<PAGE>
As Filed with the Securities and Exchange Commission on August 18, 1997
Registration Nos. 33-46374
811-6589
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 12 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 /X/
AMENDMENT NO. __ / /
(Check appropriate box or boxes)
----------------------------
First Funds
(Exact Name of Registrant as Specified in Charter)
370 Seventeenth Street, Suite 2700
Denver, Colorado 80202
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 303-623-2577
James V. Hyatt, Esq.
370 Seventeenth Street, Suite 2700
Denver, Colorado 80202
(Name and Address of Agent for Service)
Copy to:
Daniel B. Hatzenbuehler, Esq.
Baker, Donelson, Bearman & Caldwell
165 Madison Avenue, Suite 2100
Memphis, TN 38103
It is proposed that this filing will become effective (check appropriate box):
____ immediately upon filing pursuant to paragraph (b)
____ on (date) pursuant to paragraph (b)
_X__ 60 days after filing pursuant to paragraph (a)
____ 75 days after filing pursuant to paragraph (a)(2)
____ on (date) pursuant to paragraph (a) of Rule 485
Registrant registered an indefinite number of shares pursuant to regulation
24f-2 under the Investment Company Act of 1940 on August 29, 1996.
================================================================================
<PAGE>
FIRST FUNDS
INTERMEDIATE BOND PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III PROSPECTUS
<TABLE>
Form N-1A Item Number
- ---------------------
Part A Prospectus Caption
- ------ ------------------
<S> <C>
1........................................................................Cover Page
2.....................................................Summary of Portfolio Expenses
3 a,b.............................................................................*
c..................................................How is Performance Calculated?
4 a(i)..............................................How is the Portfolio Organized?
a(ii),b,c.....................What is the Investment Objective of the Portfolio?;
What are the Portfolio's Investment Policies and Limitations?;
Investment Instruments, Strategies, Transactions and Risks;
Is the Portfolio a Suitable Investment?
5 a.................................................How is the Portfolio Organized?
b,c,d,e......................What Advisory and Other Fees does the Portfolio Pay?
f..........................................................Portfolio Transactions
6 a(i)..............................................How is the Portfolio Organized?
a(ii)........................How are Investments, Exchanges and Redemptions Made?
a(iii)............................................How is the Portfolio Organized?
b,c,d...........................................................................*
e................Cover Page; How are Investments, Exchanges and Redemptions Made?
f,g.........................How are Investments, Exchanges and Redemptions Made?;
What is the Effect of Federal Income Tax on this Investment?
7 a............................What Advisory and Other Fees does the Portfolio Pay?
b(i, ii, iii, iv, v), c, d...How are Investments, Exchanges and Redemptions Made?
e, f(i, ii)..................What Advisory and Other Fees does the Portfolio Pay?
f(iii)..........................................................................*
8..............................How are Investments, Exchanges and Redemptions Made?
9.................................................................................*
* Not Applicable
</TABLE>
<PAGE>
FIRST FUNDS
CAPITAL APPRECIATION PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III PROSPECTUS
<TABLE>
Form N-1A Item Number
- ---------------------
Part A Prospectus Caption
- ------ ------------------
<S> <C>
1........................................................................Cover Page
2.....................................................Summary of Portfolio Expenses
3 a,b.............................................................................*
c..................................................How is Performance Calculated?
4 a(i)..............................................How is the Portfolio Organized?
a(ii),b,c.....................What is the Investment Objective of the Portfolio?;
What are the Portfolio's Investment Policies and Limitations?;
Investment Instruments,Strategies, Transactions and Risks;
Is the Portfolio a Suitable Investment?
5 a.................................................How is the Portfolio Organized?
b,c,d,e......................What Advisory and Other Fees does the Portfolio Pay?
f..........................................................Portfolio Transactions
6 a(i)..............................................How is the Portfolio Organized?
a(ii)........................How are Investments, Exchanges and Redemptions Made?
a(iii)............................................How is the Portfolio Organized?
b,c,d...........................................................................*
e................Cover Page; How are Investments, Exchanges and Redemptions Made?
f,g.........................How are Investments, Exchanges and Redemptions Made?;
What is the Effect of Income Tax on this Investment?
7 a............................What Advisory and Other Fees does the Portfolio Pay?
b(i, ii, iii, iv, v), c, d...How are Investments, Exchanges and Redemptions Made?
e, f(i, ii)..................What Advisory and Other Fees does the Portfolio Pay?
f(iii)..........................................................................*
8..............................How are Investments, Exchanges and Redemptions Made?
9.................................................................................*
* Not Applicable
</TABLE>
<PAGE>
FIRST FUNDS
GROWTH & INCOME PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
BOND PORTFOLIO
INTERMEDIATE BOND PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III
STATEMENT OF ADDITIONAL INFORMATION
Form N-1A Item Number Statement of Additional Information Caption
- --------------------- -------------------------------------------
10, 11................................................................Cover Page
12......................................................Description of the Trust
13 a, b, c.......Investment Restrictions and Limitations; Investment Instruments
d...........................................................................*
14 a, b, c.................................................Trustees and Officers
c...........................................................................*
15 a, b, c..............................................Description of the Trust
16 a(i, ii)................Investment Advisory Agreements; Trustees and Officers
a(iii), b, c, d................................Investment Advisory Agreements
e, f.............................Administration Agreement and Other Contracts
g...........................................................................*
h....................................................Description of the Trust
i................................Administration Agreement and Other Contracts
17 a......................................................Portfolio Transactions
b...........................................................................*
c......................................................Portfolio Transactions
d, e........................................................................*
18 a....................................................Description of the Trust
b...........................................................................*
19 a..............................Additional Purchase and Redemption Information
b...........................................Valuation of Portfolio Securities
c...........................................................................*
20.......................................................Distributions and Taxes
21 a(i, ii).........................Administration Agreement and Other Contracts
a(iii), b, c................................................................*
22 a...........................................................................*
b.................................................................Performance
23...............Financial Information for the annual period ended June 30, 1996
............for Class I, II and III of each Portfolio is filed herein as Item 24
* Not Applicable
<PAGE>
EXPLANATORY NOTE
This amendment to the Registration Statement of First Funds contains the
following:
1. One Prospectus for the new Capital Appreciation Portfolio;
2. One Prospectus for the new Intermediate Bond Portfolio;
3. One Statement of Additional Information for the Growth & Income
Portfolio, Capital Appreciation Portfolio, Bond Portfolio and Intermediate
Bond Portfolio; and
4. One Part C of the Registration Statement
This amendment does not amend the following portions of the Registration
Statement:
1. Prospectuses for the Bond Portfolio, the Growth & Income Portfolio, the
four Money Market Portfolios, and the Tennessee Tax-Free Portfolio; and
2. Statements of Additional Information for the four Money Market Portfolios
and the Tennessee Tax-Free Portfolio.
<PAGE>
FIRST FUNDS 370 17th Street
Suite 2700
CAPITAL APPRECIATION PORTFOLIO Denver, Colorado 80202
- -----------------------------------------------------------------------------
PROSPECTUS FOR CLASS I, II, AND III
AUGUST 18, 1997
- -----------------------------------------------------------------------------
First Funds (the Trust) offers investors a convenient and economical
means of investing in a professionally managed equity mutual fund. The
objective of the Capital Appreciation Portfolio (Portfolio) is to seek
long-term capital appreciation by investing in equity securities of medium
and smaller capitalization companies. The Portfolio's net asset value per
share will fluctuate in response to changes in the value of its investments.
This Prospectus is designed to provide you with information that you
should know before investing. Please read and retain this document for future
reference. This Prospectus offers Class I, II and III shares of the
Portfolio. Class I shares are designed exclusively for investment of monies
held in non-retail trust, advisory, agency, custodial or similar accounts
(Institutional Accounts). Class I shares may be purchased for Institutional
Accounts by financial institutions, business organizations, corporations,
municipalities, non-profit institutions and other entities serving in trust,
advisory, agency, custodial or similar capacities (each, an Institutional
Investor and collectively, Institutional Investors) that meet the investment
threshold for this Class of shares. Class II and III shares are designed for
individuals and other investors who seek mutual fund investment convenience
plus a lower investment minimum. These Classes offer investors differing
expense and sales load structures to choose between. See "Expense Summary" on
page 3.
A Statement of Additional Information (dated August 18, 1997) for the
Portfolio has been filed with the Securities and Exchange Commission (SEC)
and is incorporated herein by reference. This Prospectus and the 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.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY STATE
OR JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER IN
SUCH STATE OR JURISDICTION.
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.
CA-pro-197
<PAGE>
- -----------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
----
Summary Of Portfolio Expenses............................................ 3
What Is The Investment Objective Of The Portfolio?....................... 4
Is The Portfolio A Suitable Investment?; Investment Risks................ 5
What Are The Portfolio's Investment Policies And Limitations?............ 5
How Are Investments, Exchanges And Redemptions Made?..................... 6
How Is Performance Calculated?........................................... 13
Portfolio Transactions................................................... 13
What Is The Effect Of Federal Income Tax On This Investment?............. 13
What Advisory And Other Fees Does The Portfolio Pay?..................... 14
How Is The Portfolio Organized?.......................................... 15
Investment Instruments, Transactions, Strategies And Risks............... 15
- -----------------------------------------------------------------------------
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 as an
investor in the portfolio. 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
CAPITAL APPRECIATION
PORTFOLIO
------------------------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------- -------- ---------
Maximum Sales Load on Purchases
(as a percentage of offering price) None 5.75% 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* .70% .70% .70%
12b-1 Fees .00% .00% .75%
Other Expenses* .44% .80% .81%
Total Portfolio Operating Expenses* 1.14% 1.50% 2.26%
*After expense waivers
ANNUAL PORTFOLIO OPERATING EXPENSES. The Portfolio is obligated to
pay Management Fees to First Tennessee Bank National Association (First
Tennessee) and to Investment Advisers, Inc. (IAI). First Tennessee, as
Co-Investment Adviser has voluntarily agreed to waive its entire investment
advisory fee (for the current fiscal year) which amounts to .15% of the
Portfolio's average net assets, however, there is no guarantee that the
waiver will continue. The Portfolio incurs Other Expenses, including
Administration and Co-Administration Fees, for maintaining shareholder
records, furnishing shareholder statements and reports, and other services.
ALPS, the Administrator, is entitled to .15% of the Portfolio's average net
assets for administration services. ALPS has voluntarily agreed to waive its
full administration fee for the first six months of the Portfolio's
operation. First Tennessee, the Co-Administrator, is entitled to and charges
.05% of the Portfolio's average net assets for co-administration services.
Other Expenses also include Shareholder Servicing Fees of 0.25% with respect
to Class II and Class III of the Portfolio.
If the waivers were not in effect, Management Fees would be .85% for the
current fiscal year for each Class. Other Expenses (estimated) and Total
Portfolio Operating Expenses would be as follows:
CAPITAL APPRECIATION
PORTFOLIO
------------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
Other Expenses (estimated) .52% .88% .89%
Total Portfolio Operating Expenses 1.37% 1.73% 2.49%
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
3
<PAGE>
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 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
applicable to Class III shares. Please see page 14 for further information.
B. EXAMPLE: You would pay the following expenses for every $1,000
investment in each Class of shares of the Capital Appreciation Portfolio
assuming (1) 5% annual return, (2) redemption at the end of each time period,
(3) that operating expenses (net of expense waivers) are the same as
described above, and (4) reinvestment of all dividends and distributions. THE
RETURN OF 5% AND EXPENSES SHOULD NOT BE CONSIDERED INDICATIONS OF ACTUAL OR
EXPECTED PERFORMANCE OR PORTFOLIO OPERATING EXPENSES, BOTH OF WHICH MAY VARY
SIGNIFICANTLY:
CAPITAL APPRECIATION
PORTFOLIO
------------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
1 year $12 $52* $23
3 years $36 $83* $71
*Reflects imposition of maximum sales charge at the beginning of the period.
- ------------------------------------------------------------------------------
WHAT IS THE INVESTMENT OBJECTIVE OF THE PORTFOLIO?
- ------------------------------------------------------------------------------
First Tennessee and IAI serve as Co-Investment Advisers to the
Portfolio. First Tennessee, among other things, provides investment
management evaluations to the Board of Trustees, monitors the activities of
IAI, including IAI's Portfolio transactions, and coordinates IAI's activities
with the Portfolio's custodian, transfer agent, Administrator and independent
accountants. IAI 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? - Co-Investment Advisory and Management Agreements".
The investment objective of the Portfolio is to seek long-term capital
appreciation by investing at least 65% of its total assets in equity
securities of medium and smaller capitalization companies (companies which
generally have market capitalizations of less than $5 billion). However,
the Investment Adviser and Sub-Adviser currently intend, under normal
circumstances, to invest at least 80% of the Portfolio's total assets in
equity securities, except where prevailing market conditions require a more
defensive posture. There is no assurance that the Portfolio will achieve its
investment objective. The permitted investments of the Portfolio are as
follows:
Capital Appreciation Portfolio will invest primarily in common stock,
convertible preferred stock, and bonds and debentures convertible into common
stock of U.S.-based corporations of all sizes, industries and geographical
markets. IAI 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 foreign securities that IAI believes possess
unusual values, although they may involve greater risk.
Capital Appreciation Portfolio also may invest in options, and may sell
short securities it owns. The Portfolio may engage in repurchase agreements
and 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 purposes,
invest without limit in short-term securities including U.S. government
obligations, commercial paper, and certificates of deposit.
See "Investment Instruments, Transactions, Strategies and Risks" for a
further discussion of the Portfolio's investments.
4
<PAGE>
- ------------------------------------------------------------------------------
IS THE PORTFOLIO A SUITABLE INVESTMENT?; INVESTMENT RISKS
- ------------------------------------------------------------------------------
By itself, the Portfolio does not constitute a balanced investment plan.
The Capital Appreciation Portfolio emphasizes long-term capital appreciation
by investing primarily in equity securities of medium and smaller
capitalization companies. Any income received from securities held by the
Portfolio will be incidental. An investment in the Portfolio may involve
greater risk than is inherent in other types of investments since it seeks
capital appreciation and the value of its investments will generally fluctuate
in response to stock market conditions. Investors should realize that equity
securities of medium and smaller capitalization companies may involve greater
risk than is associated with investing in more established companies. 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. IAI 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 IAI judges market
conditions incorrectly or employs a strategy that does not correlate well
with the Portfolio's investment strategy. Positions in options involve the
risk that such options may fail as a hedging technique and that closing
transactions may not be effected where a liquid secondary market does not
exist.
Further information about the types of securities in which the Portfolio
may invest and their related risks, as well as the investment policies of the
Portfolio in general, are set forth in the section "Investment Instruments,
Transactions, Strategies And Risks" in this prospectus and in the Statement
of Additional Information.
- ------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIO'S INVESTMENT POLICIES AND LIMITATIONS?
- ------------------------------------------------------------------------------
INVESTMENT LIMITATIONS. The Capital Appreciation 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; and (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; and (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. With the exception of the
Portfolio's policies and limitations regarding borrowings and investments in
illiquid securities, 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.
5
<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 of its affiliates have lending
relationships.
- ------------------------------------------------------------------------------
HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?
- ------------------------------------------------------------------------------
CLASS I
WHO MAY INVEST?
Class I shares are designed exclusively for investment of monies held in
non-retail trust, advisory, agency, custodial or similar Institutional Accounts.
Class I shares may be purchased for Institutional Accounts by financial
institutions, business organizations, corporations, municipalities, non-profit
institutions, and other Institutional Investors serving in a trust, advisory,
agency, custodial or similar capacity who meet the investment minimum.
HOW IS AN INSTITUTIONAL ACCOUNT ESTABLISHED?
An initial investment must be preceded by or made in conjunction with
the establishment of an Institutional Account with an Institutional Investor.
Establishment of an Institutional Account may require that documents and
applications be completed and signed before the investment can be
implemented. The Institutional Investor may require that certain documents be
provided prior to making a redemption from the Portfolio. Institutional
Investors may charge fees in addition to those described herein. Fee
schedules for Institutional Accounts are available upon request from the
Institutional Investor and are detailed in the agreements by which each
client opens an account with an Institutional Investor.
HOW ARE INVESTMENTS MADE?
Each Institutional Investor will transmit orders to the Transfer Agent,
Chase Global Funds Services Company (CGFSC). If an order is received by CGFSC
prior to 4:00 p.m. Eastern Time on any Business Day (as defined in the
section "How Are Investments, Exchanges and Redemptions Made - Class I, II
and III - How Are Portfolio Shares Valued?") and the funds are received by
CGFSC that day, the investment will earn dividends declared, if any, on the
day of purchase. Institutional Investors will wire funds through the Federal
Reserve System. Purchases will be processed at the net asset value per share
(NAV) calculated after an order is received by CGFSC. The Portfolio requires
advance notification of all wire purchases. To secure same day acceptance of
federal funds (monies transferred from one bank to another through the
Federal Reserve System with same-day availability), an Institutional Investor
must call CGFSC at 1-800-442-1941, (option 2) prior to 4:00 p.m. Eastern Time
on any Business Day to advise it of the wire. The Trust may discontinue
offering its shares in any Class of a Portfolio without notice to
shareholders.
MINIMUM INVESTMENT AND ACCOUNT BALANCE. The minimum initial investment
for each Institutional Investor is $100,000. Institutional Investors may
satisfy the minimum investment by aggregating their Institutional Accounts
within the Portfolio. Subsequent investments may be in any amount. If an
Institutional Investor's Class I account falls below $50,000 due to
redemption, the Portfolio may close the account. An Institutional Investor
may be notified if the minimum balance is not being maintained and will be
allowed 30 days to make additional investments before its account is closed.
Shares will be redeemed at the NAV on the day the account is closed, and
proceeds will be sent to the address of record.
Should an Institutional Investor or a beneficial owner of Class I
shares cease to be eligible to participate in this Class, Class I shares held
in an Institutional Account may be converted to shares of another Class. Any
such conversion will be effected on the basis of the relative net asset
values of the two classes without the imposition of any sales load, fee or
other charge. Institutional Investors or beneficial owners will receive at
least 30 days prior notice of any proposed conversion.
HOW ARE REDEMPTIONS MADE?
Institutional Investors may redeem all or a portion of their account
shares on any Business Day. Shares will be redeemed at the NAV next
calculated after CGFSC has received the redemption request and will earn
dividends declared, if any, through the day prior to redemption. If an
account is closed, any accrued dividends will be paid at the beginning of the
following month.
Institutional Investors may make redemptions by wire provided they have
established a wire account with CGFSC. Please call 1-800-442-1941, (option 2)
to advise CGFSC of the wire. If telephone instructions are received before
4:00 p.m. Eastern Time on any Business Day, proceeds of the redemption will
be wired as federal funds on the next Business Day
6
<PAGE>
to the bank account designated with CGFSC. The Institutional Investor may
change the bank account designated to receive an amount redeemed at any time
by sending a letter of instruction with a signature guarantee to CGFSC at 73
Tremont Street, Boston, Massachusetts, 02108.
Pursuant to the Investment Company Act of 1940, as amended (1940 Act),
if making immediate payment of redemption proceeds could adversely affect the
Portfolio, payments may be made up to seven days later. Also, when the New
York Stock Exchange (NYSE) is closed (or when trading is restricted) for any
reason other than customary weekend or holiday closings, or under any
emergency circumstances as determined by the SEC to merit such action, the
right of redemption may be suspended or the date of payment postponed for a
period of time that may exceed seven days. To the extent Portfolio securities
are traded in other markets on days when either the NYSE or the Federal
Reserve Bank of New York (New York Federal Reserve) is closed, the
Portfolio's NAV may be affected on days when investors do not have access to
the Portfolio to purchase or redeem shares.
If transactions by telephone cannot be executed (for example, during
times of unusual market activity), orders may be placed by mail to CGFSC. In
case of suspension of the right of redemption, the Institutional Investor may
either withdraw its request for redemption or it will receive payment based
on the NAV next determined after the termination of the suspension.
ADDITIONAL INFORMATION
The Portfolio also reserves the right to reject any specific purchase
order, including certain purchases by exchange. Purchase orders may be
refused if, in IAI's opinion, they are of a size that would disrupt
management of the Portfolio.
In order to allow IAI to manage the Portfolio most effectively,
Institutional Investors are strongly urged to initiate all trades
(investments, exchanges and redemptions of shares) as early in the day as
possible and to notify CGFSC at least one day in advance of trades in excess
of $1 million. In making these trade requests, the name of the Institutional
Investor and the account number(s) must be supplied.
Transactions may be initiated by telephone. Please note that the
Portfolio and its agents will not be responsible for any losses resulting
from unauthorized telephone transactions if the Portfolio or its agents
follow reasonable procedures designed to verify the identity of the caller.
These procedures may include requesting additional information or using
personalized security codes. The Portfolio or its agents may also record
calls and an Institutional Investor should verify the accuracy of
confirmation statements immediately after receipt. If an Institutional
Investor does not want to be able to initiate redemptions and exchanges by
telephone, please call CGFSC for instructions.
CLASS II AND III
WHO MAY INVEST?
Class II and III shares are designed for individuals and other investors
who seek mutual fund investment convenience plus a lower investment minimum.
These Classes offer investors differing expense and sales load structures to
choose between. See "Summary Of Portfolio Expenses" on page 3.
INVESTMENT 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,
(a consumer discount card program provided by "A" Plus Strategic Alliances,
Inc., a subsidiary of First Tennessee), the minimum initial investment is
$250, and subsequent investments may be in any amount of $25 or greater. If
you are an employee of First Tennessee or any of its affiliates and you
participate in the Systematic Investing Program, the minimum initial
investment is $50, and subsequent investments may be in any amount of $25 or
greater. See page [ ] for additional information on the Systematic Investing
Program. If your balance in the Portfolio falls below the applicable minimum
investment requirement due to redemption, you may be given 30 days' notice
to reestablish the minimum balance. If you do not reestablish the minimum
balance, your account may be closed and the proceeds mailed to you at the
address on record. Shares will be redeemed on the day the account is closed.
All purchases must be made in U.S. dollars and checks must be drawn on
U.S. banks. No cash will be accepted. If you make a purchase with more than
one check, each check must have a value of at least $100, and the minimum
investment requirement still applies (excluding the specific circumstances,
stated above, which reduce the minimum investment requirement). The Portfolio
reserves the right to limit the number of checks processed at one time. If
your check does not clear, your purchase will be canceled and you could be
liable for any losses or fees incurred.
7
<PAGE>
You may initiate any transaction either directly or through your
Investment Professional. Please note that the Portfolio and its agents will
not be responsible for any losses resulting from unauthorized transactions,
if the Portfolio or its agents follow reasonable procedures designed to
verify the identity of the caller. These procedures may include requesting
additional information or using personalized security codes. Your Investment
Professional may also record calls and you should verify the accuracy of your
confirmation statements immediately after you receive them. If you do not
want to be able to redeem and exchange by telephone, please check the box on
your application (if you invest directly) or, if you invest through an
Investment Professional, please call your Investment Professional for
instructions.
HOW DO I SET UP AN ACCOUNT?
You may set up an account directly in the Portfolio or you may invest in
the Portfolio through your Investment Professional. See page 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.
HOW DO I INVEST DIRECTLY?
When opening a new account directly, you must complete and sign an
account application and send it to CGFSC, 73 Tremont Street, Boston, MA
02108. Telephone representatives are available at 1-800-442-1941, (option 2)
between the hours of 8:00 a.m. to 4:00 p.m. Central Time (9:00 a.m. to 5:00
p.m. Eastern Time), Monday through Friday.
Investments may be made in several ways:
BY MAIL: Make your check payable to First Funds: Capital Appreciation
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.
BY BANK TRANSFER: Bank transfer allows you to move money between your
bank account and your First Funds account. This automatic service allows you
to transfer money from your bank account via the Automated Clearing House
(ACH) network to your Portfolio account. First, a Portfolio account must be
established, and an application sent to CGFSC. Be sure to indicate on the
application under the section Account Privileges that you desire to have this
option. Once you have completed this process, you can initiate a bank
transfer by contacting CGFSC at 1-800-442-1941, (option 2). Please allow two
or three days after the authorization for the transfer to occur.
BY WIRE: Call 1-800-442-1941, (option 2) to set up your Portfolio
account to accommodate wire transactions. To initiate your wire transaction,
call your depository institution. Federal funds (monies transferred from
one bank to another through the Federal Reserve System with same-day
availability) should be wired to:
Chase Manhattan Bank, N.A.
ABA #021000021
First Funds
Credit DDA #910-2-733335
(Account Registration)
(Account Number)
(Wire Control Number) *See Below*
Prior to sending wires, please be sure to call 1-800-442-1941, (option 2)
to receive a Wire Control Number to be included in the body of the wire (see
above).
Your bank may charge you a fee for this service.
HOW DO I REDEEM SHARES WHEN INVESTING DIRECTLY?
You may redeem all or a portion of your shares on any day that the
Portfolio is open for business. Shares will be redeemed at the NAV next
calculated after CGFSC has received the redemption request and will earn
dividends declared, if any, through the day prior to redemption. If a
Portfolio account is closed, any accrued dividends will be paid at the
beginning of the following month.
8
<PAGE>
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 as described below.
A signature guarantee is designed to protect you, the Portfolio, and its
agents from fraud. Your written request requires a signature guarantee if you
wish to redeem more than $1,000 worth of shares; if your Portfolio account
registration has changed within the last 30 days; if the check is not being
mailed to the address on your account; if the check is not being made out to
the account owner; or if the redemption proceeds are being transferred to
another First Funds account with a different registration. The following
institutions should be able to provide you with a signature guarantee: banks,
brokers, dealers, credit unions (if authorized under state law), securities
exchanges and associations, clearing agencies, and savings associations. A
signature guarantee may not be provided by a notary public.
BY BANK TRANSFER: When establishing your account in the Portfolio, you
must have indicated this account privilege in order to authorize the
redemption of monies with the proceeds transferred to your bank account. To
authorize a redemption, simply contact CGFSC at 1-800-442-1941, (option 2)
and your redemption will be processed at the NAV next calculated. Please
allow two or three days after the authorization for monies to reach your bank
account.
BY WIRE: You may make redemptions by wire provided you have established
a Portfolio account to accommodate wire transactions. If telephone
instructions are received before 4:00 p.m. Eastern time, proceeds of the
redemption will be wired as federal funds on the next Business Day to the
bank account designated with CGFSC. You may change the bank account
designated to receive an amount redeemed at any time by sending a letter of
instruction with a signature guarantee to CGFSC at 73 Tremont Street, Boston,
Massachusetts, 02108.
ADDITIONAL REDEMPTION REQUIREMENTS: The Portfolio may hold payment on
redemptions until it is reasonably satisfied that investments made by check
have been collected, which can take up to seven days. Also, when the NYSE 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. To the extent that Portfolio securities are traded in other
markets on days when either the NYSE or the New York Federal Reserve is closed,
each Portfolio's NAV may be affected on days when investors do not have access
to the Portfolio to purchase or redeem shares.
If you are unable to reach CGFSC by telephone (for example, during times
of unusual market activity), consider placing your order by mail directly to
CGFSC. In case of suspension of the right of redemption, you may either
withdraw your request for redemption or you will receive payment based on the
NAV next determined after the termination of the suspension.
HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?
If you are investing through your Investment Professional, you may be
required to set up a brokerage or agency account. Please call your Investment
Professional for information on establishing an account. If you are
purchasing shares of the Portfolio through a program of services offered or
administered by your Investment Professional, you should read the program
materials in conjunction with this Prospectus. Certain features of such
programs may impose additional requirements and charges for the services
rendered. Your Investment Professional may offer any or all of the services
mentioned in this section, and is responsible for initiating all initial
purchase transactions. Please contact your Investment Professional for
information on these services.
SYSTEMATIC INVESTING PROGRAM
The Systematic Investing Program offers a simple way to maintain a
regular investment program. You may arrange automatic transfers (minimum $25
per transaction) from your bank account to your First Funds account on a
periodic basis. When you participate in this program, the minimum initial
investment in each Portfolio is $250. If you are an employee of First
Tennessee or any of its affiliates, the minimum initial investment in the
portfolio is $50. You may change the amount of your automatic investment,
skip an investment, or stop the Systematic Investing Program by calling CGFSC
at 1-800-442-1941, (option 2) or your Investment Professional at least three
Business Days prior to your next scheduled investment date.
9
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN
You can have monthly, quarterly or semi-annual checks sent from your
account to you, to a person named by you, or to your bank checking account.
Your Systematic Withdrawal Plan payments are drawn from share redemptions and
must be in the amount of $100 or more per Portfolio per month. If Systematic
Withdrawal Plan redemptions exceed income dividends earned on your shares,
your account eventually may be exhausted. Please contact your Investment
Professional for more information.
ADDITIONAL INFORMATION
TAX-DEFERRED RETIREMENT PLANS: Retirement plans can offer significant
tax savings to individuals. Please call ALPS at 1-800-442-1941 (option 1) or
your Investment Professional for more information on the plans and their
benefits, provisions and fees. CGFSC or your Investment Professional can set
up your new account in the Portfolio under one of several tax-deferred plans.
These plans let you invest for retirement and defer the tax on your
investment income. Minimums may differ from those listed on page 9. Plans
include Individual Retirement Accounts (IRAs), Rollover IRAs, Keogh Plans,
and Simplified Employee Pension Plans (SEP-IRAs).
CLASS II
PUBLIC OFFERING PRICE
The public offering price for Class II shares is the sum of the NAV plus
a sales load. As indicated below, a portion of this load may be reallowed to
Investment Professionals which have entered into an agreement with ALPS, the
Portfolio's Distributor (Service Organizations). You may calculate your sales
load as follows:
TOTAL SALES LOAD FOR REALLOWANCE TO
CLASS II SHARES SERVICE ORGANIZATIONS
----------------------------- ---------------------
AS A % OF OFFERING AS A % AS A % OF OFFERING
AMOUNT OF TRANSACTION PRICE PER SHARE OF NAV PRICE PER SHARE
Less than $50,000 5.75 6.10 5.00
$50,000 to $99,999 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
The reallowance to Service Organizations may be changed from time to
time. ALPS, at its expense, may provide additional non-cash promotional
incentives to eligible representatives of Service Organizations in the form
of attendance at a sales seminar at a resort. These incentives may be
limited to certain eligible representatives of Service Organizations who have
sold significant numbers of shares of any of the Portfolios of the Trust.
You may purchase Class II shares without a sales load if the purchase
will be (a) through a First Funds sponsored IRA; (b) through an IRA, 401
Plan, 403 Plan or directed agency account if the trustee, custodian, or agent
thereof is a direct or indirect subsidiary or franchisee bank of First
Tennessee or its affiliates; (c) by registered representatives, directors,
advisory directors, officers and employees (and their immediate families) of
First Tennessee or its affiliates; (d) by a current or former Trustee,
officer or employee of First Funds; the spouse of a First Funds Trustee,
officer or employee; a First Funds Trustee acting as a custodian for a minor
child of a First Funds Trustee, officer or employee; or the child of a
current or former Trustee, officer or employee of First Funds who has reached
the age of majority; (e) by a charitable remainder trust or life income pool
established for the benefit of a charitable organization (as defined in
Section 501(c)(3) of the Internal Revenue Code); (f) for use in a financial
institution or investment adviser managed account for which a management or
investment advisory fee is charged; (g) with redemption proceeds from other
mutual fund complexes on which the investor has paid a front-end sales charge
within the past 60 days upon presentation of purchase verification
information; or (h) through certain promotions where the load is waived for
investors.
In addition, you will not pay a sales load on the reinvestment of
dividends or distributions in the Portfolio or any other First Funds
Portfolio, or in connection with certain share exchanges as described under
"How Are Investments, Exchanges And Redemptions Made? - Class I, II, and III
- - How are Exchanges Made?" on page [ ]. Further, you generally will not pay a
sales load on Class II shares of the Portfolio which you buy using proceeds
from the redemption of a First Funds Portfolio which does not charge a
front-end load, if you obtained such shares through an exchange for Class II
shares which you purchased with a sales load. A sales load will apply to
your purchase of Class II shares in the foregoing situation only to the
extent that the Portfolio's sales load exceeds the sales load you paid in the
prior purchase of the Class II shares.
10
<PAGE>
In addition, if you purchase Class II shares within 60 days after
redeeming shares of the Portfolio, you will receive credit towards the sales
load payable on the purchase to the extent of the sales load you paid on the
shares you redeemed. This reinstatement privilege may be exercised only with
respect to redemptions and purchases in the same First Funds Portfolio. The
reinstatement privilege can be exercised only one time with respect to any
particular redemption.
QUANTITY DISCOUNTS
You may be entitled to reduced sales charges through the Right of
Accumulation or a Letter of Intent, even if you do not make an investment of
a size that would normally qualify for a quantity discount.
To qualify for a reduction of or exception to the sales load, you or
your Investment Professional must notify the Transfer Agent, CGFSC at the
time of purchase or exchange. The reduction in sales load is subject to
confirmation of your holdings through a check of records. The Trust may
modify or terminate quantity discounts at any time. For more information
about quantity discounts, contact your Service Organization or ALPS at
1-800-442-1941 (option 1).
RIGHT OF ACCUMULATION. The sales charge schedule under the heading
"How Are Investments, Exchanges And Redemptions Made? - Public Offering
Price" shows that the sales load you will pay on Class II shares is reduced
as your aggregate investment increases. The Right of Accumulation allows you
to combine certain First Funds investments to determine your aggregate
investment and the applicable reduced sales load. You may combine the amount
of your investment in the Portfolio's Class II shares with the value of your
investment in Class II of any other First Funds Portfolio you own and on
which you paid a sales load. If you are a participant in a First Funds IRA
or if you are a trustee or custodian of another type of First Funds
retirement plan, you may also include as part of your aggregate investment
any holdings through the IRA or in the plan even if a load was not paid. If
for example, you beneficially own Class II shares of a First Funds Portfolio
with an aggregate current value of $99,000 and you subsequently purchase
shares of the Portfolio having a current value of $1,000, the load applicable
to the subsequent purchase would be reduced to 3.50% of the offering price.
Similarly, each subsequent purchase of First Funds Class II shares may be
added to your aggregate investment at the time of purchase to determine the
applicable sales loads.
LETTER OF INTENT. A Letter of Intent allows you to purchase Class II
shares over a 13-month period at a reduced sales charge. The sales charge is
based on the total amount you intend to purchase plus the total net asset
value of Class II shares which you already own on which you have paid a sales
load. If you are a participant in a First Funds IRA or if you are a trustee
or custodian of another type of First Funds retirement plan, you may also
credit towards completion of your Letter of Intent any Class II shares held
through the IRA or in the plan, even if a load was not paid. Each investment
you make during the period may be made at the reduced sales charge that would
apply to the total amount you intend to invest. The reduced sales load
applies only to new purchases. If you do not invest the total amount within
the period, you may pay the difference between the higher sales charge rate
that would have been applied to the purchases you made and the reduced sales
charge rate you have paid. Shares of the Portfolio equal to 5% of the amount
you intend to invest will be held in escrow and, if you do not pay the
difference within 20 days following the mailing of a request, the Transfer
Agent will redeem a sufficient amount of your escrowed shares to pay the
additional sales charge. After the terms of your Letter of Intent are
fulfilled, the Transfer Agent will release your escrowed shares.
If your purchases qualify for a further sales load reduction in addition
to that indicated in the Letter of Intent, the sales load will be adjusted to
reflect your total purchases. Signing a Letter of Intent does not bind you
to purchase the full amount indicated at the sales load in effect at the time
of signing, but you must complete the intended purchase to obtain the reduced
sales load. To apply, sign the Letter of Intent form at the time you
purchase Class II shares. You will be entitled to the applicable sales load
that is in effect at the date you submit the Letter of Intent until you
complete your intended purchase.
QUALIFICATION OF DISCOUNTS. As shown in the schedule of Class II sales
charges, larger purchases may result in lower sales charges to you. For
purposes of determining the amount of purchases using the Right of
Accumulation and Letter of Intent privileges, you may combine your purchase
with:
- purchases by your spouse or his, her or your joint account or
for the account of any minor children, and
- the aggregate investment of any trustee or other Institutional
Investor for you and/or your spouse or your minor children.
A trustee or custodian of any qualified pension or profit sharing plan may
combine its aggregate purchases.
OTHER. Class II shares also incur Shareholder Servicing Fees. See
discussion under "WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY? -
Distribution Plans and Shareholder Servicing Plans."
11
<PAGE>
CLASS III
Class III shares are bought without a front-end load; that is, the
offering price for such shares will be their NAV. Class III shares incur
Distribution Fees and Shareholder Servicing Fees. See discussion under "WHAT
ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY? - Distribution Plans and
Shareholder Servicing Plans."
CLASS I, II AND III
HOW ARE PORTFOLIO SHARES VALUED?
The term "net asset value per share," or NAV, means the worth of one
share. The NAV of each Class of the Portfolio is calculated by adding that
Class' pro rata share of the value of all securities and other assets
attributable to the Portfolio, deducting that Class' pro rata share of
Portfolio liabilities, further deducting Class specific liabilities, and
dividing the result by the number of shares outstanding in that Class.
The Portfolio is open for business each day that both the NYSE and the
New York Federal Reserve are open (a Business Day). The NAV is calculated at
the close of the Portfolio's Business Day, which coincides with the close of
regular trading of the NYSE (normally 4:00 p.m. Eastern time).
The Portfolio's securities and other assets are valued primarily on the
basis of market quotations furnished by pricing services, or if quotations
are not available, by a method that the Trustees believe accurately reflects
fair value. Foreign securities are valued on the basis of quotations from the
primary United States market in which they are traded or, if not traded on a
U.S. market, then their primary foreign market, and translated from foreign
market quotations into U.S. dollars using current exchange rates.
DISTRIBUTION OPTIONS: The Portfolio earns dividends from its stocks and
interest from bond, money market, and other fixed-income investments. These
are passed along as dividend distributions. The Portfolio may realize capital
gains if it sells securities for a higher price than it paid for them. These
are passed along as capital gain distributions. Income dividends for the
Portfolio are declared and paid monthly.
When you fill out your account application, you can specify how you want
to receive your distributions. Currently, there are three available options:
1. REINVESTMENT OPTION. Your dividend distributions and capital gain
distributions, if any, will be automatically reinvested in additional shares
of the Portfolio. Reinvestment of distributions will be made at that day's
NAV. If you do not indicate a choice on your application, you will be
assigned this option.
2. CASH OPTION. You will be sent a check for each dividend and capital
gain distribution, if any. Distribution checks will be mailed no later than
seven days after the last day of the month.
3. INCOME-EARNED OPTION. Your capital gain distributions will be
automatically reinvested, but you will be sent a check for each dividend
distribution.
HOW ARE EXCHANGES MADE?
An exchange is the redemption of shares of one Portfolio and the
purchase of shares of another. The exchange privilege is a convenient way to
sell and buy shares of other Portfolios registered in an investor's state.
Except as noted below, the Portfolio's shares may be exchanged for the same
Class shares of other First Funds Portfolios. The redemption and purchase
will be made at the next determined NAV after the exchange request is
received and accepted by CGFSC. You may execute exchange transactions by
calling CGFSC at 1-800-442-1941 (option 2) prior to 4:00 p.m. Eastern Time on
any Business Day.
Class II shares of the First Funds Money Market Portfolios are not
currently available for investment. Investors in Class II shares wishing to
exchange into one of the Money Market Portfolios will receive Class III
shares.
When making an exchange or opening an account in another Portfolio by
exchange, the registration and tax identification numbers of the two accounts
must be identical. In order to open a new account through exchange, the
minimum initial investment requirements must be met.
Each exchange may produce a gain or loss for tax purposes. In order to
protect the Portfolio's performance and its shareholders, First Tennessee and
IAI discourage 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
IAI'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
12
<PAGE>
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 upon 60 days notice and
to suspend the offering of shares in any Class without notice to shareholders.
You or your Institutional Investor, if you are invested in Class I will receive
written confirmation of each exchange transaction.
Exchanges are generally not permitted from Class I to another Class.
Should a beneficial owner of Class I shares cease to be eligible to purchase
shares of Class I, Class I shares held in an Institutional Account may be
converted to shares of another Class.
STATEMENTS AND REPORTS
You, or if Class I, the Institutional Investor, will receive a monthly
statement and a confirmation after every transaction that affects the 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 Institutional Investor will
receive the Portfolio's financial statements. To reduce expenses, only one
copy of the Portfolio's reports (such as the Prospectus and Annual Report)
will be mailed to each investor or, if Class I, each Institutional Investor.
Please write to ALPS to request additional copies.
- ------------------------------------------------------------------------------
HOW IS PERFORMANCE CALCULATED?
- ------------------------------------------------------------------------------
From time to time the Portfolio may quote the yield of Class I, II or
III shares in advertisements or in reports or other communications with
shareholders. The YIELD is a way of showing the rate of income that the
Portfolio earns on its investments as the percentage of its share price. To
calculate yield, the Portfolio takes the net investment income it earned from
its portfolio securities for a 30-day period, divides it by the average
number of shares entitled to receive dividends, and expresses the result as
an annualized percentage rate based on share price at the end of the 30-day
period. Yields do not reflect gains or losses from portfolio transactions.
Yields are calculated according to accounting methods that are standardized
for all mutual funds. Because yield accounting methods differ from the
methods used for other accounting purposes, the Portfolio's yield may not
equal its distribution rate, the income paid to an account, or the income
reported in financial statements. The Portfolio's investment objective is to
seek capital appreciation. Therefore, it does not expect to generate a
significant yield.
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 Statement of Additional Information for the
Portfolio.
- ------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- ------------------------------------------------------------------------------
Broker-dealers are utilized to conduct securities transactions for the
Portfolio and are chosen based upon professional ability and quality of
service. In addition the Portfolio's investment advisers may consider a
broker-dealer's sales of shares of the Portfolio or recommendations to its
customers that they purchase shares of the Portfolio as a factor in the
selection of broker-dealers to execute transactions for the Portfolio. In
placing business with such broker-dealers, the advisers will seek the best
execution of each transaction.
Higher commissions may be paid to firms that provide research services
to the extent permitted by law. The frequency of portfolio transactions - the
Portfolio's portfolio turnover rate - will vary from year to year depending
on market conditions. It is not anticipated that the Portfolio's turnover
rate will exceed 100% over the coming year.
13
<PAGE>
- ------------------------------------------------------------------------------
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, if any, are declared and paid monthly.
FEDERAL TAXES. Distributions from the Portfolio's taxable income and
short-term capital gains are taxed as dividends, and long-term capital
gain distributions are taxed as long-term capital gains. A portion of
the Portfolio's dividends may qualify for the dividends-received
deduction for corporations. Distributions are taxable when they are
paid, whether taken in cash or reinvested in additional shares, except
that distributions declared in December and paid in January are
taxable as if paid on December 31. The Portfolio will send each
investor or, if Class I, each Institutional Investor an IRS Form 1099-DIV
by January 31 of each year.
CAPITAL GAINS. A capital gain or loss may be realized when shares
of the Portfolio are redeemed or exchanged. For most types of accounts,
the Portfolio will report the proceeds of redemptions to each investor
or, if Class I, the Institutional Investor, and the IRS annually.
However, because the tax treatment also depends on the purchase price
and your personal tax position, regular account statements should be
used to determine the tax gain or loss.
"BUYING A DIVIDEND." On the record date for a capital gain
distribution or an income dividend, the Portfolio's share price is
reduced by the amount of the distribution. If shares are bought just
before the record date ("buying a dividend"), the full price for the
shares will be paid, and a portion of the price will be received back
as a taxable distribution.
OTHER TAX INFORMATION. The information above is only a summary of
some of the federal tax consequences generally affecting the Portfolio
and its shareholders, and no attempt has been made to discuss
individual tax consequences. In addition to federal tax,
distributions may be subject to state, local or foreign taxes.
Institutional Investors and other shareholders should consult their 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 the Portfolio
to withhold 31% of taxable distributions from your account.
- ------------------------------------------------------------------------------
WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY?
- ------------------------------------------------------------------------------
CO-INVESTMENT ADVISORY AND MANAGEMENT AGREEMENTS. The Portfolio is
obligated to pay First Tennessee, 4990 Poplar Avenue, Memphis, Tennessee,
a monthly management fee at the annual rate of 0.15% of its average net
assets for the investment advisory services First Tennessee provides.
First Tennessee has voluntarily agreed to waive its entire management
fee for the current fiscal year. This voluntary waiver can be
discontinued at any time.
Under its Investment Advisory and Management Agreement, First
Tennessee monitors and evaluates the performance of IAI, allocates
Portfolio assets to be managed by multiple, active investment
advisers, recommends any changes in or additional investment advisers when
appropriate, coordinates the activities of the Portfolio's investment
advisers with its custodian, transfer agent, administrator and independent
accountants, and monitors Portfolio purchase and sale transactions for
compliance purposes.
First Tennessee has experience as an investment adviser to individual,
corporate and institutional advisory clients, pension plans and collective
investment funds, with approximately $13.8 billion in assets under
administration (including nondiscretionary accounts) and $5.3 billion in
assets under management as of June 30, 1996, as well as experience in
supervising sub-advisers.
IAI serves as Co-Adviser for the Portfolio pursuant to the authority
granted to it under its Investment Advisory and Management Agreement with
the Trust on behalf of the Portfolio. IAI is responsible for the
day-to-day investment and reinvestment of the Portfolio's assets in
accordance with its investment objective and policies. IAI is obligated to
provide a continual program of investment of Portfolio assets, to conduct
investment research and credit analysis concerning Portfolio investments,
and to place orders for all purchases and sales on investments on behalf
of the Portfolio. As compensation for the services it provides, IAI is
entitled to receive from the Portfolio a monthly management fee at the
annual rate 0.70% for the first $50 million of the Portfolio's average net
assets and .65% on average daily net assets of the Portfolio in excess of
$50 million.
IAI also furnishes investment advice to other concerns including
other investment companies, pension and profit sharing plans, portfolios
of foundations, religious, educational and charitable institutions,
trusts, municipalities and individuals, having total assets in excess of
$16 billion. IAI's ultimate corporate parent is Lloyds TSB Group plc, a
publicly-held financial services organization headquartered in London,
England. Lloyds TSB Group plc is one of the largest personal and
corporate financial services groups in the United Kingdom and is engaged
in a wide range of activities including commercial and retail banking. The
address of IAI is 3700 First Bank Place, P.O. Box 357, Minneapolis,
Minnesota 55440.
14
<PAGE>
ADMINISTRATOR AND DISTRIBUTOR. ALPS, 370 17th Street, Suite 2700,
Denver Colorado, 80202, serves as the Administrator and Distributor for
the Portfolio. As Administrator, ALPS assists in the Portfolio's
administration and operation, including but not limited to, providing
office space and various legal and operational services in connection
with the regulatory requirements applicable to the Portfolio. ALPS is
entitled to receive from the Portfolio a monthly fee at the annual
rate of .15% of average net assets. ALPS has voluntarily agreed to
waive its full administration fee for the first six months of the
Portfolio's operation.
First Tennessee serves as the Co-Administrator for the Portfolio. As
the Co-Administrator, First Tennessee assists in each Portfolio's operation,
including but not limited to, providing non-investment related research and
statistical data and various operational and administrative services.
First Tennessee is entitled to receive from the Portfolio a monthly fee at
the annual rate of .05% of average net assets.
As the Distributor, ALPS sells shares of the Portfolio as agent on
behalf of the Trust at no additional cost to the Trust. First Tennessee and
its affiliates do not participate in and are not responsible for selling
as an agent on behalf of the Trust, underwriting or distributing Trust
shares. Consistent with applicable law, affiliates of First Tennessee may
receive commissions or asset-based fees.
TRANSFER AGENT AND CUSTODIAN. Chase Global Funds Services Company, a
division of Chase Manhattan Bank, N.A. (CGFSC), provides transfer agent and
related services for the Portfolio. Chase Manhattan Bank, N.A. is Custodian
of the Portfolio's assets.
PRICING AND ACCOUNTING. CGFSC calculates the NAV and dividends of
each Class and maintains the portfolio and general accounting records.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING PLANS. The Trustees have
adopted a Distribution Plan on behalf of Class III of the Portfolio pursuant
to Rule 12b-1 (the Rule) under the 1940 Act. The NASD subjects asset-based
sales charges to its maximum sales charge rule. Fees paid pursuant to the
Portfolio's Distribution Plan will be limited by the restrictions imposed
by the NASD rule. The Distribution Plan provides for payment of a fee to
ALPS at the annual rate of .75% of the average net assets of Class III.
All or a portion of these fees will in turn be paid to Investment
Professionals as compensation for selling shares of Class III and for
providing ongoing sales support services. The Trustees have also adopted
Shareholder Servicing Plans on behalf of Class II and III of the Portfolio,
under which Service Organizations are paid at the annual rate of .25% of
each Class' average net assets, for shareholder services and account
maintenance, including responding to shareholder inquiries, directing
shareholder communications, account balance maintenance, and dividend
posting. The Distribution Fees are expenses of Class III and the
Shareholder Servicing Fees are expenses of Class II and III in
addition to the Management Fee and the Administration and Co-Administration
Fees, and will reduce the net income and total return of both Classes.
- -------------------------------------------------------------------------------
HOW IS THE PORTFOLIO ORGANIZED?
- -------------------------------------------------------------------------------
The Portfolio is a diversified portfolio of First Funds, an open-end
management investment company organized as a Massachusetts business trust
by a Declaration of Trust dated March 6, 1992, as amended and restated on
September 4, 1992. The Portfolio consists of three separate Classes. The
Trustees supervise the Trust's activities and review its contractual
arrangements with companies that provide the Trust with services. The
Trust is not required to hold annual shareholder meetings, although special
meetings may be called for a specific Portfolio or Class with respect to
issues affecting that Portfolio or Class, or the Trust as a whole, for
purposes such as electing or removing Trustees, changing fundamental
policies or approving investment advisory agreements. Shareholders receive
one vote for each share owned and fractional votes for fractional shares
owned. A Portfolio or Class votes separately with respect to issues
affecting only that Portfolio or Class. Pursuant to the Declaration of
Trust, the Trustees have the authority to issue additional Classes of
shares for the Portfolio.
PORTFOLIO MANAGEMENT
Martin Calihan has responsibility for the management of the
Portfolio. Mr. Calihan is a Vice President and has served as an equity
analyst for IAI since 1992. Before joining IAI, Mr. Calihan was an
equity analyst with Morgan Stanley and Company from 1991 to 1992, and
with State Street Research management from 1990 to 1991. Mr. Calihan has
managed the Portfolio since its inception.
15
<PAGE>
- -------------------------------------------------------------------------------
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. IAI 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 IAI fails to predict foreign currency values correctly or
employs a strategy that does not correlate well with a Portfolio's
investments. A loss to the Portfolio may also result if the
counterparty to a transaction fails to perform as obligated. Please
see discussion under "Forwards" below.
DELAYED-DELIVERY AND WHEN-ISSUED TRANSACTIONS. The Portfolio may buy
and sell obligations on a when-issued or delayed-delivery basis, with
payment and delivery taking place at a future date. The market value
of obligations purchased in this way may change before the delivery
date, which could increase fluctuations in the Portfolio's share
price, yield, and return. Ordinarily, the Portfolio will not earn
interest on obligations until they are delivered.
FORWARDS. A forward represents a contract that obligates the
counterparty to buy, and the other to sell, a specific underlying asset
at a specific price, amount, and date in the future. Forwards are similar
to futures except for the fact that forwards are privately negotiated. The
most common type of forward contracts are foreign currency exchange
contracts.
The Portfolio may enter into forward exchange currency contracts in
order to hedge its exposure to changes in foreign currency exchange rates
on its foreign portfolio holdings and to hedge certain firm purchase and
sale commitments denominated in foreign currencies. A forward exchange
currency contract is a commitment to purchase or sell a foreign currency
at a future date at a negotiated forward rate. The gain or loss arising
from the difference between the original contract and the closing of such
contract is included in net realized gain or loss on foreign currency
transactions. Fluctuations in the value of forward exchange currency
contracts are recorded for financial reporting purposes as unrealized
gains or losses by the Portfolio.
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. Investing in restricted securities could have the
effect of increasing the level of Portfolio illiquidity if qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
ILLIQUID SECURITIES. Under guidelines established by the Board of
Trustees, IAI 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 net assets in illiquid investments.
16
<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.
OPTIONS CONTRACTS. An option is a contract that gives the owner the
right, but not the obligation, to either buy (call option) or sell (put
option) an underlying security or currency at a fixed price for a specified
period of time. The Portfolio may buy and sell (write) put and call
options contracts to manage its exposure to changing interest rates and
security prices. To the extent it invests in securities denominated in
foreign currencies, the Portfolio may also buy and sell options contracts
to manage exposure to currency exchange rates. Some option strategies,
including buying puts and writing calls, tend to hedge the Portfolio's
investments against price fluctuations. Other strategies, including writing
puts and buying calls, tend to increase market exposure. Options may be
combined with each other in order to adjust the risk and return
characteristics of the overall strategy. The Portfolio may enter into
forward contracts for settlement or hedging purposes. The Portfolio may
invest in options based on any type of security, index, or currency,
including options traded on foreign exchanges and options not traded on
exchanges.
Options can be volatile investments and involve certain risks. If
IAI 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. In a repurchase agreement, the Portfolio buys
a security at one price and simultaneously agrees to sell it back at a
higher price. In the event of the bankruptcy of the other party to a
repurchase agreement or a securities loan, the Portfolio could experience
delays in recovering its cash or the securities it lent. To the extent
that, in the meantime, the value of the obligations purchased had decreased,
or the value of obligations lent had increased, a Portfolio could
experience a loss. In all cases, IAI 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
17
<PAGE>
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.
18
<PAGE>
CO-INVESTMENT ADVISER
First Tennessee Bank National Association
Memphis, TN
INVESTMENT ADVISER
Investment Advisers, Inc.
Minneapolis, MN
OFFICERS
Richard C. Rantzow, President
James V. Hyatt, Secretary
Jeremy O. May, Treasurer
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
19
<PAGE>
[LOGO]
FIRST FUNDS 370 17th Street
Suite 2700
INTERMEDIATE BOND PORTFOLIO Denver, Colorado 80202
- --------------------------------------------------------------------------------
Prospectus for Class I, II, and III
August 18, 1997
- --------------------------------------------------------------------------------
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 Intermediate Bond Portfolio (the Portfolio) is to seek high
current income consistent with preservation of capital. Under normal
circumstances, the Portfolio will maintain a dollar-weighted average maturity
of between three and ten years. The Portfolio's net asset value per share
will fluctuate in response to changes in the value of its investments.
This Prospectus is designed to provide you with information that you
should know before investing. Please read and retain this document for future
reference. This Prospectus offers Class I, II and III shares of the
Portfolio. Class I shares are designed exclusively for investment of monies
held in non-retail trust, advisory, agency, custodial or similar accounts
(Institutional Accounts). Class I shares may be purchased for Institutional
Accounts by financial institutions, business organizations, corporations,
municipalities, non-profit institutions and other entities serving in trust,
advisory, agency, custodial or similar capacities (each, an Institutional
Investor and collectively, Institutional Investors) that meet the investment
threshold for this Class of shares. Class II and III shares are designed for
individuals and other investors who seek mutual fund investment convenience
plus a lower investment minimum. These Classes offer investors differing
expense and sales load structures to choose between. See "Expense Summary" on
page 3.
A Statement of Additional Information (dated August 18, 1997) for the
Portfolio has been filed with the Securities and Exchange Commission (SEC)
and is incorporated herein by reference. This Prospectus and the 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.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY STATE
OR JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER IN
SUCH STATE OR JURISDICTION.
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
IB-pro-97
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
Summary Of Portfolio Expenses............................................... 3
What Is The Investment Objective Of The Portfolio?.......................... 4
Is The Portfolio A Suitable Investment?; Investment Risks................... 5
What Are The Portfolio's Investment Policies and Limitations?............... 5
How Are Investments, Exchanges And Redemptions Made?........................ 6
How Is Performance Calculated?.............................................. 13
Portfolio Transactions...................................................... 14
What Is The Effect Of Federal Income Tax On This Investment?................ 14
What Advisory And Other Fees Does The Portfolio Pay?........................ 14
How Is The Portfolio Organized?............................................. 16
Investment Instruments, Transactions, Strategies And Risks.................. 16
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF PORTFOLIO EXPENSES
- --------------------------------------------------------------------------------
The purpose of the table below is to assist you in understanding the
various costs and expenses that you would bear directly or indirectly. This
standard format was developed for use by all mutual funds to help you make
your investment decisions. The information below is based upon anticipated
operating expenses.
A. EXPENSE SUMMARY
INTERMEDIATE
BOND PORTFOLIO
-----------------------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------- -------- ---------
Maximum Sales Load on Purchases
(as a percentage of offering price) None 3.75% None
Sales Load Imposed on Reinvested
Distributions None None None
Deferred Sales Load None None None
Redemption Fees None None None
Exchange Fee None None None
ANNUAL PORTFOLIO OPERATING EXPENSES (as a percentage of average net assets)
Management Fees* .00% .00% .00%
12b-1 Fees .00% .00% .75%
Other Expenses* .27% .70% .63%
---- ---- -----
Total Portfolio Operating Expenses* .27% .70% 1.38%
---- ---- -----
---- ---- -----
*After 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 (for the
current fiscal year), however, there is no guarantee that the waiver
will continue. The Portfolio incurs Other Expenses, including Administration
and Co-Administration Fees, for maintaining shareholder records, furnishing
shareholder statements and reports, and other services. ALPS, the
Administrator, is entitled to .15% of the Portfolio's average net assets for
administration services. ALPS has voluntarily agreed to waive its full
administration fee for the first six months of the Portfolio's operation.
First Tennessee, the Co-Administrator, is entitled to and charges .05% of the
Portfolio's average net assets for co-administration services. Other
Expenses also include Shareholder Servicing Fees of 0.25% with respect to
Class II and Class III of the Portfolio.
If the waivers were not in effect, Management Fees would be .50% for the
current fiscal year for each Class. Other Expenses (estimated) and Total
Portfolio Operating Expenses would be as follows:
INTERMEDIATE
BOND PORTFOLIO
-----------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
Other Expenses (estimated) .35% .78% .71%
Total Portfolio Operating Expenses .85% 1.28% 1.95%
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
3
<PAGE>
accounts. Long-term shareholders may 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 applicable
to Class III shares. 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 Intermediate Bond Portfolio
assuming (1) 5% annual return, (2) redemption at the end of each time period,
(3) that operating expenses (net of expense waivers) are the same as
described above, and (4) reinvestment of all dividends and distributions. THE
RETURN OF 5% AND EXPENSES SHOULD NOT BE CONSIDERED INDICATIONS OF ACTUAL OR
EXPECTED PERFORMANCE OR PORTFOLIO OPERATING EXPENSES, BOTH OF WHICH MAY VARY
SIGNIFICANTLY:
INTERMEDIATE
BOND PORTFOLIO
-----------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
1 year $3 $52* $14
3 years $9 $67* $44
*Reflects imposition of maximum sales charge at the beginning of the period.
- --------------------------------------------------------------------------------
WHAT IS THE INVESTMENT OBJECTIVE OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
First Tennessee serves as Investment Adviser to the Portfolio and, with
prior approval of the Board of Trustees (Trustees), has engaged Highland
Capital Management Corp. (Highland), to act as Sub-Adviser to the Portfolio.
Subject to First Tennessee's supervision, Highland is responsible for the
day-to-day investment management of the Portfolio, including providing
investment research and credit analysis concerning Portfolio investments and
conducting a continuous program of investment of Portfolio assets in
accordance with the investment policies and objective of the Portfolio. For
additional information about the Portfolio's investment advisory
arrangements, see "What Advisory And Other Fees Does The Portfolio Pay? -
Investment Advisory and Management Agreements".
The investment objective of the Portfolio is to seek high current income
consistent with the preservation of capital. Although the Portfolio can
invest in securities of any maturity, under normal circumstances the
Portfolio maintains a dollar-weighted average maturity of between three and
ten years. There is no assurance that the Portfolio will achieve its
investment objective. The permitted investments of the Portfolio are as
follows:
The Portfolio will invest primarily in U.S. government obligations;
investment grade debt of U.S. corporations; mortgage-backed securities, such
as Government National Mortgage Association, Federal National Mortgage
Association, and Federal Home Loan Mortgage Corporation obligations, and
investment grade asset-backed securities. The Sub-Adviser expects to invest
the Portfolio 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 the Sub-Adviser 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 the Sub-Adviser
deems that such securities present attractive investment opportunities.
Securities rated Baa/BBB have speculative characteristics and may be more
sensitive to economic changes in the financial conditions of issuers. The
Portfolio may also invest in unrated securities judged to be of equivalent
quality by Highland. 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 the Sub-Adviser's credit analysis when investing in
debt securities that are unrated. In the event the Portfolio owns a security
whose rating is subsequently reduced below investment grade by Moody's or
S&P, the Sub-Adviser will determine whether the Portfolio should continue to
hold such security, but in no event will the Portfolio's investments in such
securities exceed 5% of its net assets.
The Portfolio also may invest in foreign currencies and make investments
in foreign securities. The Portfolio may buy or 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 purposes, invest without limit in short-term money
market securities.
The Portfolio will generally invest primarily in short to intermediate
bonds. While it may invest in obligations of any maturity, its dollar-weighted
average portfolio maturity will generally range between 3 and 6 years depending
on the interest rate and investment environment. If the Sub-Adviser determines
that market conditions warrant a shorter or longer average maturity within the
range, the Portfolio's investments will be adjusted accordingly.
4
<PAGE>
See "Investment Instruments, Transactions, Strategies And Risks" 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 current income by investing primarily in
intermediate term, fixed income 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. Intermediate-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 Intermediate Bond 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 put and call option contracts, 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. This is called leverage. 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.
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
dollar-weighted average portfolio maturity to between 3 and 6 years.
Further information about the types of securities in which the Portfolio
may invest and their related risks, as well as the investment policies of the
Portfolio in general are set forth in the section "Investment Instruments,
Transactions, Strategies and Risks" 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
5
<PAGE>
repurchase agreements; and (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; and (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. With the exception of the
Portfolio's policies and limitations regarding borrowings and investments in
illiquid securities, 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
non-retail trust, advisory, agency, custodial or similar Institutional
Accounts. Class I shares may be purchased for Institutional Accounts by
financial institutions, business organizations, corporations, municipalities,
non-profit institutions, and other Institutional Investors serving in a
trust, advisory, agency, custodial or similar capacity who meet the
investment minimum.
HOW IS AN INSTITUTIONAL ACCOUNT ESTABLISHED?
An initial investment must be preceded by or made in conjunction with
the establishment of an Institutional Account with an Institutional Investor.
Establishment of an Institutional Account may require that documents and
applications be completed and signed before the investment can be
implemented. The Institutional Investor may require that certain documents be
provided prior to making a redemption from the Portfolio. Institutional
Investors may charge fees in addition to those described herein. Fee
schedules for Institutional Accounts are available upon request from the
Institutional Investor and are detailed in the agreements by which each
client opens an account with an Institutional Investor.
HOW ARE INVESTMENTS MADE?
Each Institutional Investor will transmit orders to the Transfer Agent,
Chase Global Funds Services Company (CGFSC). If an order is received by CGFSC
prior to 4:00 p.m. Eastern Time on any Business Day (as defined in the
section "How Are Investments, Exchanges And Redemptions Made - Class I, II
and III - How Are Portfolio Shares Valued?") and the funds are received by
CGFSC that day, the investment will earn dividends declared, if any, on the
day of purchase. Institutional Investors will wire funds through the Federal
Reserve System. Purchases will be processed at the net asset value per share
(NAV) calculated after an order is received by CGFSC. The Portfolio requires
advance notification of all wire purchases. To secure same day acceptance of
federal funds (monies transferred from one bank to another through the
Federal Reserve System with same-day availability), an Institutional Investor
must call CGFSC at 1-800-442-1941, (option 2) prior to 4:00 p.m. Eastern Time
on any Business Day to advise it of the wire. The Trust may discontinue
offering its shares in any Class of a Portfolio without notice to
shareholders.
MINIMUM INVESTMENT AND ACCOUNT BALANCE. The minimum initial investment
for each Institutional Investor is $100,000. Institutional Investors may
satisfy the minimum investment by aggregating their Institutional Accounts
within the Portfolio. Subsequent investments may be in any amount. If an
Institutional Investor's Class I account falls below $50,000 due to
redemption, the Portfolio may close the account. An Institutional Investor
may be notified if the mini-
6
<PAGE>
mum 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.
Should an Institutional Investor or a beneficial owner of Class I shares
cease to be eligible to participate in this Class, Class I shares held in an
Institutional Account may be converted to shares of another Class. Any such
conversion will be effected on the basis of the relative net asset values of
the two classes without the imposition of any sales load, fee or other
charge. Institutional Investors or beneficial owners will receive at least 30
days prior notice of any proposed conversion.
HOW ARE REDEMPTIONS MADE?
Institutional Investors may redeem all or a portion of their account
shares on any Business Day. Shares will be redeemed at the NAV next
calculated after CGFSC has received the redemption request and will accrue
dividends through the day of redemption. If an account is closed, any accrued
dividends will be paid at the beginning of the following month.
Institutional Investors may make redemptions by wire provided they have
established a wire account with CGFSC. Please call 1-800-442-1941 (option 2)
to advise CGFSC of the wire. If telephone instructions are received before
4:00 p.m. Eastern Time on any Business Day, proceeds of the redemption will
be wired as federal funds on the next Business Day to the bank account
designated with CGFSC. The Institutional Investor may change the bank account
designated to receive an amount redeemed at any time by sending a letter of
instruction with a signature guarantee to CGFSC at 73 Tremont Street, Boston,
Massachusetts, 02108.
Pursuant to the Investment Company Act of 1940, as amended (1940 Act),
if making immediate payment of redemption proceeds could adversely affect the
Portfolio, payments may be made up to seven days later. Also, when the New
York Stock Exchange (NYSE) is closed (or when trading is restricted) for any
reason other than customary weekend or holiday closings, or under any
emergency circumstances as determined by the SEC to merit such action, the
right of redemption may be suspended or the date of payment postponed for a
period of time that may exceed seven days. To the extent Portfolio securities
are traded in other markets on days when either the NYSE or the Federal Reserve
Bank of New York (New York Federal Reserve) is closed, the Portfolio's NAV
may be affected on days when investors do not have access to the Portfolio to
purchase or redeem shares.
If transactions by telephone cannot be executed (for example, during
times of unusual market activity), orders may be placed by mail to CGFSC. In
case of suspension of the right of redemption, the Institutional Investor may
either withdraw its request for redemption or it will receive payment based
on the NAV next determined after the termination of the suspension.
ADDITIONAL INFORMATION
The Portfolio also reserves the right to reject any specific purchase
order, including certain purchases by exchange. Purchase orders may be
refused if, in First Tennessee's opinion, they are of a size that would
disrupt management of the Portfolio.
In order to allow First Tennessee to manage the Portfolio most
effectively, Institutional Investors are strongly urged to initiate all
trades (investments, exchanges and redemptions of shares) as early in the day
as possible and to notify CGFSC at least one day in advance of trades in
excess of $1 million. In making these trade requests, the name of the
Institutional Investor and the account number(s) must be supplied.
Transactions may be initiated by telephone. Please note that the
Portfolio and its agents will not be responsible for any losses resulting
from unauthorized telephone transactions if the Portfolio or its agents
follow reasonable procedures designed to verify the identity of the caller.
These procedures may include requesting additional information or using
personalized security codes. The Portfolio or its agents may also record
calls, and an Institutional Investor should verify the accuracy of
confirmation statements immediately after receipt. If an Institutional
Investor does not want to be able to initiate redemptions and exchanges by
telephone, please call CGFSC for instructions.
Class II and III
WHO MAY INVEST?
Class II and III shares are designed for individuals and other investors
who seek mutual fund investment convenience plus a lower investment minimum.
These Classes offer investors differing expense and sales load structures to
choose between. See "Summary Of Portfolio Expenses" on page 3.
7
<PAGE>
INVESTMENT REQUIREMENTS
The minimum initial investment in Class II or III shares is $1,000.
Subsequent investments may be in any amount greater than $100. If you
participate in the Systematic Investing Program or the "A Plus Card Program"
(a consumer discount card program provided by "A" Plus Strategic Alliances,
Inc., a subsidiary of First Tennessee), the minimum initial investment is
$250, and subsequent investments may be in any amount of $25 or greater. If
you are an employee of First Tennessee or any of its affiliates and you
participate in the Systematic Investing Program, the minimum initial
investment is $50, and subsequent investments may be in any amount of $25 or
greater. See page 11 for additional information on the Systematic Investing
Program. If your balance in the Portfolio falls below the applicable minimum
investment requirement due to redemption, you may be given 30 days' notice to
reestablish the minimum balance. If you do not reestablish the minimum
balance, your account may be closed and the proceeds mailed to you at the
address on record. Shares will be redeemed on the day the account is closed.
All purchases must be made in U.S. dollars and checks must be drawn on
U.S. banks. No cash will be accepted. If you make a purchase with more than
one check, each check must have a value of at least $100, and the minimum
investment requirement still applies (excluding the specific circumstances,
stated above, which reduce the minimum investment requirement). The Portfolio
reserves the right to limit the number of checks processed at one time. If
your check does not clear, your purchase will be canceled and you could be
liable for any losses or fees incurred.
You may initiate any transaction either directly or through your
Investment Professional. Please note that the Portfolio and its agents will
not be responsible for any losses resulting from unauthorized transactions if
the Portfolio or its agents follow reasonable procedures designed to verify
the identity of the caller. These procedures may include requesting
additional information or using personalized security codes. Your Investment
Professional may also record calls and you should verify the accuracy of your
confirmation statements immediately after you receive them. If you do not
want to be able to redeem and exchange by telephone, please check the box on
your application (if you invest directly) or, if you invest through an
Investment Professional, please call your Investment Professional for
instructions.
HOW DO I SET UP AN ACCOUNT?
You may set up an account directly in the Portfolio or you may invest in
the Portfolio through your Investment Professional. See page 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.
HOW DO I INVEST DIRECTLY?
When opening a new account directly, you must complete and sign an account
application and send it to CGFSC, 73 Tremont Street, Boston, MA 02108.
Telephone representatives are available at 1-800-442-1941 between the hours
of 8:00 a.m. to 4:00 p.m. Central Time (9:00 a.m. to 5:00 p.m. Eastern Time),
Monday through Friday.
Investments may be made in several ways:
BY MAIL: Make your check payable to First Funds: Intermediate Bond
Portfolio, and mail it, along with the application, to the address indicated
on the application. Your account will be credited on the business day that
CGFSC receives your application in good order.
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:
8
<PAGE>
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 as described below.
A signature guarantee is designed to protect you, the Portfolio, and its
agents from fraud. Your written request requires a signature guarantee if you
wish to redeem more than $1,000 worth of shares; if your Portfolio account
registration has changed within the last 30 days; if the check is not being
mailed to the address on your account; if the check is not being made out to
the account owner; or if the redemption proceeds are being transferred to
another First Funds account with a different registration. The following
institutions should be able to provide you with a signature guarantee: banks,
brokers, dealers, credit unions (if authorized under state law), securities
exchanges and associations, clearing agencies, and savings associations. A
signature guarantee may not be provided by a notary public.
BY BANK TRANSFER: When establishing your account in the Portfolio, you
must have indicated this account privilege in order to authorize the
redemption of monies with the proceeds transferred to your bank account. To
authorize a redemption, simply contact CGFSC at 1-800-442-1941 (option 2) and
your redemption will be processed at the NAV next calculated. Please allow
two or three days after the authorization for monies to reach your bank
account.
BY WIRE: You may make redemptions by wire provided you have established
a Portfolio account to accommodate wire transactions. If telephone
instructions are received before 4:00 p.m. Eastern time, proceeds of the
redemption will be wired as federal funds on the next Business Day to the
bank account designated with CGFSC. You may change the bank account
designated to receive an amount redeemed at any time by sending a letter of
instruction with a signature guarantee to CGFSC at 73 Tremont Street, Boston,
Massachusetts, 02108.
ADDITIONAL REDEMPTION REQUIREMENTS: The Portfolio may hold payment on
redemptions until it is reasonably satisfied that investments made by check
have been collected, which can take up to seven days. Also, when the NYSE 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. To the extent that Portfolio securities are traded in
other markets on days when either the NYSE or the New York Federal Reserve is
closed, each Portfolio's NAV may be affected on days when investors do not
have access to the Portfolios to purchase or redeem shares.
If you are unable to reach CGFSC by telephone (for example, during times of
unusual market activity), consider placing your order by mail directly to CGFSC.
In case of suspension of the right of redemption, you may either withdraw your
request for redemption or you will receive payment based on the NAV next
determined after the termination of the suspension.
9
<PAGE>
HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?
If you are investing through your Investment Professional, you may be
required to set up a brokerage or agency account. Please call your Investment
Professional for information on establishing an account. If you are
purchasing shares of the Portfolio through a program of services offered or
administered by your Investment Professional, you should read the program
materials in conjunction with this Prospectus. Certain features of such
programs may impose additional requirements and charges for the services
rendered. Your Investment Professional may offer any or all of the services
mentioned in this section, and is responsible for initiating all initial
purchase transactions. Please contact your Investment Professional for
information on these services.
SYSTEMATIC INVESTING PROGRAM
The Systematic Investing Program offers a simple way to maintain a
regular investment program. You may arrange automatic transfers (minimum $25
per transaction) from your bank account to your First Funds account on a
periodic basis. When you participate in this program, the minimum initial
investment in each Portfolio is $250. If you are an employee of First
Tennessee or any of its affiliates, the minimum initial investment is $50.
You may change the amount of your automatic investment, skip an investment,
or stop the Systematic Investing Program by calling CGFSC at 1-800-442-1941
(option 2) or your Investment Professional at least three Business Days prior
to your next scheduled investment date.
SYSTEMATIC WITHDRAWAL PLAN
You can have monthly, quarterly or semi-annual checks sent from your
account to you, to a person named by you, or to your bank checking account.
Your Systematic Withdrawal Plan payments are drawn from share redemptions and
must be in the amount of $100 or more per Portfolio per 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 II
PUBLIC OFFERING PRICE
The public offering price for Class II shares is the sum of the NAV plus
a sales load. As indicated below, a portion of this load may be reallowed to
Investment Professionals which are financial institutions which have entered
into an agreement with ALPS, the Portfolio's Distributor (Service
Organizations). You may calculate your sales load as follows:
<TABLE>
REALLOWANCE TO
TOTAL SALES LOAD FOR CLASS II SHARES SERVICE ORGANIZATIONS
------------------------------------ ---------------------
AS A % OF OFFERING AS A % AS A % OF OFFERING
AMOUNT OF TRANSACTION PRICE PER SHARE OF NAV PRICE PER
<S> <C> <C> <C>
Less than $100,000 3.75 3.90 3.25
$100,000 to $249,999 3.00 3.09 2.65
$250,000 to $499,999 2.25 2.30 2.00
$500,000 to $999,999 1.50 1.52 1.25
$1,000,000 and over 0.50 0.50 0.40
</TABLE>
The reallowance to Service Organizations may be changed from time to time. ALPS,
at its expense, may provide additional non-cash promotional incentives to
eligible representatives of Service Organizations in the form of attendance at a
sales seminar at a resort. These incentives may be limited to certain eligible
representatives of Service Organizations who have sold significant numbers of
shares of any of the Portfolios of the Trust.
You may purchase Class II shares without a sales load if the purchase
will be (a) through a First Funds sponsored IRA; (b) through an IRA, 401
Plan, 403 Plan or directed agency account if the trustee, custodian, or agent
thereof is a direct or indirect subsidiary or franchisee bank of First
Tennessee or its affiliates; (c) by registered representatives, directors,
advisory directors, officers and employees (and their immediate families) of
First Tennessee or its affiliates; (d) by a
10
<PAGE>
current or former Trustee, officer or employee of First Funds; the spouse of
a First Funds Trustee, officer or employee; a First Funds Trustee acting as a
custodian for a minor child of a First Funds Trustee, officer or employee; or
the child of a current or former Trustee, officer or employee of First Funds
who has reached the age of majority; (e) by a charitable remainder trust or
life income pool established for the benefit of a charitable organization (as
defined in Section 501(c)(3) of the Internal Revenue Code); (f) for use in a
financial institution or investment adviser managed account for which a
management or investment advisory fee is charged; (g) with redemption
proceeds from other mutual fund complexes on which the investor has paid a
front-end sales charge within the past 60 days upon presentation of purchase
verification information; or (h) through certain promotions where the load is
waived for investors.
In addition, you will not pay a sales load on the reinvestment of
dividends or distributions in the Portfolio or any other First Funds
Portfolio, or in connection with certain share exchanges as described under
"How Are Investments, Exchanges And Redemptions Made? - Class I, II, and III
- - How are Exchanges Made?" on page 14. Further, you generally will not pay a
sales load on Class II shares of the Portfolio which you buy using proceeds
from the redemption of a First Funds Portfolio which does not charge a
front-end load, if you obtained such shares through an exchange for Class II
shares which you purchased with a sales load. A sales load will apply to
your purchase of Class II shares in the foregoing situation only to the
extent that the Portfolio's sales load exceeds the sales load you paid in the
prior purchase of the Class II shares.
In addition, if you purchase Class II shares within 60 days after
redeeming shares of the Portfolio, you will receive credit towards the sales
load payable on the purchase to the extent of the sales load you paid on the
shares you redeemed. This reinstatement privilege may be exercised only with
respect to redemptions and purchases in the same First Funds Portfolio. The
reinstatement privilege can be exercised only one time with respect to any
particular redemption.
QUANTITY DISCOUNTS
You may be entitled to reduced sales charges through the Right of
Accumulation or a Letter of Intent, even if you do not make an investment of
a size that would normally qualify for a quantity discount.
To qualify for a reduction of or exception to the sales load, you or
your Investment Professional must notify the Transfer Agent, CGFSC at the
time of purchase or exchange. The reduction in sales load is subject to
confirmation of your holdings through a check of records. The Trust may
modify or terminate quantity discounts at any time. For more information
about quantity discounts, contact your Service Organization or ALPS at
1-800-442-1941 (option 1).
RIGHT OF ACCUMULATION. The sales charge schedule under the heading
"How Are Investments, Exchanges And Redemptions Made? - Public Offering
Price" shows that the sales load you will pay on Class II shares is reduced
as your aggregate investment increases. The Right of Accumulation allows you
to combine certain First Funds investments to determine your aggregate
investment and the applicable reduced sales load. You may combine the amount
of your investment in the Portfolio's Class II shares with the value of your
investment in Class II of any other First Funds Portfolio you own and on
which you paid a sales load. If you are a participant in a First Funds IRA
or if you are a trustee or custodian of another type of First Funds
retirement plan, you may also include as part of your aggregate investment
any holdings through the IRA or in the plan even if a load was not paid. If
for example, you beneficially own Class II shares of a First Funds Portfolio
with an aggregate current value of $99,000 and you subsequently purchase
shares of the Portfolio having a current value of $1,000, the load applicable
to the subsequent purchase would be reduced to 3.00% 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.
11
<PAGE>
If your purchases qualify for a further sales load reduction in addition
to that indicated in the Letter of Intent, the sales load will be adjusted to
reflect your total purchases. Signing a Letter of Intent does not bind you
to purchase the full amount indicated at the sales load in effect at the time
of signing, but you must complete the intended purchase to obtain the reduced
sales load. To apply, sign the Letter of Intent form at the time you purchase
Class II shares. You will be entitled to the applicable sales load that is in
effect at the date you submit the Letter of Intent until you complete your
intended purchase.
QUALIFICATION OF DISCOUNTS. As shown in the schedule of Class II sales
charges, larger purchases may result in lower sales charges to you. For
purposes of determining the amount of purchases using the Right of
Accumulation and Letter of Intent privileges, you may combine your purchase
with:
- purchases by your spouse or his, her or your joint account or for
the account of any minor children, and
- the aggregate investment of any trustee or other Institutional
Investor for you and/or your spouse or your minor children.
A trustee or custodian of any qualified pension or profit sharing plan may
combine its aggregate purchases.
OTHER. Class II shares also incur Shareholder Servicing Fees. See
discussion under "WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY? -
Distribution Plans and Shareholder Servicing Plans."
CLASS III
Class III shares are bought without a front-end load; that is, the
offering price for such shares will be their NAV. Class III shares incur
Distribution Fees and Shareholder Servicing Fees. See discussion under "WHAT
ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY? - Distribution Plans and
Shareholder Servicing Plans."
CLASS I, II AND III
HOW ARE PORTFOLIO SHARES VALUED?
The term "net asset value per share," or NAV, means the worth of one
share. The NAV of each Class of the Portfolio is calculated by adding that
Class' pro rata share of the value of all securities and other assets
attributable to the Portfolio, deducting that Class' pro rata share of
Portfolio liabilities, further deducting Class-specific liabilities, and
dividing the result by the number of shares outstanding in the Class.
The Portfolio is open for business each day that both the NYSE and the
New York Federal Reserve are open (a Business Day). The NAV is calculated at
the close of the Portfolio's Business Day, which coincides with the close of
regular trading of the NYSE (normally 4:00 p.m. Eastern Time).
The Portfolio's securities and other assets are valued primarily on the
basis of market quotations furnished by pricing services, or if quotations
are not available, by a method that the Trustees believe accurately reflects
fair value. Foreign securities are valued on the basis of quotations from the
primary United States market in which they are traded or, if not traded on a
U.S. market, then their primary foreign market, and translated from foreign
market quotations into U.S. dollars using current exchange rates.
DISTRIBUTION OPTIONS: The Portfolio earns interest from bond, money
market, and other fixed-income investments and dividends from its stocks.
These are passed along as dividend distributions. The Portfolio may realize
capital gains if it sells securities for a higher price than it paid for
them. These are passed along as capital gain distributions. Income dividends
for the 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.
12
<PAGE>
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. You may execute exchange transactions by
calling CGFSC at 1-800-442-1941 (option 2) prior to 4:00 p.m. Eastern Time on
any Business Day.
Class II shares of the First Funds Money Market Portfolios are not
currently available for investment. Investors in Class II shares wishing to
exchange into one of these Money Market Portfolios will receive Class III
shares.
When making an exchange or opening an account in another Portfolio by
exchange, the registration and tax identification numbers of the two accounts
must be identical. In order to open a new account through exchange, the
minimum initial investment requirements must be maintained.
Each exchange may produce a gain or loss for tax purposes. In order to
protect the Portfolio's performance and its shareholders, First Tennessee
discourages frequent exchange activity in response to short-term market
fluctuations. The Portfolio reserves the right to refuse any specific
purchase order, including certain purchases by exchange if, in First
Tennessee's opinion, the Portfolio would be unable to invest effectively in
accordance with its investment objective and policies, or would otherwise be
affected adversely. Exchanges or purchase orders may be restricted or refused
if the Portfolio receives or anticipates individual or simultaneous orders
affecting significant portions of the Portfolio's assets. Although the
Portfolio will attempt to give prior notice whenever it is reasonably able to
do so, it may impose these restrictions at any time. The Portfolio reserves
the right to modify or withdraw the exchange privilege upon 60 days notice
and to suspend the offering of shares in any class without notice to
shareholders. You or your Institutional Investor will receive written
confirmation of each exchange transaction.
Exchanges are generally not permitted from Class I to another Class.
Should a beneficial owner of Class I shares cease to be eligible to purchase
shares of Class I, Class I shares held in an Institutional Account may be
converted to shares of another class.
STATEMENTS AND REPORTS
You or, if Class I, the Institutional Investor will receive a monthly
statement and a confirmation after every transaction that affects the 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 Institutional Investor will
receive the Portfolio's financial statements. To reduce expenses, only one
copy of the Portfolio's reports (such as the Prospectus and Annual Report)
will be mailed to each investor or, if Class I, each Institutional Investor.
Please write to ALPS at the address indicated on the previous page 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 securities 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.
13
<PAGE>
For additional performance information, contact your Investment
Professional or ALPS for a free Statement of Additional Information for the
Portfolio.
- ------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- ------------------------------------------------------------------------------
Broker-dealers are utilized to conduct securities transactions for the
Portfolio and are chosen based upon professional ability and quality of
service. In addition, the Portfolio's investment advisers may consider a
broker-dealer's sales of shares of the Portfolio or recommendations to its
customers that they purchase shares of the Portfolio as a factor in the
selection of broker-dealers to execute transactions for the Portfolio. In
placing business with such broker-dealers, the advisers will seek the best
execution of each transaction.
Higher commissions may be paid to firms that provide research services
to the extent permitted by law. The frequency of portfolio transactions - the
Portfolio's portfolio turnover rate - will vary from year to year depending
on market conditions. It is not anticipated that the Portfolio's turnover
rate will exceed 100% over the coming year.
- ------------------------------------------------------------------------------
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 the Portfolio's taxable income and
short-term capital gains are taxed as dividends, and long-term capital gain
distributions are taxed as long-term capital gains. Distributions are taxable
when they are paid, whether taken in cash or reinvested in additional shares,
except that distributions declared in December and paid in January are
taxable as if paid on December 31. The Portfolio will send each investor or,
if Class I, each Institutional Investor an IRS Form 1099-DIV by January 31 of
each year.
CAPITAL GAINS. A capital gain or loss may be realized when shares of
the Portfolio are redeemed or exchanged. For most types of accounts, the
Portfolio will report the proceeds of redemptions to each investor or, if
Class I, the Institutional Investor, and the IRS annually. However, because
the tax treatment also depends on the purchase price and your personal tax
position, regular account statements should be used to determine the tax gain
or loss.
"BUYING A DIVIDEND." On the record date for a distribution, the
Portfolio's share price is reduced by the amount of the distribution. If
shares are bought just before the record date (buying a dividend), the full
price for the shares will be paid, and a portion of the price will be
received back as a taxable distribution.
OTHER TAX INFORMATION. The information above is only a summary of some
of the federal tax consequences generally affecting the Portfolio and its
shareholders, and no attempt has been made to discuss individual tax
consequences. In addition to federal tax, distributions may be subject to
state, local or foreign taxes. Institutional Investors and other shareholders
should consult their 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 the Portfolio to
withhold 31% of taxable distributions from your account.
- ------------------------------------------------------------------------------
WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY?
- ------------------------------------------------------------------------------
INVESTMENT ADVISORY AND MANAGEMENT AND SUB-ADVISORY AGREEMENTS. For
managing its investment and business affairs, the Portfolio is obligated to
pay First Tennessee, 4990 Poplar Avenue, Memphis, 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 advisory fee for the
current fiscal year. This voluntary waiver can be discontinued at any time.
14
<PAGE>
Under the Investment Advisory and Management Agreement, First Tennessee
may, with the prior approval of the Trustees and the shareholders of the
Portfolio, engage one or more sub-advisers which may have full investment
discretion to make all determinations with respect to the investment and
reinvestment of all or any portion of the Portfolio's assets, subject to the
terms and conditions of the Investment Advisory and Management Agreement and
the written agreement with any such sub-adviser. In the event one or more
sub-advisers is appointed by First Tennessee, First Tennessee shall monitor
and evaluate the performance of such sub-advisers, allocate Portfolio assets
to be managed by such sub-advisers, recommend any changes in or additional
sub-advisers when appropriate and compensate each sub-adviser out of the
investment advisory fee received by First Tennessee from the Portfolio.
First Tennessee has experience as an investment adviser to individual,
corporate and institutional advisory clients, pension plans and collective
investment funds, with approximately $13.8 billion in assets under
administration (including nondiscretionary accounts) and $5.3 billion in
assets under management as of June 30, 1996, as well as experience in
supervising sub-advisers.
Highland serves as the Sub-Adviser for the Portfolio subject to the
supervision of First Tennessee and pursuant to the authority granted to it
under its Sub-Advisory Agreement with First Tennessee. On March 1, 1994,
Highland merged with and into First Tennessee Investment Management, Inc.
(FTIM), an affiliate of First Tennessee, and changed its name to Highland
Capital Management Corp. FTIM (now Highland), has been a wholly-owned
subsidiary of First Tennessee National Corporation since 1972. First Tennessee
and Highland have a history of investment management since 1929. Highland has
a total of $2.1 billion in assets under management as of June 30, 1996. First
Tennessee is obligated to pay Highland a monthly sub-advisory fee at the
annual rate of .30% of the Intermediate Bond Portfolio's average net assets.
Highland is currently waiving some or all of its fees for the Portfolio.
ADMINISTRATOR AND DISTRIBUTOR. ALPS, 370 17th Street, Suite 2700, Denver
Colorado, 80202, serves as the Administrator and Distributor for the
Portfolio. As Administrator, ALPS assists in the Portfolio's administration
and operation, including but not limited to, providing office space and
various legal and operational services in connection with the regulatory
requirements applicable to the Portfolio. ALPS is entitled to receive from
the Portfolio a monthly fee at the annual rate of .15% of average net assets.
ALPS has voluntarily agreed to waive its full administration fee for the first
six months of the portfolio's operation.
First Tennessee serves as the Co-Administrator for the Portfolio. As the
Co-Administrator, First Tennessee assists in the Portfolio's operation,
including but not limited to, providing non-investment related research and
statistical data and various operational and administrative services. First
Tennessee is entitled to receive from the Portfolio a monthly fee at the
annual rate of .05% of average net assets.
As the Distributor, ALPS sells shares of each Portfolio as agent on
behalf of the Trust at no additional cost to the Trust. First Tennessee and
its affiliates do not participate in and are not responsible for selling as an
agent on behalf of the Trust, underwriting or distributing Trust shares.
Consistent with applicable law, affiliates of First Tennessee may receive
commissions or asset-based fees.
TRANSFER AGENT AND CUSTODIAN. Chase Global Funds Services Company, a
division of Chase Manhattan Bank, N.A. ("CGFSC"), provides transfer agent and
related services for the Portfolio. Chase Manhattan Bank, N.A. is custodian of
the assets of the Trust.
PRICING AND ACCOUNTING. CGFSC calculates the NAV and dividends of each
class and maintains the portfolio and general accounting records.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING PLANS. The Trustees have
adopted a Distribution Plan on behalf of Class III of the Portfolio pursuant
to Rule 12b-1 (the Rule) under the 1940 Act. The NASD subjects asset-based
sales charges to its maximum sales charge rule. Fees paid pursuant to the
Portfolio's Distribution Plan will be limited by the restrictions imposed by
the NASD rule. The Distribution Plan provides for payment of a fee to ALPS at
the annual rate of .75% of the average net assets of Class III. All or a
portion of these fees will in turn be paid to 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 Service
Organizations are paid at the annual rate of .25% of each Class' average net
assets, for shareholder services and account maintenance, including responding
to shareholder inquiries, directing shareholder communications, account
balance maintenance, and dividend posting. The Distribution Fees are expenses
of Class III and the Shareholder Servicing Fees are expenses of Class II and
III in addition to the Management Fee, and the Administration Fee and
Co-Administration Fees, and will reduce the net income and total return of
both Classes.
15
<PAGE>
- -----------------------------------------------------------------------------
HOW IS THE PORTFOLIO ORGANIZED?
- -----------------------------------------------------------------------------
The Portfolio is a diversified portfolio of First Funds, an open-end
management investment company organized as a Massachusetts business trust by a
Declaration of Trust dated March 6, 1992, as amended and restated on September
4, 1992. The Portfolio consists of three separate classes. The Trustees
supervise the Trust's activities and review its contractual arrangements with
companies that provide the Trust with services. The Trust is not required to
hold annual shareholder meetings, although special meetings may be called for
a specific Portfolio or class with respect to issues affecting that Portfolio
or class, or the Trust as a whole, for purposes such as electing or removing
Trustees, changing fundamental policies or approving investment advisory
agreements. Shareholders receive one vote for each share owned and fractional
votes for fractional shares owned. A Portfolio or class votes separately with
respect to issues affecting only that Portfolio or class. Pursuant to the
Declaration of Trust, the Trustees have the authority to issue additional
classes of shares for the Portfolio.
PORTFOLIO MANAGEMENT
James R. Turner is one of the Portfolio Managers for the Intermediate
Bond Portfolio. He is a Senior Vice President of Highland and is a Chartered
Financial Analyst. Mr. Turner is a graduate of the U.S. Military Academy and
received a Masters of Science in Industrial Engineering from Stanford
University.
Steven Wishnia, one of the Portfolio Managers for the Intermediate Bond
Portfolio, is a Director and Chairman of the Board of Highland. He joined
Highland in April, 1987. Mr. Wishnia is a graduate of Pace University.
- -----------------------------------------------------------------------------
INVESTMENT INSTRUMENTS, TRANSACTIONS, STRATEGIES AND RISKS
- -----------------------------------------------------------------------------
The following paragraphs provide a brief description of the securities in
which the Portfolio may invest and the transactions each may make. The
Portfolio is not limited by this discussion, however, and may purchase other
types of securities and may enter into other types of transactions if they are
consistent with the Portfolio's investment objective and policies.
ASSET-BACKED AND MORTGAGE SECURITIES purchased by the Portfolio may
include interests in pools of mortgages, loans (including consumer loans),
receivables or other assets. They may also include collateralized mortgage
obligations (CMOs) and stripped mortgage-backed securities. CMOs are
pass-through securities collateralized by mortgages or mortgage-backed
securities. CMOs are issued in classes and series that have different
maturities and often are retired in sequence. Payment of principal and
interest may be largely dependent upon the cash flows generated by the assets
backing the securities. The Portfolio may purchase mortgage-backed securities
issued by government and non-government entities such as banks, mortgage
lenders, or other financial institutions. A mortgage-backed security may be an
obligation of the issuer backed by a mortgage or pool of mortgages or a direct
interest in an underlying pool of mortgages. Some mortgage-backed securities,
such as CMOs, make payments of both principal and interest at a variety of
intervals; others make semiannual interest payments at a predetermined rate
and repay principal at maturity (like a typical bond). Mortgage-backed
securities are based on different types of mortgages including those on
commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the
Portfolio may invest in them if Highland determines they are consistent with
the Portfolio's investment objective and policies.
The value of mortgage-backed securities may change due to changes in the
market's perception of issuers including their credit-worthiness. In addition,
regulatory or tax changes may adversely affect the mortgage securities market
as a whole. Non-government mortgage-backed securities may offer higher yields
than those issued by government entities, but also may be subject to greater
price changes than government issues. Mortgage-backed securities are subject
to prepayment risk. Prepayment, which occurs when unscheduled or early
payments are made on the underlying mortgages, may shorten the effective
maturities of these securities and may lower their total returns. Some
securities may have a structure that makes their reaction to changing interest
rates and other factors difficult to predict and highly volatile.
COMMERCIAL PAPER purchased by the Portfolio are short-term obligations
issued by banks, broker-dealers, corporations and other entities for purposes
such as financing their current operations.
DELAYED-DELIVERY AND WHEN-ISSUED TRANSACTIONS. The Portfolio may buy and
sell obligations on a when-issued or delayed-delivery basis, with payment and
delivery taking place at a future date. The market value of obligations
pur-
16
<PAGE>
chased 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.
FORWARDS. A forward represents a contract that obligates the
counterparty to buy, and the other to sell, a specific underlying asset at a
specific price, amount, and date in the future. Forwards are similar to
futures except for the fact that forwards are privately negotiated. The most
common type of forward contracts are foreign currency exchange contracts.
The Portfolio may enter into forward exchange currency contracts in order
to hedge its exposure to changes in foreign currency exchange rates on its
foreign portfolio holdings and to hedge certain firm purchase and sale
commitments denominated in foreign currencies. A forward exchange currency
contract is a commitment to purchase or sell a foreign currency at a future
date at a negotiated forward rate. The gain or loss arising from the
difference between the original contract and the closing of such contract is
included in net realized gain or loss on foreign currency transactions.
Fluctuations in the value of forward exchange currency contracts are recorded
for financial reporting purposes as unrealized gains or losses by the
Portfolio.
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. Investing in restricted securities
could have the effect of increasing the level of Portfolio illiquidity if
qualified institutional buyers become, for a time, uninterested in purchasing
these securities.
ILLIQUID SECURITIES. Under guidelines established by the Board of
Trustees, Highland, under First Tennessee's supervision, determines the
liquidity of the Portfolio's investments. The absence of a trading market can
make it difficult to ascertain a market value for illiquid investments.
Disposing of illiquid investments or securities subject to legal restrictions
may involve time-consuming negotiation and legal expenses. It may be
difficult or impossible for the Portfolio to sell illiquid or restricted
securities promptly at an acceptable price. The Portfolio may invest up to
15% of its net 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.
17
<PAGE>
OPTIONS CONTRACTS. An option is a contract that gives the owner the
right, but not the obligation, to either buy (call option) or sell (put
option) an underlying security or currency at a fixed price for a specified
period of time. The Portfolio may buy and sell (write) put and call options
contracts to manage its exposure to changing interest rates and security
prices. To the extent it invests in securities denominated in foreign
currencies, the Portfolio may also buy and sell options contracts to manage
exposure to currency exchange rates. Some option strategies, including buying
puts and writing calls, tend to hedge the Portfolio's investments against
price fluctuations. Other strategies, including writing puts and buying calls,
tend to increase market exposure. Options may be combined with each other in
order to adjust the risk and return characteristics of the overall strategy.
The Portfolio may enter into forward contracts for settlement or hedging
purposes. The Portfolio may invest in options based on any type of security,
index, or currency, including options traded on foreign exchanges and options
not traded on exchanges.
Options can be volatile investments and involve certain risks. If
Highland applies a hedge at an inappropriate time or judges market conditions
incorrectly, options strategies may result in a loss and lower the Portfolio's
return. The Portfolio could also experience losses if the prices of its
options positions were poorly correlated with its other investments, or if it
could not close out its positions because of an illiquid secondary market. The
use of options may increase the volatility of the Portfolio and may involve
the investment of a small amount of cash relative to the risk assumed.
The Portfolio will be able to hedge its total assets by writing calls or
purchasing puts under normal conditions. In addition, the Portfolio will not
write puts whose underlying value exceeds 25% of total assets, and will not
buy calls with a value exceeding 5% of total assets.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Portfolio buys a
security at one price and simultaneously agrees to sell it back at a higher
price. In the event of the bankruptcy of the other party to a repurchase
agreement or a securities loan, the Portfolio could experience delays in
recovering its cash or the securities it lent. To the extent that, in the
meantime, the value of the obligations purchased had decreased, or the value
of obligations lent had increased, the Portfolio could experience a loss. In
all cases, Highland must find the creditworthiness of the other party to the
transaction satisfactory.
U.S. GOVERNMENT OBLIGATIONS purchased by the Portfolio are debt
obligations issued or guaranteed by the U.S. Treasury or by an agency or
instrumentality of the U.S. government. Not all U.S. government obligations
are backed by the full faith and credit of the United States. For example,
obligations issued by the Federal Farm Credit Bank or by the Federal National
Mortgage Association are supported by the agency's right to borrow money from
the U.S. Treasury under certain circumstances. Obligations issued by the
Federal Home Loan Bank are supported only by the credit of the agency. There
is no guarantee that the government will support these types of obligations,
and therefore they involve more risk than other government obligations.
U.S. TREASURY OBLIGATIONS purchased by the Portfolio are obligations
issued by the United States and backed by its full faith and credit.
VARIABLE AND FLOATING RATE INSTRUMENTS purchased by the Portfolio,
including certain participation interests in municipal obligations, have
interest rate adjustment formulas that help to stabilize their market values.
Many variable or floating rate instruments also carry demand features that
permit the Portfolio to sell them at par value plus accrued interest on short
notice. When determining its average weighted portfolio maturity, the
Portfolio will look to the interest readjustment date, rather than the
maturity date, of the instrument.
ZERO COUPON BONDS purchased by the Portfolio do not make regular interest
payments; instead they are sold at a deep discount from their face value and
are redeemed at face value when they mature. Because zero coupon bonds do not
pay current income, their prices can be very volatile when interest rates
change. In calculating its daily dividend, the Portfolio takes into account as
income a portion of the difference between a zero coupon bond's purchase price
and its face value.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
18
<PAGE>
securities. Bonds issued by the Resolution Funding Corporation (REFCORP) and
the Financing Corporation (FICO) can also be separated in this fashion. The
risks of these securities are similar to those of other debt securities,
although they may be more volatile and the value of certain types of stripped
securities may move in the same direction as interest rates. Original issue
zeros are zero coupon securities originally issued by the U.S. government, a
government agency, or a corporation in zero coupon form.
19
<PAGE>
INVESTMENT ADVISER
First Tennessee Bank National Association
Memphis, TN
SUB-ADVISER
Highland Capital Management Corp.
Memphis, TN
OFFICERS
Richard C. Rantzow, President
James V. Hyatt, Secretary
Jeremy O. May, Treasurer
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
20
<PAGE>
FIRST FUNDS
GROWTH & INCOME PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
BOND PORTFOLIO
INTERMEDIATE BOND PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION FOR CLASS I, CLASS II, AND CLASS III
OCTOBER 25, 1996
AS SUPPLEMENTED AUGUST 18, 1997
This Statement is not a prospectus but should be read in conjunction with
the current Prospectus for each Class of First Funds: Growth & Income
Portfolio and Bond Portfolio, dated October 25, 1996, and Capital Appreciation
Portfolio and Intermediate Bond Portfolio dated August 18, 1997. Please
retain this Statement for future reference. The financial statements and
financial highlights of the Growth & Income and Bond Portfolios are included
in the Annual Report for the fiscal year ended June 30, 1996 and the
Semi-Annual Report for the period ended December 31, 1996 and are
incorporated herein by reference. The Capital Appreciation and Intermediate
Bond Portfolios had not commenced operations as of December 31, 1996 and
therefore are not included in the Annual or Semi-Annual Report. To obtain
additional free copies of this Statement, the Annual Report, the Semi-Annual
Report or the Prospectuses for each Portfolio, 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 3
Portfolio Transactions 9
Valuation of Portfolio Securities 10
Performance 10
Additional Purchase and Redemption Information 12
Distributions and Taxes 13
Trustees and Officers 14
Investment Advisory Agreements 15
Administration Agreements and Other Contracts 16
Description of the Trust 18
Financial Statements 20
Appendix 20
INVESTMENT ADVISER (GROWTH & INCOME, BOND AND INTERMEDIATE BOND PORTFOLIOS)
First Tennessee Bank National Association (First Tennessee)
SUB-ADVISER (GROWTH & INCOME, BOND AND INTERMEDIATE BOND PORTFOLIOS)
Highland Capital Management Corp. (the Sub-Adviser)
CO-INVESTMENT ADVISERS (CAPITAL APPRECIATION PORTFOLIO)
First Tennessee Bank National Association (First Tennessee)
Investment Advisers, Inc. (IAI)
ADMINISTRATOR AND DISTRIBUTOR
ALPS Mutual Funds Services, Inc. (ALPS or the Administrator and Distributor)
CO-ADMINISTRATOR
First Tennessee Bank National Association (First Tennessee or the
Co-Administrator)
TRANSFER AGENT & SHAREHOLDER SERVICING AGENT
Chase Global Funds Services Company (CGFSC or the Transfer Agent)
CUSTODIAN
Chase Manhattan Bank, N.A. (Custodian)
1
<PAGE>
INVESTMENT RESTRICTIONS AND LIMITATIONS
The following policies and limitations supplement those set forth in the
Portfolios' Prospectuses. 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.
With respect to illiquid securities, any investment in such securities that
exceeds 15% of a Portfolio's net assets will be reduced promptly to meet such
limitation.
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 THE GROWTH & INCOME, CAPITAL APPRECIATION, BOND
AND INTERMEDIATE BOND PORTFOLIOS
THE FOLLOWING ARE THE FUNDAMENTAL LIMITATIONS FOR EACH PORTFOLIO, SET FORTH IN
THEIR ENTIRETY. EACH PORTFOLIO MAY NOT:
(1) with respect to 75% of a 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 a Portfolio's total assets would be invested in the
securities of that issuer; or (b) such a 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 each 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 each
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 such a 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 a 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 a
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) Each 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 EACH PORTFOLIO ARE NOT FUNDAMENTAL AND MAY BE
CHANGED WITHOUT SHAREHOLDER APPROVAL.
2
<PAGE>
(i) Each Portfolio does not currently intend during the coming year to
purchase securities on margin, except that each 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.
(ii) Each 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.
(iii) Each 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.
(iv) Each 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.
(v) Each Portfolio does not currently intend during the coming year to make
loans, but this limitation does not apply to purchases of debt
securities.
(vi) Each 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 (First Tennessee), serves as
Investment Adviser to the Growth & Income, Bond and Intermediate Bond
Portfolios and, with the prior approval of the Board of Trustees (the
Trustees), has engaged Highland Capital Management Corp. (the Sub-Adviser) to
act as Sub-Adviser to these Portfolios. First Tennessee and Investment
Advisers, Inc. (IAI) act as Co-Advisers to the Capital Appreciation
Portfolio. The activities of the Sub-Adviser and IAI include 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 a Portfolio is not required to pay for securities until
the delivery date, these risks are in addition to the risks associated with such
Portfolio's other investments. If a 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, a Portfolio will set aside
appropriate liquid assets in a segregated custodial account to cover its
purchase obligations. When a Portfolio has sold a security on a
delayed-delivery basis, a Portfolio does not participate in further gains or
losses with respect to the security. If the
3
<PAGE>
other party to a delayed-delivery transaction fails to deliver or pay for the
securities, such 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.
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 a Portfolio's investment adviser 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. The Portfolios 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
Portfolios 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 Portfolios may also use swap agreements, indexed
securities, and options and futures contracts relating to foreign currencies for
the same purposes.
4
<PAGE>
When a 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 the Portfolio's investment adviser.
A Portfolio may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example, if
a 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. A 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.
A 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 a Portfolio held investments denominated in Deutsche
marks, such 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, the Portfolios will segregate assets to cover currency
forward contracts, if any, whose purpose is essentially speculative. The
Portfolios 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 IAI's skill in
analyzing and predicting currency values. Forward contracts may substantially
change a Portfolio's investment exposure to changes in currency exchange
rates, and could result in losses to a Portfolio if currencies do not perform
as the investment adviser anticipates. For example, if a currency's value
rose at a time when IAI had hedged a Portfolio by selling that currency in
exchange for dollars, a Portfolio would be unable to participate in the
currency's appreciation. If the investment adviser hedges currency exposure
through proxy hedges, a 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 IAI increases a Portfolio's exposure to a
foreign currency, and that currency's value declines, the Portfolio will
realize a loss. There is no assurance that IAI's use of forward currency
contracts will be advantageous to a Portfolio or that it will hedge at an
appropriate time. The policies described in this section are non-fundamental
policies of each 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 guidelines established by the Trustees, the Sub-Adviser, under
the supervision of First Tennessee, and IAI determine the liquidity of each
respective Portfolio's investments and, through reports from the Sub-Adviser
and IAI, the Trustees monitor investments in illiquid instruments. In
determining the liquidity of each Portfolio's investments, the Sub-Adviser
and IAI 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 the Sub-Adviser or IAI 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 agree-
5
<PAGE>
ment 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. The Growth & Income and Capital Appreciation
Portfolios (Equity Portfolios) 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 the Sub-Adviser or IAI, as the case
may be.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a
Portfolio sells a portfolio security 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 the
Sub-Adviser or IAI, as the case may be. 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 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
the Sub-Adviser or IAI to be of good standing. Furthermore, they will only
be made if, in the Sub-Adviser's or IAI's judgment, the consideration to be
earned from such loans would justify the risk.
First Tennessee and IAI understand 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.
6
<PAGE>
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).
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.
The Bond and Intermediate Bond Portfolios (the Bond Portfolios) 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 these
Portfolios to tender (or put) their bonds to an institution at periodic
intervals and to receive the principal amount thereof. These Portfolios consider
variable rate instruments structured in this way (Participating VRDOs) to be
essentially equivalent to other VRDOs they purchase.
WARRANTS. The Equity Portfolios 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 the
Sub-Adviser or IAI 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 a Portfolio's
total assets would be hedged with options under normal conditions; (b) write put
options if, as a result, a Portfolio's 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 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, a 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, a Portfolio pays
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. A Portfolio may terminate its position in a put
option it has purchased by allowing them to expire or by exercising the option.
If the option is allowed to expire, a Portfolio will lose the entire premium it
paid. If a Portfolio exercises the option, it completes the sale of the
underlying instrument at the strike price. A Portfolio 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.
7
<PAGE>
WRITING PUT AND CALL OPTIONS. When a Portfolio writes a put option, it takes
the opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the Portfolio assumes 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 their positions in
put options they write before exercise by closing out the options in the
secondary market at their current price. If the secondary market is not liquid
for a put option a Portfolio has written, however, the Portfolio 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 its
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.
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.
8
<PAGE>
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 the
respective Portfolios by First Tennessee, the Sub-Adviser and IAI
(collectively, the Advisers) pursuant to authority contained in each
Portfolio's Investment Advisory Agreement, Sub-Advisory Agreement or
Co-Advisory Agreement, as the case may be. 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 adviser. 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.
Each Portfolio may execute portfolio transactions with broker-dealers who
provide research and execution services to the Portfolios 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 years ended June 30, 1996 and 1995, the portfolio turnover rates
were 41% and 33% for the Growth & Income Portfolio, and 56% and 23% for the Bond
Portfolio, respectively. In aggregate, the Trust paid brokerage commissions in
the amounts of $276,190, $146,176 and $161,109 during the fiscal years ended
June 30, 1996, 1995 and 1994, respectively. During the fiscal years ended June
30, 1996, 1995 and 1994, no brokerage commissions were paid by either Portfolio
to an affiliat-
9
<PAGE>
ed broker of the Trust. The Capital Appreciation and Intermediate Bond
Portfolios had not commenced operations as of the fiscal year ended June 30,
1996.
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 the Advisers 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 outweighs any disadvantages to the Portfolios that may be said to
exist from exposure to simultaneous transactions.
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 Trustees. Securities and other
assets for which there is no readily available market are valued in good faith
by a committee appointed by the 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 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 Portfolios are determined
as of such time for the purpose of computing the Portfolios' net asset values
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 the Portfolios, 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 stan-
10
<PAGE>
dardized 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. For the fiscal
year ending June 30, 1996, the 30-day yields for Class I, II and III of Bond
Portfolio were 6.41%, 5.88% and 5.39%, respectively. The Intermediate Bond and
Capital Appreciation Portfolios had not commenced operations as of June 30,
1996.
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. The following table shows total returns
for the fiscal year ending June 30, 1996 for each Class of the Growth & Income
and Bond Portfolios (the Capital Appreciation and Intermediate Bond Portfolios
had not commenced operations as June 30, 1996):
<TABLE>
Class I Average Class II Average Class III Average
Annual Total Return Annual Total Return Annual Total Return
-------------------- -------------------- --------------------
One Since One Since One Since
Year Inception Year Inception Year Inception
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Growth & Income Portfolio 23.54% 18.67% 17.68% 16.65% 22.19% 17.40%
Bond Portfolio 4.23% 4.91% 0.14% 3.39% 3.11% 3.65%
</TABLE>
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 loads may or may not be included.
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
11
<PAGE>
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 which is reported in the BOND FUND REPORT, 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 and seek to maintain a stable $1.00 share price. The
Bond Portfolios, however, invest in longer-term instruments and their 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. The Portfolios 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.
Growth & Income 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
Capital Appreciation Portfolio may compare its performance to that of the
Standard & Poor's 400 Midcap Index or the Russell 2000 Index. The Bond 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. The Intermediate Bond Portfolio may
compare its performance to that of the Lehman Brothers Government/Corporate
Intermediate Bond Index, which consists of the Government/Corporate Bond Index
securities with maturities less than ten years. 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
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.
12
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The following holiday closings have been scheduled for 1997: Veterans' Day,
Thanksgiving Day, Christmas Day, New Year's Day, Dr. Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, and
Columbus Day. Although First Tennessee expects the same holiday schedule to be
observed in the future, the New York Stock Exchange 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. For employees of First
Tennessee Bank National Association or any of its affiliates, who participate in
the Systematic Investing Program, the minimum initial investment requirement is
$50. 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 the income distributed by the Equity Portfolios may
qualify for the dividends-received deduction available to corporate shareholders
to the extent that the Portfolios' income is derived from qualifying dividends.
Because the Portfolios 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 each Portfolio that qualifies for the
deduction will generally be less than 100%. Each Portfolio will notify corporate
shareholders annually of the percentage of portfolio dividends which qualify for
the dividends received deduction. Because the income earned by the Bond
Portfolios is primarily derived from interest, dividends from each such
Portfolio generally will not qualify for the dividends-received deduction
available to corporations. A portion of each Portfolio's dividends derived from
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
13
<PAGE>
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 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
14
<PAGE>
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.
*JEREMY O. MAY, Treasurer, is a Fund Controller at ALPS Mutual Funds Services,
Inc. (ALPS), the Administrator and Distributor. Prior to joining ALPS, Mr. May
was an auditor with Deloitte & Touch LLP in their Denver office.
*JAMES V. HYATT, Secretary, is General Counsel of ALPS Mutual Funds Services,
Inc. (ALPS), the Administrator and Distributor. Prior to joining ALPS, Mr. Hyatt
served as Senior Legal Counsel for FMR and Clerk for Fidelity Management Trust
Company.
The Trustees of the Trust each receive from the Trust an annual fee of $4,000
and a fee in the amount of $1,250 for attending each regularly scheduled
quarterly meeting of the Trustees and $500 for each unscheduled meeting. The
Trustees were compensated as follows for their services provided during the
Trust's fiscal year ended June 30, 1996:
- -----------------------------------------------------------------------------
Pension Or Aggregate
Retirement Estimated Compensation
Aggregate Benefits Annual From The Trust
Compensation Accrued As Benefits and Fund
From the Part of Fund Upon Complex Paid
Trust Expenses Retirement to Trustees
- -----------------------------------------------------------------------------
Thomas M. Batchelor
Trustee $6,000 $0 $0 $6,000
- -----------------------------------------------------------------------------
John A. DeCell
Trustee $6,000 $0 $0 $6,000
- -----------------------------------------------------------------------------
L.R. Jalenak, Jr.
Trustee $6,000 $0 $0 $6,000
- -----------------------------------------------------------------------------
Larry W. Papasan,
Trustee $6,000 $0 $0 $6,000
- -----------------------------------------------------------------------------
Richard C. Rantzow
Trustee $6,000 $0 $0 $6,000
- -----------------------------------------------------------------------------
As of September 30, 1996, the officers and Trustees of the Trust owned less than
1% of the outstanding shares of any Portfolio.
INVESTMENT ADVISORY AGREEMENTS
The Growth & Income, Bond and Intermediate Bond Portfolios employ First
Tennessee Bank National Association, Memphis, Tennessee, to furnish
investment advisory and other services to each such Portfolio. Under the
Investment Advisory and Management Agreement with each such Portfolio, First
Tennessee is authorized to appoint one or more sub-advisers at First
Tennessee's expense. Highland Capital Management Corp., Memphis, Tennessee,
acts as Sub-Adviser to the Growth & Income, Bond and Intermediate Bond
Portfolios. Subject to the direction of the Trustees and of First Tennessee,
the Sub-Adviser will direct the investments of these Portfolios in accordance
with their respective investment objectives, policies and limitations.
First Tennessee and Investment Advisers, Inc., Minneapolis, Minnesota, act as
Co-Advisers to the Capital Appreciation Portfolio. Subject to the direction
of the Trustees and monitoring by First Tennessee, IAI directs the
investments of this Portfolio in accordance with the Portfolio's investment
objective, policies and limitations.
In addition to First Tennessee's and IAI's fees 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 reg-
15
<PAGE>
istering 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 the investment and business affairs of the Growth & Income,
Capital Appreciation, Bond and Intermediate Bond Portfolios, First Tennessee
is entitled to receive a monthly management fee at the annual rate of .65%,
.15%, .55% and .50% of each Portfolio's average net assets, respectively. For
the fiscal years ended June 30, 1996, 1995 and 1994, First Tennessee earned
$1,076,198, $686,850 and $447,908 from the Growth & Income Portfolio,
respectively, before waiving $358,250, $532,648 and $447,908 of its fees,
respectively. For the fiscal years ended June 30, 1996, 1995 and 1994, First
Tennessee earned $563,748, $447,309 and $350,736 from the Bond Portfolio,
respectively, before waiving $482,559, $447,309 and $350,736 of its fees,
respectively. The Capital Appreciation and Intermediate Bond Portfolios had
not commenced operations as of the fiscal year ended June 30, 1996.
Under its Investment Advisory and Management Agreement with each of the
Growth & Income, Bond and Intermediate Bond Portfolios, First Tennessee is
authorized, at its own expense, to hire sub-advisers to provide investment
advice to each such Portfolio. The Sub-Adviser is entitled to receive from
First Tennessee a monthly sub-advisory fee at the annual rate of .38% of
Growth & Income Portfolio's average net assets, .33% of Bond Portfolio's
average net assets and .30% of Intermediate Bond Portfolio's average net
assets. As Co-Adviser to the Capital Appreciation Portfolio, IAI is entitled
to receive .70% of that Portfolio's average net assets up to $50 million and
.65% thereafter. Under the terms of each sub-advisory agreement with First
Tennessee and IAI's Investment Advisory and Management Agreement with the
Trust, the Sub-Adviser, subject to the supervision of First Tennessee, and
IAI supervise the day-to-day operations of their respective Portfolios and
provide investment research and credit analysis concerning their respective
Portfolios' investments, conduct a continual program of investment of their
respective Portfolios' assets and maintain the books and records required in
connection with their duties under their advisory agreements. In addition,
the Sub-Adviser and IAI keep First Tennessee informed of the developments
materially affecting each Portfolio. The Sub-Adviser is currently waiving
some or all of the fees it is entitled to receive from First Tennessee.
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. 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.
For each Portfolio's fiscal year ended June 30, 1996, ALPS earned administration
fees in the amount of $248,353 and $153,749 from the Growth & Income Portfolio
and the Bond Portfolio, respectively. The Capital Appreciation and Intermediate
Bond Portfolios had not commenced operations as of the fiscal year ended June
30, 1996. For the fiscal years ended June 30, 1995 and 1994, 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 Growth &
Income Portfolio and the Bond Portfolio, respectively. For the period July 1,
1994 to September 30, 1994, NFSC waived .05% of its administration fees,
totaling $13,373 for the Growth & Income Portfolio and $9,078 for the Bond
Portfolio. For the period ended June 30, 1994, NFSC received administration and
distribution fees totaling $137,818 and $127,540 from the Growth & Income and
Bond Portfolios, respectively. For this period, NFSC waived administration fees
of $34,455 for the Growth & Income Portfolio and $31,885 for the Bond Portfolio
and reimbursed these Portfolios $1,748 and $1,742, respectively. The Capital
Appreciation and Intermediate Bond Portfolios had not commenced operations as
of the fiscal year ended June 30, 1996.
First Tennessee serves as the Co-Administrator for each Portfolio. As the
Co-Administrator, First Tennessee assists in each Portfolio's operation,
including, but not limited to, providing non-investment related research and
statistical data and various operational and administrative services. First
Tennessee is entitled to receive from each Portfolio a monthly fee at the annual
rate of .05% of average net assets. For each Portfolio's fiscal year ended June
30, 1996, First Tennessee earned co-administration fees in the amount of $82,965
and $51,198 from the Growth & Income Portfolio and the Bond Portfolio,
respectively, before waiving $34,639 and $23,882, respectively.
16
<PAGE>
As the Distributor, ALPS sells shares of Class I as agent on behalf of the Trust
at no additional cost to the Trust. 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. See "ADMINISTRATION AGREEMENTS AND CONTRACTS -
Distribution Plans" on page 18. 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 AGREEMENTS AND OTHER
CONTRACTS - Shareholder Services Plans" on page 18. First Tennessee and its
affiliates neither participate in nor are responsible for the underwriting of
Portfolio shares. Consistent with applicable law, affiliates of First Tennessee
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 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 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, 1996, the following fees were earned by the
Transfer Agent/Fund Accountant and Custodian:
Growth & Income Bond
Portfolio Portfolio
--------------- ---------
Transfer Agent/Fund Accounting
Class I $85,576 68,107
Class II $467 $17
Class III $49,582 $2,950
Custodian $40,307 $26,793
For the fiscal year ended June 30, 1995, the following fees were earned by the
Transfer Agent, Fund Accountant and Custodian:
Growth & Income Bond
Portfolio Portfolio
--------------- ---------
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
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 Growth & Income Portfolio and the Bond Portfolio, respectively.
The Capital Appreciation and Intermediate Bond Portfolios had not commenced
operations as of the fiscal year ended June 30, 1996.
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 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 promo-
17
<PAGE>
tional 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.
For the fiscal years ended June 30, 1996 and 1995, the Growth & Income Portfolio
and the Bond Portfolio paid distribution fees in the amounts of $226,023 and
$73,018, and $23,789 and $9,726, respectively. The Capital Appreciation and
Intermediate Bond Portfolios had not commenced operations as of the fiscal
year ended June 30, 1996.
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 .25% of average net assets of Class II and Class III.
For the fiscal years ended June 30, 1996 and 1995, the Growth & Income Portfolio
and the Bond Portfolio paid shareholder servicing fees in the following amounts
(the Capital Appreciation and Intermediate Bond Portfolios had not commenced
operations as of the fiscal year ended June 30, 1996.:
Growth & Income Bond
Portfolio Portfolio
------------------ ----------------
1996 1995 1996 1995
------- ------- ------ ------
Class II $ 989 $ 0 $ 36 $ 0
Class III $75,107 $24,340 $7,930 $3,240
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 contem-
18
<PAGE>
plated 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. Growth & Income Portfolio, Bond Portfolio, Capital
Appreciation Portfolio and Intermediate Bond 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 nine 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, 1996, the following shareholders owned more than 5% of the
outstanding shares of the indicated Class of the Portfolios:
Name and Address Portfolio Class % of Class Held
- ---------------- --------------- ----- ---------------
First Tennessee National Corp. Growth & Income I 40%
D/B Pension Plan Bond I 57%
Memphis, TN
Milton C. Vincent Growth & Income II 37.68%
102 Polo Field Road
Chattanooga, TN 37419
19
<PAGE>
Herschel B. Brown Growth & Income II 8.32%
P.O. Box 127
Hixson, TN 37343
Bonnie B. Hixson Growth & Income II 6.51%
4 Whispering Pines Dr.
Signal Mountain, TN 37377
First Tennessee National Corp. Growth & Income I 7%
401K Savings - Fund A Bond I 6%
Memphis, TN
James Pentecost and Virginia Bond II 32.54%
Pentecost, Trustees FBO
Pentecost Family Trust
2700 Germantown Road
Germantown, TN 38138
David Pitchford and June Pitchford Bond II 24.95%
2002 Cochran
Mayville, TN 37801
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. 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.
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 Growth & Income and Bond Portfolios' financial statements and financial
highlights for the fiscal year ended June 30, 1996 and for the six months
ended December 31, 1996 are included in the Trust's Annual Report and
Semi-Annual Report, respectively, which are separate reports supplied
independent of this Statement of Additional Information. The Capital
Appreciation and Intermediate Bond Portfolios had not commenced operations as
of December 31, 1996. The Growth & Income and Bond Portfolios' financial
statements and financial highlights are incorporated herein by reference.
20
<PAGE>
APPENDIX
DOLLAR-WEIGHTED AVERAGE MATURITY for Bond 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.
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.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for the effectiveness of this Registration statement pursuant to
Rule 485(a) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment No. 10 to the Registration Statement to be signed on
its behalf by the undersigned, hereunto duly authorized, in the City of
Memphis, and State of Tennessee, on the 18th day of August, 1997.
FIRST FUNDS
By /c/ Richard C. Rantzow, President*
------------------------------------
Richard C. Rantzow, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
/c/ Richard C. Rantzow* President and Trustee August 18, 1997
- --------------------------
Richard C. Rantzow
/c/ Jeremy O. May Treasurer (Principal August 18, 1997
- -------------------------- Financial Officer)
Jeremy O. May
/c/ Thomas M. Batchelor* Trustee August 18, 1997
- --------------------------
Thomas M. Batchelor
/c/ John A. DeCell* Trustee August 18, 1997
- --------------------------
John A. DeCell
/c/ Larry W. Papasan* Trustee August 18, 1997
- --------------------------
Larry W. Papasan
* Signature affixed by Daniel B. Hatzenbuehler pursuant to a power of attorney
dated June 22, 1992 and filed herewith.
<PAGE>
PART C. OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements for the fiscal year ended June 30, 1996 for each
applicable Portfolio are incorporated herein by reference to Post-
Effective Amendment No. 9 to the Trust's registration statement filed
herein as Item 24. Financial Statements for the fiscal period ended
December 31, 1996 for each applicable Portfolio are incorporated
herein by reference.
(b) Exhibits:
(1) (a) Declaration of Trust dated as of March 6, 1992 is incorporated
herein by reference to Exhibit 1 to the Trust's Registration
Statement.
(b) Supplement to the Declaration of Trust effective April 24, 1992
is incorporated herein by reference to Exhibit 1(b) to Pre-
Effective Amendment No. 1 to the Trust's Registration Statement.
(c) Amended and Restated Declaration of Trust dated is of September
4, 1992 is incorporated herein by reference to Exhibit 1 (c) to
Post-Effective Amendment No. 1 to the Trust's Registration
Statement.
(d) Supplement to The Declaration of Trust effective August 1, 1993
is incorporated herein by reference to Exhibit 1 (d) to Post-
Effective Amendment No. 4 to the Trust's Registration Statement.
(2) (a) Bylaws of the Trust are incorporated herein by reference to
Exhibit 2 to Post-Effective Amendment No. 1 to the Trust's
Registration Statement.
(b) Amendment to the Bylaws dated November 17, 1992 is incorporated
herein by reference to Exhibit 2(a) to Post-Effective Amendment
No. 1 to the Trust's Registration Statement.
(3) Not Applicable.
(4) Not Applicable.
(5) (a) Investment Advisory and Management Agreements between the First
Funds on behalf of U.S. Treasury Money Market Portfolio, U.S.
Government Money Market Portfolio, and Municipal Money Market
Portfolio, and First Tennessee Bank National Association dated
September 4, 1992 are incorporated herein by reference to Exhibit
5(a) to Post-Effective Amendment No. 1 to the Trust's
Registration Statement.
(b) Sub-Advisory Agreements between Provident Institutional
Management Corporation and First Tennessee Bank National
Association on behalf of U.S. Treasury Money Market Portfolio,
U.S. Government Money Market Portfolio, and Municipal Money
Market Portfolio, dated September 4, 1992 are incorporated herein
by reference to Exhibit 5(b) to Post-Effective Amendment No. 1 to
the Trust's Registration Statement.
(c) Investment Advisory and Management Agreement between the First
Funds on behalf of Cash Reserve Portfolio, Total Return Equity
Portfolio, and Total Return Fixed Income Portfolio, and First
Tennessee Bank National Association dated February 15, 1993 are
incorporated herein by reference to Exhibit 5(c) to Post-
Effective Amendment No. 3 to the Trust's Registration Statement.
(d) Sub-Advisory Agreements between First Tennessee Investment
Management, Inc. and First Tennessee Bank National Association on
behalf of Total Return Equity Portfolio and Total Return Fixed
Income Portfolio, dated May 4, 1993 are incorporated herein by
reference to Exhibit 5(d) to Post-Effective
<PAGE>
Amendment No. 5 to the Trust's Registration Statement.
(e) Investment Advisory and Management Agreement between First Funds
on behalf of Tennessee Tax-Free Portfolio and First Tennessee
Bank National Association dated October 25, 1995 is incorporated
herein by reference to Exhibit 5(e) to Post-Effective Amendment
No. 9 to the Trust's Registration Statement.
(f) Form of Co-Investment Advisory and Management Agreement between
First Funds on behalf of Capital Appreciation Portfolio and First
Tennessee Bank National Association is incorporated herein by
reference to Exhibit 5(f) to Post-Effective Amendment No. 11
to the Trust's Registration Statement.
(g) Form of Investment Advisory and Management Agreement between
First Funds on behalf of Intermediate Bond Portfolio is
incorporated herein by reference to Exhibit 5(g) to Post-
Effective Amendment No. 10 to the Trust's Registration Statement.
(h) Form of Sub-Advisory Agreement between First Funds on behalf of
Intermediate Bond Portfolio and Highland Capital Management is
incorporated herein by reference to Exhibit 5(h) to Post-
Effective Amendment No. 10 to the Trust's Registration Statement.
(i) Form of Investment Advisory and Management Agreement between
First Funds on behalf of Capital Appreciation Portfolio and
Investment Advisers, Inc. is incorporated herein by reference
to Exhibit 5(i) to Post-Effective Amendment No. 11 to the
Trust's Registration Statement.
(6) (a) General Distribution Agreement between First Funds on behalf of
all Portfolios, and ALPS Mutual Funds Services, Inc., dated
July 1, 1995 is incorporated herein by reference to Exhibit 6(a)
to Post-Effective Amendment No. 8 to the Trust's Registration
Statement.
(b) Administration Agreement between First Funds on behalf of all
Portfolios, and ALPS Mutual Funds Services, Inc., dated July 1,
1995 is incorporated herein by reference to Exhibit 6(b) to Post-
Effective Amendment No. 8 to the Trust's Registration Statement.
(c) Co-Administration Agreement between First Funds on behalf of all
Portfolios, and First Tennessee Bank National Association, dated
July 1, 1995 is incorporated herein by reference to Exhibit 6 (c)
to Post-Effective Amendment No. 9 to the Trust's Registration
Statement.
(d) Form of Servicing Agreement between ALPS Mutual Funds Services,
Inc. and an Agency Institution is incorporated herein by
reference to Exhibit 6(d) to Post-Effective Amendment No. 8 to
the Trust's Registration Statement.
(7) Not Applicable.
(8) (a) Mutual Fund Custody Agreement between the First Funds and Chase
Manhattan Bank of New York dated October 12, 1992 is incorporated
herein by reference to Exhibit 8(a) to Post-Effective Amendment
No.1 to the Trust's Registration Statement.
(b) Mutual Fund Transfer Agency Agreement between the First Funds and
United States Trust Company of New York dated November 10, 1992
is incorporated herein by reference to Exhibit 8(b) to Post-
Effective Amendment No. 1 to the Trust's Registration Statement.
(c) Amendment to Exhibit 8(b) above dated July 28, 1995 is
incorporated herein by reference to Exhibit 8(c) to Post-
Effective Amendment No. 8 to the Trust's Registration Statement.
(d) Amendment to Exhibit 8(b) above dated December 7, 1995 is
incorporated herein by reference to Exhibit 8(d) to Post-
Effective Amendment No. 9 to the Trust's Registration Statement.
(9) (a) Fund Accounting and Pricing Services Agreement between the First
Funds and Chase Manhattan Bank of New York dated November 10,
1992 is incorporated herein by reference to Exhibit 9 to Post-
Effective Amendment No. 1 to the Trust's Registration Statement.
(b) Amendment to Exhibit 9(a) above dated July 28, 1995 is
incorporated herein by reference to Exhibit 9(b) to Post-
Effective Amendment No. 8 to the Trust's Registration Statement.
(c) Amendment to Exhibit 9(a) above dated December 7, 1995 is
incorporated herein by reference to Exhibit 9(c) of Post-
Effective Amendment No. 9 to the Trust's Registration Statement.
(10) Not Applicable.
(11) Opinion and Consent of Price Warehouse LLP, independent
accountants is filed herein as Exhibit 11.
<PAGE>
(12) Not Applicable
(13) Written assurances that purchase representing initial capital was
made for investment purposes without any present intention of
redeeming or reselling is incorporated herein by reference to
Exhibit 13 to Pre-Effective Amendment No. 2 to the Trust's
Registration Statement.
(14) Not Applicable.
(15) (a) Distribution and Service Plan Agreements on behalf of all
Portfolios, are incorporated herein by reference to Exhibit 15(a)
to Post-Effective Amendment No. 8 to the Trust's Registration
Statement.
(b) Shareholder Servicing Plan on behalf of Class II and III of each
Portfolio, dated March 20, 1993, is incorporated herein by
reference to Exhibit 15(b) to Post-Effective Amendment No. 8 to
the Trust's Registration Statement.
(16) Schedule of Yield Computations is incorporated herein by
reference to Exhibit 16 to Post-Effective Amendment No. 1 to the
Trust's Registration Statement.
(17) Not Applicable.
(18) Plan Providing for Multiple Classes of Shares pursuant to
Rule 18f-3 is incorporated herein by reference to Exhibit (12) to
Post-Effective Amendment No. 8 to the Trust's Registration
Statement.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
Item 26. NUMBER OF HOLDERS OF SECURITIES
June 30, 1997
Title of Class: Shares of Beneficial Interest Number of Recordholders
- --------------------------------------------- -----------------------
CLASS I
U.S. Treasury Money Market Portfolio 4
U.S. Government Money Market Portfolio 3
Municipal Money Market Portfolio 4
Cash Reserve Portfolio 3
Growth & Income Portfolio 6
Bond Portfolio 4
Tennessee Tax-Free Portfolio 2
CLASS II
Growth and Income Portfolio 915
Bond Portfolio 19
Tennessee Tax-Free Portfolio 129
CLASS III
Growth & Income Portfolio 2,416
<PAGE>
Bond Portfolio 209
Tennessee Tax-Free Portfolio 97
Treasury Money Market Portfolio 26
Government Money Market Portfolio 21
Municipal Money Market Portfolio 28
Cash Reserve Portfolio 206
Item 27. INDEMNIFICATION
Article XI, Section 2 of the Declaration of Trust sets forth the reasonable and
fair means for determining whether indemnification shall be provided to any past
or present Trustee or officer. It states that the Registrant shall indemnify
any present or past Trustee, or officer to the fullest extent permitted by law
against liability and all expenses reasonably incurred by him in connection with
any claim, action suit or proceeding in which he is involved by virtue of his
service as a trustee, officer, or both. Additionally, amounts paid or incurred
in settlement of such matters are covered by this indemnification.
Indemnification will not be provided in certain circumstances, however. These
include instances of willful misfeasance, bad faith, gross negligence, and
reckless disregard of the duties involved in the conduct of the particular
office involved.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy is expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT MANAGER
First Tennessee Bank National Association serves as Investment Adviser to the
Registrant on behalf of each Portfolio. The directors and officers of the
Adviser have held, during the past two fiscal years, the following positions of
a substantial nature:
<PAGE>
<TABLE>
<CAPTION>
First Tennessee Bank National Association (FTB) - Investment Adviser
Position Other Business Type of
with FTB Name connections* Business
- -------- ---- -------------- --------
<S> <C> <C> <C>
Director Robert C. Blattberg Polk Brothers Distinguished Education
Professor of Retailing
J.L. Kellogg Graduate School
of Management
Northwestern University(1)
Director, Factory Card Outlet of Retail
America(2)
Director Carlos H. Cantu President, Chief Executive Consumer services and
Officer, The ServiceMaster Company, supportive management
L.P.(3) services
Director, Haggar Corporation(4) Apparel
Director George E. Cates Chairman of the Board and Chief Real estate investment
Executive Officer, Mid-America Apartment trust
Communities, Inc.(5)
Director, President, J. Kenneth Glass Executive Vice President, FTNC(6) Bank holding company
Tennessee Banking
Group Director, Norlen Life Insurance Credit life insurance
Company(6)
Director, FT Mortgage Companies(7) Mortgage company
Director, FT Mortgage Holding Corporation(8) Mortgage company
Director, FT Mortgage Services, Inc.(9) Mortgage company
Director, Highland Capital Management Investment Advisor
Corp.(10)
Chairman and Director, "A" PLUS Consumer access/discount
Strategic Alliances, Inc.(11) card program and finder
Director, Corona National Life Insurance(12) Credit life insurance
Director, First Tennessee Merchant Merchant processing
Services, Inc.(13)
Director, First Tennessee Merchant Merchant processing
Equipment, Inc.(14)
Director, Federal Flood Certification Corp.(15) Flood insurance
Director James A. Haslam, III Chief Executive Officer and Chief Operating Retail operator of
Officer, Pilot Corporation(16) convenience stores and
travel centers
Director, Plasti-Line, Inc.(17) Sign manufacturer
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- -------- ---- -------------- --------
<S> <C> <C> <C>
President, Chairman Ralph Horn President, Chairman of the Board, Chief Bank holding company
of the Board, Chief Executive Officer and Director, FTNC(6)
Executive Officer
and Director Vice President and Director, National bank
First Tennessee Bank National
Association Mississippi(18)
Director, Harrah's Entertainment, Casino, entertainment
Inc.(19)
Director, President, John C. Kelley, Jr. Executive Vice President, FTNC(6) Bank holding company
Memphis Banking
Group Director, Check Consultants, Inc.(6) Check processing and
related services
Director, First Tennessee Housing Public welfare investments
Corporation(20)
Director R. Brad Martin Chairman of the Board, Chief Retail
Executive Officer, Proffits, Inc.(21)
Director, Harrah's Entertainment, Inc.(18) Casino, entertainment
Director, Pilot Corporation(15) Retail operator of
convenience stores and
travel centers
Director Joseph Orgill, III Chairman of the Board, Distributor and
West Union Corporation(22) manufacturer for
construction industry
Director, Chairman of the Board Wholesale hardware
Orgill, Inc.(23) distributor
Director Vicki G. Roman Corporate Vice President and Treasurer of Bottler of soft drink
Coca Cola Enterprises, Inc.(24) products
Director Michael D. Rose Chairman of the Board, Promus Hotel Hotel franchisor and
Corporation(25) operator
Director, General Mills, Inc.(26) Food processing
Director, Ashland Inc.(27) Oil company
Director, Darden Restaurants, Inc.(28) Restaurant
Director, Stein Mart, Inc.(29) Retail
Director William B. Sansom Chairman of the Board and Chief Wholesale distributor
Executive Officer, The H.T.
Hackney Company(30)
Director, Martin Marietta Materials(31) Construction aggregate
materials producer
Director, Astec Industries, Inc.(32) Construction aggregate
materials producer
Director Gordon P. Street, Jr. Chairman of the Board, Chief Manufacturing
Executive Officer and President,
North American Royalties, Inc.(33)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- -------- ---- -------------- --------
<S> <C> <C> <C>
Executive Vice Susan Schmidt Bies Executive Vice President, FTNC(6) Bank holding
President company
Executive Vice Harry A. Johnson, III Executive Vice President Bank holding company
President and General and General Counsel of FTNC(6)
Counsel
Executive Vice George Perry Lewis Director, First Tennessee Broker Dealer
President - Group Brokerage, Inc.(34)
Manager, Money
Management Director, Highland Capital
Management, Corp.(10) Investment Advisor
Director, Hickory Venture Venture Capital
Capital Corporation(35)
Director, Hickory Capital Venture Capital
Corporation(36)
Executive Vice John P. O'Connor, Jr. Executive Vice President and Chief Bank holding company
President and Credit Officer of FTNC(6)
Chief Credit Officer
Executive Vice G. Robert Vezina Executive Vice President of Bank holding company
President FTNC(6)
Executive Vice Elbert L. Thomas, Jr. Executive Vice President and Chief Bank holding company
President, Chief Financial Officer of FTNC(6)
Financial Officer
Executive Vice E. Kelton Morris Director, Highland Capital Management Investment Advisor
President Corp.(10)
Executive Vice David L. Berry None
President
Executive Vice Carey H. Brown None
President
Executive Vice Robert Killefer, Jr. None
President
Executive Vice Charles Burkett None
President
Senior Vice President James F. Keen Senior Vice President and Bank holding company
Controller of FTNC(6)
Senior Vice President Wayne C. Marsh None
Senior Vice President Deborah McDonald None
Senior Vice President Yvonne Watson None
Senior Vice President C. Douglas Kelso None
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- -------- ---- -------------- --------
<S> <C> <C> <C>
Senior Vice President David M. Taylor None
Senior Vice President Joe Hildreth None
Senior Vice President David B. Lantz None
Senior Vice President William E. Woodson None
Senior Vice President Steven J. McNally None
Senior Vice President Scott Bovee None
Senior Vice President Gary L. Hoemann None
Senior Vice President Suzanne Donaldson None
Vice President William J. Branta None
Vice President O. Norris Avey None
Vice President Edward C. Dellinger None
Vice President Otis M. Clayton None
Vice President Ralph W. Herbert None
Vice President John C. Miller None
Vice President Claudette S.Sanders None
Vice President Ashley Stamper None
Vice President Rosemary Manning None
Vice President Kenneth Koster None
Vice President Maureen MacIver None
Vice President John Barringer None
Investment Analyst Karen Kruse None
Investment Officer Jeff Smith None
Administrative Assistant Joey Brewer None
Chairman and CEO Larry B. Martin None
First Tennessee
Bank-Knoxville
President, First Lew Weems None
Tennessee Bank-Knoxville
President, First J. Kenneth Youngblood None
Tennessee Bank-Maryville
President, First Anderson L. Smith None
Tennessee Bank-Morristown
</TABLE>
<PAGE>
NOTES:
* All directors of FTB are also directors of its parent, First Tennessee
National Corporation, which controls FTB. Messrs. Glass, Horn, Johnson,
Keen, Kelley, Lewis, O'Connor, Thomas and Vezina and Ms. Bies are
considered executive officers of FTNC.
(1) J.L. Kellogg Graduate School of Management, 875 N. Michigan Ave., Suite
2945, Chicago, IL 60611
(2) Factory Card Outlet of America, 745 Birbinal Drive, Bensenville, IL
60106-1212
(3) ServiceMaster Company, L.P., One ServiceMaster Way, Downers Grove, IL
30515
(4) Haggar Corporation, 6113 Lemmon Ave., Dallas, TX 75209
(5) Mid-America Apartment Communities, Inc., 6584 Poplar Ave., Ste. 340,
Memphis, TN 38138
(6) First Tennessee Bank National Association and First Tennessee National
Corporation, 165 Madison Avenue, Memphis, TN 38103
(7) FT Mortgage Companies, 2974 LBJ Freeway, Dallas, TX 75234
(8) FT Mortgage Holding Corporation, 165 Madison Ave., Memphis, TN 38103
(9) FT Mortgage Services, Inc., 165 Madison Ave., Memphis, TN 38103
(10) Highland Capital Management Corp., 6077 Primacy Parkway, Suite 228,
Memphis, TN 38117
(11) "A" PLUS Strategic Alliances, Inc., 1700 Rambling Road, Richmond, VA
23235
(12) Corona National Life Insurance, 1421 E. Thomas Road, Phoenix, AZ 85014
(13) First Tennessee Merchant Services, Inc., 300 Court Ave., Memphis, TN
38103
(14) First Tennessee Merchant Equipment, Inc., 300 Court Ave., Memphis, TN
38103
(15) Federal Flood Certification Corporation, 6220 Gaston Ave., Dallas, TX
75214
(16) Pilot Corporation, 5508 Lonas Road, Knoxville, TN 37909
(17) Plasti-Line, Inc., P O Box 59043, Knoxville, TN 37950-9043
(18) First Tennessee Bank National Association Mississippi, 579 Goodman Road
East, Southaven, MS 38671
(19) Harrah's Entertainment, Inc., 1023 Cherry Road, Memphis, TN 38117
(20) First Tennessee Housing Corporation, 165 Madison Ave., Memphis, TN 38103
(21) Profitt's Inc., 5810 Shelby Oaks Drive, Memphis, TN 38134
(22) West Union Corporation, 35 Union Ave., Suite 300, Memphis, TN 38103
(23) Orgill, Inc., 2100 Latham Street, Memphis, TN 38109
(24) Coca Cola Enterprises, Inc., 2500 Windy Ridge Pkwy, Marietta, GA 30067
(25) Promus Companies, Inc., 1023 Cherry Road, Memphis, TN 38117
(26) General Mills, Inc., 9200 Wayzata Blvd., Minneapolis, MN 55426
(27) Ashland Co., 2351 Channel Ave., Memphis, TN
(28) Darden Restaurants, Inc., 5900 Lake Ellenor Drive, Orlando, FL 32809
<PAGE>
(29) Stein Mart, Inc., 1200 Riverplace Blvd., Jacksonville, FL 32207
(30) The H. T. Hackney Company, Fidelity Bldg., 502 S. Gay Street,
Suite 300, Knoxville, TN 37902
(31) Martin Marietta Materials, P. O. Box 30013, Raleigh, NC 27622-0013
(32) Astec Industries, Inc., P O Box 72787, Chattanooga, TN 37407
(33) North American Royalties, 200 E. 8th Street, Chattanooga, TN 37402
(34) First Tennessee Brokerage, Inc., 5100 Poplar Avenue, Memphis, TN 38117
(35) Hickory Venture Capital Corporation, 200 West Court Square, Suite 100,
Huntsville, AL 35801
(36) Hickory Capital Corporation, 200 West Court Square, Suite 100,
Huntsville, AL 35801
<PAGE>
Highland Capital Management Corp. (Highland)
6077 Primacy Parkway, Memphis, TN
<TABLE>
<CAPTION>
Position Other Business
with Highland Name Connections
- ------------- ---- --------------
<S> <C> <C>
Director, President Charles Thomas Whitman (1) Director,
NexAir, LLC
Director, Chairman of the Board Steven Wishnia (1) None
Director, Executive Vice President,
Secretary James M. Weir (1) None
Director, Executive Vice President
Treasurer Paul H. Berz (1) None
Director, Executive Vice President Edward J. Goldstein (1) None
Director J. Kenneth Glass see FTB listing
Director E. Kelton Morris see FTB listing
Director George Perry Lewis see FTB listing
Senior Vice President Steven T. Ashby None
Senior Vice President David L. Thompson None
Senior Vice President James R. Turner None
Vice President Donald J. Norsworthy None
</TABLE>
(1) Previously, Managing Director of Highland Capital Management Corp., 6077
Primacy Parkway, Memphis, TN 38119
(2) NexAir, LLC, 1385 Corporate Avenue, Memphis, TN 38186-1182, distributor of
industrial gases, welding supplies and medical product
Item 29. Principal Underwriters
(a) The sole principal underwriter for the Fund is ALPS Mutual Funds Services,
Inc. which acts as distributor for the Registrant and the following other
funds: Westcore Trust, FGIC Public Trust, and Countrybaskets-TM- Index
Fund, Inc.
(b) To the best of Registrant's knowledge, the directors and executive officers
of ALPS Mutual Funds Services, Inc., the distributor for Registrant, are as
follows:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with
Business Address* Positions and Offices with Registrant Underwriter
- ------------------ ------------------------------------- --------------------------
<S> <C> <C>
W. Robert Alexander None Chairman and Chief Executive Officer
Arthur J. L. Lucey None President and Secretary
Thomas A. Carter None Chief Financial Officer
<PAGE>
Edmund J. Burke None Senior Vice President
William N. Paston None Vice President
James V. Hyatt Secretary General Counsel
Jeremy O. May Treasurer Fund Controller
Rick A. Pederson None Director
Chris Woessner None Director
</TABLE>
* All addresses are 370 Seventeenth Street, Suite 2700, Denver, Colorado 80202.
(c) Not applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS
First Tennessee Bank National Association is located at 4990 Poplar Avenue,
Memphis, Tennessee. Highland Capital Management Corp. is located at 6011
Privacy Parkway, Suite 228, Memphis, Tennessee. PNC Institutional Management
Corporation is located at 103 Bellevue Parkway, Wilmington, Delaware.
Investment Advisers, Inc. is located at 3700 First Bank Place, Minneapolis,
Minnesota. These entities will maintain physical possession of each such
account, book or other documents of the Trust, except for those documents
relating to the custodial functions maintained by the Trust's Custodian,
Chase Manhattan Bank of New York, 114 West 47th Street, New York, New York,
and those transfer agent, pricing and bookkeeping and general accounting
records maintained by the Trust's Transfer Agent and Pricing and Accounting
Agent, Chase Global Funds Services Company, a wholly owned subsidiary of
Chase Manhattan Bank of New York, 73 Tremont Street, Boston, Massachusetts.
Item 31. MANAGEMENT SERVICES
Not Applicable.
Item 32. UNDERTAKINGS
(a) Capital Appreciation Portfolio and Intermediate Bond Portfolio undertake to
file a Post-Effective Amendment using financial statements, which need not
be certified, within 6 months, of each Portfolio's effectiveness.
(b) The Registrant, on behalf of each Portfolio undertakes, provided the
information required by Item 5A is contained in the annual report, to
furnish each person to whom a prospectus has been delivered, upon their
<PAGE>
request and without charge, a copy of the Registrant's latest annual report
to shareholders.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
=============================================================================
EXHIBITS
to
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
AND
THE INVESTMENT COMPANY ACT OF 1940
=============================================================================
FIRST FUNDS
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
- ------- --------
11 Consent of Price Waterhouse, L.L.P., Independent Public Accountants
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Statement of
Additional Information constituting part of this Post-Effective Amendment No.
11 to the registration statement on Form N-1A (the "Registration Statement")
of our report dated August 12, 1996, relating to the financial statements and
financial highlights of the Total Return Equity Portfolio (currently the
Growth & Income Portfolio) and the Total Return Fixed Income Portfolio
(currently the Bond Portfolio) appearing in the June 30, 1996 Annual Report
to Shareholders of the First Funds, which are also incorporated by reference
into the Registration Statement. We also consent to the reference to us under
the heading "Independent Accountants" in the Statement of Additional
Information.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Boston, Massachusetts
August 12, 1997
