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[LOGO]
FIRST FUNDS 370 17th Street
Suite 2700
GROWTH & INCOME PORTFOLIO Denver, Colorado 80202
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PROSPECTUS FOR CLASS I, II, AND III
October 25, 1996
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First Funds (the Trust) offers investors a convenient and economical means of
investing in a professionally managed equity mutual fund. The objective of the
Growth & Income Portfolio (formerly the Total Return Equity Portfolio) (the
Portfolio) is to achieve maximum total return through a combination of capital
appreciation and dividend income consistent with reasonable risk by investing
primarily in equity securities. The Portfolio's net asset value per share will
fluctuate in response to changes in the value of its investments.
This Prospectus is designed to provide you with information that you
should know before investing. Please read and retain this document for future
reference. This Prospectus offers Class I, II and III shares of the
Portfolio. Class I shares are designed exclusively for investment of monies
held in non-retail trust, advisory, agency, custodial or similar accounts
(Institutional Accounts). Class I shares may be purchased for Institutional
Accounts by financial institutions, business organizations, corporations,
municipalities, non-profit institutions and other entities serving in trust,
advisory, agency, custodial or similar capacities (each, an Institutional
Investor and collectively, Institutional Investors) that meet the investment
threshold for this Class of shares. Class II and III shares are designed for
individuals and other investors who seek mutual fund investment convenience
plus a lower investment minimum. These Classes offer investors differing
expense and sales load structures to choose between. See "Expense Summary" on
page 3.
A Statement of Additional Information (dated October 25, 1996) for the
Portfolio has been filed with the Securities and Exchange Commission (SEC)
and is incorporated herein by reference. This Prospectus, the Annual Report
and the Statement of Additional Information are available free upon request
from ALPS Mutual Funds Services, Inc., (ALPS), the Portfolio's Distributor.
The Annual Report for the fiscal period ended June 30, 1996 for the Portfolio
is incorporated into the Statement of Additional Information by reference.
Please call ALPS at 1-800-442-1941 (option 1) for more information concerning
each Class of shares. If you are investing through a broker, other financial
institution or adviser (Investment Professional), please contact that
institution directly.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED
BY, FIRST TENNESSEE BANK NATIONAL ASSOCIATION OR ANY DEPOSITORY INSTITUTION.
SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
TNTREQ-pro-1096
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TABLE OF CONTENTS
PAGE
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Summary Of Portfolio Expenses ............................................. 3
Financial Highlights ...................................................... 5
What Is The Investment Objective Of The Portfolio? ........................ 6
Is The Portfolio A Suitable Investment?; Investment Risks ................ 6
What Are The Portfolio's Investment Policies And Limitations? ............. 7
How Are Investments, Exchanges And Redemptions Made? ...................... 7
How Is Performance Calculated? ............................................ 14
Portfolio Transactions .................................................... 15
What Is The Effect Of Federal Income Tax On This Investment? .............. 15
What Advisory And Other Fees Does The Portfolio Pay? ...................... 16
How Is The Portfolio Organized? ........................................... 17
Investment Instruments, Transactions, Strategies And Risks ................ 17
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2
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SUMMARY OF PORTFOLIO EXPENSES
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The purpose of the table below is to assist you in understanding the
various costs and expenses that you would bear directly or indirectly. This
standard format was developed for use by all mutual funds to help you make
your investment decisions. The information below is based upon the Portfolio's
expenses for the fiscal year ended June 30, 1996 adjusted to reflect new
servicing arrangements. This expense information should be considered along
with other important information, such as the Portfolio's investment objective.
A. EXPENSE SUMMARY
GROWTH & INCOME
PORTFOLIO
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SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
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Maximum Sales Load on Purchases
(as a percentage of offering price) None 4.50% None
Sales Load Imposed on Reinvested
Distributions None None None
Deferred Sales Load None None None
Redemption Fees None None None
Exchange Fee None None None
ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees* .50% .50% .50%
12b-1 Fees .00% .00% .75%
Shareholder Servicing Fees .00% .25% .25%
Other Expenses .35% .40% .46%
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Total Portfolio Operating Expenses* .85% 1.15% 1.96%
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*Net of expense waivers
ANNUAL PORTFOLIO OPERATING EXPENSES. The Portfolio is obligated to pay
Management Fees to First Tennessee Bank National Association (First Tennessee)
for managing the Portfolio's investments. First Tennessee, as Investment
Adviser, has voluntarily agreed to waive its investment advisory fee to .50% of
the Portfolio's average net assets, however, there is no guarantee that the
waiver will continue. The Portfolio incurs Other Expenses, including
Administration and Co-Administration Fees, for maintaining shareholder records,
furnishing shareholder statements and reports, and other services. ALPS, the
Administrator, is entitled to and charges .15% of the Portfolio's average net
assets for administration services. First Tennessee, the Co-Administrator, is
entitled to and charges .05% of the Portfolio's average net assets for
co-administration services.
If the waivers were not in effect, Management Fees would be .65% for each
Class. Total Portfolio Operating Expenses would be estimated as follows:
GROWTH & INCOME
PORTFOLIO
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CLASS I CLASS II CLASS III
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Total Portfolio Operating Expenses 1.00% 1.30% 2.11%
There is no guarantee that any waivers will continue at their stated
levels.
Management Fees, 12b-1 Fees, Shareholder Servicing Fees, and Other
Expenses, are reflected in the Portfolio's share price and are not charged
directly to individual accounts. 12b-1 Fees are paid by Class III of the
Portfolio to ALPS for services and expenses in connection with distribution.
Shareholder Servicing Fees are paid by Class II and III of the
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Portfolio to securities brokers, financial institutions or advisers
(Investment Professionals) for services and expenses incurred in connection
with providing personal service to shareholders and/or maintenance of
shareholder accounts. Long-term shareholders may eventually pay more than the
economic equivalent of the maximum 8.50% front-end sales charge permitted by
the National Association of Securities Dealers, Inc. (NASD) due to 12b-1
fees. Please see page 16 for further information.
B. EXAMPLE: You would pay the following expenses for every $1,000
investment in each Class of shares of the Growth & Income Portfolio assuming
(1) 5% annual return, (2) redemption at the end of each time period, (3) that
operating expenses (net of expense waivers) are the same as described above,
and (4) reinvestment of all dividends and distributions. THE RETURN OF 5% AND
EXPENSES SHOULD NOT BE CONSIDERED INDICATIONS OF ACTUAL OR EXPECTED PERFORMANCE
OR PORTFOLIO OPERATING EXPENSES, BOTH OF WHICH MAY VARY SIGNIFICANTLY:
GROWTH & INCOME
PORTFOLIO
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CLASS I CLASS II CLASS III
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1 year $9 $56* $20
3 years $27 $80* $62
5 years $47 $106* $107
10 years $105 $179* $230
*Reflects imposition of maximum sales charge at the beginning of the period.
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FINANCIAL HIGHLIGHTS
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The table that follows is included in the Annual Report for the Portfolio
dated June 30, 1996 and has been audited by Price Waterhouse LLP, independent
accountants. Their report on the financial statements and the financial
highlights for the Portfolio is included in the Annual Report. The financial
statements and financial highlights are incorporated by reference into the
Portfolio's Statement of Additional Information. The Annual Report contains
additional performance information and will be made available upon request
and without charge.
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GROWTH & INCOME PORTFOLIO
(FORMERLY THE TOTAL RETURN EQUITY PORTFOLIO)
CLASS I CLASS II CLASS III
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For the Year For the Year For the Year
Ended June 30, Ended June 30, Ended June 30,
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1996 1995 1994** 1996**** 1996 1995 1994***
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<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of
period $12.22 $10.53 $10.00 $13.05 $12.23 $10.51 $10.60
-------- -------- ------- ------- ------- ------- ------
Income from investment operations:
Net investment income 0.19 0.23 0.17 0.09 0.03 0.06 0.06
Net realized and unrealized gain (loss) on
investments 2.58 2.21 0.57 1.74 2.60 2.24 (0.05)
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Total from investment operations 2.77 2.44 0.74 1.83 2.63 2.30 0.01
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Distributions:
Net investment income (0.19) (0.23) (0.17) (0.08) (0.07) (0.06) (0.06)
Net realized gain (0.68) (0.52) (0.04) (0.68) (0.68) (0.52) (0.04)
-------- -------- ------- ------- ------- ------- ------
Total distributions (0.87) (0.75) (0.21) (0.76) (0.75) (0.58) (0.10)
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Net asset value, end of period $14.12 $12.22 $10.53 $14.12 $14.11 $12.23 $10.51
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TOTAL RETURN+ 23.54% 24.20% 7.39%# 14.71%# 22.19% 22.61% 0.08%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $159,146 $114,000 $82,751 $1,918 $36,892 $19,363 $2,094
Ratio of expenses to average daily net
assets (1) 0.76% 0.47% 0.34%* 1.06%* 1.87% 1.72% 1.83%*
Ratio of net investment income to
average net assets 1.40% 2.12% 1.83%* 1.10%* 0.29% 0.87% 0.34%*
Portfolio turnover rate 41% 33% 83%* 41% 41% 33% 83%*
(1) During the period, various fees
were waived. The ratio of expenses to
average net assets had such waivers not
occurred is as follows. 1.00% 0.99% 1.05%* 1.30%* 2.11% 2.26% 6.03%*
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* Annualized.
** Class commenced operations on August 2, 1993.
*** Fund commenced operations on December 9, 1993.
**** Class commenced operations on December 20,1995.
+ Total return would have been lower had
various fees not been waived during the period.
# Total return for periods of less than one year
are not annualized.
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WHAT IS THE INVESTMENT OBJECTIVE OF THE PORTFOLIO?
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First Tennessee serves as Investment Adviser to the Portfolio and, with the
prior approval of the Board of Trustees (the Trustees), has engaged Highland
Capital Management Corp. (Highland), to act as Sub-Adviser to the Portfolio.
Subject to First Tennessee's supervision, Highland is responsible for the
day-to-day investment management of the Portfolio, including providing
investment research and credit analysis concerning Portfolio investments and
conducting a continuous program of investment of Portfolio assets in accordance
with the investment policies and objectives of the Portfolio. For additional
information about the Portfolio's investment advisory arrangements, see "What
Advisory And Other Fees Does The Portfolio Pay? - Investment Advisory and
Management and Sub-Advisory Agreements" beginning on page 16.
The investment objective of the Portfolio is to achieve maximum total
return through a combination of capital appreciation and dividend income by
investing at least 65% of its total assets in equity securities. However, the
Investment Adviser and Sub-Adviser currently intend, under normal circumstances,
to invest at least 80% of the Portfolio's total assets in equity securities,
except where prevailing market conditions require a more defensive posture.
There is no assurance that the Portfolio will achieve its investment objective.
The permitted investments of the Portfolio are as follows:
The Portfolio invests primarily in common stock and American Depository
Receipts (ADRs) of U.S. and international companies that trade on major
exchanges (NYSE, ASE, NASDAQ). Highland will analyze the fundamental values both
of particular companies and industries. Fundamental analysis considers a
company's essential soundness and future prospects, as well as overall industry
outlook.
The Portfolio may also invest in convertible preferred stock, bonds and
debentures that are convertible into common stock, options and may sell short
securities it owns. The Portfolio may engage in repurchase agreements and
reverse repurchase agreements, may buy and sell securities on a when-issued or
delayed-delivery basis, and may purchase warrants, interests in real estate
investment trusts, forward currency contracts, illiquid and restricted
securities, and shares in other investment companies. The Portfolio may, for
temporary defensive or liquidity purposes, invest without limit in short-term
money market securities including, but not limited to, U.S. government
obligations, commercial paper, and certificates of deposit.
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IS THE PORTFOLIO A SUITABLE INVESTMENT?; INVESTMENT RISKS
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By itself, the Portfolio does not constitute a balanced investment plan.
The Growth & Income Portfolio emphasizes maximizing total return through a
combination of capital appreciation and dividend income by investing primarily
in equity securities. An investment in the Portfolio may involve greater risk
than is inherent in other types of investments since it seeks capital
appreciation, and the value of its investments will generally fluctuate in
response to stock market conditions. Further, investment in the securities of
issuers in any foreign country involves special risks and considerations not
typically associated with investing in U.S. issuers. The Portfolio's share
price, yield and total return will fluctuate. An investment in the Portfolio may
be worth more or less than the original cost when shares are redeemed.
In addition, the Portfolio may invest in instruments and securities
generally known as derivative investments. These investments may include the use
of forward currency contracts, put and call option contracts, zero coupon bonds
and stripped fixed-income obligations. Highland may not buy all of these
instruments or use all of these techniques unless it believes that doing so will
help the Portfolio achieve its investment objective. Use of these instruments
and techniques can alter the risk and return characteristics of the Portfolio.
They may increase the Portfolio's volatility and may involve the investment of
small amounts of cash relative to the magnitude of the risk assumed. They may
also result in a loss of principal if Highland judges market conditions
incorrectly or employs a strategy that does not correlate well with the
Portfolio's investment strategy. Positions in options involve the risk that such
options may fail as a hedging technique and that closing transactions may not be
effected where a liquid secondary market does not exist.
Further information about the types of securities in which the Portfolio
may invest and their related risks, as well as the investment policies of the
Portfolio in general are set forth in the section "Investment Instruments,
Transactions, Strategies And Risks " on page 17 and in the Statement of
Additional Information.
6
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WHAT ARE THE PORTFOLIO'S INVESTMENT POLICIES AND LIMITATIONS?
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INVESTMENT LIMITATIONS. The Growth & Income Portfolio has adopted the
following investment limitations:
(1) With respect to 75% of the Portfolio's assets, the Portfolio will
not purchase a security, other than U.S. government securities, if, as a result,
(a) more than 5% of its total assets would be invested in the securities of any
single issuer; or (b) the Portfolio would own more than 10% of the voting
securities of any single issuer.
(2) The Portfolio will not invest 25% or more of
its total assets in a particular industry, other than U.S. government
obligations.
(3) (a) The Portfolio may borrow money solely for temporary or
emergency purposes, but not in an amount exceeding 33 1/3% of its total assets.
(b) The Portfolio may borrow money from banks, or by engaging in reverse
repurchase agreements. (c) The Portfolio will not purchase securities when
borrowings exceed 5% of its total assets. If the Portfolio borrows money, its
share price may be subject to greater fluctuation until the borrowing is paid
off. To this extent, purchasing securities when borrowings are outstanding may
involve an element of leverage.
(4) (a) The Portfolio may temporarily lend its portfolio securities to
broker-dealers and institutions, but only when the loans are fully
collateralized. (b) Loans, in the aggregate, will be limited to 33 1/3% of the
Portfolio's total assets.
Unless otherwise noted, the Portfolio's policies and limitations are not
fundamental and may be changed by the Trustees without shareholder approval. The
fundamental policies of the Portfolio that require shareholder approval prior to
any changes are: the Portfolio's investment objective, and limitations (1), (2),
(3)(a), and (4)(b) above. These limitations and the Portfolio's policies are
considered at the time of purchase of securities; the sale of securities is not
required in the event of a subsequent change in circumstances.
The investment policies and limitations set forth above are supplemented by
the investment policies and limitations in the Statement of Additional
Information. No assurance can be made that the Portfolio will achieve its
objective, but it will follow the investment style described in this Prospectus.
From time to time, the Portfolio, to the extent consistent with its
investment objective, policies, and restrictions, may invest in securities of
companies with which First Tennessee or any affiliates have lending
relationships.
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HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?
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CLASS I
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WHO MAY INVEST?
Class I shares are designed exclusively for investment of monies held in
non-retail trust, advisory, agency, custodial or similar Institutional Accounts.
Class I shares may be purchased for Institutional Accounts by financial
institutions, business organizations, corporations, municipalities, non-profit
institutions, and other Institutional Investors serving in a trust, advisory,
agency, custodial or similar capacity who meet the investment minimum.
HOW IS AN INSTITUTIONAL ACCOUNT ESTABLISHED?
An initial investment must be preceded by or made in conjunction with the
establishment of an Institutional Account with an Institutional Investor.
Establishment of an Institutional Account may require that documents and
applications be completed and signed before the investment can be implemented.
The Institutional Investor may require that certain documents be provided prior
to making a redemption from the Portfolio. Institutional Investors may charge
fees in addition to those described herein. Fee schedules for Institutional
Accounts are available upon request from the Institutional Investor and are
detailed in the agreements by which each client opens an account with an
Institutional Investor.
HOW ARE INVESTMENTS MADE?
Each Institutional Investor will transmit orders to the Transfer Agent,
Chase Global Funds Services Company (CGFSC). If an order is received by CGFSC in
proper form prior to 4:00 p.m. Eastern Time on any Business Day (as
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defined in the section "HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE -
Class I, II and III - How Are Portfolio Shares Valued?") and the funds are
received by CGFSC that day, the investment will earn dividends declared, if
any, on the day of purchase. Institutional Investors will wire funds through
the Federal Reserve System. Purchases will be processed at the net asset
value per share (NAV) calculated after an order is received in proper form
and accepted by CGFSC. The Portfolio requires advance notification of all
wire purchases. To secure same day acceptance of federal funds (monies
transferred from one bank to another through the Federal Reserve System with
same-day availability), an Institutional Investor must call CGFSC at
1-800-442-1941, (option 2) prior to 4:00 p.m. Eastern Time on any Business
Day to advise it of the wire. The Trust may discontinue offering its shares
in any Class of a Portfolio without notice to shareholders.
MINIMUM INVESTMENT AND ACCOUNT BALANCE. The minimum initial investment for
each Institutional Investor is $100,000. Institutional Investors may satisfy the
minimum investment by aggregating their Institutional Accounts within the
Portfolio. Subsequent investments may be in any amount. If an Institutional
Investor's Class I account falls below $50,000 due to redemption, the Portfolio
may close the account. An Institutional Investor may be notified if the minimum
balance is not being maintained and will be allowed 30 days to make additional
investments before its account is closed. Shares will be redeemed at the NAV on
the day the account is closed, and proceeds will be sent to the address of
record.
Exchanges are generally permitted from Class I to another class should a
beneficial owner of these shares cease to be eligible to purchase shares of
Class I. Class I shares held in an Institutional Account may be converted to
shares of another Class upon distribution.
HOW ARE REDEMPTIONS MADE?
Institutional Investors may redeem all or a portion of their account shares
on any Business Day. Shares will be redeemed at the NAV next calculated after
CGFSC has received the redemption request in proper form and will earn dividends
declared, if any, through the day prior to redemption. If an account is closed,
any accrued dividends will be paid at the beginning of the following month.
Institutional Investors may make redemptions by wire provided they have
established a wire account with CGFSC. Please call 1-800-442-1941, (option 2) to
advise CGFSC of the wire. If telephone instructions are received before 4:00
p.m. Eastern Time on any Business Day, proceeds of the redemption will be wired
as federal funds on the next Business Day to the bank account designated with
CGFSC. The Institutional Investor may change the bank account designated to
receive an amount redeemed at any time by sending a letter of instruction with a
signature guarantee to CGFSC at 73 Tremont Street, Boston, Massachusetts, 02108.
Pursuant to the Investment Company Act of 1940, as amended (1940 Act), if
making immediate payment of redemption proceeds could adversely affect the
Portfolio, payments may be made up to seven days later. Also, when the New York
Stock Exchange (NYSE) or the Federal Reserve Bank of New York (New York Federal
Reserve) is closed (or when trading is restricted) for any reason other than
customary weekend or holiday closings, or under any emergency circumstances as
determined by the SEC to merit such action, the right of redemption may be
suspended or the date of payment postponed for a period of time that may exceed
seven days. In addition, the Portfolio reserves the right to advance the time on
that day by which purchase and redemption orders must be received. To the extent
Portfolio securities are traded in other markets on days when either the NYSE or
the New York Federal Reserve is closed, the Portfolio's NAV may be affected on
days when investors do not have access to the Portfolio to purchase or redeem
shares.
If transactions by telephone cannot be executed (for example, during times
of unusual market activity), orders may be placed by mail to CGFSC. In case of
suspension of the right of redemption, the Institutional Investor may either
withdraw its request for redemption or it will receive payment based on the NAV
next determined after the termination of the suspension.
ADDITIONAL INFORMATION
The Portfolio also reserves the right to reject any specific purchase
order, including certain purchases by exchange. Purchase orders may be refused
if, in First Tennessee's opinion, they are of a size that would disrupt
management of the Portfolio.
In order to allow First Tennessee to manage the Portfolio most effectively,
Institutional Investors are strongly urged to initiate all trades (investments,
exchanges and redemptions of shares) as early in the day as possible and to
notify CGFSC at least one day in advance of trades in excess of $1 million. In
making these trade requests, the name of the Institutional Investor and the
account number(s) must be supplied.
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Transactions may be initiated by telephone. Please note that the Portfolio
and its agents will not be responsible for any losses resulting from
unauthorized telephone transactions if the Portfolio or its agents follow
reasonable procedures designed to verify the identity of the caller. These
procedures may include requesting additional information or using personalized
security codes. The Portfolio or its agents may also record calls and an
Institutional Investor should verify the accuracy of confirmation statements
immediately after receipt. If an Institutional Investor does not want to be able
to initiate redemptions and exchanges by telephone, please call CGFSC for
instructions.
CLASS II AND III
WHO MAY INVEST?
Class II and III shares are designed for individuals and other investors
who seek mutual fund investment convenience plus a lower investment minimum.
These Classes offer investors differing expense and sales load structures to
choose between. See "Summary Of Portfolio Expenses" on page 3.
INVESTMENT REQUIREMENTS
The minimum initial investment in Class II or III shares is $1,000.
Subsequent investments may be in any amount greater than $100. If you
participate in the Systematic Investing Program or the "A Plus Card Program" (a
consumer discount card program provided by "A" Plus Strategic Alliances, Inc., a
subsidiary of First Tennessee), the minimum initial investment is $250, and
subsequent investments may be in any amount of $25 or greater. If you are an
employee of First Tennessee or any of its affiliates and you participate in the
Systematic Investing Program, the minimum initial investment is $50, and
subsequent investments may be in any amount of $25 or greater. See page 11 for
additional information on the Systematic Investing Program. If your balance in
the Portfolio falls below the applicable minimum investment requirement due to
redemption, you may be given 30 days' notice to reestablish the minimum balance.
If you do not reestablish the minimum balance, your account may be closed and
the proceeds mailed to you at the address on record. Shares will be redeemed on
the day the account is closed.
All purchases must be made in U.S. dollars and checks must be drawn on U.S.
banks. No cash will be accepted. If you make a purchase with more than one
check, each check must have a value of at least $100, and the minimum investment
requirement still applies (excluding the specific circumstances, stated above,
which reduce the minimum investment requirement). The Portfolio reserves the
right to limit the number of checks processed at one time. If your check does
not clear, your purchase will be canceled and you could be liable for any losses
or fees incurred.
You may initiate any transaction either directly or through your Investment
Professional. Please note that the Portfolio and its agents will not be
responsible for any losses resulting from unauthorized transactions if the
Portfolio or its agents follow reasonable procedures designed to verify the
identity of the caller. These procedures may include requesting additional
information or using personalized security codes. Your Investment Professional
may also record calls and you should verify the accuracy of your confirmation
statements immediately after you receive them. If you do not want to be able to
redeem and exchange by telephone, please check the box on your application (if
you invest directly) or, if you invest through an Investment Professional,
please call your Investment Professional for instructions.
HOW DO I SET UP AN ACCOUNT?
You may set up an account directly in the Portfolio or you may invest in
the Portfolio through your Investment Professional. See page 11 for information
on how to invest through your Investment Professional. Shares will be purchased
based on the NAV next calculated after CGFSC has received the request in proper
form. If you are investing through an Investment Professional, transactions that
your Investment Professional initiates should be transmitted to CGFSC before
4:00 p.m. Eastern Time in order for you to receive that day's share price. CGFSC
must receive payment within three business days after an order is placed.
Otherwise, the purchase order may be canceled and you could be held liable for
the resulting fees and/or losses. An investor will earn dividends declared, if
any, on the day of purchase if the funds are received by CGFSC that day.
HOW DO I INVEST DIRECTLY?
When opening a new account directly, you must complete and sign an account
application and send it to CGFSC, 73 Tremont Street, Boston, MA 02108. Telephone
representatives are available at 1-800-442-1941, (option 2) between the hours of
8:00 a.m. to 4:00 p.m. Central Time (9:00 a.m. to 5:00 p.m. Eastern Time),
Monday through Friday.
Investments may be made in several ways:
BY MAIL: Make your check payable to First Funds: Growth & Income
Portfolio, and mail it, along with the application, to the address indicated on
the application. Your account will be credited on the business day that CGFSC
receives your application in good order and processes your transaction.
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BY BANK TRANSFER: Bank transfer allows you to move money between your bank
account and your First Funds account. This automatic service allows you to
transfer money from your bank account via the Automated Clearing House (ACH)
network to your Portfolio account. First, a Portfolio account must be
established, and an application sent to CGFSC. Be sure to indicate on the
application under the section Account Privileges that you desire to have this
option. Once you have completed this process, you can initiate a bank transfer
by contacting CGFSC at 1-800-442-1941, (option 2). Please allow two or three
days after the authorization for the transfer to occur.
BY WIRE: Call 1-800-442-1941, (option 2) to set up your Portfolio account
to accommodate wire transactions. To initiate your wire transaction, call your
depository institution. Federal funds (monies transferred from one bank to
another through the Federal Reserve System with same-day availability) should be
wired to:
Chase Manhattan Bank, N.A.
ABA #021000021
First Funds
Credit DDA #910-2-733335
(Account Registration)
(Account Number)
(Wire Control Number) *See Below*
Prior to sending wires, please be sure to call 1-800-442-1941, (option 2)
to receive a Wire Control Number to be included in the body of the wire (see
above).
Your bank may charge you a fee for this service.
HOW DO I REDEEM SHARES WHEN INVESTING DIRECTLY?
You may redeem all or a portion of your shares on any day that the
Portfolio is open for business. Shares will be redeemed at the NAV next
calculated after CGFSC has received the redemption request and will earn
dividends declared, if any, through the day prior to redemption. If a Portfolio
account is closed, any accrued dividends will be paid at the beginning of the
following month.
You may redeem shares in several ways:
BY MAIL: Write a "letter of instruction" with your name, the Portfolio's
name, your Portfolio account number, the dollar amount or number of shares to be
redeemed, and any additional requirements that apply to each particular account.
You will need the letter of instruction signed by all persons required to sign
for transactions, exactly as their names appear on the account application,
along with a signature guarantee.
A signature guarantee is designed to protect you, the Portfolio, and its
agents from fraud. Your written request requires a signature guarantee if you
wish to redeem more than $1,000 worth of shares; if your Portfolio account
registration has changed within the last 30 days; if the check is not being
mailed to the address on your account; if the check is not being made out to the
account owner; or if the redemption proceeds are being transferred to another
First Funds account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public.
BY BANK TRANSFER: When establishing your account in the Portfolio, you
must have indicated this account privilege in order to authorize the redemption
of monies with the proceeds transferred to your bank account. To authorize a
redemption, simply contact CGFSC at 1-800-442-1941, (option 2) and your
redemption will be processed at the NAV next calculated. Please allow two or
three days after the authorization for monies to reach your bank account.
BY WIRE: You may make redemptions by wire provided you have established a
Portfolio account to accommodate wire transactions. If telephone instructions
are received before 4:00 p.m. Eastern Time, proceeds of the redemption will be
wired as federal funds on the next Business Day to the bank account designated
with CGFSC. You may change the bank account designated to receive an amount
redeemed at any time by sending a letter of instruction with a signature
guarantee to CGFSC at 73 Tremont Street, Boston, Massachusetts, 02108.
ADDITIONAL REDEMPTION REQUIREMENTS: The Portfolio may hold payment on
redemptions until it is reasonably satisfied that investments made by check have
been collected, which can take up to seven days. Also, when the NYSE or the New
York Federal Reserve is closed (or when trading is restricted) for any reason
other than its customary weekend or holiday closings, or under any emergency
circumstances as determined by the SEC to merit such action, the right of
redemption may be suspended or the date of payment postponed for a period of
time that may exceed seven days. In addition, the Portfolio reserves the right
to advance the time on that day by which purchase and redemption orders
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<PAGE>
must be received. To the extent that portfolio securities are traded in other
markets on days when either the NYSE or the New York Federal Reserve is
closed, each Portfolio's NAV may be affected on days when investors do not
have access to the Portfolios to purchase or redeem shares.
If you are unable to reach CGFSC by telephone (for example, during times of
unusual market activity), consider placing your order by mail directly to CGFSC.
In case of suspension of the right of redemption, you may either withdraw your
request for redemption or you will receive payment based on the NAV next
determined after the termination of the suspension.
HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?
If you are investing through your Investment Professional, you may be
required to set up a brokerage or agency account. Please call your Investment
Professional for information on establishing an account. If you are purchasing
shares of the Portfolio through a program of services offered or administered by
your Investment Professional, you should read the program materials in
conjunction with this Prospectus. Certain features of such programs may impose
additional requirements and charges for the services rendered. Your Investment
Professional may offer any or all of the services mentioned in this section, and
is responsible for initiating all initial purchase transactions. Please contact
your Investment Professional for information on these services.
SYSTEMATIC INVESTING PROGRAM
The Systematic Investing Program offers a simple way to maintain a regular
investment program. You may arrange automatic transfers (minimum $25 per
transaction) from your bank account to your First Funds account on a periodic
basis. When you participate in this program, the minimum initial investment in
each Portfolio is $250. If you are an employee of First Tennessee or any of its
affiliates, the minimum initial investment in the Portfolio is $50. You may
change the amount of your automatic investment, skip an investment, or stop the
Systematic Investing Program by calling CGFSC at 1-800-442-1941, (option 2) or
your Investment Professional at least three Business Days prior to your next
scheduled investment date.
SYSTEMATIC WITHDRAWAL PLAN
You can have monthly, quarterly or semi-annual checks sent from your
account to you, to a person named by you, or to your bank checking account. Your
Systematic Withdrawal Plan payments are drawn from share redemptions and must be
in the amount of $100 or more per Portfolio per month. If Systematic Withdrawal
Plan redemptions exceed income dividends earned on your shares, your account
eventually may be exhausted. Please contact your Investment Professional for
more information.
ADDITIONAL INFORMATION
TAX-DEFERRED RETIREMENT PLANS: Retirement plans can offer significant tax
savings to individuals. Please call ALPS at 1-800-442-1941 (option 1) or your
Investment Professional for more information on the plans and their benefits,
provisions and fees. CGFSC or your Investment Professional can set up your new
account in the Portfolio under one of several tax-deferred plans. These plans
let you invest for retirement and defer the tax on your investment income.
Minimums may differ from those listed on page 9. Plans include Individual
Retirement Accounts (IRAs), Rollover IRAs, Keogh Plans, and Simplified Employee
Pension Plans (SEP-IRAs).
CLASS II
- --------
PUBLIC OFFERING PRICE
The public offering price for Class II shares is the sum of the NAV plus a
sales load. As indicated below, a portion of this load may be reallowed to
Investment Professionals which have entered into an agreement with ALPS, the
Portfolio's Distributor (Service Organizations). You may calculate your sales
load as follows:
<TABLE>
TOTAL SALES LOAD REALLOWANCE TO
FOR CLASS II SHARES SERVICE ORGANIZATIONS
------------------- ---------------------
AS A % OF OFFERING AS A % OF OFFERING
AMOUNT OF TRANSACTION PRICE PER SHARE AS A % OF NAV PRICE PER SHARE
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 to $249,999 3.50 3.63 3.00
$250,000 to $499,999 2.50 2.56 2.25
$500,000 to $999,999 1.50 1.52 1.25
$1,000,000 and over 0.50 0.50 0.40
</TABLE>
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<PAGE>
The reallowance to Service Organizations may be changed from time to time. ALPS,
at its expense, may provide additional non-cash promotional incentives to
eligible representatives of Service Organizations in the form of attendance at a
sales seminar at a resort. These incentives may be limited to certain eligible
representatives of Service Organizations who have sold significant numbers of
shares of any of the Portfolios of the Trust.
You may purchase Class II shares without a sales load if the purchase will
be (a) through a First Funds sponsored IRA; (b) through an IRA, 401 Plan, 403
Plan or directed agency account if the trustee, custodian, or agent thereof is a
direct or indirect subsidiary or franchisee bank of First Tennessee or its
affiliates; (c) by registered representatives, directors, advisory directors,
officers and employees (and their immediate families) of First Tennessee or its
affiliates ; (d) by a current or former Trustee, officer or employee of First
Funds; the spouse of a First Funds Trustee, officer or employee; a First Funds
Trustee acting as a custodian for a minor child of a First Funds Trustee,
officer or employee; or the child of a current or former Trustee, officer or
employee of First Funds who has reached the age of majority; (e) by a charitable
remainder trust or life income pool established for the benefit of a charitable
organization (as defined in Section 501(c)(3) of the Internal Revenue Code); (f)
for use in a financial institution or investment adviser managed account for
which a management or investment advisory fee is charged; (g) with redemption
proceeds from other mutual fund complexes on which the investor has paid a
front-end sales charge within the past 60 days upon presentation of purchase
verification information; or (h) through certain promotions where the load is
waived for investors.
In addition, you will not pay a sales load on the reinvestment of dividends
or distributions in the Portfolio or any other First Funds Portfolio, or in
connection with certain share exchanges as described under "How Are Investments,
Exchanges And Redemptions Made? - Class I, II, and III - How are Exchanges
Made?" on page 14. Further, you generally will not pay a sales load on Class II
shares of the Portfolio which you buy using proceeds from the redemption of a
First Funds Portfolio which does not charge a front-end load, if you obtained
such shares through an exchange for Class II shares which you purchased with a
sales load. A sales load will apply to your purchase of Class II shares in the
foregoing situation only to the extent that the Portfolio's sales load exceeds
the sales load you paid in the prior purchase of the Class II shares.
In addition, if you purchase Class II shares within 60 days after redeeming
shares of the Portfolio, you will receive credit towards the sales load payable
on the purchase to the extent of the sales load you paid on the shares you
redeemed. This reinstatement privilege may be exercised only with respect to
redemptions and purchases in the same First Funds Portfolio. The reinstatement
privilege can be exercised only one time with respect to any particular
redemption.
QUANTITY DISCOUNTS
You may be entitled to reduced sales charges through the Right of
Accumulation or a Letter of Intent, even if you do not make an investment of a
size that would normally qualify for a quantity discount.
To qualify for a reduction of or exception to the sales load, you or your
Investment Professional must notify the Transfer Agent, CGFSC at the time of
purchase or exchange. The reduction in sales load is subject to confirmation of
your holdings through a check of records. The Trust may modify or terminate
quantity discounts at any time. For more information about quantity discounts,
contact your Service Organization or ALPS at 1-800-442-1941 (option 1).
RIGHT OF ACCUMULATION. The sales charge schedule under the heading "How
Are Investments, Exchanges And Redemptions Made? - Public Offering Price" shows
that the sales load you will pay on Class II shares is reduced as your aggregate
investment increases. The Right of Accumulation allows you to combine certain
First Funds investments to determine your aggregate investment and the
applicable reduced sales load. You may combine the amount of your investment in
the Portfolio's Class II shares with the value of your investment in Class II of
any other First Funds Portfolio you own and on which you paid a sales load. If
you are a participant in a First Funds IRA or if you are a trustee or custodian
of another type of First Funds retirement plan, you may also include as part of
your aggregate investment any holdings through the IRA or in the plan even if a
load was not paid. If for example, you beneficially own Class II shares of a
First Funds Portfolio with an aggregate current value of $99,000 and you
subsequently purchase shares of the Portfolio having a current value of $1,000,
the load applicable to the subsequent purchase would be reduced to 3.50% of the
offering price. Similarly, each subsequent purchase of First Funds Class II
shares may be added to your aggregate investment at the time of purchase to
determine the applicable sales loads.
LETTER OF INTENT. A Letter of Intent allows you to purchase Class II
shares over a 13-month period at a reduced sales charge. The sales charge is
based on the total amount you intend to purchase plus the total net asset value
of Class II shares which you already own on which you have paid a sales load. If
you are a participant in a First Funds IRA or if you are a trustee or custodian
of another type of First Funds retirement plan, you may also credit towards
completion of your Letter of Intent any Class II shares held through the IRA or
in the plan, even if a load was not paid. Each investment you make during the
period may be made at the reduced sales charge that would apply to the total
amount you
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<PAGE>
intend to invest. The reduced sales load applies only to new purchases. If
you do not invest the total amount within the period, you may pay the
difference between the higher sales charge rate that would have been applied
to the purchases you made and the reduced sales charge rate you have paid.
Shares of the Portfolio equal to 5% of the amount you intend to invest will
be held in escrow and, if you do not pay the difference within 20 days
following the mailing of a request, the Transfer Agent will redeem a
sufficient amount of your escrowed shares to pay the additional sales charge.
After the terms of your Letter of Intent are fulfilled, the Transfer Agent
will release your escrowed shares.
If your purchases qualify for a further sales load reduction in addition to
that indicated in the Letter of Intent, the sales load will be adjusted to
reflect your total purchases. Signing a Letter of Intent does not bind you to
purchase the full amount indicated at the sales load in effect at the time of
signing, but you must complete the intended purchase to obtain the reduced sales
load. To apply, sign the Letter of Intent form at the time you purchase Class
II shares. You will be entitled to the applicable sales load that is in effect
at the date you submit the Letter of Intent until you complete your intended
purchase.
QUALIFICATION OF DISCOUNTS. As shown in the schedule of Class II sales
charges, larger purchases may result in lower sales charges to you. For purposes
of determining the amount of purchases using the Right of Accumulation and
Letter of Intent privileges, you may combine your purchase with:
- purchases by your spouse or his, her or your joint account or for the
account of any minor children, and
- the aggregate investment of any trustee or other Institutional Investor
for you and/or your spouse or your minor children.
A trustee or custodian of any qualified pension or profit sharing plan may
combine its aggregate purchases.
OTHER. Class II shares also incur Shareholder Servicing Fees. See
discussion under "WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY? -
Distribution Plans and Shareholder Servicing Plans."
CLASS III
- ---------
Class III shares are bought without a front-end load; that is, the offering
price for such shares will be their NAV. Class III shares incur Distribution
Fees and Shareholder Servicing Fees. See discussion under "WHAT ADVISORY AND
OTHER FEES DOES THE PORTFOLIO PAY? - Distribution Plans and Shareholder
Servicing Plans."
CLASS I, II AND III
- -------------------
HOW ARE PORTFOLIO SHARES VALUED?
The term "net asset value per share," or NAV, means the worth of one share.
The NAV of each Class of the Portfolio is calculated by adding that Class' pro
rata share of the value of all securities and other assets attributable to the
Portfolio, deducting that Class' pro rata share of Portfolio liabilities,
further deducting Class specific liabilities, and dividing the result by the
number of shares outstanding in that Class.
The Portfolio is open for business each day that both the NYSE and the
New York Federal Reserve are open (a Business Day). The NAV is calculated at
the close of the Portfolio's Business Day, which coincides with the close of
regular trading of the NYSE (normally 4:00 p.m. Eastern Time).
The Portfolio's securities and other assets are valued primarily on the
basis of market quotations furnished by pricing services, or if quotations are
not available, by a method that the Trustees believe accurately reflects fair
value. Foreign securities are valued on the basis of quotations from the primary
United States market in which they are traded or, if not traded on a U.S.
market, then their primary foreign market, and translated from foreign market
quotations into U.S. dollars using current exchange rates.
DISTRIBUTION OPTIONS: The Portfolio earns dividends from its stocks and
interest from bond, money market, and other fixed-income investments. These are
passed along as dividend distributions. The Portfolio may realize capital gains
if it sells securities for a higher price than it paid for them. These are
passed along as capital gain distributions. Income dividends for the Portfolio
are declared and paid monthly.
When you fill out your account application, you can specify how you want to
receive your distributions. Currently, there are three available options:
1. REINVESTMENT OPTION. Your dividend distributions and capital gain
distributions, if any, will be automatically reinvested in additional shares of
the Portfolio. Reinvestment of distributions will be made at that day's NAV. If
you do not indicate a choice on your application, you will be assigned this
option.
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<PAGE>
2. CASH OPTION. You will be sent a check for each dividend and capital
gain distribution, if any. Distribution checks will be mailed no later than
seven days after the last day of the month.
3. INCOME-EARNED OPTION. Your capital gain distributions will be
automatically reinvested, but you will be sent a check for each dividend
distribution.
HOW ARE EXCHANGES MADE?
An exchange is the redemption of shares of one Portfolio and the purchase
of shares of another. The exchange privilege is a convenient way to sell and
buy shares of other Portfolios registered in an investor's state. Except as
noted below, the Portfolio's shares may be exchanged for the same Class shares
of other First Funds Portfolios. The redemption and purchase will be made at
the next determined NAV after the exchange request is received and accepted by
CGFSC. You may execute exchange transactions by calling CGFSC at 1-800-442-1941
(option 2) prior to 4:00 p.m. Eastern Time on any Business Day.
Class II shares of the First Funds Money Market Portfolios are not
currently available for investment. Investors in Class II shares wishing to
exchange into one of the Money Market Portfolios will receive Class III shares.
When making an exchange or opening an account in another Portfolio by
exchange, the registration and tax identification numbers of the two accounts
must be identical. In order to open a new account through exchange, the minimum
initial investment requirements must be met.
Each exchange may produce a gain or loss for tax purposes. In order to
protect the Portfolio's performance and its shareholders, First Tennessee
discourages frequent exchange activity by investors in response to short-term
market fluctuations. The Portfolio reserves the right to refuse any specific
purchase order, including certain purchases by exchange if, in First Tennessee's
opinion, the Portfolio would be unable to invest effectively in accordance with
its investment objective and policies, or would otherwise be affected adversely.
Exchanges or purchase orders may be restricted or refused if the Portfolio
receives or anticipates individual or simultaneous orders affecting significant
portions of the Portfolio's assets. Although the Portfolio will attempt to give
prior notice whenever it is reasonably able to do so, it may impose these
restrictions at any time. The Portfolio reserves the right to modify or withdraw
the exchange privilege and to suspend the offering of shares in any Class
without notice to shareholders. You or your Institutional Investor, if you are
invested in Class I, will receive written confirmation of each exchange
transaction.
Exchanges are generally not permitted from Class I to another Class. Should
a beneficial owner of Class I shares cease to be eligible to purchase shares of
Class I, Class I shares held in an Institutional Account may be converted to
shares of another Class.
STATEMENTS AND REPORTS
You, or if Class I, the Institutional Investor, will receive a monthly
statement and a confirmation after every transaction that affects the account
registration. A statement with tax information will be mailed by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
or, if Class I, the Institutional Investor will receive the Portfolio's
financial statements. To reduce expenses, only one copy of the Portfolio's
reports (such as the Prospectus and Annual Report) will be mailed to each
investor or, if Class I, each Institutional Investor. Please write to ALPS to
request additional copies.
- --------------------------------------------------------------------------------
HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------
From time to time the Portfolio may quote the yield of Class I, II or III
shares in advertisements or in reports or other communications with
shareholders. The YIELD is a way of showing the rate of income that the
Portfolio earns on its investments as the percentage of its share price. To
calculate yield, the Portfolio takes the net investment income it earned from
its portfolio securities for a 30-day period, divides it by the average number
of shares entitled to receive dividends, and expresses the result as an
annualized percentage rate based on share price at the end of the 30-day period.
Yields do not reflect gains or losses from portfolio transactions. Yields are
calculated according to accounting methods that are standardized for all mutual
funds. Because yield accounting methods differ from the methods used for other
accounting purposes, the Portfolio's yield may not equal its distribution rate,
the income paid to an account, or the income reported in financial statements.
TOTAL RETURN for Class I, II or III of the Portfolio is based on the
overall dollar or percentage change in value of a hypothetical investment,
assuming dividends are reinvested. A CUMULATIVE TOTAL RETURN reflects
performance over a stated period of time. An AVERAGE ANNUAL TOTAL RETURN
reflects the hypothetical annually compounded rate that would have
14
<PAGE>
produced the same cumulative total return if performance had been constant
over the entire period. Because average annual returns tend to smooth out
variations in performance, you should recognize that they are not the same as
actual year-by-year results. The yield and total returns of the three Classes
of the Portfolio are calculated separately due to separate expense structures
as indicated in the "Summary Of Portfolio Expenses"; the yields and total
returns of Class II and Class III will be lower than that of Class I.
For additional performance information, contact your Investment
Professional or ALPS for a free Annual Report and Statement of Additional
Information for the Portfolio.
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Broker-dealers are utilized to conduct securities transactions for the
Portfolio and are chosen based upon professional ability and quality of
service.In additionthe Portfolio's investment advisers may consider a
broker-dealer's sales of shares of the Portfolio or recommendations to its
customers that they purchase shares of the Portfolio as a factor in the
selection of broker-dealers to execute transactions for the Portfolio. In
placing business with such broker-dealers, the advisers will seek the best
execution of each transaction.
Higher commissions may be paid to firms that provide research services to
the extent permitted by law. The frequency of Portfolio transactions - the
portfolio turnover rate - will vary from year to year depending on market
conditions. The Portfolio's portfolio turnover rate for the period ended June
30, 1996 was 41%.
- --------------------------------------------------------------------------------
WHAT IS THE EFFECT OF FEDERAL INCOME TAX ON THIS INVESTMENT?
- --------------------------------------------------------------------------------
The Portfolio intends to distribute substantially all of its net investment
income and capital gains, if any, to shareholders within each calendar year as
well as on a fiscal year basis. Any net capital gains realized are normally
distributed in December. Income dividends for the Portfolio are declared and
paid monthly.
FEDERAL TAXES. Distributions from the Portfolio's taxable income and
short-term capital gains are taxed as dividends, and long-term capital gain
distributions are taxed as long-term capital gains. A portion of the
Portfolio's dividends may qualify for the dividends-received deduction for
corporations. Distributions are taxable when they are paid, whether taken in
cash or reinvested in additional shares, except that distributions declared in
December and paid in January are taxable as if paid on December 31. The
Portfolio will send each investor or, if Class I, each Institutional Investor an
IRS Form 1099-DIV by January 31.
CAPITAL GAINS. A capital gain or loss may be realized when shares of the
Portfolio are redeemed or exchanged. For most types of accounts, the Portfolio
will report the proceeds of redemptions to each investor or, if Class I, the
Institutional Investor, and the IRS annually. However, because the tax
treatment also depends on the purchase price and your personal tax position,
regular account statements should be used to determine the tax gain or loss.
"BUYING A DIVIDEND." On the record date for a capital gain distribution or
an income dividend, the Portfolio's share price is reduced by the amount of the
distribution. If shares are bought just before the record date ("buying a
dividend"), the full price for the shares will be paid, and a portion of the
price will be received back as a taxable distribution.
OTHER TAX INFORMATION. The information above is only a summary of some of
the federal tax consequences generally affecting the Portfolio and its
shareholders, and no attempt has been made to discuss individual tax
consequences. In addition to federal tax, distributions may be subject to state
or local taxes. Institutional Investors and other shareholders should consult
their tax advisers for details and up-to-date information on the tax laws in
your state to determine whether the Portfolio is suitable given your particular
tax situation. It is not anticipated that the Portfolio's distributions will be
exempt from Tennessee personal income tax, except to the extent that any
distributions of income are attributable to interest on bonds or securities of
the U.S. government or any of its agencies or instrumentalities.
When you sign your account application, you will be asked to certify that
your taxpayer identification number is correct and that you are not subject to
backup withholding for failing to report income to the IRS. If you do not comply
with IRS regulations, the IRS can require the Portfolio to withhold 31% of
taxable distributions from your account.
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- -------------------------------------------------------------------------------
WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY?
- -------------------------------------------------------------------------------
INVESTMENT ADVISORY AND MANAGEMENT AND SUB-ADVISORY AGREEMENTS. For
managing its investment and business affairs, the Portfolio is obligated to pay
First Tennessee, 4990 Poplar Avenue, Memphis, Tennessee, a monthly management
fee at the annual rate of .65% of its average net assets. First Tennessee has
voluntarily agreed to waive its advisory fees to .50% of the Portfolio's average
net assets. This voluntary waiver can be discontinued at any time.
Under the Investment Advisory and Management Agreement, First Tennessee
may, with the prior approval of the Trustees, engage one or more sub-advisers
which may have full investment discretion to make all determinations with
respect to the investment and reinvestment of all or any portion of the
Portfolio's assets, subject to the terms and conditions of the Investment
Advisory and Management Agreement and the written agreement with any such
sub-adviser. In the event one or more sub-advisers is appointed by First
Tennessee, First Tennessee shall monitor and evaluate the performance of such
sub-advisers, allocate Portfolio assets to be managed by such sub-advisers,
recommend any changes in or additional sub-advisers when appropriate and
compensate each sub-adviser out of the investment advisory fee received by First
Tennessee from the Portfolio.
First Tennessee has experience as an investment adviser to individual,
corporate and institutional advisory clients, pension plans and collective
investment funds, with approximately $13.8 billion in assets under
administration (including nondiscretionary accounts) and $5.3 billion in assets
under management as of June 30, 1996, as well as experience in supervising
sub-advisers. For the Portfolio's fiscal year ended June 30, 1996, First
Tennessee earned $1,076,198 from the Portfolio before waiving $358,250 of its
fee.
Highland serves as the Sub-Adviser for the Portfolio subject to the
supervision of First Tennessee and pursuant to the authority granted to it under
its Sub-Advisory Agreement with First Tennessee. On March 1, 1994, Highland
merged with and into First Tennessee Investment Management, Inc. (FTIM), an
affiliate of First Tennessee, and changed its name to Highland Capital
Management Corp. FTIM (now Highland), has been a wholly-owned subsidiary of
First Tennessee National Corporation since 1972. First Tennessee and Highland
have a history of investment management that dates back to 1929. Highland has a
total of $2.1 billion in assets under management as of June 30, 1996. First
Tennessee is obligated to pay Highland a monthly sub-advisory fee at the annual
rate of .38% of the Portfolio's average net assets. Highland is currently
waiving some or all of its fees for the Portfolio.
ADMINISTRATOR AND DISTRIBUTOR. ALPS, 370 17th Street, Suite 2700, Denver,
Colorado 80202, serves as the Administrator and Distributor for the Portfolio.
As Administrator, ALPS assists in the Portfolio's administration and operation,
including but not limited to, providing office space and various legal and
operational services in connection with the regulatory requirements applicable
to the Portfolio. ALPS is entitled to and receives from the Portfolio a
monthly fee at the annual rate of .15% of average net assets.
First Tennessee, serves as the Co-Administrator for the Portfolio. As the
Co-Administrator, First Tennessee assists in the Portfolio's operation,
including but not limited to, providing non-investment related research and
statistical data and various operational and administrative services. First
Tennessee is entitled to and receives from the Portfolio a monthly fee at the
annual rate of .05% of average net assets.
As the Distributor, ALPS sells shares of the Portfolio as agent on behalf
of the Trust at no additional cost to the Trust. First Tennessee and its
affiliates do not participate in and are not responsible for selling as an agent
on behalf of the Trust, underwriting or distributing Trust shares. Consistent
with applicable law, affiliates of First Tennessee may receive commissions or
asset-based fees.
TRANSFER AGENT AND CUSTODIAN. Chase Global Funds Services Company, a
division of Chase Manhattan Bank, N.A. (CGFSC), provides transfer agent and
related services for the Portfolio. Chase Manhattan Bank, N.A. is Custodian of
the Portfolio's assets.
PRICING AND ACCOUNTING. CGFSC calculates the NAV and dividends of each
Class and maintains the Portfolio and general accounting records.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING PLANS. The Trustees have
adopted a Distribution Plan on behalf of Class III of the Portfolio pursuant to
Rule 12b-1 (the Rule) under the 1940 Act. The NASD subjects asset-based sales
charges to its maximum sales charge rule. Fees paid pursuant to the Portfolio's
Distribution Plan will be limited by the restrictions imposed by the NASD rule.
The Distribution Plan provides for payment of a fee to ALPS at the annual rate
of .75% of the average net assets of Class III. All or a portion of these fees
will in turn be paid to Investment Professionals as compensation for selling
shares of Class III and for providing ongoing sales support services. The
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<PAGE>
Trustees have also adopted Shareholder Servicing Plans on behalf of Class II and
III of the Portfolio, under which Service Organizations are paid at the annual
rate of .25% of each Class' average net assets for shareholder services and
account maintenance, including responding to shareholder inquiries, directing
shareholder communications, account balance maintenance, and dividend posting.
The Distribution Fees are expenses of Class III and the Shareholder Servicing
Fees are expenses of Class II and III in addition to the Management Fee, and the
Administration and Co-Administration Fees, and will reduce the net income and
total return of both Classes.
- -------------------------------------------------------------------------------
HOW IS THE PORTFOLIO ORGANIZED?
- -------------------------------------------------------------------------------
The Portfolio is a diversified portfolio of First Funds, an open-end
management investment company organized as a Massachusetts business trust by a
Declaration of Trust dated March 6, 1992, as amended and restated on September
4, 1992. The Portfolio consists of three separate Classes. The Trustees
supervise the Trust's activities and review its contractual arrangements with
companies that provide the Trust with services. The Trust is not required to
hold annual shareholder meetings, although special meetings may be called for a
specific Portfolio or Class with respect to issues affecting that Portfolio or
Class, or the Trust as a whole, for purposes such as electing or removing
Trustees, changing fundamental policies or approving investment advisory
agreements. Shareholders receive one vote for each share owned and fractional
votes for fractional shares owned. A Portfolio or Class votes separately with
respect to issues affecting only that Portfolio or Class. Pursuant to the
Declaration of Trust, the Trustees have the authority to issue additional
Classes of shares for the Portfolio.
PORTFOLIO MANAGEMENT
Edward J. Goldstein, one of the Portfolio Managers for the Portfolio, is a
Director and Executive Vice President of Highland. He joined Highland in
September, 1989. Mr. Goldstein is a graduate of Boston University and received a
Master of Business Administration from Columbia University.
David L. Thompson, one of the Portfolio Managers for the Portfolio, is
Senior Vice President of Highland. He joined Highland in May 1995 and is
Chartered Financial Analyst. Mr. Thompson is a graduate of the University of
Mississippi and received a Masters of Business Administration from the
University of North Carolina.
- -------------------------------------------------------------------------------
INVESTMENT INSTRUMENTS, TRANSACTIONS, STRATEGIES AND RISKS
- -------------------------------------------------------------------------------
The following paragraphs provide a brief description of the securities in
which the Portfolio may invest and the transactions each may make. The Portfolio
is not limited by this discussion, however, and may purchase other types of
securities and may enter into other types of transactions if they are consistent
with the Portfolio's investment objective and policies.
EQUITY SECURITIES may include common stocks, preferred stocks, convertible
securities, ADRs and warrants. Common stock purchased by the Portfolio is
evidence of ownership of a corporation. Owners typically are entitled to vote on
the selection of directors and other important matters as well as to receive
dividends on their holdings. In the event that a corporation is liquidated, the
claims of secured and unsecured creditors and owners of bonds and preferred
stock take precedence over the claims of those who own common stock. For the
most part, however, common stock has more potential for appreciation. Preferred
Stock is a class of capital stock that pays dividends at a specified rate and
that has preference over common stock in the payment of dividends and the
liquidation of assets. Preferred stock does not ordinarily carry voting rights.
Although equity securities have a history of long-term growth in value, their
prices fluctuate based on changes in a company's financial condition and on
overall market and economic conditions.
FOREIGN INVESTMENTS. The Portfolio may invest in foreign securities, which
may involve additional risks. Foreign securities and securities denominated in
or indexed to foreign currencies may be affected by the strength of foreign
currencies relative to the U.S. dollar, or by political, regulatory, or economic
developments in foreign countries. Foreign companies may not be subject to
accounting standards or governmental supervision comparable to U.S. companies,
and there may be less public information about their operations. Foreign markets
may be less liquid or more volatile than U.S. markets, and may offer less
protection to investors. In addition to the political and economic factors that
can affect foreign securities, a governmental issuer may be unwilling to repay
principal and interest when due, and may require that the conditions for payment
be renegotiated. These factors could make foreign investments, especially those
in developing countries, more volatile. Highland considers these factors in
making foreign investments for the Portfolio.
17
<PAGE>
The Portfolio may also enter into currency forward contracts (agreements to
exchange one currency for another at a future date) to manage currency risks and
to facilitate transactions in foreign securities. Although currency forward
contracts can be used to protect the Portfolio from adverse exchange rate
changes, they involve a risk of loss if Highland fails to predict foreign
currency values correctly or employs a strategy that does not correlate well
with a Portfolio's investments. A loss to the Portfolio may also result if the
counterparty to a transaction fails to perform as obligated. Please see
discussion under "Forwards" below.
DELAYED-DELIVERY AND WHEN-ISSUED TRANSACTIONS. The Portfolio may buy and
sell obligations on a when-issued or delayed-delivery basis, with payment and
delivery taking place at a future date. The market value of obligations
purchased in this way may change before the delivery date, which could increase
fluctuations in the Portfolio's share price, yield, and return. Ordinarily, the
Portfolio will not earn interest on obligations until they are delivered.
FORWARDS. A forward represents a contract that obligates the counterparty
to buy, and the other to sell, a specific underlying asset at a specific
price, amount, and date in the future. Forwards are similar to futures except
for the fact that forwards are privately negotiated. The most common type of
forward contracts are foreign currency exchange contracts.
The Portfolio may enter into forward exchange currency contracts in order
to hedge its exposure to changes in foreign currency exchange rates on its
foreign portfolio holdings and to hedge certain firm purchase and sale
commitments denominated in foreign currencies. A forward exchange currency
contract is a commitment to purchase or sell a foreign currency at a future
date at a negotiated forward rate. The gain or loss arising from the
difference between the original contract and the closing of such contract is
included in net realized gain or loss on foreign currency transactions.
Fluctuations in the value of forward exchange currency contracts are recorded
for financial reporting purposes as unrealized gains or losses by the
Portfolio.
ILLIQUID SECURITIES. Under the supervision of the Board of Trustees,
Highland, under First Tennessee's supervision, determines the liquidity of the
Portfolio's investments. The absence of a trading market can make it difficult
to ascertain a market value for illiquid investments. Disposing of illiquid
investments or securities subject to legal restrictions may involve
time-consuming negotiation and legal expenses. It may be difficult or impossible
for the Portfolio to sell illiquid or restricted securities promptly at an
acceptable price. The Portfolio may invest up to 15% of its assets in illiquid
investments.
MONEY MARKET INSTRUMENTS are high quality instruments that present minimal
credit risk. They may include U.S. government obligations, commercial paper and
other short-term corporate obligations, and certificates of deposit, bankers'
acceptances, bank deposits and other financial institution obligations. These
instruments may carry fixed or variable rates.
RESTRICTED SECURITIES. The Portfolio may purchase securities which cannot
be sold to the public without registration under the Securities Act of 1933
(restricted securities). Unless registered for sale, these securities can only
be sold in privately negotiated transactions or pursuant to an exemption from
registration. Provided that the security has a demand feature of seven days or
less, or a dealer or institutional trading market exists, these restricted
securities are not treated as illiquid securities for the purposes of the
Portfolio's investment limitations.
OPTIONS CONTRACTS. An option is a contract that gives the owner the right,
but not the obligation, to either buy (call option) or sell (put option) an
underlying security or currency at a fixed price for a specified period of time.
The Portfolio may buy and sell (write) put and call options contracts to manage
its exposure to changing interest rates and security prices. To the extent it
invests in securities denominated in foreign currencies, the Portfolio may also
buy and sell options contracts to manage exposure to currency exchange rates.
Some option strategies, including buying puts and writing calls, tend to hedge
the Portfolio's investments against price fluctuations. Other strategies,
including writing puts and buying calls, tend to increase market exposure.
Options may be combined with each other in order to adjust the risk and return
characteristics of the overall strategy. The Portfolio may enter into forward
contracts for settlement or hedging purposes. The Portfolio may invest in
options based on any type of security, index, or currency, including options
traded on foreign exchanges and options not traded on exchanges.
Options can be volatile investments and involve certain risks. If Highland
applies a hedge at an inappropriate time or judges market conditions
incorrectly, options strategies may result in a loss and lower the Portfolio's
return. The Portfolio could also experience losses if the prices of its options
positions were poorly correlated with its other investments, or if it could not
close out its positions because of an illiquid secondary market. The use of
options may increase the volatility of the Portfolio and may involve the
investment of a small amount of cash relative to the risk assumed.
The Portfolio will be able to hedge its total assets by writing calls or
purchasing puts under normal conditions. In addition, the Portfolio will not
write puts whose underlying value exceeds 25% of total assets, and will not buy
calls with a value exceeding 5% of total assets.
18
<PAGE>
REPURCHASE AGREEMENTS. In a repurchase agreement, the Portfolio buys a
security at one price and simultaneously agrees to sell it back at a higher
price. In the event of the bankruptcy of the other party to a repurchase
agreement or a securities loan, the Portfolio could experience delays in
recovering its cash or the securities it lent. To the extent that, in the
meantime, the value of the obligations purchased had decreased, or the value of
obligations lent had increased, the Portfolio could experience a loss. In all
cases, Highland must find the creditworthiness of the other party to the
transaction satisfactory.
U.S. GOVERNMENT OBLIGATIONS purchased by the Portfolio are debt obligations
issued or guaranteed by the U.S. Treasury or by an agency or instrumentality of
the U.S. government. Not all U.S. government obligations are backed by the full
faith and credit of the United States. For example, obligations issued by the
Federal Farm Credit Bank or by the Federal National Mortgage Association are
supported by the agency's right to borrow money from the U.S. Treasury under
certain circumstances. Obligations issued by the Federal Home Loan Bank are
supported only by the credit of the agency. There is no guarantee that the
government will support these types of obligations, and therefore they involve
more risk than other government obligations.
U.S. TREASURY OBLIGATIONS purchased by the Portfolio are obligations issued
by the United States and backed by its full faith and credit.
ZERO COUPON BONDS purchased by the Portfolio do not make regular interest
payments; instead they are sold at a deep discount from their face value and are
redeemed at face value when they mature. Because zero coupon bonds do not pay
current income, their prices can be very volatile when interest rates change. In
calculating its daily dividend, the Portfolio takes into account as income a
portion of the difference between a zero coupon bond's purchase price and its
face value.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corporation (REFCORP) and the
Financing Corporation (FICO) can also be separated in this fashion. The risks of
these securities are similar to those of other debt securities, although they
may be more volatile and the value of certain types of stripped securities may
move in the same direction as interest rates. Original issue zeros are zero
coupon securities originally issued by the U.S. government, a government agency,
or a corporation in zero coupon form.
19
<PAGE>
INVESTMENT ADVISER AND CO-ADMINISTRATOR
---------------------------------------
First Tennessee Bank National Association
Memphis, TN
SUB-ADVISER
-----------
Highland Capital Management Corp.
Memphis, TN
OFFICERS
--------
Richard C. Rantzow, President
Mark A. Pougnet, Treasurer
James V. Hyatt, Secretary
TRUSTEES
--------
Thomas M. Batchelor
John A. DeCell
L.R. Jalenak, Jr.
Larry W. Papasan
Richard C. Rantzow
ADMINISTRATOR AND DISTRIBUTOR
-----------------------------
ALPS Mutual Funds Services, Inc.
Denver, CO
TRANSFER AND SHAREHOLDER SERVICING AGENT
----------------------------------------
Chase Global Funds Services Company
Boston, MA
CUSTODIAN
---------
Chase Manhattan Bank, N.A.
New York, NY
<PAGE>
[LOGO]
FIRST FUNDS 370 17th Street
Suite 2700
BOND PORTFOLIO Denver, Colorado 80202
- -------------------------------------------------------------------------------
PROSPECTUS FOR CLASS I, II, and III
October 25, 1996
- -------------------------------------------------------------------------------
First Funds (the Trust) offers investors a convenient and economical means
of investing in a professionally managed fixed income mutual fund. The objective
of the Bond Portfolio (formerly the Total Return Fixed Income Portfolio) (the
Portfolio) is to achieve maximum total return through high current income
consistent with reasonable risk by investing primarily in fixed income
securities. The Portfolio's net asset value per share will fluctuate in response
to changes in the value of its investments.
This Prospectus is designed to provide you with information that you should
know before investing. Please read and retain this document for future
reference. This Prospectus offers Class I, II and III shares of the Portfolio.
Class I shares are designed exclusively for investment of monies held in
non-retail trust, advisory, agency, custodial or similar accounts (Institutional
Accounts). Class I shares may be purchased for Institutional Accounts by
financial institutions, business organizations, corporations, municipalities,
non-profit institutions and other entities serving in trust, advisory, agency,
custodial or similar capacities (each, an Institutional Investor and
collectively, Institutional Investors) that meet the investment threshold for
this Class of shares. Class II and III shares are designed for individuals and
other investors who seek mutual fund investment convenience plus a lower
investment minimum. These Classes offer investors differing expense and sales
load structures to choose between. See "Expense Summary" on page 3.
A Statement of Additional Information (dated October 25, 1996) for the
Portfolio has been filed with the Securities and Exchange Commission (SEC) and
is incorporated herein by reference. This Prospectus, the Annual Report and the
Statement of Additional Information are available free upon request from ALPS
Mutual Funds Services, Inc., (ALPS) the Portfolio's Distributor. The Annual
Report for the fiscal period ended June 30, 1996 for the Portfolio is
incorporated into the Statement of Additional Information by reference. Please
call ALPS at 1-800-442-1941 (option 1) for more information concerning each
Class of shares. If you are investing through a broker, other financial
institution or adviser (Investment Professional), please contact that
institution directly.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED
BY, FIRST TENNESSEE BANK NATIONAL ASSOCIATION OR ANY DEPOSITORY INSTITUTION.
SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE
<PAGE>
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
----
Summary Of Portfolio Expenses ............................................. 3
Financial Highlights ...................................................... 5
What Is The Investment Objective Of The Portfolio? ........................ 6
Is The Portfolio A Suitable Investment?; Investment Risks ................ 6
What Are The Portfolio's Investment Policies And Limitations? ............. 7
How Are Investments, Exchanges And Redemptions Made? ...................... 8
How Is Performance Calculated? ............................................ 15
Portfolio Transactions .................................................... 15
What Is The Effect Of Federal Income Tax On This Investment? .............. 15
What Advisory And Other Fees Does The Portfolio Pay? ...................... 16
How Is The Portfolio Organized? ........................................... 17
Investment Instruments, Transactions, Strategies And Risks ................ 18
- -------------------------------------------------------------------------------
2
<PAGE>
- ------------------------------------------------------------------------------
SUMMARY OF PORTFOLIO EXPENSES
- ------------------------------------------------------------------------------
The purpose of the table below is to assist you in understanding the
various costs and expenses that you would bear directly or indirectly. This
standard format was developed for use by all mutual funds to help you make your
investment decisions. The information below is based upon the Portfolio's
expenses for the fiscal year ended June 30, 1996 adjusted to reflect new
servicing arrangements. This expense information should be considered along with
other important information such as the Portfolio's investment objective.
A. EXPENSE SUMMARY
BOND PORTFOLIO
-----------------------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------- -------- ---------
Maximum Sales Load on Purchases
(as a percentage of offering price) None 3.75% None
Sales Load Imposed on Reinvested
Distributions None None None
Deferred Sales Load None None None
Redemption Fees None None None
Exchange Fee None None None
ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees* .15% .15% .15%
12b-1 Fees .00% .00% .75%
Shareholder Servicing Fees .00% .25% .25%
Other Expenses .36% .50% .44%
---- ---- -----
Total Portfolio Operating Expenses* .51% .90% 1.59%
---- ---- -----
---- ---- -----
*Net of expense waivers
ANNUAL PORTFOLIO OPERATING EXPENSES. The Portfolio is obligated to pay
Management Fees to First Tennessee Bank National Association (First Tennessee)
for managing the Portfolio's investments. First Tennessee, as Investment
Adviser, has voluntarily agreed to waive its investment advisory fee to .15% of
the Portfolio's average net assets; however, there is no guarantee that the
waiver will continue. The Portfolio incurs Other Expenses, including
Administration and Co-Administration Fees, for maintaining shareholder records,
furnishing shareholder statements and reports, and other services. ALPS, the
Administrator, is entitled to and charges .15% of the Portfolio's average net
assets for administration services. First Tennessee, the Co-Administrator, is
entitled to and charges .05% of the Portfolio's average net assets for
co-administration services.
If the waivers were not in effect, Management Fees would be .55% for each
Class. Total Portfolio Operating Expenses would be estimated as follows:
BOND PORTFOLIO
-----------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
Total Portfolio Operating Expenses .91% 1.30% 1.99%
There is no guarantee that any waivers will continue at their stated
levels.
Management Fees, 12b-1 Fees, Shareholder Servicing Fees, and Other
Expenses, are reflected in the Portfolio's share price and are not charged
directly to individual accounts. 12b-1 Fees are paid by Class III shares of the
Portfolio to ALPS for services and expenses in connection with distribution.
Shareholder Servicing Fees are paid by Class II and III shares of the Portfolio
to securities brokers, financial institutions or advisers (Investment
Professionals) for services and expenses incurred in connection with providing
personal service to shareholders and/or maintenance of shareholder accounts.
3
<PAGE>
Long-term shareholders may eventually pay more than the economic equivalent of
the maximum 8.50% front-end sales charge permitted by the National Association
of Securities Dealers, Inc. (NASD) due to 12b-1 fees. Please see page 17 for
further information.
B. EXAMPLE: You would pay the following expenses for every $1,000
investment in each Class of shares of the Bond Portfolio assuming (1) 5% annual
return, (2) redemption at the end of each time period, (3) that operating
expenses (net of expense waivers) are the same as described above, and (4)
reinvestment of all dividends and distributions. THE RETURN OF 5% AND EXPENSES
SHOULD NOT BE CONSIDERED INDICATIONS OF ACTUAL OR EXPECTED PERFORMANCE OR
PORTFOLIO OPERATING EXPENSES, BOTH OF WHICH MAY VARY SIGNIFICANTLY:
BOND PORTFOLIO
-----------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
1 year $5 $46* $16
3 years $16 $65* $51
5 years $29 $86* $87
10 years $64 $145* $190
*Reflects imposition of maximum sales charge at the beginning of the period.
4
<PAGE>
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
The table that follows is included in the Annual Report for the Portfolio
dated June 30, 1996 and has been audited by Price Waterhouse LLP, independent
accountants. Their report on the financial statements and the financial
highlights for the Portfolio is included in the Annual Report. The financial
statements and financial highlights are incorporated by reference into the
Portfolio's Statement of Additional Information. The Annual Report contains
additional performance information and will be made available upon request and
without charge.
<TABLE>
BOND PORTFOLIO
(FORMERLY THE TOTAL RETURN FIXED INCOME PORTFOLIO)
CLASS I CLASS II CLASS III
-------------------------- -------------- -------------------------
For the Year For the Year For the Year
Ended June 30, Ended June 30, Ended June 30,
-------------------------- -------------- -------------------------
1996 1995 1994** 1996**** 1996 1995 1994***
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of
period $9.91 $9.41 $10.00 $10.18 $9.89 $9.40 $10.04
-----------------------------------------------------------------------
Income from investment operations:
Net investment income 0.60 0.57 0.45 0.29 0.49 0.43 0.21
Net realized and unrealized gain (loss)
on investments (0.18) 0.50 (0.57) (0.47) (0.18) 0.49 (0.62)
-----------------------------------------------------------------------
Total from investment operations 0.42 1.07 (0.12) (0.18) 0.31 0.92 (0.41)
-----------------------------------------------------------------------
Distributions:
Net investment income (0.60) (0.57) (0.46) (0.29) (0.49) (0.43) (0.22)
Net realized gain - - (0.01) - - - (0.01)
-----------------------------------------------------------------------
Total distributions (0.60) (0.57) (0.47) (0.29) (0.49) (0.43) (0.23)
-----------------------------------------------------------------------
Net asset value, end of period $9.73 $9.91 $9.41 $9.71 $9.71 $9.89 $9.40
-----------------------------------------------------------------------
-----------------------------------------------------------------------
TOTAL RETURN+ 4.23% 11.87% (1.38)%# (1.75)%# 3.11% 10.12% (4.19)%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $107,832 $90,574 $75,686 $67 $3,445 $1,916 $923
Ratio of expenses to average daily
net assets(1) 0.41% 0.35% 0.36%* 0.80%* 1.49% 1.84% 1.82%*
Ratio of net investment income to average
net assets 5.99% 6.07% 5.07%* 5.61%* 4.92% 4.58% 3.61%*
Portfolio turnover rate 56% 23% 36%* 56% 56% 23% 36%*
(1) During the period, various fees were
waived. The ratio of expenses to average
net assets had such waivers not occurred
is as follows. 0.91% 0.91% 0.96%* 1.30%* 1.99% 3.35% 6.36%*
</TABLE>
* Annualized.
** Class commenced operations on August 2, 1993.
*** Class commenced operations on December 2, 1993.
**** Class commenced operations on December 20,1995.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are
not annualized.
5
<PAGE>
- --------------------------------------------------------------------------------
WHAT IS THE INVESTMENT OBJECTIVE OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
First Tennessee, serves as Investment Adviser to the Portfolio and, with
the prior approval of the Board of Trustees (the Trustees), has engaged Highland
Capital Management Corp. (Highland), to act as Sub-Adviser to the Portfolio.
Subject to First Tennessee's supervision, Highland is responsible for the
day-to-day investment management of the Portfolio, including providing
investment research and credit analysis concerning Portfolio investments and
conducting a continuous program of investment of Portfolio assets in accordance
with the investment policies and objective of the Portfolio. For additional
information about the Portfolio's investment advisory arrangements, see "What
Advisory And Other Fees Does The Portfolio Pay? - Investment Advisory and
Management and Sub-Advisory Agreements" beginning on page 16.
The investment objective of the Portfolio is to achieve maximum total
return through high current income by investing at least 65% of its total assets
in fixed income securities. There is no assurance that the Portfolio will
achieve its investment objective. The permitted investments of the Portfolio are
as follows:
The Portfolio invests primarily in U.S. government obligations, investment
grade debt of U.S. corporations, mortgage-backed securities, (such as Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA), and Federal Home Loan Mortgage Corporation (Freddie Mac) obligations,
and investment-grade asset-backed securities. First Tennessee expects to invest
a major portion of the Portfolio (at least 65% of total assets) in
investment-grade debt securities, which are considered to be those rated Baa or
higher by Moody's Investors Service, Inc. (Moody's) or BBB or higher by Standard
& Poor's Corporation (S&P). Investment-grade securities are generally of medium
to high quality. Accordingly, the Portfolio will not invest in securities judged
by Highland to be predominantly speculative or of poor quality, although it may
invest in securities rated in the lower end of the investment-grade category
(Baa/BBB), if Highland deems that such securities present attractive investment
opportunities. Securities rated Baa/BBB have speculative characteristics and are
more sensitive to economic changes and changes in the financial condition of
issuers. The Portfolio may also invest in unrated securities. Unrated securities
are not necessarily of lower quality than rated securities, but they may not be
attractive to as many buyers. The Portfolio relies more on Highland's credit
analysis when investing in debt securities that are unrated.
The Portfolio also may invest in foreign securities and make foreign
investments in foreign currencies. The Portfolio may buy and sell securities on
a when-issued or delayed-delivery basis, engage in dollar roll transactions,
invest in options, and purchase zero coupon bonds, illiquid and restricted
securities, and shares in other investment companies. The Portfolio may, for
temporary defensive and liquidity purposes, invest without limit in short-term
money market securities.
The Portfolio will invest primarily in intermediate to long-term bonds.
While the Portfolio's dollar-weighted average portfolio maturity may range from
5 to 15 years, Highland anticipates that this average maturity, under normal
circumstances, will fluctuate between 7 and 11 years. If Highland determines
that market conditions warrant a shorter or longer average maturity within the
range of 5 to 15 years, the Portfolio's investments will be adjusted
accordingly.
See "Investment Instruments, Transactions, Strategies And Risks" on page
18 for a further discussion of the Portfolio's investments.
- --------------------------------------------------------------------------------
IS THE PORTFOLIO A SUITABLE INVESTMENT?; INVESTMENT RISKS
- --------------------------------------------------------------------------------
By itself, the Bond Portfolio does not constitute a balanced investment
plan. The Bond Portfolio emphasizes maximizing total return through high current
income by investing primarily in debt securities. An increase in interest rates
generally will reduce the value of portfolio investments of the Portfolio and a
decline in interest rates will generally increase the value of its portfolio
investments. Short-term obligations (such as instruments with maturities of one
year or less) generally offer greater stability and are less sensitive to
interest rate changes. Long-term bonds of the type in which the Portfolio will
invest offer less stability and are more sensitive to interest rate changes, but
generally offer higher yields. Further, investment in the securities of issuers
in any foreign country involves special risks and considerations not typically
associated with investing in U.S. issuers. The Portfolio's share price, yield
and total return will fluctuate. An investment in the Bond Portfolio may be
worth more or less than the original cost when shares are redeemed.
6
<PAGE>
In addition, the Portfolio may invest in instruments and securities
generally known as derivative investments. These investments may include the use
of forward currency contracts, put and call option contracts, zero coupon bonds
stripped fixed-income obligations and mortgage-backed and asset-backed
pass-through securities. Highland may not buy all of these instruments or use
all of these techniques unless it believes that doing so will help the Portfolio
achieve its investment objective. Use of these instruments and techniques can
alter the risk and return characteristics of the Portfolio. They may increase
the Portfolio's volatility and may involve the investment of small amounts of
cash relative to the magnitude of the risk assumed. They may also result in a
loss of principal if Highland judges market conditions incorrectly or employs a
strategy that does not correlate well with the Portfolio's investment strategy.
With respect to mortgage-backed securities, risks include a sensitivity to the
rate of prepayments in that, although the value of fixed-income securities
generally increase during periods of falling interest as a result of prepayments
and other factors, this is not always the case with respect to mortgage-backed
securities. Asset-backed securities involve the risk that such securities do not
usually have the benefit of a complete security interest in the related
collateral. Positions in options involve the risk that such options may fail as
a hedging technique and that closing transactions may not be effected where a
liquid secondary market does not exist.
The Portfolio seeks to maximize total return over an interest rate cycle.
Highland believes that by lessening the effect of bond market declines,
investors should experience greater overall returns; accordingly, Highland may
address market risk through a strategy of adjusting the dollar-weighted average
maturity of the Portfolio to reflect changing economic and interest rate
environments. The timing of Portfolio transactions in response to anticipated
changes in interest rate trends is important to the successful application of
such strategies. Bond funds such as the Portfolio are generally subject to two
risk factors: (1) credit risk, and (2) interest rate risk. The Portfolio will
seek to manage credit risk by investing only in investment-grade securities as
described previously. In the event a security's credit rating is downgraded, its
value can be expected to decrease. Highland may elect to continue to hold such
securities. The Portfolio will seek to manage interest rate risk by limiting its
average maturity to 15 years or less.
Further information about the types of securities in which the Portfolio
may invest and their related risks, as well as the investment policies of the
Portfolio in general are set forth in the section "Investment Instruments,
Transactions, Strategies and Risks" on page 18 and in the Statement of
Additional Information.
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIO'S INVESTMENT POLICIES AND LIMITATIONS?
- --------------------------------------------------------------------------------
INVESTMENT LIMITATIONS. The Portfolio has adopted the following
investment limitations:
(1) With respect to 75% of the Portfolio's assets, the Portfolio
will not purchase a security, other than U.S. government securities, if,
as a result, (a) more than 5% of its total assets would be invested in
the securities of any single issuer; or (b) the Portfolio would own more
than 10% of the voting securities of any single issuer.
(2) The Portfolio will not invest 25% or more of its total assets
in a particular industry, other than U.S. government obligations.
(3) (a) The Portfolio may borrow money solely for temporary or
emergency purposes, but not in an amount exceeding 33 1/3% of its
total assets. (b) The Portfolio may borrow money from banks, or by
engaging in reverse repurchase agreements. (c) The Portfolio will not
purchase securities when borrowings exceed 5% of its total assets. If
the Portfolio borrows money, its share price may be subject to greater
fluctuation until the borrowing is paid off. To this extent, purchasing
securities when borrowings are outstanding may involve an element of
leverage.
(4) (a) The Portfolio may temporarily lend its portfolio securities
to broker-dealers and institutions, but only when the loans are fully
collateralized. (b) Loans, in the aggregate, will be limited to 33 1/3%
of the Portfolio's total assets.
Unless otherwise noted, the Portfolio's policies and limitations are not
fundamental and may be changed by the Trustees without shareholder approval. The
fundamental policies of the Portfolio that require shareholder approval prior to
any changes are: the Portfolio's investment objective, and limitations (1), (2),
(3)(a), and (4)(b) above. These limitations and the Portfolio's policies are
considered at the time of purchase of securities; the sale of securities is not
required in the event of a subsequent change in circumstances.
The investment policies and limitations set forth above are supplemented by
the investment policies and limitations in the Statement of Additional
Information. No assurance can be made that the Portfolio will achieve its
objective, but it will follow the investment style described in this Prospectus.
7
<PAGE>
From time to time, the Portfolio, to the extent consistent with its
investment objective, policies, and restrictions, may invest in
securities of companies with which First Tennessee or any affiliates
have lending relationships.
- --------------------------------------------------------------------------------
HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?
- --------------------------------------------------------------------------------
CLASS I
- -------
WHO MAY INVEST?
Class I shares are designed exclusively for investment of monies held in
non-retail trust, advisory, agency, custodial or similar Institutional Accounts.
Class I shares may be purchased for Institutional Accounts by financial
institutions, business organizations, corporations, municipalities, non-profit
institutions, and other Institutional Investors serving in a trust, advisory,
agency, custodial or similar capacity who meet the investment threshold for this
Class of shares.
HOW IS AN INSTITUTIONAL ACCOUNT ESTABLISHED?
An initial investment must be preceded by or made in conjunction with the
establishment of an Institutional Account with an Institutional Investor.
Establishment of an Institutional Account may require that documents and
applications be completed and signed before the investment can be implemented.
The Institutional Investor may require that certain documents be provided prior
to making a redemption from the Portfolio. Institutional Investors may charge
fees in addition to those described herein. Fee schedules for Institutional
Accounts are available upon request from the Institutional Investor and are
detailed in the agreements by which each client opens an account with an
Institutional Investor.
HOW ARE INVESTMENTS MADE?
Each Institutional Investor will transmit orders to the Transfer Agent,
Chase Global Funds Services Company (CGFSC). If an order is received by CGFSC in
proper form prior to 4:00 p.m. Eastern Time on any Business Day (as defined in
the section "HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE - Class I, II
and III - How Are Portfolio Shares Valued?") and the funds are received by CGFSC
that day, the investment will earn dividends declared, if any, on the day of
purchase. Institutional Investors will wire funds through the Federal Reserve
System. Purchases will be processed at the net asset value per share (NAV)
calculated after an order is received in proper form and accepted by CGFSC. The
Portfolio requires advance notification of all wire purchases. To secure same
day acceptance of federal funds (monies transferred from one bank to another
through the Federal Reserve System with same-day availability), an Institutional
Investor must call CGFSC at 1-800-442-1941, (option 2) prior to 4:00 p.m.
Eastern Time on any Business Day to advise it of the wire. The Trust may
discontinue offering its shares in any Class of a Portfolio without notice to
shareholders.
MINIMUM INVESTMENT AND ACCOUNT BALANCE. The minimum initial investment for
each Institutional Investor is $100,000. Institutional Investors may satisfy the
minimum investment by aggregating their Institutional Accounts within the
Portfolio. Subsequent investments may be in any amount. If an Institutional
Investor's Class I account falls below $50,000 due to redemption, the Portfolio
may close the account. An Institutional Investor may be notified if the minimum
balance is not being maintained and will be allowed 30 days to make additional
investments before its account is closed. Shares will be redeemed at the NAV on
the day the account is closed, and proceeds will be sent to the address of
record.
Exchanges are generally permitted from Class I to another class should a
beneficial owner of these shares cease to be eligible to purchase shares of
Class I. Class I shares held in an Institutional Account may be converted to
shares of another Class upon distribution.
HOW ARE REDEMPTIONS MADE?
Institutional Investors may redeem all or a portion of their account shares
on any Business Day. Shares will be redeemed at the NAV next calculated after
CGFSC has received the redemption request in proper form and will accrue
dividends through the day of redemption. If an account is closed, any accrued
dividends will be paid at the beginning of the following month.
Institutional Investors may make redemptions by wire provided they have
established a wire account with CGFSC. Please call 1-800-442-1941 (option 2) to
advise CGFSC of the wire. If telephone instructions are received before 4:00
p.m. Eastern Time on any Business Day, proceeds of the redemption will be wired
as federal funds on the next Business Day to the bank account designated with
CGFSC. The Institutional Investor may change the bank account designated to
8
<PAGE>
receive an amount redeemed at any time by sending a letter of instruction with a
signature guarantee to CGFSC at 73 Tremont Street, Boston, Massachusetts, 02108.
Pursuant to the Investment Company Act of 1940, as amended (1940 Act), if
making immediate payment of redemption proceeds could adversely affect the
Portfolio, payments may be made up to seven days later. Also, when the New York
Stock Exchange (NYSE) or the Federal Reserve Bank of New York (New York Federal
Reserve) is closed (or when trading is restricted) for any reason other than
customary weekend or holiday closings, or under any emergency circumstances as
determined by the SEC to merit such action, the right of redemption may be
suspended or the date of payment postponed for a period of time that may exceed
seven days. In addition, the Portfolio reserves the right to advance the time on
that day by which purchase and redemption orders must be received. To the extent
Portfolio securities are traded in other markets on days when either the NYSE or
the New York Federal Reserve is closed, the Portfolio's NAV may be affected on
days when investors do not have access to the Portfolio to purchase or redeem
shares.
If transactions by telephone cannot be executed (for example, during times
of unusual market activity), orders may be placed by mail to CGFSC. In case of
suspension of the right of redemption, the Institutional Investor may either
withdraw its request for redemption or it will receive payment based on the NAV
next determined after the termination of the suspension.
ADDITIONAL INFORMATION
The Portfolio also reserves the right to reject any specific purchase
order, including certain purchases by exchange. Purchase orders may be refused
if, in First Tennessee's opinion, they are of a size that would disrupt
management of the Portfolio.
In order to allow First Tennessee to manage the Portfolio most effectively,
Institutional Investors are strongly urged to initiate all trades (investments,
exchanges and redemptions of shares) as early in the day as possible and to
notify CGFSC at least one day in advance of trades in excess of $1 million. In
making these trade requests, the name of the Institutional Investor and the
account number(s) must be supplied.
Transactions may be initiated by telephone. Please note that the Portfolio
and its agents will not be responsible for any losses resulting from
unauthorized telephone transactions if the Portfolio or its agents follow
reasonable procedures designed to verify the identity of the caller. These
procedures may include requesting additional information or using personalized
security codes. The Portfolio or its agents may also record calls, and an
Institutional Investor should verify the accuracy of confirmation statements
immediately after receipt. If an Institutional Investor does not want to be
able to initiate redemptions and exchanges by telephone, please call CGFSC for
instructions.
CLASS II AND III
- ----------------
WHO MAY INVEST?
Class II and III shares are designed for individuals and other investors
who seek mutual fund investment convenience plus a lower investment minimum.
These Classes offer investors differing expense and sales load structures to
choose between. See "Summary Of Portfolio Expenses" on page 3.
INVESTMENT REQUIREMENTS
The minimum initial investment in Class II or III shares is $1,000.
Subsequent investments may be in any amount greater than $100. If you
participate in the Systematic Investing Program or the "A Plus Card Program" (a
consumer discount card program provided by "A" Plus Strategic Alliances, Inc., a
subsidiary of First Tennessee), the minimum initial investment is $250, and
subsequent investments may be in any amount of $25 or greater. If you are an
employee of First Tennessee or any of its affiliates and you participate in the
Systematic Investing Program, the minimum initial investment is $50, and
subsequent investments may be in any amount of $25 or greater. See page 11 for
additional information on the Systematic Investing Program. If your balance in
the Portfolio falls below the applicable minimum investment requirement due to
redemption, you may be given 30 days' notice to reestablish the minimum balance.
If you do not reestablish the minimum balance, your account may be closed and
the proceeds mailed to you at the address on record. Shares will be redeemed on
the day the account is closed.
All purchases must be made in U.S. dollars and checks must be drawn on U.S.
banks. No cash will be accepted. If you make a purchase with more than one
check, each check must have a value of at least $100, and the minimum investment
requirement still applies (excluding the specific circumstances, stated above,
which reduce the minimum investment requirement). The Portfolio reserves the
right to limit the number of checks processed at one time. If your check does
not clear, your purchase will be canceled and you could be liable for any losses
or fees incurred.
9
<PAGE>
You may initiate any transaction either directly or through your Investment
Professional. Please note that the Portfolio and its agents will not be
responsible for any losses resulting from unauthorized transactions if the
Portfolio or its agents follow reasonable procedures designed to verify the
identity of the caller. These procedures may include requesting additional
information or using personalized security codes. Your Investment Professional
may also record calls and you should verify the accuracy of your confirmation
statements immediately after you receive them. If you do not want to be able to
redeem and exchange by telephone, please check the box on your application (if
you invest directly) or, if you invest through an Investment Professional,
please call your Investment Professional for instructions.
HOW DO I SET UP AN ACCOUNT?
You may set up an account directly in the Portfolio or you may invest in
the Portfolio through your Investment Professional. See page 11 for information
on how to invest through your Investment Professional. Shares will be purchased
based on the NAV next calculated after CGFSC has received the request in proper
form. If you are investing through an Investment Professional, transactions that
your Investment Professional initiates should be transmitted to CGFSC before
4:00 p.m. Eastern Time in order for you to receive that day's share price. CGFSC
must receive payment within three business days after an order is placed.
Otherwise, the purchase order may be canceled and you could be held liable for
the resulting fees and/or losses. An investor will earn dividends declared, if
any, on the day of purchase if the funds are received by CGFSC that day.
HOW DO I INVEST DIRECTLY?
When opening a new account directly, you must complete and sign an account
application and send it to CGFSC, 73 Tremont Street, Boston, MA 02108. Telephone
representatives are available at 1-800-442-1941, (option 2) between the hours of
8:00 a.m. to 4:00 p.m. Central Time (9:00 a.m. to 5:00 p.m. Eastern Time),
Monday through Friday.
Investments may be made in several ways:
BY MAIL: Make your check payable to First Funds: Bond Portfolio, and mail
it, along with the application, to the address indicated on the application.
Your account will be credited on the business day that CGFSC receives your
application in good order and processes your transaction.
BY BANK TRANSFER: Bank transfer allows you to move money between your bank
account and your First Funds account. This automatic service allows you to
transfer money from your bank account via the Automated Clearing House (ACH)
network to your Portfolio account. First, a Portfolio account must be
established, and an application sent to CGFSC. Be sure to indicate on the
application under the section Account Privileges that you desire to have this
option. Once you have completed this process, you can initiate a bank transfer
by contacting CGFSC at 1-800-442-1941, (option 2). Please allow two or three
days after the authorization for the transfer to occur.
BY WIRE: Call 1-800-442-1941, (option 2) to set up your Portfolio account
to accommodate wire transactions. To initiate your wire transaction, call your
depository institution. Federal funds (monies transferred from one bank to
another through the Federal Reserve System with same-day availability) should be
wired to:
Chase Manhattan Bank, N.A.
ABA #021000021
First Funds
Credit DDA #910-2-733335
(Account Registration)
(Account Number)
(Wire Control Number) *See Below*
Prior to sending wires, please be sure to call 1-800-442-1941, (option 2)
to receive a Wire Control Number to be included in the body of the wire (see
above).
Your bank may charge you a fee for this service.
HOW DO I REDEEM SHARES WHEN INVESTING DIRECTLY?
You may redeem all or a portion of your shares on any day that the
Portfolio is open for business. Shares will be redeemed at the NAV next
calculated after CGFSC has received the redemption request and will earn
dividends declared, if any, through the day prior to redemption. If a Portfolio
account is closed, any accrued dividends will be paid at the beginning of the
following month.
You may redeem shares in several ways:
10
<PAGE>
BY MAIL: Write a "letter of instruction" with your name, the Portfolio's
name, your Portfolio account number, the dollar amount or number of shares to be
redeemed, and any additional requirements that apply to each particular account.
You will need the letter of instruction signed by all persons required to sign
for transactions, exactly as their names appear on the account application,
along with a signature guarantee.
A signature guarantee is designed to protect you, the Portfolio, and its
agents from fraud. Your written request requires a signature guarantee if you
wish to redeem more than $1,000 worth of shares; if your Portfolio account
registration has changed within the last 30 days; if the check is not being
mailed to the address on your account; if the check is not being made out to the
account owner; or if the redemption proceeds are being transferred to another
First Funds account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public.
BY BANK TRANSFER: When establishing your account in the Portfolio, you
must have indicated this account privilege in order to authorize the redemption
of monies with the proceeds transferred to your bank account. To authorize a
redemption, simply contact CGFSC at 1-800-442-1941, (option 2) and your
redemption will be processed at the NAV next calculated. Please allow two or
three days after the authorization for monies to reach your bank account.
BY WIRE: You may make redemptions by wire provided you have established a
Portfolio account to accommodate wire transactions. If telephone instructions
are received before 4:00 p.m. Eastern Time, proceeds of the redemption will be
wired as federal funds on the next Business Day to the bank account designated
with CGFSC. You may change the bank account designated to receive an amount
redeemed at any time by sending a letter of instruction with a signature
guarantee to CGFSC at 73 Tremont Street, Boston, Massachusetts, 02108.
ADDITIONAL REDEMPTION REQUIREMENTS: The Portfolio may hold payment on
redemptions until it is reasonably satisfied that investments made by check have
been collected, which can take up to seven days. Also, when the NYSE or the New
York Federal Reserve is closed (or when trading is restricted) for any reason
other than its customary weekend or holiday closings, or under any emergency
circumstances as determined by the SEC to merit such action, the right of
redemption may be suspended or the date of payment postponed for a period of
time that may exceed seven days. In addition, the Portfolio reserves the right
to advance the time on that day by which purchase and redemption orders must be
received. To the extent that portfolio securities are traded in other markets on
days when either the NYSE or the New York Federal Reserve is closed, each
Portfolio's NAV may be affected on days when investors do not have access to the
Portfolios to purchase or redeem shares.
If you are unable to reach CGFSC by telephone (for example, during times of
unusual market activity), consider placing your order by mail directly to CGFSC.
In case of suspension of the right of redemption, you may either withdraw your
request for redemption or you will receive payment based on the NAV next
determined after the termination of the suspension.
HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?
If you are investing through your Investment Professional, you may be
required to set up a brokerage or agency account. Please call your Investment
Professional for information on establishing an account. If you are purchasing
shares of the Portfolio through a program of services offered or administered by
your Investment Professional, you should read the program materials in
conjunction with this Prospectus. Certain features of such programs may impose
additional requirements and charges for the services rendered. Your Investment
Professional may offer any or all of the services mentioned in this section, and
is responsible for initiating all initial purchase transactions. Please contact
your Investment Professional for information on these services.
SYSTEMATIC INVESTING PROGRAM
The Systematic Investing Program offers a simple way to maintain a regular
investment program. You may arrange automatic transfers (minimum $25 per
transaction) from your bank account to your First Funds account on a periodic
basis. When you participate in this program, the minimum initial investment in
each Portfolio is $250. If you are an employee of First Tennessee or any of its
affiliates, the minimum initial investment in the Portfolio is $50. You may
change the amount of your automatic investment, skip an investment, or stop the
Systematic Investing Program by calling CGFSC at 1-800-442-1941, (option 2) or
your Investment Professional at least three Business Days prior to your next
scheduled investment date.
SYSTEMATIC WITHDRAWAL PLAN
You can have monthly, quarterly or semi-annual checks sent from your
account to you, to a person named by you, or to your bank checking account. Your
Systematic Withdrawal Plan payments are drawn from share redemptions and
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<PAGE>
must be in the amount of $100 or more per Portfolio per month. If Systematic
Withdrawal Plan redemptions exceed income dividends earned on your shares,
your account eventually may be exhausted. Please contact your Investment
Professional for more information.
ADDITIONAL INFORMATION
TAX-DEFERRED RETIREMENT PLANS: Retirement plans can offer significant tax
savings to individuals. Please call ALPS at 1-800-442-1941 (option 1) or your
Investment Professional for more information on the plans and their benefits,
provisions and fees. CGFSC or your Investment Professional can set up your new
account in the Portfolio under one of several tax-deferred plans. These plans
let you invest for retirement and defer the tax on your investment income.
Minimums may differ from those listed on page 9. Plans include Individual
Retirement Accounts (IRAs), Rollover IRAs, Keogh Plans, and Simplified Employee
Pension Plans (SEP-IRAs).
CLASS II
- --------
PUBLIC OFFERING PRICE
The public offering price for Class II shares is the sum of the NAV plus a
sales load. As indicated below, a portion of this load may be reallowed to
Investment Professionals which have entered into an agreement with ALPS, the
Portfolio's Distributor (Service Organizations). You may calculate your sales
load as follows:
<TABLE>
TOTAL SALES LOAD REALLOWANCE TO
FOR CLASS II SHARES SERVICE ORGANIZATIONS
------------------- ---------------------
AS A % OF OFFERING AS A % OF OFFERING
AMOUNT OF TRANSACTION PRICE PER SHARE AS A % OF NAV PRICE PER SHARE
<S> <C> <C> <C>
Less than $100,000 3.75 3.90 3.25
$100,000 to $249,999 3.00 3.09 2.65
$250,000 to $499,999 2.25 2.30 2.00
$500,000 to $999,999 1.50 1.52 1.25
$1,000,000 and over 0.50 0.50 0.40
</TABLE>
The reallowance to Service Organizations may be changed from time to time. ALPS,
at its expense, may provide additional non-cash promotional incentives to
eligible representatives of Service Organizations in the form of attendance at a
sales seminar at a resort. These incentives may be limited to certain eligible
representatives of Service Organizations who have sold significant numbers of
shares of any of the Portfolios of the Trust.
You may purchase Class II shares without a sales load if the purchase will
be (a) through a First Funds sponsored IRA; (b) through an IRA, 401 Plan, 403
Plan or directed agency account if the trustee, custodian, or agent thereof is a
direct or indirect subsidiary or franchisee bank of First Tennessee or its
affiliates; (c) by registered representatives, directors, advisory directors,
officers and employees (and their immediate families) of First Tennessee or its
affiliates ; (d) by a current or former Trustee, officer or employee of First
Funds; the spouse of a First Funds Trustee, officer or employee; a First Funds
Trustee acting as a custodian for a minor child of a First Funds Trustee,
officer or employee; or the child of a current or former Trustee, officer or
employee of First Funds who has reached the age of majority; (e) by a charitable
remainder trust or life income pool established for the benefit of a charitable
organization (as defined in Section 501(c)(3) of the Internal Revenue Code); (f)
for use in a financial institution or investment adviser managed account for
which a management or investment advisory fee is charged; (g) with redemption
proceeds from other mutual fund complexes on which the investor has paid a
front-end sales charge within the past 60 days upon presentation of purchase
verification information; or (h) through certain promotions where the load is
waived for investors.
In addition, you will not pay a sales load on the reinvestment of dividends
or distributions in the Portfolio or any other First Funds Portfolio, or in
connection with certain share exchanges as described under "How Are Investments,
Exchanges And Redemptions Made? - Class I, II, and III - How are Exchanges
Made?" on page 14. Further, you generally will not pay a sales load on Class II
shares of the Portfolio which you buy using proceeds from the redemption of a
First Funds Portfolio which does not charge a front-end load, if you obtained
such shares through an exchange for Class II shares which you purchased with a
sales load. A sales load will apply to your purchase of Class II shares in the
foregoing situation only to the extent that the Portfolio's sales load exceeds
the sales load you paid in the prior purchase of the Class II shares.
In addition, if you purchase Class II shares within 60 days after redeeming
shares of the Portfolio, you will receive credit towards the sales load payable
on the purchase to the extent of the sales load you paid on the shares you
redeemed. This reinstatement privilege may be exercised only with respect to
redemptions and purchases in the same First Funds Portfolio. The reinstatement
privilege can be exercised only one time with respect to any particular
redemption.
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<PAGE>
QUANTITY DISCOUNTS
You may be entitled to reduced sales charges through the Right of
Accumulation or a Letter of Intent, even if you do not make an investment of a
size that would normally qualify for a quantity discount.
To qualify for a reduction of or exception to the sales load, you or your
Investment Professional must notify the Transfer Agent, CGFSC at the time of
purchase or exchange. The reduction in sales load is subject to confirmation of
your holdings through a check of records. The Trust may modify or terminate
quantity discounts at any time. For more information about quantity discounts,
contact your Service Organization or ALPS at 1-800-442-1941 (option 1).
RIGHT OF ACCUMULATION. The sales charge schedule under the heading "How
Are Investments, Exchanges And Redemptions Made? - Public Offering Price" shows
that the sales load you will pay on Class II shares is reduced as your aggregate
investment increases. The Right of Accumulation allows you to combine certain
First Funds investments to determine your aggregate investment and the
applicable reduced sales load. You may combine the amount of your investment in
the Portfolio's Class II shares with the value of your investment in Class II of
any other First Funds Portfolio you own and on which you paid a sales load. If
you are a participant in a First Funds IRA or if you are a trustee or custodian
of another type of First Funds retirement plan, you may also include as part of
your aggregate investment any holdings through the IRA or in the plan even if a
load was not paid. If for example, you beneficially own Class II shares of a
First Funds Portfolio with an aggregate current value of $99,000 and you
subsequently purchase shares of the Portfolio having a current value of $1,000,
the load applicable to the subsequent purchase would be reduced to 3.50% of the
offering price. Similarly, each subsequent purchase of First Funds Class II
shares may be added to your aggregate investment at the time of purchase to
determine the applicable sales loads.
LETTER OF INTENT. A Letter of Intent allows you to purchase Class II
shares over a 13-month period at a reduced sales charge. The sales charge is
based on the total amount you intend to purchase plus the total net asset value
of Class II shares which you already own on which you have paid a sales load. If
you are a participant in a First Funds IRA or if you are a trustee or custodian
of another type of First Funds retirement plan, you may also credit towards
completion of your Letter of Intent any Class II shares held through the IRA or
in the plan, even if a load was not paid. Each investment you make during the
period may be made at the reduced sales charge that would apply to the total
amount you intend to invest. The reduced sales load applies only to new
purchases. If you do not invest the total amount within the period, you may pay
the difference between the higher sales charge rate that would have been applied
to the purchases you made and the reduced sales charge rate you have paid.
Shares of the Portfolio equal to 5% of the amount you intend to invest will be
held in escrow and, if you do not pay the difference within 20 days following
the mailing of a request, the Transfer Agent will redeem a sufficient amount of
your escrowed shares to pay the additional sales charge. After the terms of your
Letter of Intent are fulfilled, the Transfer Agent will release your escrowed
shares.
If your purchases qualify for a further sales load reduction in addition to
that indicated in the Letter of Intent, the sales load will be adjusted to
reflect your total purchases. Signing a Letter of Intent does not bind you to
purchase the full amount indicated at the sales load in effect at the time of
signing, but you must complete the intended purchase to obtain the reduced sales
load. To apply, sign the Letter of Intent form at the time you purchase Class
II shares. You will be entitled to the applicable sales load that is in effect
at the date you submit the Letter of Intent until you complete your intended
purchase.
QUALIFICATION OF DISCOUNTS. As shown in the schedule of Class II sales
charges, larger purchases may result in lower sales charges to you. For purposes
of determining the amount of purchases using the Right of Accumulation and
Letter of Intent privileges, you may combine your purchase with:
- purchases by your spouse or his, her or your joint account or for the
account of any minor children, and
- the aggregate investment of any trustee or other Institutional Investor
for you and/or your spouse or your minor children.
A trustee or custodian of any qualified pension or profit sharing plan may
combine its aggregate purchases.
OTHER. Class II shares also incur Shareholder Servicing Fees. See
discussion under "WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY? -
Distribution Plans and Shareholder Servicing Plans."
CLASS III
- ---------
Class III shares are bought without a front-end load; that is, the offering
price for such shares will be their NAV. Class III shares incur Distribution
Fees and Shareholder Servicing Fees. See discussion under "WHAT ADVISORY AND
OTHER FEES DOES THE PORTFOLIO PAY? - Distribution Plans and Shareholder
Servicing Plans."
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<PAGE>
CLASS I, II AND III
- -------------------
HOW ARE PORTFOLIO SHARES VALUED?
The term "net asset value per share," or NAV, means the worth of one share.
The NAV of each Class of the Portfolio is calculated by adding that Class' pro
rata share of the value of all securities and other assets attributable to the
Portfolio, deducting that Class' pro rata share of Portfolio liabilities,
further deducting Class-specific liabilities, and dividing the result by the
number of shares outstanding in the Class.
The Portfolio is open for business each day that both the NYSE and the New
York Federal Reserve are open (a Business Day). The NAV is calculated at the
close of the Portfolio's Business Day, which coincides with the close of regular
trading of the NYSE (normally 4:00 p.m. Eastern Time).
The Portfolio's securities and other assets are valued primarily on the
basis of market quotations furnished by pricing services, or if quotations are
not available, by a method that the Trustees believe accurately reflects fair
value. Foreign securities are valued on the basis of quotations from the
primary United States market in which they are traded or, if not traded on a
U.S. market, then their primary foreign market, and translated from foreign
market quotations into U.S. dollars using current exchange rates.
DISTRIBUTION OPTIONS: The Portfolio earns interest from bond, money
market, and other fixed-income investments and dividends from its stocks. These
are passed along as dividend distributions. The Portfolio may realize capital
gains if it sells securities for a higher price than it paid for them. These
are passed along as capital gain distributions. Income dividends for the Bond
Portfolio are declared daily and paid monthly.
When you fill out your account application, you can specify how you want to
receive your distributions. Currently, there are three available options:
1. REINVESTMENT OPTION. Your dividend distributions and capital gain
distributions, if any, will be automatically reinvested in additional shares of
the Portfolio. Reinvestment of distributions will be made at that day's NAV. If
you do not indicate a choice on your application, you will be assigned this
option.
2. CASH OPTION. You will be sent a check for each dividend and capital
gain distribution, if any. Distribution checks will be mailed no later than
seven days after the last day of the month.
3. INCOME-EARNED OPTION. Your capital gain distributions will be
automatically reinvested, but you will be sent a check for each dividend
distribution.
HOW ARE EXCHANGES MADE?
An exchange is the redemption of shares of one Portfolio and the purchase
of shares of another. The exchange privilege is a convenient way to sell and
buy shares of other Portfolios registered in an investor's state. Except as
noted below, the Portfolio's shares may be exchanged for the same Class shares
of other First Funds Portfolios. The redemption and purchase will be made at
the next determined NAV after the exchange request is received and accepted by
CGFSC. You may execute exchange transactions by calling CGFSC at 1-800-442-1941
(option 2) prior to 4:00 p.m. Eastern Time on any Business Day. Class II shares
of the First Funds Money Market Portfolios are not currently available for
investment. Investors in Class II shares wishing to exchange into one of these
Money Market Portfolios will receive Class III shares.
When making an exchange or opening an account in another Portfolio by
exchange, the registration and tax identification numbers of the two accounts
must be identical. In order to open a new account through exchange, the minimum
initial investment requirements must be met.
Each exchange may produce a gain or loss for tax purposes. In order to
protect the Portfolio's performance and its shareholders, First Tennessee
discourages frequent exchange activity by investors in response to short-term
market fluctuations. The Portfolio reserves the right to refuse any specific
purchase order, including certain purchases by exchange if, in First Tennessee's
opinion, the Portfolio would be unable to invest effectively in accordance with
its investment objective and policies, or would otherwise be affected adversely.
Exchanges or purchase orders may be restricted or refused if the Portfolio
receives or anticipates individual or simultaneous orders affecting significant
portions of the Portfolio's assets. Although the Portfolio will attempt to give
prior notice whenever it is reasonably able to do so, it may impose these
restrictions at any time. The Portfolio reserves the right to modify or withdraw
the exchange privilege and to suspend the offering of shares in any Class
without notice to shareholders. You or your Institutional Investor, if you are
invested in Class I, will receive written confirmation of each exchange
transaction.
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Exchanges are generally not permitted from Class I to another Class. Should
a beneficial owner of Class I shares cease to be eligible to purchase shares of
Class I , Class I shares held in an Institutional Account may be converted to
shares of another Class.
STATEMENTS AND REPORTS
You or, if Class I, the Institutional Investor will receive a monthly
statement and a confirmation after every transaction that affects the account
registration. A statement with tax information will be mailed by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
or, if Class I, the Institutional Investor will receive the Portfolio's
financial statements. To reduce expenses, only one copy of the Portfolio's
reports (such as the Prospectus and Annual Report) will be mailed to each
investor or, if Class I, each Institutional Investor. Please write to ALPS to
request additional copies.
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HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------
From time to time the Portfolio may quote the yield of Class I, II or III
shares in advertisements or in reports or other communications with
shareholders. The YIELD is a way of showing the rate of income that the
Portfolio earns on its investments as the percentage of its share price. To
calculate yield, the Portfolio takes the net investment income it earned from
its Portfolio securities for a 30-day period, divides it by the average number
of shares entitled to receive dividends, and expresses the result as an
annualized percentage rate based on share price at the end of the 30-day period.
Yields do not reflect gains or losses from portfolio transactions. Yields are
calculated according to accounting methods that are standardized for all mutual
funds. Because yield accounting methods differ from the methods used for other
accounting purposes, the Portfolio's yield may not equal its distribution rate,
the income paid to an account, or the income reported in financial statements.
TOTAL RETURN for Class I, II or III of the Portfolio is based on the
overall dollar or percentage change in value of a hypothetical investment,
assuming dividends are reinvested. A CUMULATIVE TOTAL RETURN reflects
performance over a stated period of time. An AVERAGE ANNUAL TOTAL RETURN
reflects the hypothetical annually compounded rate that would have produced the
same cumulative total return if performance had been constant over the entire
period. Because average annual returns tend to smooth out variations in
performance, you should recognize that they are not the same as actual
year-by-year results. The yield and total returns of the three classes of the
Portfolio are calculated separately due to separate expense structures as
indicated in the "Summary Of Portfolio Expenses"; the yields and total returns
of Class II and Class III will be lower than that of Class I.
For additional performance information, contact your Investment
Professional or ALPS for a free Annual Report and Statement of Additional
Information for the Portfolio.
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PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Broker-dealers are utilized to conduct securities transactions for the
Portfolio and are chosen based upon professional ability and quality of service.
In addition, the Portfolio's investment advisers may consider a broker-dealer's
sales of shares of the Portfolio or recommendations to its customers that they
purchase shares of the Portfolio as a factor in the selection of broker-dealers
to execute transactions for the Portfolio. In placing business with such
broker-dealers, the advisers will seek the best execution of each transaction.
Higher commissions may be paid to firms that provide research services to
the extent permitted by law. The frequency of Portfolio transactions - the
portfolio turnover rate - will vary from year to year depending on market
conditions. Bond Portfolio's portfolio turnover rate for the period ended June
30, 1996 was 56%.
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WHAT IS THE EFFECT OF FEDERAL INCOME TAX ON THIS INVESTMENT?
- --------------------------------------------------------------------------------
The Portfolio intends to distribute substantially all of its net investment
income and capital gains, if any, to shareholders within each calendar year as
well as on a fiscal year basis. Any net capital gains realized are normally
distributed in December. Income dividends for the Portfolio are declared daily
and paid monthly.
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FEDERAL TAXES. Distributions from the Portfolio's taxable income and
short-term capital gains are taxed as dividends, and long-term capital gain
distributions are taxed as long-term capital gains. Distributions are taxable
when they are paid, whether taken in cash or reinvested in additional shares,
except that distributions declared in December and paid in January are taxable
as if paid on December 31. The Portfolio will send each investor or, if Class I,
each Institutional Investor, an IRS Form 1099-DIV by January 31.
CAPITAL GAINS. A capital gain or loss may be realized when shares of the
Portfolio are redeemed or exchanged. For most types of accounts, the Portfolio
will report the proceeds of redemptions to each investor or, if Class I,the
Institutional Investor and the IRS annually. However, because the tax treatment
also depends on the purchase price and your personal tax position, regular
account statements should be used to determine the tax gain or loss.
"BUYING A DIVIDEND." On the record date for a distribution, the
Portfolio's share price is reduced by the amount of the distribution. If shares
are bought just before the record date (buying a dividend), the full price for
the shares will be paid, and a portion of the price will be received back as a
taxable distribution.
OTHER TAX INFORMATION. The information above is only a summary of some of
the federal tax consequences generally affecting the Portfolio and its
shareholders, and no attempt has been made to discuss individual tax
consequences. In addition to federal tax, distributions may be subject to state
or local taxes. Institutional Investors and other shareholders should consult
their tax advisers for details and up-to-date information on the tax laws in
your state to determine whether the Portfolio is suitable given your particular
tax situation. It is not anticipated that the Portfolio's distributions will be
exempt from Tennessee personal income tax, except to the extent that any
distributions of income are attributable to interest on bonds or securities of
the U.S. government or any of its agencies or instrumentalities.
When you sign your account application, you will be asked to certify that
your taxpayer identification number is correct and that you are not subject to
backup withholding for failing to report income to the IRS. If you do not comply
with IRS regulations, the IRS can require the Portfolio to withhold 31% of
taxable distributions from your account.
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WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY?
- --------------------------------------------------------------------------------
INVESTMENT ADVISORY AND MANAGEMENT AND SUB-ADVISORY AGREEMENTS. For
managing its investment and business affairs, the Portfolio is obligated to pay
First Tennessee, 4990 Poplar Avenue, Memphis, Tennessee, a monthly management
fee at the annual rate of .55% of its average net assets. First Tennessee has
voluntarily agreed to waive its advisory fees to .15% of the Portfolio's average
net assets. This voluntary waiver can be discontinued at any time.
Under the Investment Advisory and Management Agreement, First Tennessee
may, with the prior approval of the Trustees, engage one or more sub-advisers
which may have full investment discretion to make all determinations with
respect to the investment and reinvestment of all or any portion of the
Portfolio's assets, subject to the terms and conditions of the investment
advisory agreement and the written agreement with any such sub-adviser. In the
event one or more sub-advisers is appointed by First Tennessee, First Tennessee
shall monitor and evaluate the performance of such sub-advisers, allocate
Portfolio assets to be managed by such sub-advisers, recommend any changes in or
additional sub-advisers when appropriate and compensate each sub-adviser out of
the investment advisory fee received by First Tennessee from the Portfolio.
First Tennessee has experience as an investment adviser to individual,
corporate and institutional advisory clients, pension plans and collective
investment funds, with approximately $13.8 billion in assets under
administration (including nondiscretionary accounts) and $5.3 billion in assets
under management as of June 30, 1996, as well as experience in supervising
sub-advisers. For the Portfolio's fiscal year ended June 30, 1996, First
Tennessee earned $563,748 from the Portfolio before waiving $482,559 of its fee.
Highland serves as the Sub-Adviser for the Portfolio subject to the
supervision of First Tennessee and pursuant to the authority granted to it under
its Sub-Advisory Agreement with First Tennessee. On March 1, 1994, Highland
merged with and into First Tennessee Investment Management, Inc. (FTIM), an
affiliate of First Tennessee, and changed its name to Highland Capital
Management Corp. FTIM (now Highland), has been a wholly-owned subsidiary of
First Tennessee National Corporation since 1972. First Tennessee and Highland
have a history of investment management since 1929. Highland has a total of $2.1
billion in assets under management as of June 30, 1996. First Tennessee is
obligated to pay Highland a monthly sub-advisory fee at the annual rate of .33%
of the Bond Portfolio's average net assets. Highland is currently waiving some
or all of its fees for the Portfolio.
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<PAGE>
ADMINISTRATOR AND DISTRIBUTOR. ALPS, 370 17th Street, Suite 2700, Denver,
Colorado 80202, serves as the Administrator and Distributor for the Portfolio.
As Administrator, ALPS assists in the Portfolio's administration and operation,
including but not limited to, providing office space and various legal and
operational services in connection with the regulatory requirements applicable
to the Portfolio. ALPS is entitled to and receives from the Portfolio a monthly
fee at the annual rate of .15% of average net assets.
First Tennessee serves as the Co-Administrator for the Portfolio. As the
Co-Administrator, First Tennessee assists in the Portfolio's operation,
including but not limited to, providing non-investment related research and
statistical data and various operational and administrative services. First
Tennessee is entitled to and receives from the Portfolio a monthly fee at the
annual rate of .05% of average net assets.
As the Distributor, ALPS sells shares of the Portfolio as agent on behalf
of the Trust at no additional cost to the Trust. First Tennessee and its
affiliates do not participate in and are not responsible for selling as an agent
on behalf of the Trust, underwriting or distributing Trust shares. Consistent
with applicable law, affiliates of First Tennessee may receive commissions or
asset-based fees.
TRANSFER AGENT AND CUSTODIAN. Chase Global Funds Services Company, a
division of Chase Manhattan Bank, N.A. ("CGFSC"), provides transfer agent and
related services for the Portfolio. Chase Manhattan Bank, N.A. is custodian of
the assets of the Trust.
PRICING AND ACCOUNTING. CGFSC calculates the NAV and dividends of each
class and maintains the portfolio and general accounting records.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING PLANS. The Trustees have
adopted a Distribution Plan on behalf of Class III of the Portfolio pursuant to
Rule 12b-1 (the Rule) under the 1940 Act. The NASD subjects asset-based sales
charges to its maximum sales charge rule. Fees paid pursuant to the Portfolio's
Distribution Plan will be limited by the restrictions imposed by the NASD rule.
The Distribution Plan provides for payment of a fee to ALPS at the annual rate
of .75% of the average net assets of Class III. All or a portion of these fees
will in turn be paid to Service Organizations as compensation for selling shares
of Class III and for providing ongoing sales support services. The Trustees
have also adopted Shareholder Servicing Plans on behalf of Class II and III of
the Portfolio, under which Investment Professionals are paid at the annual rate
of .25% of each Class' average net assets, for shareholder services and account
maintenance, including responding to shareholder inquiries, directing
shareholder communications, account balance maintenance, and dividend posting.
The Distribution Fees are expenses of Class III and the Shareholder Servicing
Fees are expenses of Class II and III in addition to the Management Fee, and the
Administration and Co-Administration Fees, and will reduce the net income and
total return of both Classes.
- --------------------------------------------------------------------------------
HOW IS THE PORTFOLIO ORGANIZED?
- --------------------------------------------------------------------------------
The Portfolio is a diversified portfolio of First Funds, an open-end
management investment company organized as a Massachusetts business trust by a
Declaration of Trust dated March 6, 1992, as amended and restated on September
4, 1992. The Portfolio consists of three separate Classes. The Trustees
supervise the Trust's activities and review its contractual arrangements with
companies that provide the Trust with services. The Trust is not required to
hold annual shareholder meetings, although special meetings may be called for a
specific Portfolio or class with respect to issues affecting that Portfolio or
Class, or the Trust as a whole, for purposes such as electing or removing
Trustees, changing fundamental policies or approving investment advisory
agreements. Shareholders receive one vote for each share owned and fractional
votes for fractional shares owned. A Portfolio or Class votes separately with
respect to issues affecting only that Portfolio or Class. Pursuant to the
Declaration of Trust, the Trustees have the authority to issue additional
classes of shares for the Portfolio.
PORTFOLIO MANAGEMENT
James R. Turner is one of the Portfolio Managers for the Bond Portfolio.
Mr. Turner managed the assets of the Portfolio's predecessor account from August
1986 until its conversion in August 1993 to a mutual fund. He also manages
pension and endowment funds. He is a Senior Vice President of Highland and is a
Chartered Financial Analyst. Mr. Turner is a graduate of the U.S. Military
Academy and received a Masters of Science in Industrial Engineering from
Stanford University.
Steven Wishnia, one of the Portfolio Managers for the Bond Portfolio, is a
Director and Chairman of the Board of Highland. He joined Highland in April,
1987. Mr. Wishnia is a graduate of Pace University.
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INVESTMENT INSTRUMENTS, TRANSACTIONS, STRATEGIES AND RISKS
- --------------------------------------------------------------------------------
The following paragraphs provide a brief description of the securities in
which the Portfolio may invest and the transactions each may make. The
Portfolio is not limited by this discussion, however, and may purchase other
types of securities and may enter into other types of transactions if they are
consistent with the Portfolio's investment objective and policies.
ASSET-BACKED AND MORTGAGE SECURITIES purchased by the Portfolio may include
interests in pools of mortgages, loans (including consumer loans), receivables
or other assets. They may also include collateralized mortgage obligations
(CMOs) and stripped mortgage-backed securities. CMOs are pass-through securities
collateralized by mortgages or mortgage-backed securities. CMOs are issued in
classes and series that have different maturities and often are retired in
sequence. Payment of principal and interest may be largely dependent upon the
cash flows generated by the assets backing the securities. The Portfolio may
purchase mortgage-backed securities issued by government and non-government
entities such as banks, mortgage lenders, or other financial institutions. A
mortgage-backed security may be an obligation of the issuer backed by a mortgage
or pool of mortgages or a direct interest in an underlying pool of mortgages.
Some mortgage-backed securities, such as CMOs, make payments of both principal
and interest at a variety of intervals; others make semiannual interest payments
at a predetermined rate and repay principal at maturity (like a typical bond).
Mortgage-backed securities are based on different types of mortgages including
those on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the
Portfolio may invest in them if Highland determines they are consistent with the
Portfolio's investment objective and policies.
The value of mortgage-backed securities may change due to changes in the
market's perception of issuers including their credit-worthiness. In addition,
regulatory or tax changes may adversely affect the mortgage securities market as
a whole. Non-government mortgage-backed securities may offer higher yields than
those issued by government entities, but also may be subject to greater price
changes than government issues. Mortgage-backed securities are subject to
prepayment risk. Prepayment, which occurs when unscheduled or early payments are
made on the underlying mortgages, may shorten the effective maturities of these
securities and may lower their total returns. Some securities may have a
structure that makes their reaction to changing interest rates and other factors
difficult to predict and highly volatile.
COMMERCIAL PAPER purchased by the Portfolio are short-term obligations
issued by banks, broker-dealers, corporations and other entities for purposes
such as financing their current operations.
DELAYED-DELIVERY AND WHEN-ISSUED TRANSACTIONS. The Portfolio may buy and
sell obligations on a when-issued or delayed-delivery basis, with payment and
delivery taking place at a future date. The market value of obligations
purchased in this way may change before the delivery date, which could increase
fluctuations in the Portfolio's share price, yield, and return. Ordinarily, the
Portfolio will not earn interest on obligations until they are delivered.
DOLLAR ROLL TRANSACTIONS. In order to enhance portfolio returns and manage
prepayment risks, the Portfolio may engage in dollar roll transactions with
respect to mortgage securities. In a dollar roll transaction, the Portfolio
sells a mortgage security to a financial institution, such as a bank or
broker-dealer, and simultaneously agrees to repurchase a substantially similar
(same type, coupon and maturity) security from the institution at a later date
at an agreed upon price. The mortgage securities that are repurchased will bear
the same interest rate as those sold, but generally will be collateralized by
different pools of mortgages with different prepayment histories. During the
period between the sale and repurchase, the Portfolio will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of the
sale will be invested in short-term instruments. The income from these
investments, together with any price difference at the time of sale, will
determine the net advantage to the Portfolio. When the Portfolio enters into a
dollar roll transaction, liquid assets of the Portfolio, in a dollar amount
sufficient to make payment for the obligations to be repurchased, are segregated
at the trade date. These securities are marked to market daily and are
maintained until the transaction is settled.
FOREIGN INVESTMENTS. The Portfolio may invest in foreign securities, which
may involve additional risks. Foreign securities and securities denominated in
or indexed to foreign currencies may be affected by the strength of foreign
currencies relative to the U.S. dollar, or by political, regulatory or economic
developments in foreign countries. Foreign companies may not be subject to
accounting standards or governmental supervision comparable to U.S. companies,
and there may be less public information about their operations. Foreign markets
may be less liquid or more volatile than U.S. markets, and may offer less
protection to investors. In addition to the political and economic factors that
can affect foreign securities, a governmental issuer may be unwilling to repay
principal and interest when due, and may require that the conditions for payment
be renegotiated. These factors could make foreign investments, especially those
in developing countries, more volatile. Highland considers these factors in
making foreign investments for the Portfolio.
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<PAGE>
The Portfolio may also enter into currency forward contracts (agreements to
exchange one currency for another at a future date) to manage currency risks and
to facilitate transactions in foreign securities. Although currency forward
contracts can be used to protect the Portfolio from adverse exchange rate
changes, they involve a risk of loss if Highland fails to predict foreign
currency values correctly or employs a strategy that does not correlate well
with a Portfolio's investments. A loss to the Portfolio may also result if the
counterparty to a transaction fails to perform as obligated.
FORWARDS. A forward represents a contract that obligates the counterparty
to buy, and the other to sell, a specific underlying asset at a specific price,
amount, and date in the future. Forwards are similar to futures except for the
fact that forwards are privately negotiated. The most common type of forward
contracts are foreign currency exchange contracts.
The Portfolio may enter into forward exchange currency contracts in order
to hedge its exposure to changes in foreign currency exchange rates on its
foreign portfolio holdings and to hedge certain firm purchase and sale
commitments denominated in foreign currencies. A forward exchange currency
contract is a commitment to purchase or sell a foreign currency at a future date
at a negotiated forward rate. The gain or loss arising from the difference
between the original contract and the closing of such contract is included in
net realized gain or loss on foreign currency transactions. Fluctuations in the
value of forward exchange currency contracts are recorded for financial
reporting purposes as unrealized gains or losses by the Portfolio.
ILLIQUID SECURITIES. Under the supervision of the Board of Trustees,
Highland, under First Tennessee's supervision, determines the liquidity of the
Portfolio's investments. The absence of a trading market can make it difficult
to ascertain a market value for illiquid investments. Disposing of illiquid
investments or securities subject to legal restrictions may involve
time-consuming negotiation and legal expenses. It may be difficult or impossible
for the Portfolio to sell illiquid or restricted securities promptly at an
acceptable price. The Portfolio may invest up to 15% of its assets in illiquid
investments.
MONEY MARKET INSTRUMENTS are high quality instruments that present minimal
credit risk. They may include U.S. government obligations, commercial paper and
other short-term corporate obligations, and certificates of deposit, bankers'
acceptances, bank deposits and other financial institution obligations. These
instruments may carry fixed or variable rates.
OPTIONS CONTRACTS. An option is a contract that gives the owner the right,
but not the obligation, to either buy (call option) or sell (put option) an
underlying security or currency at a fixed price for a specified period of time.
The Portfolio may buy and sell put and call options contracts to manage its
exposure to changing interest rates and security prices. To the extent it
invests in securities denominated in foreign currencies, the Portfolio may also
buy and sell options contracts to manage exposure to currency exchange rates.
Some option strategies, including buying puts and writing calls, tend to hedge
the Portfolio's investments against price fluctuations. Other strategies,
including writing puts and buying calls, tend to increase market exposure.
Options may be combined with each other in order to adjust the risk and return
characteristics of the overall strategy. The Portfolio may enter into forward
contracts for settlement or hedging purposes. The Portfolio may invest in
options based on any type of security, index, or currency, including options
traded on foreign exchanges and options not traded on exchanges.
Options can be volatile investments and involve certain risks. If Highland
applies a hedge at an inappropriate time or judges market conditions
incorrectly, options strategies may result in a loss and lower the Portfolio's
return. The Portfolio could also experience losses if the prices of its options
positions were poorly correlated with its other investments, or if it could not
close out its positions because of an illiquid secondary market. The use of
options may increase the volatility of the Portfolio and may involve the
investment of a small amount of cash relative to the risk assumed.
The Portfolio will be able to hedge its total assets by writing calls or
purchasing puts under normal conditions. In addition, the Portfolio will not
write puts whose underlying value exceeds 25% of total assets, and will not buy
calls with a value exceeding 5% of total assets.
REPURCHASE AGREEMENTS AND SECURITIES LOANS. In a repurchase agreement, a
Portfolio buys a security at one price and simultaneously agrees to sell it back
at a higher price. A Portfolio may also make securities loans to broker-dealers
and institutional investors. In the event of the bankruptcy of the other party
to a repurchase agreement or a securities loan, a Portfolio could experience
delays in recovering its cash or the securities it lent. To the extent that, in
the meantime, the value of the obligations purchased had decreased, or the
value of obligations lent had increased, a Portfolio could experience a loss. In
all cases, Highland must find the creditworthiness of the other party to the
transaction satisfactory.
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<PAGE>
RESTRICTED SECURITIES. The Portfolio may purchase securities which cannot
be sold to the public without registration under the Securities Act of 1933
(restricted securities). Unless registered for sale, these securities can only
be sold in privately negotiated transactions or pursuant to an exemption from
registration. Provided that the security has a demand feature of seven days or
less, or a dealer or institutional trading market exists, these restricted
securities are not treated as illiquid securities for the purposes of the
Portfolio's investment limitations.
U.S. GOVERNMENT OBLIGATIONS purchased by the Portfolio are debt obligations
issued or guaranteed by the U.S. Treasury or by an agency or instrumentality of
the U.S. government. Not all U.S. government obligations are backed by the full
faith and credit of the United States. For example, obligations issued by the
Federal Farm Credit Bank or by the Federal National Mortgage Association are
supported by the agency's right to borrow money from the U.S. Treasury under
certain circumstances. Obligations issued by the Federal Home Loan Bank are
supported only by the credit of the agency. There is no guarantee that the
government will support these types of obligations, and therefore they involve
more risk than other government obligations.
U.S. TREASURY OBLIGATIONS purchased by the Portfolio are obligations issued
by the United States and backed by its full faith and credit.
VARIABLE AND FLOATING RATE INSTRUMENTS purchased by the Bond Portfolio,
including certain participation interests in municipal obligations, have
interest rate adjustment formulas that help to stabilize their market values.
Many variable or floating rate instruments also carry demand features that
permit the Portfolio to sell them at par value plus accrued interest on short
notice. When determining its average weighted portfolio maturity, the Portfolio
will look to the interest readjustment date, rather than the maturity date, of
the instrument.
ZERO COUPON BONDS purchased by the Portfolio do not make regular interest
payments; instead they are sold at a deep discount from their face value and are
redeemed at face value when they mature. Because zero coupon bonds do not pay
current income, their prices can be very volatile when interest rates change. In
calculating its daily dividend, the Portfolio takes into account as income a
portion of the difference between a zero coupon bond's purchase price and its
face value.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corporation (REFCORP) and the
Financing Corporation (FICO) can also be separated in this fashion. The risks of
these securities are similar to those of other debt securities, although they
may be more volatile and the value of certain types of stripped securities may
move in the same direction as interest rates. Original issue zeros are zero
coupon securities originally issued by the U.S. government, a government agency,
or a corporation in zero coupon form.
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INVESTMENT ADVISER AND CO-ADMINISTRATOR
---------------------------------------
First Tennessee Bank National Association
Memphis, TN
SUB-ADVISER
-----------
Highland Capital Management Corp.
Memphis, TN
OFFICERS
--------
Richard C. Rantzow, President
Mark A. Pougnet, Treasurer
James V. Hyatt, Secretary
TRUSTEES
--------
Thomas M. Batchelor
John A. DeCell
L.R. Jalenak, Jr.
Larry W. Papasan
Richard C. Rantzow
ADMINISTRATOR AND DISTRIBUTOR
-----------------------------
ALPS Mutual Funds Services, Inc.
Denver, CO
TRANSFER AND SHAREHOLDER SERVICING AGENT
----------------------------------------
Chase Global Funds Services Company
Boston, MA
CUSTODIAN
---------
Chase Manhattan Bank, N.A.
New York, NY
<PAGE>
[LOGO]
FIRST FUNDS 370 17th Street
Suite 2700
TENNESSEE TAX-FREE PORTFOLIO Denver, Colorado 80202
Prospectus for Class I, II, and III
October 25, 1996
First Funds (the Trust) offers investors a convenient and economical
means of investing in a professionally managed mutual fund. The objective of
the Tennessee Tax-Free Portfolio (the Portfolio) is to seek a high level of
current income, which is exempt from federal and Tennessee personal income
tax, by investing in a portfolio consisting primarily of Tennessee tax-exempt
obligations. The Portfolio's net asset value per share will fluctuate in
response to changes in the value of its investments.
This Prospectus is designed to provide you with information that you
should know before investing. Please read and retain this document for future
reference. This Prospectus offers Class I, II and III shares of the
Portfolio. Class I shares are designed exclusively for investment of monies
held in non-retail trust, advisory, agency, custodial or similar accounts
(Institutional Accounts). Class I shares may be purchased for Institutional
Accounts by financial institutions, business organizations, corporations,
municipalities, non-profit institutions and other entities serving in trust,
advisory, agency, custodial or similar capacities (each, an Institutional
Investor and collectively, Institutional Investors) that meet the investment
threshold for this Class of shares. Class II and III shares are designed for
individuals and other investors who seek mutual fund investment convenience
plus a lower investment minimum. These Classes offer investors differing
expense and sales load structures to choose between. See "Expense Summary" on
page 3.
A Statement of Additional Information (dated October 25, 1996) for the
Portfolio has been filed with the Securities and Exchange Commission (SEC)
and is incorporated herein by reference. This Prospectus, the Annual Report
and the Statement of Additional Information are available free upon request
from ALPS Mutual Funds Services, Inc., (ALPS), the Portfolio's Distributor.
The Annual Report for the fiscal period ended June 30, 1996 for the Portfolio
is incorporated into the Statement of Additional Information by reference.
Please call ALPS at 1-800-442-1941 (option 1) for more information concerning
each Class of shares. If you are investing through a broker, other financial
institution or adviser (Investment Professional), please contact that
institution directly.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR
GUARANTEED BY, FIRST TENNESSEE BANK NATIONAL ASSOCIATION OR ANY DEPOSITORY
INSTITUTION. SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FDIC, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
TNTF-pro-1096
<PAGE>
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TABLE OF CONTENTS
PAGE
----
Summary of Portfolio Expenses.............................................. 3
Financial Highlights....................................................... 5
What Is The Investment Objective Of The Portfolio?......................... 6
Is The Portfolio A Suitable Investment?; Investment Risks.................. 6
What Are The Portfolio's Investment Policies and Limitations?.............. 8
How Are Investment, Exchanges and Redemptions Made?........................ 9
How Is Performance Calculated?............................................. 16
Portfolio Transactions..................................................... 16
What Is The Effect Of Income Tax On This Investment?....................... 16
What Advisory And Other Fees Does The Portfolio Pay?....................... 17
How Is The Portfolio Organized?............................................ 18
Investment Instruments, Transactions, Strategies and Risks................. 18
- -------------------------------------------------------------------------------
2
<PAGE>
- -------------------------------------------------------------------------------
SUMMARY OF PORTFOLIO EXPENSES
- -------------------------------------------------------------------------------
The purpose of the table below is to assist you in understanding the
various costs and expenses that you would bear directly or indirectly. This
standard format was developed for use by all mutual funds to help you make
your investment decisions. The information below is based upon the
Portfolio's expenses for the fiscal year ended June 30, 1996 adjusted to
reflect new servicing arrangements. This expense information should be
considered along with other important information, such as the Portfolio's
investment objective.
A. EXPENSE SUMMARY
TENNESSEE TAX-FREE
PORTFOLIO
------------------------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------- -------- ---------
Maximum Sales Load on Purchases
(as a percentage of offering price) None 3.75% None
Sales Load Imposed on Reinvested
Distributions None None None
Deferred Sales Load None None None
Redemption Fees None None None
Exchange Fee None None None
ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees* .00% .00% .00%
12b-1 Fees* .00% .00% .00%
Shareholder Servicing Fees .00% .00% .00%
OTHER EXPENSES* .00% .00% .00%
---- ---- ----
Total Portfolio Operating Expenses* .00% .00% .00%
---- ---- ----
---- ---- ----
*Net of expense waivers and/or reimbursements.
ANNUAL PORTFOLIO OPERATING EXPENSES. The Portfolio is obligated to pay
Management Fees to First Tennessee Bank National Association (First Tennessee)
for managing the Portfolio's investments. First Tennessee, as Investment
Adviser, has voluntarily agreed to waive its entire investment advisory fee;
however, there is no guarantee that the waiver will continue. The Portfolio
incurs Other Expenses, including Administrative and Co-Administrative Fees, for
maintaining shareholder records, furnishing shareholder statements and reports,
and other services. ALPS, the Administrator, is entitled to .15% of the
Portfolio's average net assets for administration services. ALPS has agreed to
voluntarily waive its administration fee to .075% through December 31, 1996.
Additionally, through December 31, 1996, ALPS has voluntarily agreed to assume
all Portfolio expenses in order to maintain an expense ratio of 0.00% for all
Classes of the Portfolio. ALPS reserves the right to modify or terminate this
voluntary fee waiver and assumption of expenses at any time. First Tennessee,
the Co-Administrator, is entitled to .05% of the Portfolio's average net assets
for co-administration services. First Tennessee has voluntarily agreed to waive
its entire co-administration fee; however, there is no guarantee that this
waiver will continue.
If the waivers and assumption of expenses were not in effect, Management
Fees would be .75% of average net assets for each Class and 12b-1 Fees would be
.50% of average net assets for Class III. Other Expenses and Total Portfolio
Operating Expenses would be estimated as follows:
TENNESSEE TAX-FREE
PORTFOLIO
------------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
Other Expenses .92% .92% .92%
Total Portfolio Operating Expenses 1.67% 1.67% 2.17%
3
<PAGE>
There is no guarantee that any waivers or assumptions of expenses will
continue at their stated levels.
Management Fees, 12b-1 Fees, Shareholder Servicing Fees, and Other
Expenses, are reflected in the Portfolio's share price and are not charged
directly to individual accounts. 12b-1 Fees are paid by Class III to ALPS for
services and expenses in connection with distribution. Shareholder Servicing
Fees are paid by Class II and III to securities brokers, financial
institutions or advisers (Investment Professionals) for services and expenses
incurred in connection with providing personal service to shareholders and/or
maintenance of shareholder accounts. Long-term shareholders may eventually
pay more than the economic equivalent of the maximum 8.50% front-end sales
charge permitted by the National Association of Securities Dealers, Inc.
(NASD) due to 12b-1 fees. Please see page 17 for further information.
B. EXAMPLE: You would pay the following expenses for every $1,000
investment in each Class of shares of the Tennessee Tax-Free Portfolio assuming
(1) 5% annual return, (2) redemption at the end of each time period, (3) that
operating expenses (net of expense waivers) are the same as described above, and
(4) reinvestment of all dividends and distributions. THE RETURN OF 5% AND
EXPENSES SHOULD NOT BE CONSIDERED INDICATIONS OF ACTUAL OR EXPECTED PERFORMANCE
OR PORTFOLIO OPERATING EXPENSES, BOTH OF WHICH MAY VARY SIGNIFICANTLY:
TENNESSEE TAX-FREE
PORTFOLIO
------------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
1 year $0 $38* $0
3 years $0 $38* $0
5 years $0 $38* $0
10 years $0 $38* $0
*Reflects imposition of maximum sales charge at the beginning of the period.
4
<PAGE>
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FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The table that follows is included in the Annual Report for the Portfolio
dated June 30, 1996 and has been audited by Price Waterhouse LLP, independent
accountants. Their report on the financial statements and the financial
highlights for the Portfolio is included in the Annual Report. The financial
statements and financial highlights are incorporated by reference into the
Portfolio's Statement of Additional Information. The Annual Report contains
additional performance information and will be made available upon request and
without charge.
<TABLE>
TENNESSEE TAX-FREE PORTFOLIO
CLASS I CLASS II CLASS III
--------------- --------------- ---------------
For the For the For the
Year Ended Year Ended Year Ended
June 30, 1996** June 30, 1996** June 30, 1996**
--------------- --------------- ---------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of
period $10.00 $10.06 $10.00
---------------------------------------------------
Income from investment operations:
Net investment income 0.23 0.21 0.19
Net realized and unrealized gain (loss)
on investments (0.29) (0.33) (0.28)
---------------------------------------------------
Total from investment operations (0.06) (0.12) (0.09)
---------------------------------------------------
Distributions:
Net investment income (0.23) (0.21) (0.19)
Net realized gain - - -
---------------------------------------------------
Total distributions (0.23) (0.21) (0.19)
---------------------------------------------------
Net asset value, end of period $9.71 $9.73 $9.72
---------------------------------------------------
---------------------------------------------------
TOTAL RETURN+ (0.65)%# (1.25)%# (0.87)%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $5,925 $1,875 $896
Ratio of expenses to average daily
net assets 0.50%* 0.49%* 0.98%*
Ratio of net investment income to average
net assets 4.31%* 4.32%* 3.83%*
Portfolio turnover rate 8%* 8%* 8%*
(1) During the period, various fees were
waived. The ratio of expenses to average
net assets had such waivers not occurred
is as follows. 1.42% 1.42% 1.91%
</TABLE>
* Annualized.
** Class I and III commenced operations on December 15, 1995.
Class II commenced operations on December 29, 1995.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are
not annualized.
5
<PAGE>
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WHAT IS THE INVESTMENT OBJECTIVE OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
The Tennessee Tax-Free Portfolio's investment objective is to provide a
high level of current income which is exempt from federal and Tennessee personal
income tax. There is no assurance that the Portfolio will achieve its investment
objective.
The Portfolio invests in securities rated at least investment grade by
Moody's Investors Services, Inc. (Moody's) or Standard & Poor's Corporation
(S&P), or another nationally recognized statistical rating service, or in
unrated securities deemed by First Tennessee to be of comparable quality, issued
by the State of Tennessee or any city, county, school district or any other
political agency or sub-division of the State of Tennessee. These may include
tax, revenue, or bond anticipation notes; tax-exempt commercial paper; general
obligation or revenue bonds (including municipal lease obligations and resource
recovery bonds); industrial development bonds; private activity securities;
standby commitments; and tender option bonds. It is a non-fundamental investment
policy of the Portfolio that under normal conditions, it will invest its assets
so that at least 65% of its income will be exempt from Tennessee personal income
tax, and it is a fundamental policy of the Portfolio that at least 80% of its
income will be exempt from federal income tax. As a non-fundamental investment
policy, the Portfolio will invest its assets on an ongoing basis to achieve as
fully as possible income that is tax-exempt for both Tennessee and federal
income tax purposes.
Municipal obligations are issued to raise money for various public
purposes, including general purpose financing for state and local governments as
well as financing for specific projects or public facilities. Municipal
obligations may be backed by the full taxing power of a municipality or by the
revenues from a specific project or the credit of a private organization. Some
municipal obligations are insured by private insurance companies, while others
may be supported by letters of credit furnished by domestic or foreign banks.
It is anticipated that the Portfolio normally will be invested in
intermediate-to-long term bonds, and its dollar-weighted average maturity
generally will be between 5 and 15 years, although it may invest in obligations
of any maturity. If First Tennessee determines that market conditions warrant a
shorter or longer average maturity within the range of 5 to 15 years, the
Portfolio's investments will be adjusted accordingly.
The Portfolio does not intend to invest in federally taxable obligations
under normal conditions; however, it may, for temporary defensive purposes,
invest in high quality taxable money market instruments, including U.S.
government obligations; U.S. Treasury bills, notes and bonds; commercial paper;
repurchase agreements; and reverse repurchase agreements. The Portfolio may also
buy and sell securities on a when-issued or delayed delivery basis, and may
purchase zero coupon bonds.
See "Investment Instruments, Transactions, Strategies And Risks" on page 18
for a further discussion of the Portfolio's investments.
- -------------------------------------------------------------------------------
IS THE PORTFOLIO A SUITABLE INVESTMENT?; INVESTMENT RISKS
- -------------------------------------------------------------------------------
By itself, the Tennessee Tax-Free Portfolio does not constitute a balanced
investment plan; it emphasizes both federal and Tennessee personal tax-free
income. Bond funds such as the Portfolio are generally subject to two risk
factors: (1) credit risk and (2) interest rate risk. The Portfolio will seek to
manage credit risk by investing only in securities as described previously in
"What is the Investment Objective of the Portfolio?" In the event a security's
credit rating is downgraded, its value can be expected to decrease. First
Tennessee may elect to continue to hold such securities. The Portfolio will seek
to manage interest rate risk by limiting its average maturity to 15 years or
less. An increase in interest rates will generally reduce the value of portfolio
investments and a decline in interest rates will generally increase the value of
portfolio investments. Shorter-term obligations (such as instruments with
maturities of one year or less) generally offer greater stability and are less
sensitive to interest rate changes. Longer-term bonds of the type in which the
Portfolio will invest offer less stability and are more sensitive to interest
rate changes, but generally offer higher yields. The Portfolio's share price,
yield and total return will fluctuate, and an investment may be worth more or
less than the original cost when shares are redeemed.
In general, the secondary market for Tennessee obligations is less liquid
than that for taxable debt obligations or for large issues of municipal
obligations that trade in a national market. There is, however, an established
resale market for Tennessee obligations in which the Portfolio may invest. These
considerations may have the effect of restricting
6
<PAGE>
the availability of such obligations for the Portfolio to purchase, may
affect the choice of securities sold to meet redemption requests and may have
the effect of limiting the ability of the Portfolio to sell or dispose of
such securities. Also, valuation of such obligations may be more difficult.
SPECIAL FACTORS CONCERNING THE STATE OF TENNESSEE
Because the Portfolio will ordinarily invest 65% or more of its total
assets in Tennessee obligations, it is more susceptible to factors affecting
Tennessee issuers than is a comparable fund not concentrated in the obligations
located in a single state.
Tennessee contains four geographically separated cities and a number of
small towns spread throughout the state. The demography of the State is such
that its economic strength is concentrated in Nashville, Memphis, Knoxville, and
Chattanooga. The different geographic influences of these cities, strongly
affect the economic growth and diversity of surrounding counties. The state also
contains a number of emerging economic centers such as Johnson
City/Bristol/Kingsport (Tri-Cities), Jackson, and Cookeville. Most of the
remaining counties have more isolated and rural economies. Although rural, most
of these economies often include some diversified, small scale manufacturing
concerns which are often the cornerstone of local employment and personal
income.
Tennessee's industrialized economy is dominated by diverse manufacturing,
which includes automotive, fabricated metals, non-electrical machinery,
electronic equipment, chemicals and textiles. The State's industrial expansion
has left Tennessee vulnerable to national economic cycles and foreign
competition. Consequently, Tennessee has focused on developing growth in the
services sector. Total State employment has continued to grow and the
unemployment rate since 1988 has been at or below the national average. The
State unemployment rate for August 1996, seasonally adjusted, declined to 4.4%
from 5.1% for August 1995. The national average was 5.1% for August 1996. Per
capita income has steadily increased and in 1994 was 90% of the national
average, up from 85% in 1990 and 83% in 1995.
TennCare, the State-provided healthcare plan, replaced Medicaid and insures
all qualified uninsured individuals in the State. This has caused a strain in
the past on the State's finances; however, the costs associated with the program
have stabilized in fiscal 1996.
Tennessee has revamped its education aid program, the Basic Education
Program. In 1993, it increased the State sales tax rate from 5.5% to 6%, with
the additional half percent dedicated to education. Funding under the Basic
Education Program continues to be phased in and is expected to be fully funded
by July 1, 1998. $125 million is estimated to be required during the next
fiscal year for this program.
Tennessee's financial operations are considerably different than most other
states because there is no state payroll income tax. This factor, together with
the State's reliance on the sales tax for approximately 60% of general fund
receipts, exposes total State tax collections to considerably more volatility
than would otherwise be the case and, in the event of an economic downswing,
could affect the State's ability to pay principal and interest in a timely
manner. The second largest revenue generator is the gasoline tax. The General
Fund balance, which was drawn down to $7.3 million in 1991, has since grown to
$101.4 million in fiscal year 1995. The State economy remains strong with
revenue growth of 9% in fiscal 1995. Estimated growth in the current year is
expected to be sufficient to meet increased expenditures. Although the State
continues to experience balanced financial operations, there can be no assurance
that Tennessee's relatively favorable economic performance will continue.
As of the date of this Prospectus, general obligations of the State of
Tennessee are currently rated "AA+," "Aaa" and "AAA" by S&P, Moody's and Fitch
Investors Service, respectively. There can be no assurance that the economic
conditions on which these ratings are based will continue or that particular
bond issues may not be adversely affected by changes in economic, political
or other conditions. There are no material state tax considerations for
shareholders of this Portfolio other than those set forth under the section
"What Is The Effect Of Federal Income Tax On This Investment?" on page 16.
Further information about the types of securities in which the Portfolio
may invest and their related risks, as well as the investment policies of the
Portfolio in general are set forth in the section "Investment Instruments,
Transactions, Strategies And Risks" on page 18 and in the Statement of
Additional Information.
7
<PAGE>
- -------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIO'S INVESTMENT POLICIES AND LIMITATIONS?
- -------------------------------------------------------------------------------
INVESTMENT LIMITATIONS. The Tennessee Tax-Free Portfolio has adopted the
following investment limitations:
(1) The Portfolio will not invest 25% or more of its total assets in a
particular industry, other than U.S. government obligations.
(2) (a) The Portfolio may borrow money solely for temporary or
emergency purposes, but not in an amount exceeding 33 1/3% of its total
assets. (b) The Portfolio may borrow money from banks or by engaging in
reverse repurchase agreements. (c) The Portfolio will not purchase
securities when borrowings exceed 5% of its total assets. If the Portfolio
borrows money, its share price may be subject to greater fluctuation until
the borrowing is paid off. To this extent, purchasing securities when
borrowings are outstanding may involve an element of leverage.
Unless otherwise noted, the Portfolio's policies and limitations are not
fundamental and may be changed by the Trustees without shareholder approval. The
fundamental policies of the Portfolio that require shareholder approval prior to
any changes are: the Portfolio's investment objective, the Portfolio's policy
that, under normal conditions, at least 80% of its income will be exempt from
federal income tax, and limitations (1) and (2)(a) above. These limitations and
the Portfolio's policies are considered at the time of purchase of securities;
the sale of securities is not required in the event of a subsequent change in
circumstances.
Tennessee Tax-Free Portfolio is classified under the Investment Company Act
of 1940, as amended (1940 Act) as a "non-diversified" investment company, which
allows it to invest more than 5% of its assets in the securities of any issuer,
subject to satisfaction of certain tax requirements. Due to the relatively small
number of issuers of Tennessee obligations, the Portfolio is likely to invest a
greater percentage of its assets in the securities of a single issuer than is an
investment company which invests in a broad range of municipal obligations on a
national scale. The Portfolio is, therefore, more susceptible than a diversified
portfolio to any single adverse economic or political occurrence or development
affecting Tennessee issuers. The Portfolio will also be subject to an
incremental risk of loss if the issuer is unable to make interest or principal
payments or if the market value of such securities declines. It is also possible
that there will not be sufficient availability of suitable Tennessee tax-exempt
obligations for the Portfolio to achieve its objective of providing income
exempt from Tennessee personal income taxes.
The Portfolio may also invest 25% or more of its total assets in municipal
securities whose revenue sources are from similar types of projects, e.g.,
education, electric utilities, health care, housing, transportation, or water,
sewer, and gas utilities. There may be economic, business or political
developments or changes that affect all securities of a similar type.
First Tennessee defines the issuer of a security depending on its terms and
conditions. In identifying the issuer, First Tennessee will consider the entity
or entities responsible for payment of interest and repayment of principal and
the source of such payments; the way in which assets and revenues of an issuing
political subdivision are separated from those of other political entities; and
whether a governmental body is guaranteeing the security.
It is the current position of the SEC staff that the Portfolio may not
derive more than 20% of its income from municipal obligations that pay interest
that is a preference item for purposes of the federal alternative minimum tax
(AMT).
To the extent that the Portfolio invests in private activity obligations,
individuals who are subject to the AMT will be required to report a portion of
the Portfolio's dividends as a "tax preference item" in determining their
federal tax. Income distributions that are a tax preference item for purposes of
the federal AMT are considered to be exempt from federal income tax for purposes
of the Portfolio's fundamental policy that at least 80% of its income will be
federally tax-exempt.
The investment policies and limitations set forth above are supplemented by
the investment policies and limitations in the Statement of Additional
Information. No assurance can be made that the Portfolio will achieve its
objective, but it will follow the investment style described in this Prospectus.
From time to time, the Portfolio to the extent consistent with its
investment objective, policies and restrictions, may invest in securities of
cities, counties or municipalities with which First Tennessee or its affiliates
have lending relationships and may engage in agency brokerage transactions with
First Tennessee. Subject to the terms of the SEC exemptive order received by the
Portfolio on July 15, 1996 , the Portfolio may invest in securities underwritten
by First Tennessee and may engage in brokerage transactions with First Tennessee
acting as principal.
8
<PAGE>
- -------------------------------------------------------------------------------
HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?
- -------------------------------------------------------------------------------
CLASS I
- -------
WHO MAY INVEST?
Class I shares are designed exclusively for investment of monies held in
non-retail trust, advisory, agency, custodial or similar Institutional Accounts.
Class I shares may be purchased for Institutional Accounts by financial
institutions, business organizations, corporations, municipalities, non-profit
institutions, and other Institutional Investors serving in a trust, advisory,
agency, custodial or similar capacity who meet the investment threshold for this
Class of shares.
HOW IS AN INSTITUTIONAL ACCOUNT ESTABLISHED?
An initial investment must be preceded by or made in conjunction with the
establishment of an Institutional Account with an Institutional Investor.
Establishment of an Institutional Account may require that documents and
applications be completed and signed before the investment can be implemented.
The Institutional Investor may require that certain documents be provided prior
to making a redemption from the Portfolio. Institutional Investors may charge
fees in addition to those described herein. Fee schedules for Institutional
Accounts are available upon request from the Institutional Investor and are
detailed in the agreements by which each client opens an account with an
Institutional Investor.
HOW ARE INVESTMENTS MADE?
Each Institutional Investor will transmit orders to the Transfer Agent,
Chase Global Funds Services Company (CGFSC). If an order is received by CGFSC in
proper form prior to 4:00 p.m. Eastern Time on any Business Day (as defined in
the section "HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE - Class I, II
and III - How Are Portfolio Shares Valued?") and the funds are received by CGFSC
that day, the investment will earn dividends declared, if any, on the day of
purchase. Institutional Investors will wire funds through the Federal Reserve
System. Purchases will be processed at the net asset value per share (NAV)
calculated after an order is received in proper form and accepted by CGFSC. The
Portfolio requires advance notification of all wire purchases. To secure same
day acceptance of federal funds (monies transferred from one bank to another
through the Federal Reserve System with same-day availability), an Institutional
Investor must call CGFSC at 1-800-442-1941, (option 2) prior to 4:00 p.m.
Eastern Time on any Business Day to advise it of the wire. The Trust may
discontinue offering its shares in any Class of a Portfolio without notice to
shareholders.
MINIMUM INVESTMENT AND ACCOUNT BALANCE. The minimum initial investment for
each Institutional Investor is $100,000. Institutional Investors may satisfy the
minimum investment by aggregating their Institutional Accounts within the
Portfolio. Subsequent investments may be in any amount. If an Institutional
Investor's Class I account falls below $50,000 due to redemption, the Portfolio
may close the account. An Institutional Investor may be notified if the minimum
balance is not being maintained and will be allowed 30 days to make additional
investments before its account is closed. Shares will be redeemed at the NAV on
the day the account is closed, and proceeds will be sent to the address of
record.
Exchanges are generally permitted from Class I to another class should a
beneficial owner of these shares cease to be eligible to purchase shares of
Class I. Class I shares held in an Institutional Account may be converted to
shares of another Class upon distribution.
HOW ARE REDEMPTIONS MADE?
Institutional Investors may redeem all or a portion of their account shares
on any Business Day. Shares will be redeemed at the NAV next calculated after
CGFSC has received the redemption request in proper form and will accrue
dividends through the day of redemption. If an account is closed, any accrued
dividends will be paid at the beginning of the following month.
Institutional Investors may make redemptions by wire provided they have
established a wire account with CGFSC. Please call 1-800-442-1941 (option 2) to
advise CGFSC of the wire. If telephone instructions are received before 4:00
p.m. Eastern time on any Business Day, proceeds of the redemption will be wired
as federal funds on the next Business Day to the bank account designated with
CGFSC. An Institutional Investor may change the bank account designated to
receive an amount redeemed at any time by sending a letter of instruction with a
signature guarantee to CGFSC, 73 Tremont Street, Boston, Massachusetts, 02108.
Shares redeemed will earn dividends declared, if any, through the date of
redemption.
9
<PAGE>
Pursuant to the 1940 Act, if making immediate payment of redemption
proceeds could adversely affect the Portfolio, payments may be made up to seven
days later. Also, when the New York Stock Exchange (NYSE) or the Federal Reserve
Bank of New York (New York Federal Reserve) is closed (or when trading is
restricted) for any reason other than its customary weekend or holiday closings,
or under any emergency circumstances as determined by the SEC to merit such
action, the right of redemption may be suspended or the date of payment
postponed for a period of time that may exceed seven days. In addition, the
Portfolio reserves the right to advance the time on that day by which purchase
and redemption orders must be received. To the extent Portfolio securities are
traded in other markets on days when either the NYSE or the New York Federal
Reserve is closed, the Portfolio's NAV may be affected on days when investors do
not have access to the Portfolio to purchase or redeem shares.
If transactions by telephone cannot be executed (for example, during times
of unusual market activity), orders may be placed by mail to CGFSC. In case of
suspension of the right of redemption, an Institutional Investor may either
withdraw its request for redemption, or it will receive payment based on the NAV
next determined after the termination of the suspension.
ADDITIONAL INFORMATION
The Portfolio also reserves the right to reject any specific purchase
order, including certain purchases by exchange. Purchase orders may be refused
if, in First Tennessee's opinion, they are of a size that would disrupt
management of the Portfolio.
In order to allow First Tennessee to manage the Portfolio most effectively,
Institutional Investors are strongly urged to initiate all trades (investments,
exchanges and redemptions of shares) as early in the day as possible and to
notify CGFSC at least one day in advance of trades in excess of $1 million. In
making these trade requests, the name of the Institutional Investor and the
account number(s) must be supplied.
Transactions may be initiated by telephone. Please note that the Portfolio
and its agents will not be responsible for any losses resulting from
unauthorized telephone transactions if the Portfolio or its agents follow
reasonable procedures designed to verify the identity of the caller. These
procedures may include requesting additional information or using personalized
security codes. The Portfolio or its agents may also record calls and an
Institutional Investor should verify the accuracy of confirmation statements
immediately after receipt. If an Institutional Investor does not want to be able
to initiate redemptions and exchanges by telephone, please call CGFSC for
instructions.
CLASS II AND III
- ----------------
WHO MAY INVEST?
Class II and III shares are designed for individuals and other investors
who seek mutual fund investment convenience plus a lower investment minimum.
These Classes offer investors differing expense and sales load structures to
choose between. See "Summary Of Portfolio Expenses" on page 3.
INVESTMENT REQUIREMENTS
The minimum initial investment in Class II or III shares is $1,000.
Subsequent investments may be in any amount greater than $100. If you
participate in the Systematic Investing Program or the "A Plus Card Program", (a
consumer discount card program provided by "A" Plus Strategic Alliances, Inc. a
subsidiary of First Tennessee), the minimum initial investment is $250, and
subsequent investments may be in any amount of $25 or greater. If you are an
employee of First Tennessee or any of its affiliates and you participate in the
Systematic Investing Program, the minimum initial investment is $50, and
subsequent investments may be in any amount of $25 or greater. See page 12 for
additional information on the Systematic Investing Program. If your balance in
the Portfolio falls below the applicable minimum investment requirement due to
redemption, you may be given 30 days' notice to reestablish the minimum balance.
If you do not reestablish the minimum balance, your account may be closed and
the proceeds mailed to you at the address on record. Shares will be redeemed on
the day the account is closed.
All purchases must be made in U.S. dollars and checks must be drawn on U.S.
banks. No cash will be accepted. If you make a purchase with more than one
check, each check must have a value of at least $100, and the minimum investment
requirement still applies (excluding the specific circumstances, stated above,
which reduce the minimum investment requirement). The Portfolio reserves the
right to limit the number of checks processed at one time. If your check does
not clear, your purchase will be canceled, and you could be liable for any
losses or fees incurred.
You may initiate any transaction either directly or through your Investment
Professional. Please note that the Portfolio and its agents will not be
responsible for any losses resulting from unauthorized transactions if the
Portfolio or its agents follow reasonable procedures designed to verify the
identity of the caller. These procedures may include
10
<PAGE>
requesting additional information or using personalized security codes. Your
Investment Professional may also record calls, and you should verify the
accuracy of your confirmation statements immediately after you receive them.
If you do not want to be able to redeem and exchange by telephone, please
check the box on your application (if you invest directly) or, if you invest
through an Investment Professional, please call your Investment Professional
for instructions.
HOW DO I SET UP AN ACCOUNT?
You may set up an account directly in the Portfolio or you may invest in
the Portfolio through your Investment Professional. See page 12 for information
on how to invest through your Investment Professional. Shares will be purchased
based on the NAV next calculated after CGFSC has received the request in proper
form. If you are investing through an Investment Professional, transactions that
your Investment Professional initiates should be transmitted to CGFSC before
4:00 p.m. Eastern Time in order for you to receive that day's share price. CGFSC
must receive payment within three business days after an order is placed.
Otherwise, the purchase order may be canceled and you could be held liable for
the resulting fees and/or losses. An investment will begin accruing dividends on
the day following purchase.
HOW DO I INVEST DIRECTLY?
When opening a new account directly, you must complete and sign an account
application and send it to CGFSC, 73 Tremont Street, Boston, MA 02108. Telephone
representatives are available at 1-800-442-1941, (option 2) between the hours of
8:00 a.m. to 4:00 p.m. Central Time (9:00 a.m. to 5:00 p.m. Eastern Time),
Monday through Friday.
Investments may be made in several ways:
BY MAIL: Make your check payable to First Funds: Tennessee Tax-Free, and
mail it, along with the application, to the address indicated on the
application. Your account will be credited on the business day that CGFSC
receives your application in good order and processes your transaction.
BY BANK TRANSFER: Bank transfer allows you to move money between your bank
account and your First Funds account. This automatic service allows you to
transfer money from your bank account via the Automated Clearing House (ACH)
network to your Portfolio account. First, a Portfolio account must be
established, and an application sent to CGFSC. Be sure to indicate on the
application under the section Account Privileges that you desire to have this
option. Once you have completed this process, you can initiate a bank transfer
by contacting CGFSC at 1-800-442-1941, (option 2). Please allow two or three
days after the authorization for the transfer to occur.
BY WIRE: Call 1-800-442-1941, (option 2) to set up your Portfolio account
to accommodate wire transactions. To initiate your wire transaction, call your
depository institution. Federal funds (monies transferred from one bank to
another through the Federal Reserve System with same-day availability) should be
wired to:
Chase Manhattan Bank, N.A.
ABA #021000021
First Funds
Credit DDA #910-2-733335
(Account Registration)
(Account Number)
(Wire Control Number) *See Below*
Prior to sending wires, please be sure to call 1-800-442-1941, (option
2) to receive a Wire Control Number to be included in the body of the wire
(see above).
Your bank may charge you a fee for this service.
HOW DO I REDEEM SHARES WHEN INVESTING DIRECTLY?
You may redeem all or a portion of your shares on any day that the
Portfolio is open for business. Shares will be redeemed at the NAV next
calculated after CGFSC has received the redemption request and will earn
dividends declared, if any, through the day prior to redemption. If a Portfolio
account is closed, any accrued dividends will be paid at the beginning of the
following month.
You may redeem shares in several ways:
BY MAIL: Write a "letter of instruction" with your name, the Portfolio's
name, your Portfolio account number, the dollar amount or number of shares to be
redeemed, and any additional requirements that apply to each particular
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<PAGE>
account. You will need the letter of instruction signed by all persons
required to sign for transactions, exactly as their names appear on the
account application, along with a signature guarantee.
A signature guarantee is designed to protect you, the Portfolio, and its
agents from fraud. Your written request requires a signature guarantee if you
wish to redeem more than $1,000 worth of shares; if your Portfolio account
registration has changed within the last 30 days; if the check is not being
mailed to the address on your account; if the check is not being made out to the
account owner; or if the redemption proceeds are being transferred to another
First Funds account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public.
BY BANK TRANSFER: When establishing your account in the Portfolio, you
must have indicated this account privilege in order to authorize the redemption
of monies with the proceeds transferred to your bank account. To authorize a
redemption, simply contact CGFSC at 1-800-442-1941, (option 2) and your
redemption will be processed at the NAV next calculated. Please allow two or
three days after the authorization for monies to reach your bank account.
BY WIRE: You may make redemptions by wire provided you have established a
Portfolio account to accommodate wire transactions. If telephone instructions
are received before 4:00 p.m. Eastern Time, proceeds of the redemption will be
wired as federal funds on the next Business Day to the bank account designated
with CGFSC. You may change the bank account designated to receive an amount
redeemed at any time by sending a letter of instruction with a signature
guarantee to CGFSC at 73 Tremont Street, Boston, Massachusetts, 02108.
ADDITIONAL REDEMPTION REQUIREMENTS: The Portfolio may hold payment on
redemptions until it is reasonably satisfied that investments made by check have
been collected, which can take up to seven days. Also, when the NYSE or the New
York Federal Reserve is closed (or when trading is restricted) for any reason
other than its customary weekend or holiday closings, or under any emergency
circumstances as determined by the SEC to merit such action, the right of
redemption may be suspended or the date of payment postponed for a period of
time that may exceed seven days. In addition, the Portfolio reserves the right
to advance the time on that day by which purchase and redemption orders must be
received. To the extent that portfolio securities are traded in other markets on
days when either the NYSE or the New York Federal Reserve is closed, each
Portfolio's NAV may be affected on days when investors do not have access to the
Portfolios to purchase or redeem shares.
If you are unable to reach CGFSC by telephone (for example, during times of
unusual market activity), consider placing your order by mail directly to CGFSC.
In case of suspension of the right of redemption, you may either withdraw your
request for redemption or you will receive payment based on the NAV next
determined after the termination of the suspension.
HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?
If you are investing through your Investment Professional, you may be
required to set up a brokerage or agency account. Please call your Investment
Professional for information on establishing an account. If you are purchasing
shares of the Portfolio through a program of services offered or administered by
your Investment Professional, you should read the program materials in
conjunction with this Prospectus. Certain features of such programs may impose
additional requirements and charges for the services rendered. Your Investment
Professional may offer any or all of the services mentioned in this section, and
is responsible for initiating all initial purchase transactions. Please contact
your Investment Professional for information on these services.
SYSTEMATIC INVESTING PROGRAM
The Systematic Investing Program offers a simple way to maintain a regular
investment program. You may arrange automatic transfers (minimum $25 per
transaction) from your bank account to your First Funds account on a periodic
basis. When you participate in this program, the minimum initial investment in
each Portfolio is $250. If you are an employee of First Tennessee or any of its
affiliates, the minimum initial investment in the Portfolio is $50. You may
change the amount of your automatic investment, skip an investment, or stop the
Systematic Investing Program by calling CGFSC at 1-800-442-1941, (option 2) or
your Investment Professional at least three Business Days prior to your next
scheduled investment date.
SYSTEMATIC WITHDRAWAL PLAN
You can have monthly, quarterly or semi-annual checks sent from your
account to you, to a person named by you, or to your bank checking account. Your
Systematic Withdrawal Plan payments are drawn from share redemptions and must be
in the amount of $100 or more per Portfolio per month. If Systematic Withdrawal
Plan redemptions exceed income dividends earned on your shares, your account
eventually may be exhausted. Please contact your Investment Professional for
more information.
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CLASS II
- --------
PUBLIC OFFERING PRICE
The public offering price for Class II shares is the sum of the NAV plus a
sales load. As indicated below, a portion of this load may be reallowed to
Investment Professionals which have entered into an agreement with ALPS, the
Portfolio's Distributor (Service Organizations). You may calculate your sales
load as follows:
<TABLE>
TOTAL SALES LOAD REALLOWANCE TO
FOR CLASS II SHARES SERVICE ORGANIZATIONS
------------------- ---------------------
AS A % OF OFFERING AS A % OF OFFERING
AMOUNT OF TRANSACTION PRICE PER SHARE AS A % OF NAV PRICE PER SHARE
<S> <C> <C> <C>
Less than $100,000 3.75 3.90 3.25
$100,000 to $249,999 3.00 3.09 2.65
$250,000 to $499,999 2.25 2.30 2.00
$500,000 to $999,999 1.50 1.52 1.25
$1,000,000 and over 0.50 0.50 0.40
</TABLE>
The reallowance to Service Organizations may be changed from time to time. ALPS,
at its expense, may provide additional non-cash promotional incentives to
eligible representatives of Service Organizations in the form of attendance at a
sales seminar at a resort. These incentives may be limited to certain eligible
representatives of Service Organizations who have sold significant numbers of
shares of any of the Portfolios of the Trust.
You may purchase Class II shares without a sales load if the purchase will
be (a) by registered representatives, directors, advisory directors, officers
and employees (and their immediate families) of First Tennessee or its
affiliates ; (b) by a current or former Trustee, officer or employee of First
Funds; the spouse of a First Funds Trustee, officer or employee; a First Funds
Trustee acting as a custodian for a minor child of a First Funds Trustee,
officer or employee; or the child of a current or former Trustee, officer or
employee of First Funds who has reached the age of majority; (c) by a charitable
remainder trust or life income pool established for the benefit of a charitable
organization (as defined in Section 501(c)(3) of the Internal Revenue Code); (d)
for use in a financial institution or investment adviser managed account for
which a management or investment advisory fee is charged; (e) with redemption
proceeds from other mutual fund complexes on which the investor has paid a
front-end sales charge within the past 60 days upon presentation of purchase
verification information; or (f) through certain promotions where the load is
waived for investors.
In addition, you will not pay a sales load on the reinvestment of dividends
or distributions in the Portfolio or any other First Funds Portfolio, or in
connection with certain share exchanges as described under "How Are Investments,
Exchanges And Redemptions Made? - Class I, II, and III - How are Exchanges
Made?" on page 15. Further, you generally will not pay a sales load on Class II
shares of the Portfolio which you buy using proceeds from the redemption of a
First Funds Portfolio which does not charge a front-end load, if you obtained
such shares through an exchange for Class II shares which you purchased with a
sales load. A sales load will apply to your purchase of Class II shares in the
foregoing situation only to the extent that the Portfolio's sales load exceeds
the sales load you paid in the prior purchase of the Class II shares.
In addition, if you purchase Class II shares within 60 days after redeeming
shares of the Portfolio, you will receive credit towards the sales load payable
on the purchase to the extent of the sales load you paid on the shares you
redeemed. This reinstatement privilege may be exercised only with respect to
redemptions and purchases in the same First Funds Portfolio. The reinstatement
privilege can be exercised only one time with respect to any particular
redemption.
QUANTITY DISCOUNTS
You may be entitled to reduced sales charges through the Right of
Accumulation or a Letter of Intent, even if you do not make an investment of a
size that would normally qualify for a quantity discount.
To qualify for a reduction of or exception to the sales load, you or your
Investment Professional must notify the Transfer Agent, CGFSC at the time of
purchase or exchange. The reduction in sales load is subject to confirmation of
your holdings through a check of records. The Trust may modify or terminate
quantity discounts at any time. For more information about quantity discounts,
contact your Service Organization or ALPS at 1-800-442-1941 (option 1).
RIGHT OF ACCUMULATION. The sales charge schedule under the heading "How
Are Investments, Exchanges And Redemptions Made? - Public Offering Price" shows
that the sales load you will pay on Class II shares is reduced as your aggregate
investment increases. The Right of Accumulation allows you to combine certain
First Funds investments to determine your aggregate investment and the
applicable reduced sales load. You may combine the amount of your
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<PAGE>
investment in the Portfolio's Class II shares with the value of your
investment in Class II of any other First Funds Portfolio you own and on
which you paid a sales load. If you are a participant in a First Funds IRA
or if you are a trustee or custodian of another type of First Funds
retirement plan, you may also include as part of your aggregate investment
any holdings through the IRA or in the plan even if a load was not paid. If
for example, you beneficially own Class II shares of a First Funds Portfolio
with an aggregate current value of $99,000 and you subsequently purchase
shares of the Portfolio having a current value of $1,000, the load applicable
to the subsequent purchase would be reduced to 3.50% of the offering price.
Similarly, each subsequent purchase of First Funds Class II shares may be
added to your aggregate investment at the time of purchase to determine the
applicable sales loads.
LETTER OF INTENT. A Letter of Intent allows you to purchase Class II
shares over a 13-month period at a reduced sales charge. The sales charge is
based on the total amount you intend to purchase plus the total net asset value
of Class II shares which you already own on which you have paid a sales load. If
you are a participant in a First Funds IRA or if you are a trustee or custodian
of another type of First Funds retirement plan, you may also credit towards
completion of your Letter of Intent any Class II shares held through the IRA or
in the plan, even if a load was not paid. Each investment you make during the
period may be made at the reduced sales charge that would apply to the total
amount you intend to invest. The reduced sales load applies only to new
purchases. If you do not invest the total amount within the period, you may pay
the difference between the higher sales charge rate that would have been applied
to the purchases you made and the reduced sales charge rate you have paid.
Shares of the Portfolio equal to 5% of the amount you intend to invest will be
held in escrow and, if you do not pay the difference within 20 days following
the mailing of a request, the Transfer Agent will redeem a sufficient amount of
your escrowed shares to pay the additional sales charge. After the terms of your
Letter of Intent are fulfilled, the Transfer Agent will release your escrowed
shares.
If your purchases qualify for a further sales load reduction in addition to
that indicated in the Letter of Intent, the sales load will be adjusted to
reflect your total purchases. Signing a Letter of Intent does not bind you to
purchase the full amount indicated at the sales load in effect at the time of
signing, but you must complete the intended purchase to obtain the reduced sales
load. To apply, sign the Letter of Intent form at the time you purchase Class
II shares. You will be entitled to the applicable sales load that is in effect
at the date you submit the Letter of Intent until you complete your intended
purchase.
QUALIFICATION OF DISCOUNTS. As shown in the schedule of Class II sales
charges, larger purchases may result in lower sales charges to you. For purposes
of determining the amount of purchases using the Right of Accumulation and
Letter of Intent privileges, you may combine your purchase with:
- purchases by your spouse or his, her or your joint account or for the
account of any minor children, and
- the aggregate investment of any trustee or other Institutional Investor
for you and/or your spouse or your minor children.
A trustee or custodian of any qualified pension or profit sharing plan may
combine its aggregate purchases.
OTHER. Class II shares also incur Shareholder Servicing Fees. See
discussion under "WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY? -
Distribution Plans and Shareholder Servicing Plans."
CLASS III
- ---------
Class III shares are bought without a front-end load; that is, the offering
price for such shares will be their NAV. Class III shares incur Distribution
Fees and Shareholder Servicing Fees. See discussion under "WHAT ADVISORY AND
OTHER FEES DOES THE PORTFOLIO PAY? - Distribution Plans and Shareholder
Servicing Plans."
CLASS I, II AND III
- -------------------
HOW ARE PORTFOLIO SHARES VALUED?
The term "net asset value per share," or NAV, means the worth of one share.
The NAV of each Class is calculated by adding that Class' pro rata share of the
value of all securities and other assets attributable to the Portfolio,
deducting that Class' pro rata share of Portfolio liabilities, further deducting
Class specific liabilities, and dividing the result by the number of shares
outstanding in that Class.
The Portfolio is open for business each day that both the NYSE and the New
York Federal Reserve are open (a Business Day). The NAV is calculated at the
close of the Portfolio's Business Day, which coincides with the close of regular
trading of the NYSE (normally 4:00 p.m. Eastern Time).
The Portfolio's securities and other assets are valued primarily on the
basis of market quotations furnished by pricing services, or, if quotations are
not available, by a method that the Trustees believe accurately reflects fair
value.
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<PAGE>
DISTRIBUTION OPTIONS: The Portfolio earns interest from its bond, money
market, and other fixed-income investments. These are passed along as dividend
distributions. The Portfolio may realize capital gains if it sells securities
for a higher price than it paid for them. These are passed along as capital
gain distributions. Income dividends for the Tennessee Tax-Free Portfolio are
declared daily and paid monthly.
When you fill out your account application, you can specify how you want to
receive your distributions. Currently, there are two available options:
1. REINVESTMENT OPTION. Your dividend distributions and capital gain
distributions, if any, will be automatically reinvested in additional shares of
the Portfolio. Reinvestment of distributions will be made at that day's NAV. If
you do not indicate a choice on your application, you will be assigned this
option.
2. CASH OPTION. You will be sent a check for each dividend and capital
gain distribution, if any. Distribution checks will be mailed no later than
seven days after the last day of the month.
3. INCOME-EARNED OPTION. Your capital gain distributions will be
automatically reinvested, but you will be sent a check for each dividend
distribution.
HOW ARE EXCHANGES MADE?
An exchange is the redemption of shares of one Portfolio and the purchase
of shares of another. The exchange privilege is a convenient way to sell and buy
shares of other Portfolios registered in an investor's state. Except as noted
below, the Portfolio's shares may be exchanged for the same Class shares of
other First Funds Portfolios. The redemption and purchase will be made at the
next determined NAV after the exchange request is received and accepted by
CGFSC. You may execute exchange transactions by calling CGFSC at 1-800-442-1941
(option 2) prior to 4:00 p.m. Eastern Time on any Business Day.
Class II shares of the First Funds Money Market Portfolios are not
currently available for investment. Investors in Class II shares wishing to
exchange into one of the Money Market Portfolios will receive Class III shares.
When making an exchange or opening an account in another Portfolio by
exchange, the registration and tax identification numbers of the two accounts
must be identical. In order to open a new account through exchange, the minimum
initial investment requirements must be met.
Each exchange may produce a gain or loss for tax purposes. In order to
protect the Portfolio's performance and its shareholders, First Tennessee
discourages frequent exchange activity by investors in response to short-term
market fluctuations. The Portfolio reserves the right to refuse any specific
purchase order, including certain purchases by exchange if, in First Tennessee's
opinion, the Portfolio would be unable to invest effectively in accordance with
its investment objective and policies, or would otherwise be affected adversely.
Exchanges or purchase orders may be restricted or refused if the Portfolio
receives or anticipates individual or simultaneous orders affecting significant
portions of the Portfolio's assets. Although the Portfolio will attempt to give
prior notice whenever it is reasonably able to do so, it may impose these
restrictions at any time. The Portfolio reserves the right to modify or withdraw
the exchange privilege and to suspend the offering of shares in any Class
without notice to shareholders. You or your Institutional Investor, if you are
invested in Class I, will receive written confirmation of each exchange
transaction.
Exchanges are generally not permitted from Class I to another Class. Should
a beneficial owner of Class I shares cease to be eligible to purchase shares of
Class I, Class I shares held in an Institutional Account may be converted for
shares of another Class.
STATEMENTS AND REPORTS
You or, if Class I, the Institutional Investor, will receive a monthly
statement and a confirmation after every transaction that affects the account
registration. A statement with tax information will be mailed by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
or, if Class I, the Institutional Investor, will receive the Portfolio's
financial statements. To reduce expenses, only one copy of the Portfolio's
reports (such as the Prospectus and Annual Report) will be mailed to each
investor or, if Class I, each Institutional Investor. Please write to ALPS to
request additional copies.
15
<PAGE>
- --------------------------------------------------------------------------------
HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------
From time to time the Portfolio may quote the yield of Class I, II or III
shares in advertisements or in reports or other communications with
shareholders. The YIELD is a way of showing the rate of income that the
Portfolio earns on its investments as the percentage of its share price. To
calculate yield, the Portfolio takes the net investment income it earned from
its Portfolio securities for a 30-day period, divides it by the average number
of shares entitled to receive dividends, and expresses the result as an
annualized percentage rate based on share price at the end of the 30-day period.
Yields do not reflect gains or losses from portfolio transactions. Yields are
calculated according to accounting methods that are standardized for all mutual
funds. Because yield accounting methods differ from the methods used for other
accounting purposes, the Portfolio's yield may not equal its distribution rate,
the income paid to an account, or the income reported in financial statements.
The Portfolio also may quote the TAX EQUIVALENT YIELD, which shows the
taxable yield an investor would have to earn, before taxes, to equal the
tax-free yield. A tax equivalent yield is calculated by dividing the tax-exempt
current yield by the result of one minus a combined federal and Tennessee tax
rate.
TOTAL RETURN for Class I, II or III of the Portfolio is based on the overall
dollar or percentage change in value of a hypothetical investment, assuming
dividends are reinvested. A CUMULATIVE TOTAL RETURN reflects performance over a
stated period of time. An AVERAGE ANNUAL TOTAL RETURN reflects the hypothetical
annually compounded rate that would have produced the same cumulative total
return if performance had been constant over the entire period. Because average
annual returns tend to smooth out variations in performance, you should
recognize that they are not the same as actual year-by-year results. The yield
and total returns of the three Classes of the Portfolio are calculated
separately due to separate expense structures as indicated in the "Summary Of
Portfolio Expenses"; the yields and total returns of Class II and Class III will
be lower than that of Class I.
For additional performance information, contact your Investment
Professional or ALPS for a free Annual Report and Statement of Additional
Information for the Portfolio.
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Municipal obligations and other fixed income securities are generally
traded in the over-the-counter market through broker-dealers. Broker-dealers are
utilized to conduct securities transactions for the Portfolio and are chosen
based upon professional ability and quality of service. In addition, the
Portfolio's investment advisers may consider a broker-dealer's sales of shares
of the Portfolio or recommendations to its customers that they purchase shares
of the Portfolio as a factor in the selection of broker-dealers to execute
transactions for the Portfolio. In placing business with such broker-dealers,
the advisers will seek the best execution of each transaction.
Higher commissions may be paid to firms that provide research services to
the extent permitted by law. The frequency of Portfolio transactions - the
portfolio turnover rate - will vary from year to year depending on market
conditions. The Portfolio's portfolio turnover rate for the period ended June
30, 1996 was 8%.
- --------------------------------------------------------------------------------
WHAT IS THE EFFECT OF INCOME TAX ON THIS INVESTMENT?
- --------------------------------------------------------------------------------
The Portfolio intends to distribute substantially all of its net investment
income, and capital gains, if any, to shareholders within each calendar year as
well as on a fiscal year basis. Any net capital gains realized are normally
distributed in December. Income dividends for the Portfolio are declared daily
and paid monthly.
FEDERAL TAXES. Distributions from the Portfolio's taxable income and
short-term capital gains are taxed as dividends, and long-term capital gain
distributions are taxed as long-term capital gains. Distributions are taxable
when they are paid, whether taken in cash or reinvested in additional shares,
except that distributions declared in December and paid in January are taxable
as if paid on December 31. The Portfolio will send each investor or, if Class I,
each Institutional Investor, an IRS Form 1099-DIV by January 31.
Federally tax-free interest earned by the Portfolio is federally tax-free
when distributed as income dividends. If the Portfolio earns federally taxable
income from any of its investments, it will be distributed as a taxable
dividend. Gains
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<PAGE>
from the sale of tax-free bonds results in a taxable capital gain
distribution. Short-term capital gains and a portion of the gain on bonds
purchased at a discount are taxed as dividends.
STATE TAXES. In the opinion of Fund counsel, Baker, Donelson, Bearman &
Caldwell, Memphis, Tennessee, distributions received from the Portfolio will not
be subject to Tennessee personal income taxes to the extent such distributions
are attributable to interest on bonds or securities of the U.S. government or
any of its agencies or instrumentalities, or on bonds or securities issued by
the State of Tennessee or any county, municipality or political subdivision of
Tennessee, including any agency, board, authority or commission thereof, without
regard to maturity.
CAPITAL GAINS. A capital gain or loss may be realized when shares of the
Portfolio are redeemed or exchanged. For most types of accounts, the Portfolio
will report the proceeds of redemptions to each investor or, if Class I, each
Institutional Investor and the IRS annually. However, because the tax treatment
also depends on the purchase price and the investor's personal tax position,
regular account statements should be used to determine the tax gain or loss.
"BUYING A DIVIDEND." On the record date for a capital gain distribution,
the Portfolio's share price is reduced by the amount of the distribution. If
shares are bought just before the record date ("buying a dividend"), the full
price for the shares will be paid, and a portion of the price may be received
back as a taxable distribution. Consult your tax advisor for more information.
OTHER TAX INFORMATION. The information above is only a summary of some of
the federal and Tennessee tax consequences generally affecting the Portfolio and
its shareholders, and no attempt has been made to discuss individual tax
consequences. You should consult your tax adviser for details and up-to-date
information on the tax laws in your state to determine whether the Portfolio is
suitable given a your particular tax situation.
When you sign an account application, you will be asked to certify that
your taxpayer identification number is correct and that you are not subject to
backup withholding for failing to report income to the IRS. If you do not comply
with IRS regulations, the IRS can require the Portfolio to withhold 31% of
distributions from your account.
- --------------------------------------------------------------------------------
WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY?
- --------------------------------------------------------------------------------
INVESTMENT ADVISORY AND MANAGEMENT AND SUB-ADVISORY AGREEMENTS. For
managing its investment and business affairs, the Tennessee Tax-Free Portfolio
is obligated to pay First Tennessee a monthly management fee at the annual rate
of .50% of its average net assets. First Tennessee has voluntarily agreed to
waive its entire fee. This voluntary waiver can be discontinued at any time.
Under the Investment Advisory and Management Agreement, First Tennessee
may, with the prior approval of the Trustees, engage one or more sub-advisers
which may have full investment discretion to make all determinations with
respect to the investment and reinvestment of all or any portion of the
Portfolio's assets, subject to the terms and conditions of the investment
advisory agreement and the written agreement with any such sub-adviser. In the
event one or more sub-advisers is appointed by First Tennessee, First Tennessee
shall monitor and evaluate the performance of such sub-advisers, allocate
Portfolio assets to be managed by such sub-advisers, recommend any changes in or
additional sub-advisers when appropriate and compensate each sub-adviser out of
the investment advisory fee received by First Tennessee from the Portfolio.
First Tennessee has experience as an investment adviser to individual,
corporate and institutional advisory clients, pension plans and collective
investment funds, with approximately $ 13.8 billion in assets under
administration (including nondiscretionary accounts) and $5.3 billion in assets
under management as of June 30, 1996, as well as experience in supervising
sub-advisers.
ADMINISTRATOR AND DISTRIBUTOR. ALPS, 370 17th Street, Suite 2700, Denver,
Colorado 80202, serves as the Administrator and Distributor for the Portfolio.
As Administrator, ALPS assists in the Portfolio's administration and operation,
including but not limited to, providing office space and various legal and
operational services in connection with the regulatory requirements applicable
to each Portfolio. ALPS is entitled to receive from each Class of the Portfolio
a monthly fee at the annual rate of .15% of average net assets. ALPS has
voluntarily agreed to waive its administration fee to .075% through December
31, 1996. Additionally, through December 31, 1996, ALPS has voluntarily agreed
to assume all Portfolio expenses in order to maintain an expense ratio of 0.00%
for all Classes of the Portfolio. ALPS reserves the right to modify or terminate
this voluntary fee waiver and assumption of expenses at any time.
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<PAGE>
First Tennessee serves as the Co-Administrator for the Portfolio. As the
Co-Administrator, First Tennessee assists in the Portfolio's operation,
including but not limited to, providing non-investment related research and
statistical data and various operational and administrative services. First
Tennessee is entitled to receive from the Portfolio a monthly fee at the annual
rate of .05% of average net assets. First Tennessee is voluntarily waiving its
full fee; , however, there is no guarantee that this waiver will continue.
As the Distributor, ALPS sells shares of the Portfolio as agent on behalf
of the Trust at no additional cost to the Trust. First Tennessee and its
affiliates do not participate in and are not responsible for selling as an agent
on behalf of the Trust, underwriting or distributing Trust shares. Consistent
with applicable law, affiliates of First Tennessee may receive commissions or
asset-based fees.
TRANSFER AGENT AND CUSTODIAN. Chase Global Funds Services Company, a
division of Chase Manhattan Bank, N.A. (CGFSC), provides transfer agent and
related services for the Portfolio. Chase Manhattan Bank, N. A. is Custodian of
the Portfolio's assets.
PRICING AND ACCOUNTING. CGFSC calculates the NAV and dividends of each
class and maintains the portfolio and general accounting records.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING PLANS. The Trustees have
adopted a Distribution Plan on behalf of Class III of the Portfolio pursuant
to Rule 12b-1 (the Rule) under the 1940 Act, as amended. The NASD subjects
asset-based sales charges to its maximum sales charge rule. Fees paid
pursuant to the Portfolio's Distribution Plan will be limited by the
restrictions imposed by the NASD rule. The Distribution Plan provides for
payment of a fee to ALPS at the annual rate of up to .75% of the average net
of assets of Class III; however, the Trustees have limited such fees to .50% of
Class III's average net assets. All or a portion of these fees will in turn
be paid to Investment Professionals as compensation for selling shares of
Class III and for providing ongoing sales support services. The Trustees
have also adopted Shareholder Servicing Plans on behalf of Class II and Class
III of the Portfolio under which Investment Professionals may be paid at an
annual rate of up to .25% of the average net assets of each Class for
shareholder services and account maintenance including responding to
shareholder inquiries, directing shareholder communications, account balance
maintenance and dividend posting. The Distribution Fees are expenses of
Class III, and the Shareholder Servicing Fees would be expenses of Class II
and III in addition to the Management Fee, and Administration and
Co-Administration Fees, and would reduce the net income and total return of
both Classes.
- --------------------------------------------------------------------------------
HOW IS THE PORTFOLIO ORGANIZED?
- --------------------------------------------------------------------------------
The Tennessee Tax-Free Portfolio is a non-diversified portfolio of First
Funds, an open-end management investment company organized as a Massachusetts
business trust by a Declaration of Trust dated March 6, 1992, as amended and
restated on September 4, 1992. The Portfolio consists of three separate Classes.
The Trustees supervise the Trust's activities and review its contractual
arrangements with companies that provide the Trust with services. The Trust is
not required to hold annual shareholder meetings, although special meetings may
be called for a specific Portfolio or class with respect to issues affecting
that Portfolio or Class, or the Trust as a whole, for purposes such as electing
or removing Trustees, changing fundamental policies or approving investment
advisory agreements. Shareholders receive one vote for each share owned and
fractional votes for fractional shares owned. A Portfolio or Class votes
separately with respect to issues affecting only that Portfolio or Class.
Pursuant to the Declaration of Trust, the Trustees have the authority to issue
additional Classes of shares for the Portfolio.
PORTFOLIO MANAGEMENT
Ralph W. Herbert, Vice President and Portfolio Manager, has eighteen years
experience in the financial services industry and specializes in fixed income
securities. Before joining First Tennessee in 1991, he was with Valley Fidelity
Bank and Trust Company (Valley), Knoxville, Tennessee, for three years. For the
two years prior to joining Valley, he was a municipal debt underwriter.
- --------------------------------------------------------------------------------
INVESTMENT INSTRUMENTS, TRANSACTIONS, STRATEGIES AND RISKS.
- --------------------------------------------------------------------------------
The following paragraphs provide a brief description of the securities in
which the Portfolio may invest and the transactions it may make. The Portfolio
is not limited by this discussion, however, and may purchase other types of
securities and may enter into other types of transactions if they are consistent
with the Portfolio's investment objective and policies.
18
<PAGE>
DELAYED DELIVERY TRANSACTIONS. The Portfolio may buy and sell obligations
on a when-issued or delayed delivery basis, with payment and delivery taking
place at a future date. The market value of obligations purchased in this way
may change before the delivery date, which could increase fluctuations in the
Portfolio's share price, yield, and return. Ordinarily, the Portfolio will not
earn interest on obligations until they are delivered.
DEMAND FEATURES AND STAND-BY COMMITMENTS. A demand feature is a put that
entitles the security holder to repayment of the principal amount of the
underlying security at any time or at specified intervals. A standby commitment
is a put that entitles the security holder to same-day settlement at amortized
cost plus accrued interest.
ILLIQUID INVESTMENTS. Under the supervision of the Trustees, First
Tennessee determines the liquidity of the Portfolio's investments. The absence
of a trading market can make it difficult to ascertain a market value for
illiquid investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expense, and it may be difficult or
impossible for the Portfolio to sell them promptly at an acceptable price. The
Portfolio may invest up to 15% of its assets in illiquid investments and private
placements.
LETTERS OF CREDIT. Issuers or financial intermediaries who provide demand
features or standby commitments often support their ability to buy obligations
on demand by obtaining LETTERS OF CREDIT (LOCS) or other guarantees from
domestic or foreign banks. LOCs also may be used as credit supports for
municipal instruments. First Tennessee may rely upon its evaluation of a bank's
credit in determining whether to purchase an instrument supported by an LOC. In
evaluating a foreign bank's credit, First Tennessee will consider whether
adequate public information about the bank is available and whether the bank may
be subject to unfavorable political or economic developments, currency controls,
or other governmental restrictions that might affect the bank's ability to honor
its credit commitment.
MUNICIPAL LEASE OBLIGATIONS are issued by a state and local government or
authority to acquire land and a wide variety of equipment and facilities. These
obligations typically are not fully backed by the municipality's credit, and
their interest may become taxable if the lease is assigned. If funds are not
appropriated for the following year's lease payments, the lease may terminate,
with the possibility of significant loss to the Portfolio. CERTIFICATES OF
PARTICIPATION in municipal lease obligations or installment sales contracts
entitle the holder to a proportionate interest in the lease- purchase payments
made.
MUNICIPAL REFUNDING COLLATERALIZED MORTGAGE OBLIGATIONS (MR CMOs) are CMOs
originated from revenue bonds issued to fund low interest rate mortgages for
first time home buyers with low to moderate incomes. The security is considered
a "mortgage related security" for investment purposes; therefore, banks have no
investment limitations or restrictions for purchasing the security for their own
account. MR CMOs are attractive for investors seeking triple-A credit quality
with above average yield.
CMOS are pass-through securities collateralized by mortgages or
mortgage-backed securities. CMOs are issued in classes and series that have
different maturities and often are retired in sequence. Payment of principal and
interest may be largely dependent upon the cash flows generated by the assets
backing the securities.
MUNICIPAL SECURITIES include GENERAL OBLIGATION SECURITIES, which are
backed by the full taxing power of a municipality, and REVENUE SECURITIES, which
are backed by the revenues of a specific tax, project, or facility. INDUSTRIAL
REVENUE BONDS are a type of revenue bond backed by the credit and security of a
private issuer and may involve greater risk. PRIVATE ACTIVITY MUNICIPAL
SECURITIES, which may be subject to the federal alternative minimum tax, include
securities issued to finance housing projects, student loans, and privately
owned solid waste disposal and water and sewage treatment facilities. TAX AND
REVENUE ANTICIPATION NOTES are issued by municipalities in expectation of future
tax or other revenues and are payable from those specific taxes or revenues.
BOND ANTICIPATION NOTES normally provide interim financing in advance of an
issue of bonds or notes, the proceeds of which are used to repay the
anticipation notes.
TAX-EXEMPT COMMERCIAL PAPER are promissory notes issued by municipalities
to help finance short-term capital or operating needs.
RESOURCE RECOVERY BONDS are a type of revenue bond issued to build
facilities such as solid waste incinerators or waste-to-energy plants.
Typically, a private corporation will be involved, at least during the
construction phase, and the revenue stream will be secured by fees or rents paid
by municipalities for use of the facilities. The viability of a resource
recovery project, environmental protection regulations, and project operator tax
incentives may affect the value and credit quality of resource recovery bonds.
REFUNDING CONTRACTS. The Portfolio may purchase securities on a
when-issued basis in connection with the refinancing of an issuer's outstanding
indebtedness. Refunding contracts require the issuer to sell and the Portfolio
to buy refunded municipal obligations at a stated price and yield on a
settlement date that may be several months or several years in the future.
Although the Portfolio may sell its rights under a refunding contract, these
contracts are relatively
19
<PAGE>
new and the secondary market for them may be less liquid than the secondary
market for other types of municipal securities.
REPURCHASE AGREEMENTS AND SECURITIES LOANS. In a repurchase agreement, the
Portfolio buys a security at one price and simultaneously agrees to sell it back
at a higher price. The Portfolio may also make securities loans to
broker-dealers and institutional investors. In the event of the bankruptcy of
the other party to a repurchase agreement or a securities loan, the Portfolio
could experience delays in recovering its cash or the securities it lent. To the
extent that, in the meantime, the value of the obligations purchased had
decreased, or the value of obligations lent had increased, the Portfolio could
experience a loss. In all cases, First Tennessee must find the creditworthiness
of the other party to the transaction satisfactory.
RESTRICTED SECURITIES. The Portfolio may purchase securities which cannot
be sold to the public without registration under the Securities Act of 1933
(restricted securities). Unless registered for sale, these securities can only
be sold in privately negotiated transactions or pursuant to an exemption from
registration. Provided that the security has a demand feature of seven days or
less, or a dealer or institutional trading market exists, these restricted
securities are not treated as illiquid securities for the purposes of the
Portfolio's investment limitations.
U.S. GOVERNMENT OBLIGATIONS are debt obligations issued or guaranteed by
the U.S. Treasury or by an agency or instrumentality of the U.S. government. Not
all U.S. government obligations are backed by the full faith and credit of the
United States. For example, obligations issued by the Federal Farm Credit Bank
or by the Federal National Mortgage Association are supported by the agency's
right to borrow money from the U.S. Treasury under certain circumstances.
Obligations issued by the Federal Home Loan Bank are supported only by the
credit of the agency. There is no guarantee that the government will support
these types of obligations, and ,therefore, they involve more risk than other
government obligations.
U.S. TREASURY OBLIGATIONS are obligations issued by the United States and
backed by its full faith and credit.
VARIABLE AND FLOATING RATE INSTRUMENTS, including certain participation
interests in municipal obligations, have interest rate adjustment formulas that
help to stabilize their market values. Many variable or floating rate
instruments also carry demand features that permit the Portfolio to sell them at
par value plus accrued interest on short notice.
20
<PAGE>
INVESTMENT ADVISER AND CO-ADMINISTRATOR
---------------------------------------
First Tennessee Bank National Association
Memphis, TN
OFFICERS
--------
Richard C. Rantzow, President
Mark A. Pougnet, Treasurer
James V. Hyatt, Secretary
TRUSTEES
--------
Thomas M. Batchelor
John A. DeCell
L.R. Jalenak, Jr.
Larry W. Papasan
Richard C. Rantzow
ADMINISTRATOR AND DISTRIBUTOR
-----------------------------
ALPS Mutual Funds Services, Inc.
Denver, CO
TRANSFER AND SHAREHOLDER SERVICING AGENT
----------------------------------------
Chase Global Funds Services Company
Boston, MA
CUSTODIAN
---------
Chase Manhattan Bank, N.A.
New York, NY
<PAGE>
[LOGO]
FIRST FUNDS
U.S. TREASURY MONEY MARKET PORTFOLIO
U.S. GOVERNMENT MONEY MARKET PORTFOLIO 370 17th Street
MUNICIPAL MONEY MARKET PORTFOLIO Suite 2700
CASH RESERVE PORTFOLIO Denver, Colorado 80202
- -------------------------------------------------------------------------------
PROSPECTUS FOR CLASSES I, II AND III
October 25, 1996
- -------------------------------------------------------------------------------
First Funds (the Trust) offers investors a convenient and economical
means of investing in professionally managed money market mutual funds. The
objective of each Money Market Portfolio is to obtain as high a level of
current income as is consistent with the preservation of principal and
liquidity. Municipal Money Market Portfolio also seeks as high a level of
federally tax-exempt income as is consistent with this objective.
AN INVESTMENT IN EACH PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT EACH PORTFOLIO WILL
MAINTAIN A STABLE $1.00 SHARE PRICE.
This Prospectus is designed to provide you with information that you
should know before investing. Please read and retain this document for future
reference. This Prospectus offers Class I, II and III shares of each
Portfolio. Class I shares are designed exclusively for investment of monies
held in non-retail trust, advisory, agency, custodial or similar accounts
(Institutional Accounts). Class I shares may be purchased for Institutional
Accounts by financial institutions, business organizations, corporations,
municipalities, non-profit institutions and other entities serving in trust,
advisory, agency, custodial or similar capacities (each, an Institutional
Investor and collectively, Institutional Investors) that meet the investment
threshold for this Class of shares. Class II and III shares are designed for
individuals and other investors who seek mutual fund investment convenience
plus a lower investment minimum. These Classes offer investors differing
expense and sales load structures to choose between. See "Expense Summary" on
page 3.
A Statement of Additional Information (dated October 25, 1996) for the
Portfolio has been filed with the Securities and Exchange Commission (SEC)
and is incorporated herein by reference. This Prospectus, the Annual Report
and the Statement of Additional Information are available free upon request
from ALPS Mutual Funds Services, Inc., (ALPS) the Portfolio's Distributor.
The Annual Report for the fiscal period ended June 30, 1996 for the Portfolio
is incorporated into the Statement of Additional Information by reference.
Please call ALPS at 1-800-442-1941 (option 1) for more information concerning
each Class of shares. If you are investing through a broker, other financial
institution or adviser (Investment Professional), please contact that
institution directly.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR
GUARANTEED BY, FIRST TENNESSEE BANK NATIONAL ASSOCIATION OR ANY DEPOSITORY
INSTITUTION. SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FDIC, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY AND ARE SUBJECT TO INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
TNMMIII-pro-1096
<PAGE>
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
----
Summary Of Portfolio Expenses. . . . . . . . . . . . . . . . . . . . . . . . 3
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
What Is The Investment Objective Of Each Portfolio?. . . . . . . . . . . . . 8
Are The Portfolios Suitable Investments? Investment Risks. . . . . . . . . . 9
What Are The Portfolios' Investment Policies And Limitations?. . . . . . . .10
How Are Investments, Exchanges And Redemptions Made? . . . . . . . . . . . .11
How Is Performance Calculated? . . . . . . . . . . . . . . . . . . . . . . .17
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . .17
What Is The Effect Of Federal Income Tax On This Investment? . . . . . . . .17
What Advisory And Other Fees Do The Portfolios Pay?. . . . . . . . . . . . .18
How Are The Portfolios Organized?. . . . . . . . . . . . . . . . . . . . . .19
Investment Instruments, Transactions, Strategies and Risks . . . . . . . . .20
- -------------------------------------------------------------------------------
2
<PAGE>
- -------------------------------------------------------------------------------
SUMMARY OF PORTFOLIO EXPENSES
- -------------------------------------------------------------------------------
The purpose of the table below is to assist you in understanding the
various costs and expenses that you would bear directly or indirectly. This
standard format was developed for use by all mutual funds to help you make
your investment decisions. The information below is based upon the
Portfolios' expenses for the fiscal year ended June 30, 1996, adjusted to
reflect new servicing arrangements. This expense information should be
considered along with other important information, such as each Portfolio's
investment objective. There are no sales charges, exchange, or redemption
fees.
A. EXPENSE SUMMARY
<TABLE>
U.S. TREASURY U.S. GOVERNMENT
MONEY MARKET PORTFOLIO MONEY MARKET PORTFOLIO
---------------------------------------------------------------
CLASS I CLASS II CLASS III CLASS I CLASS II CLASS III
------- -------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees* 10% 10% 10% 10% 10% 10%
12b-1 Fees 00% 00% 25% 00% 00% 25%
Shareholder Servicing Fees 00% 25% 00% 00% 25% 00%
Other Expenses* 28% 29% 29% 25% 32% 32%
------- -------- --------- ------- -------- ---------
Total Portfolio Operating Expenses* 38% 64% 64% 35% 67% 67%
------- -------- --------- ------- -------- ---------
------- -------- --------- ------- -------- ---------
MUNICIPAL MONEY CASH RESERVE
MARKET PORTFOLIO PORTFOLIO
---------------------------------------------------------------
CLASS I CLASS II CLASS III CLASS I CLASS II CLASS III
------- -------- --------- ------- -------- ---------
ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees* 10% 10% 10% 10% 10% 10%
12b-1 Fees 00% 00% 25% 00% 00% 25%
Shareholder Servicing Fees 00% 25% 00% 00% 25% 00%
Other Expenses* 24% 25% 25% 33% 28% 28%
------- -------- --------- ------- -------- ---------
Total Portfolio Operating Expenses* 34% 60% 60% 43% 63% 63%
------- -------- --------- ------- -------- ---------
------- -------- --------- ------- -------- ---------
</TABLE>
*Net of expense waivers.
ANNUAL PORTFOLIO OPERATING EXPENSES. Each Portfolio is obligated to pay
Management Fees to First Tennessee Bank National Association (First
Tennessee) for managing each Portfolio's investments. First Tennessee, as
Investment Adviser, is entitled to receive .25% of each Portfolio's average
net assets. First Tennessee has voluntarily agreed to waive its investment
advisory fee to .10% of each Portfolio's average net assets; however, there
is no guarantee that this waiver will continue. Each Portfolio incurs Other
Expenses, including Administration and Co-Administration Fees, for
maintaining shareholder records, furnishing shareholder statements and
reports, and other services. ALPS Mutual Funds Services, Inc. (ALPS), the
Administrator, is entitled to and charges .075% of each Portfolio's average
net assets for administration services. First Tennessee, the
Co-Administrator, is entitled to .05% of each Portfolio's average net assets
for co-administration services. First Tennessee has voluntarily agreed to
waive this fee to .025%; however, there is no guarantee that this waiver will
continue.
3
<PAGE>
If the waivers were not in effect, Management Fees would be .25% for
each Class and 12b-1 Fees would be .45% for Class III. Other Expenses and
Total Portfolio Operating Expenses would be estimated as follows:
<TABLE>
U.S. TREASURY U.S. GOVERNMENT
MONEY MARKET PORTFOLIO MONEY MARKET PORTFOLIO
---------------------------------------------------------------
CLASS I CLASS II CLASS III CLASS I CLASS II CLASS III
------- -------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Other Expenses 31% 32% 32% 28% 35% 35%
Total Portfolio Operating Expenses 56% 82% 1.02% 53% 85% 1.05%
MUNICIPAL MONEY CASH RESERVE
MARKET PORTFOLIO PORTFOLIO
---------------------------------------------------------------
CLASS I CLASS II CLASS III CLASS I CLASS II CLASS III
------- -------- --------- ------- -------- ---------
Other Expenses 27% 28% 28% 36% 31% 31%
Total Portfolio Operating Expenses 52% 78% 98% 61% 81% 1.01%
</TABLE>
There is no guarantee that any waivers will continue at their stated
levels.
Management Fees, 12b-1 Fees, Shareholder Servicing Fees, and Other
Expenses, are reflected in each Portfolio's yield and are not charged
directly to individual accounts. 12b-1 Fees are paid by each Class III
Portfolio to ALPS for services and expenses in connection with distribution.
Shareholder Servicing Fees are paid by Class II to securities brokers,
financial institutions or advisers (Investment Professionals) for services
and expenses incurred in connection with providing personal service to
shareholders, subaccounting and/or maintenance of shareholder accounts.
Long-term shareholders may eventually pay more than the economic equivalent
of the maximum 8.50% front-end sales charge permitted by the National
Association of Securities Dealers, Inc. (NASD) due to 12b-1 fees. Please see
page 19 for further information.
B. EXAMPLE: You would pay the following expenses for every $1,000
investment in each Class of shares of the Money Market Portfolios assuming
(1) 5% annual return, (2) redemption at the end of each time period, (3) that
operating expenses (net of expense waivers) are the same as described above,
and (4) reinvestment of all dividends and distributions. THE RETURN OF 5% AND
EXPENSES SHOULD NOT BE CONSIDERED INDICATIONS OF ACTUAL OR EXPECTED
PERFORMANCE OR PORTFOLIO OPERATING EXPENSES, BOTH OF WHICH MAY VARY
SIGNIFICANTLY:
U.S. TREASURY U.S. GOVERNMENT
MONEY MARKET PORTFOLIO MONEY MARKET PORTFOLIO
---------------------------------------------------------------
CLASS I CLASS II CLASS III CLASS I CLASS II CLASS III
------- -------- --------- ------- -------- ---------
1 year $4 $7 $7 $4 $7 $7
3 years $12 $21 $21 $11 $22 $22
5 years $21 $36 $36 $20 $37 $37
10 years $48 $80 $80 $44 $84 $84
MUNICIPAL MONEY CASH RESERVE
MARKET PORTFOLIO PORTFOLIO
---------------------------------------------------------------
CLASS I CLASS II CLASS III CLASS I CLASS II CLASS III
------- -------- --------- ------- -------- ---------
1 year $4 $6 $6 $4 $6 $6
3 years $11 $19 $19 $14 $20 $20
5 years $19 $34 $34 $24 $35 $35
10 years $43 $75 $75 $54 $79 $79
4
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The tables that follow are included in the Annual Report for the
Portfolios dated June 30, 1996 and have been audited by Price Waterhouse LLP,
independent accountants. Their report on the financial statements and the
financial highlights for the Portfolios is included in the Annual Report.
The financial statements and financial highlights are incorporated by
reference into the Portfolios' Statement of Additional Information. The
Annual Report contains additional performance information and will be made
available upon request and without charge.
<TABLE>
U.S. TREASURY MONEY MARKET PORTFOLIO
CLASS I CLASS III
---------------------------------------- --------------
For the Year For the Period
Ended June 30, Ended June 30,
---------------------------------------- --------------
1996 1995 1994 1993** 1996***
---- ---- ---- ------ -------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $1.00 1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------
Income from investment operations:
Net investment income 0.052 0.050 0.030 0.018 0.044
Distributions:
Net investment income (0.052) (0.050) (0.030) (0.018) (0.044)
---------------------------------------------------------------
Net asset value, end of period $1.00 1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------
---------------------------------------------------------------
TOTAL RETURN+ 5.30% 5.10% 3.06% 1.76%# 4.47%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) 75,703 $67,377 $100,868 $59,326 $3,528
Ratio of expenses to average net assets (1) 0.36% 0.36% 0.33% 0.39%* 0.62%*
Ratio of net investment income to
average net assets 5.19% 5.00% 3.04% 2.73%* 4.93%*
(1) During the period, various fees were
waived. The ratio of expenses to
average net assets had such waivers
not occurred is as follows. 0.56% 0.63% 0.60% 0.65%* 0.82%*
</TABLE>
* Annualized.
** Class commenced operations on November 12, 1992.
*** Class commenced operations on August 8, 1995.
+ Total return would have been lower had various fees not
been waived during the period.
# Total return for periods of less than one year are not annualized.
5
<PAGE>
<TABLE>
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
CLASS I CLASS III
---------------------------------------- --------------
For the Year For the Period
Ended June 30, Ended June 30,
---------------------------------------- --------------
1996 1995 1994 1993** 1996***
---- ---- ---- ------ -------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------
Income from investment operations:
Net investment income 0.053 0.053 0.032 0.019 0.044
---------------------------------------------------------------
Distributions:
Net investment income (0.053) (0.053) (0.032) (0.019) (0.044)
---------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------
---------------------------------------------------------------
TOTAL RETURN+ 5.37% 5.39% 3.23% 1.87%# 4.49%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) 88,111 $88,057 $67,854 $94,903 $228
Ratio of expenses to average net assets (1) 0.33% 0.31% 0.28% 0.27%* 0.65%*
Ratio of net investment income to
average net assets 5.28% 5.27% 3.18% 2.98%* 4.96%*
(1)During the period, various fees were
waived. The ratio of expenses to average
net assets had such waivers not occurred
is as follows. 0.53% 0.58% 0.55% 0.55%* 0.85%*
</TABLE>
* Annualized.
** Class commenced operations on November 12, 1992.
*** Class commenced operations on August 8, 1995.
+ Total return would have been lower had various fees not
been waived during the period.
# Total return for periods of less than one year are not annualized.
<TABLE>
MUNICIPAL MONEY MARKET PORTFOLIO
CLASS I CLASS III
---------------------------------------- --------------
For the Year For the Period
Ended June 30, Ended June 30,
---------------------------------------- --------------
1996 1995 1994 1993** 1996***
---- ---- ---- ------ -------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------
Income from investment operations:
Net investment income 0.035 0.034 0.024 0.014 0.030
---------------------------------------------------------------
Distributions:
Net investment income (0.035) (0.034) (0.024) (0.014) (0.030)
---------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------
---------------------------------------------------------------
TOTAL RETURN+ 3.52% 3.48% 2.40% 1.40%# 3.03%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $71,665 $94,078 $76,231 $74,362 $2,905
Ratio of expenses to average net assets (1) 0.32% 0.30% 0.28% 0.31%* 0.58%*
Ratio of net investment income to average net
assets 3.50% 3.44% 2.39% 2.26%* 3.24%*
(1)During the period, various fees were
waived. The ratio of expenses to average
net assets had such waivers not occurred
is as follows. 0.52% 0.57% 0.55% 0.58%* 0.78%*
</TABLE>
* Annualized.
** Class commenced operations on November 12, 1992.
*** Class commenced operations on July 28, 1995.
+ Total return would have been lower had various fees not
been waived during the period.
# Total return for periods of less than one year are not annualized.
6
<PAGE>
<TABLE>
CASH RESERVE PORTFOLIO
CLASS I CLASS III
-------------------- --------------
For the Year For Period
Ended June 30, Ended June 30,
-------------------- --------------
1996 1995** 1996***
---- ---- ----
<S> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $1.00 $1.00 $1.00
-------------------------------------
Income from investment operations:
Net investment income 0.053 0.042 0.047
-------------------------------------
Distributions:
Net investment income (0.053) (0.042) (0.047)
-------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00
-------------------------------------
-------------------------------------
TOTAL RETURN+ 5.39% 4.27%# 4.78%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $16,369 $15,460 $24,190
Ratio of expenses to average net assets (1) 0.42% 0.43%* 0.62%*
Ratio of net investment income to average net
assets 5.22% 5.48%* 5.02%*
(1)During the period, various fees were
waived. The ratio of expenses to average
net assets had such waivers not occurred
is as follows. 0.61% 0.70%* 0.81%*
</TABLE>
* Annualized.
** Class commenced operations on September 26, 1994.
*** Class commenced operations on July 28, 1995.
+ Total return would have been lower had various fees
not been waived during the period.
# Total return for periods of less than one year are not annualized.
7
<PAGE>
- ------------------------------------------------------------------------------
WHAT IS THE INVESTMENT OBJECTIVE OF EACH PORTFOLIO?
- ------------------------------------------------------------------------------
First Tennessee, serves as Investment Adviser to each Portfolio and,
with the prior approval of the Board of Trustees (the Trustees), has engaged
PNC Institutional Management Corporation (PIMC) to act as Sub-Adviser to each
Portfolio. Subject to First Tennessee's supervision, PIMC is responsible for
the day-to-day operations of the Portfolios, including providing investment
research and credit analysis concerning Portfolio investments and conducting
a continuous program of investment of Portfolio assets in accordance with the
investment policies and objectives of each Portfolio. For additional
information about the Portfolios' investment advisory arrangements, see "What
Advisory and Other Fees Do the Portfolios Pay? - Investment Advisory and
Management and Sub-Advisory Agreements" beginning on page 18.
The investment objective of each Money Market Portfolio is to obtain as
high a level of current income as is consistent with the preservation of
principal and liquidity within the prescribed standards for each Portfolio.
Municipal Money Market Portfolio also seeks as high a level of federally
tax-exempt income as is consistent with this objective. There is no assurance
that each Portfolio will achieve its investment objective. The permitted
investments of each Money Market Portfolio are as follows:
U.S. TREASURY MONEY MARKET PORTFOLIO may invest in U.S. Treasury bills,
notes, and bonds, and in other direct obligations of the U.S. Treasury. The
Portfolio also may engage in repurchase agreements and reverse repurchase
agreements backed by these instruments. As an operating policy, the Portfolio
intends to invest 100% of its total assets in these instruments. This
operating policy is not fundamental and may be changed upon 90 days' notice
to shareholders.
U.S. Treasury Money Market Portfolio is rated to reflect investment
quality by a nationally recognized statistical rating organization. These
quality ratings are based on, but not limited to, an analysis of the
Portfolio's operational policies, investment strategies and management. These
rating organizations also may undertake an ongoing analysis and assessment of
these criteria in order to continually update the Portfolio's rating. For
additional information please call the Distributor, ALPS Mutual Funds
Services, Inc., at 1-800-442-1941 (option 1).
U.S. GOVERNMENT MONEY MARKET PORTFOLIO may invest in instruments issued
or guaranteed as to principal and interest by the U.S. government or by any
of its agencies or instrumentalities. These instruments include, but are not
limited to, U.S. Treasury bills, notes, and bonds, and other obligations of
the U.S. government such as the Export-Import Bank of the U.S., the General
Services Administration, the Government National Mortgage Association, the
Small Business Administration and the Washington Metropolitan Area Transit
Authority (U.S. government obligations). U.S. Government Money Market
Portfolio may also include instruments which are backed only by the right of
the issuer to borrow from the U.S. Treasury or are backed only by the credit
of the agency or instrumentality issuing the obligations. Such instruments
(e.g., those issued by the Federal Home Loan Bank, Federal Farm Credit Bank,
and Federal National Mortgage Association) are not deemed direct obligations
of the United States. The Portfolio may invest in variable or floating rate
instruments that have features that give them interest rates, maturities, and
prices similar to short-term instruments.
The Portfolio invests at least 65% of its total assets in the instruments
described in the above paragraph.
The Portfolio may also engage in repurchase agreements and reverse
repurchase agreements, may buy and sell securities on a when-issued or
delayed-delivery basis, and may purchase restricted securities and illiquid
securities.
MUNICIPAL MONEY MARKET PORTFOLIO may invest in high-quality, short-term
municipal obligations but also may invest in high-quality, long-term fixed,
variable or floating rate instruments (including tender option bonds) that
have features that give them interest rates, maturities, and prices similar
to short-term instruments. Under normal conditions, at least 80% of the
Portfolio's income will be exempt from federal income tax. The Portfolio's
investments in municipal obligations may include tax, revenue, or bond
anticipation notes; tax-exempt commercial paper; general obligation or
revenue bonds (including municipal lease obligations and resource recovery
bonds); standby commitments; and zero coupon bonds. The Portfolio may buy and
sell securities on a when-issued or delayed-delivery basis, and may purchase
restricted and illiquid securities.
Municipal obligations are issued to raise money for various public
purposes, including general purpose financing for state and local governments
as well as financing for specific projects or public facilities. Municipal
obligations may be backed by the full taxing power of a municipality or by
the revenues from a specific project or the credit of a private organization.
Some municipal obligations are insured by private insurance companies, while
others may be supported by letters of credit furnished by domestic or foreign
banks. PIMC monitors the financial condition of parties (including insurance
companies, banks, and corporations) whose creditworthiness is relied upon in
determining the credit quality of securities the Portfolio may purchase.
8
<PAGE>
Municipal Money Market Portfolio does not intend to invest in federally
taxable obligations under normal conditions; however, it reserves the right,
for temporary defensive purposes, to invest without limitation in taxable
money market instruments, including U.S. government securities, commercial
paper, and repurchase agreements.
CASH RESERVE PORTFOLIO may invest in a broad range of high-quality,
short-term, U.S. dollar-denominated money market obligations. Such
obligations may include, but are not limited to, certificates of deposit,
bankers' acceptances, demand and time deposits, bank notes, corporate
commercial paper, bonds, variable and floating rate notes, and short-term
obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities.
Cash Reserve Portfolio concentrates its investments in obligations
issued by the financial services industry. Money market instruments of
companies in the financial services industry include, but are not limited to,
certificates of deposit, commercial paper, bankers' acceptances, demand and
time deposits, and bank notes. These money market obligations are issued by
domestic or foreign banks, savings and loan associations, consumer and
industrial finance companies, securities brokerage companies and a variety of
firms in the insurance field. Financial service companies offering money
market issues must have total assets of $1 billion or more before their
issues can be considered for investment. Because the Portfolio concentrates
more than 25% of its total assets in the financial services industry, it will
be exposed to greater risks associated with that industry, such as government
regulation, the availability and cost of capital funds, and general economic
conditions.
The Portfolio may also invest in U.S. dollar-denominated obligations of
foreign banks or foreign branches of U.S. banks where PIMC deems the
instrument to present minimal credit risks. Foreign banks offering money
market issues must also have total assets of $1 billion or more before their
issues can be considered for investment. Such investments may include
Eurodollar Certificates of Deposit (ECDs), which are U.S. dollar-denominated
certificates of deposit issued by offices of foreign and domestic banks
located outside the United States; Eurodollar Time Deposits (ETDs), which are
U.S. dollar-denominated deposits in a foreign branch of a U.S. bank or a
foreign bank; Canadian Time Deposits (CTDs), which are essentially the same
U.S. dollar-denominated instruments as ETDs, except that they are issued by
Canadian offices of major Canadian banks; and Yankee Certificates of Deposit
(Yankee CDs), which are U.S. dollar-denominated certificates of deposit
issued by a U.S. branch of a foreign bank and held in the United States.
Investments in obligations issued by foreign banks and foreign branches of
U.S. banks may involve risks that are different from investments in
obligations of domestic branches of U.S. banks. These risks may include
future unfavorable political and economic developments, possible withholding
taxes on interest income, seizure or nationalization of foreign deposits,
currency controls, interest limitations, or other government restrictions
which might affect the payment of principal or interest on the securities
held by the Portfolio. Additionally, these institutions may be subject to
less stringent reserve requirements and to different accounting, auditing,
reporting and recordkeeping requirements than those applicable to domestic
branches of U.S. banks.
The Portfolio may engage in repurchase agreements and reverse repurchase
agreements, may buy and sell securities on a when-issued or delayed-delivery
basis, and may purchase restricted and illiquid securities.
See "Investment Instruments, Transactions, Strategies and Risks" on
page 20 for a further discussion of each Portfolio's investments.
- ------------------------------------------------------------------------------
ARE THE PORTFOLIOS SUITABLE INVESTMENTS?; INVESTMENT RISKS
- ------------------------------------------------------------------------------
Each Money Market Portfolio may be appropriate for investors who seek to
earn income at current money market rates while preserving the value of their
investment. The rate of income will vary from day to day, generally reflecting
current short-term interest rates. Each Portfolio individually may not
constitute a balanced investment plan. Each Portfolio's objective emphasizes
income with preservation of capital and liquidity, and not the higher yields
or capital appreciation that may be available from more aggressive investments.
However, because they emphasize stability, each Portfolio could be well-suited
for a portion of an investor's savings. Although no guarantee can be made, each
Money Market Portfolio seeks to maintain a stable $1.00 share price.
Further information relating to the types of securities in which each
Portfolio may invest and their related risks, as well as the investment
policies of each Portfolio in general are set forth in the section
"Investment Instruments, Transactions, Strategies And Risks" on page 20 and
in the Statement of Additional Information.
The Portfolios attempt to maintain the value of their shares at a
constant $1.00 per share price, although there can be no assurance that the
Portfolios will always be able to do so. The Portfolios may not achieve as
high a level of current income as other funds that do not limit their
investments to the high quality securities in which the Portfolios invest.
9
<PAGE>
Each Portfolio's ability to achieve its investment objective depends on
the quality and maturity of its investments. Although each Portfolio's
policies are designed to help maintain a stable share price of $1.00, all
money market instruments can change in value when interest rates or issuers'
creditworthiness change, or if an issuer or guarantor of a security fails to
pay interest or principal when due. If these changes in value were large
enough, a Portfolio's share price could fall below $1.00. In general,
obligations with longer maturities are more vulnerable to price changes,
although they may provide higher yields.
While each Portfolio invests in high quality obligations, note that
investments are not without risk. A Portfolio's ability to achieve its
objective depends on a number of factors, including the skills of First
Tennessee and PIMC in purchasing securities whose issuers can be expected to
have the ability to meet their obligations for the payment of interest and
principal when due.
- -------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS' INVESTMENT POLICIES AND LIMITATIONS?
- -------------------------------------------------------------------------------
MAINTAINING $1.00 NAV. The Trust uses its best efforts to maintain a
stable net asset value per share (NAV) of $1.00 for each Portfolio, and to
value its portfolio securities on the basis of the amortized cost valuation
method, pursuant to Rule 2a-7 under the Investment Company Act of 1940. This
method is based on acquisition cost and assumes a steady rate of amortization
of premium or discount from the date of purchase until maturity instead of
looking at actual changes in market values.
MATURITY. Each Portfolio must limit its investments to obligations with
remaining maturities of 397 days or less, as determined in accordance with
the rules of the SEC, and must maintain a dollar-weighted average maturity of
90 days or less.
QUALITY. Pursuant to procedures adopted by the Trustees, each Portfolio may
purchase only high quality obligations that the Sub-Adviser believes present
minimal credit risks. To be considered high quality, a security must be a
U.S. government security; or rated in accordance with applicable rules in one
of the two highest rating categories for short-term obligations by at least
two nationally recognized rating services (or by one, if only one rating
service has rated the security); or, if unrated, judged to be of equivalent
quality by PIMC.
High-quality securities are divided into"first tier" and "second tier"
securities. First tier securities have received the highest rating (e.g.,
Standard & Poor's A-1 rating) from at least two rating services (or one, if
only one has rated the security). Second tier securities have received
ratings within the two highest categories (e.g., Standard & Poor's A-1 or
A-2) from at least two rating services (or one, if only one has rated the
security), but do not qualify as first tier securities. If a security has
been assigned different ratings by different rating services, at least two
rating services must have assigned the higher rating in order for PIMC to
determine eligibility on the basis of that higher rating. Based on procedures
adopted by the Trustees, PIMC, under the supervision of First Tennessee, may
determine that an unrated security is of equivalent quality to a rated first
or second tier security. Cash Reserve Portfolio, as a non-fundamental policy,
will limit its investments to first tier securities.
INVESTMENT LIMITATIONS. Each Portfolio has adopted the following investment
limitations:
(1) Each Portfolio normally may not invest more than 5% of
its total assets in the securities (other than U.S.
government securities) of any single issuer. Under certain
conditions, however, Cash Reserve Portfolio may invest up to
25% of its total assets in the first tier securities of a
single issuer for up to three days.
(2) Each Portfolio will not purchase a security if, as a
result, 25% or more of its total assets would be invested in
a particular industry, other than U.S. government
obligations; or (i) with respect to Municipal Money Market
Portfolio, other than tax-exempt obligations issued or
guaranteed by a U.S. territory or possession or a state or
local government, or a political subdivision thereof; or
(ii) with respect to Cash Reserve Portfolio, other than
obligations issued by members of the financial services
industry.
(3) Each Portfolio (a) may borrow money for temporary or
emergency purposes or, with respect to U.S. Treasury Money
Market Portfolio, U.S. Government Money Market Portfolio and
Cash Reserve Portfolio, engage in reverse repurchase
agreements in a combined amount not to exceed 33 1/3% of its
total assets and (b) will not purchase any security while
borrowings (including reverse repurchase agreements)
representing more than 5% of its total assets are
outstanding. If a Portfolio borrows money, its share price
may be subject to greater fluctuation until the borrowing is
paid off. To this extent, purchasing securities when
borrowings are outstanding may involve an element of
leverage.
10
<PAGE>
(4)(a) Each Portfolio may temporarily lend its portfolio
securities to broker-dealers and institutions, but only when
the loans are fully collateralized. (b) Loans, in the
aggregate, will be limited to 33 1/3% of each Portfolio's
total assets.
Unless otherwise noted, the Portfolios' policies and limitations are not
fundamental and may be changed by the Trustees without shareholder approval.
The fundamental policies of each Portfolio that require shareholder approval
prior to any changes are: each Portfolio's investment objective; Municipal
Money Market Portfolio's policy that, under normal conditions, at least 80%
of its income will be exempt from federal income tax; and investment
limitation (1), with respect to 75% of each Portfolio's assets, and
limitations (2), (3)(a) and (4)(b) above. These limitations and each
Portfolio's policies are considered at the time of purchase of securities;
the sale of securities is not required in the event of a subsequent change in
circumstances.
Municipal Money Market Portfolio may invest all or a portion of its assets
in municipal obligations whose interest is a tax preference item for purposes
of the federal alternative minimum tax (AMT). If an individual is subject to
the AMT, a portion of the income may not be exempt from federal income tax.
Income distributions that are a tax preference item for purposes of the
federal AMT are considered to be exempt from federal income tax for purposes
of the 80% policy noted above. See "What Is The Effect Of Federal Income Tax
On This Investment?" on page 18 for further information. Municipal Money
Market Portfolio may purchase other types of tax-exempt instruments that
become available in the future as long as First Tennessee and PIMC believe
that their character is consistent with the Portfolio's quality and maturity
standards.
Municipal Money Market Portfolio and Cash Reserve Portfolio each may
invest up to 25% of their total assets in a particular industry. Therefore,
developments affecting a single issuer or industry, or securities financing
similar types of projects, could have a significant effect on the Portfolios'
performance. Municipal Money Market Portfolio may invest any portion of its
assets in industrial revenue bonds (IRBs) backed by private issuers, and may
invest up to 25% of its total assets in IRBs related to a single industry.
Municipal Money Market Portfolio may also invest 25% or more of its total
assets in securities whose revenue sources are from similar types of
projects, e.g., education, electric utilities, health care, housing,
transportation, or water, sewer, and gas utilities. There may be economic,
business or political developments or changes that affect all securities of a
similar type.
PIMC defines the issuer of a security depending on its terms and
conditions. In identifying the issuer, PIMC will consider the entity or
entities responsible for payment of interest and repayment of principal and
the source of such payments; the way in which assets and revenues of an
issuing political subdivision are separated from those of other political
entities; and whether a governmental body is guaranteeing the security.
The investment policies and limitations set forth above are supplemented
by the investment policies and limitations in the Statement of Additional
Information. No assurance can be made that each Portfolio will achieve its
objective, but it will follow the investment style described in this
Prospectus.
From time to time, each Portfolio, to the extent consistent with its
investment objective, policies, and restrictions, may invest in securities of
companies with which First Tennessee, PIMC or their affiliates have lending
relationships.
- -------------------------------------------------------------------------------
HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?
- -------------------------------------------------------------------------------
CLASS I
- -------
WHO MAY INVEST?
Class I shares are designed exclusively for investment of monies held in
non-retail trust, advisory, agency, custodial or similar Institutional
Accounts. Class I shares may be purchased for Institutional Accounts by
financial institutions, business organizations, corporations, municipalities,
non-profit institutions, and other Institutional Investors serving in a
trust, advisory, agency, custodial or similar capacity who meet the
investment threshold for this Class of shares.
HOW IS AN INSTITUTIONAL ACCOUNT ESTABLISHED?
An initial investment must be preceded by or made in conjunction with the
establishment of an Institutional Account with an Institutional Investor.
Establishment of an Institutional Account may require that documents and
applications be completed and signed before the investment can be
implemented. The Institutional Investor may require that certain documents be
provided prior to making a redemption from any Portfolio. Institutional
Investors may charge fees in addition to those described herein. Fee
schedules for Institutional Accounts are available upon request from the
11
<PAGE>
Institutional Investor and are detailed in the agreements by which each
client opens an account with an Institutional Investor.
HOW ARE INVESTMENTS MADE?
Each Institutional Investor will telephone the Transfer Agent, Chase
Global Funds Services Company (CGFSC), with the investment instructions. If
investment instructions are received by CGFSC in proper form prior to 2:00
p.m. Eastern Time on any Business Day (as defined in the section "HOW ARE
INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE - Class I, II and III - How Are
Portfolio Shares Valued?")and the funds are received by CGFSC that day, you
will earn that day's dividend accrual. Institutional Investors will wire
funds through the Federal Reserve System. Purchases will be processed at the
NAV calculated after an order is received in proper form and accepted by
CGFSC. Each Portfolio requires advance notification of all wire purchases.
To secure same day acceptance of federal funds (monies transferred from one
bank to another through the Federal Reserve System with same-day
availability), an Institutional Investor must call CGFSC at 1-800-442-1941
(option 2) prior to 2:00 p.m. Eastern Time on any Business Day, defined
below, to advise it of the wire. The Trust may discontinue offering its
shares in any Class of a Portfolio without notice to shareholders
MINIMUM INVESTMENT AND ACCOUNT BALANCE. The minimum initial investment
for each Institutional Investor is $100,000 per Portfolio. Institutional
Investors may satisfy the minimum investment by aggregating their
Institutional Accounts within each Portfolio. Subsequent investments may be
in any amount. If an Institutional Investor's Class I account falls below
$50,000 due to redemption, a Portfolio may close the account. An
Institutional Investor may be notified if the minimum balance is not being
maintained and will be allowed 30 days to make additional investments before
its account is closed. Shares will be redeemed at the NAV on the day the
account is closed, and proceeds will be sent to the address of record.
HOW ARE REDEMPTIONS MADE?
Institutional Investors may redeem all or a portion of their account
shares on any Business Day. Shares will be redeemed at the NAV next
calculated after CGFSC has received the redemption request in proper form. If
an account is closed, any accrued dividends will be paid at the beginning of
the following month.
Institutional Investors may make redemptions by wire provided they have
established a wire account with CGFSC. Please call 1-800-442-1941 (option 2)
to advise CGFSC of the wire. If telephone instructions are received before
2:00 p.m. Eastern Time on any Business Day, proceeds of the redemption will
be wired as federal funds on the same day to the bank account designated with
CGFSC. An Institutional Investor may change the bank account designated to
receive an amount redeemed at any time by sending a letter of instruction
with a signature guarantee to CGFSC, 73 Tremont Street, Boston,
Massachusetts, 02108. Shares redeemed will receive the accrued dividends
through the day prior to redemption.
Pursuant to the Investment Company Act of 1940, as amended (1940 Act), if
making immediate payment of redemption proceeds could adversely affect a
Portfolio, payments may be made up to seven days later. Also, when the New
York Stock Exchange (NYSE) or the Federal Reserve Bank of New York (New York
Federal Reserve) is closed (or when trading is restricted) for any reason
other than customary weekend or holiday closings, or under any emergency
circumstances as determined by the SEC to merit such action, the right of
redemption may be suspended or the date of payment postponed for a period of
time that may exceed seven days. In addition, each Portfolio reserves the
right to advance the time on that day by which purchase and redemption orders
must be received. To the extent Portfolio securities are traded in other
markets on days when either the NYSE or the New York Federal Reserve is
closed, each Portfolio's NAV may be affected on days when investors do not
have access to the Portfolios to purchase or redeem shares.
If transactions by telephone cannot be executed (for example, during times
of unusual market activity), orders may be placed by mail to CGFSC. In case
of suspension of the right of redemption, an Institutional Investor may
either withdraw its request for redemption or it will receive payment based
on the NAV next determined after the termination of the suspension.
ADDITIONAL INFORMATION
Each Portfolio also reserves the right to reject any specific purchase order,
including certain purchases by exchange. Purchase orders may be refused if,
in First Tennessee's opinion, they are of a size that would disrupt
management of a Portfolio.
12
<PAGE>
In order to allow First Tennessee to manage each Portfolio most
effectively, Institutional Investors are strongly urged to initiate all
trades (investments, exchanges and redemptions of shares) as early in the day
as possible and to notify CGFSC at least one day in advance of trades in
excess of $1 million. In making these trade requests, the name of the
Institutional Investor and the account number(s) must be supplied.
Transactions may be initiated by telephone. Please note that each
Portfolio and its agents will not be responsible for any losses resulting
from unauthorized telephone transactions if such Portfolios or agents follow
reasonable procedures designed to verify the identity of the caller. These
procedures may include requesting additional information or using
personalized security codes. Each Portfolio or its agents may also record
calls and an Institutional Investor should verify the accuracy of
confirmation statements immediately after receipt. If an Institutional
Investor does not want to be able to initiate redemptions and exchanges by
telephone, please call CGFSC for instructions.
CLASS II AND III
- ----------------
WHO MAY INVEST?
Class II and III shares are designed for individuals and other investors
who seek mutual fund investment convenience plus a lower investment minimum.
These Classes offer investors differing expense structures to choose from.
See "Expense Summary" on page 3. Class II shares of the First Funds Money
Market Portfolios are not currently available for investment.
INVESTMENT REQUIREMENTS
The minimum initial Class II or Class III investment is $1,000 per Portfolio.
Subsequent investments may be in any amount greater than $100. If you
participate in the Systematic Investing Program, or the "A Plus Card
Program," (a consumer discount card program provided by "A" Plus Strategic
Alliances, Inc., a subsidiary of First Tennessee), the minimum initial
investment is $250, and subsequent investments may be in any amount of $25 or
greater. If you are an employee of First Tennessee or any of its affiliates
and you participate in the Systematic Investing Program, the minimum initial
investment is $50, and subsequent investments may be in any amount of $25 or
greater. See page 15 for additional information on the Systematic Investing
Program. If your balance in the Portfolio falls below the applicable minimum
investment requirement due to redemption, you may be given 30 days' notice to
reestablish the minimum balance. If you do not reestablish the minimum
balance, your account may be closed and the proceeds mailed to you at the
address of record. Shares will be redeemed on the day the account is closed.
All purchases must be made in U.S. dollars and checks must be drawn on
U.S. banks. No cash will be accepted. If you make a purchase with more than
one check, each check must have a value of at least $100, and the minimum
investment requirement still applies (excluding the specific circumstances
stated above which reduce the minimum investment requirement). Each Portfolio
reserves the right to limit the number of checks processed at one time. If
your check does not clear, your purchase will be canceled and you could be
liable for any losses or fees incurred.
You may initiate any transaction either directly or through your
Investment Professional. Please note that each Portfolio and its agents will
not be responsible for any losses resulting from unauthorized transactions if
such Portfolios or agents follow reasonable procedures designed to verify the
identity of the caller. These procedures may include requesting additional
information or using personalized security codes. Your Investment
Professional may also record calls, and you should verify the accuracy of
your confirmation statements immediately after you receive them. If you do
not want to be able to redeem and exchange by telephone, please check the box
on your application (if you invest directly), or, if you invest through an
Investment Professional, please call your Investment Professional for
instructions.
HOW DO I SET UP AN ACCOUNT?
You may set up an account directly in each Portfolio or you may invest in
each Portfolio through your Investment Professional. See page 15 for
information on how to invest through your Investment Professional. Shares
will be purchased based on the NAV next calculated after CGFSC has received
the request in proper form. If you are investing through an Investment
Professional, investment instructions that your Investment Professional
initiates should be called in to CGFSC before 2:00 p.m. Eastern Time and the
funds must be received by CGFSC that day in order for you to receive that
day's dividend accrual.
HOW DO I INVEST DIRECTLY?
When opening a new account directly, you must complete and sign an account
application and send it to CGFSC, 73 Tremont Street, Boston, MA 02108.
Telephone representatives are available at 1-800-442-1941 between the hours
of 8:00 a.m. to 4:00 p.m. Central Time (9:00 a.m. to 5:00 p.m. Eastern Time),
Monday through Friday.
Investments may be made in several ways:
13
<PAGE>
BY MAIL: Make your check payable to First Funds: [name of
Portfolio], and mail it, along with the application, to the
address indicated on the application. Your account will be
credited on the Business Day that CGFSC receives your
application in good order and processes your transaction.
BY BANK TRANSFER: Bank transfer allows you to move money
between your bank account and your First Funds account. This
automatic service allows you to transfer money from your
bank account via the Automated Clearing House (ACH) network
to your Portfolio account. First, a Portfolio account must
be established, and an application sent to CGFSC. Next, a
deposit account must be opened at a bank providing bank
transfer services and you must arrange for this service to
be provided. Once you have completed this process, you can
initiate a bank transfer by contacting a representative from
your bank, providing the required information for the bank,
and authorizing the transfer to take place. Please allow two
or three days after the authorization for the transfer to
occur.
BY WIRE: Call 1-800-442-1941 (option 2) to set up your
Portfolio account to accommodate wire transactions. To
initiate your wire transaction, call your depository
institution. If you call CGFSC before 2:00 p.m. Eastern Time
and your wire is received that day, you will earn that day's
dividend accrual. Federal funds (monies transferred from one
bank to another through the Federal Reserve System with
same-day availability) should be wired to:
Chase Manhattan Bank, N.A.
ABA #021000021
First Funds
Credit DDA #910-2-733335
(Account Registration)
(Account Number)
(Wire Control Number) *See Below*
Prior to sending wires, please be sure to call
1-800-442-1941 (option 2) to receive a Wire Control Number
to be included in the body of the wire (see above).
Your bank may charge you a fee for this service.
HOW DO I REDEEM SHARES WHEN INVESTING DIRECTLY?
You may redeem all or a portion of your shares on any day
that a Portfolio is open for business. Shares will be
redeemed at the NAV next calculated after CGFSC has received
the redemption request in proper form. If a Portfolio
account is closed, any accrued dividends will be paid at the
beginning of the following month.
You may redeem shares in several ways:
BY MAIL: Write a "letter of instruction" with your name,
the Portfolio's name, your Portfolio account number, the
dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular
account. You will need the letter of instruction signed by
all persons required to sign for transactions, exactly as
their names appear on the account application, along with a
signature guarantee.
A signature guarantee is designed to protect you, the
Portfolios and their agents from fraud. Your written request
requires a signature guarantee if you wish to redeem more
than $1,000 worth of shares; if your Portfolio account
registration has changed within the last 30 days; if the
check is not being mailed to the address on your account; if
the check is not being made out to the account owner; or if
the redemption proceeds are being transferred to another
First Funds account with a different registration. The
following institutions should be able to provide you with a
signature guarantee: banks, brokers, dealers, credit unions
(if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A
signature guarantee may not be provided by a notary public.
BY BANK TRANSFER: You must have opened a Portfolio account
as well as a deposit account with a bank providing this
feature in order to authorize the redemption of monies with
the proceeds transferred to your bank account. Please allow
two or three days after the authorization for the redemption
to take place.
BY WIRE: You may make redemptions by wire provided you have
established a Portfolio account to accommodate wire
transactions. If telephone instructions are received before
2:00 p.m. Eastern Time, proceeds of the redemption for each
Portfolio will be wired as federal funds on the same day to
the bank account designated with CGFSC. You may change the
bank account designated to receive an amount redeemed at any
time by sending a letter of instruction with a signature
guarantee to CGFSC, 73 Tremont Street, Boston,
Massachusetts, 02108.
BY CHECK: You may request on your Account Application or by
written request to the Trust that a Portfolio provide you
with Redemption Checks ("Checks") which you can write on
your account. In order to establish the checkwriting
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option, you must manually sign a signature card.
Corporations, trusts and other organizations should call or
write the Portfolio's Distributor before submitting
signature cards as additional documents may be required to
establish the checkwriting service. The Trust will send
checks only to the registered owner(s) of the account and
only to the address listed in the Trust's records. You may
make checks payable to the order of any person in the amount
of $250 or more. When a Check is presented to the Transfer
Agent for payment, the Transfer Agent, as your agent, will
cause a Portfolio to redeem a sufficient number of your
shares to cover the amount of the Check. Shares earn
dividends through the day prior to the day that the
redemption is processed. There is no charge to you for the
use of the Checks; however, the Transfer Agent will impose a
charge for stopping payment of a Check upon request, or if
the Transfer Agent cannot honor a Check due to insufficient
funds or other valid reasons. A Portfolio cannot guarantee a
stop payment order on a Check. You must submit any request
to reverse a stop payment order in writing.
You may not write a Check to redeem shares which you
purchase by check until your check clears. If the amount of
the Check is greater than the value of the shares in your
account, the Check will be returned marked "insufficient
funds." Checks written on amounts subject to the hold
described above will be returned marked "uncollected." If
your check does not clear, you will be responsible for any
loss the Portfolio or its service providers incur.
Checkwriting is not available for participants in retirement
plan accounts, to shareholders who hold shares in
certificate form or to shareholders who are subject to
Internal Revenue Service (IRS) backup withholding. You may
not use a Check to close an account. The Trust may
terminate or alter the checkwriting service at any time.
ADDITIONAL REDEMPTION REQUIREMENTS: Each Portfolio may hold
payment on redemptions until it is reasonably satisfied that
investments made by check have been collected, which can
take up to seven days. Also, when the NYSE or the New York
Federal Reserve is closed (or when trading is restricted)
for any reason other than its customary weekend or holiday
closings, or under any emergency circumstances as determined
by the SEC to merit such action, the right of redemption may
be suspended or the date of payment postponed for a period
of time that may exceed seven days. In addition, each
Portfolio reserves the right to advance the time on that day
by which purchase and redemption orders must be received. To
the extent that Portfolio securities are traded in other
markets on days when either the NYSE or the New York Federal
Reserve is closed, each Portfolio's NAV may be affected on
days when investors do not have access to the Portfolios to
purchase or redeem shares.
If you are unable to reach CGFSC by telephone (for example,
during times of unusual market activity), consider placing
your order by mail directly to CGFSC. In case of suspension
of the right of redemption, you may either withdraw your
request for redemption or you will receive payment based on
the NAV next determined after the termination of the
suspension. Shares redeemed will receive the accrued
dividends through the day prior to redemption.
HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?
If you are investing through your Investment Professional,
you may be required to set up a brokerage or agency account.
Please call your Investment Professional for information on
establishing an account. If you are purchasing shares of any
Portfolio through a program of services offered or
administered by your Investment Professional, you should
read the program materials in conjunction with this
Prospectus. Certain features of such programs may impose
additional requirements and charges for the services
rendered. Your Investment Professional may offer any or all
of the services mentioned in this section, and is
responsible for initiating all initial purchase
transactions. Please contact your Investment Professional
for information on these services.
SYSTEMATIC INVESTING PROGRAM
The Systematic Investing Program offers a simple way to
maintain a regular investment program. You may arrange
automatic transfers (minimum $25 per transaction) from your
bank account to your First Funds account on a periodic
basis. When you participate in this program, the minimum
initial investment in each Portfolio is $250. If you are an
employee of First Tennessee or any of its affiliates, the
minimum initial investment in the Portfolio is $50. You may
change the amount of your automatic investment, skip an
investment, or stop the Systematic Investing Program by
calling CGFSC at 1-800-442-1941 (option 2) or your
Investment Professional at least three Business Days prior
to your next scheduled investment date.
SYSTEMATIC WITHDRAWAL PLAN
You can have monthly, quarterly or semi-annual checks sent
from your account to you, to a person named by you, or to
your bank checking account. Your Systematic Withdrawal Plan
payments are drawn from share redemptions and must be in the
amount of $100 or more per Portfolio per month. If
Systematic Withdrawal Plan redemptions exceed income
dividends earned on your shares, your account eventually may
be exhausted. Please contact ALPS at 1-800-442-1941 (option
1) or your Investment Professional for more information.
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ADDITIONAL INFORMATION
TAX-DEFERRED RETIREMENT PLANS: Retirement plans can offer
significant tax savings to individuals. Please call ALPS at
1-800-442-1941 (option 1) or your Investment Professional
for more information on the plans and their benefits,
provisions and fees. CGFSC or your Investment Professional
can set up your new account in any of the Portfolios (with
the exception of Municipal Money Market Portfolio) under one
of several tax-deferred plans. These plans let you invest
for retirement and defer the tax on your investment income.
Minimums may differ from those listed on page 13. Plans
include Individual Retirement Accounts (IRAs), Rollover
IRAs, Keogh Plans, and Simplified Employee Pension Plans
(SEP-IRAs).
ADDITIONAL FEES: Class III shares are sold without a
front-end sales load; that is, the offering price for such
shares will be their NAV. Class II shares incur Shareholder
Servicing Fees and Class III shares incur Distribution Fees.
See discussion under "WHAT ADVISORY AND OTHER FEES DO THE
PORTFOLIOS PAY? - Distribution Plans and Shareholder
Servicing Plans."
CLASS I, II AND III
HOW ARE PORTFOLIO SHARES VALUED?
The term "net asset value per share," or NAV, means the
worth of one share. The NAV of each Class of each Portfolio
is calculated by adding that Class' pro rata share of the
value of all securities and other assets attributable to a
Portfolio, deducting that Class' pro rata share of Portfolio
liabilities, further deducting Class specific liabilities,
and dividing the result by the number of shares outstanding
in that Class.
Each Portfolio is open for business each day that both the
NYSE and the New York Federal Reserve are open (a Business
Day). The NAV is calculated twice daily, at 2:00 p.m.
Eastern Time, and at the close of each Portfolio's Business
Day, which coincides with the close of regular trading of
the NYSE (normally 4:00 p.m. Eastern Time).
Assets in each Portfolio are valued based upon the amortized
cost method. Although each Portfolio seeks to maintain a
NAV of $1.00, there can be no assurance that this NAV will
not vary.
DISTRIBUTION OPTIONS: Each Portfolio earns interest from
its investments. These are passed along as dividend
distributions. Income dividends on the Portfolios are
declared daily and paid monthly.
When you fill out your account application, you can specify
how you want to receive your distributions. Currently, there
are two available options:
1. REINVESTMENT OPTION. Your dividend distributions, if
any, will be automatically reinvested in additional shares
of a Portfolio. Reinvestment of distributions will be made
at that day's NAV. If you do not indicate a choice on your
application, you will be assigned this option.
2. CASH OPTION. You will be sent a check for income
distributions, if any. Distribution checks will be mailed no
later than seven days after the last day of the month.
HOW ARE EXCHANGES MADE?
An exchange is the redemption of shares of one Portfolio and
the purchase of shares of another. The exchange privilege
is a convenient way to sell and buy shares of other
Portfolios registered in an investor's state. Except as
noted below, the Portfolio's shares may be exchanged for the
same Class of shares of other First Funds Portfolios. The
redemption and purchase will be made at the next determined
NAV after the exchange request is received in proper form
and accepted by CGFSC. You may execute exchange transactions
by calling CGFSC at 1-800-442-1941 (option 2) prior to 4:00
p.m. Eastern Time on any Business Day. Class II shares of
the First Funds Money Market Portfolios are not currently
available for investment. Investors in Class II shares of
other First Funds Portfolios wishing to exchange into one of
the Money Market Portfolios will receive Class III shares.
When making an exchange or opening an account in another
Portfolio by exchange, the registration and tax
identification numbers of the two accounts must be
identical. In order to open a new account through exchange,
the minimum initial investment requirements must be met.
Each exchange may produce a gain or loss for tax purposes.
In order to protect each Portfolio's performance and its
shareholders, First Tennessee discourages frequent exchange
activity by investors in response to short-term market
fluctuations. Each Portfolio reserves the right to refuse
any specific purchase order, including certain purchases by
exchange if, in First Tennessee's opinion, a Portfolio would
be unable to invest effectively in accordance with its
investment objective and policies, or would otherwise be
affected adversely. Exchanges or purchase orders may be
restricted or refused if a Portfolio receives or anticipates
individual or simultaneous orders affecting significant
portions of the Portfolio's
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<PAGE>
assets. Although a Portfolio will attempt to give prior notice
whenever it is reasonably able to do so, it may impose these
restrictions at any time. Each Portfolio reserves the right to
modify or withdraw the exchange privilege and to suspend the
offering of shares in any Class without notice to
shareholders. You or your Institutional Investor, if you are
invested in Class I, will receive written confirmation of each
exchange transaction.
Exchanges are generally not permitted from Class I to
another Class. Should a beneficial owner of Class I shares
cease to be eligible to purchase shares of Class I, Class I
shares held in a Institutional Account may be converted to
shares of another Class.
STATEMENTS AND REPORTS
You or, if Class I, the Institutional Investor, will
receive a monthly statement and a confirmation after every
transaction that affects the account registration. A
statement with tax information will be mailed by January 31
of each tax year and also will be filed with the IRS. At
least twice a year, you, or if Class I, the Institutional
Investor will receive the Portfolios' financial statements.
To reduce expenses, only one copy of each Portfolio's
reports (such as the Prospectus and Annual Report) will be
mailed to each investor or, if Class I, each Institutional
Investor. Please write to ALPS to request additional copies.
- --------------------------------------------------------------
HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------
From time to time each Portfolio may quote the CURRENT YIELD
and EFFECTIVE YIELD of Class I, II or III shares in
advertisements or in reports or other communications with
shareholders. Both yield figures are based on historical
earnings and are not intended to indicate future
performance. CURRENT YIELD refers to the income generated
by an investment over a seven-day period expressed as an
annual percentage rate. Since money market funds seek to
maintain a stable $1.00 share price, current yields are the
most common illustration of money market fund performance.
The effective yield is calculated similarly, but assumes
that the income earned from the investment is reinvested.
The EFFECTIVE YIELD will be slightly higher than the current
yield because of the compounding effect on this assumed
reinvestment. In addition to the current yield, yields may
be quoted in advertising based on any historical seven-day
period.
Municipal Money Market Portfolio also may quote the TAX
EQUIVALENT YIELD for Class I, II or III shares, which shows
the taxable yield an investor would have to earn, before
taxes, to equal the tax-free yield. A tax equivalent yield
is calculated by dividing the tax-exempt current yield by
the result of one minus a stated federal tax rate.
The yield of the three Classes of each Portfolio are
calculated separately due to separate expense structures as
indicated in the "Summary Of Portfolio Expenses"; the yields
of Class II and Class III will be lower than that of Class
I. For additional performance information, contact your
Investment Professional or ALPS for a free Annual Report and
Statement of Additional Information for these Portfolios.
- --------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------
Money market obligations are generally traded in the
over-the-counter market through broker-dealers. A
broker-dealer is a securities firm or bank which makes a
market for securities by offering to buy at one price and
sell at a slightly higher price. The difference between the
prices is known as a spread. The selection of such
broker-dealers is generally made based upon the price,
quality of execution services and research provided.
As a money market fund, each Portfolio does not pay
commissions, as securities purchased and sold by each
Portfolio will be traded on a net basis (i.e., without
commission) through principals acting for their own account
and not as agents for the issuer or otherwise involve
transactions directly with the issuer of the instrument.
- --------------------------------------------------------------
WHAT IS THE EFFECT OF FEDERAL INCOME TAX ON THIS INVESTMENT?
- --------------------------------------------------------------
Each Portfolio intends to distribute substantially all of
its net investment income and capital gains, if any, to
shareholders within each calendar year as well as on a
fiscal year basis. Income dividends are declared daily and
paid monthly.
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FEDERAL TAXES. Dividends derived from net investment income for U.S.
Treasury Money Market Portfolio, U.S. Government Money Market Portfolio and
Cash Reserve Portfolio, and short-term capital gains, if any, are taxable as
ordinary income. Distributions are taxable when they are paid, whether taken
in cash or reinvested in additional shares, except that distributions
declared in December and paid in January are taxable as if paid on December
31. Each Portfolio will send each investor, or if Class I, each Institutional
Investor, an IRS Form 1099-DIV by January 31.
Federally tax-free interest earned by Municipal Money Market Portfolio
is federally tax-free when distributed as income dividends. If the Portfolio
earns federally taxable income from any of its investments, it will be
distributed as a taxable dividend. Gains on the sale of tax-free bonds result
in a taxable distribution. Short-term capital gains and a portion of the gain
on bonds purchased at a discount are taxed as dividends. The Portfolio may
invest up to 100% of its assets in municipal obligations whose interest is
subject to the federal alternative minimum tax (AMT) for individuals (private
activity obligations). To the extent that the Portfolio invests in private
activity obligations, individuals who are subject to the AMT will be required
to report a portion of the Portfolio's dividends as a "tax preference item"
in determining their federal income tax.
STATE AND LOCAL TAXES. Mutual fund dividends from U.S. government
securities generally are free from state and local income taxes. Income
dividends distributed by the Portfolios attributable to interest on bonds or
securities of the U.S. government or any of its agencies or instrumentalities
will generally be exempt from Tennessee personal income tax. However,
particular states may limit this benefit, and some types of securities, such
as repurchase agreements and some agency-backed securities, may not qualify
for the benefit. Ginnie Mae securities and other mortgage-backed securities
are notable exceptions to this limitation, and will qualify for the benefit
in most states. Some states may impose intangible property taxes.
OTHER TAX INFORMATION. The information above is only a summary of some
of the tax consequences generally affecting each Portfolio and its
shareholders, and no attempt has been made to discuss individual tax
consequences. You should consult your tax adviser for details and up-to-date
information on the tax laws in your state to determine whether a Portfolio is
suitable to your particular tax situation.
When you sign an account application, you will be asked to certify that
the taxpayer identification number is correct and that you are not subject to
backup withholding for failing to report income to the IRS. If you do not
comply with IRS regulations, the IRS can require each Portfolio to withhold
31% of taxable distributions from your account.
- --------------------------------------------------------------------------------
WHAT ADVISORY AND OTHER FEES DO THE PORTFOLIOS PAY?
- --------------------------------------------------------------------------------
INVESTMENT ADVISORY AND MANAGEMENT AND SUB-ADVISORY AGREEMENTS. For
managing its investment and business affairs, each Portfolio is obligated to
pay First Tennessee, 4990 Poplar Avenue, Memphis, Tennessee, a monthly
management fee at the annual rate of .25% of aggregate average net assets of
all Money Market Portfolios of the Trust managed by First Tennessee through
$1 billion, and .22% on amounts greater than $1 billion. First Tennessee has
voluntarily agreed to waive its fees to .10% of each Money Market Portfolio's
average net assets. This voluntary waiver can be discontinued at any time.
Under the Investment Advisory and Management Agreement, First Tennessee
may, with the prior approval of the Trustees, engage one or more sub-advisers
which may have full investment discretion to make all determinations with
respect to the investment and reinvestment of all or any portion of a
Portfolio's assets, subject to the terms and conditions of the Investment
Advisory and Management Agreement and the written agreement with any such
sub-adviser. In the event one or more sub-advisers is appointed by First
Tennessee, First Tennessee shall monitor and evaluate the performance of such
sub-advisers, allocate Portfolio assets to be managed by such sub-advisers,
recommend any changes in or additional sub-advisers when appropriate and
compensate each sub-adviser out of the investment advisory fee received by
First Tennessee from each Portfolio.
First Tennessee has experience as an investment adviser to individual,
corporate and institutional advisory clients, pension plans and collective
investment funds, with approximately $13.8 billion in assets under
administration (including non-discretionary accounts) and $5.3 billion in
assets under management as of June 30, 1996, as well as experience in
supervising sub-advisers.
PIMC, 400 Bellevue Parkway, Wilmington, Delaware, serves as the
Sub-Adviser for each Portfolio subject to the supervision of First Tennessee,
pursuant to the authority granted to it under its Sub-Advisory Agreement with
First Tennessee. PIMC is a wholly-owned subsidiary of PNC Bank National
Association (PNC Bank). PIMC was organized in 1977 to perform advisory
services for investment companies. PNC Bank and its predecessors have been in
the business
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of managing the investments of fiduciary and other accounts in the
Philadelphia, Pennsylvania area since 1847. PNC Bank is a wholly-owned,
indirect subsidiary of PNC Bank Corp., a multi-bank holding company. PIMC
advises or manages approximately 45 investment company portfolios with total
assets of approximately $30.3 billion as of September 30, 1996. PIMC is paid
by First Tennessee a monthly sub-advisory fee at the annual rate of .08% of
aggregate average net assets of all of the First Funds Money Market
Portfolios advised by PIMC through $500 million, .06% of the next $500
million, and .05% on assets greater than $1 billion.
ADMINISTRATOR AND DISTRIBUTOR. ALPS, 370 17th Street, Suite 2700,
Denver, Colorado 80202, serves as the Administrator and Distributor for each
Portfolio. As Administrator, ALPS assists in each Portfolio's administration
and operation, including but not limited to, providing office space and
various legal and operational services in connection with the regulatory
requirements applicable to each Portfolio. ALPS is entitled to and receives
from each Portfolio a monthly fee at the annual rate of .075% of average net
assets.
First Tennessee serves as the Co-Administrator for each Portfolio. As
the Co-Administrator, First Tennessee assists in each Portfolio's operation,
including but not limited to, providing non-investment related research and
statistical data and various operational and administrative services. First
Tennessee is entitled to receive from each Portfolio a monthly fee at the
annual rate of .05% of average net assets. First Tennessee is voluntarily
waiving this fee to .025%; however, there is no guarantee that this waiver
will continue.
As the Distributor, ALPS sells shares of each Portfolio as agent on
behalf of the Trust at no additional cost to the Trust. First Tennessee and
its affiliates do not participate in and are not responsible for selling as
an agent on behalf of the Trust, underwriting or distributing Trust shares.
Consistent with applicable law, affiliates of First Tennessee may receive
commissions or asset-based fees.
TRANSFER AGENT AND CUSTODIAN. Chase Global Funds Services Company
(CGFSC), a division of Chase Manhattan Bank, N.A. provides transfer agent and
related services for each Portfolio. Chase Manhattan Bank, N.A. is custodian
of each Portfolio's assets.
PRICING AND ACCOUNTING. CGFSC calculates the NAV and dividends of each
Class and maintains the Portfolio and general accounting records.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING PLANS. The Trustees have
adopted a Distribution Plan on behalf of Class III of each Portfolio pursuant
to Rule 12b-1 (the Rule) under the 1940 Act. The NASD subjects asset-based
sales charges to its maximum sales charge rule. Fees paid pursuant to each
Portfolio's Distribution Plan will be limited by the restrictions imposed by
the NASD rule. Each Distribution Plan provides for payment of a fee to ALPS
at the annual rate of up to .45% of the average net assets of Class III;
however, the Trustees have limited such fees to .25% of Class III's average
net assets. All or a portion of these fees will in turn be paid to Investment
Professionals as compensation for selling shares of Class III and for
providing ongoing sales support services. The Trustees have also adopted
Shareholder Servicing Plans on behalf of Class II of each Portfolio under
which Investment Professionals are paid at the annual rate of up to .25% of
the average net assets of Class II for shareholder services and account
maintenance, including responding to shareholder inquiries, directing
shareholder communications, account balance maintenance, and dividend
posting. The Distribution Fees and the Shareholder Servicing Fees are
expenses of Class III and Class II, respectively, in addition to the
Management Fee, and Administration and Co-Administration Fees, and will
reduce the net income and total return of both Classes.
- --------------------------------------------------------------------------------
HOW ARE THE PORTFOLIOS ORGANIZED?
- --------------------------------------------------------------------------------
U.S. Treasury Money Market Portfolio, U.S. Government Money Market
Portfolio, Municipal Money Market Portfolio, and Cash Reserve Portfolio are
diversified portfolios of First Funds, an open-end management investment
company organized as a Massachusetts business trust by a Declaration of Trust
dated March 6, 1992, as amended and restated on September 4, 1992. Each
Portfolio consists of three separate Classes. The Trustees supervise the
Trust's activities and review its contractual arrangements with companies
that provide the Trust with services. The Trust is not required to hold
annual shareholder meetings, although special meetings may be called for a
specific Portfolio or Class with respect to issues affecting that Portfolio
or Class, or the Trust as a whole, for purposes such as electing or removing
Trustees, changing fundamental policies or approving investment advisory
agreements. Shareholders receive one vote for each share owned and fractional
votes for fractional shares owned. A Portfolio or Class votes separately with
respect to issues affecting only that Portfolio or Class.
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<PAGE>
Pursuant to the Declaration of Trust, the Trustees have the authority to
issue additional Classes of shares for each Portfolio of the Trust.
- --------------------------------------------------------------------------------
INVESTMENT INSTRUMENTS, TRANSACTIONS, STRATEGIES AND RISKS
- --------------------------------------------------------------------------------
The following paragraphs provide a brief description of the securities
in which each Portfolio may invest and the transactions each may make. Each
Portfolio is not limited by this discussion, however, and may purchase other
types of securities and may enter into other types of transactions if they
are consistent with each Portfolio's investment objective and policies.
ASSET-BACKED SECURITIES purchased by each Portfolio may include pools of
mortgages, loans, receivables or other assets. Payment of principal and
interest may be largely dependent upon the cash flows generated by the assets
backing the securities.
BANKERS' ACCEPTANCES purchased by Cash Reserve Portfolio are negotiable
obligations of a bank to pay a draft which has been drawn on it by a
customer. These obligations are backed by large banks and also usually are
backed by goods in international trade.
CERTIFICATES OF DEPOSIT purchased by Cash Reserve Portfolio are
negotiable certificates that represent a commercial bank's obligations to
repay funds deposited with it and earn rates of interest over given periods.
COMMERCIAL PAPER purchased by Cash Reserve Portfolio are short-term
obligations issued by banks, broker-dealers, corporations and other entities
for purposes such as financing their current operations.
CORPORATE OBLIGATIONS purchased by Municipal Money Market Portfolio and
Cash Reserve Portfolio are bonds and notes issued by corporations and other
business organizations to finance their credit needs.
DELAYED-DELIVERY TRANSACTIONS. Each Portfolio may buy and sell
obligations on a when-issued or delayed-delivery basis, with payment and
delivery taking place at a future date. The market value of obligations
purchased in this way may change before the delivery date, which could affect
the market value of a Portfolio's assets. Ordinarily, each Portfolio will not
earn interest on obligations until they are delivered.
DEMAND FEATURES AND STANDBY COMMITMENTS. A demand feature purchased by
Municipal Money Market Portfolio is a put that entitles the security holder
to repayment of the principal amount of the underlying security at any time
or at specified intervals not exceeding 397 days on no more than 30 days'
notice. A standby commitment is a put that entitles the security holder to
same-day settlement at amortized cost plus accrued interest.
ILLIQUID SECURITIES. Under the supervision of the Trustees, PIMC, under
the supervision of First Tennessee, determines the liquidity of the
Portfolios' investments. The absence of a trading market can make it
difficult to ascertain a market value for illiquid investments. Disposing of
illiquid investments or securities subject to legal restrictions may involve
time-consuming negotiation and legal expenses. It may be difficult or
impossible for the Portfolio to sell illiquid or restricted securities
promptly at an acceptable price. Each Portfolio may invest up to 15% of its
assets in illiquid investments.
LETTERS OF CREDIT. Issuers or financial intermediaries who provide
demand features or standby commitments often support their ability to buy
obligations on demand by obtaining letters of credit (LOCs) or other
guarantees from domestic or foreign banks. LOCs also may be used as credit
supports for municipal instruments purchased by Municipal Money Market
Portfolio. PIMC may rely upon its evaluation of a bank's credit in
determining whether to purchase an instrument supported by an LOC. In
evaluating a foreign bank's credit, PIMC, under the supervision of First
Tennessee, will consider whether adequate public information about the bank
is available and whether the bank may be subject to unfavorable political or
economic developments, currency controls, or other governmental restrictions
that might affect the bank's ability to honor its credit commitment.
MONEY MARKET refers to the marketplace where short-term, high grade debt
obligations are traded, including U.S. government obligations, commercial
paper, certificates of deposit, bankers' acceptances, time deposits and
short-term corporate obligations. Money market instruments may carry fixed
rates of return or have variable or floating interest rates.
MUNICIPAL LEASE OBLIGATIONS purchased by Municipal Money Market
Portfolio are issued by a state or local government or authority to acquire
land and a wide variety of equipment and facilities. These obligations
typically are not fully backed by the municipality's credit, and their
interest may become taxable if the lease is assigned. If funds are not
appro-
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priated for the following year's lease payments, the lease may terminate,
with the possibility of significant loss to the Portfolio. Certificates of
Participation in municipal lease obligations or installment sales contracts
entitle the holder to a proportionate interest in the lease-purchase payments
made.
MUNICIPAL SECURITIES purchased by Municipal Money Market Portfolio
include GENERAL OBLIGATION SECURITIES, which are backed by the full taxing
power of a municipality, and REVENUE SECURITIES, which are backed by the
revenues of a specific tax, project, or facility. INDUSTRIAL REVENUE BONDS
are a type of revenue bond backed by the credit and security of a private
issuer and may involve greater risk. PRIVATE ACTIVITY MUNICIPAL SECURITIES,
which may be subject to the federal AMT, include securities issued to finance
housing projects, student loans, and privately owned solid waste disposal and
water and sewage treatment facilities. TAX AND REVENUE ANTICIPATION NOTES are
issued by municipalities in expectation of future tax or other revenues, and
are payable from those specific taxes or revenues. BOND ANTICIPATION NOTES
normally provide interim financing in advance of an issue of bonds or notes,
the proceeds of which are used to repay the anticipation notes. TAX-EXEMPT
COMMERCIAL PAPER are promissory notes issued by municipalities to help
finance short-term capital or operating needs.
RESOURCE RECOVERY BONDS purchased by Municipal Money Market Portfolio
are a type of revenue bond issued to build facilities such as solid waste
incinerators or waste-to-energy plants. Typically, a private corporation will
be involved, at least during the construction phase, and the revenue stream
will be secured by fees or rents paid by municipalities for use of the
facilities. The viability of a resource recovery project, environmental
protection regulations, and project operator tax incentives may affect the
value and credit quality of resource recovery bonds
REPURCHASE AGREEMENTS are transactions by which a Portfolio buys a
security at one price and simultaneously agrees to sell it back at a higher
price. In the event of the bankruptcy of the other party to a repurchase
agreement, a Portfolio could experience delays in recovering its cash. To the
extent that, in the meantime, the value of the obligations purchased had
decreased, a Portfolio could experience a loss. In all cases, PIMC must find
the creditworthiness of the other party to the transaction satisfactory.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a
Portfolio temporarily transfers possession of a portfolio security to another
party, such as a bank or broker-dealer, in return for cash. At the same time,
each Portfolio agrees to repurchase the instrument at an agreed upon price
and time. Each Portfolio expects that it will engage in reverse repurchase
agreements for temporary purposes such as to fund redemptions, or with
respect to U.S. Treasury Money Market Portfolio, U.S. Government Money Market
Portfolio, and Cash Reserve Portfolio, when each is able to invest the cash
so acquired at a rate higher than the cost of the agreement, which would
increase income earned by these Portfolios. Reverse repurchase agreements may
increase the risk of fluctuation in the market value of a Portfolio's assets
or in each Portfolio's yield. Engaging in reverse repurchase agreements may
involve an element of leverage, and each Portfolio will not purchase a
security while borrowings (including reverse repurchase agreements)
representing more than 5% of its total assets are outstanding. Each Portfolio
may engage in reverse repurchase agreements only with those parties whose
creditworthiness has been reviewed and found satisfactory by PIMC consistent
with each Portfolio's objective and policies.
RESTRICTED SECURITIES. Municipal Money Market Portfolio and Cash
Reserve Portfolio may purchase securities which cannot be sold to the public
without registration under the Securities Act of 1933 (restricted
securities). Unless registered for sale, these securities can only be sold in
privately negotiated transactions or pursuant to an exemption from
registration. Provided that the security has a demand feature of seven days
or less, or a dealer or institutional trading market exists, these restricted
securities are not treated as illiquid securities for the purposes of the
Portfolios' investment limitations.
SECURITIES LENDING. Each Portfolio may lend securities to parties such
as broker-dealers or institutional investors. Securities lending allows each
Portfolio to retain ownership of the securities loaned and, at the same time,
to earn additional income. Since there may be delays in the recovery of
loaned securities, or even a loss of rights in collateral supplied should the
borrower fail financially, loans will be made only to parties deemed by PIMC
to be of good standing. Furthermore, they will only be made if, in PIMC's
judgment, the consideration to be earned from such loans would justify the
risk.
PIMC understands that it is the current view of the SEC Staff that a
Portfolio may engage in loan transactions only under the following
conditions: (1) the Portfolio must receive 100% collateral in the form of
cash or cash equivalents (e.g., U.S. Treasury bills or notes) from the
borrower; (2) the borrower must increase the collateral whenever the market
value of the securities loaned (determined on a daily basis) rises above the
value of the collateral; (3) after giving notice, the Portfolio must be able
to terminate the loan at any time; (4) the Portfolio must receive reasonable
interest on the loan or a flat fee from the borrower, as well as amounts
equivalent to any dividends, interest,or other distributions on the
securities loaned and to any increase in market value; (5) the Portfolio may
pay only reasonable custodian fees in con-
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nection with the loan; and (6) the Board of Trustees must be able to vote
proxies on the securities loaned, either by terminating the loan or by
entering into an alternative arrangement with the borrower. Cash received
through loan transactions may be invested in any security in which a
Portfolio is authorized to invest.
STRIPPED GOVERNMENT SECURITIES. Stripped securities are created by
separating the income and principal components of a debt instrument and
selling them separately. Each Portfolio may purchase U.S. Treasury STRIPS
(Separate Trading of Registered Interest and Principal of Securities) that
are created when the coupon payments and the principal payment are stripped
from an outstanding Treasury bond by the Federal Reserve Bank. Bonds issued
by the Resolution Funding Corporation (REFCORP) can also be stripped in this
fashion. REFCORP STRIPS are eligible investments for U.S. Government Money
Market Portfolio, Municipal Money Market Portfolio and Cash Reserve
Portfolio.
Cash Reserve Portfolio and Municipal Money Market Portfolio may purchase
privately stripped government securities, which are created when a dealer
deposits a Treasury security or federal agency security with a custodian for
safekeeping and then sells the coupon payments and principal payments that
will be generated by this security. Proprietary receipts, such as
Certificates of Accrual on Treasury Securities (CATS), Treasury Investment
Growth Receipts (TIGRs), and generic Treasury Receipts (TRs), are stripped
U.S. Treasury securities that are separated into their component parts
through trusts created by their broker sponsors. Bonds issued by the
Financing Corporation (FICO) can also be stripped in this fashion.
Because of the SEC's views on privately stripped government securities,
Cash Reserve Portfolio must evaluate them as it would non-government
securities pursuant to regulatory guidelines applicable to all money market
funds. Accordingly, Cash Reserve Portfolio currently intends to purchase only
those privately stripped government securities that have either received the
highest rating from two nationally recognized rating services (or one, if
only one has rated the security), or, if unrated, been judged to be of
equivalent quality by PIMC.
TIME DEPOSITS purchased by Cash Reserve Portfolio are non-negotiable
deposits in a banking institution earning a specified interest rate over a
given period of time.
U.S. GOVERNMENT OBLIGATIONS are debt obligations issued or guaranteed by
the U.S. Treasury or by an agency or instrumentality of the U.S. government.
Not all U.S. government obligations are backed by the full faith and credit
of the United States. For example, obligations issued by the Federal Farm
Credit Bank or by the Federal National Mortgage Association are supported by
the agency's right to borrow money from the U.S. Treasury under certain
circumstances. Obligations issued by the Federal Home Loan Bank are supported
only by the credit of the agency. There is no guarantee that the government
will support these types of obligations, and therefore they involve more risk
than other government obligations.
U.S. TREASURY OBLIGATIONS are obligations issued by the United States
and backed by its full faith and credit.
VARIABLE AND FLOATING RATE INSTRUMENTS for Municipal Money Market
Portfolio, including certain participation interests in municipal
obligations, have interest rate adjustment formulas that help to stabilize
their market values. Many variable or floating rate instruments also carry
demand features that permit the Portfolio to sell them at par value plus
accrued interest on short notice. When determining the maturity of a variable
or floating rate instrument, the Portfolio may look to the date the demand
feature can be exercised, or to the date the interest rate is readjusted,
rather than to the final maturity of the instrument.
VARIABLE AND FLOATING RATE Instruments for U.S. Government Money Market
Portfolio and Cash Reserve Portfolio, including notes purchased directly from
issuers, bear variable or floating interest rates and may carry rights that
permit holders to demand full payment from the issuers or certain financial
intermediaries. Floating rate securities have interest rates that change
whenever there is a change in a designated market-based interest rate, while
variable rate instruments provide for a specified periodic adjustment in the
interest rate. These formulas are designed to result in a market value for
the instrument that approximates its par value.
ZERO COUPON BONDS purchased by each Portfolio do not make regular
interest payments; instead they are sold at a deep discount from their face
value and are redeemed at face value when they mature. Because zero coupon
bonds do not pay current income, their prices can be very volatile when
interest rates change. In calculating its daily dividend, each Portfolio
takes into account as income a portion of the difference between a zero
coupon bond's purchase price and its face value.
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INVESTMENT ADVISER AND CO-ADMINISTRATOR
---------------------------------------
First Tennessee Bank National Association
Memphis, TN
SUB-ADVISER
-----------
PNC Institutional Management Corporation
Wilmington, DE
OFFICERS
--------
Richard C. Rantzow, President
Mark A. Pougnet, Treasurer
James V. Hyatt, Secretary
TRUSTEES
--------
Thomas M. Batchelor
John A. DeCell
L.R. Jalenak, Jr.
Larry W. Papasan
Richard C. Rantzow
GENERAL DISTRIBUTOR
-------------------
ALPS Mutual Funds Services, Inc.
Denver, CO
TRANSFER AND SHAREHOLDER SERVICING AGENT
----------------------------------------
Chase Global Funds Services Company
Boston, MA
CUSTODIAN
---------
Chase Manhattan Bank, N.A.
New York, NY
