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[LOGO OF SOUTHTRUST VULCAN FUNDS]
SOUTHTRUST VULCAN INCOME FUND PROSPECTUS DATED DECEMBER 15, 1995
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The shares offered in this prospectus represent interests in the SouthTrust
Vulcan Income Fund (the "Fund"), an investment portfolio of SouthTrust Vulcan
Funds (the "Company"), an open-end investment company (a mutual fund). The
investment objective of the Fund is to provide current income. Although there
is no guarantee it will do so, the Fund will attempt to achieve this objective
with a minimum of principal volatility by maintaining a dollar-weighted
average maturity of five years or less. The Company currently offers a
selection of four investment portfolios, including the Fund ("Portfolios").
Each Portfolio offered by the Company has a distinct investment objective and
policy, as described below:
. TREASURY OBLIGATIONS MONEY MARKET FUND -- to provide as high a level of
current interest income as is consistent with maintaining liquidity and
stability of principal.
. BOND FUND -- to provide a level of total return consistent with a
portfolio of high quality debt securities.
. STOCK FUND -- to provide a level of long-term capital appreciation, with
income a secondary consideration.
. INCOME FUND -- to provide current income.
This Prospectus pertains to the Fund. For information on the other
Portfolios, call the number set forth below. SouthTrust Bank of Alabama, N.A.,
is the investment adviser (the "Adviser") of the Fund.
SHARES OF THE COMPANY ARE NOT DEPOSITS OR OBLIGATIONS OF SOUTHTRUST BANK OF
ALABAMA, N.A., ARE NOT ENDORSED, INSURED, GUARANTEED, NOR OTHERWISE SUPPORTED
BY, SOUTHTRUST BANK OF ALABAMA, N.A., ANY BANK, OR THE FEDERAL DEPOSIT
INSURANCE CORPORATION (THE "FDIC"), THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENTS IN SHARES OF THE FUND OFFERED BY THIS
PROSPECTUS INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This Prospectus contains information that a prospective investor should know
before investing. Investors are encouraged to read this Prospectus and retain
it for future reference. A Statement of Additional Information dated December
15, 1995 has been filed with the Securities and Exchange Commission and is
incorporated by reference into this Prospectus. It may be obtained free of
charge by calling the Company at 1-800-843-8618.
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SECURITIES OFFERED BY THIS PROSPECTUS 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.
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EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)................................... 3.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................... None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)................. None
Redemption Fees (as a percentage of amount redeemed, if applicable).... 1.00%*
Exchange Fee........................................................... None
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* Applies to shares purchased at net asset value which are redeemed within one
year of purchase. See "How to Purchase, Exchange and Redeem Shares."
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)
Advisory Fee (after waiver) (1)........................................ 0.55%
12b-1 Fee (2).......................................................... 0.00%
Total Other Expenses................................................... 0.30%
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Total Fund Operating Expenses (after waiver) (3)....................... 0.85%
====
</TABLE>
(1) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver by the investment adviser. The adviser can terminate this
voluntary waiver at any time at its sole discretion. The maximum management fee
is 0.60%.
(2) As of the date of this Prospectus, the Fund is not paying or accruing the
12b-1 fees. If the Fund were paying or accruing the 12b-1 fee, the Fund would
be able to pay up to 0.25% of its average, daily net assets for the 12b-1 fee.
See "Distributor."
(3) Total operating expenses are estimated to be 0.90% absent the anticipated
voluntary waiver by the Adviser.
Expenses in this table are estimated based on expenses expected to be
incurred during the fiscal year ending April 30, 1996. During the course of
this period expenses may be more or less than the amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Fund will bear, either
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "Management of the Fund" in this Prospectus and the Statement of
Additional Information.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS
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<S> <C> <C>
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end
of each time period......................................... $43 $61
</TABLE>
The above example should not be considered a representation of future
expenses. Actual expenses may be greater or less than those shown. This example
is based on estimated data for the Fund's fiscal year ending April 30, 1996.
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INVESTMENT OBJECTIVES AND POLICIES OF THE FUND
The Company was established as a Massachusetts business trust under a Master
Trust Agreement dated March 4, 1992. The Master Trust Agreement permits the
Company to offer separate series of shares of beneficial interest representing
interests in separate portfolios of securities. The Company currently offers
shares in four investment portfolios, each with its own investment objective
and policies ("Portfolios"). The purchase of shares of any Portfolio should
not be considered a complete investment program, but an important segment of a
well-diversified investment program. This prospectus relates only to shares of
the Fund.
The investment objective of the Fund is to provide current income. As a
secondary, non-fundamental objective, the Fund will attempt to minimize
principal volatility. While there is no assurance that the Fund will achieve
these objectives, it endeavors to do so by following the investment policies
described in this prospectus.
The Fund pursues its investment objective by investing in a diversified
portfolio comprised primarily of income-producing securities. Income-producing
securities may include: U.S. government securities (as defined below);
corporate debt obligations, which may include bonds, notes, and debentures;
convertible securities; asset-backed and mortgage-backed securities,
collateralized mortgage obligations and adjustable rate mortgage securities;
commercial paper, bank instruments, money market instruments, and zero coupon
securities. Under normal market and economic conditions, the Fund will invest
at least 65% of its assets in such securities. In an effort to minimize
principal volatility, the Fund will maintain a dollar-weighted average
maturity of five years or less. The Fund may also invest in certain equity
securities, including common stock, preferred stock, and convertible
securities.
INVESTMENT ACTIVITIES
U.S. GOVERNMENT SECURITIES. The Fund invests in U.S. government securities.
These instruments 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 the: Farm Credit System, including the
National Bank for Cooperatives, Farm Credit Banks, and Banks for
Cooperatives; Farmers Home Administration; Federal Home Loan Banks;
Federal Home Loan Mortgage Corporation; Federal National Mortgage
Association; Government National Mortgage Association; and Student Loan
Marketing Association.
Some obligations issued or guaranteed by agencies or instrumentalities of
the U.S. government, such as Government National Mortgage Association ("Ginnie
Mae") participation certificates, are backed by the full faith and credit of
the U.S. Treasury. No assurances can be given that the U.S. government will
provide financial support to other agencies or instrumentalities, since it is
not obligated to do so. These instrumentalities are supported by:
. the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
. discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
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. the credit of the agency or instrumentality.
CORPORATE DEBT OBLIGATIONS. The Fund may invest in corporate debt
obligations, including bonds, notes and debentures, which may have fixed or
floating rates of interest and which are rated, at the time of purchase,
investment grade by a nationally recognized statistical ratings organization
("NRSRO"), or, if unrated, are of comparable quality as determined by the
Adviser. If a security's rating is reduced below the required minimum after
the Fund has purchased it, the Fund is not required to sell the security, but
may consider doing so. Bonds rated "BBB" by Standard and Poor's Ratings
Service ("S&P") or Fitch Investors Service, Inc. ("Fitch"), or "Baa" by
Moody's Investors Service, Inc. ("Moody's"), are considered medium-grade
obligations and are regarded as having an adequate capacity to pay interest
and repay principal, and have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to weakened capacity
to make principal and interest payments than higher rated bonds.
FIXED RATE OBLIGATIONS. The Fund may invest in fixed rate securities,
including fixed rate securities with short-term characteristics. Fixed rate
securities with short-term characteristics are long-term debt obligations
but are treated in the market as having short maturities because call
features of the securities may make them callable within a short period of
time. A fixed rate security with short-term characteristics would include a
fixed income security priced close to call or redemption price or fixed
income security approaching maturity, where the expectation of call or
redemption is high.
Fixed rate securities exhibit more price volatility during times of
rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described below,
behave like short-term instruments in that the rate of interest they pay is
subject to periodic adjustments based on a designated interest rate index.
Fixed rate securities pay a fixed rate of interest and are more sensitive
to fluctuating interest rates. In periods of rising interest rates the
value of a fixed rate security is likely to fall. Fixed rate securities
with short-term characteristics are not subject to the same price
volatility as fixed rate securities without such characteristics.
Therefore, they behave more like floating rate securities with respect to
price volatility.
The market value of fixed-income obligations in the Fund can be expected
to fluctuate inversely to changes in prevailing interest rates. Investors
should recognize that, in periods of declining interest rates, the yields
of funds composed primarily of fixed-income securities will tend to be
higher than prevailing market rates and, in periods of rising interest
rates, yields will tend to be somewhat lower.
FLOATING RATE OBLIGATIONS. The Fund may invest in floating rate debt
obligations, including increasing rate securities. Floating rate securities
are generally offered an initial interest rate which is at or above
prevailing market rates. The interest rate paid on these securities is then
reset periodically (commonly every 90 days to an increment over some
predetermined interest rate index). Commonly utilized indices include the
three-month Treasury bill rate, the 180-day Treasury bill rate, the one-
month or three-month London Interbank Offered Rate (LIBOR), the prime rate
of a bank, the commercial paper rates, or the longer-term rates on U.S.
Treasury securities.
CONVERTIBLE SECURITIES. Convertible securities 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 bonds, convertible
preferred stock or debentures, units consisting of "usable" bonds or a
combination of the features of several of these securities.
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The investment characteristics of each convertible security vary widely, which
allows convertible securities to be employed for different investment
objectives.
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. Usable bonds are
corporate bonds that can be used in whole or in part, customarily at full face
value, in lieu of cash to purchase the issuer's common stock. When owned as
part of a unit along with warrants, which are options to buy the common stock,
they function as convertible bonds, except that the warrants generally will
expire before the bond's maturity. 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. The Fund will exchange or convert the convertible securities held in
its portfolio into shares of the underlying common stocks when, in the
Adviser's opinion, the investment characteristics of the underlying common
shares will assist the Fund in achieving its investment objective. Otherwise,
the Fund will hold or trade the convertible securities. In selecting
convertible securities for the 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 political outlook, the value of the security relative to other
investment alternatives, trends in the determinants of the issuer's profits,
and the issuer's management capability and practices. The Fund will invest in
convertible securities rated, at the time of purchase, investment grade by a
NRSRO, or, if unrated, are of comparable quality as determined by the Adviser.
MORTGAGE-BACKED SECURITIES. The Fund may purchase mortgage-backed securities
that provide monthly payments of principal and interest. The Fund will invest
in mortgage-backed securities which are rated at the time of purchase,
investment grade by a NRSRO, or, if unrated, are of comparable quality as
determined by the Adviser. The average life of mortgage-backed securities
varies with the maturities of the underlying instruments that have maximum
maturities of forty years. The average life of a mortgage-backed instrument,
in particular, is likely to be substantially less than the original maturity
of the mortgage pools underlying the securities as the result of scheduled
principal payments and mortgage prepayments. The rate of such mortgage
prepayments, and hence the life of the certificates, will be primarily a
function of current market rates and current conditions in the relevant
housing markets. In calculating the weighted average maturity of the Fund, the
maturity of mortgage-backed instruments will be based on estimates of average
life of the underlying mortgages. The Fund will continuously monitor and
revise, as appropriate, its calculations of the estimated average life of
mortgage-backed instruments. The relationship between mortgage prepayments and
interest rates may give some high-yielding mortgage-related securities less
potential for appreciation than conventional bonds with comparable maturities.
In addition, in periods of falling interest rates, the rate of mortgage
prepayments tend to increase. During such periods, the reinvestment of
prepayment proceeds by the Fund will generally be at lower rates than the
rates that were carried by the obligations that have been prepaid. Because of
these and other reasons, a mortgage-backed security's total return may be
difficult to predict precisely. To the extent that the Fund purchases
mortgage-related or mortgage-backed securities at a premium, mortgage
prepayments (which may be made at any time without penalty) may result in some
loss of the Fund's principal investment to the extent of the premium paid.
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Presently there are several types of mortgage-backed securities issued or
guaranteed by U.S. government agencies, including guaranteed mortgage pass-
through certificates, which provide the holder with a pro rata interest in the
underlying mortgages, and collateralized mortgage obligations ("CMOs"), which
provide the holder with a specified interest in the cash flow of a pool of
underlying mortgages or other mortgage-backed securities. Issuers of CMOs
ordinarily elect to be taxed as a pass-through entity known as a real estate
mortgage investment conduit. CMOs are issued in multiple classes, each with a
specified fixed or floating interest rate and a final distribution date. The
relative payment rights of the various CMO classes may be structured in many
ways. In most cases, however, payments of principal are applied to the CMO
classes in the order of their respective stated maturities, so that no
principal payments will be made on a CMO class until all other classes having
an earlier stated maturity date are paid in full. The classes may include
accrual certificates (also known as "Z-Bonds"), which only accrue interest at
a specified rate until other specified classes have been retired and are
converted thereafter to interest-paying securities. They may also include
planned amortization classes which generally require, within certain limits,
that specified amounts of principal be applied on each payment date, and
generally exhibit less yield and market volatility than other classes. The
Fund will not purchase "residual" CMO interests, which normally exhibit the
greatest price volatility.
RISKS OF MORTGAGE-BACKED SECURITIES. Mortgage-backed and asset-backed
securities (described below) generally pay back principal and interest over
the life of the security. At the time the 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 tend to increase
during periods of declining mortgage interest rates because many borrowers
refinance their mortgages to take advantage of the more favorable rates.
Prepayments 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 factors that affect the rate of
prepayments on mortgage-backed securities also affect the rate of prepayments
on asset-backed securities.
While mortgage-backed securities generally entail less risk of a decline
during periods of rapidly rising interest rates, mortgage-backed securities
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, mortgage-backed 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 mortgage-backed securities 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.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through mortgage
securities representing interests in adjustable rather than fixed interest
rate mortgages. The ARMS in which the Fund invests are issued by Ginnie Mae,
Federal National Mortgage Association ("Fannie Mae"), or the Federal Home Loan
Mortgage Association ("Freddie Mac"), and are actively traded. The underlying
mortgages which collateralize ARMS issued by Ginnie Mae are fully guaranteed
by the Federal Housing Administration or Veterans Administration, while those
collateralizing ARMS issued by Fannie Mae or Freddie Mac are typically
conventional residential mortgages conforming to strict underwriting size and
maturity constraints.
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ASSET-BACKED SECURITIES. The Fund may invest in asset-backed securities
which have structural characteristics similar to mortgage-backed securities
but have underlying assets that are not mortgage loans or interests in
mortgage loans. Asset-backed securities are created by the grouping of certain
private loans, receivables, and other lender assets into pools. These
securities differ from other forms of debt securities, which normally provide
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.
The Fund may invest in asset-backed securities which 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 are issued by non-governmental entities and carry no direct or
indirect government guarantee.
RISKS OF 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. Furthermore, if a vehicle is registered in one state and is then
reregistered because the owner and obligor moves to another state, such
reregistration 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.
EQUITY SECURITIES. The Fund may invest in common stocks, preferred stocks,
and convertible securities, including convertible bonds and convertible
preferred stock. A convertible security is a security that may be converted
either at a stated price or rate within a specified period of time into a
specified number of shares of common stock. By investing in convertible
securities, the Fund seeks the opportunity, through the conversion feature, to
participate in the capital appreciation of the common stock into which the
securities are convertible, while earning higher current income than is
available from the common stock.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Fund may purchase variable rate
and floating rate instruments. Variable and floating rate instruments may
include variable amount master demand notes that permit the amount of
indebtedness to vary in addition to providing for periodic adjustment in the
interest rate. The absence of an active secondary market, however, could make
it difficult to dispose of the instruments, and the
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Fund could suffer a loss if the issuer defaulted or during periods that the
Fund is not entitled to exercise its demand rights. Variable and floating rate
instruments held by the Fund may be subject to the Fund's 15% limitation on
illiquid investments when the Fund can not demand payment of the principal
amount within seven days absent a reliable trading market.
INVESTMENT COMPANY SECURITIES. The Fund may invest in the securities of
other investment companies, but will not own more than 3% of the total
outstanding voting stock of any investment company, invest more than 5% of
total assets in any one investment company, or invest more than 10% of total
assets in investment companies in the aggregate. The Fund will invest in other
investment companies primarily for the purpose of investing short-term cash
which has not yet been invested in other portfolio instruments. It should be
noted that investment companies incur certain expenses, and therefore, any
investment by the Fund in shares of another investment company would be
subject to certain duplicate expenses, particularly transfer agent and
custodian fees. The Adviser will waive its investment advisory fee on assets
invested in securities of open-end investment companies.
ZERO COUPON BONDS. The Fund may purchase zero coupon bonds (i.e., discount
debt obligations that do not make periodic interest payments). Zero coupon
bonds held by the Fund are subject to greater market fluctuations from
changing interest rates than debt obligations of comparable maturities that
make current distributions of interest. To maintain its qualification as a
regulated investment company and avoid liability of federal income taxes, the
Fund will be required to distribute income accrued from zero coupon 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.
REPURCHASE AGREEMENTS. The Fund may purchase portfolio securities subject to
the seller's agreement to repurchase them at a mutually specified date and
price ("repurchase agreements"). Repurchase agreements will be entered into
only with financial institutions, such as banks and broker/dealers, that are
deemed to be creditworthy by the Adviser under guidelines approved by the
Company's Board of Trustees (the "Trustees"). The seller under a repurchase
agreement will be required to maintain the value of the securities that are
subject to the agreement and held by the Fund in an amount that exceeds the
agreed upon repurchase price. The Fund's purchase of portfolio securities
pursuant to a repurchase agreement may be considered to be the making of a
loan to the seller. Default by or bankruptcy of the seller, however, could
expose the Fund to possible loss because of adverse market action, delays in
connection with the disposition of the underlying obligations or expenses of
enforcing its rights.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or
sell securities on a when-issued or a delayed-delivery basis. The Fund will
not enter into a when-issued or delayed-delivery transaction for speculative
purposes, but only in furtherance of its investment objective. In such
transactions, delivery of the securities occurs beyond the normal settlement
period, but no payment or delivery is made by, and no interest accrues to, the
Fund prior to, the actual delivery or payment by the other party to the
transaction, normally within 30 days of commitment. Due to fluctuations in the
value of securities purchased on a when-issued or delayed-delivery basis, the
yields obtained on such securities may be higher or lower than the yields
available in the market on the dates when the investments are actually
delivered to the Fund. Similarly, the sale of securities for delayed-delivery
can involve the risk that the prices available in the market when delivery is
made may actually be higher than those obtained in the transaction itself.
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REVERSE REPURCHASE AGREEMENTS. The Fund may borrow funds for temporary
purposes by selling portfolio securities to financial institutions, such as
banks and broker/dealers, and agreeing to repurchase them at a mutually
specified date and price ("reverse repurchase agreements"). Reverse repurchase
agreements involve the risks that the market value of the securities sold by
the Fund may decline below the repurchase price and the other party to the
agreement may default, in which event there may be delays in recovering the
securities. The Fund would pay interest on amounts obtained pursuant to a
reverse repurchase agreement.
ILLIQUID SECURITIES. The Fund may invest up to 15% of the total value of its
net assets in securities that are illiquid. An illiquid security is one which
may not be sold or disposed of in the ordinary course of business within seven
days at approximately the value at which the Fund has valued it on its books.
Repurchase agreements with maturities in excess of seven days will be
considered by the Fund to be illiquid.
LIQUIDITY MANAGEMENT. As a temporary defensive measure, if the Adviser
determines that market conditions warrant, the Fund may invest without
limitation in U.S. government obligations, notes, zero coupon securities and
repurchase agreements collateralized by U.S. government obligations.
LENDING OF PORTFOLIO SECURITIES. From time to time, the Fund may lend
portfolio securities to brokers/dealers and other financial organizations.
Such loans will not exceed 20% of the Fund's total assets. Loans of portfolio
securities by the Fund will be collateralized by cash, letters of credit or
U.S. government securities which are maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities.
The risks in lending portfolio securities, like those associated with other
extensions of secured credit, consist of possible decline in value of
collateral, possible delays in receiving additional collateral or in the
recovery of the loaned securities or expenses of enforcing the Fund's rights.
Loans will be made to firms deemed by the Adviser to be of good standing and
will not be made unless, in the judgment of the Adviser, the consideration to
be earned from such loans would justify the risk.
DERIVATIVE CONTRACTS AND SECURITIES. The term "derivative" has traditionally
been applied to certain contracts (including futures, forward, option and swap
contracts) that "derive" their value from changes in the value of an
underlying security, currency, commodity or index. Certain types of securities
that incorporate the performance characteristics of these contracts are also
referred to as "derivatives." The term has also been applied to securities
"derived" from the cash flows from underlying securities, mortgages or other
obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response
of certain derivative contracts and securities to market changes may differ
from traditional investments, such as stock and bonds, derivatives do not
necessarily present greater market risks than traditional investments. The
Fund will only use derivative contracts for the purposes disclosed in the
applicable prospectus sections above. To the extent that the Fund invests in
securities that could be characterized as derivatives, such as mortgage-backed
securities and asset-backed securities, it will only do so in a manner
consistent with its investment objective, policies and limitations.
AVERAGE PORTFOLIO MATURITY
The Fund does not maintain a stable net asset value. However, to the extent
consistent with the Fund's investment objective of current income, the Adviser
will seek to limit the magnitude of fluctuations in the Fund's net asset value
by limiting the dollar-weighted average maturity of the Fund's portfolio to
less than five years. Securities with shorter maturities generally have less
price movement than securities of comparable quality with longer maturities.
In periods of anticipated rising interest rates, a greater portion of the
assets of the Fund may be invested in securities the value of which is
believed to be less sensitive to interest rate changes. However, the prices of
fixed income securities fluctuate inversely to the direction of interest
rates.
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PORTFOLIO TRANSACTIONS AND TURNOVER
All orders for the purchase or sale of securities on behalf of the Fund are
placed by the Adviser with broker/dealers that the Adviser selects. The
Company cannot accurately predict the turnover rate for the Fund, but expects
that the annual turnover rate may, but generally will not exceed 100%. Short-
term capital gains realized from portfolio transactions are taxable to
shareholders as ordinary income. In addition, higher portfolio turnover rates
can result in corresponding increases in brokerage commissions and other
transaction costs. The Fund will not consider portfolio turnover rates a
limiting factor in making investment decisions consistent with its investment
objective and policies.
INVESTMENT LIMITATIONS
The Fund's investment objective and policies, except as otherwise indicated,
may be changed by the Trustees without shareholder approval. However,
shareholders will be notified in writing at least 30 days prior to any change
in an investment objective. Any such change may result in the Fund having an
investment objective different from the investment objective which the
shareholder considered appropriate at the time of investment in the Fund. No
assurance can be provided that the Fund will achieve its investment objective.
The Fund has also adopted certain fundamental investment limitations that
may be changed only with the approval of a majority of the Fund's outstanding
shares. The following descriptions summarize several of the Funds' fundamental
investment policies, which are set forth in full in the Statement of
Additional Information.
The Fund may not:
(1) purchase securities, except U.S. government securities, if more than 5%
of its total assets will be invested in the securities of any one
issuer, except that up to 25% of the Fund's total assets may be
invested without regard to this 5% limitation;
(2) subject to the foregoing 25% exception, purchase more than 10% of the
outstanding voting securities of any issuer;
(3) invest 25% or more of its total assets in one or more issuers
conducting their principal business activities in the same industry;
and
(4) borrow money except for temporary purposes in amounts up to one-third
of the value of its total assets at the time of such borrowing.
Whenever borrowings exceed 5% of the Fund's total assets, the Fund will
not make any additional investments.
These investment limitations are applied at the time investment securities
are purchased.
10
<PAGE>
HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
PURCHASE OF SHARES -- GENERAL
Federated Securities Corp. (the "Distributor") has established several
procedures for purchasing Fund shares. Shares may be purchased through
SouthTrust Bank of Alabama, N.A., or its affiliated and correspondent banks
("SouthTrust"), or Fund shares may be purchased through a broker/dealer that
has entered into a sales agreement with the Distributor (a "SouthTrust Vulcan
Funds Dealer"). SouthTrust or a SouthTrust Vulcan Funds Dealer will be
responsible for transmitting purchase and redemption orders directly to the
Distributor in a timely manner. Orders may be placed by contacting the Fund at
1-800-843-8618. Texas residents should purchase shares through Federated
Securities Corp. at 1-800-356-2805. Purchases will be effected at the net
asset value next determined after the purchase order is received in proper
form by the transfer agent and the custodian has federal funds available
immediately to it. SouthTrust (or a SouthTrust Vulcan Funds Dealer) will
normally be the holder of record of Fund shares and will reflect a customer's
beneficial ownership of shares in the customer's account statements. Investors
wishing to purchase shares of the Fund should contact their SouthTrust account
representative or a SouthTrust Vulcan Funds Dealer.
The minimum initial investment in the Fund is $1,000. The minimum subsequent
investment is $50. With respect to investments made in the Fund through a
sweep program, initial investment minimums may be modified under the relevant
account agreement. Purchases may be effected on business days when the
Adviser, Distributor, and the custodian are open for business. The Company
reserves the right to reject any purchase order. Additional account
applications may be obtained by calling the Fund at 1-800-843-8618. SouthTrust
or a SouthTrust Vulcan Funds Dealer may set different minimums for its
customers.
PURCHASE OF SHARES -- INCOME FUND
Shares of the Fund are purchased at the net asset value per share plus any
applicable sales charge (the "Public Offering Price") next determined on the
day the purchase order is received. Net asset value is determined at the close
of regular trading hours of the New York Stock Exchange (currently 4:00 p.m.
Eastern time). Immediately available funds in payment of the purchase price
must be received by the Fund's custodian no later than 4:00 p.m. (Eastern
time) by the third business day following receipt of the order. If federal
funds are not received by such date, the order will be canceled and notice
thereof will be given, and the institution placing the order will be
responsible for any loss to the Fund or its shareholders. Payment for orders
which are not received or accepted will be returned after prompt inquiry to
the sending institution.
AUTOMATIC INVESTMENT PROGRAM ("AIP"). Once an account has been opened in the
Fund, shareholders may add to their investment on a monthly basis in a minimum
amount of $50. Under the AIP, funds may be automatically withdrawn from the
shareholder's checking account, via Automated Clearing House ("ACH")
processing, through the shareholder's financial institution. Such funds are
invested in shares at the net asset value next determined plus any applicable
sales charges on the day an order is effected by the transfer agent. An
investor may apply for participation in the AIP through SouthTrust or a
SouthTrust Vulcan Funds Dealer servicing his or her SouthTrust Vulcan account
and by completing the supplementary AIP authorization form. In order to
participate in the AIP, the investor must determine that his or her financial
institution is an ACH participant and will clear and process ACH transactions.
The AIP may be modified or terminated by a shareholder on 30-days' written
notice to SouthTrust, a SouthTrust Vulcan Funds Dealer, or by the Fund at any
time.
11
<PAGE>
SALES CHARGE
The Public Offering Price of shares of the Fund equals the Fund's net asset
value per share plus any applicable sales charge. No sales charge will be
assessed on the reinvestment of distributions. The following tables illustrate
the applicable front-end sales charge at various investment levels.
<TABLE>
<CAPTION>
SALES CHARGE
SALES CHARGE AS % OF DEALER ALLOWANCE
AS % OF NET AMOUNT AS % OF
OFFERING PRICE INVESTED OFFERING PRICE
-------------- ------------ ----------------
<S> <C> <C> <C>
$0 but less than $100,000..... 3.50% 3.63% 3.00%
$100,000 but less than
$250,000...................... 3.00% 3.09% 2.50%
$250,000 but less than
$500,000...................... 2.50% 2.56% 2.00%
$500,000 but less than
$1,000,000.................... 2.00% 2.04% 1.50%
$1,000,000 or more............ 0* 0% 0%
</TABLE>
- --------
* A redemption fee of 1% may be imposed on certain redemptions made within one
year of purchase. See "Redemption of Shares"--"Redemption Fee."
The Distributor will pay the appropriate dealer concession to SouthTrust
Vulcan Fund Dealers. Upon notice, the Distributor may also elect to reallow a
higher percentage of the sales charge stated above to selected brokers and
dealers for all sales made during a particular period. From time to time, the
Distributor will conduct sales programs and contests that compensate
SouthTrust Vulcan Funds Dealers with cash or non-cash items, such as payments
of certain expenses of qualified SouthTrust Vulcan Funds Dealers and their
spouses to attend informational meetings about the Fund or other special
events at recreational facilities, or items of material value. In some
instances, these incentives will be made available only to SouthTrust Vulcan
Funds Dealers who have sold or may sell significant amounts of shares. The
cost of such compensation is borne by the Distributor and is not borne by the
Fund.
REDUCED SALES CHARGES
The sales charge on purchases of the Fund may be reduced through the
following:
.right of accumulation;
.quantity discounts;
.letter of intent; and
.reinvestment privilege.
RIGHT OF ACCUMULATION. Under the Right of Accumulation, the current value of
an investor's existing shares in the Portfolios may be combined with the
amount of the investor's current purchases in determining the applicable sales
charge. IN ORDER TO RECEIVE THE CUMULATIVE QUANTITY REDUCTION, PREVIOUS
PURCHASES OF FUND SHARES MUST BE CALLED TO THE ATTENTION OF THE FUND AT THE
TIME OF THE CURRENT PURCHASE.
QUANTITY DISCOUNTS. As shown on the prior page, larger purchases reduce the
sales charge paid. The Company will combine purchases made on the same day by
the investor, spouse and any children under age 21 when calculating the sales
charge.
12
<PAGE>
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
shares in the Fund over the next 13 months, the sales charge may be reduced by
signing a Letter of Intent to that effect. This Letter of Intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to hold
3.50% of the total amount intended to be purchased in escrow (in shares) until
such purchase is completed.
The shares held in escrow will be released at the fulfillment of the Letter
of Intent or at the end of the 13-month period, whichever comes first. If the
amount specified in the Letter of Intent is not purchased, 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 the shareholder does, each purchase during the period will be at the
sales charge applicable to the total amount intended to be purchased. At the
time a Letter of Intent is established, current balances in accounts in any
Fund, excluding money market accounts, will be aggregated to provide a
purchase credit towards fulfillment of the Letter of Intent. Prior trade
prices will not be adjusted.
REINVESTMENT PRIVILEGE. Upon redemption of Fund shares, a shareholder has a
one-time right, to be exercised within 30 days, to reinvest the redemption
proceeds without any sales charge at the next determined net asset value after
receipt of the purchase order. The shareholder must notify in writing
SouthTrust or his or her SouthTrust Vulcan Funds Dealer of the reinvestment in
order to eliminate a sales charge.
MISCELLANEOUS. Reduced sales charges may be modified or terminated at any
time and are subject to confirmation of an investor's holdings. For more
information about reduced sales charges, an investor should contact his or her
SouthTrust account representative, a SouthTrust Vulcan Funds Dealer or the
Fund.
SALES CHARGE WAIVERS. The following classes of investors may purchase shares
of the Fund with no sales charge in the manner described below: (1) officers,
trustees, directors, employees and retired employees of SouthTrust Corporation
and its affiliates, and employees of the transfer agent, Distributor or an
authorized SouthTrust Vulcan Funds Dealer (and spouses and children of the
foregoing); (2) investors for whom SouthTrust Corporation or one of its
affiliates acts in a fiduciary, advisory, custodial, agency or similar
capacity (this does not include self-directed Individual Retirement Accounts'
transactions executed by SouthTrust Securities, Inc.); and (3) investors who
purchase shares of the Fund through a 401(k) plan or a 403(b) plan which by
its terms permits purchases of shares.
EXCHANGES OF SHARES
The exchange privilege enables shareholders to exchange shares of the Fund
for shares in another SouthTrust Vulcan Portfolio offered by the Company.
Shareholders may also exchange shares of the Fund for Class A Shares (or
Liberty Shares, as the case may be) in certain funds within the Liberty Family
of Funds ("Liberty Funds"), which funds are distributed by Federated
Securities Corp. The Liberty Funds with net asset value exchange privileges
with the Company are:
.International Income Fund;
.International Equity Fund;
.Liberty Equity Income Fund, Inc.;
13
<PAGE>
.Liberty High Income Bond Fund, Inc.;
.Liberty Municipal Securities Fund, Inc.;
.Liberty Utility Fund, Inc.; and
.Tax-Free Instruments Trust.
EXCHANGING SHARES. Shareholders who have purchased shares of the Fund
(including shares acquired through a reinvestment of a dividend or
distribution on such shares) may exchange those shares for shares of another
load Portfolio or a Liberty Fund identified previously without paying an
additional exchange or sales charge, except that this privilege does not apply
to exchanges into the STOCK FUND until an investor has owned shares in the
Fund for 90 days. The 90-day holding period does not apply to exchanges in
which the investor obtained Fund shares through a prior exchange of shares of
the STOCK FUND.
Shareholders who exercise this exchange privilege must exchange shares
having a net asset value of at least $1,000. Prior to any exchange, the
shareholder must receive a copy of the current prospectus of the Portfolio or
Liberty Fund into which an exchange is to be effected.
The exchange privilege is available to shareholders residing in any state in
which the Fund shares being acquired may legally be sold. Upon receipt of
proper instructions and all necessary supporting documents, shares submitted
for exchange will be redeemed at the next-determined net asset value. Written
exchange instructions may require a signature guarantee (see "Redemption of
Shares"). Exercise of this privilege is treated as a sale for federal income
tax purposes and, depending on the circumstances, a short or long-term capital
gain or loss may be realized. The exchange privilege may be terminated at any
time upon 60 days' written notice to shareholders. A shareholder may obtain
further information on the exchange privilege by consulting the shareholder's
SouthTrust account representative, a SouthTrust Vulcan Funds Dealer, or the
Distributor.
EXCHANGE-BY-TELEPHONE. An investor may telephone an exchange request by
calling the investor's SouthTrust account representative or SouthTrust Vulcan
Funds Dealer which is responsible for transmitting such exchange request to
the Distributor. Shares may be exchanged by telephone only between fund
accounts having identical shareholder registrations. Telephone exchange
instructions may be recorded.
An investor may have difficulty in making exchanges by telephone through a
SouthTrust account representative or SouthTrust Vulcan Funds Dealer during
times of drastic economic or market changes. If a shareholder cannot contact
the shareholder's SouthTrust account representative or SouthTrust Vulcan Funds
Dealer by telephone, it is recommended that an exchange request be made in
writing and sent by overnight mail.
An investor should be aware that a transaction initiated by telephone and
reasonably believed to be genuine by the above-named parties may subject the
investor to the risk of loss if such transaction is subsequently found not to
be genuine. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions.
Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to the transfer agent by the SouthTrust account representative or a
SouthTrust Vulcan Funds Dealer before an exchange request can be processed.
14
<PAGE>
REDEMPTION OF SHARES
An investor may redeem Fund shares in accordance with instructions and
limitations relating to the customer's account at SouthTrust or the investor's
SouthTrust Vulcan Funds Dealer. These procedures will vary in accordance with
the type of account, and a shareholder should contact the account
representative to redeem shares. A SouthTrust account representative or a
SouthTrust Vulcan Funds Dealer is responsible for transmitting redemption
orders promptly to the Fund.
No charge for wiring redemption payments is imposed by the Company, although
SouthTrust or a SouthTrust Vulcan Funds Dealer may charge customer accounts
for services provided in connection with the redemption of shares. Information
relating to such redemption services and charges, if any, may be obtained by
customers from their account representative. Except for certain redemptions
made within one year from the date of purchase, redemption orders are effected
at the net asset value per share next determined after receipt of the order by
the Distributor. See "Redemption Fee" below for a discussion of circumstances
in which a redemption fee may be assessed on redemptions.
With respect to the Fund, redemption proceeds are normally remitted in
federal funds to the redeeming institution within five business days following
receipt of the order.
A written redemption request must identify the account number and be
accompanied by share certificates, if any have been issued, properly endorsed
for transfer. A signature guarantee is required with respect to written
redemption requests. If shares to be redeemed have a value of $5,000 or more,
the signature(s) must be guaranteed by an "eligible guarantor institution" as
that term is defined under Rule 17Ad-15 under the Securities Exchange Act of
1934. Such institutions may include domestic banks, savings and loan
institutions, credit unions, brokers, dealers, securities exchanges and
associations and clearing agencies, which are approved by the transfer agent.
Additional documentation may be required if the redemption is requested by a
corporation, partnership, trust, fiduciary, executor or administrator.
REDEMPTION FEE
In order to discourage short-term investments, the Fund charges a redemption
fee in connection with redemptions of shares held for less than one year which
were purchased at net asset value (investments in excess of $1,000,000). The
charge is 1% of the lesser of the value of the shares redeemed (exclusive of
reinvested dividends and capital gain distributions) or the total cost of such
shares. In determining if a charge applies and the amount of any such charge,
the first shares redeemed are those purchased with reinvested dividends and
capital gain distributions, followed by others held the longest. The
redemption fee is not assessed on (i) exchanges (except if shares acquired by
exchange were then redeemed with 12 months of the initial purchase); (ii)
redemptions made in connection with distributions from qualified retirement
plans, 403(b) plans or IRAs due to death, disability or attainment of age 59
1/2; (iii) redemptions resulting from the tax-free return of excess
contributions to IRAs or employee benefit plans; and (iv) redemptions through
certain automatic withdrawals. The 1% redemption fee is not a deferred sales
charge but is rather a means to offset the additional costs associated with
short-term investments in the Fund.
AUTOMATIC WITHDRAWAL PLAN ("AWP"). An AWP may be established by a new or
existing shareholder of the Fund if the value of the shareholder's account
(valued at the net asset value at the time of the establishment of the AWP)
equals $10,000 or more. Shareholders who elect to establish an AWP may receive
a monthly, quarterly, semi-annual, or annual payment in a stated amount of not
less than $50. Fund shares will be redeemed
15
<PAGE>
as necessary to meet withdrawal payments. Withdrawals may reduce principal and
eventually deplete the shareholder's account. If a shareholder desires to
establish an AWP after opening an account, a signature guarantee will be
required. An AWP may be terminated by a shareholder on 30-days' written notice
to SouthTrust, a SouthTrust Vulcan Funds Dealer, or by the Fund at any time.
PURCHASE OF SHARES AT NET ASSET VALUE. From time to time, the Distributor
may offer special concessions to enable investors to purchase shares of a load
Fund offered by the Company at net asset value, without payment of a sales
charge. To qualify for a net asset value purchase, the investor must pay for
such purchase with proceeds from the redemption of shares of a non-affiliated
mutual fund on which a sales charge was paid. A qualifying purchase of shares
must occur within 30 days of the prior redemption and must be evidenced by a
confirmation of the redemption transaction. At the time of purchase,
SouthTrust or a SouthTrust Vulcan Funds Dealer must notify the Distributor
that the purchase qualifies for a purchase at net asset value. Proceeds from
the redemption of shares on which no sales charges or commissions were paid do
not qualify for a purchase at net asset value.
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income of the Fund are declared and paid
monthly. All dividends are paid in cash. The Fund's net realized capital gains
(including net short-term capital gains) are distributed at least annually.
Shareholders may elect to have their dividends reinvested in additional shares
of the Fund at the net asset value of such shares on the payment date. Such
election, or any revocation thereof, must be communicated in writing by
SouthTrust or a SouthTrust Vulcan Funds Dealer on behalf of its customer to
the transfer agent and will become effective with respect to dividends paid
after its receipt. The crediting and payment of dividends will be in
accordance with the procedures governing the shareholder's account at
SouthTrust or the SouthTrust Vulcan Funds Dealer. Shareholders whose purchase
orders are received and executed by 12:00 noon (Eastern time) receive
dividends for that day. On the other hand, shareholders whose redemption
orders have been received by 12:00 noon (Eastern time) will not receive
dividends for that day, while shareholders whose redemption orders have been
received after 12:00 noon (Eastern time) will receive that day's dividends.
The Fund does not expect to realize net long-term capital gains.
The Fund's expenses are deducted from the total income of the Fund before
dividends are declared and paid. These expenses include, but are not limited
to: fees paid to the Adviser and the administrator, custodian and transfer
agent; fees and expenses of officers and Trustees; taxes; interest; legal and
auditing fees; brokerage fees and commissions; certain fees and expenses in
registering and qualifying the Fund and its shares for distribution under
federal and state securities laws; expenses of preparing prospectuses and
statements of additional information and of printing and distributing
prospectuses and statements of additional information to existing
shareholders; the expense of reports to shareholders, shareholders' meetings
and proxy solicitations; fidelity bond and trustees' and officers' liability
insurance premiums; and the expense of using independent pricing services and
other expenses which are not assumed by the administrator. Any general
expenses of the Company that are not readily identifiable as belonging to a
particular Portfolio will be allocated among all Portfolios by or under the
direction of the Trustees in a manner the Trustees determine to be fair and
equitable. The Adviser, administrator, custodian and transfer agent may
voluntarily waive all or a portion of their fees from time to time.
PRICING OF SHARES
The net asset value of shares in the Fund for purposes of pricing purchase
and redemption orders is determined once daily as of the close of regular
trading hours on the New York Stock Exchange or 4:00 p.m.
16
<PAGE>
(Eastern time) on days the New York Stock Exchange is closed. Net asset value
and pricing are determined on each day the New York Stock Exchange and the
Federal Reserve Bank of Philadelphia ("FRB") are open for trading. Currently,
the days on which the New York Stock Exchange and/or the FRB are closed (other
than weekends) are: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day (observed), Independence Day, Labor Day,
Columbus Day (observed), Veterans' Day, Thanksgiving Day, and Christmas Day.
The Fund's net asset value is calculated by adding the value of all securities
and other assets of the Fund, subtracting its liabilities and dividing the
result by the number of outstanding shares.
Portfolio securities which are traded on a recognized stock exchange are
valued at the last sales price on the securities exchange on which such
securities are primarily traded or at the last sale price on the national
securities market. Securities traded only on over-the-counter markets are
valued on the basis of closing over-the-counter bid prices. Securities for
which there were no transactions are valued at the average of the current bid
and asked prices. Restricted securities, securities for which market
quotations are not readily available, and other assets are valued at fair
value by the Adviser under the supervision of the Trustees. Debt securities
with remaining maturities of 60 days or less at the time of purchase are
valued on an amortized cost basis (unless the Trustees determine that such
basis does not represent fair value at the time). Under this method, such
securities are valued initially at cost on the date of purchase. Thereafter,
absent unusual circumstances, the Fund assumes a constant proportionate
amortization of any discount or premium until maturity of the security.
MANAGEMENT OF THE FUNDS
BOARD OF TRUSTEES
The Company is managed under the direction of the Board of Trustees. The
Statement of Additional Information contains background information and the
name of each Trustee.
INVESTMENT ADVISER
SouthTrust Bank of Alabama, N.A., a national banking association, serves as
the investment adviser for each of the Funds. The Adviser, headquartered in
Birmingham, Alabama, is a wholly-owned subsidiary of SouthTrust Corporation, a
publicly-held bank holding company. The Adviser and SouthTrust Corporation
have their principal offices at 420 North 20th Street, Birmingham, Alabama
35203. The Adviser's experience includes the management of various collective
and common investment funds and the provision of investment management
services to banks and thrift institutions, corporate and profit-sharing
trusts, municipal and state retirement funds, and individual investors. As of
June 1, 1995, the Adviser had approximately $1.8 billion in assets under
management. The Adviser has served as investment adviser to the Company since
its inception on March 4, 1992.
Subject to the supervision of the Trustees, the Adviser provides overall
investment management for the Fund, provides research and credit analysis, is
responsible for all purchases and sales of portfolio securities, maintains
books and records with respect to the Fund's securities transactions and
provides periodic and special reports to the Trustees as requested. All
investment decisions for the Fund are made by an investment group.
For the advisory services provided and expenses assumed by it, the Adviser
is entitled to receive a fee from the Fund, computed daily and payable
monthly, at an annual rate of 0.60%.
17
<PAGE>
As part of its regular banking operations, SouthTrust Bank of Alabama, N.A.
may make loans to public companies. Thus, it may be possible, from time to
time, for the Fund to hold or acquire the securities of issuers which are also
lending clients of SouthTrust Bank of Alabama, N.A. The lending relationship
will not be a factor in the selection of securities.
Both the Company and the Adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to
the Fund's shareholders and must place the interests of shareholders ahead of
the employees' own interest. Among other things, the codes: require
preclearance and periodic reporting of personal securities transactions;
prohibit personal transactions in securities being purchased or sold, or being
considered for purchase or sale, by the Fund; prohibit purchasing securities
in initial public offerings; and prohibit taking profits on securities held
for less than sixty days. Violations of the codes are subject to review by the
Board of Trustees, and could result in severe penalties.
ADMINISTRATOR, CUSTODIAN, AND TRANSFER AGENT
Federated Administrative Services, Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779, a subsidiary of Federated Investors, provides the
Fund with certain administrative personnel and services necessary to operate
the Fund, such as legal and accounting services. The administrator provides
these at an annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE DAILY NET ASSETS
ADMINISTRATIVE OF THE COMPANY
FEE -----------------------------------
--------------
<S> <C>
.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 with respect to the
Fund shall be at least $100,000. The administrator may voluntary waive a
portion of its fee.
State Street Bank and Trust Company ("State Street"), whose principal office
is located in Boston, Massachusetts, serves as the custodian of the Company's
assets.
Federated Services Company, a subsidiary of Federated Investors, is transfer
agent and dividend disbursing agent for the Company. It also provides certain
accounting and recordkeeping services with respect to the Fund's portfolio
investments. The transfer agent, which is a subsidiary of Federated Investors,
has the same address as the administrator and Distributor.
DISTRIBUTOR
Shares of the Fund are sold on a continuous basis for the Company by
Federated Securities Corp. It is a Pennsylvania corporation organized on
November 14, 1969, and is the distributor for a number of investment
companies. The Distributor may offer certain items of nominal value from time
to time to any shareholder or investor in connection with the sale of Fund
shares. The Distributor, which is a subsidiary of Federated Investors, has the
same address as the administrator and transfer agent.
DISTRIBUTION PLAN. Under a distribution plan (the "Plan") adopted in
accordance with Securities and Exchange Commission ("SEC") Rule 12b-1 under
the Investment Company Act of 1940, as amended, the Fund
18
<PAGE>
will pay to the Distributor an amount computed at an annual rate of up to
0.25% of the average daily net asset value of the shares to finance any
activity which is principally intended to result in the sale of shares subject
to the Plan. The Distributor may select Financial Institutions such as banks,
fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales support services as agent for their clients or
customers. Certain trust clients of the Company, including ERISA plans, will
not be affected by the Plan because the Plan will not be activated unless and
until a second, "Trust" class of shares of the Fund (which would not have a
Rule 12b-1 plan) is created and such trust clients' investments in the Fund
are converted to such Trust class.
The Fund's plan is a compensation type plan. As such, the Fund makes no
payments to the Distributor except as described above. Therefore, the Fund
does not pay for unreimbursed expenses of the Distributor, including amounts
expended by the Distributor in excess of amounts received by it from the Fund,
interest, carrying or other financing charges in connection with excess
amounts expended, or the Distributor's overhead expenses. However, the
Distributor may be able to recover such amount or may earn a profit from
future payments made by the Fund under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a
commercial bank or a savings and loan association) from being an underwriter
or distributor of most securities. In the event the Glass-Steagall Act is
deemed to prohibit depository institutions from acting in the capacities
described above or should Congress relax current restrictions on depository
institutions, the Company's Trustees will consider appropriate changes in the
services.
State securities laws on this issue may differ from the interpretations of
federal law expressed herein and banks and financial institutions may be
required to register ads dealers pursuant to certain states' laws.
ADMINISTRATIVE ARRANGEMENTS
The Distributor may select brokers, dealers and administrators (including
depository or other institutions such as commercial banks and savings and loan
associations) to provide distribution and/or administrative services for which
they will receive fees from the Distributor based upon shares owned by their
clients or customers. These administrative services include distributing
prospectuses and other information, providing account assistance, and
communicating or facilitating purchases and redemptions of the Fund's shares.
The fees are calculated as a percentage of the average aggregate net asset
value of shareholder accounts held during the period for which the brokers,
dealers, and administrators provide services. Any fees paid for these services
by the Distributor will be reimbursed by the Adviser and not the Fund.
TAXES
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
Such qualification relieves the Fund of liability for federal income taxes to
the extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for a taxable
year requires, among other things, that the Fund distribute to its
shareholders an amount equal to at least 90% of its investment company income
(if any) net of certain deductions for such year. In general, the Fund's
investment company income will be its taxable income (including dividends,
interest, and short-term capital gains) subject to certain adjustments and
excluding the excess of any net long-term capital gain for the taxable year
over the net short-term capital loss, if any, for such year. The Fund intends
to distribute substantially all of its investment company income
19
<PAGE>
each taxable year. Such distributions will be taxable as ordinary income to
the Fund's shareholders who are not currently exempt from federal income
taxes, whether such income is received in cash or reinvested in additional
shares. (Federal income taxes for distributions to an IRA or qualified
retirement plan are deferred under the Code.)
Substantially all of Fund's net realized long-term capital gains, if any,
will be distributed at least annually to the Fund's shareholders. The Fund
will generally have no tax liability with respect to such gains, and the
distributions will be taxable to such shareholders who are not currently
exempt from federal income taxes as long-term capital gains, regardless of how
long the shareholders have held Fund shares and whether such gains are
received in cash or reinvested in additional shares.
Dividends declared in October, November, or December of any year payable to
shareholders of record on a specified date in such months will be deemed to
have been received by shareholders and paid by the Fund on December 31 of such
year if such dividends are actually paid during January of the following year.
Before purchasing shares in the Fund, the impact of dividends or
distributions which are expected to be declared or have been declared, but not
paid, should be carefully considered. Any dividend or distribution declared
shortly after a purchase of such shares prior to the record date will have the
effect of reducing the per share net asset value by the per share amount of
the dividend or distribution. All or a portion of such dividend or
distribution, although in effect a return of capital, may be subject to tax.
A taxable gain or loss may be realized by a holder of shares of the Fund
upon the redemption or transfer of Fund shares, depending upon the tax basis
of such shares and their price at the time of redemption or transfer.
Distributions of net investment income may be taxable to shareholders as
dividend income under state or local laws even though a substantial portion of
such distributions may be derived from interest on U.S. government
obligations, which, if realized directly, would be exempt from such income
taxes. Shareholders should consult their tax advisers concerning the
application of state and local taxes.
On an annual basis, the Company will send written notices to record owners
of shares regarding the federal tax status of distributions made by the Fund.
Since this is not an exhaustive discussion of applicable tax consequences,
investors should contact their tax advisers concerning investments in the
Fund.
DESCRIPTION OF SHARES
The Company was organized as a Massachusetts business trust on March 4,
1992, and is registered under the 1940 Act as an open-end management
investment company. Effective June 30, 1993, the Company changed its name from
"Vulcan Funds' to "SouthTrust Vulcan Funds.' The Master Trust Agreement
authorizes the Trustees to classify and reclassify any unissued shares into
one or more classes of shares. Pursuant to such authority, the Trustees have
authorized the issuance of an unlimited number of shares of beneficial
interest in the Company, representing interests in the Fund, which is
classified as a diversified investment company under the 1940 Act.
Each share of the Fund has a par value of $.001, represents an equal
proportionate interest in the particular Fund involved and is entitled to such
dividends and distributions earned on the Fund's assets as are declared in the
discretion of the Trustees.
20
<PAGE>
The Company's shareholders are entitled to one vote for each full share held
and proportionate fractional votes for fractional shares held, and will vote
in the aggregate and not by Portfolio, except where otherwise required by law
or when the Trustees determine that the matter to be voted upon affects only
the interests of the shareholders of a particular Portfolio. Under
Massachusetts law and the Company's Master Trust Agreement, the Company is not
required and does not currently intend to hold annual meetings of shareholders
for the election of Trustees except as required under the 1940 Act. The
Trustees are required to call a meeting of shareholders upon the written
request of at least 10% of the Company's outstanding shares. In addition, to
the extent required by law, the Company will assist in shareholder
communications in connection with such a meeting. For a further discussion of
the voting rights of shareholders, see "Additional Information Concerning
Shares" in the Statement of Additional Information.
TOTAL RETURNS AND YIELDS
TOTAL RETURN. From time to time the Fund may advertise its average annual
total return over various periods of time. Such total return figures show the
average percentage change in value of an investment in the Fund from the
beginning date of the measuring period to the end of the measuring period.
These figures reflect changes in the price of the Fund's shares and assume
that any income dividends and/or capital gain distributions made by the Fund
during the period were reinvested in shares of the Fund. When considering
average total return figures for periods longer than one year, it is important
to note that the relevant Fund's average annual total return for any one year
in the period might have been greater or less than the average for the entire
period. The Fund may also use aggregate total return figures for various
periods representing the cumulative share prices and assuming reinvestment of
dividends and distributions. Aggregate total returns may be shown by means of
schedules, charts or graphs and may indicate sub-totals of the various
components of total return (i.e., change in value of initial investment,
income dividends and capital gains distributions).
YIELD. From time to time, the Fund may quote a 30-day yield in
advertisements or in communications to shareholders. The yield of the Fund
refers to the income generated by an investment in the Fund over a 30-day
period (which period will be stated in the advertisement). This income is then
"annualized." That is, the amount of income generated by the investment during
the 30-day period is assumed to be earned and reinvested at a constant rate
and compounded semi-annually. The annualized income is then shown as a
percentage of the investment.
Quotations of yield and total return of the Fund represent the Fund's past
performance and should not be considered as representative of future results.
Any account fees charged by SouthTrust or a SouthTrust Vulcan Funds Dealer
will not be included in the Fund's calculations of yield and total return.
Such fees, if any, will reduce the investor's net return on an investment. The
methods used to compute each performance quotation are described in more
detail in the Statement of Additional Information.
21
<PAGE>
No person has been authorized to give any information or to make any represen-
tations not contained in this Prospectus, or in the Company's Statement of Ad-
ditional Information incorporated herein by reference, in connection with the
offering made by this Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the Com-
pany or its Distributor. The Prospectus does not constitute an offering by the
Company or by the Distributor in any jurisdiction in which such offering may
not lawfully be made.
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Expense Summary 2
Investment Objectives and Policies of the Fund 3
Investment Activities 3
How to Purchase, Exchange and Redeem Shares 11
Dividends and Distributions 16
Pricing of Shares 16
Management of the Funds 17
Administrative Arrangements 19
Taxes 19
Description of Shares 20
Total Returns and Yields 21
</TABLE>
[LOGO OF SOUTHTRUST BANK OF ALABAMA, N.A.]
Cusip 844734 40 0 G00204-03 (12/95)
[LOGO OF SOUTHTRUST VULCAN FUNDS]
Income Fund
Prospectus
December 15, 1995
SOUTHTRUST VULCAN INCOME FUND
(AN INVESTMENT PORTFOLIO OF SOUTHTRUST VULCAN FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information provides supplementary information
pertaining to the SouthTrust Vulcan Income Fund (the "Fund"), an investment
portfolio of SouthTrust Vulcan Funds (the "Company"). This Statement of
Additional Information is not a prospectus, and should be read only in
conjunction with the Company's Prospectus for the Fund dated December 15,
1995. A copy of the Prospectus may be obtained without charge by calling
the Company at 1-800-843-8618. This Statement of Additional Information
dated December 15, 1995, although not in itself a Prospectus, is
incorporated by reference in its entirety into the Fund's Prospectus.
TABLE OF CONTENTS
PAGE
General ....................................................... 1
Additional Information on Fund Investments .................... 1
Additional Investment Limitations ............................. 3
Trustees and Officers ......................................... 5
Investment Advisory and Other Service Arrangements ............ 8
Portfolio Transactions ........................................ 8
Purchase, Exchange and Redemption Information ................. 10
Net Asset Value ............................................... 11
Performance Information ....................................... 11
Taxes ......................................................... 12
Additional Information Concerning Shares ...................... 14
Independent Public Accountants ................................ 14
Miscellaneous ................................................. 14
Appendix ......................................................A-1
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information
or in the Prospectus in connection with the offering made by the Prospectus
and, if given or made, such information or representations must not be
relied upon as having been authorized by the Company or the Distributor.
The Prospectus does not constitute an offering by the Company or by the
Distributor in any jurisdiction in which such offering may not lawfully be
made.
GENERAL
The Company is an open-end, management investment company currently
offering shares in four diversified investment portfolios. The Company was
organized on March 4, 1992. On June 30, 1993, the name of the Company changed
from "Vulcan Funds" to "SouthTrust Vulcan Funds."
As stated in the Prospectus, the investment adviser (the "Adviser") of
the Fund is SouthTrust Bank of Alabama, N.A. Capitalized terms used herein and
not otherwise defined have the same meanings as are given to them in the
Prospectus.
ADDITIONAL INFORMATION ON FUND INVESTMENTS
The following supplements the information contained in the Prospectus
concerning the investment objectives and policies of the Fund. A description of
applicable credit ratings is set forth in Appendix A hereto.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements
with financial institutions, such as banks and non-bank dealers of U.S.
government securities that are listed on the Federal Reserve Bank of New York's
list of reporting dealers. The Adviser will continuously monitor the
creditworthiness of the seller under a repurchase agreement, and will require
the seller to maintain during the term of the agreement the value of the
securities subject thereto at not less than the repurchase price. The repurchase
price under the repurchase agreements generally equals the price paid by the
Fund plus interest negotiated on the basis of current short-term rates (which
may be more or less than the rate on the securities underlying the repurchase
agreement).
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve
the sale of securities held by the Fund pursuant to the Fund's agreement to
repurchase the securities at an agreed upon price, date and rate of interest.
Such agreements are considered to be borrowings under the Investment Company Act
of 1940, as amended (the "1940 Act"), and may be entered into only for temporary
or emergency purposes. While a reverse repurchase agreement is outstanding, the
Fund will maintain in a segregated account cash, U.S. government securities or
other liquid high-grade debt securities of an amount at least equal to the
market value of the securities, plus accrued interest, subject to the agreement.
VARIABLE AND FLOATING RATE INSTRUMENTS. Debt instruments may be
structured to have variable or floating interest rates. Variable and floating
rate obligations purchased by the Fund may have stated maturities in excess of
the Fund's maturity limitation if the Fund can demand payment of the principal
of the instrument at least once every thirteen months on not more than thirty
days' notice (this demand feature is not required if the instrument is
guaranteed by the U.S. government or an agency thereof). These instruments may
include variable amount master demand notes that permit the amount of
indebtedness to vary in addition to providing for periodic adjustments in the
interest rates. The Adviser will consider the earning power, cash flows and
other liquidity ratios of the issuers and guarantors of such instruments and, if
the instrument is subject to a demand feature, will continuously monitor their
financial ability to meet payment on demand. Where necessary to ensure that a
variable or floating rate instrument is equivalent to the quality standards
applicable to the Fund, the issuer's obligation to pay the principal of the
instrument will be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend.
In determining weighted average portfolio maturity of the Fund, an
instrument will usually be deemed to have a maturity equal to the longer of the
period remaining until the next interest rate adjustment or the time the Fund
involved can recover payment of principal as specified in the instrument.
Variable rate U.S. government obligations held by the Fund, however, will be
deemed to have maturities equal to the period remaining until the next interest
rate adjustment.
The absence of an active secondary market for certain variable and
floating rate notes could make it difficult to dispose of the instruments, and
the Fund could suffer a loss if the issuer defaulted or during periods that the
Fund is not entitled to exercise its demand rights.
Variable and floating rate instruments held by the Fund will be
subject to the Fund's 15% limitation on illiquid investments when the Fund may
not demand payment of the principal amount within seven days absent a reliable
trading market.
MONEY MARKET INSTRUMENTS. The Fund may invest in money market
instruments such as:
instruments of domestic and foreign banks and savings and loans if they have
capital, surplus, and undivided profits of over $l00,000,000 or if the principal
amount of the instrument is federally insured;
commercial paper rated, at the time of purchase, not less than A-1 by
Standard & Poor's Ratings Group ("S&P"), Prime-1 by Moody's Investors Service
Inc. ("Moody's") or F-1 by Fitch Investors Service, Inc. ("Fitch"), and unrated
commercial paper that is deemed by the Fund's investment adviser to be of
comparable quality to securities having such ratings;
time and savings deposits whose accounts are insured by the Bank Insurance
Fund ("BIF") which is administered by the Federal Deposit Insurance Corporation
("FDIC") or in institutions whose accounts are insured by the Savings
Association Insurance Fund ("SAIF"), which is also administered by the FDIC,
including certificates of deposit issued by and other time deposits in foreign
branches of BIF-insured banks; or
bankers' acceptances.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS (DELAYED-DELIVERY).
When-issued purchases and forward commitments (delayed-delivery) are commitments
by the Fund to purchase or sell particular securities with payment and delivery
to occur at a future date (normally within thirty days). These transactions
permit the Fund to lock-in a price or yield on a security, regardless of future
changes in interest rates.
When the Fund agrees to purchase securities on a when-issued or
forward commitment basis, the Fund will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment, and in such a case the Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitments. It
may be expected that the market value of the Fund's net assets will fluctuate to
a greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. Because the Fund's liquidity and
ability to manage its portfolio might be affected when it sets aside cash or
portfolio securities to cover such purchase commitments, the Adviser expects
that its commitments to purchase when-issued securities and forward commitments
will not exceed 25% of the value of the Fund's total assets absent unusual
market conditions.
The Fund will purchase securities on a when-issued or forward
commitment basis only with the intention of completing the transaction and
actually purchasing the securities. If deemed advisable as a matter of
investment strategy, however, the Fund may dispose of or renegotiate a
commitment after it is entered into, and may sell securities it has committed to
purchase before those securities are delivered to the Fund on the settlement
date. In these cases the Fund may realize a taxable capital gain or loss.
When the Fund engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase
or a forward commitment to purchase securities, and any subsequent fluctuations
in their market value, are taken into account when determining the market value
of the Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
MORTGAGE-RELATED SECURITIES. There are a number of important
differences among the agencies and instrumentalities of the U.S. government that
issue mortgage-related securities and among the securities that they issue.
Mortgage-related securities guaranteed by the Government National Mortgage
Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes"), which are guaranteed as to the timely payment of principal
and interest by GNMA and such guarantee is backed by the full faith and credit
of the United States. GNMA is a wholly-owned U.S. government corporation within
the Department of Housing and Urban Development. Ginnie Maes are also supported
by the authority of GNMA to borrow funds from the U.S. Treasury to make payments
under its guarantee. Mortgage-related securities issued by the Federal National
Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage Pass-Through
Certificates (also known as "Fannie Maes") which are solely the obligations of
FNMA and are not backed by or entitled to the full faith and credit of the
United States, but are supported by the right of the issuer to borrow from the
U.S. Treasury. FNMA is a government-sponsored organization owned entirely by
private stockholders. Fannie Maes are guaranteed as to timely payment of the
principal and interest by FNMA. Mortgage-related securities issued by the
Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "PCs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by the Federal Home Loan Banks. Freddie Macs
are not guaranteed by the United States or by any Federal Home Loan Banks and do
not constitute a debt or obligation of the United States or of any Federal Home
Loan Bank. Freddie Macs entitle the holder to timely payment of interest, which
is guaranteed by the FHLMC. FHLMC guarantees either ultimate collection or
timely payment of all principal payments on the underlying mortgage loans. When
FHLMC does not guarantee timely payment of principal, FHLMC may remit the amount
due on account of its guarantee of ultimate payment of principal at any time
after default on an underlying mortgage, but in no event later than one year
after it becomes payable.
INVESTMENT COMPANIES. The Fund currently intends to limit investments
in securities issued by other investment companies so that, as determined
immediately after a purchase of such securities is made: (i) not more than 5% of
the value of the Fund's total assets will be invested in the securities of any
one investment company; (ii) not more than 10% of the value of the Fund's total
assets will be invested in the aggregate in securities of investment companies
as a group; and (iii) not more than 3% of the outstanding voting stock of any
one investment company will be owned by the Fund or by the Company as a whole.
LENDING OF PORTFOLIO SECURITIES. The Fund may lend securities from its
portfolio to brokers, dealers and other financial organizations. Such loans, if
and when made, may not exceed 20% of the Fund's total assets, taken at value.
The Fund may not lend its portfolio securities to the Adviser or its affiliates
without specific authorization from the Securities and Exchange Commission (the
"SEC"). Loans of portfolio securities by the Fund will be collateralized by
cash, letters of credit or securities issued or guaranteed by the U.S.
government or its agencies which are maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities. From time
to time, the Fund may return a part of the interest earned from the investment
of collateral received for securities loaned to the borrower and/or a third
party, which is unaffiliated with the Fund or with the Adviser, and which is
acting as a "finder."
In lending its portfolio securities, the Fund can increase its income
by continuing to receive interest on the loaned securities as well as by either
investing the cash collateral in short-term instruments or obtaining yield in
the form of interest paid by the borrower when government securities are used as
collateral. Requirements of the SEC, which may be subject to future
modifications, currently provide that the following conditions must be met
whenever portfolio securities are loaned: (a) the Fund must receive at least
100% cash collateral or equivalent securities from the borrower; (b) the
borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (c) the Fund must be able
to terminate the loan at any time; (d) the Fund must receive reasonable interest
on the loan, as well as an amount equivalent to any dividends, interest or other
distributions on the loaned securities, and any increase in market value; (e)
the Fund may pay only reasonable custodian fees in connection with the loan; and
(f) voting rights on the loaned securities may pass to the borrower; however, if
a material event adversely affecting the investment occurs, the Trustees must
terminate the loan and regain the right to vote the securities. The risks in
lending portfolio securities, like those associated with other extensions of
secured credit, consist of: possible declines in value of collateral, possible
delays in receiving additional collateral or in the recovery of loaned
securities or expenses of enforcing the Fund's rights. Loans will be made to
firms deemed by the Adviser to be of good standing and will not be made unless,
in the judgment of the Adviser, the consideration to be earned from such loans
would justify the risk.
YIELDS AND RATINGS. The yields on certain obligations, including the
money market instruments in which the Fund may invest (such as commercial paper
and bank obligations), are dependent on a variety of factors, including general
money market conditions, conditions in the particular market for the obligation,
the financial condition of the issuer, the size of the offering, the maturity of
the obligation and the ratings of the issue. The ratings of Standard & Poor's
Ratings Group, Moody's Investors Service, Inc., Duff & Phelps Credit Rating Co.,
and other nationally recognized statistical rating organizations ("NRSROs")
represent their respective opinions as to the quality of the obligations they
undertake to rate. Ratings, however, are general and are not absolute standards
of quality. Consequently, obligations with the same rating, maturity and
interest rate may have different market prices.
RESTRICTED SECURITIES. It is possible that unregistered securities
purchased by the Fund in reliance upon Rule 144A under the Securities Act of
1933 could have the effect of increasing the level of the Fund's illiquidity to
the extent that qualified institutional buyers become, for a period,
uninterested in purchasing these securities. To comply with restrictions of
certain states, the Fund will limit their investments in restricted securities
to no more than 5% of their respective total assets. (If state requirements
change, this restriction may be revised without shareholder notification.)
ADDITIONAL INVESTMENT LIMITATIONS
In addition to the fundamental investment limitations disclosed in the
Prospectus, the Fund is subject to the investment limitations enumerated in this
sub-section which may be changed with respect to a particular Fund only by a
vote of the holders of a majority of such Fund's outstanding shares as defined
under "Miscellaneous--Shareholder Approvals."
The Fund may not:
1. Purchase or sell real estate, except that the Fund may purchase
securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
2. Acquire any other investment company or investment company
security except in connection with a merger, consolidation,
reorganization or acquisition of assets or where otherwise
permitted by the 1940 Act.
3. Act as an underwriter of securities, except to the extent that it
may be deemed an underwriter within the meaning of the Securities
Act of 1933 on disposition of securities acquired subject to
legal or contractual restrictions on resale.
4. Write or sell put options, call options, straddles, spreads, or
any combination thereof, except for transactions in options on
securities, securities indices, futures contracts, options on
futures contracts and transactions in securities on a when-issued
or forward commitment basis, and except that a non-money market
fund may enter into forward foreign currency contracts and
options thereon in accordance with its investment objectives and
policies.
5. Purchase securities of companies for the purpose of exercising
control.
6. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment
limitation shall not apply to the Fund's transactions in futures
contracts and related options, the Fund's sale of securities
short against the box or the Fund's transactions in securities on
a when-issued or forward commitment basis, and (b) the Fund may
obtain short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.
7. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that the Fund
may, to the extent appropriate to its investment policies,
purchase publicly traded securities of companies engaging in
whole or in part in such activities, may enter into futures
contracts and related options, and may engage in transactions in
securities on a when-issued or forward commitment basis, and
except that a non-money market fund may enter into forward
foreign currency contracts and options thereon in accordance with
its investment objectives and policies.
8. Make loans, except that the Fund may purchase and hold debt
instruments (whether such instruments are part of a public
offering or privately negotiated), may lend portfolio securities
and enter into repurchase agreements in accordance with its
investment objective and policies.
In addition, the investment limitations listed below are summarized in
the Prospectus and are set forth below in their entirety.
The Fund may not:
1. Purchase securities of any one issuer other than securities
issued or guaranteed by the U.S. government, its agencies or
instrumentalities or certificates of deposit for any such
securities if more than 5% of the value of the Fund's total
assets, taken at current value, would be invested in the
securities of such issuer, or more than 10% of the issuer's
outstanding voting securities would be owned by the Fund or the
Company, except that up to 25% of the value of the Fund's total
assets, taken at current value, may be invested without regard to
these limitations. For purposes of this limitation, a security is
considered to be issued by the entity (or entities) whose assets
and revenues back the security. A guarantee of a security is not
deemed to be a security issued by the guarantor when the value of
all securities issued and guaranteed by the guarantor, and owned
by the Fund, does not exceed 10% of the value of the Fund's total
assets.
2. Borrow money or issue senior securities except that the Fund may
borrow from banks and enter into reverse repurchase agreements
for temporary purposes in amounts up to one-third of the value of
its total assets at the time of such borrowing; or mortgage,
pledge or hypothecate any assets, except in connection with any
such borrowing and then in amounts not in excess of one-third of
the value of the Fund's total assets at the time of such
borrowing. The Fund will not purchase securities while its
aggregate borrowings including reverse repurchase agreements and
borrowing from banks in excess of 5% of its total assets are
outstanding. Securities held in escrow or separate accounts in
connection with the Fund's investment practices are not deemed to
be pledged for purposes of this limitation.
3. Purchase any securities which would cause 25% or more of the
value of the Fund's total assets at the time of purchase to be
invested in the securities of one or more issuers conducting
their principal business activities in the same industry,
provided that (a) there is no limitation with respect to (i)
instruments that are issued (as defined in Investment Limitation
No. 1 above) or guaranteed by the United States, any state,
territory or possession of the United States, the District of
Columbia or any of their authorities, agencies, instrumentalities
or political subdivisions and (ii) repurchase agreements secured
by the instruments described in clause (i); (b) wholly-owned
finance companies will be considered to be in the industries of
their parents if their activities are primarily related to
financing the activities of the parents; and (c) utilities will
be divided according to their services (for example, gas, gas
transmission, electric and gas, electric and telephone will each
be considered a separate industry).
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in the
value of the Fund's investments will not constitute a violation of such
limitation, except that any borrowing by the Fund that exceeds the fundamental
investment limitations stated above must be reduced to meet such limitations
within the period required by the 1940 Act (currently three days). Otherwise,
the Fund may continue to hold a security even though it causes the Fund to
exceed a percentage limitation because of fluctuation in the value of the Fund's
assets.
In order to permit the sale of shares in certain states, the Company
may make commitments more restrictive than the investment policies and
limitations described above. To comply with restrictions of certain states, the
Fund will not: invest more than 5% of the value of their respective total assets
in portfolio instruments of unseasoned issuers, including their predecessors,
that have been in operation for less than three years; invest in real estate
limited partnerships or mineral leases; invest in commodities futures contracts;
nor invest more than 5% of its net assets in warrants. No more than 2% of the
Fund's net assets, to be included within the overall 5% limit on investments in
warrants may be warrants which are not listed on the New York Stock Exchange or
the American Stock Exchange. If state requirements change, these restrictions
may be revised without shareholder notification.
TRUSTEES AND OFFICERS
The Trustees and Executive Officers of the Company, and their business
addresses, birthdates, and principal occupations during the past five years,
are:
*William O. Vann
Box 757
Birmingham, AL 35201
Birthdate: January 28, 1942
Trustee and Chairman of the Board
President and Chief Executive Officer, Young & Vann Supply Co. (since 1987);
Partner, B &B Investments; Trustee and Past Chairman, The Childrens' Hospital of
Alabama.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA 15222
Birthdate: October 22, 1930
President and Treasurer
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 Director,
Federated Administrative Services; Trustee or Director and Vice President and
Treasurer of other funds distributed by Federated Securities Corp.
C. Christine Thomson
Federated Investors Tower
Pittsburgh, PA 15222
Birthdate: September 1, 1957
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Vice President and Assistant
Treasurer of other funds distributed by Federated Securities Corp.
Peter J. Germain
Federated Investors Tower
Pittsburgh, PA 15222
Birthdate: September 3, 1959
Secretary
Senior Corporate Counsel, Federated Investors
Thomas L. Merrill, Sr.
210 Inverness Center Dr.
P.O. Box 10264
Birmingham, AL 35242
Birthdate: October 27, 1925
Trustee
Chief Executive Officer, Vice Chairman and Director, Altec Industries, Inc.;
Director, Walker Companies; formerly, President, Altec Industries, Inc. (1990-
1993) and Chairman, Vantage Consulting (until 1989).
Charles G. Brown, III
P.O. Box 170100
Birmingham, AL 35217
Birthdate: November 27, 1953
Trustee
President, Tubular Products Company (since 1985); Managing Partner, Red Hollow
Partnership.
Russell W. Chambliss
Mason Corporation
P.O. Box 59226
Birmingham, AL 35259
Birthdate: December 26, 1951
Trustee
President (since 1989), Executive Vice President (1988), and Vice President of
Sales and Marketing (1984-1988), Mason Corporation.
D. Riley Stuart
P.O. Box 1028
Birmingham, AL 35201
Birthdate: November 27, 1927
Trustee
Chairman and Chief Executive Officer, Brice Building Company, Inc.
* This Trustee is deemed to be an "interested person" of the Company as
defined in the Investment Company Act of 1940, as amended.
As of the date of this Statement of Additional Information, the
Trustees and Officers of the Company, as a group, owned less than 1% of the
outstanding shares of any Fund.
TRUSTEES COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM
COMPANY COMPANY*#
WILLIAM O. VANN, $4,980
Trustee and Chairman of
The Board
THOMAS L. MERRILL, SR. $4,980
Trustee
CHARLES G. BROWN, III $4,980
Trustee
RUSSELL W. CHAMBLISS $4,980
Trustee
D. RILEY STUART $4,980
Trustee
*Information is furnished for the fiscal year ended April 30, 1995. The Company
is the only investment company in the Fund Complex.
#The aggregate compensation is provided for the Company which is comprised of
four portfolios.
SHAREHOLDER AND TRUSTEE LIABILITY. Under Massachusetts law,
shareholders of a business trust may, under certain circumstances, be held
personally liable as partners for the obligations of the trust. However, the
Company's Master Trust Agreement provides that shareholders shall not be subject
to any personal liability in connection with the assets of the Company for the
acts or obligations of the Company, and that every note, bond, contract, order,
or other undertaking made by the Company shall contain a provision to the effect
that the shareholders are not personally liable thereunder. The Master Trust
Agreement provides for indemnification out of the trust property of any
shareholder held personally liable solely by reason of the investor being or
having been a shareholder and not because of the shareholder's acts or omissions
or some other reason. The Master Trust Agreement also provides that the Company
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Company, and shall satisfy any
judgment thereon. Thus, the risk of a shareholder's incurring financial loss on
account of shareholder liability is limited to circumstances in which the
Company itself would be unable to meet its obligations.
The Master Trust Agreement further provides that all persons having
any claim against the Trustees or the Company shall look solely to the trust
property for payment; that no Trustee of the Company shall be personally liable
for or on account of any contract, debt, tort, claim, damage, judgment, or
decree arising out of or connected with the administration or preservation of
the trust property or the conduct of any business of the Company; and that no
Trustee shall be personally liable to any person for any action or failure to
act except by reason of the Trustee's own bad faith, willful misfeasance, gross
negligence or reckless disregard of the Trustee's duties as a Trustee. With the
exception stated, the Master Trust Agreement provides that a Trustee is entitled
to be indemnified against all liabilities and expenses reasonably incurred by
the Trustee in connection with the defense or disposition of any proceeding in
which the Trustee may be involved or with which the Trustee may be threatened by
reason of being or having been a Trustee, and that the Company will indemnify
Officers of the Company to the same extent that Trustees are entitled to
indemnification.
INVESTMENT ADVISORY AND OTHER SERVICE ARRANGEMENTS
ADVISORY AGREEMENT. The advisory services provided by the Adviser
pursuant to an advisory agreement (the "Advisory Agreement") between it and the
Company, as well as the fees payable by the Company to the Adviser for such
services, are described in the Prospectus.
If the total expenses borne by the Fund in any fiscal year exceed the
expense limitations imposed by applicable state securities regulations, the
Adviser will bear the amount of such excess to the extent required by such
regulations in proportion to the fees otherwise payable to it with respect to
the Fund for such year. Such amount borne will be limited to the amount of the
fees paid to it for the applicable period with respect to the Fund. As of the
date of this Statement of Additional Information, the most restrictive expense
limitation applicable to the Company limits its aggregate annual expenses,
including management and advisory fees but excluding interest, taxes, brokerage
commissions, and certain other expenses, to 2 1/2% of the first $30 million of
its average net assets, 2% of the next $70 million, and 1 1/2% of its remaining
average net assets.
The Advisory Agreement provides that the Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Company in connection with the performance of the Advisory Agreement, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
Adviser's part in the performance of its duties or from reckless disregard of
its duties and obligations thereunder.
The Advisory Agreement is terminable with respect to the Fund by vote
of the Trustees, or by the holders of a majority of the outstanding voting
securities of the Fund, at any time without penalty, on 60 days' written notice
to the Adviser. The Adviser may also terminate its advisory relationship with
respect to the Fund on 60 days' written notice to the Company, and the Advisory
Agreement terminates automatically in the event of its assignment.
Because of the internal controls maintained by SouthTrust Bank of
Alabama, N.A. to restrict the flow of non-public information, the Fund's
investments are typically made without any knowledge of SouthTrust Bank of
Alabama, N.A. or its affiliates' lending relationships with an issuer.
DISTRIBUTOR'S CONTRACT. The Company has entered into a Distributor's
Contract under which the Distributor, as agent, sells shares of the Fund on a
continuous basis. The Distributor has agreed to use appropriate efforts to
solicit orders for the purchase of shares of the Fund, although it is not
obligated to sell any particular amount of shares.
ADMINISTRATIVE SERVICES AGREEMENT. Federated Administrative Services
(the "Administrator"), which is a subsidiary of Federated Investors, provides
administrative personnel and services to the Company for the fees set forth in
the Prospectus.
The Administrative Services Agreement provides that the Administrator
shall not be liable under the Agreement except for its willful misfeasance, bad
faith or gross negligence in the performance of its duties or from the reckless
disregard by it of its duties and obligations thereunder.
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. State Street Bank and Trust
Company (the "Custodian") maintains custody of the Company's assets pursuant to
a custodian agreement (the "Custodian Agreement"). Under the Custodian
Agreement, the Custodian (i) maintains a separate account in the name of the
Fund; (ii) holds and transfers portfolio securities on account of the Fund;
(iii) accepts receipts and makes disbursements of money on behalf of the Fund;
(iv) collects and receives all income and other payments and distributions on
account of the Fund's securities; and (v) makes periodic reports to the Trustees
concerning the Fund's operations. The Custodian is authorized to select one or
more domestic banks or trust companies to serve as sub-custodian on behalf of
the Company, provided that, with respect to sub-custodians, the Custodian
remains responsible for the performance of all its duties under the Custodian
Agreement and holds the Company harmless from the acts and omissions of any sub-
custodian.
Federated Services Company (the "Transfer Agent"), a subsidiary of
Federated Investors, serves as the transfer and dividend disbursing agent for
the Company pursuant to the Fund Accounting and Shareholder Recordkeeping
Agreement.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Trustees, the Adviser makes
decisions with respect to and places orders for all purchases and sales of
portfolio securities for the Fund. Portfolio transactions of the Fund are placed
with those securities brokers and dealers that the Adviser believes will provide
the best value in transaction and research services for the Fund, either in a
particular transaction or over a period of time. Although some transactions
involve only brokerage services, many involve research services as well.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. As of the date of the
Prospectus, with respect to the Fund, there have been no payments made for
brokerage transactions.
Over-the-counter issues, including corporate debt and government
securities, are normally traded on a "net" basis (i.e., without commission)
through dealers, or otherwise involve transactions directly with the issuer of
an instrument. With respect to over-the-counter transactions, the Adviser will
normally deal directly with dealers who make a market in the instruments
involved except in those circumstances where more favorable prices and execution
are available elsewhere. The cost of securities purchased from underwriters
includes an underwriting commission or concession, and the prices at which
securities are purchased from and sold to dealers include a dealer's mark-up or
mark-down.
The Fund may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Fund will engage in this practice, however, only when the Adviser believes
such practice to be in The Fund's best interests.
The portfolio turnover rate of the Fund is calculated by dividing the
lesser of the Fund's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities held by the Fund during the year. The Fund may engage in short-term
trading to achieve its investment objectives. Portfolio turnover may vary
greatly from year to year as well as within a particular year.
In its Advisory Agreement, the Adviser agrees to select broker/dealers
in accordance with guidelines established by the Trustees from time to time and
in accordance with applicable law. In assessing the terms available for any
transaction, the Adviser shall consider all factors it deems relevant, including
the breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker/dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. In addition, the Advisory Agreement authorizes the
Adviser, subject to the prior approval of the Trustees, to cause the Fund to pay
a broker/dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker/dealer for
effecting the same transaction, provided that the Adviser determines in good
faith that such commission is reasonable in relation to the value of the
brokerage and research services provided by such broker/dealer, viewed in terms
of either the particular transaction or the overall responsibilities of the
Adviser to the Fund. Such brokerage and research services might consist of
reports and statistics on specific companies or industries, general summaries of
groups of bonds and their comparative earnings and yields, or broad overviews of
the securities markets and the economy.
Supplementary research information so received is in addition to, and
not in lieu of, services required to be performed by the Adviser and does not
reduce the advisory fees payable to the Adviser by the Fund. It is possible that
certain of the supplementary research or other services received will primarily
benefit one or more other investment companies or other accounts for which
investment discretion is exercised. Conversely, the Fund may be the primary
beneficiary of the research or services received as a result of portfolio
transactions effected for such other account or investment company. The Fund may
obtain an agreement from a broker to pay to a third-party vendor of goods or
services to the Fund a portion of the commissions paid by the Fund to that
broker.
Portfolio securities will not be purchased from or sold to the
Adviser, the Distributor or any affiliated person (as defined in the 1940 Act)
of the foregoing entities except to the extent permitted by an exemptive order
issued by the SEC or by applicable law (including Rule 17e-1 under the 1940
Act).
Investment decisions for the Fund and for other investment accounts
managed by the Adviser are made independently of each other in light of
differing conditions. However, the same investment decision may be made for two
or more of such accounts and executed on the same day. In such cases,
transactions in the same securities for multiple accounts are allocated as to
amount in a manner deemed equitable to each such account. While in some cases
this practice could have a detrimental effect on the price or value of the
security as far as the Fund is concerned, in other cases it is believed to be
beneficial to the Fund. To the extent permitted by law, the Adviser may
aggregate the securities to be sold or purchased for the Fund with those to be
sold or purchased for other investment companies or accounts in executing
transactions.
The Fund will not purchase securities during the existence of any
underwriting or selling group relating to such securities of which the Adviser
or any affiliated person (as defined in the 1940 Act) thereof is a member,
except pursuant to procedures adopted by the Trustees in accordance with Rule
10f-3 under the 1940 Act.
PURCHASE, EXCHANGE AND REDEMPTION INFORMATION
The Company reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase of the
Fund's shares by making payment in whole or in part in securities chosen by the
Company and valued in the same way as they would be valued for purposes of
computing the Fund's net asset value. If payment is made in securities, a
shareholder may incur transaction costs in converting the securities into cash.
The Company intends to elect, however, to be governed by Rule 18f-1 under the
1940 Act so that the Fund is obligated to redeem its shares solely in cash up to
the lesser of $250,000 or 1% of its net asset value during any 90-day period for
any one shareholder of the Fund.
Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange is closed (other than customary weekend and holiday
closings), or during which trading on said Exchange is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (The Fund may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.)
The Company may suspend redemption rights or postpone redemption
payments (as well as suspend the recordation of the transfer of shares) for such
periods as are permitted under the 1940 Act. The Company may also redeem shares
involuntarily or make payment for redemption in securities or other property if
it appears appropriate to do so in light of the Company's responsibilities under
the 1940 Act.
The Company may redeem shares involuntarily as described below under
"Net Asset Value" to reimburse the Fund for any loss sustained by reason of the
failure of a shareholder to make full payment for shares purchased by the
shareholder, or to collect any charge relating to a transaction effected for the
benefit of a shareholder, which is applicable to shares of the Fund as provided,
from time to time, in the Prospectus. In addition, due to the high cost of
maintaining accounts with low balances, the Company may redeem shares in any
account, except retirement plans, and pay the proceeds to the shareholder, if
the account balance falls below the required minimum account balance due to
shareholder redemptions. Before shares are redeemed to close an account, a
shareholder will be notified in writing and allowed 30 days to purchase
additional shares to meet the minimum balance.
Shareholders may exchange all or part of their shares in the Company
as described in the Prospectus. Any rights an investor may have to reduce (or
have waived) the sales load applicable to an exchange, as may be provided in the
Prospectus, will apply in connection with any such exchange.
By use of the exchange privilege, the investor authorizes SouthTrust,
the investor's SouthTrust Vulcan Funds Dealer, or the Distributor to act on
telephonic instructions from any person representing himself or herself to be
the investor and reasonably believed by SouthTrust, a SouthTrust Vulcan Funds
Dealer or the Distributor to be genuine. The Transfer Agent must be notified of
the investor's prior ownership of Fund shares and account number. The Transfer
Agent records of such instructions are binding. The exchange privilege may be
modified or terminated at any time upon 60 days written notice to shareholders.
EXCHANGING SECURITIES FOR FUND SHARES. The Fund may accept securities
in exchange for Fund shares. The Fund will allow such exchanges only upon the
prior approval of the Fund and a determination by the Fund and the Adviser that
the securities to be exchanged are acceptable.
Any securities 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. The market value of
any securities exchanged in an initial investment, plus any cash, must be at
least equal to the minimum investment in the Fund.
Securities accepted by the Fund will be valued in the same manner as
the Fund values its assets. The basis of the exchange will depend on the net
asset value of Fund shares on the day the securities are valued. One share of
the Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends, subscription, or
other rights attached to the securities become the property of the Fund, along
with the securities.
If an exchange is permitted, it will be 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.
NET ASSET VALUE
In determining the approximate market value of portfolio investments,
the Company may employ outside organizations, which may use a matrix or formula
method that takes into consideration market indices, matrices, yield curves and
other specific adjustments. This may result in the securities being valued at a
price different from the price that would have been determined had the matrix or
formula method not been used. All cash, receivables, and current payables are
carried on the Company's books at their face value. Other assets, if any, are
valued at fair value as determined in good faith under the supervision of the
Trustees.
PERFORMANCE INFORMATION
YIELD AND PERFORMANCE OF THE FUND
The 30-day (or one month) standard yield described in the Prospectus
is calculated in accordance with the method prescribed by the SEC for mutual
funds:
Where:
a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = average daily number of shares outstanding during the period
entitled to receive dividends; and
d = maximum offering price per share on the last day of the period.
For the purpose of determining interest earned on debt obligations
purchased by the Fund (variable "a" in the formula), the Fund computes the yield
to maturity of such instrument based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest). Such yield is then
divided by 360 and the quotient is multiplied by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. It is assumed in the above calculation that each
month contains 30 days. The maturity of a debt obligation with a call provision
is deemed to be the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. For the purpose of
computing yield on equity securities held by the Fund, dividend income is
recognized by accruing 1/360 of the dividend rate of the security for each day
that the security is held by the Fund. With respect to mortgage or other
receivables-backed debt obligations purchased at a discount or premium, the
formula generally calls for amortization of the discount or premium. The
amortization schedule will be adjusted monthly to reflect changes in the market
value of such debt obligations. Expenses accrued for the period (variable "b" in
the formula) include all recurring fees charged by the Fund to all shareholder
accounts in proportion to the length of the base period and the Fund's mean (or
median) account size. Undeclared earned income will be subtracted from the
offering price per share (variable "d" in the formula).
The Fund that advertises its "average annual total return" computes
such return by determining the average annual compounded rate of return during
specified periods that equates the initial amount invested to the ending
redeemable value of such investment according to the following formula:
Where:
T = average annual total return;
ERV = ending redeemable value of shares held at the end of the
period;
P = hypothetical initial investment of $1,000; and
n = number of years.
The Fund that advertises its "aggregate total return" computes such
returns by determining the aggregate compounded rates of return during specified
periods that likewise equate the initial amount invested to the ending
redeemable value of such investment. The formula for calculating aggregate total
return is as follows:
Aggregate Total Return = (ERV) - 1
P
The calculations are made assuming that (1) all dividends and capital
gain distributions are reinvested on the reinvestment dates at the price per
share existing on the reinvestment date, (2) all recurring fees charged to all
shareholder accounts are included, and (3) for any account fees that vary with
the size of the account, a mean (or median) account size in the Fund during the
periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.
In reports or other communications to shareholders or in advertising
material, the Fund may compare its performance with that of other mutual funds
as listed in the rankings prepared by Lipper Analytical Services, Inc., CDA
Technologies, Inc., or similar independent services, which monitor the
performance of mutual funds or with other appropriate indices of investment
securities. In addition, certain indices may be used to illustrate historic
performance of select asset classes. These may include, among others, the Lehman
Brothers Index of Baa-rated Corporate Bonds, the T-Bill Index, and the "Stocks,
Bonds and Inflation Index" published annually by Ibbotson Associates. The
performance information may also include evaluations of the Fund published by
ranking services and financial publications that are nationally recognized, such
as Business Week, Forbes, Fortune, Institutional Investor, Money and The Wall
Street Journal.
In addition to providing performance information that demonstrates the
actual yield or returns of a particular Fund over a particular period of time,
the Fund may provide certain other information demonstrating hypothetical
investment returns. Such information may include, but is not limited to,
illustrating the compounding effects of a dividend in a dividend reinvestment
plan or certain benefits of tax-free investing.
The performance of any investment is generally a function of portfolio
quality and maturity, type of investment and operating expenses.
TAXES
The following summarizes certain additional tax considerations
generally affecting the Fund and their shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussion here and in the
Prospectus is not intended as a substitute for careful tax planning. Potential
investors should consult their tax advisers with specific reference to their own
tax situations.
GENERAL. The Fund has elected to be taxed separately as a regulated
investment company under Part I of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). As a regulated investment company, the Fund is
exempt from federal income tax on its net investment income and realized capital
gains which it distributes to shareholders, provided that it distributes an
amount equal to the sum of (a) at least 90% of its investment company taxable
income (as that term is defined in the Code determined without regard to the
deduction for dividends paid), if any, for the year, and (b) at least 90% of its
net tax-exempt income, if any, for the year (the "Distribution Requirement") and
satisfies certain other requirements of the Code that are described below.
Distributions of investment company taxable income and net tax-exempt income
made during the taxable year or, under specified circumstances, within twelve
months after the close of the taxable year will satisfy the Distribution
Requirement.
In addition, to satisfy the Distribution Requirement, the Fund must
derive with respect to a taxable year at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or from other income derived with respect to its business of investing in such
stock, securities, or currencies (the "Income Requirement") and derive less than
30% of its gross income from the sale or other disposition of securities and
certain other investments held for less than three months (the "Short-Short Gain
Test"). Interest (including original issue discount and, in the case of debt
securities bearing taxable interest income, "accrued market discount") received
by the Fund at maturity or on disposition of a security held for less than three
months will not be treated as gross income derived from the sale or other
disposition of such security for purposes of the Short-Short Gain Test. However,
any other income which is attributable to realized market appreciation will be
treated as gross income from the sale or other disposition of securities for
this purpose.
In addition to the foregoing requirements, at the close of each
quarter of its taxable year, at least 50% of the value of the Fund's assets must
consist of cash and cash items, U.S. government securities, securities of other
regulated investment companies, and securities of other issuers (as to which the
Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which the Fund does not hold more than 10%
of the outstanding voting securities of such issuer) and no more than 25% of the
value of the Fund's total assets may be invested in the securities of any one
issuer (other than U.S. government securities and securities of other regulated
investment companies), or in two or more issuers which such Fund controls and
which are engaged in the same or similar trades or businesses.
Distributions of net investment income received by the Fund from
investments in debt securities and any net realized short-term capital gains
distributed by the Fund will be taxable to shareholders as ordinary income and
will not be eligible for the dividends received deduction for corporations.
The Fund intends to distribute to shareholders any excess of net long-
term capital gain over net short-term capital loss ("net capital gain") for each
taxable year. Such gain is distributed as a capital gain dividend and is taxable
to shareholders as long-term capital gain, regardless of the length of time the
shareholder has held the shares, whether such gain was recognized by the Fund
prior to the date on which a shareholder acquired shares of the Fund and whether
the distribution was paid in cash or reinvested in shares.
In the case of corporate shareholders, distributions (other than
capital gain dividends) of the Fund for any taxable year generally qualify for
the dividends received deduction to the extent of the gross amount of
"qualifying dividends" received by the Fund for the year. Generally, a dividend
will be treated as a "qualifying dividend" if it has been received from a
domestic corporation.
The marginal tax rate on ordinary income for taxpayers filing joint
returns is 36% of taxable income in excess of $140,000 ($115,000 for taxpayers
filing individual returns) and 39.6% of taxable income in excess of $250,000 for
taxpayers filing either individual or joint returns. Different taxable income
thresholds apply in the cases of married persons filing separately, heads of
household and trusts. Capital gains are subject to a 28% maximum stated rate.
The maximum marginal corporate income tax rate is 35% for taxable income
(including net capital gains) in excess of $10,000,000.
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders. In such
event, all distributions (whether or not derived from exempt-interest income)
would be taxable as ordinary income to the extent of the Fund's current and
accumulated earnings and profits, and would be eligible for the dividends
received deduction in the case of corporate shareholders.
Shareholders will be advised annually as to the federal income tax
consequences of distributions made by the Fund each year.
The Code imposes a non-deductible 4% excise tax on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). The Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and capital gain net income each calendar year to avoid liability for this
excise tax.
The Company will be required in certain cases to withhold and remit to
the United States Treasury 31% of taxable dividends or 31% of the gross proceeds
realized upon a redemption paid to any shareholder (i) who has provided either
an incorrect tax identification number or no number at all; (ii) who is subject
to backup withholding by the Internal Revenue Service for failure to report the
receipt of taxable interest or dividend income properly; or (iii) who has failed
to certify to the Company that he or she is not subject to backup withholding or
that he or she is an "exempt recipient."
The foregoing general discussion of federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Although the Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, the Fund
may be subject to the tax laws of such states or localities.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS. Special rules govern the
federal income tax treatment of financial instruments that may be held by some
of the Fund. These rules may have a particular impact on the amount of income or
gain that the Fund must distribute to their respective shareholders to comply
with the Distribution Requirement, on the income or gain qualifying under the
Income Requirement and on their ability to comply with the Short-Short Gain Test
described above. Federal income tax law requires the holder of a zero coupon
security to recognize income with respect to the security on an annual basis
even though there is no cash flow until maturity. To maintain its qualification
as a regulated investment company and avoid liability of federal income taxes,
the Fund will be required to distribute income accrued annually with respect to
zero coupon 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.
ADDITIONAL INFORMATION CONCERNING SHARES
The Company is a Massachusetts business trust. Under the Company's
Master Trust Agreement, the beneficial interests in the Company may be divided
into an unlimited number of full and fractional transferable shares. The Master
Trust Agreement authorizes the Company's Trustees to classify or reclassify any
unissued shares of the Company into one or more Funds by setting or changing, in
any one or more respects, their respective designations, preferences, conversion
or other rights, voting powers, restrictions, limitations, qualifications and
terms and conditions of redemption. Pursuant to such authority, the Trustees
have authorized the issuance of four series of shares representing interests in
the Income Fund, the Treasury Obligations Money Market Fund, the Bond Fund and
the Stock Fund.
In the event of a liquidation or dissolution of the Company or an
individual Fund, shareholders of a particular Fund would be entitled to receive
the assets available for distribution belonging to such Fund, and a
proportionate distribution, based upon the relative net asset values of the
Company's respective Funds, of any general assets not belonging to any
particular Fund which are available for distribution. Shareholders of the Fund
are entitled to participate in the net distributable assets of the particular
Fund involved on liquidation, based on the number of shares of the Fund that are
held by each shareholder.
The issuance of shares is recorded on the books of the Fund and share
certificates generally will not be issued.
Shareholders of the Company will vote together in the aggregate and
not separately by Fund except as otherwise required by law or when the Trustees
determine that the matter to be voted upon affects only the interests of the
shareholders of a particular Fund. Rule 18f-2 (the "Rule") under the 1940 Act
provides that any matter required to be submitted to the holders of the
outstanding voting securities of an investment company such as the Company shall
not be deemed to have been effectively acted upon unless approved by the holders
of a majority of the outstanding shares of the Fund affected by the matter. The
Fund is not affected by a matter unless it is clear that the interests of each
investment portfolio in the matter are substantially identical or that the
matter does not affect any interest of the investment portfolio. Under the Rule,
the approval of an investment advisory agreement or any change in the
fundamental investment policy would be effectively acted upon with respect to an
investment portfolio only if approved by a majority of the outstanding shares of
such investment portfolio. However, the Rule also provides that the ratification
of the appointment of independent accountants, the approval of principal
underwriting contracts and the election of trustees may be effectively acted
upon by shareholders of the Company voting together in the aggregate without
regard to a particular investment portfolio.
Shares of the Company have noncumulative voting rights and,
accordingly, the holders of more than 50% of the Company's outstanding shares
(irrespective of investment portfolio) may elect all of the Trustees. Shares
have no preemptive rights and only such conversion and exchange rights as the
Trustees may grant in their discretion. When issued for payment as described in
the Prospectus, shares will be fully paid and non-assessable by the Company.
Shareholder meetings, including meetings held to elect Trustees, will
not be held unless and until such time as required by law. At that time, the
Trustees then in office will call a shareholders' meeting to elect Trustees.
Except as set forth above, the Trustees will continue to hold office and may
appoint successor Trustees. The Master Trust Agreement provides that meetings of
the shareholders of the Company shall be called by the Trustees upon the written
request of shareholders owning at least 10% of the outstanding shares entitled
to vote.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, are the independent public accountants for the
Fund.
MISCELLANEOUS
COUNSEL. The law firm of Bell, Boyd & Lloyd, Chicago, Illinois,
serves as counsel to the Trustees.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES. As of December
15, 1995, there were no shareholders who beneficially owned or more of the
outstanding shares of the Fund.
BANKING LAWS. Banking laws and regulations currently prohibit a bank
holding company registered under the Federal Bank Holding Company Act of 1956,
or any bank or non-bank affiliate thereof from sponsoring, organizing,
controlling or distributing the shares of a registered, open-end investment
company continuously engaged in the issuance of its shares, and prohibit banks
generally from underwriting securities, but such banking laws and regulations do
not prohibit such a holding company or affiliate or banks generally from acting
as investment adviser, administrator, 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 customers. The Adviser and the Custodian are subject to such
banking laws and regulations.
The Adviser and the Custodian believe they may perform the services
for the Company contemplated by their respective agreements with the Company
without violation of applicable banking laws or regulations. It should be noted,
however, that there have been no cases deciding whether bank and nonbank
subsidiaries of a registered bank holding company may perform services
comparable to those that are to be performed by these companies, and future
changes in either federal or state statutes and regulations relating to
permissible activities of banks and their subsidiaries or affiliates, as well as
future judicial or administrative decisions or interpretations of current and
future statutes and regulations, could prevent these companies from continuing
to perform such service for the Company.
Should future legislative, judicial, or administrative action prohibit
or restrict the activities of such companies in connection with the provision of
services on behalf of the Company, the Company might be required to alter
materially or discontinue its arrangements with such companies and change its
method of operations. It is not anticipated, however, that any change in the
Company's method of operations would affect the net asset value per share of any
Fund or result in a financial loss to any customer.
SHAREHOLDER APPROVALS. As used in this Statement of Additional
Information and in the Prospectus, a "majority of the outstanding shares" of the
Fund or investment portfolio means the lesser of (a) 67% of the shares of the
particular Fund or portfolio represented at a meeting at which the holders of
more than 50% of the outstanding shares of such Fund or portfolio are present in
person or by proxy, or (b) more than 50% of the outstanding shares of such Fund
or portfolio.
APPENDIX
DESCRIPTION OF BOND RATINGS
The following summarizes the highest
four ratings used by Standard & Poor's
Ratings Group ("S&P") for corporate
and municipal debt:
AAA--Debt rated AAA has the
highest rating assigned by
S&P. Capacity to pay
interest and repay principal
is extremely strong.
AA--Debt rated AA has a very
strong capacity to pay
interest and repay principal
and differs from AAA issues
only in a 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.
BBB--Debt rated BBB is
regarded as having an
adequate capacity to pay
interest and repay
principal. Whereas it
normally exhibits adequate
protection parameters,
adverse economic conditions
or changing circumstances
are more likely to lead to a
weakened capacity to pay
interest and repay principal
for debt in this category
than for debt in higher
rated categories.
BB--Debt rated BB has less
near-term vulnerability to
default than other
speculative issues.
However, it faces major
ongoing uncertainties or
exposure to adverse
business, financial, or
economic conditions which
could lead to inadequate
capacity to meet timely
interest and principal
payments. The BB rating
category is also used for
debt subordinated to senior
debt that is assigned an
actual or implied BBB
rating.
B--Debt rated B has a
greater vulnerability to
default but currently has
the capacity to meet
interest payments and
principal payments. Adverse
business, financial, or
economic conditions will
likely impair capacity or
willingness to pay interest
and repay principal. The B
rating category is also used
for debt subordinated to
senior debt that is assigned
an actual or implied BB or
BBB rating.
To provide more detailed
indications of credit quality, the AA,
A and BBB ratings may be modified by
the addition of a plus or minus sign
to show relative standing within these
major rating categories.
The following summarizes the
highest four ratings used by Moody's
Investors Service, Inc. ("Moody's")
for corporate and municipal long-term
debt:
Aaa--Bonds that 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 that 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 that are rated A
possess many favorable
investment attributes and
are to be considered upper
medium grade obligations.
Factors giving security to
principal and interest are
considered adequate, but
elements may be present
which suggest a
susceptibility to impairment
sometime in the future.
Baa--Bonds that are rated
Baa are considered medium
grade obligations, i.e.,
they are neither highly
protected nor poorly
secured. Interest payments
and principal security
appear adequate for the
present but certain
protective elements may be
lacking or may be
characteristically
unreliable over any great
length of time. Such bonds
lack outstanding investment
characteristics and in fact
have speculative
characteristics as well.
Ba--Bonds which are Ba are
judged to have speculative
elements; their future
cannot be considered as
well-assured. Often the
protection of interest and
principal payments may be
very moderate and thereby
not well safeguarded during
both good and bad times over
the future. Uncertainty of
position characterizes bonds
in this class.
B--Bonds which are rated B
generally lack
characteristics of the
desirable investment.
Assurance of interest and
principal payments or of
maintenance of other terms
of the contract over any
long period of time may be
small.
Moody's applies numerical
modifiers (1, 2 and 3) with respect to
corporate bonds rated Aa, A and Baa.
The modifier 1 indicates that the bond
being rated ranks in the higher end of
its generic rating category; the
modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates
that the bond ranks in the lower end
of its generic rating category.
The following summarizes the
highest four ratings used by Duff &
Phelps Credit Rating Co. ("D&P") for
bonds:
AAA--Debt rated AAA is of
the highest credit quality.
The risk factors are
considered to be negligible,
being only slightly more
than for risk-free U.S.
Treasury debt.
AA--Debt rated AA is of high
credit quality. Protection
factors are strong. Risk is
modest but may vary slightly
from time to time because of
economic conditions.
A--Bonds that are rated A
have protection factors
which are average but
adequate. However risk
factors are more variable
and greater in periods of
economic stress.
BBB--Bonds that are rated
BBB have below average
protection factors but are
still considered sufficient
for prudent investment.
Considerable variability in
risk during economic cycles.
To provide more detailed
indications of credit quality, the AA,
A and BBB ratings may be modified by
the addition of a plus or minus sign
to show relative standing within these
major categories.
The following summarizes the
ratings used by IBCA Limited and IBCA
Inc. ("IBCA") for bonds:
Obligations rated AAA by
IBCA have the lowest
expectation of investment
risk. Capacity for timely
repayment of principal and
interest is substantial,
such that adverse changes in
business, economic or
financial conditions are
unlikely to increase
investment risk
significantly.
IBCA also assigns a rating
to certain international and
U.S. banks. An IBCA bank
rating represents IBCA's
current assessment of the
strength of the bank and
whether such bank would
receive support should it
experience difficulties. In
its assessment of a bank,
IBCA uses a dual rating
system comprised of Legal
Ratings and Individual
Ratings. In addition, IBCA
assigns banks Long and
Short-Term Ratings as used
in the corporate ratings
discussed above. Legal
Ratings, which range in
gradation from 1 through 5,
address the question of
whether the bank would
receive support provided by
central banks or
shareholders if it
experienced difficulties,
and such ratings are
considered by IBCA to be a
prime factor in its
assessment of credit risk.
Individual Ratings, which
range in gradations from A
through E, represent IBCA's
assessment of a bank's
economic merits and address
the question of how the bank
would be viewed if it were
entirely independent and
could not rely on support
from state authorities or
its owners.
The following summarizes the
two highest ratings used by Moody's
for short-term notes and variable rate
demand obligations:
MIG-1/VMIG-1. Obligations
bearing these designations
are of the best quality,
enjoying strong protection
by established cash flows,
superior liquidity support
or demonstrated broad-based
access to the market for
refinancing.
MIG-2/VMIG-2. Obligations
bearing these designations
are of high quality with
margins of protection ample
although not as large as in
the preceding group.
The three highest rating
categories of D&P for short-term debt
are Duff 1, Duff 2, and Duff 3. D&P
employs three designations, Duff 1+,
Duff 1 and Duff 1-, within the highest
rating category. Duff 1+ indicates
highest certainty of timely payment.
Short-term liquidity, including
internal operating factors and/or
access to alternative sources of
funds, is judged to be "outstanding,
and safety is just below risk-free
U.S. Treasury short-term obligations."
Duff 1 indicates very high certainty
of timely payment. Liquidity factors
are excellent and supported by good
fundamental protection factors. Risk
factors are considered to be minor.
Duff 1- indicates high certainty of
timely payment. Liquidity factors are
strong and supported by good
fundamental protection factors. Risk
factors are very small. Duff 2
indicates good certainty of timely
payment. Liquidity factors and company
fundamentals are sound. Although
ongoing funding needs may enlarge
total financing requirements, access
to capital markets is good. Risk
factors are small. Duff 3 indicates
satisfactory liquidity and other
protection factors qualify issue as to
investment grade. Risk factors are
larger and subject to more variation.
Nevertheless, timely payment is
expected.
D&P uses the fixed-income
ratings described above under
"Description of Bond Ratings" for tax-
exempt notes and other shortterm
obligations.
DESCRIPTION OF COMMERCIAL PAPER
RATINGS
Commercial paper rated A-1
by S&P indicates that the degree of
safety regarding timely payment is
strong. Those issues determined to
possess extremely strong safety
characteristics are denoted in A-1+.
Capacity for timely payment on
commercial paper rated A-2 is
satisfactory but the relative degree
of safety is not as high as for issues
designated A-1.
The rating Prime-1 is the
highest commercial paper rating
assigned by Moody's. Issuers rated
Prime-1 (or related supporting
institutions) are considered to have a
superior capacity for repayment of
short-term promissory obligations.
Issuers rated Prime-2 (or related
supporting institutions) are
considered to have strong capacity for
repayment of short-term promissory
obligations. This will normally be
evidenced by many of the
characteristics of issuers rated
Prime-1 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.
The highest rating of D&P
for commercial paper is Duff 1. D&P
employs three designations, Duff 1
plus, Duff 1 and Duff 1 minus, within
the highest rating category. Duff 1
plus indicates highest certainty of
timely payment. Short-term liquidity,
including internal operating factors
and/or ready access to alternative
sources of funds, is judged to be
"outstanding, and safety is just below
risk-free U.S. Treasury short-term
obligations". Duff 1 indicates very
high certainty of timely payment.
Liquidity factors are excellent and
supported by strong fundamental
protection factors. Risk factors are
considered to be minor. Duff 1 minus
indicates high certainty of timely
payment. Liquidity factors are strong
and supported by good fundamental
protection factors. Risk factors are
very small.
G00204-04(12/95)
