asset value of the Treasury Money Market Fund
is determined at 12:00 noon and 4:00 p.m. (Eastern time), while the net asset
value of the other Funds is calculated at the close of trading on the New York
Stock Exchange, usually 4:00 p.m. (Eastern time), except on: (i) days on which
there are not sufficient changes in the value of a 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, Christmas Day and Columbus Day.
PURCHASES AT NET ASSET VALUE. Fund shares may be purchased at net asset value,
without a sales charge, by officers, directors, employees and retired employees
of First Alabama and other Regions Banks, or their affiliates, and their spouses
and dependent children. Additionally, shares are available at net asset value
without a sales charge to trust customers purchasing through the Trust
Departments of First Alabama and other Regions Banks. The Trust Departments,
however, may charge fees for services provided, which may be related to the
ownership of Fund shares. This prospectus should, therefore, be read together
with any agreement between the Trust customer and the Trust Department with
regard to services provided and the fees charged for these services.
DEALER CONCESSIONS. For sales of shares of Funds other than the Treasury Money
Market 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. If accepted by the dealer, such additional payments will be predicated
upon the amount of Fund shares sold. Such payments may take the form of cash or
promotional incentives, such as payment of certain expenses of qualified
employees and their spouses to attend informational meetings about a Fund or
other special events at recreational facilities, or items of material value. In
some instances, these incentives will be made available only to dealers whose
employees have sold or may sell significant amounts of shares of a Fund.
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.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. The distributor, the Adviser, or
their affiliates may offer to pay a fee from their own assets to financial
institutions as financial assistance for providing substantial marketing and
sales support. The support may include initiating customer accounts, providing
sales literature, or participating in sales, education, and training seminars
(including those held at recreational facilities). Such assistance will be
predicated upon the amount of shares the financial institution sells or may sell
and/or upon the type and nature of sales or marketing support furnished by the
financial institution. Any payments made by the distributor will be reimbursed
by the Adviser or its affiliates and are in addition to any payments made under
a Fund's Distribution Plan.
SHARE PURCHASES. Fund shares are sold on days on which both the New York Stock
Exchange and the Federal Reserve Wire System are open for business. Trust
customers may purchase shares through the Trust Departments of First Alabama and
other Regions Banks. Other customers may purchase shares through First Alabama
Investments, Inc. ("FAII"). Texas residents must purchase shares through
Federated Securities Corp. at 1-800-356-2805. In connection with the sale of
Fund shares, the distributor may from time to time offer certain items of
nominal value to any shareholder or investor. Each Fund reserves the right to
reject any purchase request.
Trust customers may place an order to purchase shares by contacting their local
Trust Administrator or by calling First Alabama at 1-800-433-2829. Other
customers may purchase shares by contacting 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 or another Regions Bank. With respect to Treasury Money
Market Fund, 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. With respect to the other Funds, 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. (However, effective June 1, 1995, payment must be received
within three business days of receipt of the order).
CONVERSION TO FEDERAL FUNDS
It is the Funds' 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.
REDUCING THE SALES CHARGE
The sales charge, if applicable, can be reduced on the purchase of Fund 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 and can eliminate the sales charge paid. The Funds will
combine purchases of shares made
on the same day by the investor, his spouse, and his dependent children when it
calculates the sales charge.
If an additional purchase of shares is made, a Fund will consider the previous
purchases still invested in the Fund. For example, if a shareholder already owns
shares of a Fund 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, FAII 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 First Priority Funds over the next 13 months, the sales charge, if
applicable, 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 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
toward the dollar fulfillment of the letter of intent. Prior trade prices will
not be adjusted.
REINVESTMENT PRIVILEGE. If shares in a Fund have been redeemed, the shareholder
has a one-time right, within thirty days, to reinvest the redemption proceeds at
the next-determined net asset value without any sales charge. FAII 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 a 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 a 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. The Adviser will
offer to pay broker/dealers an amount equal to 0.50% of the net asset value of
shares of a Fund purchased by their clients or customers in this manner. This
offer is not available for the redemption of mutual fund shares that were or
would be subject to a contingent deferred sales charge upon redemption.
SYSTEMATIC INVESTMENT PLAN
Holders of Investment Shares of Treasury Money Market Fund and shares of the
other Funds may arrange for systematic monthly investments in their accounts in
amounts of $100 or more. Officers, directors, employees, and retired employees
of First Alabama and other Regions Banks, or their affiliates, and their spouses
and their dependent children, may arrange for systematic monthly investments in
their accounts in amounts of $25 or more. Once proper authorization is given, a
shareholder's bank account will be debited to purchase shares in the Fund.
EXCHANGING SECURITIES FOR FUND SHARES
Investors may exchange certain securities or a combination of certain securities
and cash for shares of the Funds. Each Fund reserves the right to determine the
acceptability of securities to be exchanged. On the day securities are accepted
by a Fund, they are valued in the same manner as the Fund values its assets.
Investors wishing to exchange securities should first contact First Alabama or
another Regions Bank. The market value of any securities exchanged in an initial
investment, plus any cash, must be at least $1,000,000.
SHAREHOLDER ACCOUNTS
As transfer agent for the Funds, Federated Services Company maintains a share
account for each shareholder of record. Share certificates are not usually
issued.
DIVIDENDS AND CAPITAL GAINS
With respect to the Treasury Money Market Fund, dividends are declared daily and
paid monthly. Dividends will be reinvested in additional Fund shares on payment
dates unless cash payments are requested by writing to the Fund or FAII as
appropriate. Purchase orders received by 11:00 a.m. (Central time) with share
purchase settlements received by First Alabama Bank before 2:00 p.m. (Central
time), earn dividends that day. The amount of dividends payable to holders of
Investment Shares will be less than those payable to holders of Trust Shares due
to the difference between Class Expenses and distribution expenses borne by each
respective class. 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 twelve months.
With respect to the Limited Maturity Government Fund and Fixed Income Fund,
dividends are declared daily and paid monthly. With respect to the other Funds,
dividends are declared and paid quarterly. Dividends are declared just prior to
determining net asset value. Capital gains realized by a Fund, if any, will be
distributed at least once every twelve months. Dividends and capital gains will
be reinvested in additional shares of the Fund on payment dates at the
ex-dividend date net asset value unless cash payments are requested by
shareholders by writing to the Fund, First Alabama, or another Regions Bank, as
appropriate.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
A shareholder may exchange shares of one Fund for the appropriate class of
shares of any other Fund in the First Priority Funds by calling or by writing to
First Alabama, another Regions Bank, or FAII, as appropriate. Texas residents
must telephone Federated Securities Corp. at 1-800-356-2805 to exchange shares.
In addition, shareholders of the Trust may have the ability to exchange shares
of certain funds distributed by Federated Securities Corp. For further
information, contact First Alabama or another Regions Bank. Shares purchased by
check are not eligible for exchange until the purchase check has cleared, which
could take up to seven calendar days. The exchange feature applies to shares of
each fund as of the effective offering date of each fund's shares. Telephone
exchange instructions may be recorded.
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 Funds 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.
If reasonable procedures are not followed by a Fund, it may be liable for losses
due to unauthorized or fraudulent telephone instructions.
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.
REDEEMING SHARES
- --------------------------------------------------------------------------------
Each 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
Trust customers may redeem shares of a Fund by contacting their Trust
Administrator. Other shareholders may redeem shares by telephoning their local
FAII office. For calls received by First Alabama and other Regions Banks before
3:00 p.m. (Central time) (or 11:00 a.m. (Central time) with respect to Treasury
Money Market Fund), proceeds will normally be wired within five business days to
the shareholder's account at First Alabama or another Regions Bank 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 and other Regions Banks. Telephone redemption
instructions may be recorded.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as a written request to Federated Services Company,
First Alabama, or another Regions Bank, should be considered.
If, at any time, a Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders would be promptly notified.
If reasonable procedures are not followed by a 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 BIF,
which is administered by the FDIC;
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
a savings bank or savings and loan association whose deposits are insured
by the SAIF, which is administered by the FDIC; or
any other "eligible guarantor institution" as defined in the Securities
Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds and the transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Funds may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Funds and the transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT. Normally, a check for the proceeds is mailed within five
business days (or one business day with respect to the Treasury Money Market
Fund), but in no event more than seven days, after receipt of a proper written
redemption request, provided that the transfer agent has received payment for
shares from the shareholder.
CHECKWRITING. For information on the availability of checkwriting with respect
to shareholders of Investment Shares of the Treasury Money Market Fund and
related matters, contact First Alabama at 1-800-433-2829.
SYSTEMATIC WITHDRAWAL PLAN
Under a Systematic Withdrawal Plan, with respect to Funds other than Trust
Shares of the Treasury Money Market Fund, 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. Excessive withdrawals may deplete or
decrease the value of an account. For this reason, payments under this
Systematic Withdrawal Plan should not be considered as yield or income on the
shareholder's investment in the Fund. Due to the fact that some Funds' shares
are sold with a sales charge, it is not advisable for shareholders to be
purchasing shares of a Fund while participating in this Systematic Withdrawal
Plan.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Funds may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below the applicable required minimum value. This
requirement does not apply, however, if the balance falls below the applicable
minimum because of changes in a 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.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of a Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders of that Fund for vote. All shares of
each portfolio in the Trust and of all classes, if applicable, 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 a
Fund's operation and for the election of Trustees under certain circumstances.
As of January 9, 1995, HUBCO c/o First Alabama Bank may for certain purposes be
deemed to control the Funds because it is owner of record of certain shares of
the Funds.
Trustees may be removed by Trustees or by shareholders at a special meeting. A
special meeting of 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 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 cannot meet its obligations to indemnify shareholders and pay
judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any 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 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 Funds 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 Funds. 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 Funds 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 Funds will pay no federal income tax because each Fund expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
Each Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by a Fund
will not be combined for tax purposes with those realized by any of the other
Funds.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains 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 Funds advertise their total return and yield. The Treasury
Money Market Fund may also advertise effective yield.
Total return represents the change, over a specified period of time, in the
value of an investment in a 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 a Fund (other than the Treasury Money Market Fund) is calculated by
dividing the net investment income per share (as defined by the Securities and
Exchange Commission) earned by the Fund over a thirty-day period by the maximum
offering price per share of the Fund 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 the Fund and, therefore, may
not correlate to the dividends or other distributions paid to shareholders.
The yield of Trust Shares or Investment Shares of the Treasury Money Market Fund
represents the annualized rate of income earned on an investment in that class
of 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 a class of 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. 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 Funds may advertise performance using certain financial
publications and/or compare their performance to certain indices.
The performance information described above reflects the effect of the maximum
sales load which, if excluded, would increase the total return and yield.
FIRST PRIORITY FIXED INCOME FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES+
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Trust's
independent auditors. Their report dated January 17, 1995 on the Trust's
financial statements for the year ended
November 30, 1994 is included in the combined Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Trust's financial statements and notes thereto, which may be obtained free of
charge from the Trust.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
TRUST SHARES 1994 1993 1992*
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.67 $10.27 $9.90
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.54 0.51 0.38
Net realized and unrealized gain (loss) on investments (1.01) 0.50 0.37
- ------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.47) 1.01 0.75
- ------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends to shareholders from net investment income (0.53) (0.51) (0.38)
Distributions to shareholders from net realized gain
on investment transactions (0.20) (0.10) --
Distributions to shareholders in excess of net realized gain
on investment transactions (0.01 (c) -- --
- ------------------------------------------------------------------------------------------------------------------
Total distributions (0.74) (0.61) (0.38)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.46 $10.67 $10.27
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN** (4.55%) 10.14% 7.66%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.79% 0.84% 0.77%(a)
Net investment income 5.44% 4.80% 6.02%(a)
Expense waiver/reimbursement (b) 0.25% 0.25% 0.29%(a)
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $153,289 $169,881 $96,354
Portfolio turnover rate 24% 83% 44%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Prior to February 1, 1995, the Fund offered two classes of shares: Investment
Shares and Trust Shares. Beginning February 1, 1995, the Fund will no longer
offer Trust Shares.
* 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
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(See Notes which are an integral part of the Financial Statements)
FIRST PRIORITY EQUITY FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES+
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Trust's
independent auditors. Their report dated January 17, 1995 on the Trust's
financial statements for the year ended
November 30, 1994 is included in the combined Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Trust's financial statements and notes thereto, which may be obtained free of
charge from the Trust.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
TRUST SHARES 1994 1993 1992*
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.51 $10.66 $9.86
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.25 0.18 0.14
Net realized and unrealized gain (loss) on investments (0.10) (0.03) 0.77
- ------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.15 0.15 0.91
- ------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends to shareholders from net investment income (0.23) (0.18) (0.11)
Distributions to shareholders from net realized gain
on investment transactions (0.07) (0.12) --
- ------------------------------------------------------------------------------------------------------------------
Total distributions (0.30) (0.30) (0.11)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.36 $10.51 $10.66
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN** 1.42% 1.43% 9.28%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.79% 0.84% 0.76%(a)
Net investment income 2.32% 1.85% 2.28%(a)
Expense waiver/reimbursement (b) 0.30% 0.30% 0.35%(a)
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $143,876 $154,185 $102,822
Portfolio turnover rate 66% 74% 30%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Prior to February 1, 1995, the Fund offered two classes of shares: Investment
Shares and Trust Shares. Beginning February 1, 1995, the Fund will no longer
offer Trust Shares.
* 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
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
First Priority Treasury Money Market Fund
Trust Shares
Investment Shares
First Priority Limited Maturity Government Fund Federated Investors Tower
First Priority Fixed Income Fund Pittsburgh, Pennsylvania 15222-3779
First Priority Equity Fund
First Priority Equity Income Fund
First Priority Balanced Fund
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Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Investment Adviser
First Alabama Bank P.O. Box 10247
Mutual Funds Group Birmingham, Alabama 35202
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Transfer Agent, Dividend Disbursing Agent
and Portfolio Accounting Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Custodian
First Alabama Bank 417 North 20th Street
Birmingham, Alabama 35203
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Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
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FIRST PRIORITY FUNDS
COMBINED PROSPECTUS
January 31, 1995
FIRST PRIORITY FUNDS
Combined Statement of Additional Information
This Combined Statement of Additional Information relates to the
following six portfolios (the "Funds") of First Priority Funds
(the "Trust"):
First Priority Treasury Money Market Fund
Trust Shares
Investment Shares
First Priority Limited Maturity Government Fund
First Priority Fixed Income Fund
First Priority Equity Fund
First Priority Equity Income Fund
First Priority Balanced Fund
This Combined Statement of Additional Information should be read with
the Combined Prospectus of First Priority Funds dated January 31, 1995
("Prospectus"). This Statement is not a prospectus itself. To receive
a copy of the Prospectus, write the Trust or call at 1-800-433-2829.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
STATEMENT DATED JANUARY 31, 1995
FEDERATED SECURITIES CORP.
Distributor
GENERAL INFORMATION ABOUT THE Purchasing Securities to
TRUST 1 Exercise Control 7
INVESTMENT OBJECTIVE AND POLICIES Investing in Warrants 8
OF THE FUNDS 1 Investing in Put Options 8
Warrants 1 Writing Covered Call Options
Collateralized Mortgage 8
Obligations ("CMOs") 1 Arbitrage Transactions 8
Resets of Interest 1FIRST PRIORITY FUNDS MANAGEMENT 8
Caps and Floors 2 Officers And Trustees 8
Investment Considerations - The Funds 12
Mortgage-Backed and Asset- Fund Ownership 12
Backed Securities 2 Officers and Trustees
Repurchase Agreements 2 Compensation 13
Money Market Instruments 2 Trustee Liability 14
When-Issued and Delayed INVESTMENT ADVISORY SERVICES 14
Delivery Transactions 3 Adviser to the Funds 14
Futures and Options Advisory Fees 14
Transactions 3 State Expense Limitations 14
"Margin" In Futures ADMINISTRATIVE SERVICES 14
Transactions 3CUSTODIAN 15
Put Options on Futures
Contracts 3
Call Options on Futures
Contracts 3
Stock Index Options 4
Lending of Portfolio Securities 4
Restricted Securities 5
Reverse Repurchase Agreements 5
Portfolio Turnover 5
Investment Limitations 5
Selling Short and Buying on
Margin 5
Issuing Senior Securities and
Borrowing Money 6
Pledging Assets 6
Diversification of Investments 6
Underwriting 6
Investing in Real Estate 6
Investing in Commodities 6
Lending Cash or Securities 6
Concentration of Investments 7
Investing in Restricted
Securities 7
Investing in Illiquid
Securities 7
Investing in Securities of
Other Investment Companies 7
Investing in New Issuers 7
Investing in Minerals 7
Investing in Issuers Whose
Securities Are Owned by
Officers and Trustees of the
Trust 7
PURCHASING SHARES 15
Distribution Plan 15
EXCHANGING SECURITIES FOR FUND
SHARES 16
Tax Consequences 16
DETERMINING NET ASSET VALUE 16
Determining Market Value of
Securities 16
Use of the Amortized Cost
Method (Treasury Money Market
Fund only) 17
Monitoring Procedures 17
Investment Restrictions 17
EXCHANGE PRIVILEGE 18
Requirements for Exchanging
Shares 18
Making an Exchange 18
REDEEMING SHARES 18
Redemption in Kind 18
TAX STATUS 18
The Funds' Tax Status 18
Shareholders' Tax Status 19
Capital Gains 19
TOTAL RETURN 19
YIELD 19
EFFECTIVE YIELD 20
PERFORMANCE COMPARISONS 20
Treasury Money Market Fund: 20
Limited Maturity Government
Fund: 21
Fixed Income Fund: 21
Equity Fund: 22
Equity Income Fund: 22
Balanced Fund: 23
APPENDIX 24
Standard and Poor's Ratings
Group Corporate Bond Ratings 24
Moody's Investors Service,
Inc., Corporate Bond Ratings 24
Fitch Investors Service, Inc.,
Long-Term Debt Ratings 24
Standard and Poor's Ratings
Group Commercial Paper Ratings 24
Moody's Investors Services,
Inc., Commercial Paper Ratings 24
Fitch Investors Service, Inc.,
Short-Term Ratings 25
GENERAL INFORMATION ABOUT THE TRUST
The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated October 15, 1991. As of the date of this
Statement, the Trust consists of six separate portfolios of securities
(the "Funds") which are as follows: First Priority Treasury Money
Market Fund ("Treasury Money Market Fund"), which is offered in two
classes of shares, Trust Shares and Investment Shares; First Priority
Limited Maturity Government Fund ("Limited Maturity Government Fund");
First Priority Fixed Income Fund ("Fixed Income Fund"); First Priority
Equity Fund ("Equity Fund"); First Priority Equity Income Fund ("Equity
Income Fund"); and First Priority Balanced Fund ("Balanced Fund").
INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS
The Prospectus discusses the objective of each Fund and the policies
they employ to achieve those objectives. The following discussion
supplements the description of the Funds' investment policies in the
Prospectus. The Funds' respective investment objectives cannot be
changed without approval of shareholders. The investment policies
described below may be changed by the Trustees without shareholder
approval. Shareholders will be notified before any material change in
these policies becomes effective.
WARRANTS
The Equity Fund, Equity Income Fund, and Balanced Fund may invest in
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.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The Limited Maturity Government Fund, Fixed Income Fund, and Balanced
Fund may invest in CMOs. The following example illustrates how mortgage
cash flows are prioritized in the case of CMOs--most of the CMOs in
which several of the Funds invest use the same basic structure:
(1)Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four tranches of
securities: the first three (A, B, and C bonds) pay interest at
their stated rates beginning with the issue date and the final
tranche (Z bonds) typically receives any excess income from the
underlying investments after payments are made to the other
tranches and receives no principal or interest payments until the
shorter maturity tranches have been retired, but then receives all
remaining principal and interest payments.
(2)The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.
(3)The tranches of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity tranche (or A
bonds). When those securities are completely retired, all
principal payments are then directed to the next-shortest-maturity
tranche (or B bonds). This process continues until all of the
tranches have been paid off.
Because the cash flow is distributed sequentially instead of pro rata,
as with pass-through securities, the cash flows and average lives of
CMOs are more predictable, and there is a period of time during which
the investors in the longer-maturity classes receive no principal
paydowns. One or more of the tranches often bear interest at an
adjustable rate. The interest portion of these payments is distributed
by the Funds as income, and the principal portion is reinvested.
RESETS OF INTEREST
The interest rates paid on the mortgage securities in which several of
the Funds invest may be 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 adjustable rate
mortgage securities ("ARMS") and CMOs in which several of the Funds
invest 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) 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 a 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 a Fund invests to be shorter than the maturities
stated in the underlying mortgages.
INVESTMENT CONSIDERATIONS - MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
Unlike conventional bonds, mortgage-backed and other asset-backed
securities may pay back principal over the life of the security rather
than at maturity, and a holder of these securities may receive
unscheduled principal payments representing prepayments on the
underlying mortgages or other assets. As a consequence, these
securities may be a less effective means of "locking in" long-term
interest rates than other similar investments (e.g., investments with
comparable maturities).
While these securities generally entail less risk of a decline during
periods of rapidly rising rates, they may also have less potential for
capital appreciation than other similar investments, because as interest
rates decline, the likelihood increases that the underlying obligations
will be prepaid. Furthermore, if these securities 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 these securities are purchased at a
discount, both a scheduled payment of principal and 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.
REPURCHASE AGREEMENTS
The Funds require the 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 a 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 a Fund might be delayed pending court
action. The Funds believe that under the regular procedures normally in
effect for custody of the Funds' portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in
favor of a Fund and allow retention or disposition of such securities.
The Funds will only enter into repurchase agreements with banks and
other recognized financial institutions, such as broker/dealers, which
are deemed by the Funds' Adviser to be creditworthy pursuant to
guidelines established by the Trustees.
MONEY MARKET INSTRUMENTS
The Equity Fund and Equity Income Fund may invest in the following money
market instruments:
o 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 or the Savings
Association Insurance Fund, both of which are administered by the
Federal Deposit Insurance Corporation; and
o prime commercial paper (rated "A-1" by Standard & Poor's Ratings
Group, "Prime-1" by Moody's Investors Service, or "F-1" by Fitch
Investors Service, Inc.).
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price and yield for the Funds. No fees or other expenses,
other than normal transaction costs, are incurred. However, liquid
assets of a Fund sufficient to make payment for the securities to be
purchased are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the
transaction has been settled. The Funds do not intend to engage in when-
issued and delayed delivery transactions to an extent that would cause
the segregation of more than 20% of the total value of their respective
assets.
FUTURES AND OPTIONS TRANSACTIONS
The Funds that may engage in futures and options transactions will
maintain their positions in securities, options rights, and segregated
cash subject to puts and calls until the options are exercised, closed,
or have expired. An option position on futures contracts may be closed
out over-the-counter or on a nationally recognized exchange which
provides a secondary market for options of the same series.
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.
"Margin" In Futures Transactions
Unlike the purchase or sale of a security, a 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 a 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 a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day
a 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 a Fund but is instead settlement
between a 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 Funds will mark to market their open futures
positions.
The Funds are also required to deposit and maintain margin when it
writes call options on futures contracts.
Put Options on Futures Contracts
The Funds may purchase listed put options on 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, a Fund will normally close out its option by
selling an identical option. If the hedge is successful, the
proceeds received by a Fund upon the sales of the second option
will be large enough to offset both the premium paid by a Fund for
the original option plus the decrease in value of the hedged
securities.
Alternatively, a 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 a 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 Futures Contracts
In addition to purchasing put options on futures, the Funds may
write listed and over-the-counter call options on futures
contracts to hedge its portfolio. When a 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 or market
interest rates rise, causing the prices of futures to go down, a
Fund's obligation under a call option on a future (to sell a
futures contract) costs less to fulfill, causing the value of a
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 a Fund keeps the premium received for
the option. This premium can substantially offset the drop in
value of a Fund's portfolio securities.
Prior to the expiration of a call written by a Fund, or exercise
of it by the buyer, a 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 a Fund for
the initial option. The net premium income of a Fund will then
substantially offset the decrease in value of the hedged
securities.
The Funds will not maintain open positions in futures contracts
they have sold or call options they have written on futures
contracts if, in the aggregate, the value of the open positions
(marked to market) exceeds the current market value of a Fund's
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, a 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.
Stock Index Options
The Equity Income Fund and Balanced Fund may purchase put options
on stock indices listed on national securities exchanges or traded
in the over-the-counter market. A stock index fluctuates with
changes in the market value of the stocks included in the index.
The effectiveness of purchasing stock index options will depend
upon the extent to which price movements in a Fund's portfolio
correlate with price movements of the stock index selected.
Because the value of an index option depends upon movements in the
level of the index rather than the price of a particular stock,
whether a Fund will realize a gain or loss from the purchase of
the option on an index depends upon movements in the level of
stock prices in the stock market generally or, in the case of
certain indices, in an industry or market segment, rather than
movements in the price of a particular stock. Accordingly,
successful use by a Fund of options on stock indices will be
subject to the ability of the Funds' Adviser to predict correctly
movements in the directions of the stock market generally or of a
particular industry. This requires different skills and
techniques than predicting changes in the prices of individual
stocks.
LENDING OF PORTFOLIO SECURITIES
As a fundamental policy the Funds (with the exception of Treasury Money
Market Fund) may lend portfolio securities. The collateral received
when a 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 a Fund. During the time portfolio
securities are on loan, the borrower pays a Fund any dividends or
interest paid on such securities. Loans are subject to termination at
the option of a Fund or the borrower. The Funds 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 Funds 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.
RESTRICTED SECURITIES
limitatio
limitation applicable to illiquid securities. In addition, because
Section 4(2) commercial paper is liquid, the Funds intend to not subject
such paper to the limitation applicable to restricted securities.
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange
Commission (the "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 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 the Rule. The Funds believe that the staff of the SEC
has left the question of determining the liquidity of all restricted
securities to the Trustees. The Trustees may consider the following
criteria in determining the liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace
trades.
REVERSE REPURCHASE AGREEMENTS
The Equity Income Fund and Balanced Fund may also enter into reverse
repurchase agreements pursuant to a fundamental policy. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement, a Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase
the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. The use of reverse repurchase
agreements may enable a Fund to avoid selling portfolio instruments at a
time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that a Fund
will be able to avoid selling portfolio instruments at a disadvantageous
time.
When effecting reverse repurchase agreements, liquid assets of the Fund
in a dollar amount sufficient to make payment for the obligations to be
purchased are segregated at the trade date. These securities are marked
to market daily and are maintained until the transaction is settled.
PORTFOLIO TURNOVER
For the period from December 13, 1993 (date of initial public
investment) to November 30, 1994, Limited Maturity Government Fund's
portfolio turnover rate was 3%. For the fiscal years ended November 30,
1994 and 1993, the portfolio turnover rates were 24% and 83%,
respectively, for the Fixed Income Fund; and 66% and 74%, respectively,
for the Equity Fund. Equity Income Fund and Balanced Fund may trade or
dispose of portfolio securities as considered necessary to meet its
investment objective.
INVESTMENT LIMITATIONS
Selling Short and Buying on Margin
The Funds will not sell 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 a Fund of initial or
variation margin in connection with futures contracts or related
options transactions is not considered as a purchase of a security
on margin.
Issuing Senior Securities and Borrowing Money
The Funds will not issue senior securities, except that a Fund may
borrow money directly (or with respect to the Equity Income Fund
and Balanced Fund, through reverse repurchase agreements) in
amounts up to one-third of the value of their respective total
assets, including the amounts borrowed. The Funds will not borrow
money except as a temporary, extraordinary, or emergency measure
to facilitate management of the portfolio by enabling a Fund to
meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The
Funds will not purchase any securities while borrowings in excess
of 5% of their respective total assets are outstanding.
Pledging Assets
The Funds will not mortgage, pledge, or hypothecate any assets
except to secure permitted borrowings. However, the Treasury
Money Market Fund, Limited Maturity Government Fund, Fixed Income
Fund, and Equity Fund may pledge assets having a market value not
exceeding the lesser of the dollar amounts borrowed or 10% (15%
with respect to the Limited Maturity Government Fund) 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 future contracts
and related options and the 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 each
Fund's total assets, a 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 or if it would own more than 10% of the
outstanding voting securities of that issuer. (For purposes of
this limitation, the Equity Fund, Equity Income Fund, and Balanced
Fund consider common stock and all preferred stock of an issuer
each as a single class, regardless of priorities, series,
designations, or other differences.)
Underwriting
A Fund will not underwrite any issue of securities, except as a
Fund may be deemed to be an underwriter under the Securities Act
of 1933 in connection with the sale of securities which the Funds
may purchase pursuant to its investment objective, policies, and
limitations.
Investing in Real Estate
The Funds will not purchase or sell real estate, including limited
partnership interests, although the Funds (except for Treasury
Money Market Fund) 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 Funds will not purchase or sell commodities, commodity
contracts, or commodity futures contracts (except to the extent
that a Fund may engage in transactions involving futures contracts
or options on futures contracts and related options with respect
to financial instruments, securities, or securities indices).
Lending Cash or Securities
The Funds will not lend any of its assets, except, that each Fund,
other than Treasury Money Market Fund, portfolio securities
(limited with respect to Limited Maturity Government Fund, Fixed
Income Fund, and Equity Fund to one-third of the value of its
respective total assets). This shall not prevent a 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 each Fund's investment objective, policies, and
limitations or the Trust's Declaration of Trust.
The Treasury Money Market 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.
Concentration of Investments
A Fund will not invest 25% or more of its total assets in
securities of issuers having their principal business activities
in the same industry (other than securities issued by the U.S.
government, its agencies or instrumentalities).
Due to the limited focus of its investment objective, this
limitation has no applicability to Treasury Money Market Fund.
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
A Fund will not invest more than 10% of the value of its
respective total assets in securities subject to restrictions on
resale under federal securities laws, 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 (except Treasury
Money Market Fund, which will make no such investments).
Investing in Illiquid Securities
A Fund will not invest more than 15% (10% with respect to the
Treasury Money Market Fund and Equity Fund) of its respective net
assets in illiquid securities, including repurchase agreements
providing for settlement in more than seven days after notice, non-
negotiable fixed time deposits with maturities over seven days,
over-the-counter options, and certain securities not determined
under guidelines established by the Trustees to be liquid.
Investing in Securities of Other Investment Companies
A 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 respective total
assets in any one investment company, or invest more than 10% of
its respective total assets in investment companies in general.
The Treasury Money Market 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 Funds 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.
Investing in New Issuers
A 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 Funds will apply this limitation by
reference to the issuer of a CMO (or other asset-backed security)
rather than requiring the CMO (or other asset-backed security)
itself to have at least three years of continuous operations.
Investing in Minerals
The Funds will not purchase interests in oil, gas, or other
mineral exploration or development programs or leases, except to
the extent that a Fund may otherwise purchase the securities of
issuers which invest in or sponsor such programs.
Investing in Issuers Whose Securities Are Owned by Officers and
Trustees of the Trust
The Funds will not purchase or retain the securities of any issuer
if the officers and Trustees of the Trust or the Funds' 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.
Purchasing Securities to Exercise Control
The Funds will not purchase securities of a company for the
purpose of exercising control or management.
Investing in Warrants
The Equity Fund, Equity Income Fund, and Balanced Fund will not
invest more than 5% of the value of their respective net assets in
warrants. To comply with certain state restrictions, No more than
2% of this 5% may be warrants which are not listed on the New York
Stock Exchange or the American Stock Exchange. If state
restrictions change, this latter restriction may be revised
without notice to shareholders. (For purposes of this limitation,
warrants will be valued at the lower of cost or market value,
except that warrants acquired by a Fund in units or attached to
securities may be deemed to be without value.) The Treasury Money
Market Fund will not invest in warrants.
Investing in Put Options
A 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 respective total assets would be
invested in premiums on put option positions.
Writing Covered Call Options
A 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.
Arbitrage Transactions
The Funds will not enter into transactions for the purpose of
engaging in arbitrage.
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 Funds have no present intent to borrow money, pledge securities or,
(1) with respect to Equity Income Fund and Balanced Fund, invest in
reverse repurchase agreements; (2) with respect to Limited Maturity
Government Fund, invest in credit card receivables; and (3) with respect
to Fixed Income Fund and Equity Fund, invest in restricted or illiquid
securities, all in excess of 5% of the value of each Fund's respective
net assets in the coming fiscal year. In addition, the Treasury Money
Market Fund has no present intention to invest in closed-end investment
companies in the coming fiscal year.
For purposes of their policies and limitations, the Funds consider
instruments issued by a U.S. branch of a domestic bank or savings and
loan association having capital, surplus, and undivided profits in
excess of $100,000,000 at the time of investment to be "cash items."
The Funds do not consider the issuance of separate classes of shares or
entering into futures contracts to constitute an issue of "senior
securities" within the meaning of the investment limitations set forth
above.
To comply with registration requirements in certain states, the
Funds will, as relevant, (1) limit the aggregate value of the assets
underlying covered call options or put options written by a Fund to not
more than 25% of its net assets; (2) will limit the premiums paid for
options purchased by a Fund to 20% of its net assets; and (3) will limit
the margin deposits on futures contracts entered into by a Fund to 5% of
its net assets. If state requirements change, these restrictions may be
revised without shareholder notification.
FIRST PRIORITY FUNDS MANAGEMENT
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, present positions
with the Trust, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds.
Thomas G. Bigley
28th Floor, One Oxford Center
Pittsburgh, PA
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Trustee
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Trustee, University of Pittsburgh;
Director of Corporate Health, University of Pittsburgh Medical Center;
Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Two Gateway Center - Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Keohuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Trustee
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Two Gateway Center - Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Keohuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
President, Treasurer and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Vice President
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; 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
Federated Investors Tower
Pittsburgh, PA
Vice President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
Ronald M. Petnuch
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Vice President and
Assistant Treasurer of some of the Funds; formerly, Associate Corporate
Counsel, Federated Investors.
* This Trustee is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the 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:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust;
California Municipal Cash Trust; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport
Cash Trust; 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 Institutional
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; Insight
Institutional Series, Inc.; Insurance Management Series; Intermediate
Municipal Trust; International Series, Inc.; 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; Managed Series
Trust; The Medalist Funds: Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds; The
Shawmut Funds; Short-Term Municipal Trust; 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; Trust for
U.S. Treasury Obligations; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
The following list indicates the beneficial ownership of shareholders
who are the beneficial owners of more than 5% of the outstanding shares
of the following portfolios as of January 9, 1995: HUBCO, c/o of First
Alabama Bank of Birmingham, Birmingham, Alabama, owned approximately
111,449,094 Trust shares (100%) of the Treasury Money Market Fund;
approximately 5,078,049 shares (99%) of the Limited Maturity Government
Fund; approximately 13,877,044 Trust shares (100%) of the Fixed Income
Fund; approximately 12,367,324 Trust shares (100%) of the Equity Fund;
approximately 1,937,221 shares (100%) of the Equity Income Fund;
approximately 3,961,226 shares (100%) of the Balanced Fund; S M A Inc.,
Insurance, Birmingham, Alabama, owned approximately 3,573,846 Investment
shares (16%) of the Treasury Money Market Fund; ARONOV Realty Management
Inc., Montgomery, Alabama, owned approximately 2,586,612 Investment
shares (11%) of the Treasury Money Market Fund; Andalusia Health
Services, Andalusia, Alabama, owned approximately 57,713 Investment
shares (5%) of the Fixed Income Fund; and Amsouth Bank Custodian of
United Security Bancshares Inc. , Birmingham ,Alabama, owned
approximately 57,652 Investment shares (5%) of the Fixed Income Fund.
OFFICERS AND TRUSTEES COMPENSATION
NAME , AGGREGATE TOTAL COMPENSATION
POSITION WITH COMPENSATION FROM PAID TO TRUSTEES
FROM
TRUST TRUST+ TRUST AND FUND
COMPLEX
John F. Donahue,
Chairman and Trustee $ -0- $ -0- for the Trust and
69 investment companies
Thomas G. Bigley,
Trustee $377 $24,991 for the Trust
and
50 investment companies
John T. Conroy, Jr.,
Trustee $1,599.25 $136,100 for the Trust
and
65 investment companies
William J. Copeland,
Trustee $1,599.25 $136,100 for the Trust
and
65 investment companies
James E. Dowd,
Trustee $1,599.25 $136,100 for the Trust
and
65 investment companies
Lawrence D. Ellis, M.D.,
Trustee $1,451.50 $123,600 for the Trust
and
65 investment companies
Edward L. Flaherty, Jr.,
Trustee $1,599.25 $136,100 for the Trust
and
65 investment companies
Edward C. Gonzales,
President and Trustee $ -0- $ -0- for the Trust and
18 investment companies
Peter E. Madden,
Trustee $1,222.50 $104,880 for the Trust
and
65 investment companies
Gregor F. Meyer,
Trustee $1,451.50 $123,600 for the Trust
and
65 investment companies
Wesley W. Posvar,
Trustee $1,451.50 $123,600 for the Trust
and
65 investment companies
Marjorie P. Smuts,
Trustee $1,451.50 $123,600 for the Trust
and
65 investment companies
+The aggregate compensation is provided for the Trust which is comprised
of six portfolios.
TRUSTEE LIABILITY
The Trust's 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 FUNDS
The Funds' investment adviser is First Alabama Bank ("First Alabama" or
"Adviser"), which is a wholly-owned subsidiary of Regions Financial
Corp. Because of internal controls maintained by First Alabama to
restrict the flow of non-public information, Fund investments are
typically made without any knowledge of First Alabama's or its
affiliates' lending relationships with an issuer.
The Adviser shall not be liable to the Trust, the Funds or any
shareholder of the Funds 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, the Adviser receives an annual investment
advisory fee from each Fund as described in the Prospectus. For the
years ended November 30, 1994 and 1993, and for the period from the
start of business, January 29, 1992 to November 30, 1992, the Adviser
earned fees from Treasury Money Market Fund of $573,103, $602,115, and
$249,435, respectively, of which $573,013, $551,003 and $245,692,
respectively, were waived. For the period from December 13, 1993, (date
of initial public investment) to November 30, 1994, the Adviser earned
fees from Limited Maturity Government Fund of $314,438, all of which was
waived. For the years ended November 30, 1994 and 1993, and for the
period from the date of initial public investment, April 20, 1992 to
November 30, 1992, the Adviser earned fees from Fixed Income Fund of
$1,334,608, $1,057,968 and $392,397 respectively, of which $444,869,
$352,656 and $130,799, respectively, were waived. For the years ended
November 30, 1994 and 1993, and for the period from the date of initial
public investment, April 20, 1992 to November 30, 1992, the Adviser
earned fees from Equity Fund of $1,291,843, $1,097,771 and $438,007
respectively, of which $484,441, $411,664 and $164,253, respectively,
were 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 a 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 a Fund for its
expenses over the limitation.
If a 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 ("FAS"), a subsidiary of Federated
Investors, provides administrative personnel and services to the Funds
for a fee as described in the Prospectus. For the years ended November
30, 1994 and 1993, and for the period from the start of business,
January 29, 1992 to November 30, 1992, FAS earned fees from Treasury
Money Market Fund of $157,664, $169,558, and $73,665, respectively, of
which $0, $0 and $20,916, respectively, were waived. From the date of
initial public investment, December 13, 1993 to the fiscal year ended
November, 30, 1994, FAS earned fees from Limited Maturity Government
Fund of $61,561, of which $0 was waived. For the years ended November
30, 1994 and 1993, and for the period from the date of initial public
investment, April 20, 1992 to November 30, 1992, FAS earned fees from
Fixed Income Fund of $249,639, $198,298 and $77,353, respectively, of
which $0, $0 and $24,315, respectively, were waived. For the years
ended November 30, 1994 and 1993, and for the period from the date of
initial public investment, April 20, 1992 to November 30, 1992, FAS
earned fees from Equity Fund of $222,156, $193,025 and $81,006
respectively, of which $0, $0 and $27,772, respectively, were waived.
CUSTODIAN
First Alabama Bank, Birmingham, Alabama, is custodian for the securities
and cash of the Funds. Under the custodian agreement, First Alabama
Bank holds the each 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 a Fund
or to the Adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o 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 determines 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 and dealers may be used by the Adviser in advising a
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, 1994, the Equity Fund paid $278,680 in
commissions on brokerage transactions.
PURCHASING SHARES
Shares are sold at their net asset value (with a sales charge with
respect to Funds other than the Treasury Money Market Fund) on days the
New York Stock Exchange is open for business. The procedure for
purchasing shares of the Fund is explained in the Prospectus under
"Investing in the Fund." 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
With respect to shares of the Funds, other than Trust Shares of Treasury
Money Market Fund, the Trust has adopted a Distribution Plan pursuant to
Rule 12b-1 (the "Distribution Plan") which was promulgated by the SEC
under the Investment Company Act of 1940. The Distribution Plan
provides for the payment of fees to Federated Securities Corp. to
finance any activity which is principally intended to result in the sale
of Fund shares. Such activities may include the advertising and
marketing of Fund shares; preparing, printing and distributing
prospectuses and sales literature to prospective shareholders, brokers
or administrators; and implementing and operating the Distribution Plan.
Pursuant to the Distribution Plan, the distributor may pay fees to
brokers for distribution and administrative services and to
administrators for administrative services as to Fund 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 and
closings; entering purchase and redemption transactions; providing or
arranging to provide accounting support for all transactions; wiring
funds and receiving funds for Fund share purchases and redemptions;
confirming and reconciling all transactions; reviewing the activity in
Fund accounts; providing training and supervision of broker personnel;
posting and reinvesting dividends to Fund accounts or arranging for this
service to be performed by the Funds' transfer agent; and maintaining
and distributing current copies of prospectuses and shareholder reports
to the beneficial owners of Fund shares and prospective shareholders.
The Trustees expect that the adoption of the Distribution Plan will
result in the sale of a sufficient number of Fund shares so as to allow
the Funds to achieve economic viability. It is also anticipated that an
increase in the size of a Fund will facilitate more efficient portfolio
management and assist the Funds in seeking to achieve their respective
investment objectives.
For the fiscal year ended November 30, 1994, brokers and administrators
received fees in the amount of $89,054 with respect to Treasury Money
Market Fund, $32,970 with respect to Fixed Income Fund, and $19,967 with
respect to Equity Fund, pursuant to the Distribution Plan. For the
period from December 13, 1993 (date of initial public investment) to
November 30, 1994, brokers and administrators received no fees with
respect to Limited Maturity Government Fund.
EXCHANGING SECURITIES FOR FUND SHARES
With respect to Limited Maturity Government Fund, Equity Income Fund,
and Balanced Fund, any securities to be exchanged must meet the
investment objective and policies of the Fund, must have a readily
ascertainable market value, must be liquid, and must not be subject to
restrictions on resale. An investor should forward the securities in
negotiable form with an authorized letter of transmittal to First
Alabama Bank or any Regions Bank. The Fund will notify the investor of
its acceptances and valuation of the securities within five business
days of their receipt by Federated Services Company. Securities will be
acquired for investment and not for resale.
The basis of the exchange will depend upon the net asset value of Fund
shares on the day the securities are valued. One share of a Fund will
be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to exchange will be
considered in valuing the securities. All interest, dividends,
subscriptions, conversion, or other rights attached to the securities
become the property of the Fund, along with the securities.
Tax Consequences
Exercise of this exchange privilege is currently treated as a sale
for federal income tax purposes. Depending upon the cost basis of
the securities exchanged for Fund shares, a gain or loss may be
realized by the investor.
DETERMINING NET ASSET VALUE
The Treasury Money Market Fund attempts to stabilize the value of a
share at $1.00. Net asset value generally changes each day with respect
to the other Funds. The days on which the net asset value is calculated
by the Funds are described in the Prospectus.
DETERMINING MARKET VALUE OF SECURITIES
With the exception of Treasury Money Market Fund, market or fair values
of each Fund's portfolio securities are determined as follows:
o for equity securities, according to the last sale price on a
national securities exchange, if applicable;
o in the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked
prices;
o for unlisted equity securities, latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service, or
for short-term obligations with remaining maturities of 60 days or
less at the time of purchase, at amortized cost; or
o for all other securities, 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 and may reflect:
institutional trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other
market data.
A Fund will value futures contracts and options at their market values
established by the exchanges at the close of options trading on such
exchanges unless the Trustees determine in good faith that another
method of valuing option positions is necessary.
Over-the-counter put options will be valued at the mean between the bid
and the asked prices. Covered call options will be valued at the last
sale price on the national exchange on which such option is traded.
Unlisted call options will be valued at the latest bid price as provided
by brokers.
USE OF THE AMORTIZED COST METHOD (TREASURY MONEY MARKET FUND ONLY)
With respect to the Treasury Money Market Fund, 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 indicationsof market value. The
Trustees will decide what, if any, steps ahould be taken if there
is a difference of more thant .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
invesment 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 thant 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 Money Market 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 Money Market 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 Money Market Fund computed the same way may tend to be lower than
a similar computation made by using a method of calculation based up
market prices and estimates.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGING SHARES
Shareholders using the exchange privilege must exchange shares having a
net asset value of at least the minimum initial investment requirements
of each Fund as set forth in the Prospectus. Before the exchange, the
shareholder must receive a copy of the Prospectus.
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 shares or Trust
Shares of the Treasury Money Market Fund, respectively, of the other
fund.
Further information on the exchange privilege and the Prospectus may be
obtained by calling First Alabama or any Regions Bank.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written
instructions may require a signature guarantee.
REDEEMING SHARES
The Funds redeem shares at the next computed net asset value after
receiving the redemption request. Redemption procedures are explained
in the respective prospectus under "Redeeming 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 Fund's net asset value during any 90-day period.
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 certain transaction costs.
TAX STATUS
THE FUNDS' TAX STATUS
The Funds will pay no federal income tax because they expect to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, each Fund
must, among other requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
SHAREHOLDERS' TAX STATUS
dedu
deduction for corporations will apply to ordinary income distributions
to the extent the distribution represents amounts that would qualify for
the dividends received deduction to a Fund if the Fund were a regular
corporation and to the extent designated by the Fund as so qualifying.
These dividends and any short-term capital gains are taxable as ordinary
income.
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.
With respect to the Treasury Money Market Fund, 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 twelve months.
TOTAL RETURN
The average annual total return of the Funds (other than the Treasury
Money Market 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 maximum 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 or monthly, as applicable,
reinvestment of all dividends and distributions.
The Limited Maturity Government Fund's average total return for the
period from December 13, 1993 (date of initial public investment) to
November 30 ,1994 was (1.78%). The average annual total return for
Investment Shares and Trust Shares of the Fixed Income Fund for the
fiscal year ended November 30, 1994 was (6.75%) and (4.55%),
respectively. The average annual total return for Investment Shares and
Trust Shares of the Equity Fund for the fiscal year ended November 30,
1994 was (0.87%) and 1.42%, respectively.
YIELD
The yield for Fund shares (other than shares of the Treasury Money
Market Fund) is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by
the Fund 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. This means that the amount of income
generated during the thirty-day period is assumed to be generated each
month over a twelve-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.
To the extent that financial institutions and broker/dealers charge fees
in connection with services provided in conjunction with an investment
in the Fund, the performance will be reduced for shareholders paying
those fees.
The yield for the 30-day period ended November 30, 1994 was: 6.03% for
Limited Maturity Government Fund; 6.34% and 5.92% for the Trust Shares
and Investment Shares of the Fixed Income Fund, respectively; 2.61% and
2.25% for the Trust Shares and Investment Shares of the Equity Fund,
respectively.
The Treasury Money Market Fund calculates yield for Investment Shares
and Trust 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:
o 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;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period return; and
o 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 yield for Investment Shares and Trust Shares of Treasury Money
Market Fund for the seven-day period ended November 30, 1994 was 4.30%
and 4.70%, respectively.
EFFECTIVE YIELD
The Treasury Money Market Fund's effective yield for both classes of
shares is computed by compounding the unannualized base period return
by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
The effective yield for Investment Shares for the seven-day period ended
November 30, 1994 was 4.39%. The effective yield for Trust Shares was
4.81% for the same period.
PERFORMANCE COMPARISONS
The performance of Fund shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in a Fund's or class of share's expenses; and
o various other factors, including the relative amount of Fund cash
flow.
With respect to Funds other than the Treasury Money Market Fund,
performance fluctuates on a daily basis largely because net earnings and
the maximum 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 a 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 offering price. The financial publications and/or indices which
the Funds use in advertising may include:
TREASURY MONEY MARKET FUND:
o 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.
o 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.
o LEHMAN BROTHERS TREASURY BOND INDEX comprised entirely of U.S.
Treasury obligations. Flower bonds and foreign issues are excluded.
o IBC/DONOHUE'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 reinvestment of
dividends over a specified period of time.
LIMITED MATURITY GOVERNMENT FUND:
o 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 "Short U.S.
Government Funds" category and other relevant categories in
advertising and sales literature.
o MERRILL LYNCH 1-3 YEAR TREASURY INDEX is an unmanaged index tracking
short-term U.S. government securities with maturities between 1 and
2.99 years. The index is produced by Merrill Lynch, Pierce, Fenner &
Smith, Inc.
o MERRILL LYNCH CORPORATE AND GOVERNMENT INDEX includes issues which
must be in the form of publicly placed, nonconvertible, coupon-
bearing domestic debt with maturities between 1 and 4.99 years. Par
amounts outstanding must be no less than $10 million at the start and
at the close of the performance measurement period. Corporate
instruments must be rated by S&P or by Moody's as investment grade
issues (i.e., BBB/Baa or better).
o 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, six and twelve months, as well as year-to-date. The index is
produced by Merrill Lynch, Pierce, Fenner & Smith, Inc.
o LEHMAN BROTHERS INTERMEDIATE GOVERNMENT INDEX is an unmanaged index
comprised of all publicly issued, non-convertible domestic debt of
the U.S. government. Only notes and bonds with minimum outstanding
principal of $1 million and minimum maturity of one year and maximum
maturity of ten years are included.
o MERRILL LYNCH 2-YEAR TREASURY CURVE INDEX is comprised of the most
recently issued 2-year U.S. Treasury notes. Index returns are
calculated as total returns for periods of one, three, six, and
twelve months as well as year-to-date.
o 2-YEAR TREASURY NOTE-Source: Wall Street Journal, Bloomberg
Financial Markets, and Telerate.
o MORNINGSTAR, INC., an independent rating service, is the publisher of
the bi-weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES rates more than
1,000 NASCQ-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.
Investors may use such a reporting service or indices in addition to the
Fund's prospectus to obtain a more complete view of the Fund's
performance before investing.
FIXED INCOME FUND:
o 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.
O LEHMAN BROTHERS 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 maturity of nine years. It calculates total return
for one month, three month, twelve month, and ten year periods, and
year-to-date.
o 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).
o 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.
o LEHMAN BROTHERS 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.
o 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 ratings is five stars, and
ratings are effective for two weeks.
EQUITY FUND:
O 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.
o 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.
o 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.
o 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.
o 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
shares, commingled, endowment/foundation, and mutual funds.
o 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.
o 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.
o MERCER MEIDINGLER, INC. complies 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.
O S&P/BARRA GROWTH INDEX is a sub-index of the S&P 500 composite index
of common stocks. The index represents approximately fifty percent
of the S&P 500 market capitalization and is comprised of those
companies with higher price-to-book ratio (one distinction associated
with "growth stocks"). The index is maintained by Standard and
Poor's in conjunction with BARRA, an investment technology firm.
o 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.
EQUITY INCOME FUND:
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in an appropriate category in
advertising and sale literature.
o 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, can be used to compare to the
total returns of funds whose portfolios are invested primarily in
common stocks. In addition, the Standard & Poor's Index assumes
reinvestments of all dividends paid by stocks listed on its index.
Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in Standard & Poor's figures.
o 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.
O MERRILL LYNCH GOVERNMENT/CORPORATE INDEX is comprised of
approximately 4,800 issues which include publicly placed, non-
convertible 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).
BALANCED FUND:
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in an appropriate category in
advertising and sale literature.
o 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, can be used to compare to the
total returns of funds whose portfolios are invested primarily in
common stocks. In addition, the Standard & Poor's Index assumes
reinvestments of all dividends paid by stocks listed on its index.
Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in Standard & Poor's figures.
o LEHMAN BROTHERS 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, nonconvertible
domestic bonds of companies in industry, public utilities, and
finance. Tracked by Lehman Brothers, 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.
o S&P 500/LEHMAN BROTHERS GOVERNMENT/CORPORATE (WEIGHTED INDEX) AND THE
S&P 500/LEHMAN GOVERNMENT (WEIGHTED INDEX) combine the components of
a stock-oriented index and a bond-oriented index to obtain results
which can be compared to the performance of a managed fund. The
indices' total returns will be assigned various weights depending
upon the Fund's current asset allocation.
o 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.
o 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, six and twelve months, as well as year-to-date. The index is
produced by Merrill Lynch, Pierce, Fenner & Smith, Inc.
Advertisements and other sales literature for a Fund 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 a Fund 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.
APPENDIX
STANDARD AND POOR'S RATINGS GROUP 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.
NR--Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
PLUS (+) OR MINUS (-):--The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within
the major rating 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.
NR--Not rated by Moody's.
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.
NR--NR indicates that Fitch does not rate the specific issue.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. The 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.
MOODY'S INVESTORS SERVICES, 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;
and well-established access to a range of financial markets and assured
sources of alternate 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.
FITCH INVESTORS SERVICE, INC., SHORT-TERM RATINGS
F-1+--(Exceptionally Strong Credit Quality). Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1--(Very Strong Credit Quality). Issues assigned to this rating
reflect an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2--(Good Credit Quality). Issues carrying this rating have a
satisfactory degree of assurance for timely payment but the margin of
safety is not as great as the F-1+ and F-1 categories.
007580 (1/95)
