<PAGE>
TENNESSEE TAX-FREE PORTFOLIO
The following supplement is provided to update and should be read in
conjunction with the information provided in the Prospectus dated October 25,
1995.
The following information and text shall be inserted in lieu of the sections
under "SUMMARY OF PORTFOLIO EXPENSES" on pages 3 and 4 of the prospectus.
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
(as a percentage of average net assets) None None None
ANNUAL PORTFOLIO OPERATING EXPENSES:
Management Fees* .10% .10% .10%
12b-1 Fees .00% .00% .50%
Shareholder Servicing* .00% .15% .15%
Other Expenses* .59% .72% .70%
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Total Portfolio Operating Expenses* .69% .97% 1.45%
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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
has voluntarily agreed to waive its investment advisory fee to .10% of
the Portfolio's average net assets, however, there is no guarantee that
the waiver will continue. The Portfolio incurs Other Expenses,
including Administrative and Co-Administrative Fees, which have been
estimated for the current year, 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. ALPS has
agreed to waive its full administration fee for the first six months of
the Portfolio's operation. Garland Capital Management (Garland), a
division of First Tennessee, 4990 Poplar Avenue, 3rd Floor, Memphis, TN
38117, 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 .50% for
each Class and 12b-1 fees would be .75% 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 .74% .98% .98%
Total Portfolio Operating Expenses 1.24% 1.63% 2.38%
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 to ALPS for services and expenses in connection with distribution.
Shareholder Servicing Fees are paid by Class II and III to securities
brokers or
<PAGE>
financial institution representatives (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 Tennessee Tax-Free Portfolio
assuming (1) 5% annual return, (2) redemption at the end of each time
period, (3) that operating expenses 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 $7 $47* $15
3 years $22 $67 $46
*Reflects imposition of the maximum sales charge at the beginning of
the period.
The following sentence shall be inserted in lieu of the third sentence
of the first paragraph under the section entitled "HOW ARE INVESTMENTS,
EXCHANGES AND REDEMPTIONS MADE? - Class II and III - Investment
Requirement" on page 8 of the prospectus:
"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."
The following sentence shall be inserted after the third sentence of
the section entitled "HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS
MADE? - Class II and Class III - Systematic Investment Program" on page
12 of the prospectus:
"If you are an employee of First Tennessee or any of its affiliates,
the minimum initial investment in each Portfolio is $50."
The following sentence shall be inserted in lieu of the fourth sentence
under the section entitled "WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO
PAY? - Distribution Plans and Shareholder Servicing Plans" on page 16 of the
prospectus:
"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 .15% of the Portfolio's average net assets, for
shareholder services and account maintenance..."
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[LOGO]
FIRST FUNDS 370 17TH STREET
SUITE 2700
TENNESSEE TAX-FREE PORTFOLIO DENVER, COLORADO 80202
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PROSPECTUS FOR CLASS I, II, AND III
October 25, 1995
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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 trust, fiduciary, advisory, agency, custodial or
similar accounts (Fiduciary Accounts). Class I shares may be purchased
on behalf of Fiduciary Accounts held by financial institutions,
business organizations, corporations, municipalities, non-profit
institutions, individuals and other entities (each a Fiduciary and
collectively referred to as Fiduciaries) serving in a fiduciary,
advisory or agency capacity, that meet the investment threshold for
this class of shares. Class II and III shares are designed for any
investor that seeks mutual fund investment convenience plus a low
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, 1995) for the
Portfolio has been filed with the Securities and Exchange Commission
(SEC) and is incorporated herein by reference. This Prospectus and
Statement of Additional Information are available free upon request
from ALPS Mutual Funds Services, Inc., (ALPS), the Portfolio's
Distributor. 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>
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TABLE OF CONTENTS
PAGE
Summary Of Portfolio Expenses . . . . . . . . . . . . . . . . . 3
What Is The Investment Objective Of the Portfolio?. . . . . . . 4
Is The Portfolio A Suitable Investment? . . . . . . . . . . . . 5
What Are The Portfolio's Investment Policies And Limitations? . 6
How Are Investments, Exchanges And Redemptions Made? . . . . . 7
How Is Performance Calculated? . . . . . . . . . . . . . . . . 13
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . 14
What Is The Effect Of Income Tax On This Investment?. . . . . . 14
What Advisory And Other Fees Do The Portfolios Pay? . . . . . . 15
How Is The Portfolio Organized? . . . . . . . . . . . . . . . . 16
Investment Instruments, Transactions, Strategies and Risks. . . 16
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<PAGE>
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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
anticipated operating expenses. 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% .50%
Shareholder Servicing* .00% .25% .25%
Other Expenses* .85% .88% .88%
----- ----- -----
Total Portfolio Operating Expenses* .85% 1.13% 1.63%
----- ----- -----
----- ----- -----
*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
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, which have been estimated for the current year,
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. ALPS has agreed to waive its full
administration fee for the first six months of the Portfolio's
operation. Garland Capital Management (Garland), a division of First
Tennessee, 4990 Poplar Avenue, 3rd Floor, Memphis, TN 38117, the
Co-Administrator, is entitled to .05% of the Portfolio's average net
assets for co-administration services. Garland has voluntarily agreed
to waive this fee for Class I, however, there is no guarantee that the
waiver will continue. Additionally, Garland has voluntarily agreed to
waive this fee for all Classes for the first six months of the
Portfolio's operation.
If the waivers were not in effect, Management Fees would be .50% for
each Class and 12b-1 fees would be .75% 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 1.04% 1.04% 1.04%
Total Portfolio Operating Expenses 1.54% 1.79% 2.54%
There is no guarantee that any waivers will continue at their stated
levels.
3
<PAGE>
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 or financial institution representatives (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 Tennessee Tax-Free Portfolio
assuming (1) 5% annual return, (2) redemption at the end of each time
period, (3) that operating expenses 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 $9 $49* $17
3 years $27 $72* $52
*Reflects imposition of maximum sales charge at the beginning of the
period.
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WHAT IS THE INVESTMENT OBJECTIVE OF THE PORTFOLIO?
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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 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.
4
<PAGE>
See "Investment Instruments, Transactions, Strategies And Risks" on
page 16 for a further discussion of the Portfolio's investments.
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IS THE PORTFOLIO A SUITABLE INVESTMENT?
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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 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. The
population increased 6.1%, from 4,976,000 in 1990 to 5,175,000 in 1994,
with the State ranked seventeenth in total population among states in
1994. The August 1995 seasonally adjusted unemployment rate was 5.1%,
as compared with an unemployment rate of 5.6% nationwide.
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. Operating surplus for the fiscal
year ended June 1995 was $10.9 million which brings the General Fund
balance to $4.45 billion.
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 14.
5
<PAGE>
Further information about the types of securities in which the
Portfolio may invest and the investment policies of the Portfolio in
general are set forth in the section "Investment Instruments,
Transactions, Strategies And Risks" on page 16 and in the Statement of
Additional Information.
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WHAT ARE THE PORTFOLIO'S INVESTMENT POLICIES AND LIMITATIONS?
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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 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
receipt of exemptive relief, the
6
<PAGE>
Portfolio may invest in securities underwritten by First Tennessee and may
engage in brokerage transactions with First Tennessee acting as principal.
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HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?
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CLASS I
- --------
WHO MAY INVEST?
Class I shares are designed exclusively for investment of monies held
in trust, fiduciary, advisory, agency, custodial or similar Fiduciary
Accounts. Class I shares may be purchased on behalf of Fiduciary
Accounts held by financial institutions, business organizations,
corporations, municipalities, non-profit institutions, individuals and
other Fiduciaries serving in a fiduciary, advisory or agency capacity
who can meet the investment minimum.
HOW IS A FIDUCIARY ACCOUNT ESTABLISHED?
An initial investment must be preceded by or made in conjunction with
the establishment of a Fiduciary Account with a Fiduciary.
Establishment of a Fiduciary Account may require that documents and
applications be completed and signed before the investment can be
implemented. The Fiduciary may require that certain documents be
provided prior to making a redemption from the Portfolio. Fiduciaries
may charge fees in addition to those described herein based on their
Fiduciary Account agreements. Fee schedules for Fiduciary Accounts are
available upon request from the Fiduciary and are detailed in the
agreements by which each client opens a Fiduciary Account.
HOW ARE INVESTMENTS MADE?
Each Fiduciary will transmit orders to the Transfer Agent, Chase Global
Funds Services Company (CGFSC). If an order is received by CGFSC prior
to 4:00 p.m. Eastern time on any Business Day and the funds are
received by CGFSC that day, the investment will begin accruing
dividends on the day following purchase. Fiduciaries 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. 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), a Fiduciary 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 Fiduciary is $100,000. Fiduciaries may satisfy the minimum
investment by aggregating their Fiduciary Accounts within the
Portfolio. Subsequent investments may be in any amount. If a
Fiduciary's Class I account falls below $50,000 due to redemption, the
Portfolio may close the account. A Fiduciary 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 net asset per share (NAV) on the day the account is
closed, and proceeds will be sent to the address of record.
Involuntary redemptions will be effected, if at all, at the last
calculated NAV.
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 a Fiduciary Account may be
converted to shares of another class upon distribution.
HOW ARE REDEMPTIONS MADE?
Fiduciaries 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.
Fiduciaries 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, proceeds of the redemption will be wired as
federal funds on the next Business Day to the bank account designated
with CGFSC. The Fiduciary 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.
7
<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 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 portfolio
securities are traded in other markets on days when 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 Fiduciary
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 Garland's opinion, they are of a size that would disrupt
management of the Portfolio.
In order to allow Garland to manage the Portfolio most effectively,
Fiduciaries 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 Fiduciary
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 a Fiduciary should verify the
accuracy of confirmation statements immediately after receipt. If a
Fiduciary 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 any investor who seeks 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 REQUIREMENT
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", 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, 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. Involuntary redemptions will
be effected, if at all, at the last calculated NAV.
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
8
<PAGE>
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.
PUBLIC OFFERING PRICE
Class III shares are bought without a load; that is, the offering price
for such shares will be their NAV. 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 Service Organizations which are financial
institutions which have entered into an agreement with ALPS, the Portfolio's
Distributor. You may calculate your sales load as follows:
<TABLE>
<CAPTION>
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, will provide additional non-cash promotional incentives
to dealers in the form of attendance at a sales seminar at a resort. These
incentives will be limited to certain dealers 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 your First Funds sponsored IRA upon rollover (and subsequent
contributions) from another IRA, 401 Plan or 403 Plan if the trustee or
custodian for such other IRA or Plan is a direct or indirect subsidiary or
franchisee bank of First Tennessee; (b) through a discount broker that
imposes a transaction charge with respect to such purchases; (c) by
registered representatives, directors, advisory directors, officers and
employees (and their immediate families) of banks or broker/dealer
organizations affiliated with First Tennessee that have agreements to sell
First Funds; (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
Code; (f) by financial institutions (including bank trust departments or
divisions) investing on their own behalf or on behalf of their clients; (g)
in accounts as to which a bank, registered investment adviser, or
broker/dealer charges an asset management fee; (h) with redemption proceeds
from other mutual fund complexes on which the investor has paid a front-end
sales charge within the past sixty (60) days upon presentation of purchase
verification information; or (i) 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?" 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 load, if you
obtained such no-load 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
9
<PAGE>
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 3.00% 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 fiduciary 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.
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 7:00 p.m. Central Time (9:00 a.m. to 8:00 p.m. Eastern Time),
Monday through Friday.
Investments may be made in several ways:
10
<PAGE>
BY MAIL: Make your check payable to First Funds: Tennessee Tax-Free
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 accrue
dividends through the day of 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 New York
11
<PAGE>
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 that portfolio securities are traded in other
markets on days when 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 earn dividends declared, if any, through the date of 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 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. You
will receive a written confirmation of each automatic transfer from
your bank account to your Portfolio account, and a debit entry will
appear on your bank account statement. 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
transaction. 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.
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 New York
Stock Exchange (NYSE) and the Federal Reserve Bank of New York (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 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.
DISTRIBUTION OPTIONS: The Portfolio earns interest 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 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:
12
<PAGE>
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.
Fiduciaries may execute exchange transactions by calling CGFSC at
1-800-442-1941 (option 2) prior to 4:00 p.m. 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
maintained.
Each exchange may produce a gain or loss for tax purposes. In order to
protect the Portfolio's performance and its shareholders, Garland
discourages frequent exchange activity 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
Garland'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, if Class I, the
Fiduciary, 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 Fiduciary Account
may be converted for shares of another class.
STATEMENTS AND REPORTS
You or, if Class I, the Fiduciary, will receive a monthly statement and
a confirmation after every transaction that affects the share balance
or 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 Fiduciary, 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 Fiduciary.
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 interest income it
earned from its portfolio of investments for a 30-day period (net of
expenses), 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.
13
<PAGE>
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. A
broker-dealer is a securities firm or bank that 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.
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 estimated portfolio turnover rate is
not expected to exceed 50%.
- -----------------------------------------------------------------------------
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 Fiduciary, 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 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 Fiduciary 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.
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<PAGE>
"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. Fiduciaries should consult their tax
advisers for details and up-to-date information on the tax laws in
their state to determine whether the Portfolio is suitable given a
shareholder's 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.
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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 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 $13.2 billion in assets
under administration (including nondiscretionary accounts) and $4.7
billion in assets under management as of June 30, 1995, 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 and receives from each Portfolio a monthly fee at the
annual rate of .15% of average net assets. ALPS has agreed to waive its
full administrative fee for the first six months of the Portfolio's
operation.
Garland, 4990 Poplar Avenue, 3rd Floor, Memphis, Tennessee, 38117,
serves as the Co-Administrator for each Portfolio. As the
Co-Administrator, Garland 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. Garland is entitled to receive from each Portfolio a monthly
fee at the annual rate of .05% of average net assets. Garland is
voluntarily waiving this fee for Class I, however, there is no
guarantee that this waiver will continue. Additionally, Garland has
voluntarily agreed to waive its full co-administrative fee for all
Classes for the first six months of the Portfolio's operation.
As the Distributor, ALPS sells shares of each Portfolio as agent on
behalf of the Trust at no additional cost to the Trust. Garland 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 Garland 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.
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<PAGE>
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. Each
Distribution Plan provides for payment of a fee to ALPS at the annual
rate of .75% of the Portfolio'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 III of the Portfolio, under
which Investment Professionals are paid at the annual rate of .25% of
the Portfolio's 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 Administration Fee and will reduce
both class' net income and total return.
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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 seventeen
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.
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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 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.
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.
16
<PAGE>
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.
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 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
17
<PAGE>
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.
18
<PAGE>
INVESTMENT ADVISER
------------------
First Tennessee Bank National Association
OFFICERS
--------
Richard C. Rantzow, President
Mark A. Pougnet, Treasurer & 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>
FIRST FUNDS
370 17TH STREET, SUITE 2700
DENVER, COLORADO 80202
TENNESSEE TAX-FREE PORTFOLIO
SUPPLEMENT DATED JANUARY 3, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION FOR CLASS I, CLASS II, AND CLASS III
DATED OCTOBER 25, 1995
THE FOLLOWING INFORMATION SHALL BE INSERTED UNDER THE SECTION TITLED
"ADDITIONAL PURCHASE AND REDEMPTION INFORMATION - ADDITIONAL CLASS II AND
CLASS III INFORMATION - SYSTEMATIC INVESTING PROGRAM", FOLLOWING THE FIFTH
SENTENCE, ON PAGE 12.
"FOR EMPLOYEES OF FIRST TENNESSEE BANK NATIONAL ASSOCIATION OR ANY OF
ITS AFFILIATES, THE MINIMUM INITIAL INVESTMENT REQUIREMENT IS $50."
THE FOLLOWING INFORMATION SHALL BE INSERTED UNDER THE SECTION TITLED
"TRUSTEES AND OFFICERS", PARAGRAPH 8, FOLLOWING THE FIRST SENTENCE, ON PAGE 14.
"THE TRUSTEES WERE COMPENSATED, IN AGGREGATE, $32,500 FOR THEIR SERVICES
PROVIDED DURING THE TRUST'S FISCAL YEAR ENDED JUNE 30, 1995."
THE FOLLOWING INFORMATION SHALL BE INSERTED UNDER THE SECTION TITLED
"DESCRIPTION OF THE TRUST - CLASSES", FOLLOWING THE LAST SENTENCE, ON PAGE 18.
"PURSUANT TO A VOTE BY THE BOARD OF TRUSTEES, THE TRUST HAS ADOPTED
RULE 18F-3 UNDER THE ACT AND HAS ISSUED MULTIPLE CLASSES OF SHARES WITH
RESPECT TO EACH OF ITS PORTFOLIOS. ACCORDINGLY, THE RIGHTS, PRIVILEGES
AND OBLIGATIONS OF EACH SUCH CLASS WILL BE DETERMINED IN ACCORDANCE WITH
SUCH RULE.
THE FOLLOWING INFORMATION SHALL BE INSERTED IN THE FOURTH PARAGRAPH UNDER THE
SECTION TITLED "ADMINISTRATION AGREEMENT AND OTHER CONTRACTS - ADMINISTRATOR
AND DISTRIBUTOR", IN LIEU OF THE INFORMATION IN THE SECOND SENTENCE, ON
PAGE 15.
"CLASS III IS OBLIGATED TO PAY ALPS MONTHLY A 12b-1 FEE AT THE ANNUAL
RATE OF .75% OF AVERAGE NET ASSETS, ALL OR A PORTION OF WHICH MAY BE
PAID OUT TO BROKER-DEALERS OR OTHERS INVOLVED IN THE DISTRIBUTION OF
CLASS III SHARES. CLASS II AND III PAY SHAREHOLDER SERVICING FEES TO
INVESTMENT PROFESSIONALS AT AN ANNUAL RATE OF .15% OF AVERAGE NET
ASSETS AS MORE FULLY DESCRIBED UNDER THE SECTION "ADMINISTRATION
AGREEMENT AND OTHER CONTRACTS - SHAREHOLDER SERVICES PLANS" ON
PAGE 16 BELOW."
THE FOLLOWING INFORMATION SHALL BE INSERTED UNDER THE SECTION TITLED
"ADMINISTRATION AGREEMENT AND OTHER CONTRACTS - SHAREHOLDER SERVICES PLANS",
FOLLOWING THE SECOND SENTENCE, ON PAGE 16.
"FOR THESE SERVICES THE PARTICIPATING INVESTMENT PROFESSIONALS ARE PAID
A SERVICE FEE AT THE ANNUAL RATE OF UP TO AND INCLUDING .15% OF AVERAGE
NET ASSETS OF CLASS II AND CLASS III."
<PAGE>
FIRST FUNDS
TENNESSEE TAX-FREE PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION FOR CLASS I, CLASS II, AND CLASS III
OCTOBER 25, 1995
This Statement is not a prospectus but should be read in conjunction with the
current Prospectus for each class of Tennessee Tax-Free Portfolio (dated
October 25, 1995). Please retain this Statement for future reference. To
obtain additional free copies of this Statement, the Annual Report, or of
the Prospectus, please call the Distributor at 1-800-442-1941, Option 1 or
write to the Distributor at 370 17th Street, Suite 2700, Denver CO 80202.
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
Investment Restrictions and Limitations 2
Investment Instruments 3
Special Considerations Affecting Tennessee 7
Portfolio Transactions 7
Valuation of Portfolio Securities 8
Performance 9
Additional Purchase and Redemption Information 12
Distributions and Taxes 12
Trustees and Officers 14
Investment Advisory Agreement 14
Administration Agreement and Other Contracts 15
Description of the Trust 17
Appendix 18
</TABLE>
INVESTMENT ADVISER
First Tennessee Bank National Association (First Tennessee or the
Investment Adviser)
ADMINISTRATOR AND DISTRIBUTOR
ALPS Mutual Funds Services, Inc. (ALPS, the Administrator and Distributor)
CO-ADMINISTRATOR
Garland Capital Management, a division of First Tennessee Bank National
Association (Garland or the Co-Administrator)
TRANSFER AGENT & CUSTODIAN
Chase Global Funds Services Company (CGFSC or the Transfer Agent)
1
<PAGE>
INVESTMENT RESTRICTIONS AND LIMITATIONS
The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Portfolio's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of the Portfolio's acquisition of such
security or other asset. Accordingly, any subsequent change in values, net
assets, or other circumstances will not be considered when determining
whether the investment complies with the Portfolio's investment policies and
limitations.
Fundamental policies and investment limitations cannot be changed without
approval by a "majority of the outstanding voting securities" (as defined in
the Investment Company Act of 1940) of the Portfolio. However, except for
the fundamental investment limitations set forth below, the investment
policies and limitations described in this Statement of Additional
Information are not fundamental and may be changed without shareholder
approval.
INVESTMENT LIMITATIONS OF TENNESSEE TAX-FREE PORTFOLIO
THE FOLLOWING ARE TENNESSEE TAX-FREE PORTFOLIO'S FUNDAMENTAL LIMITATIONS SET
FORTH IN THEIR ENTIRETY. THE PORTFOLIO MAY NOT:
(1) issue senior securities, except as permitted under the Investment Company
Act of 1940;
(2) borrow money, except that the Portfolio may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not
exceeding 33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that come to exceed
this amount will be reduced within three days (not including Sundays and
holidays) to the extent necessary to comply with the 33 1/3% limitation;
(3) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities;
(4) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities, or tax-exempt obligations issued or guaranteed by a U.S.
territory or possession or the state of Tennessee or any county,
municipality, or political subdivision of any of the foregoing, including
any agency, board authority, or commission of the foregoing) if, as a
result, 25% or more of the Portfolio's total assets would be invested
in securities of companies whose principal business activities are in
the same industry;
(5) purchase or sell real estate, unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate
or securities of companies engaged in the real estate business);
(6) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent
the Portfolio from purchasing or selling options and futures contracts or
from investing in securities or other instruments backed by physical
commodities); or
(7) lend any security or make any other loan if, as a result, more than 33 1/3%
of its total assets would be lent to other parties, but this limit does
not apply to purchases of debt securities or to repurchase agreements.
(8) The Portfolio may, notwithstanding any other fundamental investment policy
or limitation, invest all of its assets in the securities of a single
open-end management investment company with substantially the same
fundamental investment objectives, policies, and limitations as
the Portfolio.
2
<PAGE>
THE FOLLOWING LIMITATIONS OF TENNESSEE TAX-FREE PORTFOLIO ARE NOT FUNDAMENTAL
AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL.
(i) To meet federal tax requirements for qualification as a "regulated
investment company," the Portfolio limits its investments so that at
the close of each quarter of its taxable year: (a) with regard to at
least 50% of total assets, no more than 5% of total assets are invested
in the securities of a single issuer, and (b) no more than 25% of total
assets are invested in the securities of a single issuer. Limitations
(a) and (b) do not apply to "government securities" as defined for
federal tax purposes.
(ii) The Portfolio does not currently intend during the coming year to sell
securities short, unless it owns or has the right to obtain securities
equivalent in kind and amount to the securities sold short and provided
that transactions in futures contracts and options are not deemed to
constitute selling short.
(iii) The Portfolio does not currently intend during the coming year to
purchase securities on margin, except that the Portfolio may obtain such
short-term credits as are necessary for the clearance of transactions,
and provided that margin payments in connection with futures contracts
and options on futures contracts shall not constitute purchasing
securities on margin.
(iv) The Portfolio may borrow money only (a) from a bank, or (b) by engaging
in reverse repurchase agreements with any party (reverse repurchase
agreements are treated as borrowings for purposes of fundamental
investment limitation 2). The Portfolio will not purchase any security
while borrowings representing more than 5% of its total assets are
outstanding.
(v) The Portfolio does not currently intend during the coming year to
purchase any security, if, as a result, more than 15% of its net assets
would be invested in securities that are deemed to be illiquid because
they are subject to legal or contractual restrictions on resale or
because they cannot be sold or disposed of in the ordinary course of
business at approximately the prices at which they are valued.
(vi) The Portfolio does not currently intend during the coming year to engage
in repurchase agreements or make loans, but this limitation does not
apply to purchases of debt securities.
(vii) The Portfolio does not currently intend during the coming year to
(a) purchase securities of other investment companies, except in the
open market where no commission except the ordinary broker's commission
is paid, or (b) purchase or retain securities issued by other open-end
investment companies. Limitations (a) and (b) do not apply to
securities received as dividends, through offers of exchange, or as
a result of a reorganization, consolidation, or merger.
INVESTMENT INSTRUMENTS
DELAYED DELIVERY TRANSACTIONS. The Portfolio may buy and sell securities on
a delayed delivery or when-issued basis. These transactions involve a
commitment by the Portfolio to purchase or sell specific securities at a
predetermined price and/or yield, with payment and delivery taking place
after the customary settlement period for that type of security (and more
than seven days in the future). Typically, no interest accrues to the
purchaser until the security is delivered. The Portfolio may receive fees
for entering into delayed delivery transactions.
When purchasing securities on a delayed delivery basis, the Portfolio assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. Because the Portfolio is not required to pay for securities
until the delivery date, these risks are in addition to the risks associated
with the Portfolio's other investments. If the Portfolio remains substantially
fully invested at a time when delayed delivery purchases are outstanding, the
delayed delivery purchases may result in a form of leverage. When delayed
delivery purchases are outstanding, the Portfolio will set aside appropriate
liquid assets in a segregated custodial account to cover its purchase
obligations. When the Portfolio
3
<PAGE>
has sold a security on a delayed delivery basis, the Portfolio does not
participate in further gains or losses with respect to the security. If the
other party to a delayed delivery transaction fails to deliver or pay for the
securities, the Portfolio could miss a favorable price or yield opportunity,
or could suffer a loss.
The Portfolio may renegotiate delayed delivery transactions after they are
entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.
FEDERALLY-TAXABLE OBLIGATIONS. Tennessee Tax-Free Portfolio does not intend
to invest in securities whose interest is federally taxable; however, from
time to time, the Portfolio may invest a portion of its assets on a temporary
basis in fixed-income obligations whose interest is subject to federal income
tax. As an operating policy, the Portfolio intends to invest its assets to
achieve as fully as possible tax exempt income for both Tennessee state and
federal purposes. For example, the Portfolio may invest in obligations whose
interest is federally taxable pending the investment or reinvestment in
municipal securities of proceeds from the sale of its shares or sales of
portfolio securities.
Should the Portfolio invest in taxable obligations, it would purchase
securities which in the judgment of First Tennessee are of high quality.
These would include obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities, obligations of domestic banks, and
repurchase agreements. The Portfolio's standards for high-quality taxable
obligations are essentially the same as those described by Moody's Investors
Service, Inc. (Moody's) in rating corporate obligations within its two
highest ratings of Aaa and Aa, and those described by Standard and Poor's
Corporation (S&P) in rating corporate obligations within its two highest
ratings of AAA and AA.
Proposals to restrict or eliminate the federal income tax exemption for
interest on municipal obligations are introduced before Congress from time to
time. Proposals also may be introduced before the Tennessee legislature that
would affect the state tax treatment of the Portfolio's distributions. If
such proposals were enacted, the availability of municipal obligations and
the value of the Portfolio's holdings would be affected and the Board of
Trustees (the Trustees) would reevaluate the Portfolio's investment objective
and policies.
Tennessee Tax-Free Portfolio anticipates being as fully invested as
practicable in municipal securities; however, there may be occasions when as
a result of maturities of portfolio securities, or sales of Portfolio shares,
or in order to meet redemption requests, the Portfolio may hold cash that is
not earning income. In addition, there may be occasions when, in order to
raise cash to meet redemptions, the Portfolio may be required to sell
securities at a loss.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in
the ordinary course of business at approximately the prices at which they are
valued. Under the supervision of the Trustees, First Tennessee determines
the liquidity of Tennessee Tax-Free Portfolio's investments and, through
reports from First Tennessee, the Trustees monitor investments in illiquid
instruments. In determining the liquidity of the Portfolio's investments,
First Tennessee may consider various factors including (1) the frequency of
trades and quotations, (2) the number of dealers and prospective purchasers
in the marketplace, (3) dealer undertakings to make a market, (4) the nature
of the security (including any demand or tender features) and (5) the nature
of the marketplace for trades (including the ability to assign or offset the
Portfolio's rights and obligations relating to the investment). Investments
currently considered by the Portfolio to be illiquid include repurchase
agreements not entitling the holder to payment of principal and interest
within seven days, and some restricted securities determined by First
Tennessee to be illiquid. In the absence of market quotations, illiquid
investments are valued at fair value as determined in good faith by the
Trustees. If through a change in values, net assets or other circumstances,
the Portfolio were in a position where more than 15% of its net assets were
invested in illiquid securities, the Trustees would seek to take appropriate
steps to protect liquidity.
MUNICIPAL LEASE OBLIGATIONS. The Portfolio may invest a portion of its
assets in municipal leases and participation interests therein. These
obligations, which may take the form of a lease, an installment purchase, or
a conditional sale contract, are issued by state and local governments and
authorities to acquire land and a wide variety of equipment and facilities.
Generally, the Portfolio will not hold such obligations directly as a lessor
of the property, but will purchase a participation interest in a municipal
obligation from a bank or other third party. A participation interest gives a
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<PAGE>
Portfolio a specified, undivided interest in the obligation in proportion to
its purchased interest in the total amount of the obligation.
Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set
forth requirements that states or municipalities must meet to incur debt.
These may include voter referenda, interest rate limits, or public sale
requirements. Leases, installment purchase, or conditional sale contracts
(which normally provide for title to the leased asset to pass to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting their constitutional and
statutory requirements for the issuance of debt. Many leases and contracts
include "non-appropriation clauses" providing that the governmental issuer
has no obligation to make future payments under the lease or contract unless
money is appropriated for such purpose by the appropriate legislative body on
a yearly or other periodic basis. Non-appropriation clauses free the issuer
from debt issuance limitations.
REFUNDING CONTRACTS. Tennessee Tax-Free Portfolio generally will not be
obligated to pay the full purchase price if it fails to perform under a
refunding contract. Instead, refunding contracts generally provide for
payment of liquidated damages to the issuer (currently 15 - 20% of the
purchase price). The Portfolio may secure its obligations under a refunding
contract by depositing collateral or a letter of credit equal to the
liquidated damages provisions of the refunding contract. When required by
Securities and Exchange Commission (SEC) guidelines, the Portfolio will place
liquid assets in a segregated custodial account equal in amount to its
obligations under refunding contracts.
REPURCHASE AGREEMENTS are transactions in which the Portfolio purchases a
security and simultaneously commits to resell that security at an agreed upon
price and date within a number of days from the date of purchase. The resale
price reflects the purchase price plus an agreed upon market rate of interest
which is unrelated to the coupon rate or maturity of the purchased security.
A repurchase agreement involves the obligation of the seller to pay the
agreed upon price. This obligation is in effect secured by the underlying
security having a value at least equal to the amount of the agreed upon
resale price. The Portfolio may enter into a repurchase agreement with
respect to any security in which it is authorized to invest. While it
presently does not appear possible to eliminate all risks from the
transactions (particularly the possibility of a decline in the market value
of the underlying securities, as well as delay and costs to the Portfolio in
connection with bankruptcy proceedings), it is the policy of the Portfolio to
limit repurchase agreements to those parties whose creditworthiness has been
reviewed and found satisfactory by First Tennessee.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, the
Portfolio sells a portfolio instrument to another party, such as a bank or
broker-dealer, in return for cash and agrees to repurchase the instrument at
a particular price and time. While a reverse repurchase agreement is
outstanding, the Portfolio will maintain appropriate high grade liquid assets
in a segregated custodial account to cover its obligation under the
agreement. The Portfolio will enter into reverse repurchase agreements only
with parties whose creditworthiness has been found satisfactory by First
Tennessee. As a result, such transactions may increase fluctuations in the
market values of the Portfolio's assets and may be viewed as a form of
leverage.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is
required, Tennessee Tax-Free Portfolio may be obligated to pay all or part of
the registration expense and a considerable period may elapse between the
time each decides to seek registration and the time the Portfolio may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the
Portfolio might obtain a less favorable price than prevailed when it decided
to seek registration of the security.
STANDBY COMMITMENTS are puts that entitle holders to same-day settlement at
an exercise price equal to the amortized cost of the underlying security plus
accrued interest, if any, at the time of exercise. Tennessee Tax-Free
Portfolio may acquire standby commitments to enhance the liquidity of portfolio
securities, but only when the issuers of the commitments present minimal risk
of default.
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<PAGE>
Ordinarily, the Portfolio will not transfer a standby commitment to a third
party, although it could sell the underlying municipal security to a third
party at any time. The Portfolio may purchase standby commitments separate
from or in conjunction with the purchase of securities subject to such
commitments. In the latter case, the Portfolio would pay a higher price for
the securities acquired, thus reducing their yield to maturity.
Standby commitments are subject to certain risks, including the ability of
issuers to pay for securities at the time the commitments are exercised; the
fact that standby commitments are not marketable by the Portfolio; and that
the maturities of the underlying securities may be different from those of
the commitments.
TENDER OPTION BONDS are created by coupling an intermediate or long-term
fixed-rate tax-exempt bond (generally held pursuant to a custodial
arrangement) with a tender agreement that gives the holder the option to
tender the bond at its face value. As consideration for providing the tender
option, the sponsor (usually a bank, broker-dealer, or other financial
institution) receives periodic fees equal to the difference between the
bond's fixed coupon rate and the rate (determined by a remarketing or similar
agent) that would cause the bond, coupled with the tender option, to trade at
par on the date of such determination. After payment of the tender option
fee, Tennessee Tax-Free Portfolio effectively holds a demand obligation that
bears interest at the prevailing short-term tax-exempt rate. In selecting
tender option bonds for the Portfolio, First Tennessee will consider the
creditworthiness of the issuer of the underlying bond, the custodian, and the
third party provider of the tender option. In certain instances, a sponsor
may terminate a tender option if, for example, the issuer of the underlying
bond defaults on interest payments.
VARIABLE AND FLOATING RATE DEMAND OBLIGATIONS (VRDOs/FRDOs) are obligations
that bear variable or floating interest rates and carry rights that permit
holders to demand payment of the unpaid principal balance plus accrued
interest from the issuers or certain financial intermediaries. Floating rate
instruments have interest rates that change whenever there is a change in a
designated base rate while variable rate obligations provide for a specified
periodic adjustment in the interest rate. These formulas are designed to
result in a market value for the VRDO or FRDO that approximates its par value.
Tennessee Tax-Free Portfolio may invest in fixed-rate bonds that are subject
to third party puts and in participation interests in such bonds held by a
bank in trust or otherwise. These bonds and participation interests have
tender options or demand features that permit the Portfolio to tender (or
put) their bonds to an institution at periodic intervals and to receive the
principal amount thereof. The Portfolio consider variable rate instruments
structured in this way (Participating VRDOs) to be essentially equivalent to
other VRDOs they purchase.
ZERO COUPON BONDS 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. 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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SPECIAL CONSIDERATIONS AFFECTING TENNESSEE
TENNESSEE OBLIGATIONS. The following information as to certain Tennessee
considerations is given to investors in view of the Portfolio's policy of
concentrating its investments in Tennessee issuers. Such information is
derived from sources that are generally available to investors and is
believed to be accurate. Such information constitutes only a brief summary,
does not purport to be a complete description and is based on information
from official statements relating to securities offerings of Tennessee
issuers. Neither the Trust or the Portfolio has independently verified this
information.
In 1978, the voters of the State of Tennessee approved an amendment to the
State Constitution requiring that (1) the total expenditures of the State for
any fiscal year shall not exceed the State's revenues and reserves, including
the proceeds of debt obligations issued to finance capital expenditures and
(2) in no year shall the rate of growth of appropriations from State tax
revenues exceed the estimated rate of growth of the State's economy. In the
past the Governor and the General Assembly have had to restrict expenditures
to comply with the State Constitution.
The financial operations of the State have been negatively impacted by the
recent national economic downturn. The State was forced to partially drain
down its General Fund balance of support operations. The General Fund
balance was reduced to $7.3 million in 1991; however, operating surpluses for
1992 have built up the balance to $150.1 million for 1993.
Several new programs could have a negative impact on the financial operations
of the State. A half percent increase in the sales tax rate, imposed in
fiscal 1993, was dedicated to a new education program. This increase has
since been made permanent. Tennessee will provide health care to the entire
Medicaid population as well as the uninsured population in the State. A
service tax that was implemented to help fund this program was repealed in
connection with the implementation of the expanded health care program.
The Tennessee economy is largely based on manufacturing and services, which
accounted for approximately 47% of the gross state product in 1989. The
location of General Motors' Saturn project in Tennessee is believed to
demonstrate the continuing viability of manufacturing in the State. Other
important segments of the State economy include the wholesale and retail
trade, transportation, and the government sector. The State unemployment
rate for March 1994 declined to 5.3% from 5.8% for March 1993. The national
average was 6.5% for March 1994. There can be no assurance that Tennessee's
relatively favorable economic performance will continue.
As of the date of this Statement of Additional Information, general
obligations of the State of Tennessee are rated "AA+," "Aaa" and "AAA" by
S&P, Moody's and Fitch. 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.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of securities are placed on behalf of the
Portfolio by First Tennessee pursuant to authority contained in the
Portfolio's Investment Advisory Agreement. First Tennessee is also
responsible for the placement of transaction orders for other investment
companies and accounts for which it or its affiliates act as investment
advisor. In selecting broker-dealers, subject to applicable limitations of
the federal securities laws, First Tennessee considers various relevant
factors, including, but not limited to, the broker's execution capability;
the broker's perceived financial stability; the broker's responsiveness to
the First Tennessee's transaction requests; and the broker's clearance and
settlement capability. Commissions for foreign investments traded on foreign
exchanges will generally be higher than for U.S. investments and may not be
subject to negotiation.
The Portfolio may execute portfolio transactions with broker-dealers who
provide research and execution services to the Portfolio or other accounts
over which First Tennessee or its affiliates exercise investment discretion.
Such services may include may include research-related computer hardware and
software; furnishing analyses and reports concerning issuers, industries,
and economic factors and trends.
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The receipt of research from broker-dealers that execute transactions on
behalf of the Portfolio may be useful to First Tennessee in rendering
investment management services to the Portfolio and/or its other clients, and
conversely, such information provided by broker-dealers who have executed
transaction orders on behalf of other clients may be useful to First
Tennessee in carrying out its obligations to the Portfolio. The receipt of
such research has not reduced First Tennessee' normal independent research
activities; however, it enables First Tennessee to avoid the additional
expenses that could be incurred if it tried to develop comparable information
through its own efforts.
Subject to applicable limitations of the federal securities laws,
broker-dealers may receive commissions for agency transactions that are
higher than the commission of another broker-dealer who might have charged
for their research and execution services. In order to cause the Portfolio
to pay such higher commissions, First Tennessee must determine in good faith
that such commissions are reasonable in relation to the value of the
brokerage and research services provided by such executing broker-dealers
viewed in terms of a particular transaction or First Tennessee's overall
responsibilities to the Portfolio and its other clients. In reaching this
determination, First Tennessee will not attempt to place a specific dollar
value on the brokerage and research services provided or to determine what
portion of the compensation should be related to those services.
First Tennessee is authorized to use research services provided by and to
place portfolio transactions to the extent permitted by law, with brokerage
firms that have provided assistance in the distribution of shares of the
Portfolio.
The Trustees periodically review First Tennessee's performance of its
responsibilities in connection with the placement of portfolio transactions
on behalf of the Portfolio and review the commissions paid by the Portfolio
over representative periods of time to determine if they are reasonable in
relation to the benefits to the Portfolio.
From time to time the Trustees will review whether the recapture for the
benefit of the Portfolio of some portion of the brokerage commissions or
similar fees paid by the Portfolio on portfolio transactions is legally
permissible and advisable. The Portfolio seeks to recapture soliciting
broker-dealer fees on the tender of portfolio securities, but at present no
other recapture arrangements are in effect. The Trustees intend to continue
to review whether recapture opportunities are available and are legally
permissible and, if so, to determine, in the exercise of their business
judgment, whether it would be advisable for the Portfolio to seek such
recapture.
When two or more Portfolios are simultaneously engaged in the purchase or
sale of the same security, the prices and amounts are allocated in accordance
with a formula considered by the Trustees and First Tennessee involved to be
equitable to each Portfolio. In some cases this system could have a
detrimental effect on the price or value of the security as far as the
Portfolio is concerned. In other cases, however, the ability of the
Portfolio to participate in volume transactions will produce better
executions for the Portfolio. It is the current opinion of the Trustees that
the desirability of retaining First Tennessee as investment adviser to the
Portfolio outweighs any disadvantages that may be said to exist from exposure
to simultaneous transactions.
VALUATION OF PORTFOLIO SECURITIES
Valuations of securities furnished by the pricing service employed by the
Portfolio are based upon a computerized matrix system and/or appraisals by
the independent pricing service, in each case in reliance upon information
concerning market transactions and quotations from recognized securities
dealers. The methods used by the pricing service and the quality of
valuations so established are reviewed by officers of the Portfolio and the
Portfolio's pricing agent under general supervision of the Trustees.
Use of pricing services has been approved by the Board of Trustees.
Securities and other assets for which there is no readily available market
are valued in good faith by a committee appointed by the Board of Trustees.
The procedures set forth above need not be used to determine the value of the
securities owned by the fund if, in the opinion of a committee appointed by
the Board of Trustees, some other method (e.g., closing over-the-counter- bid
prices in the case of debt instruments traded on an exchange) would more
accurately reflect the fair market value of such securities.
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PERFORMANCE
For each class of the Portfolio, yields used in advertising are computed by
dividing interest income for a given 30-day or one-month period, net of
expenses, by the average number of shares entitled to receive dividends
during the period, dividing this figure by the net asset value per share
(NAV) at the end of the period and annualizing the result (assuming
compounding of income) in order to arrive at an annual percentage rate.
Income is calculated for purposes of yield quotations in accordance with
standardized methods applicable to all bond funds. In general, interest
income is reduced with respect to bonds trading at a premium over their par
value by subtracting a portion of the premium from income on a daily basis,
and is increased with respect to bonds trading at a discount by adding a
portion of the discount to daily income. Capital gains and losses generally
are excluded from the calculation.
Income calculated for the purposes of determining yields differs from income
as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding of income assumed in
yield calculations, yield may not equal its distribution rate, the income
paid to an account, or income reported in financial statements.
Yield information may be useful in reviewing performance and in providing a
basis for comparison with other investment alternatives. Yield will
fluctuate, unlike investments that pay a fixed interest rate over a stated
period of time. Investors should give consideration to the quality and
maturity of portfolio securities of the respective investment companies when
comparing investments.
Investors should recognize that in periods of declining interest rates, yield
will tend to be somewhat higher than prevailing market rates, and in periods
of rising interest rates yield will tend to be somewhat lower. Also, when
interest rates are falling, the inflow of net new money from the continuous
sale of its shares will likely be invested in instruments producing lower
yields than the balance of the holdings, thereby reducing the current yield.
In periods of rising interest rates, the opposite can be expected to occur.
Tennessee Tax-Free Portfolio also may quote the tax-equivalent yield for each
class, which shows the taxable yield an investor would have to earn, before
taxes, to equal the tax-free yield. Tax-equivalent yield is the current
yield that would have to be earned, in the investor's tax bracket, to match
the tax-free yields shown below after taking federal income taxes into
account. Tax-equivalent yields are calculated by dividing current yield by
the result of one minus a stated federal or combined federal and state tax
rate. It gives the approximate yield a taxable security must provide at
various income brackets to produce after-tax yields equivalent to those of
tax-exempt obligations yielding from 2.0% to 8.0%. Of course, no assurance
can be given that each class will achieve any specific tax-exempt yield.
While the Portfolio invests principally in municipal obligations whose
interest is not includable in gross income for purposes of calculating
federal income tax, other income received by the Portfolio may be taxable.
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The following table shows the effect of a shareholder's tax status on
effective yield under the federal income tax laws for 1995.
1995 TAX RATES AND TAX-EQUIVALENT YIELDS
<TABLE>
<CAPTION>
Taxable
Income* Federal State Combined
Tax Bracket** Tax Bracket Tax Bracket
single return joint return
<S> <C> <C> <C> <C>
$0 - $23,350 $0 - $39,000 15% 6% 20.10%
$23,351 - $56,550 $39,001 - $94,250 28% 6% 32.32%
$56,551 - $117,950 $94,251 - $143,600 31% 6% 35.14%
$117,951 - $256,500 $143,601 - $256,500 36% 6% 39.84%
$256,501 - above $256,501 - above 39.6% 6% 43.22%
</TABLE>
* Taxable income (gross income after all exemptions, adjustments, and
deductions) based on 1995 tax rates.
* Excludes the impact of the phaseout of personal exemptions, limitation
on itemized deductions, and other credits, exclusions, and adjustments
which may raise a taxpayer's marginal tax rate. An increase in a
shareholder's marginal tax rate would increase that shareholder's
tax-equivalent yield.
Tennessee individual income tax is levied at a flat rate of 6%. The
tax is levied on dividend and interest income.
If your effective combined federal and Tennessee state tax rate in 1995 is:
20.10% 32.32% 35.14% 39.84% 43.22%
Then your tax-equivalent yield is:
<TABLE>
<CAPTION>
TAX-EQUIVALENT YIELD
- --------------------
<S> <C> <C> <C> <C> <C>
2.0% 2.50% 2.96% 3.08% 3.32% 3.52%
3.0% 3.75% 4.43% 4.63% 4.99% 5.28%
4.0% 5.01% 5.91% 6.17% 6.65% 7.04%
5.0% 6.26% 7.39% 7.71% 8.31% 8.81%
6.0% 7.51% 8.87% 9.25% 9.97% 10.57%
7.0% 8.76% 10.34% 10.79% 11.64% 12.33%
8.0% 10.01% 11.82% 12.33% 13.30% 14.09%
</TABLE>
The Portfolio may invest a portion of its assets in obligations that
are subject to state or federal income tax. When the Portfolio invests in
these obligations, its tax-equivalent yield will be lower. In the table
above, tax-equivalent yields are calculated assuming investments are
100% federally and state tax-free.
TOTAL RETURNS for each Class of the Portfolio quoted in advertising reflect
all aspects of return, including the effect of reinvesting dividends and
capital gain distributions (if any), and any change in NAV over the period.
AVERAGE ANNUAL TOTAL RETURNS are calculated by determining the growth or
decline in value of a hypothetical historical investment over a stated
period, and then calculating the annually compounded percentage rate that
would have produced the same result if the rate of growth or decline in value
had been constant over the period. For example, a cumulative total return of
100% over ten years would produce an average annual total return of 7.18%,
which is the steady annual rate of return that would equal 100% growth on a
compounded basis in ten years. While average annual total returns are a
convenient means of comparing investment alternatives, investors should
realize that performance is not constant over time, but changes from year to
year, and that average annual total returns represent averaged figures as
opposed to the actual year-to-year performance. Average annual returns
covering periods of less than one year are calculated
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by determining total return for the period, extending that return for a full
year (assuming that performance remains constant over the year), and quoting
the result as an annual return.
CUMULATIVE TOTAL RETURNS reflect the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be
quoted as a percentage or as a dollar amount, and may be calculated for a
single investment, a series of investments, or a series of redemptions, over
any time period. Total returns may be broken down into their components of
income and capital (including capital gains and changes in share price) in
order to illustrate the relationship of these factors and their contributions
to total return. Total returns, yields, and other performance information
may be quoted numerically or in a table, graph, or similar illustration.
The Portfolio may compare the performance of its classes or the performance
of securities in which it or its classes may invest to other mutual funds,
especially to those with similar investment objectives. These comparisons
may be based on data published by IBC/Donoghue's Money Fund Report-R- of
Ashland, MA 01721, or by Lipper Analytical Services, Inc. (Lipper, sometimes
referred to as Lipper Analytical Services), an independent service located in
Summit, New Jersey that monitors the performance of mutual funds. Lipper
generally ranks funds on the basis of total return, assuming reinvestment of
distributions, but does not take sales charges or redemption fees into
consideration, and is prepared without regard to tax consequences. Lipper
may also rank funds based on yield. In addition to the mutual fund rankings,
the Portfolio's performance may be compared to mutual fund performance
indices prepared by Lipper. The BOND FUND REPORT AVERAGES-TM- which is
reported in the BOND FUND REPORT-R-, covers taxable bond funds. Investors
should give consideration to the quality and maturity of the portfolio
securities of the respective investment companies when comparing investment
alternatives.
From time to time, the Portfolio's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals.
For example, the Portfolio may quote Morningstar, Inc. in its advertising
materials. Morningstar, Inc. is a mutual fund rating service that rates
mutual funds on the basis of risk-adjusted performance.
The Portfolio may be compared in advertising to certificates of deposits
(CDS) or other investments issued by banks. Mutual funds differ from bank
investments in several respects. For example, the Portfolio may offer
greater liquidity or higher potential returns than CDS, and the Portfolio
does not guarantee your principal or your return.
Ibbotson Associates of Chicago, Illinois (Ibbotson) provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills, the U.S. rate
of inflation (based on the Consumer Price Index), and combinations of various
capital markets. The performance of these capital markets is based on the
return of different indices.
The Portfolio may compare its performance to that of the Lehman Brothers
Municipal Bond Index, an index comprised of revenue bonds and state
government obligations. The Portfolio may also compare its performance to
that of the Lehman Brothers General Obligation Bond Index, an index comprised
of all public, fixed-rate, non-convertible investment-grade domestic
corporate debt. The Portfolio may also quote mutual fund rating services in
its advertising materials, including data from a mutual fund rating service
which rates mutual funds on the basis of risk adjusted performance. Because
the fees for Class II and Class III are higher than the fees for Class I,
yields and returns for those classes will be lower than for Class I.
The Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program,
the investor invests a fixed dollar amount at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit nor guard against loss
in a declining market, the investor's average cost per share can be lower
than if fixed numbers of shares had been purchased at those intervals. In
evaluating such a plan, investors should consider their ability to continue
purchasing shares through periods of low price levels.
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ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The following holiday closings have been scheduled for the remainder of 1995
and 1996: Veterans' Day, Thanksgiving Day, Christmas Day (observed), New
Year's Day(observed), Dr. Martin Luther King Jr. Day, Presidents' Day, Good
Friday, Memorial Day (observed), Independence Day, Labor Day, and Columbus
Day (observed). Although First Tennessee expects the same holiday schedule
to be observed in the future, the New York Stock Exchange (NYSE) and the
Federal Reserve Bank of New York (New York Federal Reserve) may modify their
holiday schedules at any time.
If the Trustees determine that existing conditions make cash payment
undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing the Portfolio's NAV. Shareholders receiving securities or other
property on redemption may realize a gain or loss for tax purposes and will
incur any costs of sale, as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, the Portfolio is required to give
shareholders at least 60 days' notice prior to terminating or modifying the
Portfolio's exchange privilege. Under Rule 11a-3, the 60 day notification
requirement may be waived if (I) the only effect of a modification would be
to reduce or eliminate an administrative fee, redemption fee or deferred
sales charge ordinarily payable at the time of exchange, or (ii) under
extraordinary circumstances, a Portfolio temporarily suspends the offering of
shares as permitted under the 1940 Act or by the SEC or because it is unable
to invest amounts effectively in accordance with its investment objective and
policies. This exchange limit may be modified for accounts in certain
institutional retirement plans to conform to plan exchange limits and
Department of Labor Regulations.
ADDITIONAL CLASS II AND CLASS III INFORMATION
PURCHASE INFORMATION. As provided for in Rule 22d-1 under the 1940 Act, ALPS
Mutual Funds Services, Inc. (ALPS or the Distributor), exercises its right to
waive the Portfolio's Class II shares' maximum 3.75% sales charge in
connection with the Portfolio's merger with or acquisition of any investment
company or trust.
SYSTEMATIC INVESTING PROGRAM. Investors can make regular investments in
Class II and Class III with Systematic Investing by completing the
appropriate section on the account application and attaching a voided
personal check. If the bank account is jointly owned, make sure that all
owners sign. Investments may be made monthly by automatically deducting $25
or more from your checking account. This monthly purchase amount may be
changed at any time. There is a $50 minimum initial investment requirement
for this option. Accounts will be drafted on or about the first business day
of every month. Systematic Investing may be canceled at any time without
payment of a cancellation fee. Investors will receive a confirmation from
their securities broker or financial institution (Investment Professional),
or from the Transfer Agent for every transaction, and a debit entry will
appear on your bank statement.
SYSTEMATIC WITHDRAWAL PLAN. Investors can have monthly, quarterly or
semi-annual checks sent from their account to you, to a person named by them,
or to their bank checking account. The 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 shares, an account eventually may be exhausted.
Contact the Investment Professional for more information.
DISTRIBUTIONS AND TAXES
DIVIDENDS. To the extent that the Portfolio's income is derived from
federally tax-exempt interest, the daily dividends declared by the Portfolio
are also federally tax-exempt. The Portfolio will send each shareholder a
notice in January describing the tax status of dividends and capital gain
distributions (if any) for the prior year. Dividends derived from Tennessee
Tax-Free Portfolio's tax-exempt income are not subject to federal income tax,
but must be reported to the
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IRS by shareholders. Exempt-interest dividends are included in income for
purposes of computing the portion of social security and railroad retirement
benefits that may be subject to federal tax. If the Portfolio earns taxable
income or capital gains from its investments, these amounts will be
designated as taxable distributions. Dividends derived from taxable
investment income and short-term capital gains are taxable as ordinary
income. The Portfolio will send a tax statement showing the amount of
tax-exempt distributions for the past calendar year, and will send an IRS
Form 1099-DIV by January 31 if the Portfolio makes any taxable distributions.
The Portfolio purchases municipal obligations based on opinions of bond
counsel regarding the federal income tax status of the obligations. These
opinions generally will be based upon covenants by the issuers regarding
continuing compliance with federal tax requirements. If the issuer of an
obligation fails to comply with its covenants at any time, interest on the
obligation could become federally taxable retroactive to the date the
obligation was issued.
As a result of the Tax Reform Act of 1986, interest on certain "private
activity" securities (referred to in the Internal Revenue Code as "qualified
bonds") is subject to the federal alternative minimum tax (AMT), although the
interest continues to be excludable from gross income for other purposes.
Interest from private activity securities will be considered tax-exempt for
purposes of the Portfolio's policies of investing so that at least 80% of its
income is free from federal income tax. Interest from private activity
securities is a tax preference item for the purpose of determining whether a
taxpayer is subject to the AMT and the amount of AMT to be paid, if any.
Private activity securities issued after August 7, 1986 to benefit a private
or industrial user or to finance a private facility are affected by this rule.
STATE TAXES. In the opinion of fund counsel, Baker, Donelson, Bearman &
Caldwell, investments in Tennessee Tax-Free Portfolio will not be subject to
Tennessee personal income taxes on distributions received from the Portfolio
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 in bonds or other securities of the State of Tennessee
or any county, municipality or political subdivision, including any agency,
board, authority or commission. Other distributions from the Portfolio,
including dividends attributable to obligations of issuers in other states,
and all long-term and short-term capital gains, will not be exempt from
personal income taxes in Tennessee. The Portfolio will report annually the
percentage and source, on a state-by-state basis, of interest income received
by the Portfolio on municipal bonds during the preceding year.
CAPITAL GAIN DISTRIBUTIONS. Long-term capital gains realized by the
Portfolio on the sale of securities and distributed to shareholders are
federally taxable as long-term capital gains regardless of the length of time
that shareholders have held their shares. If a shareholder receives a
long-term capital gain distribution on shares of the Portfolio, and such
shares are held less than six months and are sold at a loss, the portion of
the loss equal to the amount of the long-term capital gain distribution will
be considered a long-term loss for tax purposes.
A portion of the gain on bonds purchased at a discount after April 30, 1993
and short-term capital gains distributed by the Portfolio are taxable to
shareholders as dividends, not as capital gains. Distributions from
short-term capital gains do not qualify for the dividends received deduction.
Dividend distributions resulting from a re characterization of gain from the
sale of bonds purchased at a discount after April 30, 1993 are not considered
income for the purposes of the Portfolio's policy of investing so that at
least 80% of its income is free from federal income tax.
TAX STATUS OF THE TRUST. The Portfolio intends to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended, (the
Code), so that the Portfolio will not be liable for federal income or excise
taxes on net investment income or capital gains to the extent that these are
distributed to shareholders in accordance with applicable provisions of the
Code. In order to qualify as a regulated investment company and avoid being
subject to federal income or excise taxes, the Portfolio intends to
distribute substantially all of its net investment income and net realized
capital gains within each calendar year as well as on a fiscal year basis.
The Portfolio also intends to comply with other tax rules applicable to
regulated investment companies, including a requirement that capital gains
from the sale of securities held for less than three months must constitute
less than 30% of the Portfolio's gross income for each fiscal year.
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<PAGE>
OTHER TAX INFORMATION. The information above is only a summary of some of
the tax consequences generally affecting the Portfolio and its shareholders,
and no attempt has been made to discuss individual tax consequences. In
addition to federal income taxes, shareholders of the Portfolio may be
subject to state and local taxes on distributions received from the
Portfolio. Investors should consult their tax advisors to determine whether
the Portfolio is suitable to their particular tax situation.
Effective January 1, 1993, federal income tax will be withheld at a 20% rate
on any eligible rollover distributions that are not transferred directly to
another qualified plan or IRA. Actual income tax may be higher or lower and
will be due when tax forms for the year are filed. Taxes will not be
withheld in cases of direct rollover into an IRA or another qualified plan.
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust are listed below. Each
Trustee or officer that is an "interested person" (as defined in the 1940
Act) by virtue of his affiliation with First Tennessee or ALPS is indicated
by an asterisk (*).
THOMAS M. BATCHELOR, Trustee, 4325 Woodcrest Drive, Memphis, TN, who
presently operates a management consultant business on a limited basis,
retired after owning and operating two General Insurance Companies agencies
for over thirty years. He was one of the founders and served as a director
of First American State Bank in Memphis, TN (now part of United American Bank
of Memphis). He currently serves as Chairman, Memphis Union Mission, TN, as
well as a charity and a non-profit foundation.
JOHN A. DECELL, Trustee, 5178 Wheelis, Suite 2, Memphis, TN is Proprietor,
DeCell & Company (real estate and business consulting), and President of
Capital Advisers, Inc. (real estate asset management).
*L. R. JALENAK, JR., Trustee, 6094 Apple Tree Drive, Suite 11, Memphis, TN
was Chairman of the Board (1990 - 1993 (retired)), Cleo Inc., a Gibson
Greetings Company. Mr. Jalenak is also a Director of Perrigo Company (1988 -
present), Lufkin Industries (1990 - present), Dyersburg Corporation (April
1992 - present), was President and CEO (until 1990) of Cleo Inc., and was a
Director of Gibson Greetings, Inc. from 1983 to 1991.
LARRY W. PAPASAN, Trustee, 1450 Brooks Road, Memphis, TN is President of
Smith & Nephew Richards, Inc. Mr. Papasan is a former Director of First
American National Bank of Memphis and The West Tennessee Board of First
American National Bank (1988 - 1991) and was President of Memphis Light Gas
and Water Division of the City of Memphis (1984 - 1991).
*RICHARD C. RANTZOW, President and Trustee, 5790 Shelby Avenue, Memphis, TN
is Vice President/Director, Ron Miller Associates, Inc. (manufacturer).
Mr. Rantzow was Managing Partner (until 1990) of the Memphis office of
Ernst & Young.
*MARK A. POUGNET, Treasurer and Secretary, is Chief Financial Officer of ALPS
Mutual Funds Services, Inc. (ALPS), the Administrator and Distributor. In
addition, Mr. Pougnet serves as Treasurer of the Duff & Phelps Funds, and
Treasurer of Westcore Trust. Prior to joining ALPS, Mr. Pougnet served as
Executive Director of Syndication Accounting for Paramount
Pictures-Television Group from 1989 to 1991.
The Trustees of the Trust receive from the Trust an annual fee of $4,000 and
a fee in the amount of $500 for attending each meeting of the Trustees and
each committee meeting.
INVESTMENT ADVISORY AGREEMENT
The Portfolio employs First Tennessee Bank National Association (First
Tennessee or the Investment Adviser), Memphis, Tennessee, to furnish
investment advisory and other services to the Portfolio. Under the
Investment
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Advisory and Management Agreement with the Portfolio, First Tennessee is
authorized to appoint one or more sub-advisers at First Tennessee's expense.
In addition to First Tennessee's fee payable to First Tennessee and the fees
payable to the Transfer Agent and Pricing and Accounting Agent, and to the
Administrator, the Portfolio pays for all its expenses, without limitation,
that are not assumed by these parties. The Portfolio pays for typesetting,
printing and mailing of proxy material to existing shareholders, legal
expenses, and the fees of the custodian, auditor and Trustees. Other
expenses paid by the Portfolio include: interest, taxes, brokerage
commissions, the Portfolio's proportionate share of insurance premiums and
Investment Company Institute dues, and costs of registering shares under
federal and state securities laws. The Portfolio also is liable for such
nonrecurring expenses as may arise, including costs of litigation to which
the Portfolio is a party, and its obligation under the Declaration of Trust
to indemnify its officers and Trustees with respect to such litigation.
For managing its investment and business affairs, Tennessee Tax-Free
Portfolio pays First Tennessee a monthly management fee at the annual rate of
.50% of average net assets. First Tennessee has voluntarily agreed to waive
its fee for the Portfolio. This fee waiver may be discontinued at any time.
ADMINISTRATION AGREEMENT AND OTHER CONTRACTS
ADMINISTRATOR AND DISTRIBUTOR. ALPS Mutual Funds Services, Inc. (ALPS, the
Administrator and Distributor), is the Administrator and Distributor to the
Portfolio under an Administration and General Distribution Agreement. ALPS,
a Colorado corporation, is a broker-dealer registered under the Securities
Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc.
As the Administrator, ALPS assists in the Portfolio's administration and
operation, including, but not limited to, providing office space and various
legal and accounting 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.
Garland, 4990 Poplar Avenue, 3rd Floor, Memphis, Tennessee, 38117, serves as
the Co-Administrator for the Portfolio. As the Co-Administrator, Garland
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. Garland is entitled to receive from
the Portfolio a monthly fee at the annual rate of .05% of average net assets.
As the Distributor, ALPS sells shares of Class I as agent on behalf of the
Trust at no additional cost to the Trust. Class II and III are obligated to
pay ALPS monthly an additional annual fee of .25% and 1.00% respectively of
each Class' average net assets, which consists of a .25% shareholder
servicing fee for Class II and a .75% 12b-1 fee and a .25% shareholder
servicing fee for class III, all or a portion of which may be paid out to
broker-dealers or others involved in the distribution of Class II and III
shares. Garland and its affiliates neither participate in nor are
responsible for the underwriting of Portfolio shares. Consistent with
applicable law, affiliates of Garland may receive commissions or asset-based
fees.
TRANSFER AGENT, FUND ACCOUNTING AND CUSTODIAN. Chase Global Funds Services
Company (CGFSC or the Transfer Agent), provides transfer agent and
shareholder services for the Portfolio, and calculates the NAV and dividends
of each class and maintains the portfolio and general accounting records.
Chase Manhattan Bank is Custodian of the assets of the Portfolio. The
Custodian is responsible for the safekeeping of the Portfolio's assets and
the appointment of sub-custodian banks and clearing agencies. The Custodian
takes no part in determining the investment policies of the Portfolio or in
deciding which securities are purchased or sold by the Portfolio. The
Portfolio, however, may invest in obligations of the Custodian and may
purchase securities from or sell securities to the Custodian.
DISTRIBUTION PLAN. The Trustees of the Trust have adopted a Distribution
Plan on behalf of Class III of the Portfolio (the Class III Plan) pursuant to
Rule 12b-1 (the Rule) under the 1940 Act. The Rule provides in substance
that a
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<PAGE>
mutual fund may not engage directly or indirectly in financing any activity
that is intended primarily to result in the sale of shares of the fund except
pursuant to a plan adopted by the fund under the Rule. The Trustees have
adopted the Plan to allow each class and ALPS to incur distribution expenses.
ALPS receives a Distribution fee (12b-1 fee) of up to and including 0.25% of
the average net assets of Class III of the Portfolio. (These fees are in
addition to the fees paid to ALPS under the Administration Agreement.) The
Trust or ALPS, on behalf of Class III of the Portfolio, may enter into
servicing agreements (Service Agreements) with banks, broker-dealers or other
institutions (Agency Institutions). The Class III Plan provides that ALPS
may use its fees and other resources to make payments to Agency Institutions
for performance of distribution-related services, including those enumerated
above. The Service Agreements further provide for compensation to
broker-dealers for their efforts to sell Class III shares. The
distribution-related services include, but are not limited to, the following:
formulation and implementation of marketing and promotional activities, such
as mail promotions and television, radio, newspaper, magazine and other mass
media advertising; preparation, printing and distribution of sales
literature; preparation, printing and distribution of prospectuses of the
Portfolio and reports to recipients other than existing shareholders of the
Portfolio; obtaining such information, analyses and reports with respect to
marketing and promotional activities as ALPS may from time to time, deem
advisable; making payments to securities dealers and others engaged in the
sales of Class III Shares; and providing training, marketing and support to
such dealers and others with respect to the sale of Class III Shares. The
Class III Plan recognizes ALPS may use its fees and other resources to pay
expenses associated with the promotion and administration of activities
primarily intended to result in the sale of shares.
The Plan has been approved by the Trustees, including the majority of
disinterested Trustees. As required by the Rule, the Trustees carefully
considered all pertinent factors relating to the implementation of the Plans
prior to its approval, and have determined that there is a reasonable
likelihood that the Plan will benefit the Portfolio and its shareholders. To
the extent that the Class III Plans give ALPS greater flexibility in
connection with the distribution of shares of the class, additional sales of
shares may result.
The Class III Plans could be construed as compensation plans because ALPS is
paid a fixed fee and is given discretion concerning what expenses are payable
under the Plans. ALPS may spend more for marketing and distribution than it
receives in fees and reimbursements from the Portfolio. However, to the
extent fees received exceed expenses, including indirect expenses such as
overhead, ALPS could be said to have received a profit. For example, if ALPS
pays $1 for Class III distribution-related expenses and receives $2 under a
Class III Plan, the $1 difference could be said to be a profit for ALPS.
(Because ALPS is reimbursed for its out-of-pocket direct promotional
expenses, a Class III Plan also could be construed as a reimbursement plan.
Until the issue is resolved by the SEC, unreimbursed expenses incurred in one
year will not be carried over to a subsequent year.) If after payments by
ALPS for marketing and distribution there are any remaining fees attributable
to a Class III Plan, these may be used as ALPS may elect. Since the amount
payable under a Class III Plan will be commingled with ALPS's general funds,
including the revenues it receives in the conduct of its business, it is
possible that certain of ALPS's overhead expenses will be paid out of Plan
fees and that these expenses may include items which the SEC has noted, for
example, the costs of leases, depreciation, communications, salaries,
training and supplies. The Portfolio believes that such expenses, if paid,
will be paid only indirectly out of the fees being paid under the Plan.
SHAREHOLDER SERVICES PLANS. In addition to the Rule 12b-1 Distribution Plans
described above, Class II and Class III have adopted Shareholder Services
Plans to compensate Agency Institutions for individual shareholder services
and account maintenance. These functions include: maintaining account
records for each shareholder who beneficially owns Class III Shares;
answering questions and handling correspondence from shareholders about their
accounts; handling the transmission of funds representing the purchase price
or redemption proceeds; issuing confirmations for transactions in Class III
Shares by shareholders; assisting customers in completing application forms;
communicating with the transfer agent; and providing account maintenance and
account level support for all transactions. For these services the
participating Agency Institutions are paid a service fee at the annual rate
of up to and including .25% of average net assets of Class II and Class III.
Banking laws and regulations, including the Glass-Steagall Act as currently
interpreted by the Board of Governors of the Federal Reserve System, prohibit
a bank holding company registered under the Bank Holding Company Act of
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<PAGE>
1956 or any affiliate thereof from sponsoring, organizing, controlling, or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares and prohibit banks
generally from issuing, underwriting, selling or distributing securities.
The same laws and regulations generally permit a bank or bank affiliate to
act as an investment adviser and co-administrator and to purchase shares of
the investment company as agent for and upon the order of a customer. In the
Trust's and Investment Adviser's opinion, banks and their affiliates may be
paid for investment advisory, shareholder servicing, recordkeeping and
co-administration functions. Changes in federal or state statutes and
regulations pertaining to the permissible activities of banks and their
affiliates or subsidiaries, as well as further judicial or administrative
decisions or interpretations, could prevent a bank from continuing to perform
all or a part of the contemplated services. If a bank or its affiliates were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services. In such event, changes in the operation of the Portfolio might
occur, including possible termination of any automatic investment or
redemption or other services then being provided by any bank. It is not
expected that shareholders would suffer any adverse financial consequences as
a result of any of these occurrences. The Portfolio may execute portfolio
transactions with and purchase securities issued by depository institutions
that receive payments under the Plans. No preference will be shown in the
selection of investments for the instruments of such depository institutions.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein, and banks and other
financial institutions may be required to register as dealers pursuant to
state law.
DESCRIPTION OF THE TRUST
TRUST ORGANIZATION. Tennessee Tax Free Portfolio is a portfolio of First
Funds (formerly The Masters Group of Mutual 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 Declaration of Trust permits the Trustees to create
additional portfolios and classes. There are seven portfolios of the Trust,
each with three classes.
The assets of the Trust received for the issue or sale of shares of the
Portfolio and all income, earnings, profits, and proceeds thereof, subject
only to the rights of creditors, are specially allocated to such Portfolio,
and constitute the underlying assets of such Portfolio. The underlying
assets of the Portfolio are segregated on the books of account, and are to be
charged with the liabilities with respect to such Portfolio and with a share
of the general expenses of the Trust. Expenses with respect to the Trust are
to be allocated in proportion to the asset value of the respective Portfolios
except where allocations of direct expense can otherwise be fairly made. The
officers of the Trust, subject to the general supervision of the Trustees,
have the power to determine which expenses are allocable to a given
Portfolio, or which are general or allocable to all of the Portfolios. In
the event of the dissolution or liquidation of the Trust, shareholders of a
Portfolio are entitled to receive as a class the underlying assets of such
Portfolio available for distribution.
SHAREHOLDER AND TRUSTEE LIABILITY. The Trust is an entity of the type
commonly known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The Declaration of Trust
provides that the Trust shall not have any claim against shareholders except
for the payment of the purchase price of shares and requires that each
agreement, obligation, or instrument entered into or executed by the Trust or
the Trustees shall include a provision limiting the obligations created
thereby to the Trust and its assets. The Declaration of Trust provides for
indemnification out of the Portfolio's property of any shareholders held
personally liable for the obligations of the Portfolio. The Declaration of
Trust also provides that the Portfolio shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation
of a Portfolio and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Portfolio itself would be unable to
meet its obligations. The Trustees believe that, in view of the above, the
risk of personal liability to shareholders is remote.
The Declaration of Trust further provides that the Trustees, if they have
exercised reasonable care, will not be liable for any neglect or wrongdoing,
but nothing in the Declaration of Trust protects a Trustee against any
liability to which
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he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct
of his office.
VOTING RIGHTS. The Portfolio's capital consists of shares of beneficial
interest. The shares have no preemptive or conversion rights; the voting and
dividend rights, the right of redemption, and the privilege of exchange are
described in the Prospectus. Shares are fully paid and nonassessable, except
as set forth under the heading "Shareholder and Trustee Liability" above.
Shareholders representing 10% or more of the Trust or a Portfolio may, as set
forth in the Declaration of Trust, call meetings of the Trust or a Portfolio
for any purpose related to the Trust or Portfolio, as the case may be,
including, in the case of a meeting of the entire Trust, the purpose of
voting on removal of one or more Trustees. The Trust or any Portfolio may be
terminated upon the sale of its assets to another open-end management
investment company, or upon liquidation and distribution of its assets, if
approved by vote of the holders of a majority of the outstanding shares of
the Trust or that Portfolio. If not so terminated, the Trust and the
Portfolio will continue indefinitely.
CLASSES. Pursuant to the Declaration of Trust, the Trustees have authorized
additional classes of shares for the Portfolio of the Trust. Although the
investment objective for each separate class of a particular Portfolio is the
same, fee structures are different such that one class may have a higher
yield than another class of the same Portfolio at any particular time.
Shareholders of the Trust will vote together in the aggregate and not
separately by Portfolio, or by class thereof, except as otherwise required by
law or when the Trustees determine that the matter to be voted upon affects
only the interests of the shareholders of a particular Portfolio or a class
thereof. The Trust has received an Exemptive Order from the SEC (the Order)
to permit additional classes of shares. Under the Order, in the event of a
shareholder meeting, Class III of a Portfolio votes separately to approve its
Distribution and Service Plan, described previously under "Distribution and
Service Plans."
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 160 Federal Street, Boston,
Massachusetts, serves as the Trust's independent accountant. The independent
accountant examines the annual financial statements for the Trust and
provides other audit, tax, and related services.
APPENDIX
DOLLAR-WEIGHTED AVERAGE MATURITY for the Portfolio is derived by multiplying
the value of each investment by the number of days remaining to its maturity,
adding these calculations, and then dividing the total by the value of the
fund's Portfolio. An obligation's maturity is typically determined on a
stated final maturity basis, although there are some exceptions to this rule.
For example, if it is probable that the issuer of an instrument will take
advantage of a maturity-shortening device, such as a call, refunding, or
redemption provision, the date on which the instrument will probably be
called, refunded, or redeemed may be considered to be its maturity date.
When a municipal bond issuer has committed to call an issue of bonds and has
established an independent escrow account that is sufficient to, and is
pledged to, refund that issue, the number of days to maturity for the
pre-refunded bond is considered to be the number of days to the announced
call date of the bonds.
The descriptions that follow are examples of eligible ratings for the
Portfolio. The Portfolio may, however, consider the ratings for other types
of investments and the ratings assigned by other rating organizations when
determining the eligibility of a particular investment.
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DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S RATINGS OF STATE AND
MUNICIPAL NOTES:
Moody's ratings for state and municipal and other short-term obligations will
be designated Moody's Investment Grade (MIG or VMIG for variable rate
obligations). This distinction is in recognition of the difference between
short-term credit risk and long-term credit risk. Factors affecting the
liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk,
long-term secular trends for example, may be less important over the short
run. Symbols used will be as follows:
MIG-1/VMIG-1 - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG-2/VMIG-2 - This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG-3/VMIG-3 - This designation denotes favorable quality, with all security
elements accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
MIG-4/VMIG-4 - This designation denotes adequate quality protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS OF STATE AND MUNICIPAL
NOTES:
SP-1 - Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2 - Satisfactory capacity to pay principal and interest.
SP-3 - Speculative capacity to pay principal and interest.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S MUNICIPAL BOND RATINGS:
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
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DESCRIPTION OF STANDARD & POOR'S CORPORATION'S MUNICIPAL BOND RATINGS:
AAA - Debt rated AAA has the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated debt issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
The ratings may be modified by the addition of a plus or minus to show
relative standing within the major rating categories.
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U.S. TREASURY MONEY MARKET PORTFOLIO
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET PORTFOLIO
CASH RESERVE PORTFOLIO
The following supplement is provided to update and should be read in
conjunction with the information provided in the Prospectus dated October 25,
1995.
The following information and text shall be inserted in lieu of the
sections under "SUMMARY OF PORTFOLIO EXPENSES" on pages 3 and 4 of the
prospectus.
A. EXPENSE SUMMARY
<TABLE>
<CAPTION>
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* .00% .25% .00% .00% .25% .00%
Other Expenses* .29% .38% .38% .26% .35% .35%
--- --- --- --- --- ---
Total Portfolio Operating Expenses* .39% .73% .73% .36% .70% .70%
--- --- --- --- --- ---
--- --- --- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
MUNICIPAL MONEY CASH RESERVE
MARKET PORTFOLIO 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* .00% .25% .00% .00% .25% .00%
Other Expenses* .25% .30% .30% .31% .31% .31%
--- --- --- --- --- ---
Total Portfolio Operating Expenses* .35% .65% .65% .41% .66% .66%
--- --- --- --- --- ---
--- --- --- --- --- ---
</TABLE>
*Net of expense waivers
ANNUAL PORTFOLIO OPERATING EXPENSES. Each Portfolio is obligated to pay
Management Fees to Garland Capital Management, (Garland) a division of First
Tennessee Bank National Association, for managing each Portfolio's
investments. Garland, as Investment Adviser, is entitled to receive .25% of
each Portfolio's average net assets. Garland 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,
which have been estimated for the current year, for maintaining shareholder
records, furnishing shareholder statements and reports, and other services.
ALPS, the Administrator, is entitled to and charges .075% of each Portfolio's
average net assets for administration services. Garland, the
Co-Administrator, is entitled to .05% of each Portfolio's average net assets
for co-administration services. Garland has voluntarily agreed to waive this
fee to .025% of each Portfolio's average net assets, however, there is no
guarantee that this waiver will continue.
If the waivers were not in effect, Management Fees would be .25% for
each Class; 12b-1 Fees would be .45% for Class III; and Shareholder Servicing
Fees would be .25% for Class III. Other Expenses and Total Portfolio
Operating Expenses would be estimated as follows:
<TABLE>
<CAPTION>
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 .32% .41% .41% .29% .38% .38%
Total Portfolio Operating Expenses .57% .91% 1.36% .54% .88% 1.33%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL MONEY CASH RESERVE
MARKET PORTFOLIO PORTFOLIO
---------------------------------------------------------------
CLASS I CLASS II CLASS III CLASS I CLASS II CLASS III
------- -------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Other Expenses .28% .33% .33% .34% .34% .34%
Total Portfolio Operating Expenses .53% .83% 1.28% .59% .84% 1.29%
</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 each Class II and III Portfolio to
securities brokers or financial institution representatives (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 18 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 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:
<TABLE>
<CAPTION>
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>
1 year $ 4 $ 7 $ 7 $ 4 $ 7 $ 7
3 years $13 $23 $23 $12 $22 $22
5 years $22 $41 $41 $20 $39 $39
10 years $49 $91 $91 $46 $87 $87
</TABLE>
<TABLE>
<CAPTION>
MUNICIPAL MONEY CASH RESERVE
MARKET PORTFOLIO PORTFOLIO
---------------------------------------------------------------
CLASS I CLASS II CLASS III CLASS I CLASS II CLASS III
------- -------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1 year $ 4 $ 6 $ 6 $ 4 $ 7 $ 7
3 years $11 $21 $21 $13 $21 $21
5 years $20 $36 $36 $23 $37 $37
10 years $44 $81 $81 $52 $82 $82
</TABLE>
The following sentence shall be inserted in lieu of the third sentence
of the first paragraph under the section entitled "HOW ARE INVESTMENTS,
EXCHANGES AND REDEMPTIONS MADE? - Class II and III - Investment Requirement"
on page 12 of the prospectus:
"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."
The following sentence shall be inserted after the third sentence of the
section entitled "HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE? -
Class II and Class III - Systematic Investment Program" on page 14 of the
prospectus:
"If you are an employee of First Tennessee or any of its affiliates, the
minimum initial investment in each Portfolio is $50."
<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, 1995
- --------------------------------------------------------------------------------
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 Trust, fiduciary, advisory, agency, custodial or similar accounts
(Fiduciary Accounts). Class I shares may be purchased on behalf of Fiduciary
Accounts maintained by financial institutions, business organizations,
corporations, municipalities, non-profit institutions, individuals and other
entities (each a Fiduciary, and collectively referred to as Fiduciaries),
serving in a fiduciary, advisory or agency capacity, that meet the investment
threshold for this class of shares. Class II and III shares are designed for
any investor who seeks mutual fund investment convenience plus a lower
investment minimum. These classes offer investors differing expense
structures to choose between. See "Expense Summary" on page 3.
A Statement of Additional Information (dated October 25, 1995) for the
Money Market Portfolios has been filed with the Securities and Exchange
Commission (SEC) and is incorporated herein by reference. This Prospectus,
the Annual Report and Statement of Additional Information are available free
upon request from ALPS Mutual Funds Services, Inc., the Portfolios'
Distributor. The Annual Report for the fiscal period ended June 30, 1995 for
each 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-1095
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary Of Portfolio Expenses ............................................. 3
Financial Highlights ...................................................... 5
What Is The Investment Objective Of Each Portfolio? ....................... 7
Are The Portfolios Suitable Investments? .................................. 8
What Are The Portfolios' Investment Policies And Limitations? ............. 9
How Are Investments, Exchanges And Redemptions Made? ...................... 10
How Is Performance Calculated? ............................................ 16
Portfolio Transactions .................................................... 16
What Is The Effect Of Federal Income Tax On This Investment? .............. 16
What Advisory And Other Fees Do The Portfolios Pay? ....................... 17
How Are The Portfolios Organized? ......................................... 18
Investment Instruments, Transactions, Strategies and Risks ................ 18
- --------------------------------------------------------------------------------
</TABLE>
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 for Class I below is based upon
the Portfolios' expenses for the fiscal year ended June 30, 1995, adjusted to
reflect new servicing arrangements. The information for Class II and Class
III below is based upon anticipated operating expenses. 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>
<CAPTION>
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* .08% .08% .08% .08% .08% .08%
12b-1 Fees* .00% .00% .25% .00% .00% .25%
Shareholder Servicing* .00% .25% .00% .00% .25% .00%
Other Expenses* .26% .41% .41% .23% .38% .38%
--- --- --- --- --- ---
Total Portfolio Operating Expenses* .34% .74% .74% .31% .71% .71%
--- --- --- --- --- ---
--- --- --- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
MUNICIPAL MONEY CASH RESERVE
MARKET PORTFOLIO 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* .08% .08% .08% .08% .08% .08%
12b-1 Fees* .00% .00% .25% .00% .00% .25%
Shareholder Servicing* .00% .25% .00% .00% .25% .00%
Other Expenses* .22% .38% .38% .31% .39% .39%
--- --- --- --- --- ---
Total Portfolio Operating Expenses* .30% .71% .71% .39% .72% .72%
--- --- --- --- --- ---
--- --- --- --- --- ---
</TABLE>
*Net of expense waivers
ANNUAL PORTFOLIO OPERATING EXPENSES. Each Portfolio is obligated to pay
Management Fees to Garland Capital Management, (Garland) a division of First
Tennessee Bank National Association, for managing each Portfolio's
investments. Garland, as Investment Adviser, is entitled to receive .25% of
each Portfolio's average net assets. Garland has voluntarily agreed to waive
its investment advisory fee to .08% 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,
which have been estimated for the current year, for maintaining shareholder
records, furnishing shareholder statements and reports, and other services.
ALPS, the Administrator, is entitled to and charges .075% of each Portfolio's
average net assets for administration services. Garland, the
Co-Administrator, is entitled to .05% of each Portfolio's average net assets
for co-administration services. Garland has voluntarily agreed to waive this
fee for Class I, 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; 12b-1 Fees would be .45% for Class III; and Shareholder Servicing
Fees would be .25% for Class III. Other Expenses and Total Portfolio
Operating Expenses would be estimated as follows:
<TABLE>
<CAPTION>
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% .41% .41% .28% .38% .38%
Total Portfolio Operating Expenses .56% .91% 1.36% .53% .88% 1.33%
</TABLE>
<TABLE>
<CAPTION>
MUNICIPAL MONEY CASH RESERVE
MARKET PORTFOLIO PORTFOLIO
---------------------------------------------------------------
CLASS I CLASS II CLASS III CLASS I CLASS II CLASS III
------- -------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Other Expenses .27% .38% .38% .36% .39% .39%
Total Portfolio Operating Expenses .52% .88% 1.33% .61% .89% 1.34%
</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 each Class II and III Portfolio to
securities brokers or financial institution representatives (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 18 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 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:
<TABLE>
<CAPTION>
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>
1 year $ 3 $ 8 $ 8 $ 3 $ 7 $ 7
3 years $11 $24 $24 $10 $23 $23
5 years $19 $41 $41 $17 $40 $40
10 years $43 $92 $92 $39 $88 $88
</TABLE>
<TABLE>
<CAPTION>
MUNICIPAL MONEY CASH RESERVE
MARKET PORTFOLIO PORTFOLIO
---------------------------------------------------------------
CLASS I CLASS II CLASS III CLASS I CLASS II CLASS III
------- -------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1 year $ 3 $ 7 $ 7 $ 4 $ 7 $ 7
3 years $10 $23 $23 $13 $23 $23
5 years $17 $40 $40 $22 $40 $40
10 years $38 $88 $88 $49 $90 $90
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The tables that follow are included in the Annual Report for the
Portfolios dated June 30, 1995 and have been audited by Price Waterhouse LLP,
independent accountants. Their report on the financial statements and the
financial highlights for Class I of the Portfolio is included in the Annual
Report (Class II and Class III had not commenced operations as of June 30,
1995). The financial statements and financial highlights are incorporated by
reference into the Portfolios' Statement of Additional Information.
<TABLE>
<CAPTION>
U.S. TREASURY MONEY U.S. GOVERNMENT MONEY
MARKET PORTFOLIO MARKET PORTFOLIO
---------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, FOR THE YEAR ENDED JUNE 30,
------------------------------ -----------------------------
1995 1994 1993** 1995 1994 1993**
------- -------- ------- ------- ------- -------
<S> <C> <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 $ 1.00
------- -------- ------- ------- ------- -------
Income from investment operations:
Net interest income 0.050 0.030 0.018 0.053 0.032 0.019
------- -------- ------- ------- ------- -------
Distributions:
Net interest income (0.050) (0.030) (0.018) (0.053) (0.032) (0.019)
------- -------- ------- ------- ------- -------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- ------- ------- ------- -------
------- -------- ------- ------- ------- -------
TOTAL RETURN 5.10%+ 3.06%+ 1.76%+# 5.39%+ 3.23%+ 1.87%+#
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $67,377 $100,868 $59,326 $88,057 $67,854 $94,903
Ratio of expenses to average net assets(1) 0.36% 0.33% 0.39%* 0.31% 0.28% 0.27%*
Ratio of net interest income to
average net assets 5.00% 3.04% 2.73%* 5.27% 3.18% 2.98%*
(1) During the period, various fees were
waived. The ratio of expenses to
average net assets had such waivers
not occurred is as follows 0.63% 0.60%* 0.65%* 0.58% 0.55% 0.55%*
</TABLE>
* Annualized
** Fund commenced operations on
November 12, 1992
+ Total return would have been lower
had various fees not been waived during
the period.
# Total returns for periods of less than one
year are not annualized.
5
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL MONEY CASH RESERVE
MARKET PORTFOLIO PORTFOLIO
---------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, FOR THE YEAR ENDED JUNE 30,
------------------------------ -----------------------------
1995 1994 1993** 1995**
------- -------- ------- -------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA:
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- -------
Income from investment operations:
Net interest income 0.034 0.024 0.014 0.042
------- ------- ------- -------
Distributions:
Net interest income (0.034) (0.024) (0.014) (0.042)
------- ------- ------- -------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN 3.48%+ 2.40%+ 1.40%+# 4.27%+#
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $94,078 $76,231 $74,362 $15,460
Ratio of expenses to average net assets(1) 0.30% 0.28% 0.31%* 0.43%
Ratio of net interest income to
average net assets 3.44% 2.39% 2.26%* 5.48%*
(1) During the period, various fees were
waived. The ratio of expenses to
average net assets had such waivers
not occurred is as follows 0.57% 0.55% 0.58%* 0.70%*
</TABLE>
* Annualized
** Municipal Money Market and Cash Reserve
Portfolios commenced operations on
November 12, 1992 and September 26, 1994
respectively
+ Total return would have been lower had
various fees not been waived during the
period.
# Total returns for periods of less than one
year are not annualized.
6
<PAGE>
- --------------------------------------------------------------------------------
WHAT IS THE INVESTMENT OBJECTIVE OF EACH PORTFOLIO?
- --------------------------------------------------------------------------------
First Tennessee Bank National Association (First Tennessee), through
Garland, 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 Garland'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 17.
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
7
<PAGE>
insurance companies, banks, and corporations) whose creditworthiness is
relied upon in determining the credit quality of securities the Portfolio may
purchase.
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
18 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 the investment policies of each 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.
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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.
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 Garland 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.
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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 Garland, 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
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<PAGE>
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.
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) and (3)(a) 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 16 for further information. Municipal
Money Market Portfolio may purchase other types of tax-exempt instruments
that become available in the future as long as Garland 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 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
trust, fiduciary, advisory, agency, custodial or similar Fiduciary Accounts.
Class I shares may be purchased on behalf of Fiduciary Accounts maintained by
financial institutions, business organizations, corporations, municipalities,
non-profit institutions, individuals and other Fiduciaries serving in a
fiduciary, advisory or agency capacity that meet the investment minimum.
HOW IS A FIDUCIARY ACCOUNT ESTABLISHED WITH A FIDUCIARY?
An initial investment must be preceded by or made in conjunction with
the establishment of a Fiduciary Account with a Fiduciary. Establishment of
a Fiduciary Account may require that documents and applications be completed
and signed before the investment can be implemented. The Fiduciary may
require that certain documents be provided prior to making a redemption from
any Portfolio. Fiduciaries may charge fees in addition to those described
herein based on their Fiduciary Account agreements. Fee schedules for
Fiduciary Accounts are available upon request from the Fiduciary and are
detailed in the agreements by which a Fiduciary Account is opened.
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<PAGE>
HOW ARE INVESTMENTS MADE?
Each Fiduciary will telephone the Transfer Agent, Chase Global Funds
Services Company (CGFSC), with the investment instructions. If investment
instructions are received by CGFSC prior to 2:00 p.m. Eastern time on any
Business Day and the funds are received by CGFSC that day, you will earn that
day's dividend accrual. Fiduciaries 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), a Fiduciary
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 Fiduciary is $100,000 per Portfolio. Fiduciaries may satisfy the
minimum investment by aggregating their Fiduciary Accounts within each
Portfolio. Subsequent investments may be in any amount. If a Fiduciary's
Class I account falls below $50,000 due to redemption, a Portfolio may close
the account. A Fiduciary 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.
Involuntary redemptions will be effected, if at all, at the last calculated
NAV.
HOW ARE REDEMPTIONS MADE?
Fiduciaries 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.
Fiduciaries 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, proceeds of the redemption will be wired as federal funds on
the same day to the bank account designated with CGFSC. The Fiduciary 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 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 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
portfolio securities are traded in other markets on days when 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, the Fiduciary 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 Garland's opinion, they are of a size that would disrupt
management of a Portfolio.
In order to allow Garland to manage each Portfolio most effectively,
Fiduciaries 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 Fiduciary
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
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<PAGE>
personalized security codes. Each Portfolio or its agents may also record
calls, and a Fiduciary should verify the accuracy of confirmation statements
immediately after receipt. If a Fiduciary does not want to be able to
initiate redemptions and exchanges by telephone, please call CGFSC for
instructions.
CLASS II AND III
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WHO MAY INVEST?
Class II and III shares are designed for any investor who seeks 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 REQUIREMENT
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", 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, the minimum initial investment is $50,
and subsequent investments may be in any amount of $25 or greater. See page
14 for additional information on the Systematic Investing Program. If your
balance in a Portfolio falls below your investment minimum 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. Involuntary redemptions will be effected, if
at all, at the last calculated net asset value per share.
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 14 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 7:00 p.m. Central Time (9:00 a.m. to 8:00 p.m. Eastern
Time), Monday through Friday.
Investments may be made in several ways:
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 repre-
12
<PAGE>
sentative 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 each
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. Shares redeemed will receive the accrued
dividends through the day prior to redemption.
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 the Fund provide you with Redemption Checks
("Checks") which you can write on your account. In order to establish the
checkwriting option, you must manually sign a signature card. Corporations,
trust and other organizations should call or write the Fund'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 the Fund to redeem
a sufficient number of your shares to cover the amount of the Check. Shares
earn dividends through the day prior to the redemption is processed. There
is no charge to you for the use of the Checks; however, the Transfer Agent
will impose a
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<PAGE>
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. The
Fund 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 Fund 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 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, 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 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. You will receive a written confirmation
of each automatic transfer from your bank account to your Portfolio account,
and a debit entry will appear on your bank account statement. 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 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
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<PAGE>
retirement and defer the tax on your investment income. Minimums may differ
from those listed on page 12. Plans include Individual Retirement Accounts
(IRAs), Rollover IRAs, Keogh Plans, and Simplified Employee Pension Plans
(SEP-IRAs).
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 New York Stock
Exchange (NYSE) and the Federal Reserve Bank of New York (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 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 an NAV of $1.00 for the
shares, 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 and accepted by CGFSC. Fiduciaries 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, Garland
discourages frequent exchange activity 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 Garland'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 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 if Class I, the
Fiduciary, 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 Fiduciary Account may be
converted to shares of another Class.
15
<PAGE>
STATEMENTS AND REPORTS
You or, if Class I, the Fiduciary, will receive a monthly statement and
a confirmation after every transaction that affects the share balance or 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 Fiduciary, 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 Fiduciary. 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.
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 Fiduciary, 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 por-
16
<PAGE>
tion 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 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 Garland, a division of First Tennessee, 4990 Poplar Avenue, Memphis,
Tennessee, its pro-rated portion of a monthly management fee at the annual
rate of .25% of aggregate average net assets of all Portfolios of the Trust
managed by Garland through $1 billion, and .22% on amounts greater than $1
billion. Garland has voluntarily agreed to waive its fees to .08% of each
Portfolio's average net assets. This voluntary waiver can be discontinued at
any time.
Under the Investment Advisory and Management Agreement, Garland 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 Garland,
Garland 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 Garland 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 $13.2 billion in assets under
administration (including non-discretionary accounts) and $4.7 billion in
assets under management as of June 30, 1995, 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 Garland,
pursuant to the authority granted to it under its Sub-Advisory Agreement with
Garland. 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
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 60 investment company portfolios with total
assets of approximately $30 billion as of August 31, 1995. PIMC is paid by
Garland 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
17
<PAGE>
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.
Garland, 4990 Poplar Avenue, 3rd Floor, Memphis, Tennessee, 38117,
serves as the Co-Administrator for each Portfolio. As the Co-Administrator,
Garland 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. Garland is entitled to receive from
each Portfolio a monthly fee at the annual rate of .05% of average net
assets. Garland is voluntarily waiving this fee for Class I, 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. Garland 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 Garland 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 .45% of each Portfolio'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 each Portfolio under which Investment
Professionals are paid at the annual rate of .25% of each Portfolio's 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 and
the Shareholder Servicing Fees are expenses of Class II and Class III in
addition to the Management Fee and Administration Fee, and will reduce both
Class' net income and total return.
- --------------------------------------------------------------------------------
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.
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.
18
<PAGE>
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 Garland, 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. The 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 Garland,
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
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 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 anticipa-
19
<PAGE>
tion 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.
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
20
<PAGE>
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.
21
<PAGE>
INVESTMENT ADVISER
------------------
Garland Capital Management
(a division of First Tennessee Bank National Association)
Memphis, TN
SUB-ADVISER
-----------
PNC Institutional Management Corporation
Wilmington, DE
OFFICERS
--------
Richard C. Rantzow, President
Mark A. Pougnet, Treasurer & 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
<PAGE>
FIRST FUNDS
370 17TH STREET, SUITE 2700
DENVER, COLORADO 80202
U.S. TREASURY MONEY MARKET PORTFOLIO
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET PORTFOLIO
CASH RESERVE PORTFOLIO
SUPPLEMENT DATED JANUARY 3, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION FOR CLASS I, CLASS II, AND CLASS III
DATED OCTOBER 25, 1995
THE FOLLOWING INFORMATION SHALL BE INSERTED UNDER THE SECTION TITLED
"ADDITIONAL PURCHASE AND REDEMPTION INFORMATION - ADDITIONAL CLASS II AND
CLASS III INFORMATION - SYSTEMATIC INVESTING PROGRAM", FOLLOWING THE FIFTH
SENTENCE, ON PAGE 17.
"FOR EMPLOYEES OF FIRST TENNESSEE BANK NATIONAL ASSOCIATION OR ANY OF ITS
AFFILIATES, THE MINIMUM INITIAL INVESTMENT REQUIREMENT IS $50."
THE FOLLOWING INFORMATION SHALL BE INSERTED UNDER THE SECTION TITLED
"TRUSTEES AND OFFICERS", PARAGRAPH 8, FOLLOWING THE FIRST SENTENCE, ON
PAGE 14.
"THE TRUSTEES WERE COMPENSATED, IN AGGREGATE, $32,500 FOR THEIR SERVICES
PROVIDED DURING THE TRUST'S FISCAL YEAR ENDED JUNE 30, 1995."
THE FOLLOWING INFORMATION SHALL BE INSERTED UNDER THE SECTION TITLED
"DESCRIPTION OF THE TRUST - CLASSES", FOLLOWING THE LAST SENTENCE, ON PAGE 18.
"PURSUANT TO A VOTE BY THE BOARD OF TRUSTEES, THE TRUST HAS ADOPTED RULE
18F-3 UNDER THE ACT AND HAS ISSUED MULTIPLE CLASSES OF SHARES WITH
RESPECT TO EACH OF ITS PORTFOLIOS. ACCORDINGLY, THE RIGHTS, PRIVILEGES
AND OBLIGATIONS OF EACH SUCH CLASS WILL BE DETERMINED IN ACCORDANCE WITH
SUCH RULE."
THE FOLLOWING INFORMATION SHALL BE INSERTED IN THE FOURTH PARAGRAPH UNDER THE
SECTION TITLED "ADMINISTRATION AGREEMENT AND OTHER CONTRACTS - ADMINISTRATOR
AND DISTRIBUTOR", IN LIEU OF THE INFORMATION IN THE SECOND SENTENCE, ON
PAGE 20.
"CLASS III IS OBLIGATED TO PAY ALPS MONTHLY A 12b-1 FEE AT THE ANNUAL
RATE OF UP TO .45% OF AVERAGE NET ASSETS, ALL OR A PORTION OF WHICH MAY BE
PAID OUT TO BROKER-DEALERS OR OTHERS INVOLVED IN THE DISTRIBUTION OF
CLASS III SHARES. CLASS II AND III PAY SHAREHOLDER SERVICING FEES TO
INVESTMENT PROFESSIONALS AT AN ANNUAL RATE OF .25% OF AVERAGE NET
ASSETS AS MORE FULLY DESCRIBED UNDER THE SECTION "ADMINISTRATION
AGREEMENT AND OTHER CONTRACTS - SHAREHOLDER SERVICES PLANS" ON
PAGE 21 BELOW."
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FIRST FUNDS
U.S. TREASURY MONEY MARKET PORTFOLIO
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET PORTFOLIO
CASH RESERVE PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION FOR CLASS I, CLASS II, AND CLASS III
OCTOBER 25, 1995
This Statement is not a prospectus but should be read in conjunction with the
current Prospectus for each class of First Funds: U.S. Treasury Money Market
Portfolio, U.S. Government Money Market Portfolio, Municipal Money Market
Portfolio, and Cash Reserve Portfolio (dated October 25, 1995). Please
retain this Statement for future reference. The Portfolios' financial
statements and financial highlights included in the Annual Report for the
fiscal year ended June 30, 1995, are incorporated herein by reference. To
obtain additional free copies of this Statement, the Annual Report, or of
the Prospectus, please call the Distributor at 1-800-442-1941, Option 1 or
write to the Distributor at 370 17th Street, Suite 2700, Denver CO 80202.
TABLE OF CONTENTS PAGE
Investment Restrictions and Limitations 2
Investment Instruments 9
Portfolio Transactions 13
Valuation of Portfolio Securities 14
Performance 14
Additional Purchase and Redemption Information 16
Distributions and Taxes 17
Trustees and Officers 18
Investment Advisory Agreement 19
Administration Agreement and Other Contracts 19
Description of the Trust 22
Financial Statements 23
Appendix 23
INVESTMENT ADVISER
Garland Capital Management, a division of First Tennessee Bank National
Association (Garland or the Investment Adviser)
SUB-ADVISER
PNC Institutional Management Corporation (PIMC or the Sub-Adviser)
ADMINISTRATOR AND DISTRIBUTOR
ALPS Mutual Funds Services, Inc. (ALPS, the Administrator and Distributor)
CO-ADMINISTRATOR
Garland Capital Management, a division of First Tennessee Bank National
Association (Garland or the Co-Administrator)
TRANSFER AGENT & CUSTODIAN
Chase Global Funds Services Company (CGFSC or the Transfer Agent)
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INVESTMENT RESTRICTIONS AND LIMITATIONS
The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of a Portfolio's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of a Portfolio's acquisition of such
security or other asset. Accordingly, any subsequent change in values, net
assets, or other circumstances will not be considered when determining
whether the investment complies with a Portfolio's investment policies and
limitations.
Fundamental policies and investment limitations cannot be changed without
approval by a "majority of the outstanding voting securities" (as defined in
the Investment Company Act of 1940 (the 1940 Act)) of that Portfolio.
However, except for the fundamental investment limitations set forth below,
the investment policies and limitations described in this Statement of
Additional Information are not fundamental and may be changed without
shareholder approval.
INVESTMENT LIMITATIONS OF U.S. TREASURY MONEY MARKET PORTFOLIO
THE FOLLOWING ARE U.S. TREASURY MONEY MARKET PORTFOLIO'S FUNDAMENTAL
LIMITATIONS SET FORTH IN THEIR ENTIRETY. THE PORTFOLIO MAY NOT:
(1) with respect to 75% of the Portfolio's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by
the U.S. government or any of its agencies or instrumentalities) if, as
a result, (a) more than 5% of the Portfolio's total assets would be
invested in the securities of that issuer; or (b) the Portfolio would
hold more than 10% of the outstanding voting securities of that issuer;
(2) issue senior securities, except as permitted under the 1940 Act;
(3) borrow money, except that the Portfolio may (I) borrow money for
temporary or emergency purposes (not for leveraging or investment) and
(ii) engage in reverse repurchase agreements for any purpose; provided
that (I) and (ii) in combination do not exceed 33-1/3% of the
Portfolio's total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that come to
exceed this amount will be reduced within three days (not including
Sundays and holidays) to the extent necessary to comply with the
33-1/3% limitation;
(4) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities;
(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, 25% or more of the Portfolio's total
assets would be invested in the securities of companies whose principal
business activities are in the same industry;
(6) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the
Portfolio from investing in securities or other instruments backed by
real estate or securities of companies engaged in the real estate
business);
(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; or
(8) lend any security or make any other loan if, as a result, more than
33-1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of debt securities or to
repurchase agreements.
(9) The Portfolio may, notwithstanding any other fundamental investment
policy or limitation, invest all of its assets in the securities of a
single, open-end management investment company with substantially the
same fundamental investment objectives, policies, and limitations as
the Portfolio.
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THE FOLLOWING LIMITATIONS OF U.S. TREASURY MONEY MARKET PORTFOLIO ARE NOT
FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL.
(I) The Portfolio does not currently intend during the
coming year to purchase the voting securities of any issuer.
(ii) The Portfolio does not currently intend during the
coming year to sell securities short, unless it owns or has the right
to obtain securities equivalent in kind and amount to the
securities sold short.
(iii) The Portfolio does not currently intend during the coming year to
purchase securities on margin, except that the Portfolio may obtain
such short-term credits as are necessary for the clearance of
transactions.
(iv) The Portfolio may borrow money only (a) from a bank or (b) by
engaging in reverse repurchase agreements with any party. The
Portfolio will not purchase any security while borrowings
(excluding reverse repurchase agreements) representing more than 5%
of its total assets are outstanding.
(v) The Portfolio does not currently intend during the coming year to
purchase any security, if, as a result, more than 10% of its net
assets would be invested in securities that are deemed to be
illiquid because they are subject to legal or contractual
restrictions on resale or because they cannot be sold or disposed
of in the ordinary course of business at approximately the prices at
which they are valued.
(vi) The Portfolio does not currently intend during the coming year to
purchase or sell futures contracts or call options. This limitation
does not apply to options attached to, or acquired or traded
together with, their underlying securities, and does not apply to
securities that incorporate features similar to options or futures
contracts.
(vii) The Portfolio does not currently intend during the coming year to
make loans, but this limitation does not apply to purchases of debt
securities or to repurchase agreements.
(viii) The Portfolio does not currently intend during the coming year to
(a) purchase securities of other investment companies, except
in the open market where no commission except the ordinary broker's
commission is paid, or (b) purchase or retain securities
issued by other open-end investment companies. Limitations (a) and
(b) do not apply to securities received as dividends, through offers
of exchange, or as a result of a reorganization, consolidation, or
merger.
(ix) The Portfolio does not currently intend during the coming year to
purchase the securities of any issuer (other than securities
issued or guaranteed by domestic or foreign governments or political
subdivisions thereof) if, as a result, more than 5% of its total
assets would be invested in the securities of business enterprises
that, including predecessors, have a record of less than three
years of continuous operation.
(x) The Portfolio does not currently intend during the coming year
to invest in oil, gas, or other mineral exploration or development
programs or leases.
(xi) The Portfolio does not currently intend during the coming year to
purchase the securities of any issuer if those officers and
Trustees of the Trust and those officers and directors of the
Investment Adviser who individually own more than 1/2 of 1% of
the securities of such issuer together own more than 5% of
such issuer's securities.
(xii) The Portfolio does not currently intend during the coming year
to invest all of its assets in the securities of a single, open-end
management investment company with substantially the same fundamental
investment objectives, policies, and limitations as the Portfolio.
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INVESTMENT LIMITATIONS OF U.S. GOVERNMENT MONEY MARKET PORTFOLIO
THE FOLLOWING ARE U.S. GOVERNMENT MONEY MARKET PORTFOLIO'S FUNDAMENTAL
LIMITATIONS SET FORTH IN THEIR ENTIRETY. THE PORTFOLIO MAY NOT:
(1) with respect to 75% of the Portfolio's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities) if,
as a result, (a) more than 5% of the Portfolio's total assets would be
invested in the securities of that issuer, or (b) the Portfolio would
hold more than 10% of the outstanding voting securities of that issuer;
(2) issue senior securities, except as permitted under the 1940 Act;
(3) borrow money, except that the Portfolio may (I) borrow money for
temporary or emergency purposes (not for leveraging or investment) and
(ii) engage in reverse repurchase agreements for any purpose; provided
that (I) and (ii) in combination do not exceed 33 1/3% of the
Portfolio's total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that come to
exceed this amount will be reduced within three days (not including
Sundays and holidays) to the extent necessary to comply with the
33 1/3% limitation;
(4) underwrite securities issued by others, except to the extent that
the Portfolio may be considered an underwriter within the meaning of
the Securities Act of 1933 in the disposition of restricted securities;
(5) purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, 25% or more of the Portfolio's
total assets would be invested in the securities of companies whose
principal business activities are in the same industry;
(6) purchase or sell real estate, unless acquired as a result of
ownership of securities or other instruments (but this shall not
prevent the Portfolio from investing in securities or other instruments
backed by real estate or securities of companies engaged in the real
estate business);
(7) purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments; or
(8) lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets would be lent to other parties,
but this limitation does not apply to purchases of debt securities or
to repurchase agreements.
(9) The Portfolio may, notwithstanding any other fundamental
investment policy or limitation, invest all of its assets in the
securities of a single, open-end management investment company with
substantially the same fundamental investment objectives, policies, and
limitations as the Portfolio.
THE FOLLOWING LIMITATIONS OF U.S. GOVERNMENT MONEY MARKET PORTFOLIO ARE NOT
FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL.
(i) The Portfolio does not currently intend during the coming year to
purchase the voting securities of any issuer.
(ii) The Portfolio does not currently intend during the coming year to
sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short.
(iii) The Portfolio does not currently intend during the coming year to
purchase securities on margin, except that the Portfolio may
obtain such short-term credits as are necessary for the clearance of
transactions.
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(iv) The Portfolio may borrow money only (a) from a bank or (b) by engaging
in reverse repurchase agreements with any party. The Portfolio will
not purchase any security while borrowings (excluding reverse repurchase
agreements) representing more than 5% of its total assets are
outstanding.
(v) The Portfolio does not currently intend during the coming year to
purchase any security, if, as a result, more than 10% of its net assets
would be invested in securities that are deemed to be illiquid because
they are subject to legal or contractual restrictions on resale or
because they cannot be sold or disposed of in the ordinary course of
business at approximately the prices at which they are valued.
(vi) The Portfolio does not currently intend during the coming year to
purchase or sell futures contracts or call options. This limitation
does not apply to options attached to, or acquired or traded together
with, their underlying securities, and does not apply to securities
that incorporate features similar to options or futures contracts.
(vii) The Portfolio does not currently intend during the coming year to make
loans, but this limitation does not apply to purchases of debt
securities or to repurchase agreements.
(viii) The Portfolio does not currently intend during the coming year to
(a) purchase securities of other investment companies, except in the
open market where no commission except the ordinary broker's commission
is paid, or (b) purchase or retain securities issued by other open-end
investment companies. Limitations (a) and (b) do not apply to
securities received as dividends, through offers of exchange, or as a
result of a reorganization, consolidation, or merger.
(ix) The Portfolio does not currently intend during the coming year to
purchase the securities of any issuer (other than securities issued or
guaranteed by domestic or foreign governments or political subdivisions
thereof) if, as a result, more than 5% of its total assets would be
invested in the securities of business enterprises that, including
predecessors, have a record of less than three years of continuous
operation.
(x) The Portfolio does not currently intend during the coming year to
invest in oil, gas, or other mineral exploration or development programs
or leases.
(xi) The Portfolio does not currently intend during the coming year to
purchase the securities of any issuer if those officers and Trustees
of the Trust and those officers and directors of the Investment Adviser
who individually own more than 1/2 of 1% of the securities of such
issuer together own more than 5% of such issuer's securities.
(xii) The Portfolio does not currently intend during the coming year to
invest all of its assets in the securities of a single, open-end
management investment company with substantially the same fundamental
investment objectives, policies, and limitations as the Portfolio.
INVESTMENT LIMITATIONS OF MUNICIPAL MONEY MARKET PORTFOLIO
THE FOLLOWING ARE MUNICIPAL MONEY MARKET PORTFOLIO'S FUNDAMENTAL
LIMITATIONS SET FORTH IN THEIR ENTIRETY. THE PORTFOLIO MAY NOT:
(1) with respect to 75% of the Portfolio's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities) if,
as a result, (a) more than 5% of the Portfolio's total assets would be
invested in the securities of that issuer, or (b) the Portfolio would
hold more than 10% of the outstanding voting securities of that issuer;
(2) issue senior securities, except as permitted under the 1940 Act;
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(3) borrow money, except that the Portfolio may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not
exceeding 33 1/3% of its total assets (including the amount borrowed)
less liabilities (other than borrowings). Any borrowings that come to
exceed this amount will be reduced within three days (not including
Sundays and holidays) to the extent necessary to comply with the 33 1/3%
limitation;
(4) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities;
(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities, or tax-exempt obligations issued or guaranteed by a
U.S. territory or possession or a state or local government, or a
political subdivision of any of the foregoing) if, as a result, 25% or
more of the Portfolio's total assets would be invested in securities
of companies whose principal business activities are in the same
industry;
(6) buy or sell real estate, unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate
or securities of companies engaged in the real estate business);
(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; or
(8) lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of debt securities or to
repurchase agreements.
(9) The Portfolio may, notwithstanding any other fundamental investment
policy or limitation, invest all of its assets in the securities of a
single, open-end management investment company with substantially the
same fundamental investment objectives, policies, and limitations as
the Portfolio.
THE FOLLOWING LIMITATIONS OF MUNICIPAL MONEY MARKET PORTFOLIO ARE NOT
FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL.
(I) the Portfolio does not currently intend during the coming year to
purchase the voting securities of any issuer.
(ii) The Portfolio does not currently intend during the coming year to sell
securities short, unless it owns or has the right to obtain securities
equivalent in kind and amount to the securities sold short.
(iii) The Portfolio does not currently intend during the coming year to
purchase securities on margin, except that the Portfolio may obtain such
short-term credits as are necessary for the clearance of transactions.
(iv) The Portfolio may borrow money only (a) from a bank, or (b) by engaging
in reverse repurchase agreements with any party (reverse repurchase
agreements are treated as borrowings for purposes of fundamental
investment limitation (3)). The Portfolio will not purchase any security
while borrowings representing more than 5% of its total assets are
outstanding.
(v) The Portfolio does not currently intend during the coming year to
purchase any security, if, as a result, more than 10% of its net assets
would be invested in securities that are deemed to be illiquid because
they are subject to legal or contractual restrictions on resale or
because they cannot be sold or disposed of in the ordinary course of
business at approximately the prices at which they are valued.
(vi) The Portfolio does not currently intend during the coming year to
purchase or sell futures contracts or call options. This limitation does
not apply to options attached to, or acquired or traded together with,
their
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underlying securities, and does not apply to securities that
incorporate features similar to options or futures contracts.
(vii) The Portfolio does not currently intend during the coming year to make
loans, but this limitation does not apply to purchases of debt
securities.
(viii) The Portfolio does not currently intend during the coming year to
(a) purchase securities of other investment companies, except in the
open market where no commission except the ordinary broker's commission
is paid, or (b) purchase or retain securities issued by other open-end
investment companies. Limitations (a) and (b) do not apply to
securities received as dividends, through offers of exchange, or as
a result of a reorganization, consolidation, or merger.
(ix) The Portfolio does not currently intend during the coming year to
purchase the securities of any issuer (other than securities issued or
guaranteed by domestic or foreign governments or political subdivisions
thereof) if, as a result, more than 5% of its total assets would be
invested in the securities of business enterprises that, including
predecessors, have a record of less than three years of continuous
operation.
(x) The Portfolio does not currently intend during the coming year to
invest in oil, gas, or other mineral exploration or development
programs or leases.
(xi) The Portfolio does not currently intend during the coming year to
purchase the securities of any issuer if those officers and Trustees
of the Trust and those officers and directors of the Investment
Adviser who individually own more than 1/2 of 1% of the securities
of such issuer together own more than 5% of such issuer's securities.
(xii) The Portfolio does not currently intend during the coming year to
invest all of its assets in the securities of a single, open-end
management investment company with substantially the same fundamental
investment objectives, policies, and limitations as the Portfolio.
INVESTMENT LIMITATIONS OF CASH RESERVE PORTFOLIO
THE FOLLOWING ARE CASH RESERVE PORTFOLIO'S FUNDAMENTAL LIMITATIONS SET
FORTH IN THEIR ENTIRETY. THE PORTFOLIO MAY NOT:
(1) with respect to 75% of the Portfolio's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities) if,
as a result, (a) more than 5% of the Portfolio's total assets would be
invested in the securities of that issuer; or (b) the Portfolio would
hold more than 10% of the outstanding voting securities of that issuer;
(2) issue senior securities, except as permitted under the 1940 Act;
(3) borrow money, except that the Portfolio may (I) borrow money for
temporary or emergency purposes (not for leveraging or investment)
and (ii) engage in reverse repurchase agreements for any purpose;
provided that (I) and (ii) in combination do not exceed 33 1/3% of the
Portfolio's total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that come to
exceed this amount will be reduced within three days (not including
Sundays and holidays) to the extent necessary to comply with the 33 1/3%
limitation;
(4) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities;
(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, 25% or more of the Portfolio's
total assets would be invested in the
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securities of companies whose principal business activities are in the
same industry, except that the Portfolio will invest 25% or more of its
total assets in the financial services industry;
(6) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the
Portfolio from investing in securities or other instruments backed by
real estate or securities of companies engaged in the real estate
business);
(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; or
(8) lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of debt securities or to
repurchase agreements.
(9) The Portfolio may, notwithstanding any other fundamental investment
policy or limitation, invest all of its assets in the securities of a
single, open-end management investment company with substantially the
same fundamental investment objectives, policies, and limitations as
the Portfolio.
THE FOLLOWING LIMITATIONS OF CASH RESERVE PORTFOLIO ARE NOT FUNDAMENTAL AND
MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL.
(I) The Portfolio does not currently intend during the coming year to
purchase a security (other than a security insured or guaranteed by
the U.S. government or any of its agencies or instrumentalities) if,
as a result, more than 5% of its total assets would be invested in
the securities of a single issuer; provided that the Portfolio may
invest up to 25% of its total assets in the first tier securities of
a single issuer for up to three business days.
(ii) The Portfolio does not currently intend during the coming year to
sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold
short.
(iii) The Portfolio does not currently intend during the coming year to
purchase securities on margin, except that the Portfolio may obtain
such short-term credits as are necessary for the clearance of
transactions.
(iv) The Portfolio may borrow money only (a) from a bank or (b) by engaging
in reverse repurchase agreements with any party. The Portfolio will
not purchase any security while borrowings (excluding reverse
repurchase agreements) representing more than 5% of its total
assets are outstanding.
(v) The Portfolio does not currently intend during the coming year to
purchase any security, if, as a result, more than 10% of its net
assets would be invested in securities that are deemed to be
illiquid because they are subject to legal or contractual restrictions
on resale or because they cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which
they are valued.
(vi) The Portfolio does not currently intend during the coming year to
purchase or sell futures contracts or call options. This limitation
does not apply to options attached to, or acquired or traded together
with, their underlying securities, and does not apply to securities
that incorporate features similar to options or futures contracts.
(vii) The Portfolio does not currently intend during the coming year to
make loans, but this limitation does not apply to purchases of debt
securities.
(viii) The Portfolio does not currently intend during the coming year to
(a) purchase securities of other investment companies, except in the
open market where no commission except the ordinary broker's
commission is paid, or (b) purchase or retain securities issued by
other open-end investment companies. Limitations (a) and (b) do
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not apply to securities received as dividends, through offers of
exchange, or as a result of a reorganization, consolidation, or
merger.
(ix) The Portfolio does not currently intend during the coming year to
purchase the securities of any issuer (other than securities issued
or guaranteed by domestic or foreign governments or political
subdivisions thereof) if, as a result, more than 5% of its total
assets would be invested in the securities of business enterprises
that, including predecessors, have a record of less than three years
of continuous operation.
(x) The Portfolio does not currently intend during the coming year to
invest in oil, gas, or other mineral exploration or development
programs or leases.
(xi) The Portfolio does not currently intend during the coming year to
purchase the securities of any issuer if those officers and Trustees
of the Trust and those officers and directors of the Investment
Adviser who individually own more than 1/2 of 1% of the securities
of such issuer together own more than 5% of such issuer's securities.
(xii) The Portfolio does not currently intend during the coming year to
invest all of its assets in the securities of a single, open-end
management investment company with substantially the same fundamental
investment objectives, policies, and limitations as the Portfolio.
INVESTMENT INSTRUMENTS
First Tennessee Bank National Association through its division, Garland
Capital Management (Garland), serves as Investment Adviser to the Portfolios,
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 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.
RULE 2A-7 The Money Market Portfolios seek to maintain a stable net asset
value per share by limiting Portfolio investments in accordance with the
terms of Rule 2a-7 under the Investment Company Act of 1940 which sets forth
limitations on the quality, maturity and other investment characteristics of
Registered Investment Companies which hold themselves out as Money Market
Funds.
ASSET-BACKED SECURITIES for Cash Reserve 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, and, in certain cases, supported by letters of
credit, surety bonds, or other credit enhancements. The value of
asset-backed securities may also be affected by the creditworthiness of the
servicing agent for the pool, the originator of the loans or receivables, or
the financial institution(s) providing the credit support.
COMMERCIAL PAPER. Cash Reserve Portfolio may purchase commercial paper rated
at the time of purchase A-1 by Standard & Poor's Corporation (S&P) or Prime-1
by Moody's Investors Service, Inc. (Moody's). The Portfolio may also
purchase unrated commercial paper determined to be of comparable quality at
the time of purchase by PIMC, pursuant to guidelines approved by the
Trustees.
DELAYED-DELIVERY TRANSACTIONS. Each Portfolio may buy and sell securities on
a delayed-delivery or when-issued basis. These transactions involve a
commitment by each Portfolio to purchase or sell specific securities at a
predetermined price and/or yield, with payment and delivery taking place
after the customary settlement period for that type of security (and more
than seven days in the future). Typically, no interest accrues to the
purchaser until the security is delivered.
When purchasing securities on a delayed-delivery basis, each Portfolio
assumes the rights and risks of ownership, including the risk of price and
yield fluctuations. Because each Portfolio is not required to pay for
securities until the delivery date, these risks are in addition to the risks
associated with the Portfolios' other investments. If each Portfolio remains
substantially fully invested at a time when delayed-delivery purchases are
outstanding, the delayed-delivery
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purchases may result in a form of leverage. When delayed-delivery purchases
are outstanding, each Portfolio will set aside appropriate liquid assets in a
segregated custodial account to cover its purchase obligations. When each
Portfolio has sold a security on a delayed-delivery basis, each Portfolio
does not participate in further gains or losses with respect to the security.
If the other party to a delayed-delivery transaction fails to deliver or pay
for the securities, each Portfolio could miss a favorable price or yield
opportunity, or could suffer a loss.
Each Portfolio may renegotiate delayed-delivery transactions after they are
entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.
FEDERALLY-TAXABLE OBLIGATIONS. Municipal Money Market Portfolio does not
intend to invest in securities whose interest is federally taxable; however,
from time to time, the Portfolio may invest a portion of its assets on a
temporary basis in fixed-income obligations whose interest is subject to
federal income tax. For example, the Portfolio may invest in obligations
whose interest is federally taxable pending the investment or reinvestment in
municipal securities of proceeds from the sale of its shares or sales of
portfolio securities.
Should the Portfolio invest in taxable obligations, it would purchase
securities which in the judgment of PIMC are of high quality. These would
include obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities, obligations of domestic banks, and repurchase
agreements. The Portfolio will purchase taxable obligations only if they
meet its quality requirements as set forth in the Prospectus.
Proposals to restrict or eliminate the federal income tax exemption for
interest on municipal obligations are introduced before Congress from time to
time. Proposals also may be introduced before state legislatures that would
affect the state tax treatment of the Portfolio's distributions. If such
proposals were enacted, the availability of municipal obligations and the
value of the Portfolio's holdings would be affected and the Trustees would
reevaluate the Portfolio's investment objectives and policies.
Municipal Money Market Portfolio anticipates being as fully invested as
practicable in municipal securities; however, there may be occasions when as
a result of maturities of portfolio securities, or sales of Portfolio shares,
or in order to meet redemption requests, the Portfolio may hold cash that is
not earning income. In addition, there may be occasions when, in order to
raise cash to meet redemptions, the Portfolio may be required to sell
securities at a loss.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in
the ordinary course of business at approximately the prices at which they are
valued. Under supervision of the Trustees, PIMC, under the supervision of
Garland, determines the liquidity of Municipal Money Market Portfolio and
Cash Reserve Portfolio's investments and, through reports from PIMC, the
Trustees monitor investments in illiquid instruments. In determining the
liquidity of the Portfolios' investments, PIMC may consider various factors
including (1) the frequency of trades and quotations, (2) the number of
dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features) and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Portfolios' rights and
obligations relating to the investment). Investments currently considered by
Cash Reserve Portfolio to be illiquid include repurchase agreements not
entitling the holder to payment of principal and interest within seven days,
and some restricted securities and time deposits determined by PIMC to be
illiquid. Investments currently considered by Municipal Money Market
Portfolio to be illiquid include some restricted securities and municipal
lease obligations determined by PIMC to be illiquid. In the absence of
market quotations, illiquid investments are valued for purposes of monitoring
amortized cost valuation at fair value as determined in good faith by the
Trustees. If through a change in values, net assets or other circumstances,
the Portfolios were in a position where more than 10% of their net assets
were invested in illiquid securities, the Trustees would seek to take
appropriate steps to protect liquidity.
MONEY MARKET OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS, DOMESTIC BRANCHES
OF FOREIGN BANKS, AND FOREIGN BRANCHES OF DOMESTIC BANKS. Cash Reserve
Portfolio may purchase bank obligations, such as certificates of deposit,
bankers' acceptances, bank notes and time deposits, including instruments
issued or supported by the credit of U.S. or foreign banks or savings
institutions that have total assets at the time of purchase in excess of
$1 billion.
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The assets of a bank or savings institution will be deemed to include the
assets of its domestic and foreign branches for purposes of the Portfolio's
investment policies. Investments in short-term bank obligations may include
obligations of foreign banks and domestic branches of foreign banks, and also
foreign branches of domestic banks.
MUNICIPAL LEASE OBLIGATIONS. Municipal Money Market Portfolio may invest a
portion of its assets in municipal leases and participation interests
therein. These obligations, which may take the form of a lease, an
installment purchase, or a conditional sale contract, are issued by state and
local governments and authorities to acquire land and a wide variety of
equipment and facilities. Generally, the Portfolio will not hold such
obligations directly as a lessor of the property, but will purchase a
participation interest in a municipal obligation from a bank or other third
party. A participation interest gives a Portfolio a specified, undivided
interest in the obligation in proportion to its purchased interest in the
total amount of the obligation.
Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set
forth requirements that states or municipalities must meet to incur debt.
These may include voter referenda, interest rate limits, or public sale
requirements. Leases, installment purchase, or conditional sale contracts
(which normally provide for title to the leased asset to pass to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting their constitutional and
statutory requirements for the issuance of debt. Many leases and contracts
include "non-appropriation clauses" providing that the governmental issuer
has no obligation to make future payments under the lease or contract unless
money is appropriated for such purpose by the appropriate legislative body on
a yearly or other periodic basis. Non-appropriation clauses free the issuer
from debt issuance limitations.
REPURCHASE AGREEMENTS are transactions in which a Portfolio purchases a
security and simultaneously commits to resell that security at an agreed upon
price and date within a number of days from the date of purchase. The resale
price reflects the purchase price plus an agreed upon market rate of interest
which is unrelated to the coupon rate or maturity of the purchased security.
A repurchase agreement involves the obligation of the seller to pay the
agreed upon price. This obligation is in effect secured by the underlying
security having a value at least equal to the amount of the agreed upon
resale price and marked to market daily. Each Portfolio may enter into a
repurchase agreement with respect to any security in which it is authorized
to invest even though the underlying security matures in more than one year.
While it presently does not appear possible to eliminate all risks from the
transactions (particularly the possibility of a decline in the market value
of the underlying securities, as well as delay and costs to each Portfolio in
connection with bankruptcy proceedings), it is the policy of each Portfolio
to limit repurchase agreements to those parties whose creditworthiness has
been reviewed and found to present minimal credit risks by PIMC.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a
Portfolio sells a portfolio instrument to another party, such as a bank or
broker-dealer, in return for cash and agrees to repurchase the instrument at
a particular price and time. While a reverse repurchase agreement is
outstanding, each Portfolio will maintain appropriate high grade liquid
assets in a segregated custodial account to cover its obligation under the
agreement. Each Portfolio will enter into reverse repurchase agreements only
with parties whose creditworthiness has been found satisfactory by PIMC.
Such transactions may increase fluctuations in the market values of each
Portfolio's assets and may be viewed as a form of leverage.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is
required, Municipal Money Market Portfolio and Cash Reserve Portfolio may be
obligated to pay all or part of the registration expense and a considerable
period may elapse between the time it decides to seek registration and the
time the Portfolios may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions
were to develop, the Portfolios might obtain a less favorable price than
prevailed when they decided to seek registration of the security. However,
in general, the Portfolios anticipate holding restricted securities to
maturity or selling them in an exempt transaction.
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SHORT SALES AGAINST THE BOX. A Portfolio may sell securities short when it
owns or has the right to obtain securities equivalent in kind or amount to
the securities sold short. Short sales could be used to protect the net
asset value per share (NAV) of that Portfolio in anticipation of increased
interest rates without sacrificing the current yield of the securities sold
short. If a Portfolio enters into a short sale against the box, it will be
required to set aside securities equivalent in kind and amount to the
securities sold short (or securities convertible or exchangeable into such
securities) and will be required to hold such securities while the short sale
is outstanding. A Portfolio will incur transaction costs, including
interest expense, in connection with opening, maintaining and closing short
sales against the box.
STANDBY COMMITMENTS are puts that entitle holders to same-day settlement at
an exercise price equal to the amortized cost of the underlying security plus
accrued interest, if any, at the time of exercise. Municipal Money Market
Portfolio may acquire standby commitments to enhance the liquidity of
portfolio securities, but only when the issuers of the commitments present
minimal risk of default.
Ordinarily, the Portfolio will not transfer a standby commitment to a third
party, although it could sell the underlying municipal security to a third
party at any time. The Portfolio may purchase standby commitments separate
from or in conjunction with the purchase of securities subject to such
commitments. In the latter case, the Portfolio would pay a higher price for
the securities acquired, thus reducing their yield to maturity. Standby
commitments will not affect the dollar-weighted average maturity of the
Portfolio, or the valuation of the securities underlying the commitments.
Issuers or financial intermediaries may obtain letters of credit or other
guarantees to support their ability to buy securities on demand. PIMC may
rely upon its evaluation of a bank's credit in determining whether to support
an instrument supported by a letter of credit. In evaluating a foreign
bank's credit, PIMC 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.
Standby commitments are subject to certain risks, including the ability of
issuers to pay for securities at the time the commitments are exercised; the
fact that standby commitments are not marketable by the Portfolio; and that
the maturities of the underlying securities may be different from those of
the commitments.
TENDER OPTION BONDS are created by coupling an intermediate or long-term,
tax-exempt bond (generally held pursuant to a custodial arrangement) with a
tender agreement that gives the holder the option to tender the bond at its
face value. As consideration for providing the tender option, the sponsor
(usually a bank, broker-dealer, or other financial institution) receives
periodic fees equal to the difference between the bond's fixed coupon rate
and the rate (determined by a remarketing or similar agent) that would cause
the bond, coupled with the tender option, to trade at par on the date of such
determination. After payment of the tender option fee, Municipal Money
Market Portfolio effectively holds a demand obligation that bears interest at
the prevailing short-term tax-exempt rate. Subject to applicable regulatory
requirements, the Portfolio may buy tender option bonds if the agreement
gives the Portfolio the right to tender the bond to its sponsor no less
frequently than once every 397 days. In selecting tender option bonds for
the Portfolio, PIMC will consider the creditworthiness of the issuer of the
underlying bond, the custodian, and the third party provider of the tender
option. In certain instances, a sponsor may terminate a tender option if,
for example, the issuer of the underlying bond defaults on interest payments.
VARIABLE AND FLOATING RATE DEMAND OBLIGATIONS (VRDOs/FRDOs) are obligations
that bear variable or floating interest rates and carry rights that permit
holders to demand payment of the unpaid principal balance plus accrued
interest from the issuers or certain financial intermediaries. Floating rate
securities have interest rates that change whenever there is a change in a
designated base 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 VRDO or FRDO that approximates its par
value.
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A demand instrument with a conditional demand feature must have received both
a short-term and a long-term high quality rating, or, if unrated, have been
determined to be of comparable quality pursuant to procedures adopted by the
Trustees. A demand instrument with an unconditional demand feature may be
acquired solely in reliance upon a short-term high quality rating or, if
unrated, upon a finding of comparable short-term quality pursuant to
procedures to be adopted by the Trustees.
Municipal Money Market Portfolio and Cash Reserve Portfolio may invest in
fixed-rate bonds that are subject to third party puts and in participation
interests in such bonds held by a bank in trust or otherwise. These bonds
and participation interests have tender options or demand features that
permit the Portfolios to tender (or put) their bonds to an institution at
periodic intervals and to receive the principal amount thereof. The
Portfolios consider variable rate instruments structured in this way
(Participating VRDOs) to be essentially equivalent to other VRDOs they
purchase. The IRS has not ruled whether the interest on participating VRDOs
is tax exempt and accordingly, Municipal Money Market Portfolio and Cash
Reserve Portfolio intend to purchase these instruments based on opinions of
PIMC's fund counsel.
Municipal Money Market Portfolio and Cash Reserve Portfolio may invest in
variable or floating rate instruments that ultimately mature in more than 397
days, if the Portfolios acquire a right to sell the instruments that meets
certain requirements set forth in Rule 2a-7. A variable rate instrument
(including instruments subject to a demand feature) that matures in 397 days
or less may be deemed to have a maturity equal to the period remaining until
the next readjustment of the interest rate. A variable rate instrument that
matures in greater than 397 days but that is subject to a demand feature that
is 397 days or less may be deemed to have a maturity equal to the longer of
the period remaining until the next readjustment of the interest rate or the
period remaining until the principal amount can be recovered through demand.
A floating rate instrument that is subject to a demand feature may be deemed
to have a maturity equal to the period remaining until the principal amount
may be recovered through demand.
U.S. Government Money Market Portfolio and Cash Reserve Portfolio may invest
in variable and floating rate instruments of the U.S. Government, its
agencies and instrumentalities, with remaining maturities of 397 days or more
provided that they are deemed to have a maturity of less than 397 days as
defined in accordance with the rules of the SEC. A variable rate instrument
that matures in 397 days or more may be deemed to have a maturity equal to
the period remaining until the next readjustment of the interest rate.
ZERO COUPON BONDS 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, a Portfolio takes into account as income a portion of the
difference between a zero coupon bond's purchase price and its face value.
PORTFOLIO TRANSACTIONS
Garland and PIMC (collectively, the Advisers) are responsible for decisions
to buy and sell securities for each Portfolio, broker-dealer selection, and
negotiation of commission rates. Since purchases and sales of portfolio
securities by the Portfolios are usually principal transactions, the
Portfolios incur little or no brokerage commissions. Portfolio securities
are normally purchased directly from the issuer or from a market maker for
the securities. The purchase price paid to dealers serving as market makers
may include a spread between the bid and asked prices. The Portfolios may
also purchase securities from underwriters at prices which include a
commission paid by the issuer to the underwriter.
Each Portfolio does not seek to profit from short-term trading, and will
generally (but not always) hold portfolio securities to maturity. Each
Portfolio requires that investments mature within 397 days or less, as
determined in accordance with the rules of the SEC. The amortized cost
method of valuing portfolio securities requires that each Portfolio maintain
an average weighted portfolio maturity of 90 days or less. Both policies may
result in relatively high portfolio turnover, but since brokerage commissions
are not normally paid on money market instruments, the high rate of portfolio
turnover is not expected to have a material effect on the Portfolios' net
income or expenses.
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The Advisers' primary consideration in effecting a security transaction is to
obtain the best net price and the most favorable execution of the order. To
the extent that the executions and prices offered by more than one dealer are
comparable, the Advisers may, at their discretion, effect transactions with
dealers that furnish statistical, research and other information or services
which are deemed by the Advisers to be beneficial to the Portfolios'
investment program. Certain research services furnished by dealers may be
useful to the Advisers with clients other than the Portfolios. Similarly,
any research services received by the Advisers through placement of portfolio
transactions of other clients may be of value to the Advisers in fulfilling
their obligations to the Portfolios. The Advisers are of the opinion that
the material received is beneficial in supplementing their research and
analysis, and therefore, may benefit the Portfolios by improving the quality
of their investment advice. The advisory fee paid by the Portfolios is not
reduced because the Advisers receive such services.
The Advisers and their affiliates manage several other investment accounts,
some of which may have objectives similar to that of the Portfolios. It is
possible that at times, identical securities will be acceptable for one or
more of such investment accounts. However, the position of each account in
the securities of the same issue may vary and the length of time that each
account may choose to hold its investment in the securities of the same issue
may likewise vary. The timing and amount of purchase by each account will
also be determined by its cash position. If the purchase or sale of
securities consistent with the investment policies of each Portfolio and one
or more of these accounts is considered at or about the same time,
transactions in such securities will be allocated in good faith among the
Portfolios and such accounts in a manner deemed equitable by the Advisers.
The Advisers may combine such transactions, in accordance with applicable
laws and regulations, in order to obtain the best net price and most
favorable execution. The allocation and combination of simultaneous
securities purchases on behalf of each Portfolio will be made in the same way
that such purchases are allocated among or combined with those of other such
investment accounts. Simultaneous transactions could adversely affect the
ability of each Portfolio to obtain or dispose of the full amount of a
security which it seeks to purchase or sell.
Except to the extent permitted by law, portfolio securities will not be
purchased from or sold to or through any "affiliated person," as defined in
the 1940 Act, of the Advisers.
VALUATION OF PORTFOLIO SECURITIES
Each Portfolio values its investments on the basis of amortized cost. This
technique involves valuing an instrument at its cost as adjusted for
amortization of premium or accretion of discount rather than its value based
on current market quotations or appropriate substitutes which reflect current
market conditions. The amortized cost value of an instrument may be higher
or lower than the price each Portfolio would receive if it sold the
instrument.
Valuing each Portfolio's instruments on the basis of amortized cost and use
of the term "money market fund" are permitted by Rule 2a-7 under the 1940
Act, as amended. Each Portfolio must adhere to certain conditions under Rule
2a-7 which are summarized in the Prospectus.
The Trustees and Garland oversee PIMC's adherence to Securities and Exchange
Commission (SEC) rules concerning money market funds, and the Trustees have
established procedures designed to stabilize each Portfolio's NAV at $1.00.
At such intervals as they deem appropriate, the Trustees consider the extent
to which NAV calculated by using market valuations would deviate from $1.00
per share. If the Trustees believe that a deviation from each Portfolio's
amortized cost per share may result in material dilution or other unfair
results to shareholders, the Trustees have agreed to take such corrective
action, if any, as they deem appropriate to eliminate or reduce, to the
extent reasonably practicable, the dilution or unfair results. Such
corrective action could include selling portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding dividends; redeeming shares in kind; establishing NAV
by using available market quotations; and such other measures as the Trustees
may deem appropriate.
During periods of declining interest rates, yield based on amortized cost may
be higher than the yield based on market valuations. Under these circumstances,
a shareholder would be able to obtain a somewhat higher yield than would result
if a Portfolio utilized market valuations to determine its NAV. The converse
would apply in a period of rising interest rates.
PERFORMANCE
From time to time, each Class of each Portfolio may quote the current yield
and effective yield for each class in advertisements or in reports or other
communications with shareholders. Both yield figures are based on historical
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earnings and are not intended to indicate future performance. The net change
in value of a hypothetical account containing one share reflects the value of
additional shares purchased with dividends from the one original share and
dividends declared on both the original share and any additional shares.
This income is then annualized; that is, the amount of income generated by
the investment during that week is assumed to be generated each week over a
52-week period and is shown as a percentage of the investment. The effective
yield is calculated similarly but, when annualized, the income earned by an
investment is assumed to be reinvested. The effective yield will be slightly
higher than the current yield because of the compounding effect of this
assumed reinvestment. In addition to the current yield, yields may be quoted
in advertising based on any historical seven-day period.
Yield information may be useful in reviewing performance and for providing a
basis for comparison with other investment alternatives. Yield will
fluctuate, unlike investments which pay a fixed yield for a stated period of
time. Investors should give consideration to the quality and maturity of
portfolio securities of the respective investment companies when comparing
investments.
Investors should recognize that in periods of declining interest rates, yield
will tend to be somewhat higher than prevailing market rates, and in periods
of rising interest rates, yield will tend to be somewhat lower. Also, when
interest rates are falling, the inflow of net new money from the continuous
sale of its shares will likely be invested in instruments producing lower
yields than the balance of the holdings, thereby reducing the current yield.
In periods of rising interest rates, the opposite can be expected to occur.
The 7-day yields for the fiscal year ending June 30, 1995 were 5.70%, 5.70%,
3.88%, and 5.80% for U.S. Treasury Money Market Portfolio, U.S. Government
Money Market Portfolio, Municipal Money Market Portfolio, and Cash Reserve
Portfolio, respectively.
Municipal Money Market Portfolio also may quote the tax-equivalent yield for
each class, which shows the taxable yield an investor would have to earn,
before taxes, to equal the tax-free yield. Tax-equivalent yield is the
current yield that would have to be earned, in the investor's tax bracket, to
match the tax-free yields shown below after taking federal income taxes into
account. Tax-equivalent yields are calculated by dividing current yield by
the result of one minus a stated federal or combined federal and state tax
rate. It gives the approximate yield a taxable security must provide at
various income brackets to produce after-tax yields equivalent to those of
tax-exempt obligations yielding from 2.0% to 4.0%. Of course, no assurance
can be given that each class will achieve any specific tax-exempt yield.
While the Portfolio invests principally in municipal obligations whose
interest is not includable in gross income for purposes of calculating
federal income tax, other income received by the Portfolio may be taxable.
The following table shows the effect of a shareholder's tax status on
effective yield under the federal income tax laws for 1995.
1995 TAX RATES AND TAX-EQUIVALENT YIELDS
<TABLE>
<CAPTION>
Taxable Federal
Income * Tax If individual tax-exempt yield is:
Bracket ** 2.00% 3.00% 4.00%
single return joint return Then taxable equivalent yield is:
<S> <C> <C> <C> <C> <C>
$0 - $23,350 $0 - $39,000 15% 2.35% 3.53% 4.71%
$23,351 - $56,550 $39,001 - $94,250 28% 2.78% 4.17% 5.56%
$56,551 - $117,950 $94,251 - $143,600 31% 2.90% 4.35% 5.80%
$117,951 - $256,500 $143,601 - $256,000 36% 3.13% 4.69% 6.25%
</TABLE>
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$256,501 - above $256,501 - above 39.6% 3.31% 4.97% 6.62%
* Taxable income (gross income after all exemptions, adjustments, and
deductions) based on 1995 tax rates.
** Excludes the impact of the phase out of personal exemptions, limitation
on itemized deductions, and other credits, exclusions, and adjustments
which may raise a taxpayer's marginal tax rate. An increase in a
shareholder's marginal tax rate would increase that shareholder's
tax-equivalent yield.
The Portfolio may invest a portion of its assets in obligations that
are subject to federal income tax. When the Portfolio invests in these
obligations, its tax-equivalent yield will be lower. In the table above,
tax-equivalent yields are calculated assuming investments are 100%
federally and state tax-free.
Each Portfolio may compare the performance of each of its classes or the
performance of securities in which it or each of its classes may invest to
other mutual funds, especially to those with similar investment objectives.
These comparisons may be based on data published by IBC USA (Publications),
Inc. of Ashland, MA, or by Lipper Analytical Services, Inc. (Lipper,
sometimes referred to as Lipper Analytical Services), an independent service
located in Summit, New Jersey that monitors the performance of mutual funds.
Lipper generally ranks funds on the basis of total return, assuming
reinvestment of distributions, but does not take sales charges or redemption
fees into consideration, and is prepared without regard to tax consequences.
Lipper may also rank funds based on yield. In addition to the mutual fund
rankings, each Portfolio's performance may be compared to mutual fund
performance indices prepared by Lipper. The MONEY FUND AVERAGES-TM-
(Government and Tax-Free), which is reported in the MONEY FUND REPORT-R-,
covers money market funds.
From time to time each Portfolio's performance may also be compared to other
mutual funds tracked by financial or business publications or periodicals.
For example, the Portfolios may quote Morningstar, Inc. in its advertising
materials. Morningstar, Inc. is a mutual fund rating service that rates
mutual funds on the basis of risk-adjusted performance.
Each Portfolio may compare its performance to the yields or averages of other
money market securities as reported by the Federal Reserve Bulletin, by
TeleRate, a financial information network, or by Salomon Brothers Inc., a
broker-dealer firm; and other fixed-income investments such as certificates
of deposit (CDS). The principal value and interest rate of CDS and money
market securities are fixed at the time of purchase whereas yield will
fluctuate. Unlike some CDS and certain other money market securities, money
market mutual funds, and each Portfolio in particular, are not insured by the
Federal Deposit Insurance Corporation (FDIC). Investors should give
consideration to the quality and maturity of the Portfolio securities of the
respective investment companies when comparing investment alternatives. Each
Portfolio may also quote mutual fund rating services in its advertising
materials, including data from a mutual fund rating service which rates
mutual funds on the basis of risk adjusted performance. Each Portfolio may
reference the growth and variety of money market mutual funds and Garland's
or Sub-Adviser's skill and participation in the industry. Because the fees
for Class II and Class III are higher than the fees for Class I, yields and
returns for those classes will be lower than for Class I.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The following holiday closings have been scheduled for the remainder of 1995
and 1996: Veterans' Day, Thanksgiving Day, Christmas Day (observed), New
Year's Day, Dr. Martin Luther King Jr. Day, (observed) Presidents' Day, Good
Friday, Memorial Day (observed), Independence Day, Labor Day, and Columbus
Day (observed). Although Garland expects the same holiday schedule to be
observed in the future, the New York Stock Exchange (NYSE) and the Federal
Reserve Bank of New York (New York Federal Reserve) may modify their holiday
schedules at any time.
If the Trustees determine that existing conditions make cash payment
undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing each
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Portfolio's NAV. Shareholders receiving securities or other property on
redemption may realize a gain or loss for tax purposes and will incur any
costs of sale, as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, each Portfolio is required to give
shareholders at least 60 days' notice prior to terminating or modifying each
Portfolio's exchange privilege. Under Rule 11a-3, the 60-day notification
requirement may be waived if (i) the only effect of a modification would be
to reduce or eliminate an administrative fee, redemption fee or deferred
sales charge ordinarily payable at the time of exchange, or (ii) under
extraordinary circumstances, a Portfolio temporarily suspends the offering of
shares as permitted under the 1940 Act or by the SEC or because it is unable
to invest amounts effectively in accordance with its investment objective and
policies. This exchange limit may be modified for accounts in certain
institutional retirement plans to conform to plan exchange limits and
Department of Labor Regulations.
ADDITIONAL CLASS II AND CLASS III INFORMATION
SYSTEMATIC INVESTING PROGRAM. Investors can make regular investments in
Class II and Class III with Systematic Investing by completing the
appropriate section on the account application and attaching a voided
personal check. If the bank account is jointly owned, make sure that all
owners sign. Investments may be made monthly by automatically deducting $25
or more from your checking account. This monthly purchase amount may be
changed at any time. There is a $50 minimum initial investment requirement
for this option. Accounts will be drafted on or about the first business day
of every month. Systematic Investing may be canceled at any time without
payment of a cancellation fee. Investors will receive a confirmation from
their securities broker or financial institution (Investment Professional),
or from the Transfer Agent for every transaction, and a debit entry will
appear on your bank statement.
SYSTEMATIC WITHDRAWAL PLAN. Investors can have monthly, quarterly or
semi-annual checks sent from their account to you, to a person named by them,
or to their bank checking account. The 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 shares, an account eventually may be exhausted.
Contact the Investment Professional for more information.
DISTRIBUTIONS AND TAXES
DIVIDENDS. Dividends will not normally qualify for the dividends-received
deduction available to corporations, since the Portfolios' income is
primarily derived from interest income and short-term capital gains.
Depending upon state law, a portion of each Portfolio's dividends
attributable to interest income derived from U.S. government securities may
be exempt from state and local taxation. It is not anticipated that
dividends attributable to U.S. government securities will be exempt from
Tennessee income tax. The Portfolios will provide information on the portion
of each Portfolio's dividends, if any, that qualifies for this exemption.
Dividends derived from Municipal Money Market Portfolio's tax-exempt income
are not subject to federal income tax, but must be reported to the IRS by
shareholders. Exempt-interest dividends are included in income for purposes
of computing the portion of social security and railroad retirement benefits
that may be subject to federal tax. If the Portfolio earns taxable income or
capital gains from its investments, these amounts will be designated as
taxable distributions. Dividends derived from taxable investment income and
short-term capital gains are taxable as ordinary income. Municipal Money
Market Portfolio will send a tax statement showing the amount of tax-exempt
distributions for the past calendar year, and will send an IRS Form 1099-DIV
by January 31 if the Portfolio makes any taxable distributions. It is not
anticipated that the Portfolio's distributions will be exempt from Tennessee
income tax.
Each Portfolio's 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 an IRS Form 1099-DIV by January 31.
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<PAGE>
CAPITAL GAIN DISTRIBUTIONS. Each Portfolio may distribute short-term capital
gains once a year or more often as necessary to maintain their NAVs at $1.00
per share or to comply with distribution requirements under federal tax law.
Each Portfolio does not anticipate earning long-term capital gains on
securities held.
TAX STATUS OF THE TRUST. Each Portfolio has qualified and intends to qualify
as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code), so that each Portfolio will not
be liable for federal income or excise taxes on net investment income or
capital gains to the extent that these are distributed to shareholders in
accordance with applicable provisions of the Code.
STATE AND LOCAL TAX ISSUES. For mutual funds organized as business trusts,
state law provides for a pass-through of the state and local income tax
exemption afforded to direct owners of U.S. government securities. Some
states limit this pass-through to mutual funds that invest a certain amount
in U.S. government securities, and some types of securities, such as
repurchase agreements and some agency backed securities, may not qualify for
this pass-through benefit. The tax treatment of dividend distributions from
U.S. Treasury Money Market Portfolio and U.S. Government Money Market
Portfolio will be the same as if a shareholder directly owned a proportionate
share of the U.S. government securities in the Portfolio. Because the income
earned on most U.S. government securities in which the Portfolios invest is
exempt from the state and local income taxes, the portion of dividends from
the Portfolios attributable to these securities will also be free from income
taxes. The exemption from state and local income taxation does not preclude
states from assessing other taxes on the ownership of U.S. government
securities.
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. In
addition to federal income taxes, shareholders may be subject to state and
local taxes on distributions received from each Portfolio. Investors should
consult their tax advisors to determine whether each Portfolio is suitable to
their particular tax situation.
Federal income tax will be withheld at a 20% rate on any eligible rollover
distributions that are not transferred directly to another qualified plan or
IRA. Actual income tax may be higher or lower and will be due when tax forms
for the year are filed. Taxes will not be withheld in cases of direct
rollover into an IRA or another qualified plan.
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust are listed below. Each
Trustee or officer that is an "interested person" (as defined in the 1940
Act) by virtue of his affiliation with Garland or ALPS, is indicated by an
asterisk (*).
THOMAS M. BATCHELOR, Trustee, 4325 Woodcrest Drive, Memphis, TN, who
presently operates a management consultant business on a limited basis,
retired after owning and operating two General Insurance Companies agencies
for over thirty years. He was one of the founders and served as a director
of First American State Bank in Memphis, TN (now part of United American Bank
of Memphis). He currently serves as Chairman, Memphis Union Mission, TN, as
well as a charity and a non-profit foundation.
JOHN A. DECELL, Trustee, 5178 Wheelis, Suite 2, Memphis, TN is Proprietor,
DeCell & Company (real estate and business consulting), and President of
Capital Advisers, Inc. (real estate asset management).
*L. R. JALENAK, JR., Trustee, 6094 Apple Tree Drive, Suite 11, Memphis, TN
was Chairman of the Board (1990 - 1993 (retired)), Cleo Inc., a Gibson
Greetings Company. Mr. Jalenak is also a Director of Perrigo Company (1988 -
present), Lufkin Industries (1990 - present), Dyersburg Corporation (April
1992 - present), was President and CEO (until 1990) of Cleo Inc., and was a
Director of Gibson Greetings, Inc. from 1983 to 1991.
LARRY W. PAPASAN, Trustee, 1450 Brooks Road, Memphis, TN is President of
Smith & Nephew Richards, Inc. Mr. Papasan is a former Director of First
American National Bank of Memphis and The West Tennessee Board of First
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<PAGE>
American National Bank (1988 - 1991) and was President of Memphis Light Gas
and Water Division of the City of Memphis (1984 - 1991).
*RICHARD C. RANTZOW, President and Trustee, 5790 Shelby Avenue, Memphis, TN
is Vice President/Director, Ron Miller Associates, Inc. (manufacturer). Mr.
Rantzow was Managing Partner (until 1990) of the Memphis office of Ernst &
Young.
*MARK A. POUGNET, Treasurer and Secretary, is Chief Financial Officer of ALPS
Mutual Funds Services, Inc. (ALPS), the Administrator and Distributor. In
addition, Mr. Pougnet serves as Treasurer of the Duff & Phelps Funds, and
Treasurer of Westcore Trust. Prior to joining ALPS, Mr. Pougnet served as
Executive Director of Syndication Accounting for Paramount
Pictures-Television Group from 1989 to 1991.
The Trustees of the Trust receive from the Trust an annual fee of $4,000 and
a fee in the amount of $500 for attending each meeting of the Trustees and
each committee meeting.
As of September 30, 1995, the officers and Trustees of the Trust owned less
than 1% of the outstanding shares of any Portfolio.
INVESTMENT ADVISORY AGREEMENTS
Each Portfolio employs First Tennessee Bank National Association (First
Tennessee), Memphis, Tennessee, to furnish investment advisory and other
services to the Portfolio. First Tennessee Bank provides these services to
each Portfolio through its division, Garland Capital Management. Under the
Investment Advisory and Management Agreement with each Portfolio, Garland is
authorized to appoint one or more sub-advisers at Garland's expense. PNC
Institutional Management Corporation, formerly known as Provident
Institutional Management Corporation, (PIMC or the Sub-Adviser), Wilmington,
Delaware acts as Sub-Adviser and, subject to the direction of the Trustees
and of Garland, directs the investments of each Portfolio in accordance with
its investment objective, policies and limitations.
In addition to Garland's fee and the fees payable to the Transfer Agent,
Pricing and Accounting Agent, and to the Administrator, each Portfolio pays
for all its expenses, without limitation, that are not assumed by these
parties. Each Portfolio pays for typesetting, printing and mailing of proxy
material to existing shareholders, legal expenses, and the fees of the
custodian, auditor and Trustees. Other expenses paid by each Portfolio
include: interest, taxes, brokerage commissions, each Portfolio's
proportionate share of insurance premiums and Investment Company Institute
dues, and costs of registering shares under federal and state securities
laws. Each Portfolio also is liable for such nonrecurring expenses as may
arise, including costs of litigation to which each Portfolio is a party, and
its obligation under the Declaration of Trust to indemnify its officers and
Trustees with respect to such litigation.
For managing its investment and business affairs, each Portfolio pays Garland
its prorated portion a monthly management fee at the annual rate of .25% of
aggregate average monthly net assets of all money market Portfolios of the
Trust managed by Garland through $1 billion, and .22% on amounts greater than
$1 billion. For the fiscal year ended June 30, 1995, Garland earned
$127,764, $206,630, $203,876, and $31,714 from U.S. Treasury Money Market
Portfolio, U.S. Government Money Market Portfolio, Municipal Money Market
Portfolio, and Cash Reserve Portfolio, respectively, before waiving fees of
$86,879, $140,508, $138,636, and $21,566 for the respective Portfolios.
Garland has voluntarily agreed to waive its fees to .08% of each Portfolio's
average net assets. This waiver is subject to change, upon notification to
shareholders.
Under the Investment Advisory and Management Agreement, Garland is
authorized, at its own expense, to hire sub-advisers to provide investment
advice to each Portfolio. As Sub-Adviser, PIMC is paid by Garland a monthly
sub-advisory fee at the annual rate of .08% of aggregate average monthly net
assets of all money market Portfolios of the Trust advised by PIMC, through
$500 million, .06% of the next $500 million, and .05% on amounts greater than
$1 billion. Under the terms of the sub-advisory agreement with Garland,
PIMC, subject to the supervision of Garland, supervises the day-to-day
operations of each Portfolio and provides investment research and credit
analysis concerning each Portfolio's investments, conducts a continual
program of investment of each Portfolio's assets and maintains the books and
records required in connection with its duties under each sub-advisory
agreement. In addition, PIMC keeps Garland informed of the developments
materially affecting each Portfolio. For the fiscal year ended June 30, 1995
fees paid to PIMC were $40,884 $66,122, $65,241, and $10,149 for U.S.
Treasury Money Market Portfolio, U.S. Government Money Market Portfolio,
Municipal Money Market Portfolio, and Cash Reserve Portfolio, respectively.
ADMINISTRATION AGREEMENT AND OTHER CONTRACTS
ADMINISTRATOR AND DISTRIBUTOR. ALPS Mutual Funds Services, Inc. (ALPS, the
Administrator and Distributor), is the Administrator and Distributor to each
Portfolio under separate Administration and General Distribution Agreements
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<PAGE>
with respect to each Portfolio. ALPS, a Colorado corporation, is a
broker-dealer registered under the Securities Exchange Act of 1934 and a
member of the National Association of Securities Dealers, Inc.
As the Administrator, ALPS assists in each Portfolio's administration and
operation, including, but not limited to, providing office space and various
legal and accounting 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.
Prior to July 1, 1995, National Financial Services Corporation (NFSC) served
as the Administrator and Distributor for each Portfolio. As Administrator,
NFSC earned fees from each Portfolio computed daily and payable monthly at an
annual rate of .20% of average net assets through $100 million, .15% above
$100 million and through $200 million, and .10% over $200 million. For each
Portfolio's fiscal year ended June 30, 1995, NFSC earned administration fees
in the amount of $102,211, $165,304, $163,101, and $25,371 from the U.S.
Treasury Money Market Portfolio, U.S. Government Money Market Portfolio,
Municipal Money Market Portfolio and the Cash Reserve Portfolio respectively.
NFSC waived a portion of its fees payable by each of the Money Market
Portfolios during the fiscal year ended June 30, 1995 so that each Money
Market Portfolio paid to NFSC .10% of its average net assets. For the fiscal
year ended June 30, 1995, NFSC waived administration fees of $51,106,
$82,652, $81,551 and $12,685 for the U.S. Treasury Money Market Portfolio,
U.S. Government Money Market Portfolio, Municipal Money Market Portfolio and
Cash Reserve Portfolio respectively.
Garland, 4990 Poplar Avenue, 3rd Floor, Memphis, Tennessee, 38117, serves as
the Co-Administrator for each Portfolio. As the Co-Administrator, Garland
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. Garland is entitled to receive from
each Portfolio a monthly fee at the annual rate of .05% of average net
assets.
As the Distributor, ALPS sells shares of Class I as agent on behalf of the
Trust at no additional cost to the Trust. Class II and III are obligated to
pay ALPS monthly an additional annual fee of up to .25% and .70% of average
net assets, respectively, which consists of up to .25% in shareholder
servicing fees for Class II, and .45% in 12b-1 fees and a .25% shareholder
servicing fee for Class III, all or a portion of which may be paid out to
broker-dealers or others involved in the distribution of Class II or Class
III shares. Garland and its affiliates neither participate in nor are
responsible for the underwriting of Portfolio shares. Consistent with
applicable law, affiliated brokers of Garland may receive commissions or
asset-based fees.
TRANSFER AGENT, FUND ACCOUNTING AND CUSTODIAN. Chase Global Funds Services
Company (CGFSC or the Transfer Agent), provides transfer agent and
shareholder services for each Portfolio, and calculates the NAV and dividends
of each class and maintains the Portfolio and general accounting records.
Chase Manhattan Bank is Custodian of the assets of the Portfolios. The
Custodian is responsible for the safekeeping of the Portfolios' assets and
the appointment of sub-custodian banks and clearing agencies. The Custodian
takes no part in determining the investment policies of the Portfolios or in
deciding which securities are purchased or sold by the Portfolios. The
Portfolios, however, may invest in obligations of the Custodian and may
purchase securities from or sell securities to the Custodian.
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<PAGE>
DISTRIBUTION PLANS. The Trustees of the Trust have adopted a Distribution
Plan on behalf of Class III of each Portfolio (each Class III Plan) pursuant
to Rule 12b-1 (the Rule) under the 1940 Act. The Rule provides in substance
that a mutual fund may not engage directly or indirectly in financing any
activity that is intended primarily to result in the sale of shares of the
fund except pursuant to a plan adopted by the fund under the Rule. The
Trustees have adopted the Plans to allow each class and ALPS to incur
distribution expenses. ALPS receives a Distribution and Service fee (12b-1
fee) of up to and including 0.75% of the average net assets of Class III of
each Portfolio. (These fees are in addition to the fees paid to ALPS under
the Administration Agreement.) The Trust or ALPS, on behalf of Class III of
each Portfolio, may enter into servicing agreements (Service Agreements) with
banks, broker-dealers or other institutions (Agency Institutions). Each
Class III Plan provides that ALPS may use its fees and other resources to
make payments to Agency Institutions for performance of distribution-related
services, including those enumerated above. The Service Agreements further
provide for compensation to broker-dealers for their efforts to sell Class
III shares. The distribution-related services include, but are not limited
to, the following: formulation and implementation of marketing and
promotional activities, such as mail promotions and television, radio,
newspaper, magazine and other mass media advertising; preparation, printing
and distribution of sales literature; preparation, printing and distribution
of prospectuses of each Portfolio and reports to recipients other than
existing shareholders of each Portfolio; obtaining such information, analyses
and reports with respect to marketing and promotional activities as ALPS may
from time to time, deem advisable; making payments to securities dealers and
others engaged in the sales of Class III Shares; and providing training,
marketing and support to such dealers and others with respect to the sale of
Class III Shares. Each Class III Plan recognizes ALPS may use its fees and
other resources to pay expenses associated with the promotion and
administration of activities primarily intended to result in the sale of
shares.
Each Plan has been approved by the Trustees, including the majority of
disinterested Trustees. As required by the Rule, the Trustees carefully
considered all pertinent factors relating to the implementation of the Plans
prior to its approval, and have determined that there is a reasonable
likelihood that each Plan will benefit each Portfolio and its shareholders.
To the extent that the Class III Plans give ALPS greater flexibility in
connection with the distribution of shares of the class, additional sales of
shares may result.
The Class III Plans could be construed as compensation plans because ALPS is
paid a fixed fee and is given discretion concerning what expenses are payable
under the Plans. ALPS may spend more for marketing and distribution than it
receives in fees and reimbursements from each Portfolio. However, to the
extent fees received exceed expenses, including indirect expenses such as
overhead, ALPS could be said to have received a profit. For example, if ALPS
pays $1 for Class III distribution-related expenses and receives $2 under a
Class III Plan, the $1 difference could be said to be a profit for ALPS.
(Because ALPS is reimbursed for its out-of-pocket direct promotional
expenses, a Class III Plan also could be construed as a reimbursement plan.
Until the issue is resolved by the SEC, unreimbursed expenses incurred in one
year will not be carried over to a subsequent year.) If after payments by
ALPS for marketing and distribution there are any remaining fees attributable
to a Class III Plan, these may be used as ALPS may elect. Since the amount
payable under a Class III Plan will be commingled with ALPS's general funds,
including the revenues it receives in the conduct of its business, it is
possible that certain of ALPS's overhead expenses will be paid out of Plan
fees and that these expenses may include items which the SEC has noted, for
example, the costs of leases, depreciation, communications, salaries,
training and supplies. Each Portfolio believes that such expenses, if paid,
will be paid only indirectly out of the fees being paid under the Plan.
SHAREHOLDER SERVICES PLANS. In addition to the Rule 12b-1 Distribution Plans
described above, Class II and Class III have adopted Shareholder Services
Plans to compensate Agency Institutions for individual shareholder services
and account maintenance. These functions include: maintaining account
records for each shareholder who beneficially owns Class III Shares;
answering questions and handling correspondence from shareholders about their
accounts; handling the transmission of funds representing the purchase price
or redemption proceeds; issuing confirmations for transactions in Class III
Shares by shareholders; assisting customers in completing application forms;
communicating with the transfer agent; and providing account maintenance and
account level support for all transactions. For these services the
participating Agency Institutions are paid a service fee at the annual rate
of up to and including .25% of average net assets of Class II and Class III.
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Banking laws and regulations, including the Glass-Steagall Act as currently
interpreted by the Board of Governors of the Federal Reserve System, prohibit
a bank holding company registered under the Bank Holding Company Act of 1956
or any affiliate thereof from sponsoring, organizing, controlling, or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares and prohibit banks
generally from issuing, underwriting, selling or distributing securities.
The same laws and regulations generally permit a bank or bank affiliate to
act as an investment adviser and co-administrator and to purchase shares of
the investment company as agent for and upon the order of a customer. In the
Trust's and Investment Adviser's opinion, banks and their affiliates may be
paid for investment advisory, shareholder servicing, recordkeeping and
co-administration functions. Changes in federal or state statutes and
regulations pertaining to the permissible activities of banks and their
affiliates or subsidiaries, as well as further judicial or administrative
decisions or interpretations, could prevent a bank from continuing to perform
all or a part of the contemplated services. If a bank or its affiliates were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services. In such event, changes in the operation of the Portfolios might
occur, including possible termination of any automatic investment or
redemption or other services then being provided by any bank. It is not
expected that shareholders would suffer any adverse financial consequences as
a result of any of these occurrences. The Portfolios may execute portfolio
transactions with and purchase securities issued by depository institutions
that receive payments under the Plans. No preference will be shown in the
selection of investments for the instruments of such depository institutions.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein, and banks and other
financial institutions may be required to register as dealers pursuant to
state law.
DESCRIPTION OF THE TRUST
TRUST ORGANIZATION. U.S. Treasury Money Market Portfolio, U.S. Government
Money Market Portfolio, Municipal Money Market Portfolio, and Cash Reserve
Portfolio are portfolios of First Funds (formerly The Masters Group of Mutual
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 Declaration of Trust
permits the Trustees to create additional portfolios and classes. There are
seven portfolios of the Trust, each with three classes.
The assets of the Trust received for the issue or sale of shares of each
Portfolio and all income, earnings, profits, and proceeds thereof, subject
only to the rights of creditors, are specially allocated to such Portfolio,
and constitute the underlying assets of such Portfolio. The underlying
assets of each Portfolio are segregated on the books of account, and are to
be charged with the liabilities with respect to such Portfolio and with a
share of the general expenses of the Trust. Expenses with respect to the
Trust are to be allocated in proportion to the asset value of the respective
Portfolios except where allocations of direct expense can otherwise be fairly
made. The officers of the Trust, subject to the general supervision of the
Trustees, have the power to determine which expenses are allocable to a given
Portfolio, or which are general or allocable to all of the Portfolios. In
the event of the dissolution or liquidation of the Trust, shareholders of a
Portfolio are entitled to receive as a class the underlying assets of such
Portfolio available for distribution.
SHAREHOLDER AND TRUSTEE LIABILITY. The Trust is an entity of the type
commonly known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The Declaration of Trust
provides that the Trust shall not have any claim against shareholders except
for the payment of the purchase price of shares and requires that each
agreement, obligation, or instrument entered into or executed by the Trust or
the Trustees shall include a provision limiting the obligations created
thereby to the Trust and its assets. The Declaration of Trust provides for
indemnification out of each Portfolio's property of any shareholders held
personally liable for the obligations of each Portfolio. The Declaration of
Trust also provides that each Portfolio shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation
of a Portfolio and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Portfolio itself would be unable to
meet its obligations. The Trustees believe that, in view of the above, the
risk of personal liability to shareholders is remote.
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The Declaration of Trust further provides that the Trustees, if they have
exercised reasonable care, will not be liable for any neglect or wrongdoing,
but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
As of September 30, 1995, First Tennessee Common Stock Fund, Memphis, TN,
owned of record or beneficially 7.6% of Class I of U.S. Treasury Money Market
Portfolio's outstanding shares. Erlanger Medical Center, Chattanooga, TN
owned of record or beneficially 11.9% of Class I of U.S. Treasury Money
Market Portfolio's outstanding shares. Marshall County Correctional
Facility, TN, owned of record or beneficially 5.3% of Class I of U.S.
Treasury Money Market Portfolio's outstanding shares.
As of September 30, 1995, Marha Robinson, Memphis, TN, owned of record or
beneficially 10.5% of Class I of U.S. Government Money market Portfolio's
outstanding shares.
As of September 30, 1995, M.R. Hyde, Memphis, TN. owned of record or
beneficially 12.7% of Class I of Municipal Money Market Portfolio.
As of September 30, 1995, First Tennessee CTF 1 Equity Fund, Memphis, TN,
owned of record or beneficially 28.5 % of Class I of Cash Reserve Portfolio's
outstanding shares.
VOTING RIGHTS. Each Portfolio's capital consists of shares of beneficial
interest. The shares have no preemptive or conversion rights; the voting and
dividend rights, the right of redemption, and the privilege of exchange are
described in the Prospectus. Shares are fully paid and nonassessable, except
as set forth under the heading "Shareholder and Trustee Liability" above.
Shareholders representing 10% or more of the Trust or a Portfolio may, as set
forth in the Declaration of Trust, call meetings of the Trust or a Portfolio
for any purpose related to the Trust or Portfolio, as the case may be,
including, in the case of a meeting of the entire Trust, the purpose of
voting on removal of one or more Trustees. The Trust or any Portfolio may be
terminated upon the sale of its assets to another open-end management
investment company, or upon liquidation and distribution of its assets, if
approved by vote of the holders of a majority of the outstanding shares of
the Trust or that Portfolio. If not so terminated, the Trust and each
Portfolio will continue indefinitely.
CLASSES. Pursuant to the Declaration of Trust, the Trustees have authorized
additional classes of shares for each Portfolio of the Trust. Although the
investment objective for each separate class of a particular Portfolio is the
same, fee structures are different such that one class may have a higher
yield than another class of the same Portfolio at any particular time.
Shareholders of the Trust will vote together in the aggregate and not
separately by Portfolio, or by class thereof, except as otherwise required by
law or when the Trustees determine that the matter to be voted upon affects
only the interests of the shareholders of a particular Portfolio or a class
thereof. The Trust has received an Exemptive Order from the SEC (the Order)
to permit additional classes of shares. Under the Order, in the event of a
shareholder meeting, Class III of a Portfolio votes separately to approve its
Distribution and Service Plan, described previously under "Distribution and
Service Plans."
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 160 Federal Street, Boston,
Massachusetts, serves as the Trust's independent accountant. The independent
accountant examines the annual financial statements for the Trust and
provides other audit, tax, and related services.
FINANCIAL STATEMENTS
The Portfolios' financial statements and financial highlights for the fiscal
period ended June 30, 1995, are included in the Portfolios' Annual Report,
which is a separate report supplied independent of this Statement of
Additional Information. The Portfolios' financial statements and financial
highlights are incorporated herein by reference.
APPENDIX
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S COMMERCIAL PAPER RATINGS:
ISSUERS RATED PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
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- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
- Broad margins in earning coverage of fixed financial charges and with
high internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S COMMERCIAL PAPER RATINGS:
A - Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2, and 3 to indicate the relative degree of safety.
A-1 - This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation.
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TOTAL RETURN EQUITY PORTFOLIO
The following supplement is provided to update and should be read in
conjunction with the information provided in the Prospectus dated
October 25, 1995.
The following information and text shall be inserted in lieu of the
sections under "SUMMARY OF PORTFOLIO EXPENSES" on pages 3 and 4 of the
prospectus.
A. EXPENSE SUMMARY
TOTAL RETURN EQUITY
PORTFOLIO
----------------------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------- -------- ---------
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 .00% .25% .25%
Other Expenses .35% .44% .44%
----- ----- -----
Total Portfolio Operating Expenses* .85% 1.19% 1.94%
----- ----- -----
----- ----- -----
*Net of expense waivers
ANNUAL PORTFOLIO OPERATING EXPENSES. The Portfolio is obligated to pay
Management Fees to Garland Capital Management (Garland), a division of
First Tennessee Bank National Association, for managing the Portfolio's
investments. Garland, 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, which have been estimated for the current
year, 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. Garland, 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. Other Expenses and Total Portfolio Operating Expenses would
be estimated as follows:
TOTAL RETURN EQUITY
PORTFOLIO
----------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
Other Expenses .35% .44% .44%
Total Portfolio Operating Expenses 1.00% 1.34% 2.09%
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 Portfolio to securities brokers or financial institution
representatives (Investment Professionals) for services and expenses
incurred in connection with providing personal service to shareholders
and/or maintenance of shareholder accounts.
<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 16 for further information.
B. EXAMPLE: You would pay the following expenses for every $1,000
investment in each Class of shares of the Total Return Equity Portfolio
assuming (1) 5% annual return, (2) redemption at the end of each time
period, (3) that operating expenses 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:
TOTAL RETURN EQUITY
PORTFOLIO
----------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
1 year $ 9 $ 57* $ 20
3 years $ 27 $ 81* $ 61
5 years $ 47 $108* $106
10 years $105 $183* $228
*Reflects imposition of the maximum sales charge at the beginning of
the period.
The following sentence shall be inserted in lieu of the third sentence
of the first paragraph under the section entitled "HOW ARE INVESTMENTS,
EXCHANGES AND REDEMPTIONS MADE? - Class II and III - Investment
Requirement" on page 9 of the prospectus:
"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."
The following sentence shall be inserted after the third sentence of
the section entitled "HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS
MADE? - Class II and Class III - Systematic Investment Program" on page
12 of the prospectus:
"If you are an employee of First Tennessee or any of its affiliates,
the minimum initial investment in the Portfolio is $50."
<PAGE>
[LOGO]
FIRST FUNDS 370 17TH STREET
SUITE 2700
TOTAL RETURN EQUITY PORTFOLIO DENVER, COLORADO 80202
- -----------------------------------------------------------------------------
PROSPECTUS FOR CLASS I, II, AND III
October 25, 1995
- -----------------------------------------------------------------------------
First Funds (the Trust) offers investors a convenient and economical
means of investing in a professionally managed equity mutual fund. The
objective of 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 trust, fiduciary, advisory, agency, custodial or
similar accounts (Fiduciary Accounts). Class I shares may be purchased
on behalf of Fiduciary Accounts held by financial institutions,
business organizations, corporations, municipalities, non-profit
institutions, individuals and other entities serving in a fiduciary,
advisory or agency capacity (each a Fiduciary and collectively referred
to as Fiduciaries) that meet the investment threshold for this Class of
shares. Class II and III shares are designed for any investor who seeks
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, 1995) 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 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, 1995 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? . . . . . . . . . 7
How Is Performance Calculated? . . . . . . . . . . . . . . . . . . . . 14
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . 14
What Is The Effect Of Federal Income Tax On This Investment?. . . . . . 15
What Advisory And Other Fees Do The Portfolios Pay? . . . . . . . . . . 15
How Is The Portfolio Organized? . . . . . . . . . . . . . . . . . . . . 16
Investment Instruments, Transactions, Strategies and Risks. . . . . . . 17
- -----------------------------------------------------------------------------
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 for Class I and III
below is based upon the Portfolio's expenses for the fiscal year ended
June 30, 1995 adjusted to reflect new servicing arrangements. The
information for Class II below is based upon anticipated operating
expenses. This expense information should be considered along with
other important information, such as the Portfolio's investment
objective.
A. EXPENSE SUMMARY
TOTAL RETURN EQUITY
PORTFOLIO
----------------------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------- -------- ---------
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* .35% .35% .35%
12b-1 Fees .00% .00% .75%
Shareholder Servicing .00% .25% .25%
Other Expenses* .32% .39% .39%
----- ----- -----
Total Portfolio Operating Expenses* .67% .99% 1.74%
----- ----- -----
----- ----- -----
*Net of expense waivers
ANNUAL PORTFOLIO OPERATING EXPENSES. The Portfolio is obligated to pay
Management Fees to Garland Capital Management (Garland), a division of
First Tennessee Bank National Association, for managing the Portfolio's
investments. Garland, as Investment Adviser has voluntarily agreed to
waive its investment advisory fee to .35% 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, which have been estimated for the current
year, 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. Garland, the Co-Administrator, is entitled to
.05% of the Portfolio's average net assets for co-administration
services. Garland has voluntarily agreed to waive this fee for Class I,
however, there is no guarantee that the waiver will continue.
If the waivers were not in effect, Management Fees would be .65% for
each Class. Other Expenses and Total Portfolio Operating Expenses would
be estimated as follows:
TOTAL RETURN EQUITY
PORTFOLIO
----------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
Other Expenses .37% .39% .39%
Total Portfolio Operating Expenses 1.02% 1.29% 2.04%
There is no guarantee that any waivers will continue at their stated
levels.
3
<PAGE>
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 Portfolio to securities brokers or financial institution
representatives (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 Total Return Equity Portfolio
assuming (1) 5% annual return, (2) redemption at the end of each time
period, (3) that operating expenses 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:
TOTAL RETURN EQUITY
PORTFOLIO
----------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
1 year $ 7 $ 55* $ 18
3 years $22 $ 75* $ 55
5 years $37 $ 97* $ 95
10 years $84 $161* $207
*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, 1995 and has been audited by Price Waterhouse
LLP, independent accountants. Their report on the financial statements
and the financial highlights for Class I and Class III of the Portfolio
is included in the Annual Report (Class II had not commenced operations
as of June 30, 1995). The financial statements and financial highlights
are incorporated by reference into the Portfolio's Statement of
Additional Information.
<TABLE>
<CAPTION>
TOTAL RETURN EQUITY
PORTFOLIO
-----------------------------------------------------------
CLASS I CLASS III
------- ---------
FOR THE YEAR ENDED JUNE 30, FOR THE YEAR ENDED JUNE 30,
--------------------------- ---------------------------
1995 1994** 1995 1994***
---- ------ ---- -------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA:
Net asset value, beginning of period $10.53 $10.00 $10.51 $10.60
------ ------ ------ -------
Income from investment operations:
Net investment income 0.23 0.17 0.06 0.06
Net realized and unrealized
gain (loss) on investments 2.21 0.57 2.24 (0.05)
------ ------ ------ -------
Total from investment operations 2.44 0.74 2.30 0.01
------ ------ ------ -------
Distributions:
Net investment income (0.23) (0.17) (0.06) (0.06)
------ ------ ------ -------
Net realized gain (0.52) (0.04) (0.52) (0.04)
------ ------ ------ -------
Total distributions (0.75) (0.21) (0.58) (0.10)
------ ------ ------ -------
------ ------ ------ -------
Net asset value, end of period $12.22 $10.53 $12.23 $10.51
Total Return 24.20%+ 7.39%+# 22.61%+ 0.08%+#
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $114,000 $82,751 $19,363 $2,094
Ratio of expenses to average net
assets(1) 0.47% 0.34%* 1.72% 1.83%*
Ratio of net investment income to
average net assets 2.12% 1.83%* 0.87% 0.34%*
Portfolio turnover rate 33% 83%* 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 0.99% 1.05%* 2.26% 6.03%*
* Annualized
** Class commenced operations on August 2, 1993.
***Class commenced operations on December 9, 1993.
+ 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>
5
<PAGE>
- -----------------------------------------------------------------------------
WHAT IS THE INVESTMENT OBJECTIVE OF THE PORTFOLIO?
- -----------------------------------------------------------------------------
First Tennessee Bank National Association (First Tennessee), through
Garland, 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 Garland'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 15.
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. 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.
- -----------------------------------------------------------------------------
IS THE PORTFOLIO A SUITABLE INVESTMENT?; INVESTMENT RISKS
- -----------------------------------------------------------------------------
By itself, the Portfolio does not constitute a balanced investment
plan. Total Return Equity Portfolio emphasizes maximizing total return
through a combination of capital appreciation and dividend income by
investing primarily in equity securities. An investment in Total Return
Equity 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 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
<PAGE>
- -----------------------------------------------------------------------------
WHAT ARE THE PORTFOLIO'S INVESTMENT POLICIES AND LIMITATIONS?
- -----------------------------------------------------------------------------
INVESTMENT LIMITATIONS. The Total Return Equity 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.
- -----------------------------------------------------------------------------
HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?
- -----------------------------------------------------------------------------
Class I
- -------
WHO MAY INVEST?
Class I shares are designed exclusively for investment of monies held
in trust, fiduciary, advisory, agency, custodial or similar Fiduciary
Accounts. Class I shares may be purchased on behalf of Fiduciary
Accounts held by financial institutions, business organizations,
corporations, municipalities, non-profit institutions, individuals and
other Fiduciaries serving in a fiduciary, advisory or agency capacity
who can meet the investment minimum.
HOW IS A FIDUCIARY ACCOUNT ESTABLISHED WITH A FIDUCIARY?
An initial investment must be preceded by or made in conjunction with
the establishment of a Fiduciary Account with a Fiduciary.
Establishment of a Fiduciary Account may require that documents and
applications be completed and signed before the investment can be
implemented. The Fiduciary may require that certain documents be
provided prior to making a redemption from the Portfolio. Fiduciaries
may charge fees in addition to those described herein based on their
Fiduciary Account agreements. Fee schedules for Fiduciary Accounts are
available upon request from the Fiduciary and are detailed in the
agreements by which each client opens a Fiduciary Account.
HOW ARE INVESTMENTS MADE?
Each Fiduciary 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, and
the funds are received by CGFSC that day, the investment will earn
dividends declared, if any, on the day of purchase. Fiduciaries will
7
<PAGE>
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. 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), a Fiduciary 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 Fiduciary is $100,000. Fiduciaries may satisfy the minimum
investment by aggregating their Fiduciary Accounts within the
Portfolio. Subsequent investments may be in any amount. If a
Fiduciary's Class I account falls below $50,000 due to redemption, the
Portfolio may close the account. A Fiduciary 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 net asset value per share (NAV) on the day the
account is closed, and proceeds will be sent to the address of record.
Involuntary redemptions will be effected, if at all, at the last
calculated NAV.
HOW ARE REDEMPTIONS MADE?
Fiduciaries 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.
Fiduciaries 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, proceeds of the redemption will be wired as
federal funds on the next Business Day to the bank account designated
with CGFSC. The Fiduciary 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 (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 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 portfolio securities are traded in
other markets on days when 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 Fiduciary
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 Garland's opinion, they are of a size that would disrupt
management of the Portfolio.
In order to allow Garland to manage the Portfolio most effectively,
Fiduciaries 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 Fiduciary
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 a Fiduciary should verify the
accuracy of confirmation statements immediately after receipt. If a
Fiduciary does not want to be able to initiate redemptions and
exchanges by telephone, please call CGFSC for instructions.
8
<PAGE>
CLASS II AND III
- ----------------
WHO MAY INVEST?
Class II and III shares are designed for any investor who seeks 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 REQUIREMENT
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, 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, 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. Involuntary
redemptions will be effected, if at all, at the last calculated NAV.
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 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 investor will earn
dividends declared, if any, on the day of purchase if the funds are
received by CGFSC that day.
PUBLIC OFFERING PRICE
Class III shares are bought without a load; that is, the offering price
for such shares will be their NAV. 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 Service Organizations which
are financial institutions which have entered into an agreement with
ALPS, the Portfolio's Distributor. You may calculate your sales load as
<TABLE>
<CAPTION>
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>
The reallowance to Service Organizations may be changed from time to
time. ALPS, at its expense, will provide additional non-cash
promotional incentives to dealers, in the form of attendance at a sales
seminar at a resort. These incentives will be limited to certain
dealers who have sold significant numbers of shares of any of the Funds
of the Trust.
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You may purchase Class II shares without a sales load if the purchase
will be (a) through your First Funds sponsored IRA upon rollover (and
subsequent contributions) from another IRA, a 401 Plan or 403 Plan, if
the trustee or custodian for such other IRA or Plan is a direct or
indirect subsidiary or franchisee bank of First Tennessee; (b) through
a discount broker that imposes a transaction charge with respect to
such purchases; (c) by registered representatives, directors, advisory
directors, officers and employees (and their immediate families) of
banks or broker/dealer organizations affiliated with First Tennessee,
that have agreements to sell First Funds; (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 Code); (f) by financial institutions (including bank trust
departments or divisions) investing on their own behalf or on behalf of
their clients; (g) in accounts as to which a bank, registered
investment adviser, or broker/dealer charges an asset management fee;
(h) with redemption proceeds from other mutual fund complexes on which
the investor has paid a front-end sales charge within the past sixty
(60) days upon presentation of purchase verification information; or
(i) 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?" 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 load, if you obtained such no-load 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 you 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,
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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 fiduciary 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.
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 7:00 p.m. Central Time
(9:00 a.m. to 8:00 p.m. Eastern Time), Monday through Friday.
Investments may be made in several ways:
BY MAIL: Make your check payable to First Funds: Total Return Equity
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
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<PAGE>
at the beginning of the following month. Shares redeemed will receive the
accrued dividends through the day prior to redemption.
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 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 that portfolio securities are traded in other markets on
days when 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. You
will receive a written confirmation of each automatic transfer from
your bank account to your Portfolio account, and a debit entry will
appear on your bank account statement. 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.
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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 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 New York
Stock Exchange (NYSE) and the Federal Reserve Bank of New York (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 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.
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.
Fiduciaries may execute exchange transactions by calling CGFSC at
1-800-442-1941 (option 2) prior to 4:00 p.m. 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.
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<PAGE>
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 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, Garland
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 Garland'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 Fiduciary 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 Fiduciary Account
may be converted to shares of another Class.
STATEMENTS AND REPORTS
You, or if Class I, the Fiduciary, will receive a monthly statement and
a confirmation after every transaction that affects the share balance
or 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 Fiduciary 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 Fiduciary.
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 of investments 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 CGFSC for a free annual report and Statement of
Additional Information for the Portfolio.
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PORTFOLIO TRANSACTIONS
- -----------------------------------------------------------------------------
Brokerage firms are utilized to conduct securities transactions for the
Portfolio. Broker-dealers are chosen by judging professional ability
and quality of service. The Portfolio generally pays lower commissions
on listed securities than would individual investors when placing
trades with brokers.
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Higher commissions may be paid to firms that provide research services
to the extent permitted by law. The frequency of portfolio transactions
- - the Portfolio's 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, 1995 was 33%.
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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 and paid monthly.
FEDERAL TAXES. Distributions from each 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 Fiduciary 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 you 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. You should consult your tax advisor
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
each 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 Garland, a division of First Tennessee, 4990 Poplar
Avenue, Memphis, Tennessee, a monthly management fee at the annual rate
of .65% of its average net assets. Garland has voluntarily agreed to
waive its fees down to .35% of the Portfolio's average net assets.
This voluntary waiver can be discontinued at any time.
Under the Investment Advisory and Management Agreement, Garland 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 Garland, Garland 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 Garland 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 $13.2 billion in assets
under administration (including nondiscretionary accounts) and $4.7
billion in assets under management as of June 30, 1995, as well as
experience in
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<PAGE>
supervising sub-advisers. For the Portfolio's fiscal year ended June 30,
1995, Garland earned $686,850 from the Portfolio before waiving $532,648 of
its fee.
Highland serves as the Sub-Adviser for the Portfolio subject to the
supervision of Garland and pursuant to the authority granted to it
under its Sub-Advisory Agreement with Garland. 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 $1.8
billion in assets under management as of June 30, 1995. Garland 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 each Portfolio. ALPS is
entitled to and receives from the Portfolio a monthly fee at the annual
rate of .15% of average net assets.
Garland, 4990 Poplar Avenue, 3rd Floor, Memphis, Tennessee, 38117,
serves as the Co-Administrator for each Portfolio. As the
Co-Administrator, Garland 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. Garland is entitled to receive from the Portfolio a monthly
fee at the annual rate of .05% of average net assets. Garland is
voluntarily waiving this fee for Class I, 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. Garland 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 Garland 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. Each Distribution Plan
provides for payment of a fee to ALPS at the annual rate of .75% of the
Portfolio'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 III of the Portfolio, under which Investment Professionals
are paid at the annual rate of .25% of the Portfolio's 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 Administration Fee, and will reduce both Class' net
income and total return.
- -----------------------------------------------------------------------------
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
16
<PAGE>
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.
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.
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.
ILLIQUID SECURITIES. Under the supervision of the Board of Trustees,
Highland, under Garland'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.
17
<PAGE>
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. The Portfolio may buy and sell options contracts to
manage their exposure to changing interest rates and security prices.
To the extent each 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 Portfolios'
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 Portfolios 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.
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
18
<PAGE>
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
------------------
Garland Capital Management
(a division of First Tennessee Bank National Association)
Memphis, TN
SUB-ADVISER
-----------
Highland Capital Management Corp.
Memphis, TN
OFFICERS
--------
Richard C. Rantzow, President
Mark A. Pougnet, Treasurer & 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>
FIRST FUNDS
370 17TH STREET, SUITE 2700
DENVER, COLORADO 80202
TOTAL RETURN EQUITY PORTFOLIO
TOTAL RETURN FIXED INCOME PORTFOLIO
SUPPLEMENT DATED JANUARY 3, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION FOR CLASS I, CLASS II, AND CLASS III
DATED OCTOBER 25, 1995
THE FOLLOWING INFORMATION SHALL BE INSERTED UNDER THE SECTION TITLED
"PORTFOLIO TRANSACTIONS", PARAGRAPH 7, FOLLOWING THE FIRST SENTENCE, ON PAGE
12.
"IN AGGREGATE, THE TRUST PAID BROKERAGE COMMISSIONS IN THE AMOUNT OF
$161,109 AND $146,176 DURING FISCAL YEARS ENDED JUNE 30, 1994 AND JUNE 30,
1995, RESPECTIVELY.
THE FOLLOWING INFORMATION SHALL BE INSERTED UNDER THE SECTION TITLED
"PERFORMANCE", PARAGRAPH 6, FOLLOWING THE SIXTH SENTENCE, ON PAGE 14.
<TABLE>
<CAPTION>
CLASS I AVERAGE CLASS III AVERAGE
ANNUAL TOTAL RETURN ANNUAL TOTAL RETURN
SINCE SINCE
INCEPTION INCEPTION
------------------- -------------------
<S> <C> <C>
TOTAL RETURN EQUITY PORTFOLIO 16.28% 15.05%
TOTAL RETURN FIXED INCOME PORTFOLIO 5.28% 3.95%
</TABLE>
THE FOLLOWING INFORMATION SHALL BE INSERTED UNDER THE SECTION TITLED
"ADDITIONAL PURCHASE AND REDEMPTION INFORMATION - ADDITIONAL CLASS II AND
CLASS III INFORMATION - SYSTEMATIC INVESTING PROGRAM", FOLLOWING THE FIFTH
SENTENCE, ON PAGE 16.
"FOR EMPLOYEES OF FIRST TENNESSEE BANK NATIONAL ASSOCIATION OR ANY OF
ITS AFFILIATES, THE MINIMUM INITIAL INVESTMENT REQUIREMENT IS $50."
THE FOLLOWING INFORMATION SHALL BE INSERTED UNDER THE SECTION TITLED
"TRUSTEES AND OFFICERS", PARAGRAPH 8, FOLLOWING THE FIRST SENTENCE, ON PAGE 18.
"THE TRUSTEES WERE COMPENSATED, IN AGGREGATE, $32,500 FOR THEIR SERVICES
PROVIDED DURING THE TRUST'S FISCAL YEAR ENDED JUNE 30, 1995."
THE FOLLOWING INFORMATION SHALL BE INSERTED UNDER THE SECTION TITLED
"DESCRIPTION OF THE TRUST - CLASSES", FOLLOWING THE LAST SENTENCE, ON PAGE 23.
"PURSUANT TO A VOTE BY THE BOARD OF TRUSTEES, THE TRUST HAS ADOPTED RULE
18F-3 UNDER THE ACT AND HAS ISSUED MULTIPLE CLASSES OF SHARES WITH RESPECT
TO EACH OF ITS PORTFOLIOS. ACCORDINGLY, THE RIGHTS, PRIVILEGES AND
OBLIGATIONS OF EACH SUCH CLASS WILL BE DETERMINED IN ACCORDANCE WITH SUCH
RULE."
THE FOLLOWING INFORMATION SHALL BE INSERTED IN THE FOURTH PARAGRAPH UNDER THE
SECTION TITLED "ADMINISTRATION AGREEMENT AND OTHER CONTRACTS - ADMINISTRATOR
AND DISTRIBUTOR", IN LIEU OF THE INFORMATION IN THE SECOND SENTENCE, ON
PAGE 19.
"CLASS III IS OBLIGATED TO PAY ALPS MONTHLY A 12b-1 FEE AT THE ANNUAL
RATE OF .75% OF AVERAGE NET ASSETS, ALL OR A PORTION OF WHICH MAY BE
PAID OUT TO BROKER-DEALERS OR OTHERS INVOLVED IN THE DISTRIBUTION OF
CLASS III SHARES. CLASS II AND III PAY SHAREHOLDER SERVICING FEES TO
INVESTMENT PROFESSIONALS AT AN ANNUAL RATE OF .25% OF AVERAGE NET
ASSETS AS MORE FULLY DESCRIBED UNDER THE SECTION "ADMINISTRATION
AGREEMENT AND OTHER CONTRACTS - SHAREHOLDER SERVICES PLANS" ON
PAGE 21 BELOW."
<PAGE>
FIRST FUNDS
TOTAL RETURN EQUITY PORTFOLIO
TOTAL RETURN FIXED INCOME PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION FOR CLASS I, CLASS II, AND CLASS III
OCTOBER 25, 1995
This Statement is not a prospectus but should be read in conjunction with the
current Prospectus for each class of First Funds: Total Return Equity
Portfolio and Total Return Fixed Income Portfolio (dated October 25, 1995).
Please retain this Statement for future reference. The Portfolio's financial
statements and financial highlights, included in the Annual Report for the
fiscal year ended June 30, 1995, are incorporated herein by reference. To
obtain additional free copies of this Statement, the Annual Report, or of
the Prospectuses for the Total Return Equity or Total Return Fixed Income
Portfolios, please call the Distributor at 1-800-442-1941, Option 1 or write
to the Distributor at 370 17th Street, Suite 2700, Denver CO 80202.
TABLE OF CONTENTS PAGE
Investment Restrictions and Limitations 2
Investment Instruments 5
Portfolio Transactions 11
Valuation of Portfolio Securities 13
Performance 13
Additional Purchase and Redemption Information 16
Distributions and Taxes 16
Trustees and Officers 17
Investment Advisory Agreement 18
Administration Agreement and Other Contracts 19
Description of the Trust 22
Financial Statements 23
Appendix 23
INVESTMENT ADVISER
Garland Capital Management, a division of First Tennessee Bank National
Association (Garland or the Investment Adviser)
SUB-ADVISER
Highland Capital Management Corp. (Highland or the Sub-Adviser)
ADMINISTRATOR AND DISTRIBUTOR
ALPS Mutual Funds Services, Inc. (ALPS, the Administrator and Distributor)
CO-ADMINISTRATOR
Garland Capital Management, a division of First Tennessee Bank National
Association (Garland or the Co-Administrator)
TRANSFER AGENT & CUSTODIAN
Chase Global Funds Services Company (CGFSC or the Transfer Agent)
1
<PAGE>
INVESTMENT RESTRICTIONS AND LIMITATIONS
The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of a Portfolio's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of a Portfolio's acquisition of such
security or other asset. Accordingly, any subsequent change in values, net
assets, or other circumstances will not be considered when determining
whether the investment complies with a Portfolio's investment policies and
limitations.
Fundamental policies and investment limitations cannot be changed without
approval by a "majority of the outstanding voting securities" (as defined in
the Investment Company Act of 1940) of that Portfolio. However, except for
the fundamental investment limitations set forth below, the investment
policies and limitations described in this Statement of Additional
Information are not fundamental and may be changed without shareholder
approval.
INVESTMENT LIMITATIONS OF TOTAL RETURN EQUITY PORTFOLIO
THE FOLLOWING ARE TOTAL RETURN EQUITY PORTFOLIO'S FUNDAMENTAL LIMITATIONS SET
FORTH IN THEIR ENTIRETY. THE PORTFOLIO MAY NOT:
(1) with respect to 75% of the Portfolio's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by
the U.S. government or any of its agencies or instrumentalities) if, as
a result, (a) more than 5% of the Portfolio's total assets would be
invested in the securities of that issuer; or (b) the Portfolio would
hold more than 10% of the outstanding voting securities of that issuer;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(3) borrow money, except that the Portfolio may borrow money for
temporary or emergency purposes (not for leveraging or investment) in an
amount not exceeding 33 1/3% of its total assets (including the amount
borrowed) less liabilities (other than borrowings). Any borrowings that
come to exceed this amount will be reduced within three days (not
including Sundays and holidays) to the extent necessary to comply with
the 33 1/3% limitation;
(4) underwrite securities issued by others, except to the extent that
the Portfolio may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities;
(5) purchase the securities of any issuer (other than securities issued
or guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, 25% or more of the Portfolio's total
assets would be invested in the securities of companies whose principal
business activities are in the same industry;
(6) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent
the Portfolio from investing in securities or other instruments backed
by real estate or securities of companies engaged in the real estate
business);
(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent
the Portfolio from purchasing or selling options and futures contracts
or from investing in securities or other instruments backed by physical
commodities); or
(8) lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other aprties, but this
limit does not apply to purchases of debt securities or to repurchase
agreements.
(9) The Portfolio may, notwithstanding any other fundamental investment
policy or limitation, invest all of its assets in the securities of a
single open-end or closed-end management investment company with
substantially the same fundamental investment objectives, policies, and
limitations as the Portfolio.
2
<PAGE>
THE FOLLOWING LIMITATIONS OF TOTAL RETURN EQUITY PORTFOLIO ARE NOT
FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL.
(I) The Portfolio does not currently intend during the coming year
to sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold
short, and provided that transactions in futures contracts and
options are not deemed to constitute selling short.
(ii) The Portfolio does not currently intend during the coming year
to purchase securities on margin, except that the Portfolio may
obtain such short-term credits as are necessary for the clearance of
transactions, and provided that margin payments in connection with
futures contracts and options on futures contracts shall not
constitute purchasing securities on margin.
(iii) The Portfolio may borrow money only (a) from a bank or (b) by
engaging in reverse repurchase agreements with any party (reverse
repurchase agreements are treated as borrowings for purposes of
fundamental investment limitation 3). The Portfolio will not
purchase any security while borrowings representing more than 5% of
its total assets are outstanding.
(iv) The Portfolio does not currently intend during the coming year
to purchase any security, if, as a result, more than 15% of its net
assets would be invested in securities that are deemed to be illiquid
because they are subject to legal or contractual restrictions on
resale or because they cannot be sold or disposed of in the ordinary
course of business at approximately the prices at which they are
valued.
(v) The Portfolio does not currently intend during the coming year
to purchase or sell futures contracts. This limitation does not
apply to securities that incorporate features similar to futures
contracts.
(vi) The Portfolio does not currently intend during the coming year
to make loans, but this limitation does not apply to purchases of
debt securities.
(vii) The Portfolio does not currently intend during the coming year
to purchase securities of other investment companies, except in the
open market where no commission except the ordinary broker's
commission is paid. This limitation does not apply to securities
received as dividends, through offers of exchange, or as a result of
a reorganization, consolidation, or merger.
(viii) The Portfolio does not currently intend during the coming year
to purchase the securities of any issuer (other than securities
issued or guaranteed by domestic or foreign governments or political
subdivisions thereof) if, as a result, more than 5% of its total
assets would be invested in the securities of business enterprises
that, including predecessors, have a record of less than three years
of continuous operation.
(ix) The Portfolio does not currently intend during the coming year
to invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental
investment objectives, policies, and limitations as the Portfolio.
3
<PAGE>
INVESTMENT LIMITATIONS OF TOTAL RETURN FIXED INCOME PORTFOLIO
THE FOLLOWING ARE TOTAL RETURN FIXED INCOME PORTFOLIO'S FUNDAMENTAL
LIMITATIONS SET FORTH IN THEIR ENTIRETY. THE PORTFOLIO MAY NOT:
(1) with respect to 75% of the Portfolio's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by
the U.S. government or any of its agencies or instrumentalities) if, as a
result, (a) more than 5% of the Portfolio's total assets would be
invested in the securities of that issuer, or (b) the Portfolio would
hold more than 10% of the outstanding voting securities of that issuer;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(3) borrow money, except that the Portfolio may borrow money for
temporary or emergency purposes (not for leveraging or investment) in an
amount not exceeding 33 1/3% of its total assets (including the amount
borrowed) less liabilities (other than borrowings). Any borrowings that
come to exceed this amount will be reduced within three days (not
including Sundays and holidays) to the extent necessary to comply with
the 33 1/3% limitation;
(4) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities;
(5) purchase the securities of any issuer (other than securities issued
or guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, 25% or more of the Portfolio's total
assets would be invested in the securities of companies whose principal
business activities are in the same industry;
(6) purchase or sell real estate, unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent
the Portfolio from investing in securities or other instruments backed by
real estate or securities of companies engaged in the real estate
business);
(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent
the Portfolio from purchasing or selling options and futures contracts or
from investing in securities or other instruments backed by physical
commodities); or
(8) lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties, but this
limit does not apply to purchases of debt securities or to repurchase
agreements.
(9) The Portfolio may, notwithstanding any other fundamental investment
policy or limitation, invest all of its assets in the securities of a
single open-end or closed-end management investment company with
substantially the same fundamental investment objectives, policies, and
limitations as the Portfolio.
THE FOLLOWING LIMITATIONS OF TOTAL RETURN FIXED INCOME PORTFOLIO ARE NOT
FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL.
(i) The Portfolio does not currently intend during the coming
year to sell securities short, unless it owns or has the right to
obtain securities equivalent in kind and amount to the securities
sold short and provided that transactions in futures contracts and
options are not deemed to constitute selling short.
(ii) The Portfolio does not currently intend during the coming
year to purchase securities on margin, except that the Portfolio
may obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments in
connection with futures contracts and options on futures contracts
shall not constitute purchasing securities on margin.
(iii) The Portfolio may borrow money only (a) from a bank or (b)
by engaging in reverse repurchase agreements with any party
(reverse repurchase agreements are treated as borrowings for
purposes of fundamental investment limitation 3). The Portfolio
will not purchase any security while borrowings representing more
than 5% of its total assets are outstanding.
4
<PAGE>
(iv) The Portfolio does not currently intend during the coming
year to purchase any security, if, as a result, more than 15% of
its net assets would be invested in securities that are deemed to
be illiquid because they are subject to legal or contractual
restrictions on resale or because they cannot be sold or disposed
of in the ordinary course of business at approximately the prices
at which they are valued.
(v) The Portfolio does not currently intend during the coming
year to purchase or sell futures contracts. This limitation does
not apply to securities that incorporate features similar to
futures contracts.
(vi) The Portfolio does not currently intend during the coming
year to make loans, but this limitation does not apply to purchases
of debt securities.
(vii) The Portfolio does not currently intend during the coming
year to purchase securities of other investment companies, except
in the open market where no commission except the ordinary broker's
commission is paid. This limitation does not apply to securities
received as dividends, through offers of exchange, or as a result
of a reorganization, consolidation, or merger.
(viii) The Portfolio does not currently intend during the coming
year to purchase the securities of any issuer (other than
securities issued or guaranteed by domestic or foreign governments
or political subdivisions thereof) if, as a result, more than 5% of
its total assets would be invested in the securities of business
enterprises that, including predecessors, have a record of less
than three years of continuous operation.
(ix) The Portfolio does not currently intend during the coming
year to invest all of its assets in the securities of a single
open-end management investment company with substantially the same
fundamental investment objectives, policies, and limitations as the
Portfolio.
INVESTMENT INSTRUMENTS
First Tennessee Bank National Association, through its division, Garland
Capital Management (Garland), serves as Investment Adviser to the Portfolios,
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
each 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.
DELAYED-DELIVERY TRANSACTIONS. Each Portfolio may buy and sell securities on
a delayed-delivery or when-issued basis. These transactions involve a
commitment by each Portfolio to purchase or sell specific securities at a
predetermined price and/or yield, with payment and delivery taking place
after the customary settlement period for that type of security (and more
than seven days in the future). Typically, no interest accrues to the
purchaser until the security is delivered. Each Portfolio may receive fees
for entering into delayed delivery transactions.
When purchasing securities on a delayed-delivery basis, each Portfolio
assumes the rights and risks of ownership, including the risk of price and
yield fluctuations. Because each Portfolio is not required to pay for
securities until the delivery date, these risks are in addition to the risks
associated with the Portfolios' other investments. If each Portfolio remains
substantially fully invested at a time when delayed-delivery purchases are
outstanding, the delayed-delivery purchases may result in a form of leverage.
When delayed-delivery purchases are outstanding, each Portfolio will set
aside appropriate liquid assets in a segregated custodial account to cover
its purchase obligations. When each Portfolio has sold a security on a
delayed-delivery basis, each Portfolio does not participate in further gains
or losses with respect to the security. If the other party to a
delayed-delivery transaction fails to deliver or pay for the securities, each
Portfolio could miss a favorable price or yield opportunity, or could suffer
a loss.
Each Portfolio may renegotiate delayed-delivery transactions after they are
entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.
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FOREIGN INVESTMENTS. Foreign investments purchased by each Portfolio can
involve significant risks in addition to the risks inherent in U.S.
investments. The value of securities denominated in or indexed to foreign
currencies, and of dividends and interest from such securities, can change
significantly when foreign currencies strengthen or weaken to the U.S.
dollar. Foreign securities markets generally have less trading volume and
less liquidity than U.S. markets, and prices on some foreign markets can be
highly volatile. Many foreign countries lack uniform accounting and
disclosure standards comparable to those applicable to U.S. companies, and it
may be more difficult to obtain reliable information regarding an issuer's
financial condition and operations. In addition, the costs of foreign
investing, including withholding taxes, brokerage commissions, and custodial
costs, are generally higher than for U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer,
and may involve substantial delays. It may also be difficult to enforce
legal rights in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse
to the interests of U.S. investors, including the possibility of
expropriation or nationalization of assets, confiscatory taxation,
restriction on U.S. investment or on the ability to repatriate assets or
convert currency into U.S. dollars, or other government intervention. There
may be a greater possibility of default by foreign governments or foreign
government-sponsored enterprises. Investments in foreign countries also
involve a risk of local political, economic, or social instability, military
action or unrest, or adverse diplomatic developments. There is no assurance
that Highland will be able to anticipate or counter these potential events.
The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.
Each Portfolio may invest in foreign securities that impose restrictions on
transfer within the U.S. or to U.S. persons. Although securities subject to
transfer restrictions may be marketable abroad, they may be less liquid than
foreign securities of the same class that are not subject to such
restrictions.
American Depository Receipts and European Depository Receipts (ADRs and EDRs)
are certificates evidencing ownership of shares of a foreign-based
corporation held in trust by a bank or similar financial institution.
Designed for use in U.S. and European securities markets, respectively, ADRs
and EDRs are alternatives to the purchase of the underlying securities in
their national markets and currencies.
FOREIGN CURRENCY TRANSACTIONS. Total Return Equity Portfolio may conduct
foreign currency transactions on a spot (i.e., cash) basis or by entering
into forward contracts to purchase or sell foreign currencies at a future
date and price. The Portfolio will convert currency on a spot basis from
time to time, and investors should be aware of the costs of currency
conversion. Although foreign exchange dealers generally do not charge a fee
for conversion, they do realize a profit based on the difference between the
prices at which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to the fund at one rate, while
offering a lesser rate of exchange should the portfolio desire to resell that
currency to the dealer. Forward contracts are generally traded in an
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. The parties to a forward contract may
agree to offset or terminate the contract before its maturity, or may hold
the contract to maturity and complete the contemplated currency exchange.
Each Portfolio may use currency forward contracts for any purpose consistent
with its investment objective. The following discussion summarizes the
principal currency management strategies involving forward contracts that
could be used by the portfolio. The portfolio may also use swap agreements,
indexed securities, and options and futures contracts relating to foreign
currencies for the same purposes.
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When the portfolio agrees to buy or sell a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security.
By entering into a forward contract for the purchase or sale, for a fixed
amount of U.S. dollars, of the amount of foreign currency involved in the
underlying security transaction, the portfolio will be able to protect itself
against an adverse change in foreign currency values between the date the
security is purchased or sold and the date on which payment is made or
received. This technique is sometimes referred to as a "settlement hedge" or
"transaction hedge." The portfolio may also enter into forward contracts to
purchase or sell a foreign currency in anticipation of future purchases or
sales of securities denominated in foreign currency, even if the specific
investments have not yet been selected by Highland.
The Portfolio may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. For
example, if the Portfolio owned securities denominated in pounds sterling, it
could enter into a forward contract to sell pounds sterling in return for
U.S. dollars to hedge against possible declines in the pound's value. Such a
hedge, sometimes referred to as a "position hedge," would tend to offset both
positive and negative currency fluctuations, but would not offset changes in
security values caused by other factors. Total Return Equity Portfolio could
also hedge the position by selling another currency expected to perform
similarly to the pound sterling - for example, by entering into a forward
contract to sell Deutsche marks or European Currency Units in return for U.S.
dollars. This type of hedge, sometimes referred to as a "proxy hedge," could
offer advantages in terms of cost, yield, or efficiency, but generally would
not hedge currency exposure as effectively as a simple hedge into U.S.
dollars. Proxy hedges may result in losses if the currency used to hedge
does not perform similarly to the currency in which the hedged securities are
denominated.
The Portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. This may include shifting exposure
from U.S. dollars to a foreign currency, or from one foreign currency to
another foreign currency. For example, if the portfolio held investments
denominated in Deutsche marks, the portfolio could enter into forward
contracts to sell Deutsche marks and purchase Swiss Francs. This type of
strategy, sometimes known as a "cross hedge," will tend to reduce or
eliminate exposure to the currency that is sold, and increase exposure to the
currency that is purchased, much as if the portfolio had sold a security
denominated in one currency and purchased an equivalent security denominated
in another. Cross-hedges protect against losses resulting from a decline in
the hedged currency, but will cause the portfolio to assume the risk of
fluctuations in the value of the currency it purchases.
Under certain conditions, Securities and Exchange Commission (SEC) guidelines
require mutual funds to set aside cash or other appropriate liquid assets in
a segregated custodial account to cover currency forward contracts. As
required by SEC guidelines, Total Return Equity Portfolio will segregate
assets to cover currency forward contracts, if any, whose purpose is
essentially speculative. The Portfolio will not segregate assets to cover
forward contracts entered into for hedging purposes, including settlement
hedges, position hedges, and proxy hedges.
Successful use of forward currency contracts will depend on Highland's skill
in analyzing and predicting currency values. Forward contracts may
substantially change the Portfolio's investment exposure to changes in
currency exchange rates, and could result in losses to the Portfolio if
currencies do not perform as Highland anticipates. For example, if a
currency's value rose at a time when Highland had hedged the Portfolio by
selling that currency in exchange for dollars, the Portfolio would be unable
to participate in the currency's appreciation. If Highland hedges currency
exposure through proxy hedges, Total Return Equity Portfolio could realize
currency losses from the hedge and the security position at the same time if
the two currencies do not move in tandem. Similarly, if Highland increases
the Portfolio's exposure to a foreign currency, and that currency's value
declines, the Portfolio will realize a loss. There is no assurance that
Highland's use of forward currency contracts will be advantageous to the
Portfolio or that it will hedge at an appropriate time. The policies
described in this section are non-fundamental policies of the Portfolio.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in
the ordinary course of business at approximately the prices at which they are
valued. Under the supervision of the Trustees, Highland, under the
supervision of Garland, determines the liquidity of each Portfolio's
investments and, through reports from Highland,
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the Trustees monitor investments in illiquid instruments. In determining the
liquidity of each Portfolio's investments, Highland may consider various
factors including (1) the frequency of trades and quotations, (2) the number
of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features) and (5) the nature of the marketplace for trades
(including the ability to assign or offset each Portfolio's rights and
obligations relating to the investment). Investments currently considered by
each Portfolio to be illiquid include repurchase agreements not entitling the
holder to payment of principal and interest within seven days,
over-the-counter options, and some restricted securities determined by
Highland to be illiquid. However, with respect to over-the-counter options
that each Portfolio writes, all or a portion of the value of the underlying
instrument may be illiquid depending on the assets held to cover the option
and the nature and terms of any agreement each Portfolio may have to close
out the option before expiration. In the absence of market quotations,
illiquid investments are priced at fair value as determined in good faith by
the Trustees. If through a change in values, net assets or other
circumstances, each Portfolio was in a position where more than 15% of its
net assets were invested in illiquid securities, the Trustees would seek to
take appropriate steps to protect liquidity.
REAL ESTATE INVESTMENT TRUSTS. Total Return Equity Portfolio may purchase
interests in real estate investment trusts. Real estate industry companies
include, among others, equity real estate investment trusts, which own
properties, and mortgage real estate investment trusts, which make
construction, development, and long-term mortgage loans. Equity real estate
investment trusts may be affected by changes in the value of the underlying
property owned by the trusts, while mortgage real estate investment trusts
may be affected by the quality of credit extended. Equity and mortgage real
estate investment trusts are dependent upon management skill, are not
diversified, and are subject to the risks of financing projects. Such trusts
are also subject to heavy cash flow dependency, defaults by borrowers, self
liquidation, and the possibilities of failing to qualify for tax-free
pass-through of income under the Internal Revenue Code and failing to
maintain exemption from the Investment Company Act of 1940 (the 1940 Act).
REPURCHASE AGREEMENTS are transactions in which a Portfolio purchases a
security and simultaneously commits to resell that security at an agreed upon
price and date within a number of days from the date of purchase. The resale
price reflects the purchase price plus an agreed upon market rate of interest
which is unrelated to the coupon rate or maturity of the purchased security.
A repurchase agreement involves the obligation of the seller to pay the
agreed upon price. This obligation is in effect secured by the underlying
security having a value at least equal to the amount of the agreed upon
resale price. Each Portfolio may enter into a repurchase agreement with
respect to any security in which it is authorized to invest. While it
presently does not appear possible to eliminate all risks from the
transactions (particularly the possibility of a decline in the market value
of the underlying securities, as well as delay and costs to each Portfolio in
connection with bankruptcy proceedings), it is the policy of each Portfolio
to limit repurchase agreements to those parties whose creditworthiness has
been reviewed and found satisfactory by Highland.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a
Portfolio sells a portfolio instrument to another party, such as a bank or
broker-dealer, in return for cash and agrees to repurchase the instrument at
a particular price and time. While a reverse repurchase agreement is
outstanding, each Portfolio will maintain appropriate high grade liquid
assets in a segregated custodial account to cover its obligation under the
agreement. Each Portfolio will enter into reverse repurchase agreements only
with parties whose creditworthiness has been found satisfactory by Highland.
Such transactions may increase fluctuations in the market values of each
Portfolio's assets and may be viewed as a form of leverage.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is
required, each Portfolio may be obligated to pay all or part of the
registration expense and a considerable period may elapse between the time it
decides to seek registration and the time each Portfolio may be permitted to
sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, each Portfolio might
obtain a less favorable price than prevailed when it decided to seek
registration of the security.
SECURITIES LENDING. Each Portfolio may lend securities to parties such as
broker-dealers or institutional investors. Securities lending allows the
Portfolios to retain ownership of the securities loaned and, at the same
time, to earn
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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
Highland to be of good standing. Furthermore, they will only be made if, in
Highland's judgment, the consideration to be earned from such loans would
justify the risk.
Garland understands that it is the current view of the SEC that each
Portfolio may engage in loan transactions only under the following
conditions: (1) each 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, each Portfolio must be able
to terminate the loan at any time; (4) each 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) each Portfolio may
pay only reasonable custodian fees in connection with the loan; and (6) the
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 the Portfolios are authorized to invest. Investing this cash subjects
that investment, as well as the security loaned, to market forces (i.e.,
capital appreciation or depreciation).
SHORT SALES AGAINST THE BOX. If Total Return Equity Portfolio enters into a
short sale against the box, it will be required to set aside securities
equivalent in kind and amount to the securities sold short (or securities
convertible or exchangeable into such securities) and will be required to
hold such securities while the short sale is outstanding. The Portfolio will
incur transaction costs, including interest expenses, in connection with
opening, maintaining and closing short sales against the box.
VARIABLE AND FLOATING RATE DEMAND OBLIGATIONS (VRDOs/FRDOs) are obligations
that bear variable or floating interest rates and carry rights that permit
holders to demand payment of the unpaid principal balance plus accrued
interest from the issuers or certain financial intermediaries. Floating rate
instruments have interest rates that change whenever there is a change in a
designated base rate while variable rate obligations provide for a specified
periodic adjustment in the interest rate. These formulas are designed to
result in a market value for the VRDO or FRDO that approximates its par
value.
Total Return Fixed Income Portfolio may invest in fixed-rate bonds that are
subject to third party puts and in participation interests in such bonds held
by a bank in trust or otherwise. These bonds and participation interests
have tender options or demand features that permit the Portfolio to tender
(or put) their bonds to an institution at periodic intervals and to receive
the principal amount thereof. The Portfolio considers variable rate
instruments structured in this way (Participating VRDOs) to be essentially
equivalent to other VRDOs they purchase.
WARRANTS. Total Return Equity Portfolio may invest in warrants which entitle
the holder to buy equity securities at a specific price during a specific
period of time. Warrants may be considered more speculative than certain
other types of investments in that they do not entitle a holder to dividends
or voting rights with respect to the securities which may be purchased, nor
do they represent any rights in the assets of the issuing company. The value
of a warrant may be more volatile than the value of the securities underlying
the warrants. Also, the value of the warrant does not necessarily change
with the value of the underlying securities and a warrant ceases to have
value if it is not exercised prior to the expiration date. Warrants may be
allowed to expire if Highland deems it undesirable to exercise or sell.
LIMITATIONS ON OPTIONS TRANSACTIONS. Each Portfolio will not: (a) purchase
put options or write call options if, as a result, more than 25% of the
Portfolios' total assets would be hedged with options under normal
conditions; (b) write put options if, as a result, the Portfolios' total
obligations upon settlement or exercise of written put options would exceed
25% each of their total assets; or (c) purchase call options if, as a result,
the current value of option premiums for call options purchased by each
Portfolio would exceed 5% of total assets. These limitations do not apply to
options
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attached to or acquired or traded together with their underlying securities,
and do not apply to securities that incorporate features similar to options.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, each Portfolio
obtains the right (but not the obligation) to sell the option's underlying
instrument at a fixed strike price. In return for this right, the Portfolios
pay the current market price for the option (known as the option premium).
Options have various types of underlying instruments, including specific
securities and indexes of securities prices. The Portfolios may terminate
their position in a put option they have purchased by allowing them to expire
or by exercising the option. If the option is allowed to expire, the
Portfolios will lose the entire premium they paid. If the Portfolios
exercise the option, they complete the sale of the underlying instrument at
the strike price. The Portfolios may also terminate a put option position by
closing it out in the secondary market at its current price, if a liquid
secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price
does not fall enough to offset the cost of purchasing the option, a put buyer
can expect to suffer a loss (limited to the amount of the premium paid, plus
related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost
of the option.
WRITING PUT AND CALL OPTIONS. When each Portfolio writes a put option, each
takes the opposite side of the transaction from the option's purchaser. In
return for receipt of the premium, the Portfolios assume the obligation to
pay the strike price for the option's underlying instrument if the other
party to the option chooses to exercise it. The Portfolios may seek to
terminate its position in a put option it writes before exercise by closing
out the option in the secondary market at its current price. If the
secondary market is not liquid for a put option the Portfolios have written,
however, the Portfolios must continue to be prepared to pay the strike price
while the option is outstanding, regardless of price changes, and must
continue to set aside assets to cover their position.
If security prices rise, a put writer would generally expect to profit,
although its gain would be limited to the amount of the premium it received.
If security prices remain the same over time, it is likely that the writer
will also profit, because it should be able to close out the option at a
lower price. If security prices fall, the put writer would expect to suffer
a loss. This loss should be less than the loss from purchasing the underlying
instrument directly, however, because the premium received for writing the
option should mitigate the effects of the decline.
Writing a call option obligates each Portfolio to sell or deliver the
option's underlying instrument, in return for the strike price, upon exercise
of the option. The characteristics of writing call options are similar to
those of writing put options, except that writing calls generally is a
profitable strategy if prices remain the same or fall. Through receipt of
the option premium, a call writer mitigates the effects of a price decline.
At the same time, because a call writer must be prepared to deliver the
underlying instrument in return for the strike price, even if its current
value is greater, a call writer gives up some ability to participate in
security price increases.
COMBINED POSITIONS. Each Portfolio may purchase and write options in
combination with each other, or in combination with forward contracts, to
adjust the risk and return characteristics of the overall position. For
example, the Portfolios may purchase a put option and write a call option on
the same underlying instrument, in order to construct a combined position
whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call
option at one strike price and buying a call option at a lower price, in
order to reduce the risk of the written call option in the event of a
substantial price increase. Because combined options positions involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
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CORRELATION OF PRICE CHANGES. Because there are a limited number of types of
exchange-traded options contracts, it is likely that the standardized
contracts available will not match the Portfolios' current or anticipated
investments exactly. Each Portfolio may invest in options contracts based on
securities with different issuers, maturities, or other characteristics from
the securities in which each typically invests.
Options prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments match the Portfolios'
investments well. Options prices are affected by such factors as current and
anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the
contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options
markets and the securities markets, from structural differences in how
options and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. The Portfolios may purchase or sell
options contracts with a greater or lesser value than the securities it
wishes to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although
this may not be successful in all cases. If price changes in the Portfolios'
options positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are
not offset by gains in other investments.
LIQUIDITY OF OPTIONS. There is no assurance a liquid secondary market will
exist for any particular options contract at any particular time. Options
may have relatively low trading volume and liquidity if their strike prices
are not close to the underlying instrument's current price. On volatile
trading days when the price fluctuation limit is reached or a trading halt is
imposed, it may be impossible for the Portfolios to enter into new positions
or close out existing positions. If the secondary market for a contract is
not liquid because of price fluctuation limits or otherwise, it could prevent
prompt liquidation of unfavorable positions, and potentially could require
the Portfolios to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, the Portfolios' access to
other assets held to cover its options or futures positions could also be
impaired.
OTC OPTIONS. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size, and
strike price, the terms of over-the-counter options (options not traded on
exchanges) generally are established through negotiation with the other party
to the option contract. While this type of arrangement allows the Portfolios
greater flexibility to tailor an option to its needs, OTC options generally
involve greater credit risk than exchange-traded options, which are
guaranteed by the clearing organization of the exchanges where they are
traded.
ASSET COVERAGE FOR OPTIONS POSITIONS. The Portfolios will comply with
guidelines established by the SEC with respect to coverage of options
strategies by mutual funds, and if the guidelines so require will set aside
appropriate liquid assets in a segregated custodial account in the amount
prescribed. Securities held in a segregated account cannot be sold while the
option strategy is outstanding, unless they are replaced with other suitable
assets. As a result, there is a possibility that segregation of a large
percentage of the Portfolios' assets could impede portfolio management or the
Portfolios' ability to meet redemption requests or other current obligations.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of securities are placed on behalf of
each Portfolio by Garland and Highland (collectively, the Advisers) pursuant
to authority contained in each Portfolio's Investment Advisory Agreement and
Sub-Advisory Agreement. The Advisers are also responsible for the placement
of transaction orders for other investment companies and accounts for which
they or their affiliates act as investment advisor. In selecting
broker-dealers, subject to applicable limitations of the federal securities
laws, the Advisers consider various relevant factors, including, but not
limited to, the broker's execution capability; the broker's perceived
financial stability; the broker's responsiveness to the Advisers' transaction
requests; and the broker's clearance and settlement capability. Commissions
for foreign investments traded on foreign exchanges will generally be higher
than for U.S. investments and may not be subject to negotiation.
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Each Portfolio may execute portfolio transactions with broker-dealers who
provide research and execution services to each Portfolio or other accounts
over which the Advisers or their affiliates exercise investment discretion.
Such services may include research-related computer hardware and software;
furnishing analyses and reports concerning issuers, industries, and economic
factors and trends.
The receipt of research from broker-dealers that execute transactions on
behalf of each Portfolio may be useful to the Advisers in rendering
investment management services to each Portfolio and/or its other clients,
and conversely, such information provided by broker-dealers who have executed
transaction orders on behalf of other clients may be useful to the Advisers
in carrying out its obligations to each Portfolio. The receipt of such
research has not reduced the Advisers' normal independent research
activities; however, it enables the Advisers to avoid the additional expenses
that could be incurred if they tried to develop comparable information
through their own efforts.
Subject to applicable limitations of the federal securities laws,
broker-dealers may receive commissions for agency transactions that are
higher than the commission of other broker-dealers in recognition of their
research and execution services. In order to cause each Portfolio to pay
such higher commissions, the Advisers must determine in good faith that such
commissions are reasonable in relation to the value of the brokerage and
research services provided by such executing broker-dealers viewed in terms
of a particular transaction or the Advisers' overall responsibilities to each
Portfolio and its other clients. In reaching this determination, the
Advisers will not attempt to place a specific dollar value on the brokerage
and research services provided or to determine what portion of the
compensation should be related to those services.
The Advisers are authorized to use research services provided by and to place
portfolio transactions to the extent permitted by law, with brokerage firms
that have provided assistance in the distribution of shares of each
Portfolio.
The Trustees periodically review the Advisers' performance of its
responsibilities in connection with the placement of portfolio transactions
on behalf of each Portfolio and review the commissions paid by each Portfolio
over representative periods of time to determine if they are reasonable in
relation to the benefits to each Portfolio.
For the fiscal period ended June 30, 1995, the portfolio turnover rates were
33% and 23%, for Total Return Equity Portfolio and Total Return Fixed Income
Portfolio, respectively.
From time to time the Trustees will review whether the recapture for the
benefit of each Portfolio of some portion of the brokerage commissions or
similar fees paid by each Portfolio on portfolio transactions is legally
permissible and advisable. Each Portfolio seeks to recapture soliciting
broker-dealer fees on the tender of portfolio securities, but at present no
other recapture arrangements are in effect. The Trustees intend to continue
to review whether recapture opportunities are available and are legally
permissible and, if so, to determine, in the exercise of their business
judgment, whether it would be advisable for each Portfolio to seek such
recapture.
When two or more Portfolios are simultaneously engaged in the purchase or
sale of the same security, the prices and amounts are allocated in accordance
with a formula considered by the Trustees and Garland involved to be
equitable to each portfolio. In some cases this system could have a
detrimental effect on the price or value of the security as far as each
Portfolio is concerned. In other cases, however, the ability of each
Portfolio to participate in volume transactions will produce better
executions for each Portfolio. It is the current opinion of the Trustees
that the desirability of retaining the Advisers as investment adviser and
sub-adviser to each Portfolio outweighs any disadvantages that may be said to
exist from exposure to simultaneous transactions.
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VALUATION OF PORTFOLIO SECURITIES
Securities owned by each Portfolio are appraised by various methods depending
on the market or exchange on which they trade. Securities traded on the New
York Stock Exchange (NYSE) or the American Stock Exchange are appraised at
the last sale price, or if no sale has occurred, at the closing bid price.
Securities traded on other exchanges are appraised as nearly as possible in
the same manner. Securities and other assets for which exchange quotations
are not readily available are valued on the basis of closing over-the-counter
bid prices, if available, or at their fair value as determined in good faith
under consistently applied procedures under the general supervision of the
Trustees. Short-term securities maturing in 60 days are valued either at
amortized cost or at original cost plus accrued interest, both of which
approximate current value. Convertible securities and fixed-income securities
are valued primarily by a pricing service that uses a vendor security
valuation matrix which incorporates both dealer-supplied valuations and
electronic data processing techniques. This two-fold approach is believed to
more accurately reflect fair value because it takes into account appropriate
factors such as institutional trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics, and
other market data, without exclusive reliance upon quoted, exchange, or
over-the-counter prices.
Use of pricing services has been approved by the Board of Trustees.
Securities and other assets for which there is no readily available market
are valued in good faith by a committee appointed by the Board of Trustees.
The procedures set forth above need not be used to determine the value of the
securities owned by a Portfolio if, in the opinion of a committee appointed
by the Board of Trustees , some other method (e.g., closing over-the-counter
bid prices in the case of debt instruments traded on an exchange) would more
accurately reflect the fair market value of such securities.
Generally, the valuation of foreign and domestic equity securities, as well
as corporate bonds, U.S. government securities, money market instruments, and
repurchase agreements, is substantially completed each day at the close of
the NYSE. The values of any such securities held by the Portfolio are
determined as of such time for the purpose of computing the Portfolio's net
asset value per share (NAV). Foreign security prices are furnished by
independent brokers or quotation services which express the value of
securities in their local currency. Chase Global Funds Services Company, the
Transfer Agent gathers all exchange rates daily at the close of the NYSE
using the last quoted price on the local currency and then translates the
value of foreign securities from their local currency into U.S. dollars. Any
changes in the value of forward contracts due to exchange rate fluctuations
and days to maturity are included in the calculation of the net asset value.
If an extraordinary event that is expected to materially affect the value of
a portfolio security occurs after the close of an exchange on which that
security is traded, then the security will be valued as determined in good
faith.
PERFORMANCE
For each Class of Total Return Fixed Income Portfolio, yields used in
advertising are computed by dividing interest income for a given 30-day or
one-month period, net of expenses, by the average number of shares entitled
to receive dividends during the period, dividing this figure by the NAV at
the end of the period and annualizing the result (assuming compounding of
income) in order to arrive at an annual percentage rate. Income is
calculated for purposes of yield quotations in accordance with standardized
methods applicable to all bond funds. In general, interest income is reduced
with respect to bonds trading at a premium over their par value by
subtracting a portion of the premium from income on a daily basis, and is
increased with respect to bonds trading at a discount by adding a portion of
the discount to daily income. Capital gains and losses generally are
excluded from the calculation.
Income calculated for the purposes of determining yields differs from income
as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding of income assumed in
yield calculations, yield may not equal its distribution rate, the income
paid to an account, or income reported in financial statements.
13
<PAGE>
Yield information may be useful in reviewing performance and in providing a
basis for comparison with other investment alternatives. Yield will
fluctuate, unlike investments that pay a fixed interest rate over a stated
period of time. Investors should give consideration to the quality and
maturity of portfolio securities of the respective investment companies when
comparing investments.
Investors should recognize that in periods of declining interest rates, yield
will tend to be somewhat higher than prevailing market rates, and in periods
of rising interest rates, yield will tend to be somewhat lower. Also, when
interest rates are falling, the inflow of net new money from the continuous
sale of its shares will likely be invested in instruments producing lower
yields than the balance of the holdings, thereby reducing the current yield.
In periods of rising interest rates, the opposite can be expected to occur.
For the fiscal period ending June 30, 1995, the 30-day yield for Class I of
Total Return Fixed Income Portfolio was 6.24%, and for Class III of Total
Return Fixed Income Portfolio was 4.71%. Class II shares were not sold
during the period.
TOTAL RETURNS for each Class of each Portfolio quoted in advertising reflect
all aspects of return, including the effect of reinvesting dividends and
capital gain distributions (if any), and any change in NAV over the period.
AVERAGE ANNUAL TOTAL RETURNS are calculated by determining the growth or
decline in value of a hypothetical historical investment over a stated
period, and then calculating the annually compounded percentage rate that
would have produced the same result if the rate of growth or decline in value
had been constant over the period. For example, a cumulative total return of
100% over ten years would produce an average annual total return of 7.18%,
which is the steady annual rate of return that would equal 100% growth on a
compounded basis in ten years. While average annual total returns are a
convenient means of comparing investment alternatives, investors should
realize that performance is not constant over time, but changes from year to
year, and that average annual total returns represent averaged figures as
opposed to the actual year-to-year performance. Average annual returns
covering periods of less than one year are calculated by determining total
return for the period, extending that return for a full year (assuming that
performance remains constant over the year), and quoting the result as an
annual return.
CUMULATIVE TOTAL RETURNS reflect the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be
quoted as a percentage or as a dollar amount, and may be calculated for a
single investment, a series of investments, or a series of redemptions, over
any time period. Total returns may be broken down into their components of
income and capital (including capital gains and changes in share price) in
order to illustrate the relationship of these factors and their contributions
to total return. Total returns, yields, and other performance information
may be quoted numerically or in a table, graph, or similar illustration.
Where applicable, sales load may or may not be included. The following table
shows total returns for the fiscal year ending June 30, 1995 for each Class
of each Portfolio.
<TABLE>
<CAPTION>
CLASS I CLASS III
TOTAL RETURN TOTAL RETURN
------------ ------------
<S> <C> <C>
Total Return Equity Portfolio 24.20% 22.61%
Total Return Fixed Income Portfolio 11.87% 10.12%
</TABLE>
Each Portfolio may compare the performance of each of its classes or the
performance of securities in which it or each of its classes may invest to
other mutual funds, especially to those with similar investment objectives.
These comparisons may be based on data published by IBC USA (Publications),
Inc. of Ashland, MA or by Lipper Analytical Services, Inc. (Lipper, sometimes
referred to as Lipper Analytical Services), an independent service located in
Summit, New Jersey that monitors the performance of mutual funds. Lipper
generally ranks funds on the basis of total return, assuming reinvestment of
distributions, but does not take sales charges or redemption fees into
consideration, and is prepared without regard to tax consequences. Lipper
may also rank funds based on yield. In addition to the mutual fund rankings,
the Portfolio's performance may be compared to mutual fund performance
indices prepared by Lipper. The BOND FUND REPORT AVERAGES-TM- which is
reported in the BOND FUND REPORT-R-, covers taxable bond funds. When
evaluating comparisons to money market funds, investors should consider the
relevant differences in investment objectives and policies. Specifically,
money market funds invest in short-term, high-quality instruments
14
<PAGE>
and seek to maintain a stable $1.00 share price. Total Return Fixed Income
Portfolio, however, invests in longer-term instruments and its share price
changes daily in response to a variety of factors. Investors should give
consideration to the quality and maturity of the portfolio securities of the
respective investment companies when comparing investment alternatives.
MOVING AVERAGES. Total Return Equity Portfolio may illustrate performance
using moving averages. A long-term moving average is the average of each
week's adjusted closing NAV for a specified period. A short-term moving
average is the average of each day's adjusted closing NAV for a specified
period. Moving Average Activity Indicators combine adjusted closing NAVs
from the last business day of each week with moving averages for a specified
period to produce indicators showing when an NAV has crossed, stayed above,
or stayed below its moving average.
NET ASSET VALUE. Charts and graphs using the Portfolios' net asset values,
adjusted net asset values, and benchmark indices may be used to exhibit
performance. An adjusted NAV includes any distributions paid by the
Portfolio and reflects all elements of its return. Unless otherwise
indicated, the Portfolio's adjusted NAVs are not adjusted for sales charges,
if any.
From time to time, each Portfolio's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals.
For example, the Portfolios may quote Morningstar, Inc. in its advertising
materials. Morningstar, Inc. is a mutual fund rating service that rates
mutual funds on the basis of risk-adjusted performance.
Each Portfolio may be compared in advertising to certificates of deposits
(CDS) or other investments issued by banks. Mutual funds differ from bank
investments in several respects. For example, the Portfolios may offer
greater liquidity or higher potential returns than CDS, and the Portfolio
does not guarantee your principal or your return.
Ibbotson Associates of Chicago, Illinois (Ibbotson) provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills, the U.S. rate
of inflation (based on the Consumer Price Index), and combinations of various
capital markets. The performance of these capital markets is based on the
return of different indices.
Total Return Equity Portfolio may compare its performance to that of the
Standard & Poor's Composite Index of 500 stocks (S&P 500), a widely
recognized, unmanaged index of the combined performance of the stocks of 500
American companies. The index is composed of stocks from 400 industrial
corporations, 20 transportation, 40 utility, and 40 financial corporations,
which amounts to approximately 80% of the U.S. equity market value. Total
Return Fixed Income Portfolio may compare its performance to that of the
Lehman Brothers Government Bond Index, an index comprised of all public
obligations of the U.S. Treasury, U.S. government agencies, quasi-federal
corporations, and corporate debt guaranteed by the U.S. government, and the
Lehman Brothers Corporate Bond Index, an index comprised of all public,
fixed-rate, non-convertible investment-grade domestic corporate debt. Issues
included in this index are rated at least Baa by Moody's or BBB by S&P, or in
the case of non-rated bonds, BBB by Fitch Investors Service. The Government
Bond Index and the Corporate Bond Index are combined to form the
Government/Corporate Bond Index. Each Portfolio may compare its performance
to that of the Lehman Brothers Aggregate Bond Index, an index comprised of
securities from the Lehman Brothers Government/Corporate Bond Index,
Mortgage-Backed Securities Index, and Yankee Bond Index. Each Portfolio may
also quote mutual fund rating services in its advertising materials,
including data from a mutual fund rating service which rates mutual funds on
the basis of risk adjusted performance. Because the fees for Class II and
Class III are higher than the fees for Class I, yields and returns for those
classes will be lower than for Class I.
Each Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program,
the investor invests a fixed dollar amount at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit nor guard against loss
in a declining market, the investor's average cost per share can be lower
than if fixed numbers
15
<PAGE>
of shares had been purchased at those intervals. In evaluating such a plan,
investors should consider their ability to continue purchasing shares through
periods of low price levels.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The following holiday closings have been scheduled for the remainder of 1995
and for 1996: Veterans' Day, Thanksgiving Day, Christmas Day (observed),New
Year's Day, Dr. Martin Luther King Jr. Day (observed), Presidents' Day, Good
Friday, Memorial Day (observed), Independence Day, Labor Day, and Columbus
Day (observed). Although Garland expects the same holiday schedule to be
observed in the future, the NYSE and the Federal Reserve Bank of New York
(New York Federal Reserve) may modify their holiday schedules at any time.
If the Trustees determine that existing conditions make cash payment
undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing each Portfolio's NAV. Shareholders receiving securities or other
property on redemption may realize a gain or loss for tax purposes and will
incur any costs of sale, as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, each Portfolio is required to give
shareholders at least 60 days' notice prior to terminating or modifying each
Portfolio's exchange privilege. Under Rule 11a-3, the 60-day notification
requirement may be waived if (I) the only effect of a modification would be
to reduce or eliminate an administrative fee, redemption fee or deferred
sales charge ordinarily payable at the time of exchange, or (ii) under
extraordinary circumstances, a Portfolio temporarily suspends the offering of
shares as permitted under the 1940 Act or by the SEC or because it is unable
to invest amounts effectively in accordance with its investment objective and
policies. This exchange limit may be modified for accounts in certain
institutional retirement plans to conform to plan exchange limits and
Department of Labor Regulations.
ADDITIONAL CLASS II AND CLASS III INFORMATION
SYSTEMATIC INVESTING PROGRAM. Investors can make regular investments in
Class II and Class III with Systematic Investing by completing the
appropriate section on the account application and attaching a voided
personal check. If the bank account is jointly owned, make sure that all
owners sign. Investments may be made monthly by automatically deducting $25
or more from your checking account. This monthly purchase amount may be
changed at any time. There is a $250 minimum initial investment requirement
for this option. Accounts will be drafted on or about the first business day
of every month. Systematic Investing may be canceled at any time without
payment of a cancellation fee. Investors will receive a confirmation from
their securities broker or financial institution (Investment Professional),
or from the Transfer Agent for every transaction, and a debit entry will
appear on your bank statement.
SYSTEMATIC WITHDRAWAL PLAN. Investors can have monthly, quarterly or
semi-annual checks sent from their account to you, to a person named by them,
or to their bank checking account. The Systematic Withdrawal Plan payments
are drawn from share redemptions and must be in the amount of $100 or more
per Portfolio per transaction. If Systematic Withdrawal Plan redemptions
exceed income dividends earned on shares, an account eventually may be
exhausted. Contact the Investment Professional for more information.
DISTRIBUTIONS AND TAXES
DIVIDENDS. A portion of Total Return Equity Portfolio's income may qualify
for the dividends-received deduction available to corporate shareholders to
the extent that the Portfolio's income is derived from qualifying dividends.
Because the Portfolio may also earn other types of income, such as interest,
income from securities loans, non-qualifying dividends and short-term capital
gains, the percentage of dividends from the Portfolio that qualifies for the
deduction will generally be less than 100%. The Portfolio will notify
corporate shareholders annually of the percentage of portfolio dividends
which qualify for the dividends received deduction. Because Total Return
Fixed Income Portfolio's income is primarily derived from interest, dividends
from the Portfolio generally will not qualify for the dividends-received
deductible available to corporations. A portion of each Portfolio's
dividends derived from
16
<PAGE>
certain U.S. government obligations may be exempt from state and local
taxation. Gains (losses) attributable to foreign currency fluctuations are
generally taxable as ordinary income and therefore increase (decrease)
dividend distributions. Each Portfolio will send each shareholder a notice
in January describing the tax status of dividends and capital gain
distributions for the prior year.
CAPITAL GAIN DISTRIBUTIONS. Long-term capital gains realized by each
Portfolio on the sale of securities and distributed to shareholders are
federally taxable as long-term capital gains regardless of the length of time
that shareholders have held their shares. If a shareholder receives a
long-term capital gain distribution on shares of each Portfolio, and such
shares are held less than six months and are sold at a loss, the portion of
the loss equal to the amount of the long-term capital gain distribution will
be considered a long-term loss for tax purposes.
Short-term capital gains distributed by each Portfolio are taxable to
shareholders as dividends, not as capital gains. Distributions from
short-term capital gains do not qualify for the dividends received deduction.
FOREIGN TAXES. Foreign governments may withhold taxes on dividends and
interest paid with respect to foreign securities. Because each Portfolio does
not currently anticipate that securities of foreign corporations will
constitute more than 50% of each Portfolio's total assets at the end of its
fiscal year, shareholders should not expect to claim a foreign tax credit or
deduction on their federal income tax returns with respect to foreign taxes
withheld.
TAX STATUS OF THE TRUST. Each Portfolio has qualified and intends to qualify
as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code), so that each Portfolio will not
be liable for federal income or excise taxes on net investment income or
capital gains to the extent that these are distributed to shareholders in
accordance with applicable provisions of the Code. In order to qualify as a
regulated investment company and avoid being subject to federal income or
excise taxes, each Portfolio intends to distribute substantially all of its
net investment income and net realized capital gains within each calendar
year as well as on a fiscal year basis. Each Portfolio also intends to
comply with other tax rules applicable to regulated investment companies,
including a requirement that capital gains from the sale of securities held
for less than three months must constitute less than 30% of each Portfolio's
gross income for each fiscal year.
Gains from some forward currency contracts and options are included in this
30% calculation, which may limit each Portfolio's investments in such
instruments. If the Portfolios purchase shares in certain foreign investment
entities, called passive foreign investment companies (PFICs), they may be
subject to U.S. federal income tax on a portion of any excess distribution or
gain from the disposition of such shares. Interest charges may also be
imposed on the Portfolios with respect to deferred taxes arising from such
distributions or gains.
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. In
addition to federal income taxes, shareholders may be subject to state and
local taxes on distributions received from each Portfolio. Investors should
consult their tax advisors to determine whether each Portfolio is suitable to
their particular tax situation.
Federal income tax will be withheld at a 20% rate on any eligible rollover
distributions that are not transferred directly to another qualified plan or
IRA. Actual income tax may be higher or lower and will be due when tax forms
for the year are filed. Taxes will not be withheld in cases of direct
rollover into an IRA or another qualified plan.
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust are listed below. Each
Trustee or officer that is an "interested person" (as defined in the 1940
Act) by virtue of his affiliation with Garland or ALPS, is indicated by an
asterisk (*).
THOMAS M. BATCHELOR, Trustee, 4325 Woodcrest Drive, Memphis, TN, who
presently operates a management consultant business on a limited basis,
retired after owning and operating two General Insurance Companies agencies
17
<PAGE>
for over thirty years. He was one of the founders and served as a director
of First American State Bank in Memphis, TN (now part of United American Bank
of Memphis). He currently serves as Chairman, Memphis Union Mission, TN, as
well as a charity and a non-profit foundation.
JOHN A. DECELL, Trustee, 5178 Wheelis, Suite 2, Memphis, TN is Proprietor,
DeCell & Company (real estate and business consulting), and President of
Capital Advisers, Inc. (real estate asset management).
*L. R. JALENAK, JR., Trustee, 6094 Apple Tree Drive, Suite 11, Memphis, TN
was Chairman of the Board (1990 - 1993 (retired)), Cleo Inc., a Gibson
Greetings Company. Mr. Jalenak is also a Director of Perrigo Company (1988 -
present), Lufkin Industries (1990 - present), Dyersburg Corporation (April
1992 - present), was President and CEO (until 1990) of Cleo Inc., and was a
Director of Gibson Greetings, Inc. from 1983 to 1991.
LARRY W. PAPASAN, Trustee, 1450 Brooks Road, Memphis, TN is President of
Smith & Nephew Richards, Inc. Mr. Papasan is a former Director of First
American National Bank of Memphis and The West Tennessee Board of First
American National Bank (1988 - 1991) and was President of Memphis Light Gas
and Water Division of the City of Memphis (1984 - 1991).
*RICHARD C. RANTZOW, President and Trustee, 5790 Shelby Avenue, Memphis, TN
is Vice President/Director, Ron Miller Associates, Inc. (manufacturer). Mr.
Rantzow was Managing Partner (until 1990) of the Memphis office of Ernst &
Young.
*MARK A. POUGNET, Treasurer and Secretary, is Chief Financial Officer of ALPS
Mutual Funds Services, Inc. (ALPS), the Administrator and Distributor. In
addition, Mr. Pougnet serves as Treasurer of the Duff & Phelps Funds, and
Treasurer of Westcore Trust. Prior to joining ALPS, Mr. Pougnet served as
Executive Director of Syndication Accounting for Paramount
Pictures-Television Group from 1989 to 1991.
The Trustees of the Trust receive from the Trust an annual fee of $4,000 and
a fee in the amount of $500 for attending each meeting of the Trustees and
each committee meeting.
As of September 30, 1995, the officers and Trustees of the Trust owned less
than 1% of the outstanding shares of any Portfolio.
INVESTMENT ADVISORY AGREEMENTS
Each Portfolio employs First Tennessee Bank National Association (First
Tennessee), Memphis, Tennessee, to furnish investment advisory and other
services to the Portfolio. First Tennessee Bank provides these services to
each Portfolio through its division, Garland Capital Management. Under the
Investment Advisory and Management Agreement with each Portfolio, Garland is
authorized to appoint one or more sub-advisers at Garland's expense.
Highland Capital Management Corp. (Highland), Memphis, Tennessee, acts as
Sub-Adviser and, subject to the direction of the Trustees and of Garland,
directs the investments of each Portfolio in accordance with its investment
objective, policies and limitations.
In addition to Garland's fee and the fees payable to the Transfer Agent,
Pricing and Accounting Agent, and to the Administrator, each Portfolio pays
for all its expenses, without limitation, that are not assumed by these
parties. Each Portfolio pays for typesetting, printing and mailing of proxy
material to existing shareholders, legal expenses, and the fees of the
custodian, auditor and Trustees. Other expenses paid by each Portfolio
include: interest, taxes, brokerage commissions, the Portfolio's
proportionate share of insurance premiums and Investment Company Institute
dues, and costs of registering shares under federal and state securities
laws. Each Portfolio also is liable for such nonrecurring expenses as may
arise, including costs of litigation to which each Portfolio is a party, and
its obligation under the Declaration of Trust to indemnify its officers and
Trustees with respect to such litigation.
18
<PAGE>
For managing its investment and business affairs, Total Return Equity
Portfolio pays Garland a monthly management fee at the annual rate of .65% of
its average net assets. Total Return Fixed Income Portfolio pays Garland a
monthly management fee at the annual rate of .55% of its average net assets.
For the fiscal year ended June 30, 1995, Garland earned $686,850 and $447,309
from Total Return Equity Portfolio and Total Return Fixed Income Portfolio,
respectively, before waiving $532,648 of its fees for the Total Return Equity
Portfolio and all of its fees for the Total Return Fixed Income Portfolio.
Under the Investment Advisory and Management Agreement, Garland is
authorized, at its own expense, to hire sub-advisers to provide investment
advice to each Portfolio. As Sub-Adviser, Highland is paid by Garland a
monthly sub-advisory fee at the annual rate of .38% of Total Return Equity
Portfolio's average net assets, and .33% of Total Return Fixed Income
Portfolio's average net assets. Under the terms of the sub-advisory
agreement with Garland, Highland, subject to the supervision of Garland,
supervises the day-to-day operations of each Portfolio and provides
investment research and credit analysis concerning each Portfolio's
investments, conducts a continual program of investment of each Portfolio's
assets and maintains the books and records required in connection with its
duties under each sub-advisory agreement. In addition, Highland keeps
Garland informed of the developments materially affecting each Portfolio.
ADMINISTRATION AGREEMENT AND OTHER CONTRACTS
ADMINISTRATOR AND DISTRIBUTOR. ALPS Mutual Funds Services, Inc. (ALPS, the
Administrator and Distributor), is the Administrator and Distributor to each
Portfolio under separate Administration and General Distribution Agreements
with respect to each Portfolio. ALPS, a Colorado corporation, is a
broker-dealer registered under the Securities Exchange Act of 1934 and a
member of the National Association of Securities Dealers, Inc.
As the Administrator, ALPS assists in each Portfolio's administration and
operation, including, but not limited to, providing office space and various
legal and accounting 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 .15% of average net assets.
Prior to July 1, 1995, National Financial Services Corporation (NFSC) served
as the Administrator and Distributor for each Portfolio. As Administrator,
NFSC earned fees from each Portfolio computed daily and payable monthly at an
annual rate of .20% of average net assets through $100 million, .15% above
$100 million and through $200 million, and .10% over $200 million. For each
Portfolio's fiscal year ended June 30, 1995, NFSC earned administration fees
in the amount of $208,504 and $162,658 from the Total Return Equity Portfolio
and the Total Return Fixed Income Portfolio respectively. For the period
from July 1, 1994 through September 30, 1994, NFSC waived .05% of its
administration fees totaling $13,373 for the Total Return Equity Portfolio
and $9,078 for the Total Return Fixed Income Portfolio.
Garland, 4990 Poplar Avenue, 3rd Floor, Memphis, Tennessee, 38117, serves as
the Co-Administrator for each Portfolio. As the Co-Administrator, Garland
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. Garland is entitled to receive from
each Portfolio a monthly fee at the annual rate of .05% of average net
assets.
As the Distributor, ALPS sells shares of Class I as agent on behalf of the
Trust at no additional cost to the Trust. Class II and III are obligated to
pay ALPS monthly an additional annual fee of .25% and 1.00% respectively of
each Portfolio's average net assets, which consists of a .25% shareholder
servicing fee for Class II and a .75% 12b-1 fee and a .25% shareholder
servicing fee for Class III, all or a portion of which may be paid out to
broker-dealers or others involved in the distribution of Class II and III
shares. Garland and its affiliates neither participate in nor are
responsible for the underwriting of Portfolio shares. Consistent with
applicable law, affiliates of Garland may receive commissions or asset-based
fees.
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<PAGE>
TRANSFER AGENT, FUND ACCOUNTING AND CUSTODIAN. Chase Global Funds Services
Company (CGFSC or the Transfer Agent), provides transfer agent and
shareholder services for each Portfolio, and calculates the NAV and dividends
of each class and maintains the portfolio and general accounting records.
Chase Manhattan Bank is Custodian of the assets of the Portfolios. The
Custodian is responsible for the safekeeping of the Portfolios' assets and
the appointment of sub-custodian banks and clearing agencies. The Custodian
takes no part in determining the investment policies of the Portfolios or in
deciding which securities are purchased or sold by the Portfolios. The
Portfolios, however, may invest in obligations of the Custodian and may
purchase securities from or sell securities to the Custodian.
For the fiscal year ended June 30, 1995, the following fees were earned by
the Transfer Agent, Fund Accountant and Custodian:
<TABLE>
<CAPTION>
TOTAL RETURN TOTAL RETURN
EQUITY PORTFOLIO FIXED INCOME PORTFOLIO
---------------- ----------------------
<S> <C> <C>
Transfer Agent
Class I $13,594 $14,672
Class III $25,174 $17,500
Fund Accounting $28,082 $28,767
Custodian $29,646 $22,079
</TABLE>
During the fiscal year ended June 30, 1995, the transfer agent voluntarily
agreed to waive its fee for Class III of each Portfolio to the extent
necessary to maintain the maximum differential in expenses, excluding 12b-1
fees and shareholder servicing fees, between Class I and Class III of each
Portfolio to .49% of average net assets. The transfer agent waived fees
totaling $5,333 and $12,462 for the Total Return Equity Portfolio and the
Total Return Fixed Income Portfolio respectively.
DISTRIBUTION PLANS. The Trustees of the Trust have adopted a Distribution
Plan on behalf of Class III of each Portfolio (each Class III Plan) pursuant
to Rule 12b-1 (the Rule) under the 1940 Act. The Rule provides in substance
that a mutual fund may not engage directly or indirectly in financing any
activity that is intended primarily to result in the sale of shares of the
fund except pursuant to a plan adopted by the fund under the Rule. The
Trustees have adopted the Plans to allow each class and ALPS to incur
distribution expenses. ALPS receives a Distribution and Service fee (12b-1
fee) of up to and including 0.75% of the average net assets of Class III of
each Portfolio. (These fees are in addition to the fees paid to ALPS under
the Administration Agreement.) The Trust or ALPS, on behalf of Class III of
each Portfolio, may enter into servicing agreements (Service Agreements) with
banks, broker-dealers or other institutions (Agency Institutions). Each
Class III Plan provides that ALPS may use its fees and other resources to
make payments to Agency Institutions for performance of distribution-related
services, including those enumerated above. The Service Agreements further
provide for compensation to broker-dealers for their efforts to sell Class
III shares. The distribution-related services include, but are not limited
to, the following: formulation and implementation of marketing and
promotional activities, such as mail promotions and television, radio,
newspaper, magazine and other mass media advertising; preparation, printing
and distribution of sales literature; preparation, printing and distribution
of prospectuses of each Portfolio and reports to recipients other than
existing shareholders of each Portfolio; obtaining such information, analyses
and reports with respect to marketing and promotional activities as ALPS may
from time to time, deem advisable; making payments to securities dealers and
others engaged in the sales of Class III Shares; and providing training,
marketing and support to such dealers and others with respect to the sale of
Class III Shares. Each Class III Plan recognizes ALPS may use its fees and
other resources to pay expenses associated with the promotion and
administration of activities primarily intended to result in the sale of
shares.
Each Plan has been approved by the Trustees, including the majority of
disinterested Trustees. As required by the Rule, the Trustees carefully
considered all pertinent factors relating to the implementation of the Plans
prior to its approval, and have determined that there is a reasonable
likelihood that each Plan will benefit each Portfolio and its shareholders.
To the extent that the Class III Plans gives ALPS greater flexibility in
connection with the distribution of shares of the class, additional sales of
shares may result.
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<PAGE>
The Class III Plans could be construed as compensation plans because ALPS is
paid a fixed fee and is given discretion concerning what expenses are payable
under the Plans. ALPS may spend more for marketing and distribution than it
receives in fees and reimbursements from each Portfolio. However, to the
extent fees received exceed expenses, including indirect expenses such as
overhead, ALPS could be said to have received a profit. For example, if ALPS
pays $1 for Class III distribution-related expenses and receives $2 under a
Class III Plan, the $1 difference could be said to be a profit for ALPS.
(Because ALPS is reimbursed for its out-of-pocket direct promotional
expenses, a Class III Plan also could be construed as a reimbursement plan.
Until the issue is resolved by the SEC, unreimbursed expenses incurred in one
year will not be carried over to a subsequent year.) If after payments by
ALPS for marketing and distribution there are any remaining fees attributable
to a Class III Plan, these may be used as ALPS may elect. Since the amount
payable under a Class III Plan will be commingled with ALPS's general funds,
including the revenues it receives in the conduct of its business, it is
possible that certain of ALPS's overhead expenses will be paid out of Plan
fees and that these expenses may include items which the SEC has noted, for
example, the costs of leases, depreciation, communications, salaries,
training and supplies. Each Portfolio believes that such expenses, if paid,
will be paid only indirectly out of the fees being paid under the Plan.
For the fiscal year ended June 30, 1995, the Total Return Equity Portfolio
and the Total Return Fixed Income Portfolio paid distribution fees in the
amount of $73,018 and $9,726 respectively.
SHAREHOLDER SERVICES PLANS. In addition to the Rule 12b-1 Distribution Plans
described above, Class II and Class III have adopted Shareholder Services
Plans to compensate Agency Institutions for individual shareholder services
and account maintenance. These functions include: maintaining account
records for each shareholder who beneficially owns Class II or Class III
Shares; answering questions and handling correspondence from shareholders
about their accounts; handling the transmission of funds representing the
purchase price or redemption proceeds; issuing confirmations for transactions
in Class II or Class III Shares by shareholders; assisting customers in
completing application forms; communicating with the transfer agent; and
providing account maintenance and account level support for all transactions.
For these services the participating Agency Institutions are paid a service
fee at the annual rate of up to and including .25% of average net assets of
Class II and Class III.
For the fiscal year ended June 30, 1995, the Total Return Equity Portfolio
and the Total Return Fixed Income Portfolio paid shareholder servicing fees
in the amount of $24,340 and $3,240 respectively.
Banking laws and regulations, including the Glass-Steagall Act as currently
interpreted by the Board of Governors of the Federal Reserve System, prohibit
a bank holding company registered under the Bank Holding Company Act of 1956
or any affiliate thereof from sponsoring, organizing, controlling, or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares and prohibit banks
generally from issuing, underwriting, selling or distributing securities.
The same laws and regulations generally permit a bank or bank affiliate to
act as an investment adviser and co-administrator and to purchase shares of
the investment company as agent for and upon the order of a customer. In the
Trust's and Investment Adviser's opinion, banks and their affiliates may be
paid for investment advisory, shareholder servicing, recordkeeping and
co-administration functions. Changes in federal or state statutes and
regulations pertaining to the permissible activities of banks and their
affiliates or subsidiaries, as well as further judicial or administrative
decisions or interpretations, could prevent a bank from continuing to perform
all or a part of the contemplated services. If a bank or its affiliates were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services. In such event, changes in the operation of the Portfolios might
occur, including possible termination of any automatic investment or
redemption or other services then being provided by any bank. It is not
expected that shareholders would suffer any adverse financial consequences as
a result of any of these occurrences. The Portfolios may execute portfolio
transactions with and purchase securities issued by depository institutions
that receive payments under the Plans. No preference will be shown in the
selection of investments for the instruments of such depository institutions.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein, and banks and other
financial institutions may be required to register as dealers pursuant to
state law.
21
<PAGE>
DESCRIPTION OF THE TRUST
TRUST ORGANIZATION. Total Return Equity Portfolio and Total Return Fixed
Income Portfolio are Portfolios of First Funds (formerly The Masters Group of
Mutual 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 Declaration of Trust
permits the Trustees to create additional Portfolios and classes. There are
seven Portfolios of the Trust, each with three classes.
The assets of the Trust received for the issue or sale of shares of each
Portfolio and all income, earnings, profits, and proceeds thereof, subject
only to the rights of creditors, are specially allocated to such Portfolio,
and constitute the underlying assets of such Portfolio. The underlying
assets of each Portfolio are segregated on the books of account, and are to
be charged with the liabilities with respect to such Portfolio and with a
share of the general expenses of the Trust. Expenses with respect to the
Trust are to be allocated in proportion to the asset value of the respective
Portfolios except where allocations of direct expense can otherwise be fairly
made. The officers of the Trust, subject to the general supervision of the
Trustees, have the power to determine which expenses are allocable to a given
Portfolio, or which are general or allocable to all of the Portfolios. In
the event of the dissolution or liquidation of the Trust, shareholders of a
Portfolio are entitled to receive as a class the underlying assets of such
Portfolio available for distribution.
SHAREHOLDER AND TRUSTEE LIABILITY. The Trust is an entity of the type
commonly known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The Declaration of Trust
provides that the Trust shall not have any claim against shareholders except
for the payment of the purchase price of shares and requires that each
agreement, obligation, or instrument entered into or executed by the Trust or
the Trustees shall include a provision limiting the obligations created
thereby to the Trust and its assets. The Declaration of Trust provides for
indemnification out of each Portfolio's property of any shareholders held
personally liable for the obligations of each Portfolio. The Declaration of
Trust also provides that each Portfolio shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation
of a Portfolio and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Portfolio itself would be unable to
meet its obligations. The Trustees believe that, in view of the above, the
risk of personal liability to shareholders is remote.
The Declaration of Trust further provides that the Trustees, if they have
exercised reasonable care, will not be liable for any neglect or wrongdoing,
but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
As of September 30, 1995, First Tennessee National Corp. D/B Pension Plan,
Memphis, TN, owned of record or beneficially 58.3% of Class I of Total Return
Equity Portfolio's outstanding shares and 64.9% of Total Return Fixed Income
Portfolio's outstanding shares.
VOTING RIGHTS. Each Portfolio's capital consists of shares of beneficial
interest. The shares have no preemptive or conversion rights; the voting and
dividend rights, the right of redemption, and the privilege of exchange are
described in the Prospectus. Shares are fully paid and nonassessable, except
as set forth under the heading "Shareholder and Trustee Liability" above.
Shareholders representing 10% or more of the Trust or a Portfolio may, as set
forth in the Declaration of Trust, call meetings of the Trust or a Portfolio
for any purpose related to the Trust or Portfolio, as the case may be,
including, in the case of a meeting of the entire Trust, the purpose of
voting on removal of one or more Trustees. The Trust or any Portfolio may be
terminated upon the sale of its assets to another open-end management
investment company, or upon liquidation and distribution of its assets, if
approved by vote of the holders of a majority of the outstanding shares of
the Trust or that Portfolio. If not so terminated, the Trust and each
Portfolio will continue indefinitely.
22
<PAGE>
CLASSES. Pursuant to the Declaration of Trust, the Trustees have authorized
additional classes of shares for each Portfolio of the Trust. Although the
investment objective for each separate class of a particular Portfolio is the
same, fee structures are different such that one class may have a higher
yield than another class of the same Portfolio at any particular time.
Shareholders of the Trust will vote together in the aggregate and not
separately by Portfolio, or by class thereof, except as otherwise required by
law or when the Trustees determine that the matter to be voted upon affects
only the interests of the shareholders of a particular Portfolio or a class
thereof. The Trust has received an Exemptive Order from the SEC (the Order)
to permit additional classes of shares. Under the Order, in the event of a
shareholder meeting, Class III of a Portfolio votes separately to approve its
Distribution and Service Plan, described previously under "Distribution and
Service Plans."
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 160 Federal Street, Boston,
Massachusetts, serves as the Trust's independent accountant. The independent
accountant examines the annual financial statements for the Trust and
provides other audit, tax, and related services.
FINANCIAL STATEMENTS
Portfolios' financial statements and financial highlights for the fiscal year
ended June 30, 1995 are included in each Portfolio's Annual Report which is a
separate report supplied independent of this Statement of Additional
Information. The Portfolios' financial statements and financial highlights
are incorporated herein by reference.
APPENDIX
DOLLAR-WEIGHTED AVERAGE MATURITY for Total Return Fixed Income Portfolio is
derived by multiplying the value of each investment by the number of days
remaining to its maturity, adding these calculations, and then dividing the
total by the value of the Portfolio. An obligation's maturity is typically
determined on a stated final maturity basis, although there are some
exceptions to this rule.
For example, if it is probable that the issuer of an instrument will take
advantage of a maturity-shortening device, such as a call, refunding, or
redemption provision, the date on which the instrument will probably be
called, refunded, or redeemed may be considered to be its maturity date.
Also, the maturities of mortgage-backed securities and some asset-backed
securities, such as collateralized mortgage obligations, are determined on a
weighted average life basis, which is the average time for principal to be
repaid. For a mortgage security, this average time is calculated by assuming
a constant prepayment rate for the life of the mortgage. The weighted
average life of these securities is likely to be substantially shorter than
their stated final maturity.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS:
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins
of protections may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
23
<PAGE>
Baa - Bonds rated Baa are considered as medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through Baa in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S CORPORATE BOND RATINGS:
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's to
a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated debt issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in highest-rated categories.
The ratings from AA to BBB may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
24
<PAGE>
TOTAL RETURN FIXED INCOME PORTFOLIO
The following supplement is provided to update and should be read in
conjunction with the information provided in the Prospectus dated October 25,
1995.
The following information and text shall be inserted in lieu of the
sections under "SUMMARY OF PORTFOLIO EXPENSES" on pages 3 and 4 of the
prospectus.
A. EXPENSE SUMMARY
<TABLE>
<CAPTION>
TOTAL RETURN FIXED
INCOME PORTFOLIO
--------------------------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
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 .00% .25% .25%
Other Expenses .37% .51% .51%
---- ---- -----
Total Portfolio Operating Expenses* .52% .91% 1.66%
---- ---- -----
---- ---- -----
</TABLE>
*Net of expense waivers
ANNUAL PORTFOLIO OPERATING EXPENSES. The Portfolio is obligated to pay
Management Fees to Garland Capital Management (Garland), a division of First
Tennessee Bank National Association, for managing the Portfolio's
investments. Garland 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, which have been
estimated for the current year, 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. Garland, 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. Other Expenses and Total Portfolio Operating Expenses would be
estimated as follows:
<TABLE>
<CAPTION>
TOTAL RETURN FIXED
INCOME PORTFOLIO
--------------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
Other Expenses .37% .51% .51%
Total Portfolio Operating Expenses .92% 1.31% 2.06%
</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 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 or financial institution
representatives (Investment Professionals) for services and expenses incurred
in connection with providing personal service to shareholders and/or
maintenance of shareholder
<PAGE>
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 Total Return Fixed Income Portfolio
assuming (1) 5% annual return, (2) redemption at the end of each time period,
(3) that operating expenses 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:
<TABLE>
<CAPTION>
TOTAL RETURN FIXED
INCOME PORTFOLIO
--------------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
1 year $ 5 $ 46* $ 17
3 years $17 $ 66* $ 53
5 years $29 $ 86* $ 91
10 years $65 $146* $198
</TABLE>
*Reflects imposition of maximum sales charge at the beginning of the period.
The following sentence shall be inserted in lieu of the third sentence
of the first paragraph under the section entitled "HOW ARE INVESTMENTS,
EXCHANGES AND REDEMPTIONS MADE? - Class II and III - Investment Requirement"
on page 9 of the prospectus:
"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."
The following sentence shall be inserted after the third sentence of the
section entitled "HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE? -
Class II and Class III - Systematic Investment Program" on page 13 of the
prospectus:
"If you are an employee of First Tennessee or any of its affiliates, the
minimum initial investment in the Portfolio is $50."
<PAGE>
[LOGO]
FIRST FUNDS
370 17th Street
Suite 2700
TOTAL RETURN FIXED INCOME PORTFOLIO Denver, Colorado 80202
- -------------------------------------------------------------------------------
PROSPECTUS FOR CLASS I, II, AND III
October 25, 1995
- -------------------------------------------------------------------------------
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 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 trust, fiduciary, advisory, agency, custodial or similar accounts
(Fiduciary Accounts). Class I shares may be purchased on behalf of Fiduciary
Accounts held by financial institutions, business organizations,
corporations, municipalities, non-profit institutions, individuals and other
entities (each a Fiduciary and collectively referred to as Fiduciaries),
serving in a fiduciary, advisory or agency capacity that meet the minimum
investment threshold for this class of shares. Class II and III shares are
designed for any investor who seeks 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, 1995) 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 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, 1995 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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 Portfolios Pay? ................... 16
How Is The Portfolio Organized? ......................................... 17
Investment Instruments, Transactions, Strategies and Risks .............. 17
- -------------------------------------------------------------------------------
</TABLE>
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 for Class I and III below is based
upon the Portfolio's expenses for the fiscal year ended June 30, 1995
adjusted to reflect new servicing arrangements. The information for Class II
below is based upon anticipated operating expenses.
A. EXPENSE SUMMARY
<TABLE>
<CAPTION>
TOTAL RETURN FIXED
INCOME PORTFOLIO
--------------------------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
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% .75%
Shareholder Servicing .00% .25% .25%
Other Expenses* .33% .45% .45%
---- ---- -----
Total Portfolio Operating Expenses* .33% .70% 1.45%
---- ---- -----
---- ---- -----
</TABLE>
*Net of expense waivers
ANNUAL PORTFOLIO OPERATING EXPENSES. The Portfolio is obligated to pay
Management Fees to Garland Capital Management (Garland), a division of First
Tennessee Bank National Association, for managing the Portfolio's
investments. Garland 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 Administration and
Co-Administration Fees, which have been estimated for the current year, 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. Garland, the Co-Administrator, is entitled to .05% of the
Portfolio's average net assets for co-administration services. Garland has
voluntarily agreed to waive this fee for Class I, however, there is no
guarantee that the waiver will continue.
If the waivers were not in effect, Management Fees would be .55% for
each Class. Other Expenses and Total Portfolio Operating Expenses would be
estimated as follows:
<TABLE>
<CAPTION>
TOTAL RETURN FIXED
INCOME PORTFOLIO
--------------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
Other Expenses .38% .45% .45%
Total Portfolio Operating Expenses .93% 1.25% 2.00%
</TABLE>
There is no guarantee that any waivers will continue at their stated
levels.
3
<PAGE>
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 or financial institution
representatives (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 Total Return Fixed Income Portfolio
assuming (1) 5% annual return, (2) redemption at the end of each time period,
(3) that operating expenses 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:
<TABLE>
<CAPTION>
TOTAL RETURN FIXED
INCOME PORTFOLIO
--------------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
1 year $ 3 $ 44* $ 15
3 years $11 $ 59* $ 46
5 years $19 $ 75* $ 80
10 years $42 $122* $174
</TABLE>
*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, 1995 and has been audited by Price Waterhouse LLP,
independent accountants. Their report on the financial statements and the
financial highlights for Class I and Class III of the Portfolio is included
in the Annual Report (Class II had not commenced operations as of June 30,
1995). The financial statements and financial highlights are incorporated by
reference into the Portfolio's Statement of Additional Information.
<TABLE>
<CAPTION>
TOTAL RETURN FIXED
INCOME PORTFOLIO
----------------------------------------------------------
CLASS I CLASS III
--------------------------- ---------------------------
FOR THE YEAR ENDED JUNE 30, FOR THE YEAR ENDED JUNE 30,
--------------------------- ---------------------------
1995 1994** 1995 1994***
------- ------- ------ -------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA:
Net asset value, beginning of period $ 9.41 $ 10.00 $ 9.40 $10.04
------- ------- ------ ------
Income from investment operations:
Net interest income 0.57 0.45 0.43 0.21
Net realized and unrealized
gain (loss) on investments 0.50 (0.57) 0.49 (0.62)
------- ------- ------ ------
Total from investment operations 1.07 (0.12) 0.92 (0.41)
------- ------- ------ ------
Distributions:
Net interest income (0.57) (0.46) (0.43) (0.22)
Net realized gain - (0.01) - (0.01)
------- ------- ------ ------
Total distributions (0.57) (0.47) (0.43) (0.23)
------- ------- ------ ------
Net asset value, end of period $ 9.91 $ 9.41 $ 9.89 $ 9.40
------- ------- ------ ------
------- ------- ------ ------
Total Return 11.87%+ (1.38)%+# 10.12%+ (4.19)%+#
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $90,574 $75,686 $1,916 $ 923
Ratio of expenses to average net assets(1) 0.35% 0.36%* 1.84% 1.82%*
Ratio of net interest income to average
net assets 6.07% 5.07%* 4.58% 3.61%*
Portfolio turnover rate 23% 36%* 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% 0.96%* 3.35% 6.36%*
</TABLE>
* Annualized
** Class commenced operations on August 2, 1993.
***Class commenced operations on December 2, 1993.
+ 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 Bank National Association (First Tennessee), through
Garland, 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 Garland'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. Garland 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 it may invest in obligations of any maturity, its dollar-weighted
average portfolio maturity will normally fluctuate between 5 and 15 years
depending on the interest rate and investment environment. 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
17 for a further discussion of the Portfolio's investments.
- -------------------------------------------------------------------------------
IS THE PORTFOLIO A SUITABLE INVESTMENT?; INVESTMENT RISKS
- -------------------------------------------------------------------------------
By itself, the Portfolio does not constitute a balanced investment plan.
The 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 Total Return Fixed Income 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 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.
- -------------------------------------------------------------------------------
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.
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HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?
- -------------------------------------------------------------------------------
CLASS I
- -------
WHO MAY INVEST?
Class I shares are designed exclusively for investment of monies held in
trust, fiduciary, advisory, agency, custodial or similar Fiduciary Accounts.
Class I shares may be purchased on behalf of Fiduciary Accounts held by
financial institutions, business organizations, corporations, municipalities,
non-profit institutions, individuals and other Fiduciaries serving in a
fiduciary, advisory or agency capacity who can meet the investment minimum.
HOW IS A FIDUCIARY ACCOUNT ESTABLISHED?
An initial investment must be preceded by or made in conjunction with
the establishment of a Fiduciary Account with a Fiduciary. Establishment of a
Fiduciary Account may require that documents and applications be completed
and signed before the investment can be implemented. The Fiduciary may
require that certain documents be provided prior to making a redemption from
the Portfolio. Fiduciaries may charge fees in addition to those described
herein based on their Fiduciary Account agreements. Fee schedules for
Fiduciary Accounts are available upon request from the Fiduciary and are
detailed in the agreements by which each client opens a Fiduciary Account.
HOW ARE INVESTMENTS MADE?
Each Fiduciary will transmit orders to the Transfer Agent, Chase Global
Funds Services Company (CGFSC). If an order is received by CGFSC prior to
4:00 p.m. Eastern time on any Business Day and the funds are received by
CGFSC that day, the investment will begin accruing dividends on the day
following purchase. Fiduciaries 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. 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), a Fiduciary 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 Fiduciary is $100,000. Fiduciaries may satisfy the minimum
investment by aggregating their Fiduciary Accounts within the Portfolio.
Subsequent investments may be in any amount. If a Fiduciary's Class I account
falls below $50,000 due to redemption, the Portfolio may close the account. A
Fiduciary 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 net asset per share (NAV) on the day
the account is closed, and proceeds will be sent to the address of record.
Involuntary redemptions will be effected, if at all, at the last calculated
NAV.
HOW ARE REDEMPTIONS MADE?
Fiduciaries 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.
Fiduciaries 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, proceeds of the redemption will be wired as federal funds on
the next Business Day to the bank account designated with CGFSC. The
Fiduciary 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 (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 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
8
<PAGE>
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 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 Fiduciary 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 Garland's opinion, they are of a size that would disrupt
management of the Portfolio.
In order to allow Garland to manage the Portfolio most effectively,
Fiduciaries 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 Fiduciary 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 Fiduciary should verify the accuracy of confirmation statements
immediately after receipt. If the Fiduciary 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 any investor who seeks 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 REQUIREMENT
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,
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, the minimum initial investment is $50, and subsequent
investments may be in any amount of $25 or greater. See page 13 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. Involuntary redemptions
will be effected, if at all, at the last calculated NAV.
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.
9
<PAGE>
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 13 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.
PUBLIC OFFERING PRICE
Class III shares are bought without a load; that is, the offering price
for such shares will be their NAV. 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 Service Organizations which are financial
institutions which have entered into an agreement with ALPS, the Portfolio's
Distributor. You may calculate your sales load as follows:
<TABLE>
<CAPTION>
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 dealers, in the form of attendance at a sales seminar at a resort. These
incentives will be limited to certain dealers 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 your First Funds sponsored IRA upon rollover (and
subsequent contributions) from another IRA, a 401 Plan or 403 Plan, if the
trustee or custodian for such other IRA or Plan is a direct or indirect
subsidiary or franchisee bank of First Tennessee; (b) through a discount
broker that imposes a transaction charge with respect to such purchases; (c)
by registered representatives, directors, advisory directors, officers and
employees (and their immediate families) of banks or broker/dealer
organizations affiliated with First Tennessee, that have agreements to sell
First Funds; (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
Code; (f) by financial institutions (including bank trust departments or
divisions) investing on their own behalf or on behalf of their clients; (g)
in accounts as to which a bank, registered investment advisor, or
broker/dealer charges an asset management fee; (h) with redemption proceeds
from other mutual fund complexes on which the investor has paid a front-end
sales charge within the past sixty (60) days upon presentation of purchase
verification information; or (i) 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?" 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 load, if you
obtained such no-load 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.
10
<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 3.00% 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 fiduciary 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.
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 7:00 p.m. Central Time (9:00 a.m. to 8:00 p.m. Eastern
Time), Monday through Friday.
Investments may be made in several ways:
BY MAIL: Make your check payable to First Funds: Total Return Fixed
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.
11
<PAGE>
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 accrue
dividends through the day of 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 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
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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 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. You will receive a written confirmation
of each automatic transfer from your bank account to your Portfolio account,
and a debit entry will appear on your bank account statement. 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 transaction. 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 I, II AND III
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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 New York Stock
Exchange (NYSE) and the Federal Reserve Bank of New York (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 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.
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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 Total Return Fixed Income 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, each 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. Fiduciaries may execute exchange
transactions by calling CGFSC at 1-800-442-1941 (option 2) prior to 4:00 p.m.
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 maintained.
Each exchange may produce a gain or loss for tax purposes. In order to
protect the Portfolio's performance and its shareholders, Garland discourages
frequent exchange activity 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 Garland'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, if Class I, the Fiduciary 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 Fiduciary Account may be
converted to shares of another class.
STATEMENTS AND REPORTS
You or, if Class I, the Fiduciary will receive a monthly statement and a
confirmation after every transaction that affects the share balance or 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 Fiduciary 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 Fiduciary. Please write to ALPS at the address
indicated on the previous page 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 interest income it earned from its
portfolio of investments for a 30-day period (net of expenses), 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
- -------------------------------------------------------------------------------
The Portfolio's securities are generally traded in the over-the-counter
market through broker-dealers. In the over-the-counter market, a securities
firm or bank 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.
Higher commissions may be paid to firms that provide research services
to the extent permitted by law. The frequency of portfolio transactions - the
Portfolio's portfolio turnover rate - will vary from year to year depending
on market conditions. Total Return Fixed Income Portfolio's portfolio
turnover rate for the period ended June 30, 1995 was 23%.
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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.
FEDERAL TAXES. Distributions from each 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 Fiduciary, 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 you 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.
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<PAGE>
"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. You should consult your tax advisor 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 each Portfolio to
withhold 31% of taxable distributions from your account.
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WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY?
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INVESTMENT ADVISORY AND MANAGEMENT AND SUB-ADVISORY AGREEMENTS. For
managing its investment and business affairs, the Portfolio is obligated to
pay Garland, a division of First Tennessee, 4990 Poplar Avenue, Memphis,
Tennessee, a monthly management fee at the annual rate of .55% of its average
net assets. Garland has voluntarily agreed to waive its full advisory fee for
the Portfolio. This voluntary waiver can be discontinued at any time.
Under the Investment Advisory and Management Agreement, Garland 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 Garland, Garland 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 Garland 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 $13.2 billion in assets under
administration (including nondiscretionary accounts) and $4.7 billion in
assets under management as of June 30, 1995, as well as experience in
supervising sub-advisers. For the Portfolio's fiscal year ended June 30,
1995, Garland earned $447,309 from the Portfolio before waiving all of its
fee.
Highland serves as the Sub-Adviser for the Portfolio subject to the
supervision of Garland and pursuant to the authority granted to it under its
Sub-Advisory Agreement with Garland. 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 $1.8 billion in
assets under management as of June 30, 1995. Garland is obligated to pay
Highland a monthly sub-advisory fee at the annual rate of .33% of Total
Return Fixed Income 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 each Portfolio. ALPS is entitled to and receives
from the Portfolio a monthly fee at the annual rate of .15% of average net
assets.
Garland, 4990 Poplar Avenue, 3rd Floor, Memphis, Tennessee, 38117,
serves as the Co-Administrator for each Portfolio. As the Co-Administrator,
Garland 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. Garland is entitled to receive from
the Portfolio a monthly fee at the annual rate of .05% of average net assets.
Garland is voluntarily waiving this fee for Class I, however, there is no
guarantee that this waiver will continue.
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As the Distributor, ALPS sells shares of each Portfolio as agent on
behalf of the Trust at no additional cost to the Trust. Garland 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 Garland 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. Each Distribution Plan provides for payment of a fee to ALPS
at the annual rate of .75% of the Portfolio'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 III of the Portfolio, under which Investment
Professionals are paid at the annual rate of .25% of the Portfolio's 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 Administration Fee,
and will reduce both class' net income and total return.
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HOW IS THE PORTFOLIO ORGANIZED?
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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
Steven Wishnia, one of the Portfolio Managers for Total Return Fixed
Income 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.
James R. Turner is one of the Portfolio Managers for Total Return Fixed
Income Portfolio. Mr. Turner managed the assets of the predecessor Fund to
Total Return Fixed Income Portfolio from August 1986 until its conversion in
August 1993 to a mutual fund. He also manages pension and endowment funds. He
is a 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.
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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.
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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.
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.
ILLIQUID SECURITIES. Under the supervision of the Board of Trustees,
Highland, under Garland's supervision, determines the liquidity of the
Portfolio's investments. The absence of a trading market can make it
difficult to ascertain a
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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. The Portfolio may buy and sell options contracts to
manage their 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.
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 Total Return Fixed
Income 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
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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
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Garland Capital Management
(a division of First Tennessee Bank National Association)
Memphis, TN
SUB-ADVISER
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Highland Capital Management Corp.
Memphis, TN
OFFICERS
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Richard C. Rantzow, President
Mark A. Pougnet, Treasurer & Secretary
TRUSTEES
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Thomas M. Batchelor
John A. DeCell
L.R. Jalenak, Jr.
Larry W. Papasan
Richard C. Rantzow
ADMINISTRATOR AND DISTRIBUTOR
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ALPS Mutual Funds Services, Inc.
Denver, CO
TRANSFER AND SHAREHOLDER SERVICING AGENT
----------------------------------------
Chase Global Funds Services Company
Boston, MA
CUSTODIAN
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Chase Manhattan Bank, N.A.
New York, NY