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June 30, 1997
ANNUAL REPORT TO SHAREHOLDERS
OF
FIRST
FUNDS
DISCIPLINE, CONSISTENCY, PATIENCE
[PHOTO]
[LOGO]
Investment Advisor
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LETTER FROM THE PRESIDENT
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Dear Shareholder:
This is First Funds' Annual Report for the year ending June 30, 1997. In
the following pages you will find a comprehensive group of financial statements,
including the Portfolio of Investments, which outlines the holdings in each
Portfolio as of the end of the period. In addition, each Portfolio Manager
outlines the moves in their particular market during the past year, then
discusses how they responded within their respective Portfolios.
As you will note by reading through the commentary from each of the
Portfolio Managers, this twelve month period presented more challenges for
investment practitioners than may be readily apparent to those of us watching
from the sidelines. While hindsight allows us to see a growing economy with the
lowest levels of inflation in a generation, day-to-day decisions were made in
the face of growing uncertainties. While the stock market was reaching new
highs, unemployment was reaching new lows; this was uncharted territory, and
even the most experienced managers found the going unsettling. In this type of
environment, it is often easy to get caught up in the tide of sentiment that
washes over markets. For long-term investors, however, allowing market sentiment
to overcome a disciplined, systematic approach is akin to allowing the wind to
be the sole determinant of your course: you may end up where you want to go,
but chance is not in your favor.
At First Funds, we are committed to achieving long-term investment success
for our shareholders. We strongly believe that the best way to achieve that
success is through a disciplined and consistent approach to investing. As
financial markets rise, we expect to participate. When financial markets
retreat, we believe discipline and consistency help provide investors with some
rational course of action. With experience in a number of market cycles, both
good and bad, the First Funds' team of investment professionals has developed an
investment approach that fully encompasses this principle. To exhibit our
commitment to our belief in this approach, we have added it to the First Funds'
logo: "Discipline, Consistency, Patience".
We hope you are pleased with the results of your investment in First Funds
over the past year and, as always, welcome your questions or comments. Our
toll-free line is (800) 442-1941 or, if you prefer, please contact us in writing
at 370 17th Street, Suite 2700, Denver, CO 80202 or on the world wide web at
www.firstfunds.com. Thank you for your continued interest in the First Funds
family of mutual funds.
Sincerely,
/s/ Richard Rantzow
Richard C. Rantzow
President
IMPORTANT NOTICE
FIRST FUNDS SHARES
* are NOT insured by the FDIC, the Federal Reserve Board or any other
governmental agency.
* are NOT bank deposits or other obligations of or guaranteed by First Tennessee
Bank National Association or any of its affiliates.
* involve investment risks, including the possible loss of the principal amount
invested.
First Funds are managed by First Tennessee Bank National Association, (First
Tennessee), Highland Capital Management Corp. (Highland) and PNC Institutional
Management Corp. (PNC). First Tennessee and Highland are subsidiaries of First
Tennessee National Corporation. The Funds are sponsored and distributed by ALPS
Mutual Funds Services, Inc., member NASD.
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FIRST FUNDS GROWTH & INCOME PORTFOLIO
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[PHOTO OF EDWARD GOLDSTEIN AND DAVID THOMPSON]
GROWTH & INCOME PORTFOLIO MANAGERS
EDWARD GOLDSTEIN AND DAVID THOMPSON
Mr. Goldstein is a Managing Director of Highland Capital Management
Corporation, sub-adviser to the Portfolio. A 1971 graduate of Boston University,
he went on to receive his MBA from Columbia University in 1976. Joining Goldman,
Sachs & Co. in New York in 1976, he became a vice president in the international
department with responsibility for Japan, the Middle East and Latin America. Mr.
Goldstein joined Highland Capital in 1989, and has been portfolio manager for
the Portfolio since July 1994.
Mr. Thompson, is a Senior Vice President with Highland Capital
Management Corporation. After graduating from the University of Mississippi in
1981, he worked as an analyst for Gulf Oil for three years, then went on receive
his MBA from the University of North Carolina at Chapel Hill in 1986. With nine
years of experience managing both individual and institutional investment
portfolios at major regional banks, Mr. Thompson joined Highland Capital
Management's equity team in 1995. Mr. Thompson is also a Certified Financial
Analyst.
YEAR IN REVIEW-----------------------------------------------------------------
PERFORMANCE
For the twelve-month period ended 6/30/97, the First Funds Growth & Income
Portfolio for Classes I, II and III returned 28.83%, 21.11% and 27.44%,
respectively, net of fees and sales charges, versus a return of 34.68% for the
S&P 500 Index.
MARKET REVIEW
The Portfolio's fiscal year began on July 1, 1996--in the midst of a
long-anticipated market correction. Strong employment numbers triggered the
stock market's decline, which ultimately trimmed about 10% from the high in May.
Visions of rising wages reawakened inflation fears, which could in turn lead to
rising interest rates. Subsequent economic reports quieted these fears, however.
The economy cooled to a more acceptable 2.1% growth rate without intervention
by the Federal Reserve, thus reassuring the stock market.
COMPARISON OF CHANGE IN VALUE OF A $100,000 INVESTMENT IN THE FIRST FUNDS GROWTH
& INCOME PORTFOLIO (CLASS I) AND THE S&P 500.
[GRAPH]
PLEASE NOTE: CLASS I INCEPTION IS AUGUST 2, 1993. PAST PERFORMANCE IS NOT
PREDICTIVE OF FUTURE RESULTS.*
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FIRST FUNDS GROWTH & INCOME PORTFOLIO
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COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE FIRST FUNDS GROWTH
& INCOME PORTFOLIO (CLASS II) AND THE S&P 500.
[GRAPH]
PLEASE NOTE: CLASS II INCEPTION IS DECEMBER 20, 1995. CLASS II IS SUBJECT TO A
MAXIMUM INITIAL FRONT-END SALES LOAD OF 5.75% AND $9,425 IS THE NET INITIAL
INVESTMENT AFTER THE SALES LOAD IS DEDUCTED. PAST PERFORMANCE IS NOT PREDICTIVE
OF FUTURE RESULTS.*
In all, market activity was increasingly focused on large capitalization
companies during the final two quarters of calendar year 1996, with double-digit
earnings growth consistently rewarded. As the Dow Industrials continued to rise
into record territory, overall market volatility increased relative to the last
three years. When viewed from a historical perspective, however, this increase
was little more than a return to more normal market levels of volatility.
The absence of rising inflation levels has been an important factor in the
financial markets' performance over the past fiscal year. The equilibrium has
been attributed in part to widespread improvements in productivity. Capital
spending for technology has continued to grow over the past several years,
and the effects are being felt throughout the economy. The stock market has
reflected this through in increased flow of funds to the Technology sector,
which in itself has exhibited some increase in volatility during the past
twelve months. Another factor limiting inflation has been the significant
slowdown in growth of employee benefits costs. New approaches in group
healthcare were the catalyst, benefiting the Healthcare sector during the
fiscal year. Additional sectors contributing to market performance include
Finance and select areas within the Energy group.
PORTFOLIO UPDATE
The Portfolio benefited from the prevailing investment environment over much of
the period. The market concentrated on large capitalization companies with
strong, reliable earnings growth; our position in GENERAL ELECTRIC has been
highly representative of this focus. With inflation--and subsequently interest
rates--remaining fairly subdued, we maintained our overweight position in the
Financial sector throughout the period. Healthcare companies, particularly
pharmaceutical stocks such as ELAN and SCHERING-PLOUGH, were also important
contributors to overall performance. On the negative side, our underweighted
position in the Technology sector turned into a drag on performance during the
final two
Growth & Income Portfolio
Asset Type Profile as of June 30, 1997
[GRAPH]
REPURCHASE AGREEMENTS 2.6%
COMMERCIAL PAPER 8.1%
CONSUMER STAPLES 11.5%
CAPITAL GOODS 8.8%
FINANCE & INSURANCE 15.1%
TECHNOLOGY 9.5%
COMMUNICATION SERVICES 9.8%
ENERGY 10.0%
BASIC MATERIALS 2.8%
CONSUMER CYCLICALS 6.7%
HEALTHCARE 15.1%
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FIRST FUNDS GROWTH & INCOME PORTFOLIO
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COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE FIRST FUNDS GROWTH
& INCOME PORTFOLIO (CLASS III) AND THE S&P 500.
[GRAPH]
PLEASE NOTE: CLASS III INCEPTION IS DECEMBER 9, 1993. PAST PERFORMANCE IS NOT
PREDICTIVE OF FUTURE RESULTS.*
quarters of the fiscal year, when this sector played a leadership role.
CURRENT STRATEGY AND OUTLOOK
Looking forward, we believe that a disciplined approach will be more
important than ever. Prices for many stocks are at very high historical
levels by nearly any measurement, and while we believe that companies able to
deliver strong, consistent earnings will continue to be rewarded, it seems
unlikely that valuations can stretch indefinitely. Another consideration is
the level of economic growth; we are expecting a slower rate of growth in the
economy over the second half of the year. While this scenario means inflation
is likely to remain in check, it also translates to slower earnings growth.
Against this backdrop, we believe the market will probably continue to favor
large capitalization stocks, but a switch in market focus to small and
midsize stocks due to their lower relative valuations could pose a risk to
relative Portfolio performance.
In general, the Portfolio will continue to be dominated by high quality, large
capitalization stocks exhibiting consistent growth. For the present, the
Portfolio remains overweighted in the Financial and Healthcare sectors, and
underweighted in the more economically sensitive areas such as Basic Materials,
Transportation, and Consumer Durables.
GROWTH & INCOME PORTFOLIO
Cumulative Average Annual
Total Return* Total Return*
SINCE 1 YEAR SINCE
INCEPTION INCEPTION
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CLASS I 112.28% 28.83% 21.15%
CLASS II 99.29% 21.11% 19.21%
CLASS III 103.52% 27.44% 19.86%
S&P 500 117.71% 34.68% 21.97%
*TOTAL RETURNS ARE FOR THE PERIOD ENDED JUNE 30, 1997 AND REFLECT REINVESTMENT
OF ALL DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS, ALL FEE WAIVERS IN EFFECT AND ANY
EXPENSE REIMBURSEMENTS. WITHOUT THE FEE WAIVERS AND EXPENSE REIMBURSEMENTS, THE
TOTAL RETURN FIGURES WOULD HAVE BEEN LOWER. FUND INCEPTION DATE IS AUGUST 2,
1993. ON DECEMBER 9, 1993, THE PORTFOLIO COMMENCED SALES OF CLASS III SHARES,
WHICH INCLUDE A HIGHER TRANSFER AGENCY FEE, A .75% DISTRIBUTION FEE AND A .25%
SHAREHOLDER SERVICES FEE. PERFORMANCE INFORMATION PRIOR TO DECEMBER 9, 1993 FOR
CLASS III IS BASED ON THE PERFORMANCE OF CLASS I SHARES AND DOES NOT REFLECT THE
EFFECTS OF THESE FEES, WHICH, IF INCLUDED, WOULD LOWER CLASS III PERFORMANCE.
THE PORTFOLIO COMMENCED SALES OF CLASS II SHARES ON DECEMBER 20, 1995, WHICH
INCLUDE A HIGHER TRANSFER AGENCY FEE AND A .25% SHAREHOLDER SERVICES FEE.
PERFORMANCE INFORMATION FOR CLASS II SHARES PRIOR TO THEIR INCEPTION DATE IS
BASED ON THE PERFORMANCE OF CLASS I SHARES AND DOES NOT REFLECT THE EFFECTS OF
THESE FEES WHICH, IF INCLUDED, WOULD LOWER CLASS II PERFORMANCE. PAST
PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS.
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FIRST FUNDS BOND PORTFOLIO
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[PHOTO OF JAMES TURNER AND STEVEN WISHNIA]
BOND PORTFOLIO MANAGERS
JAMES TURNER AND STEVEN WISHNIA
Mr. Turner, CFA, is a Senior Vice President with Highland Capital
Management Corporation. A 1959 graduate of the U.S. Military Academy, he
received a MS degree from Stanford University in 1964. Mr. Turner was a vice
president in the Trust Investment Department of FirsTier Bank, N.A. in Omaha,
Nebraska from 1979 through 1986. Joining First Tennessee Bank's investment
department in 1986, he was part of that group's merger with Highland Capital
Management in 1994. He has managed the Portfolio since its inception.
Mr. Wishnia is a Managing Director of Highland Capital Management
Corporation. A 1972 graduate of Pace University, Mr. Wishnia was Treasurer of
S.G. Securities, a closed-end mutual fund in Boston, MA from 1973 to 1975,
prior to joining Highland Investment Corporation, the predecessor firm to
Highland Capital. Mr. Wishnia was a co-founder of Highland Capital in 1987;
he has managed the Portfolio since its inception.
YEAR IN REVIEW ----------------------------------------------------------------
PERFORMANCE
For the twelve months ended 6/30/97, the First Funds Bond Portfolio for Classes
I, II and III returned 7.58%, 3.08%, and 6.37%, respectively, net of fees and
sales charges, versus a return of 7.75% for the Lehman Brothers
Government/Corporate Bond Index.
MARKET REVIEW
Inflation--or rather, the lack of it--remained a focal point for the bond
markets throughout the period. Wholesale prices fell 3.4% during the first two
calendar quarters of 1997, netting a drop of 0.1% for the full twelve month
period. Consumer prices also remained subdued, up 1.4% over the first two
calendar quarters of 1997 and totaling 2.3% for the entire period. While it is
logical to assume that the bond market would cheer this seeming triumph over
inflation, it continued to find reasons to worry over FUTURE inflation. The drop
in energy prices is unlikely to continue indefinitely, and analysts worry over
how much additional gain can be squeezed from consolidation in the healthcare
COMPARISON OF CHANGE IN VALUE OF A $100,000 INVESTMENT IN THE FIRST FUNDS BOND
PORTFOLIO (CLASS I) AND THE LEHMAN BROTHERS GOVERNMENT/ CORPORATE BOND INDEX.
[GRAPH]
PLEASE NOTE: CLASS I INCEPTION IS AUGUST 2, 1993. PAST PERFORMANCE IS NOT
PREDICTIVE OF FUTURE RESULTS.*
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FIRST FUNDS BOND PORTFOLIO
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COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE FIRST FUNDS BOND
PORTFOLIO (CLASS II) AND THE LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX.
[GRAPH]
PLEASE NOTE: CLASS II INCEPTION IS DECEMBER 20, 1995. CLASS II IS SUBJECT TO A
MAXIMUM FRONT-END INITIAL SALES LOAD OF 3.75% AND $9,625 IS THE NET INITIAL
INVESTMENT AFTER THE SALES LOAD IS DEDUCTED. PAST PERFORMANCE IS NOT PREDICTIVE
OF FUTURE RESULTS.*
industry. Low unemployment levels also remain a worry. The on-again, off-again
nature of acceleration that characterized U.S. economic growth during the past
twelve months was mirrored by similar swings in the bond market. Strong data at
the beginning of the period caused bond prices to remain fairly weak, with
yields in early September at 6.98% for intermediate bonds and long rates at
7.11%. With less robust economic news during the final calendar quarter of 1996,
intermediate and long rates fell back by early December to 6.05% and 6.36%,
respectively. The reappearance of economic strength with the new year propelled
intermediate rates back up to 6.93% and long bonds to 7.14%, convincing the
Federal Reserve to tighten the Fed Funds rate by .25% in March. Signs of slowing
growth were evident by early June, once again raising bond prices and dropping
yields back to 6.49% for intermediate bonds and 6.78% on long bonds.
PORTFOLIO UPDATE
With unpredictability the only predictable trend in the bond market over the
past year, strategic portfolio moves have been difficult to call. The Portfolio
benefited modestly early in the period as some longer maturities were added in
response to the market's somewhat overdone pessimism. Next, primary emphasis was
placed on adding value and increasing yield through careful sector selection.
The Portfolio's weighting in corporate bonds was increased from 38% to 63% in
order to take advantage of the higher yields available there. About half of this
position was related to the Financial sector, with the remainder comprised of
bonds in the Industrial or Utility
Bond Portfolio
Asset Type Profile as of June 30, 1997
[GRAPH]
FOREIGN BOND 1.2%
U.S. GOVERNMENT & AGENCY OBLIGATIONS 24.6%
MORTGAGE-BACKED OBLIGATIONS 6.6%
COMMERCIAL PAPER 1.4%
REPURCHASE AGREEMENTS 2.9%
CORPORATE BONDS & NOTES 63.3%
sectors. Exposure to mortgage-backed securities was also increased to about 7%
of the Portfolio. These fixed income instruments not only offer higher yields,
but a measure of defense in negative markets, as well.
For most of the fiscal year, mortgages were the best performers, with corporate
bonds not far behind. This situation reversed fairly dramatically late in the
period, as mortgages began noticeably underperforming the corporate sector in
May and June.
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FIRST FUNDS BOND PORTFOLIO
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COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE FIRST FUNDS BOND
PORTFOLIO (CLASS III) AND THE LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX.
[GRAPH]
PLEASE NOTE: CLASS III INCEPTION IS DECEMBER 2, 1993. PAST PERFORMANCE IS
NOT PREDICTIVE OF FUTURE RESULTS.*
The Portfolio's risk profile remained low, with credit quality at year's end
averaging A+, and average maturity modestly decreased from 8.9 years to 8.4
years.
CURRENT STRATEGY AND OUTLOOK
The strength in the economy is likely to continue worrying the bond market; the
business cycle is now more than six years old, and well into the mature stage
where inflationary pressures have tended to rise in the past. Additional
positive economic signs include a relatively benign interest rate environment,
which is currently at levels where economic growth has historically tended to
rebound, and high levels of consumer confidence. This last factor, suggesting
that consumers are willing (and able) to spend--thus further stimulating the
economy--is probably tied in fair measure to the continuing high
levels of employment. This in particular tends to concern fixed income
investors, as the economy has been running at near-full employment for a number
of months, and wage pressures are unlikely to remain quiescent for long.
With little data suggesting a meaningful slowdown in economic growth, at least
in the near-term, we remain cautious. Given the recent pattern of economic
swings, the stage appears to be set for another upswing. If sufficiently strong,
the bond market would view this as an inflationary threat and respond
negatively. Therefore, we are maintaining our near-neutral stance versus the
market. Any corrections will be used as an opportunity to add value to the
Portfolio.
BOND PORTFOLIO
Cumulative Average Annual
Total Return* Total Return*
SINCE 1 YEAR SINCE
INCEPTION INCEPTION
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CLASS I 23.72% 7.58% 5.58%
CLASS II 18.06% 3.08% 4.32%
CLASS III 18.10% 6.37% 4.33%
LEHMAN BROS. 24.51% 7.75% 5.76%
GOV'T/CORP
BOND INDEX
*TOTAL RETURNS ARE FOR THE PERIOD ENDED JUNE 30, 1997 AND REFLECT REINVESTMENT
OF ALL DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS, ALL FEE WAIVERS IN EFFECT AND
ANY EXPENSE REIMBURSEMENTS. WITHOUT THE FEE WAIVERS AND EXPENSE
REIMBURSEMENTS, THE TOTAL RETURN FIGURES WOULD HAVE BEEN LOWER. FUND
INCEPTION DATE IS AUGUST 2, 1993. ON DECEMBER 2, 1993, THE PORTFOLIO
COMMENCED SALES OF CLASS III SHARES, WHICH INCLUDED A HIGHER TRANSFER AGENCY
FEE, A .75% DISTRIBUTION FEE AND A .25% SHAREHOLDER SERVICES FEE. PERFOMANCE
INFORMATION PRIOR TO DECEMBER 2, 1993 FOR CLASS III IS BASED ON THE
PERFORMANCE OF CLASS I SHARES AND DOES NOT REFLECT THE EFFECTS OF THESE FEES,
WHICH, IF INCLUDED, WOULD LOWER CLASS III PERFORMANCE. THE BOND PORTFOLIO
COMMENCED SALES OF CLASS II SHARES ON DECEMBER 20, 1995. THESE SHARES
INCLUDE A HIGHER TRANSFER AGENCY FEE AND A .25% SHAREHOLDER SERVICES FEE.
PERFORMANCE INFORMATION FOR CLASS II SHARES PRIOR TO THEIR INCEPTION DATE IS
BASED ON THE PERFORMANCE OF CLASS I SHARES AND DOES NOT REFLECT THE EFFECTS
OF THESE FEES WHICH, IF INCLUDED, WOULD LOWER CLASS II PERFORMANCE. PAST
PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS.
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FIRST FUNDS TENNESSEE TAX-FREE PORTFOLIO
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[PHOTO OF RALPH HERBERT]
TENNESSEE TAX-FREE PORTFOLIO MANAGER
RALPH HERBERT
Mr. Herbert, Vice President and Portfolio Manager, has seventeen years
experience in the financial services industry. A 1977 graduate of the University
of Tennessee, Mr. Herbert began his career with First American Bank in 1978,
first in retail banking and later joining the bank's bond division. He joined
Culver Securities in 1986 where his duties included municipal debt underwriting,
before joining Valley Fidelity Bank as a Portfolio Manager in 1988. Valley
Fidelity Bank merged with First Tennessee Bank in 1991. Mr. Herbert has managed
the Tennessee Tax-Free Portfolio since its inception.
YEAR IN REVIEW-----------------------------------------------------------------
PERFORMANCE
For the twelve-month period ended 6/30/97, the First Funds Tennessee Tax-Free
Portfolio for Classes I, II and III, returned 8.26%, 4.29% and 8.20%,
respectively, net of fees and sales charges, versus a return of 8.34% for the
Lehman Brothers 10-Year Municipal Bond Index.
MARKET REVIEW
In reviewing bond market movements over the past twelve months, it is apparent
that the most outstanding characteristic affecting the market's performance has
been the economy itself--solid growth accompanied by remarkably restrained
levels of inflation. Companies have grown fairly steadily through increasing
productivity and expanding overseas markets. All this activity has helped to
create hundreds of thousands of new jobs; however, low unemployment has yet to
translate into wage inflation. In addition, both wholesale and consumer prices
also appear to be well under control. Many statistics suggest that the present
economy is the strongest we have seen in a generation. Even the Chairman of the
Federal Reserve Board has professed to be pleased with the nation's economic
health.
While all this economic activity worried the municipal market to some extent
over the last months of calendar
COMPARISON OF CHANGE IN VALUE OF A $100,000 INVESTMENT IN THE FIRST FUNDS
TENNESSEE TAX-FREE PORFOLIO (CLASS I) AND THE LEHMAN BROTHERS 10-YEAR MUNICIPAL
BOND INDEX.
[GRAPH]
PLEASE NOTE: CLASS I INCEPTION IS DECEMBER 15, 1995. PAST PERFORMANCE IS NOT
PREDICTIVE OF FUTURE RESULTS.*
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FIRST FUNDS TENNESSEE TAX-FREE PORTFOLIO
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COMPARISON OF CHANGE IN VALUE OF A $100,000 INVESTMENT IN THE FIRST FUNDS
TENNESSEE TAX-FREE PORTFOLIO (CLASS II) AND THE LEHMAN BROTHERS 10-YEAR
MUNICIPAL BOND INDEX.
[GRAPH]
PLEASE NOTE: CLASS II INCEPTION IS DECEMBER 29, 1995. CLASS II IS SUBJECT TO
A MAXIMUM FRONT-END INITIAL SALES LOAD OF 3.75% AND $9,625 IS THE NET INITIAL
INVESTMENT AFTER THE SALES LOAD IS DEDUCTED. PAST PERFORMANCE IS NOT
PREDICTIVE OF FUTURE RESULTS.*
year 1996, that was not the case during the first half of calendar year 1997,
when the market shrugged off those worries. The economic environment has
produced fairly muted reactions from the bond market of late. Signs of strength
have been greeted as generally benign for inflation, and any indication of
sluggishness has resulted in a rally. Further evidence that the market perceives
little current threat from inflation may be found in the 30 basis point (.30%)
drop in municipal bond rates over the twelve months ended June 30, 1997--in
spite of Federal Reserve tightening in March of this year.
PORTFOLIO UPDATE
As the period started on July 1, 1996, the municipal market was experiencing
some weakness. We took advantage of lower prices to purchase high quality bonds
with longer maturities. This strategy paid off well as, by the fall of 1996, the
market began to rally. The high quality bonds in the Portfolio turned into
somewhat of a mixed blessing early in 1997, however. Bond prices dropped during
the first calendar quarter of 1997 when the markets responded to the .25% rise
in rates by the Federal Reserve in March. Lower quality bonds tend to perform
better as the market is dropping because they pay investors higher coupons to
compensate for their higher risk profile. However, the tables turn when the
municipal bond market rallies, as it did during the second calendar quarter of
1997. Investors will then try to take advantage of what they perceive as a
market "bottom" to upgrade their portfolios, thus increasing demand for high
quality bonds as the market begins to rise.
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Tennessee Tax-Free Portfolio
Asset Type Profile as of June 30, 1997
[GRAPH]
OTHER 2.4%
GENERAL OBLIGATION BONDS 50.0%
REVENUE BONDS 47.6%
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We took advantage of any periods of weakness to capture both higher yields and
lower issue prices. Duration was extended in the Portfolio to just over eight
years, and call protection was taken where possible for longer maturities (10+
years).
CURRENT STRATEGY AND OUTLOOK
We are pleased with the Portfolio's performance over the past year, and will
attempt to continue those results into the next period. The fairly steady nature
of this present
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FIRST FUNDS TENNESSEE TAX-FREE PORTFOLIO
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COMPARISON OF CHANGE IN VALUE OF A $100,000 INVESTMENT IN THE FIRST FUNDS
TENNESSEE TAX-FREE PORFOLIO (CLASS III) AND THE LEHMAN BROTHERS 10-YEAR
MUNICIPAL BOND INDEX.
[GRAPH]
PLEASE NOTE: CLASS III INCEPTION IS DECEMBER 15, 1995. PAST PERFORMANCE IS NOT
PREDICTIVE OF FUTURE RESULTS.*
economy bodes well for the bond market in the near term. If this scenario
holds, lower rates are a good possibility, and as long as this remains the case,
we will continue buying longer maturities. Further extension of duration in the
Portfolio creates some opportunity to increase net asset values should rates
actually fall.
One area causing some minor concern is the continuing shortfall in supply of new
issues in the Tennessee municipal market. If interest rates continue to soften,
more municipalities may take advantage of the low levels to refund some of their
current issues. This type of activity could help replenish the supply of bonds,
driving prices down enough to enhance the available yields.
We will, of course, make appropriate adjustments to the Portfolio should
inflationary pressures become apparent and cause interest rates to reverse
direction. In addition to wage and price inflation, we are alert to the
pressures possibly being created by the continued sharp rise in corporate
earnings. The rising levels of wealth being created through financial assets are
unlikely to forever remain a neutral factor on the inflation front, especially
if reinvestment begins to be replaced by consumption.
TENNESSEE TAX-FREE PORTFOLIO
Cumulative Average Annual
Total Return* Total Return*
SINCE 1 YEAR SINCE
INCEPTION INCEPTION
- ----------------------------------------------------------
CLASS I 7.57% 8.26% 4.84%
CLASS II 3.55% 4.29% 2.28%
CLASS III 7.26% 8.20% 4.64%
LEHMAN BROS. 7.96% 8.34% 5.24%
10-YEAR
MUNICIPAL
BOND INDEX
*TOTAL RETURNS ARE FOR THE PERIOD ENDED JUNE 30, 1997 AND REFLECT REINVESTMENT
OF ALL DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS, ALL FEE WAIVERS IN EFFECT AND ANY
EXPENSE REIMBURSEMENTS. WITHOUT THE FEE WAIVERS AND EXPENSE REIMBURSEMENTS, THE
TOTAL RETURN FIGURES WOULD HAVE BEEN LOWER. CLASS I INCEPTION DATE IS DECEMBER
15, 1995. ON DECEMBER 15, 1995, THE PORTFOLIO ALSO COMMENCED SALES OF CLASS III
SHARES, WHICH INCLUDE A HIGHER TRANSFER AGENCY FEE AND A .50% DISTRIBUTION FEE.
ON DECEMBER 29, 1995, THE PORTFOLIO COMMENCED SALES OF CLASS II SHARES, WHICH
INCLUDE A HIGHER TRANSFER AGENCY FEE. PAST PERFORMANCE IS NOT PREDICTIVE OF
FUTURE RESULTS.
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FIRST FUNDS ANNUAL REPORT
- --------------------------------------------------------------------------------
DEFINITION OF COMMON TERMS
GAIN (OR LOSS)
If a stock or bond appreciates in price, there is an unrealized gain; if it
depreciates there is an unrealized loss. A gain or loss is "realized" upon the
sale of a security; if a Portfolio's net gains exceed net losses, there may be a
capital gain distribution to shareholders. There could also be an ordinary
income distribution if the net gain is short term or no distribution if there is
a capital loss carryover.
DIVIDEND
Net income distributed to shareholders generated by securities in a
Portfolio. The Bond, Tennessee Tax-Free and all the Money Market Portfolios pay
dividends monthly. The Growth & Income Portfolio pays dividends quarterly.
NET ASSET VALUE (NAV)
Total value of all securities and other assets held by a Portfolio, minus
liabilities, divided by the number of shares outstanding. It is the value of a
single share of a mutual fund on a given day. The total value of your investment
would be the NAV multiplied by the number of shares you own. NAV generally
fluctuates daily for all the First Funds Portfolios except the Money Market
Portfolios, which seek to maintain a stable $1.00 per share NAV.
CERTIFICATES OF PARTICIPATION
Certificates of Participation (COPs), or lease-secured bonds, represent a
bondholder's proportionate interest in rental payments made under a municipal
lease contract. The payments are normally made pursuant to a lease and trust
agreement. This type of tax-exempt municipal leasing has become an attractive
alternative to traditional bond financing.
INSURED BONDS
Insured Bonds refer to municipal obligations which are covered by an
insurance policy issued by independent insurance companies. The policies insure
the payment of principal and interest of the issuer. Examples of such companies
would be MBIA (Municipal Bond Investors Assurance Corporation), or AMBAC
(American Municipal Bond Assurance Corporation). Bonds insured by either AMBAC
or MBIA are rated AAA.
GENERAL OBLIGATION BONDS
General Obligation Bonds (GOs) are debts backed by the general taxing power
of the issuer. Payment of the obligation may be backed by a specific tax or the
issuer's general tax fund. Examples of GOs include sidewalk bonds, sewer bonds,
street bonds and so on. These bonds are also known as FULL FAITH AND CREDIT
bonds because the debt is a general obligation of the issuer.
REVENUE BONDS
Revenue Bonds are issued to provide capital for the construction of a
revenue-producing facility. The interest and principal payments are backed to
the extent that the facility produces revenue to pay. Examples of revenue bonds
include toll bridges, roads, parking lots and ports. The municipality is not
obligated to cover debt payments on revenue bonds in default.
BOND RATINGS
The quality of bonds can, to some degree, be determined from the ratings of
the two most prominent rating services: Moody's and Standard & Poor's. The
ratings are used by the government and industry regulatory agencies, the
investing public, and portfolio managers as a guide to the relative security and
value of each bond. The ratings are not used as an absolute factor in
determining the strength of the pledge securing a particular issue. However,
since Moody's and Standard & Poor's rate bonds on a fee basis, some issuers
choose not to be rated. Many non-rated issues are sound investments. The rating
symbols of the two services are shown in the accompanying table.
MOODY'S INVESTORS STANDARD & POOR'S CORP.
SERVICES, INC. (PLUS (+) OR MINUS(-))
----------------- -----------------------
Prime Aaa AAA
Excellent Aa AA
Good A A
Average Baa BBB
Fair Ba BB
Poor B B
Marginal Caa C
xi------------------------------------------------------------------------------
<PAGE>
DEFINITION OF COMMON TERMS (CONTINUED)
SEC YIELD
The SEC Yield was mandated by the Securities and Exchange Commission in
1988 as a standardized yield calculation intended to put performance
presentations for all bond and money market funds on a level playing field. The
SEC yield does not take into account income derived from capital gains, option
writing, futures, or return of capital. The formula also adjusts the income from
premium or discounted bonds to reflect the amortization of that bond.
TOTAL RETURN
Total return measures a Portfolio's performance over a stated period of
time, taking into account the combination of dividends paid and the gain or loss
in the value of the securities held in the Portfolio. It may be expressed on an
average annual basis or a cumulative basis (total change over a given period).
DEFINITION OF INDICES
STANDARD & POOR'S 500 is a broad-based measurement of changes in stock market
conditions based on the average performance of 500 widely-held common stocks. It
is an unmanaged index.
LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX, an unmanaged index, is a broad
measure of bond performance, and includes reinvestment of dividends and capital
gains.
LEHMAN BROTHERS 10-YEAR MUNICIPAL BOND INDEX, an unmanaged index, is a broad
measure of municipal bond performance and includes reinvestment of dividends and
capital gains.
- -----------------------------------------------------------------------------xii
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of First Funds:
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Growth & Income Portfolio
(formerly the Total Return Equity Portfolio), the Bond Portfolio (formerly the
Total Return Fixed Income Portfolio), the Tennessee Tax-Free Portfolio, the U.S.
Treasury Money Market Portfolio, the U.S. Government Money Market Portfolio, the
Municipal Money Market Portfolio, and the Cash Reserve Portfolio (Portfolios of
First Funds, hereafter, referred to as the "Portfolios") at June 30, 1997, and
the results of each of their operations, the changes in each of their net assets
and the financial highlights for the periods indicated, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Portfolios' management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at June 30, 1997 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
Boston, Massachusetts
August 12, 1997
1-------------------------------------------------------------------------------
<PAGE>
GROWTH & INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1997
(Showing Percentage of Total Value of Investments)
Value
Shares (Note 1)
------ --------
COMMON STOCKS - 89.3%
BASIC MATERIALS - 2.8%
Morton International, Inc. 267,800 $ 8,084,213
-------------
CAPITAL GOODS - 8.8%
Belden, Inc. 238,400 8,120,500
General Electric Co. 129,200 8,446,450
Waste Management, Inc. 157,174 5,049,215
York International Corp. 75,100 3,454,600
-------------
TOTAL CAPITAL GOODS 25,070,765
-------------
COMMUNICATION SERVICES - 9.8%
Airtouch Communications, Inc.* 346,200 9,477,225
GTE Corp. 215,100 9,437,513
Sprint Corp. 173,200 9,114,650
-------------
TOTAL COMMUNICATION SERVICES 28,029,388
-------------
CONSUMER STAPLES - 11.5%
Belo (A.H.) Corp., Class A 183,800 7,650,675
Pepsico Inc. 137,400 5,161,088
Sara Lee Corp. 216,850 9,026,381
Sysco Corp. 305,300 11,143,450
-------------
TOTAL CONSUMER STAPLES 32,981,594
-------------
CONSUMER CYCLICALS - 6.7%
Federated Department Stores, Inc.* 253,500 8,809,125
Interpublic Group of Companies, Inc. 168,800 10,349,549
-------------
TOTAL CONSUMER CYCLICALS 19,158,674
-------------
ENERGY - 10.0%
Input/Output, Inc. 350,925 6,360,516
Repsol S.A. ADR 191,217 8,114,771
Texaco, Inc. 56,500 6,144,375
YPF S.A. ADR 260,500 8,010,375
-------------
TOTAL ENERGY 28,630,037
-------------
FINANCE & INSURANCE - 15.1%
BankBoston Corp. 115,000 8,287,188
Chase Manhattan Corp. 96,100 9,327,706
Federal National Mortgage Association 186,000 8,114,250
Norwest Corp. 192,900 10,850,624
UNUM Insurance Corp. 161,000 6,762,000
-------------
TOTAL FINANCE & INSURANCE 43,341,768
-------------
HEALTHCARE - 15.1%
Abbott Laboratories 148,400 9,905,700
Elan Corp., plc ADR* 242,000 10,950,500
Medtronic, Inc. 47,250 3,827,250
Merck & Co., Inc. 83,000 8,590,500
Schering-Plough Corp. 209,400 10,025,025
-------------
TOTAL HEALTHCARE 43,298,975
-------------
Value
Shares (Note 1)
------ --------
TECHNOLOGY - 9.5%
EMC Corp.* 156,600 $ 6,107,400
Grainger (W.W.), Inc. 92,900 7,263,619
Intel Corp. 35,700 5,053,781
Motorola, Inc. 101,600 7,721,600
Raytheon Co. 18,600 948,600
-------------
TOTAL TECHNOLOGY 27,095,000
-------------
TOTAL COMMON STOCKS
(Cost $175,381,812) 255,690,414
-------------
Due Discount Rate or Principal
Date Coupon Rate Amount
- ---- ---------------- ------
SHORT-TERM INVESTMENTS - 10.7%
COMMERCIAL PAPER - 8.1%
Associates Corp
07/14/97 5.671% $ 2,000,000 2,000,000
Avnet, Inc.
07/07/97 5.570% 2,000,000 1,998,143
Central Louisiana Electric, Inc.
07/29/97 5.550% 2,000,000 1,991,367
First Chicago Corp.
07/14/97 5.540% 2,000,000 1,995,999
Ford Motor Corp.
07/10/97 5.540% 2,000,000 2,000,000
GE Capital Management, Inc.
07/14/97 5.554% 2,000,000 2,000,000
Liberty Mutual
07/08/97 5.560% 2,000,000 1,997,838
Lubersoil
07/07/97 5.550% 1,245,000 1,243,848
Merrill Lynch Co.
07/24/97 5.550% 2,000,000 1,992,908
South Western Public Service
07/18/97 5.560% 2,000,000 1,994,749
Trans American Corp.
07/10/97 5.600% 1,000,000 998,600
Union Electric
07/17/97 5.540% 1,000,000 997,538
University of Chicago
07/02/97 5.520% 2,000,000 1,999,693
-------------
TOTAL COMMERCIAL PAPER 23,210,683
-------------
Maturity
Amount
--------
REPURCHASE AGREEMENTS - 2.6%
HSBC Securities, Inc., 5.50%, dated
06/30/97, due 07/01/97, collateralized
by $6,931,000 U.S. Treasury Bond,
8.75%, due 11/15/08 7,551,554 7,550,400
-------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $30,761,083) 30,761,083
-------------
TOTAL INVESTMENTS - 100%
(Cost $206,142,895) $ 286,451,497
-------------
-------------
*Non-income producing security
ADR - American Depository Receipt
The accompanying notes are an integral part of the financial statements.
- -------------------------------------------------------------------------------2
<PAGE>
GROWTH & INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1997
INCOME TAX INFORMATION:
At June 30, 1997, the net unrealized appreciation based on cost for income tax
purposes of $206,190,441 was as follows:
Aggregate gross unrealized appreciation for
all investments in which there was an excess
of value over tax cost $ 80,813,200
Aggregate gross unrealized depreciation for
all investments in which there was an excess
of tax cost over value (552,144)
------------
Net unrealized appreciation $ 80,261,056
------------
------------
OTHER INFORMATION:
Purchases and sales of securities, other than short-term securities, for the
year ended June 30, 1997 aggregated $70,140,791 and $54,040,512, respectively.
UNAUDITED INCOME TAX INFORMATION:
For the year ended June 30, 1997, 100% of the Growth & Income Portfolio's
dividends from investment income qualify for the 70% dividend received deduction
for corporations.
BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1997
(Showing Percentage of Total Value of Investments)
Due Principal Value
Date Coupon Amount (Note 1)
- ---- ------ --------- --------
U.S GOVERNMENT & AGENCY OBLIGATIONS - 24.6%
U.S. TREASURY BONDS
05/15/16 7.250% $ 12,490,000 $ 13,024,734
U.S. TREASURY NOTES
05/31/98 5.375% 5,440,000 5,419,600
04/30/00 6.750% 6,285,000 6,367,491
08/15/02 6.375% 3,845,000 3,842,597
FEDERAL NATIONAL MORTGAGE ASSOCIATION
10/11/06 7.150% 2,000,000 1,992,646
----------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost $30,869,822) 30,647,068
----------
CORPORATE BONDS & NOTES - 63.3%
BASIC MATERIALS - 2.9%
BHP Finance USA
03/01/06 6.690% 2,395,000 2,328,407
USX Corp.
01/21/99 8.050% 1,190,000 1,217,913
----------
TOTAL BASIC MATERIALS 3,546,320
----------
CAPITAL GOODS - 12.0%
Arrow Electronics, Inc.
01/15/07 7.000% 1,700,000 1,697,549
Dover Corp.
11/15/05 6.450% 1,900,000 1,838,584
Lockheed Martin Corp.
05/15/01 6.850% 2,000,000 2,004,814
03/15/03 6.750% 2,400,000 2,387,683
Raytheon Co.
07/15/05 6.500% 2,400,000 2,307,396
Tyco International Limited
11/01/01 6.500% 2,250,000 2,227,280
Waste Management, Inc.
10/01/02 7.700% 2,490,000 2,582,240
----------
TOTAL CAPITAL GOODS 15,045,546
----------
CONSUMER NON-DURABLES - 5.0%
Anheuser Busch, Inc.
09/01/05 7.000% 2,300,000 2,302,845
Coca-Cola Enterprises, Inc.
10/15/36 6.700% 1,650,000 1,653,960
Philip Morris, Inc.
12/01/99 7.125% 2,200,000 2,224,424
----------
TOTAL CONSUMER NON-DURABLES 6,181,229
----------
CONSUMER SERVICES - 7.2%
Belo (AH) Corp.
06/01/02 6.875% 2,400,000 2,402,374
Federal Express Corp., Series 97-B
01/15/18 7.520% 2,000,000 2,037,756
Price/Costco, Inc.
06/15/05 7.125% 2,300,000 2,266,015
The accompanying notes are an integral part of the financial statements.
3-------------------------------------------------------------------------------
<PAGE>
BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1997
(Showing Percentage of Total Value of Investments)
Due Principal Value
Date Coupon Amount (Note 1)
- ---- ------ --------- ------
CORPORATE BONDS & NOTES (CONTINUED)
CONSUMER SERVICES (CONTINUED)
US West Capital Funding, Inc.
01/15/07 7.300% $ 2,300,000 $ 2,303,671
----------
TOTAL CONSUMER SERVICES 9,009,816
----------
BANKS - 10.1%
Banc One Corp.
05/01/07 7.600% 2,400,000 2,464,961
Barnett Cap II 144A**
12/01/26 7.950% 2,400,000 2,364,960
First Chicago Corp.
01/15/03 7.625% 2,300,000 2,369,248
First Empire Cap Tr I
02/01/27 8.234% 1,600,000 1,616,558
Wachovia Corp.
11/15/06 6.625% 2,100,000 2,051,303
Wells Fargo Capital
12/15/26 7.960% 1,800,000 1,775,734
----------
TOTAL BANKS 12,642,764
----------
BROKER/DEALERS - 6.7%
Donaldson, Lufkin & Jenrette
02/15/16 5.625% 2,000,000 1,920,684
Lehman Brothers, Inc.
04/15/03 7.250% 2,300,000 2,311,077
Merrill Lynch, Inc.
01/15/07 7.000% 2,050,000 2,037,292
Morgan Stanley Group, Inc.
10/01/03 6.125% 2,200,000 2,109,626
----------
TOTAL BROKER/DEALERS 8,378,679
----------
FINANCIAL SERVICES - 10.1%
Aon Capital Trust
01/01/27 8.205% 2,000,000 2,055,400
Associates Corp. of North America
09/17/99 6.680% 1,230,000 1,237,375
05/15/37 5.960% 1,500,000 1,502,490
CNA Financial Corp.
11/15/03 6.250% 2,400,000 2,295,907
Ford Capital
05/01/98 9.125% 910,000 931,894
Ford Motor Credit Co.
09/25/01 7.000% 2,400,000 2,422,889
General Motors Acceptance Corp.
02/15/01 5.625% 2,250,000 2,171,245
----------
TOTAL FINANCIAL SERVICES 12,617,200
----------
TRAVEL & TRANSPORTATION - 5.7%
Norfolk Southern Corp.
02/15/04 7.875% 2,400,000 2,535,336
Northwest Airlines Corp.
01/02/15 7.670% 2,281,992 2,334,889
CORPORATE BONDS & NOTES (CONTINUED)
TRAVEL & TRANSPORTATION (CONTINUED)
Union Pacific Corp.
01/15/04 6.125% $ 2,400,000 $ 2,297,683
----------
TOTAL TRAVEL & TRANSPORTATION 7,167,908
----------
UTILITIES - 3.6%
GTE Corp.
11/01/08 6.900% 2,375,000 2,347,578
Public Service Electric & Gas Co.
11/01/01 7.875% 2,000,000 2,067,920
----------
TOTAL UTILITIES 4,415,498
----------
TOTAL CORPORATE BONDS & NOTES
(Cost $79,202,457) 79,004,960
----------
FOREIGN BOND - 1.2%
Fomento Economico Mexico S.A.
07/22/97 9.500% 1,500,000 1,499,998
----------
(Cost $1,499,998)
ASSET-BACKED OBLIGATIONS - 0.0%
Security Pacific Home Equity Loan,
Series 1991-2 A
06/15/20 8.100% 2,069 2,069
----------
(Cost $2,101)
MORTGAGE-BACKED OBLIGATIONS - 6.6%
Federal Home Loan Mortgage Corp.,
Series 1698-E
10/15/06 6.000% 2,400,000 2,371,848
Federal National Mortgage Association,
1994-M3, Class B
04/25/06 7.710% 2,225,000 2,276,453
Federal National Mortgage Association,
Pool #250885
04/01/27 7.500% 3,323,189 3,330,467
Guaranteed Mortgage Corp. III,
Series L4
07/20/19 9.050% 38,000 37,933
Resolution Trust Corp.,
Series 1992-8 A2***
12/25/26 8.250% 47,752 47,752
Resolution Trust Corp.,
Series 1992-C6 A2
07/25/24 6.750%* 268,386 268,720
----------
TOTAL MORTGAGE-BACKED OBLIGATIONS
(Cost $8,384,619) 8,333,173
----------
SHORT-TERM INVESTMENTS - 4.3%
COMMERCIAL PAPER - 1.4%
American Family
07/17/97 5.590% 711,000 709,233
Trans American Corp.
07/10/97 5.600% 1,000,000 998,600
----------
TOTAL COMMERCIAL PAPER 1,707,833
----------
The accompanying notes are an integral part of the financial statements.
- -------------------------------------------------------------------------------4
<PAGE>
BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1997
(Showing Percentage of Total Value of Investments)
Maturity Value
Amount (Note 1)
------ ---------
SHORT-TERM INVESTMENTS (CONTINUED)
REPURCHASE AGREEMENTS - 2.9%
HSBC Securities, Inc., 5.50%, dated
06/30/97, due 07/01/97, collateralized
by $3,246,000 U.S. Treasury Bond, 8.13%
due 05/15/21 $ 3,659,459 $ 3,658,900
--------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $5,366,733) 5,366,733
--------------
TOTAL INVESTMENTS - 100%
(Cost $125,325,730) $ 124,854,001
--------------
--------------
* Floating or variable rate security - rate disclosed as of June 30, 1997.
Maturity date represents the next interest reset date.
** Security exempt from registration under Rule 144A of the Securities
Act of 1933. This security may be resold in transactions exempt
from registration, normally to qualified institutional buyers. At
June 30, 1997, this security amounted to a value of $2,364,960 or
1.9% of net assets.
***Security is valued at fair value. See Note 1.
INCOME TAX INFORMATION:
At June 30, 1997, the net unrealized depreciation based on cost for income tax
purposes of $125,325,730 was as follows:
Aggregate gross unrealized appreciation for
all investments in which there was an excess
of value over tax cost $ 599,713
Aggregate gross unrealized depreciation for
all investments in which there was an excess
of tax cost over value (1,071,442)
--------------
Net unrealized depreciation $ (471,729)
--------------
--------------
As of June 30, 1997, the Bond Portfolio had a capital loss carryover of
approximately $660,000 available to offset capital gains to the extent provided
in regulations, which will expire on June 30, 2003.
OTHER INFORMATION:
Purchases and sales of securities, other than short-term securities, for the
year ended June 30, 1997 aggregated $75,665,528 and $64,041,261,
respectively. Purchases and sales of U.S. Government and Agency securities,
other than short-term securities, for the year ended June 30, 1997 aggregated
$17,689,520 and $45,512,058, respectively.
TENNESSEE TAX-FREE PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1997
(Showing Percentage of Total Value of Investments)
Due Bond Rating Principal Value
Date Coupon Moody/S&P Amount (Note 1)
- ---- ------ --------- ------ ---------
GENERAL OBLIGATION BONDS - 50.0%
Grundy County, Tennessee
05/01/06 5.350%, FGIC Aaa/AAA $ 300,000 $ 311,067
Hamilton County, Tennessee
09/01/05 5.000% Aa2/NR 300,000 305,619
Johnson City, Tennessee
06/01/12 5.900%, FSA Aaa/AAA 245,000 253,678
05/01/14 5.500%, FGIC Aaa/AAA 750,000 760,148
Knox County, Tennessee
02/01/12 5.000% Aa3/AA 750,000 723,615
Knoxville, Tennessee
Refunding & Improvements
05/01/08 5.300%, MBIA Aaa/AAA 350,000 358,656
Memphis, Tennessee
08/01/06 5.200% Aa/AA 500,000 514,660
Metropolitan Nashville, Tennessee
05/15/05 5.000% Aa/AA 350,000 355,443
01/01/13 5.200%, FGIC Aaa/AAA 500,000 493,720
07/01/13 5.125% Aa3/AA 500,000 487,740
Oak Ridge, Tennessee
07/01/10 5.550% Aa/A+ 500,000 511,635
Putnam County, Tennessee
04/01/07 5.100%, MBIA Aaa/AAA 1,000,000 1,015,270
Rutherford County, Tennessee
04/01/09 5.250% Aa/AA- 500,000 507,315
Sevier County, Tennessee
04/01/12 5.600%, FGIC Aaa/AAA 400,000 405,848
Shelby County, Tennessee
04/01/10 5.500% Aa2/AA+ 750,000 772,283
State of Tennessee
03/01/07 5.400% Aaa/AA+ 240,000 252,570
05/01/14 5.350% Aaa/AA+ 750,000 757,583
Tipton County, Tennessee
04/01/12 5.250%, AMBAC Aaa/NR 500,000 505,280
Weakley County, Tennessee
05/01/09 5.000%, FGIC Aaa/AAA 350,000 348,432
Wilson County, Tennessee
06/01/13 5.500%, FGIC Aaa/AAA 500,000 502,109
-----------
TOTAL GENERAL OBLIGATION BONDS
(Cost $10,015,690) 10,142,671
-----------
REVENUE BONDS - 47.6%
HOSPITAL - 8.4%
Bristol County, Tennessee
Health & Education Facilities
09/01/13 5.125%, FGIC Aaa/AAA 500,000 489,205
Knox County, Tennessee
Health & Education
(Ft. Sanders Hospital)
01/01/11 5.750%, MBIA Aaa/AAA 300,000 308,523
Madison County, Tennessee
(Jackson Hospital)
04/01/10 5.500%, AMBAC Aaa/AAA 400,000 408,132
Shelby County, Tennessee
Health & Education
08/01/12 5.500%, FGIC Aaa/AAA 500,000 505,760
-----------
TOTAL HOSPITAL 1,711,620
-----------
The accompanying notes are an integral part of the financial statements.
5-------------------------------------------------------------------------------
<PAGE>
TENNESSEE TAX-FREE PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1997
(Showing Percentage of Total Value of Investments)
Due Bond Rating Principal Value
Date Coupon Moody/S&P Amount (Note 1)
- ---- ------ --------- ------ --------
REVENUE BONDS (CONTINUED)
HOUSING - 3.8%
Tennessee Housing
Development Authority
01/01/11 5.800% Aa2/AA $ 400,000 $ 411,136
07/01/13 5.800% Aa2/AA 350,000 355,142
-----------
TOTAL HOUSING 766,278
-----------
STATE AUTHORITY - 3.8%
Tennessee State Local
Development Authority
03/01/11 5.750% A/AA- 250,000 252,135
Tennessee State School
Board Authority
05/01/11 5.500% A1/AA 500,000 509,550
-----------
TOTAL STATE AUTHORITY 761,685
-----------
UTILITY - 31.6%
Clarksville, Tennessee
Water, Sewer & Gas
02/01/10 5.300%, MBIA Aaa/NR 900,000 914,769
Collierville, Tennessee
Water & Sewer
11/01/10 5.300%, MBIA Aaa/AAA 475,000 478,791
Harpeth Valley, Tennessee
Utility District
09/01/11 5.500% A1/A 650,000 661,928
Knox County, Tennessee
1ST Utility District
12/01/14 5.500%, MBIA Aaa/AAA 750,000 758,715
Knoxville, Tennessee
Electric
07/01/12 5.700% Aa3/AA 500,000 510,685
Knoxville, Tennessee
Gas
03/01/14 5.350% Aa3/AA 760,000 760,000
La Follette, Tennessee
Electrical Systems
06/01/11 5.800%, AMBAC Aaa/AAA 430,000 449,775
La Vergne, Tennessee
Water & Sewer
03/01/14 5.400% A1/NR 500,000 504,460
Lawrenceburg, Tennessee
Electric
07/01/06 5.200%, MBIA Aaa/AAA 345,000 355,501
Sevier County, Tennessee
Utility District
05/01/11 5.400%, AMBAC Aaa/NR 1,000,000 1,013,630
-----------
TOTAL UTILITY 6,408,254
-----------
TOTAL REVENUE BONDS
(COST $9,505,064) 9,647,837
-----------
Value
Shares (Note 1)
------ --------
MUTUAL FUNDS - 2.4%
Federated Tennessee Municipal Cash Trust 480,700 $ 480,700
(Cost $480,700) ------------
TOTAL INVESTMENTS - 100%
(Cost $20,001,454) $ 20,271,208
-----------
-----------
The Portfolio had the following insurance concentration greater that 10% at June
30, 1997 (as a percentage of net assets):
MBIA 20.3%
FGIC 18.5%
AMBAC 11.5%
INCOME TAX INFORMATION:
At June 30, 1997, the net unrealized depreciation based on cost for income tax
purposes of $20,001,454 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there was an excess of value
over tax cost $ 287,702
Aggregate gross unrealized depreciation for all
investments in which there was an excess of tax
cost over value (17,948)
-----------
Net unrealized appreciation $ 269,754
-----------
-----------
As of June 30, 1997, the Tennessee Tax-Free Portfolio had a capital loss
carryover of approximately $29,000 available to offset capital gains to the
extent provided in regulations, which will expire on June 30, 2005.
The Tennessee Tax-Free Portfolio intends to elect to defer to its fiscal year
ending June 30, 1998 $6,980 of losses recognized during the period November 1,
1996 to June 30, 1997.
OTHER INFORMATION:
Purchases and sales of securities, other than short-term securities, for the
year ended June 30, 1997 aggregated $27,302,839 and $15,714,736, respectively.
UNAUDITED INCOME TAX INFORMATION:
Tennessee Tax-Free Portfolio had designated all dividends paid during the year
as exempt-interest dividends. Thus, 100% of these distributions are exempt from
Federal income tax.
RATINGS:
The Moody's and S&P ratings are believed to be the most recent ratings at
6/30/97. Ratings are not covered by the Report of Independent Auditors.
The accompanying notes are an integral part of the financial statements.
- -------------------------------------------------------------------------------6
<PAGE>
U.S. TREASURY MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1997
(Showing Percentage of Total Value of Investments)
Due Discount Rate or Principal Value
Date Coupon Rate Amount (Note 1)
- ---- ----------- ------ --------
U.S. TREASURY OBLIGATIONS - 57.9%
U.S. TREASURY NOTES
07/31/97 5.88% $ 18,000,000 $ 18,007,936
08/15/97 6.50% 4,428,000 4,433,479
08/31/97 6.00% 1,000,000 1,000,737
09/30/97 5.75% 4,500,000 4,502,555
10/31/97 5.63% 1,000,000 999,553
11/30/97 5.38% 6,000,000 5,991,576
11/30/97 6.00% 1,500,000 1,502,892
02/28/98 5.13% 2,000,000 1,991,285
U.S. TREASURY BILLS
08/21/97 5.08% 320,000 317,698
-----------
TOTAL U.S. TREASURY OBLIGATIONS 38,747,711
-----------
Maturity
Amount
------
REPURCHASE AGREEMENTS - 42.1%
HSBC Securities Inc., 5.65%, dated
06/30/97, due 07/01/97, collateralized
by $9,295,000 U.S. Treasury Bond,
10.38%, due 11/15/12 11,619,823 11,618,000
Donaldson, Lufkin & Jenrette Securities
Corp., 5.90%, dated 06/30/97, due
07/01/97, collateralized by $6,243,000
U.S. Treasury Note, 8.25% due
07/15/98 6,501,065 6,500,000
Donaldson, Lufkin & Jenrette Securities
Corp., 5.50%, dated 06/04/97, due
08/04/97, collateralized by $9,960,000
U.S. Treasury Note, 6.25%, due
07/31/98 10,093,194 10,000,000
-----------
TOTAL REPURCHASE AGREEMENTS 28,118,000
-----------
TOTAL INVESTMENTS - 100% $ 66,865,711
-----------
-----------
INCOME TAX INFORMATION:
Total cost for Federal income tax purposes - $66,865,711
As of June 30, 1997, the U.S. Treasury Money Market Portfolio had a capital loss
carryover of approximately $10,000 available to offset capital gains to the
extent provided in regulations, which will expire on June 30, 2005.
The U.S. Treasury Money Market Portfolio intends to elect to defer to its fiscal
year ending June 30, 1998 $5,179 of losses recognized during the period November
1, 1996 to June 30, 1997.
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1997
(Showing Percentage of Total Value of Investments)
Due Discount Rate or Principal Value
Date Coupon Rate Amount (Note 1)
- ---- ----------- ------ --------
U.S. TREASURY OBLIGATIONS - 18.4%
U.S TREASURY NOTES
08/15/97 6.50% $ 4,000,000 $ 4,005,193
08/31/97 6.00% 4,000,000 4,002,927
09/30/97 5.75% 2,000,000 2,001,232
10/15/97 8.75% 1,000,000 1,008,990
10/31/97 5.63% 1,000,000 1,000,463
10/31/97 5.75% 1,000,000 1,000,920
11/30/97 6.00% 2,500,000 2,504,919
01/31/98 5.00% 2,000,000 1,991,606
U.S. TREASURY BILLS
08/21/97 5.08% 435,000 431,867
-----------
TOTAL U.S. TREASURY OBLIGATIONS 17,948,117
-----------
U.S. GOVERNMENT OBLIGATIONS - 73.3%
Federal Home Loan Bank
07/17/97 5.96% 2,000,000 2,000,140
07/24/97 5.51%* 5,000,000 4,998,988
08/08/97 5.21% 2,000,000 1,989,000
11/21/97 5.48% 810,000 792,368
Federal Home Loan Mortgage Corp.
08/05/97 5.53% 2,000,000 1,989,247
09/12/97 5.47% 2,022,000 1,999,572
09/30/97 5.58% 2,000,000 1,971,790
Federal National Mortgage Association
07/01/97 5.25%* 5,000,000 5,000,000
07/01/97 5.54%* 15,000,000 14,996,292
07/03/97 5.34%* 5,000,000 4,998,553
07/07/97 5.27%* 5,000,000 4,999,596
07/18/97 5.49% 3,470,000 3,461,004
08/04/97 5.45% 1,795,000 1,785,761
08/18/97 5.17% 460,000 456,829
10/17/97 5.55% 2,000,000 1,966,700
11/24/97 5.49% 2,160,000 2,111,908
11/26/97 5.44% 2,550,000 2,492,971
06/18/98 5.84% 1,000,000 999,687
Student Loan Marketing Association
07/01/97 5.42%* 12,650,000 12,648,877
-----------
TOTAL U.S. GOVERNMENT OBLIGATIONS 71,659,283
-----------
Maturity
Amount
------
REPURCHASE AGREEMENTS - 8.3%
HSBC Securities Inc., 5.65%, dated
06/30/97, due 07/01/97, collateralized
by $3,979,000 U.S. Treasury Bond, 7.25%,
due 05/15/16 4,081,640 4,081,000
Donaldson, Lufkin & Jenrette Securities
Corp., 5.90%, dated 06/30/97, due
07/01/97, collateralized by $4,085,000
U.S. Treasury Note, 6.50%, due
04/30/99 4,081,669 4,081,000
------------
TOTAL REPURCHASE AGREEMENTS 8,162,000
------------
TOTAL INVESTMENTS - 100% $ 97,769,400
------------
------------
The accompanying notes are an integral part of the financial statements.
7-------------------------------------------------------------------------------
<PAGE>
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1997
*Floating or variable rate security - rate disclosed as of June 30, 1997.
Maturity date represents the next interest reset date.
INCOME TAX INFORMATION:
Total cost for Federal income tax purposes - $97,769,400
As of June 30, 1997, the U.S. Government Money Market Portfolio had a capital
loss carryover of approximately $7,000 available to offset capital gains to the
extent provided in regulations, which will expire on June 30, 2005.
MUNICIPAL MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1997
(Showing Percentage of Total Value of Investments)
Due Discount Rate or Principal Value
Date Coupon Rate Amount (Note 1)
- ---- ----------- ------ --------
MUNICIPAL BONDS & NOTES - 100.0%
ALABAMA - 5.1%
Alabama Housing Finance Authority
Rime Ridge Project
07/07/97 4.20%* $ 3,000,000 $ 3,000,000
-----------
DISTRICT OF COLUMBIA - 4.1%
District of Columbia General Obligation
07/01/97 4.30%* 2,400,000 2,400,000
-----------
GEORGIA - 11.1%
Cobb County Housing Authority
Post Bridge Project
07/07/97 4.15%* 1,450,000 1,450,000
Georgia, Municipal Gas Authority
07/07/97 4.05%* 2,100,000 2,100,000
Smyrna Housing Authority
Post Valley Project
07/07/97 4.15%* 3,000,000 3,000,000
-----------
6,550,000
-----------
ILLINOIS - 5.9%
Illinois Development Authority
Amoco Oil
07/01/97 4.00%* 1,500,000 1,500,000
Illinois Health Facilities Authority
(Streeterville Corp.)
07/07/97 4.15%* 2,000,000 2,000,000
-----------
3,500,000
-----------
INDIANA - 0.5 %
City of Rockport PCR Michigan Power
07/07/97 4.15%* 300,000 300,000
-----------
LOUISIANA - 2.4%
St James Parish PCR Texaco
07/23/97 3.90% 1,400,000 1,400,000
-----------
MASSACHUSETTS - 1.2%
Mass. Industrial Finance Agency
New England Power
07/29/97 3.80% 700,000 700,000
-----------
MICHIGAN - 7.6%
Michigan State Building Authority
09/04/97 3.80% 1,500,000 1,500,000
Michigan State Hospital Finance
Authority St. Mary's Hospital
07/07/97 4.15%* 1,300,000 1,300,000
Michigan Strategic Fund Consumers
Power Co.
07/01/97 4.05%* 1,700,000 1,700,000
-----------
4,500,000
-----------
MISSOURI - 4.6 %
Missouri State Health & Education
Facilities (Washington University)
07/07/97 4.15%* 2,700,000 2,700,000
-----------
The accompanying notes are an integral part of the financial statements.
- -------------------------------------------------------------------------------8
<PAGE>
MUNICIPAL MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1997
(Showing Percentage of Total Value of Investments)
Due Discount Rate or Principal Value
Date Coupon Rate Amount (Note 1)
- ---- ----------- ------ --------
MUNICIPAL BONDS & NOTES (CONTINUED)
NEW YORK - 4.3%
New York City Series F-7
General Obligation
07/07/97 4.10%* $ 300,000 $ 300,000
New York State Local Government
Assistance, Series 1994 B
07/07/97 4.25%* 500,000 500,000
New York State Local Government
Assistance
07/07/97 4.05%* 1,700,000 1,700,000
-----------
2,500,000
-----------
NORTH CAROLINA - 0.3%
Raleigh Durham Airport Authority
07/01/97 4.10%* 200,000 200,000
-----------
OHIO - 8.8%
Berea Bond Anticipation Notes
07/10/97 4.09% 765,000 765,024
Hamilton Bond Anticipation Notes
06/12/98 4.25% 1,000,000 1,003,185
Medina County Housing
(Oaks at Medina)
07/07/97 4.20%* 2,400,000 2,400,000
Toledo Bond Anticipation Notes
10/15/97 4.50% 1,000,000 1,001,704
-----------
5,169,913
-----------
OREGON - 3.4%
Forsyth Portland Electric Co.
07/07/97 4.15%* 2,000,000 2,000,000
-----------
PENNSYLVANIA - 4.8%
Emmaus General Authority,
Series B-12
07/07/97 4.30%* 1,600,000 1,600,000
Emmaus General Authority,
Series H-6
07/07/97 4.30%* 1,200,000 1,200,000
-----------
2,800,000
-----------
TENNESSEE - 21.2%
Chattanooga Health and Education
(Baylor)
07/07/97 4.20%* 3,000,000 3,000,000
Knox County IDB
Professional Plaza
07/15/97 3.85%* 250,000 250,000
Knox County IDB
Weisgarber Partner
07/15/97 3.85%* 1,400,000 1,400,000
Memphis General Obligation
07/07/97 4.15%* 700,000 700,000
Metropolitan Government Nashville
Baptist Hospital
08/22/97 3.85% 2,500,000 2,500,000
Metropolitan Government Nashville
DeDe Wallace Health
07/07/97 4.20%* 1,900,000 1,900,000
Due Discount Rate or Principal Value
Date Coupon Rate Amount (Note 1)
- ---- ----------- ------ --------
MUNICIPAL BONDS & NOTES (CONTINUED)
TENNESSEE (CONTINUED)
Metropolitan Nashville Airport
07/02/97 4.20%* $ 800,000 $ 800,000
Shelby County Health & Education
08/01/97 4.05% 1,930,000 1,930,000
-----------
12,480,000
-----------
TEXAS - 11.3%
Bexar County Health Facilities
Development
07/07/97 4.13%* 960,000 960,000
City of Houston General Obligation
07/07/97 3.80% 1,000,000 1,000,000
Harris County General Obligation
09/26/97 3.80% 1,000,000 1,000,000
Lower Colorado River Authority
09/02/97 3.70% 3,700,000 3,700,000
-----------
6,660,000
-----------
WASHINGTON - 3.4%
Washington Public Power Supply
07/07/97 4.05%* 2,000,000 2,000,000
-----------
TOTAL MUNICIPAL BONDS & NOTES 58,859,913
-----------
TOTAL INVESTMENTS - 100% $ 58,859,913
-----------
-----------
*Floating or variable rate security - rate disclosed as of June 30, 1997.
Maturity date represents the next interest rate reset.
INCOME TAX INFORMATION:
Total cost for Federal income tax purposes - $58,859,913
As of June 30, 1997, Municipal Money Market Portfolio had a capital loss
carryover of approximately $3,000 available to offset capital gains to the
extent provided in the regulations, which will expire on June 30, 2002.
The Municipal Money Market Portfolio intends to elect to defer to its fiscal
year ending June 30, 1998, $1,475 of losses recognized during the period
November 1, 1996 to June 30, 1997.
UNAUDITED INCOME TAX INFORMATION:
Municipal Money Market Portfolio had designated all dividends paid during the
year as exempt-interest dividends. Thus, 100% of these distributions are exempt
from Federal income tax.
The accompanying notes are an integral part of the financial statements.
9-------------------------------------------------------------------------------
<PAGE>
CASH RESERVE PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1997
(Showing Percentage of Total Value of Investments)
Due Discount Rate or Principal Value
Date Coupon Rate Amount (Note 1)
- ---- ----------- ------ --------
CERTIFICATE OF DEPOSIT - 4.0%
Wilmington Trust Co.
10/20/97 5.92% $ 2,000,000 $ 2,000,000
-----------
CORPORATE NOTES - 8.0%
SECURITY BROKER/DEALERS
Associates Corporation of North America
07/01/97 5.57%* 2,000,000 1,999,031
Bear Stearns Co.
08/06/97 5.79%* 2,000,000 2,000,000
-----------
TOTAL SECURITY BROKER/DEALERS 3,999,031
-----------
TOTAL CORPORATE NOTES 3,999,031
-----------
COMMERCIAL PAPER - 76.9%
AGRICULTURAL SERVICES - 4.0%
Golden Peanut Co.
07/10/97 5.37% 2,000,000 1,997,314
-----------
ASSET-BACKED SECURITIES - 7.5%
Corporate Asset Funding, Inc.
01/12/98 5.70% 2,000,000 1,938,250
SMM Trust 1997-L, 144A**
07/29/97 5.69%* 1,800,000 1,800,000
-----------
TOTAL ASSET-BACKED SECURITIES 3,738,250
-----------
AUTOMOTIVE - 4.1%
Daimler Benz Corp.
07/07/97 5.38% 900,000 899,193
11/03/97 5.65% 1,165,000 1,142,145
-----------
TOTAL AUTOMOTIVE 2,041,338
-----------
AUTOMOTIVE LEASING SERVICES - 4.0%
PHH Corp.
08/22/97 5.63% 2,000,000 1,983,736
-----------
BANKS - 13.4%
Bank of America, N.A.
07/01/97 5.55%* 2,000,000 1,998,450
Corestates Bank, NA
07/30/97 5.66%* 2,000,000 2,000,000
JP Morgan & Co., Inc.
08/05/97 5.40% 700,000 696,325
National City Corp.
08/02/97 5.62% 2,000,000 1,984,389
-----------
TOTAL BANKS 6,679,164
-----------
BUSINESS CREDIT INSTITUTIONS - 3.0%
Penney Funding Corp.
09/08/97 5.60% 1,500,000 1,483,900
-----------
PIPELINES - 1.2%
Colonial Pipeline Co.
08/18/97 5.30% 600,000 595,760
-----------
NATURAL GAS DISTRIBUTION - 0.8%
Southern California Gas
08/11/97 5.70% 401,000 398,397
-----------
Due Discount Rate or Principal Value
Date Coupon Rate Amount (Note 1)
- ---- ----------- ------ --------
PERSONAL CREDIT INSTITUTIONS - 12.9%
American General Finance Corp.
07/07/97 5.63% $ 2,000,000 $ 1,998,124
General Motor Acceptance Corp.
11/17/97 5.75% 2,000,000 1,955,597
Household Finance, Inc.
07/17/97 5.64% 2,500,000 2,493,734
-----------
TOTAL PERSONAL CREDIT INSTITUTIONS 6,447,455
-----------
PETROLEUM REFINING - 4.0%
Koch Industries
07/01/97 6.15% 2,000,000 2,000,000
-----------
PHARMACEUTICALS - 1.9%
Bayer Corporation
07/08/97 5.65% 970,000 968,935
-----------
PUBLISHING - 1.4%
McGraw-Hill Inc.
08/05/97 5.70% 680,000 676,231
-----------
SECURITY BROKER/DEALERS - 16.9%
Credit Suisse First Boston
09/10/97 5.44% 2,000,000 1,978,542
Goldman Sachs & Co.
11/04/97 5.65% 2,000,000 1,960,450
Morgan Stanley Group
07/07/97 5.65%* 2,500,000 2,500,000
Nomura Holdings America, Inc.
07/21/97 5.70% 2,000,000 1,993,667
-----------
TOTAL SECURITY BROKER/DEALERS 8,432,659
-----------
TELEPHONE COMMUNICATIONS - 1.8%
BellSouth Funding Corp.
09/18/97 5.57% 910,000 898,876
-----------
TOTAL COMMERCIAL PAPER 38,342,015
-----------
Maturity
Amount
------
REPURCHASE AGREEMENT - 11.1%
Donaldson, Lufkin & Jenrette Securities
Corp., 5.90%, dated 06/30/97, due
07/01/97, collateralized by $5,620,000
U.S. Treasury Bill, 6.00% due 12/31/97 5,522,905 5,522,000
-----------
TOTAL INVESTMENTS - 100% $49,863,046
-----------
-----------
*Floating or variable rate security - rate disclosed as of June 30, 1997.
Maturity date represents the next interest rate reset.
**Security exempt from registration under Rule 144A of the Securities
Act of 1933. This security may be resold in transactions exempt
from registration, normally to qualified institutional buyers. At
June 30, 1997, this security amounted to a value of $1,800,000 or
3.6% of net assets.
INCOME TAX INFORMATION:
Total cost for income tax purposes - $49,863,046
The accompanying notes are an integral part of the financial statements.
- -----------------------------------------------------------------------------10
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1997
<TABLE>
<CAPTION>
GROWTH & INCOME BOND TENNESSEE TAX-FREE
PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments, at value (cost-see below)(Note 1) $ 286,451,497 $124,854,001 $20,271,208
Cash 30 78 0
Receivable for portfolio shares sold 1,605,146 54,539 91,400
Dividends receivable 227,460 0 0
Interest receivable 28,042 1,887,136 317,368
Due from administrator 0 0 18,870
Other assets 9,038 6,970 278
-------------------------------------------------------------------
Total assets 288,321,213 126,802,724 20,699,124
-------------------------------------------------------------------
LIABILITIES:
Payable for portfolio shares redeemed 137,755 48,000 0
Accrued advisory fee 118,609 15,065 0
Accrued administration fee 33,100 15,916 0
Accrued co-administration fee 11,597 5,443 745
Dividends payable 9,689 83,377 45,689
Accrued distribution fee 36,428 1,663 2,176
Accrued shareholder servicing fee 15,543 703 0
Other payables and accrued expenses 130,683 53,856 23,833
-------------------------------------------------------------------
Total liabilities 493,404 224,023 72,443
-------------------------------------------------------------------
NET ASSETS $ 287,827,809 $ 126,578,701 $ 20,626,681
-------------------------------------------------------------------
-------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in capital $ 197,700,631 $ 127,761,311 $ 20,392,453
(Over)Undistributed net investment income 0 (49,220) 748
Accumulated net realized gain (loss) on
investments 9,818,576 (661,661) (36,274)
Net unrealized appreciation (depreciation)
in value of investments 80,308,602 (471,729) 269,754
-------------------------------------------------------------------
NET ASSETS $ 287,827,809 $ 126,578,701 $ 20,626,681
-------------------------------------------------------------------
-------------------------------------------------------------------
COST OF INVESTMENTS $ 206,142,895 $ 125,325,730 $ 20,001,454
-------------------------------------------------------------------
-------------------------------------------------------------------
NET ASSET VALUE PER SHARE
Net Assets
Class I $ 221,136,180 $ 123,184,438 $ 8,935,496
Class II $ 16,513,769 $ 841,204 $ 5,941,064
Class III $ 50,177,860 $ 2,553,059 $ 5,750,121
-------------------------------------------------------------------
Shares outstanding of $.001 par value capital
stock, unlimited shares authorized
Class I 12,983,222 12,520,930 894,654
Class II 968,266 85,720 593,365
Class III 2,953,667 260,042 574,972
-------------------------------------------------------------------
Net Asset Value and redemption price per
share
Class I $17.03 $9.84 $ 9.99
Class II $17.05 $9.81 $10.01
Class III $16.99 $9.82 $10.00
-------------------------------------------------------------------
Maximum offering price per share
Class I (no sales charge) $17.03 $ 9.84 $ 9.99
Class II (net asset value plus maximum
sales charge of 5.75%, 3.75% and 3.75%
of offering price, respectively) $18.09 $10.19 $10.40
Class III (no sales charge) $16.99 $ 9.82 $10.00
-------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11------------------------------------------------------------------------------
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1997
<TABLE>
<CAPTION>
U.S. TREASURY U.S. GOVERNMENT MUNICIPAL CASH
MONEY MARKET MONEY MARKET MONEY MARKET RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value (1)(Note 1) $ 66,865,711 $ 97,769,400 $ 58,859,913 $ 49,863,046
Cash 0 44,710 0 19,158
Interest receivable 757,152 691,712 266,171 73,017
Other assets 4,379 3,327 5,399 1,718
------------------------------------------------------------------------
Total assets 67,627,242 98,509,149 59,131,483 49,956,939
------------------------------------------------------------------------
LIABILITIES:
Dividends payable 258,154 410,338 138,071 70,482
Accrued management fee 4,746 8,255 4,856 4,018
Accrued administration fee 4,024 6,183 3,630 3,009
Accrued co-administration fee 1,367 2,108 1,374 1,011
Accrued distribution fee 15,759 2,976 3,830 7,514
Other payables and accrued expenses 67,784 51,967 105,159 38,141
------------------------------------------------------------------------
Total liabilities 351,834 481,827 256,920 124,175
------------------------------------------------------------------------
NET ASSETS $ 67,275,408 $ 98,027,322 $ 58,874,563 $ 49,832,764
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in capital $ 67,287,503 $ 98,034,708 $ 58,879,051 $ 49,832,680
Undistributed net investment income 0 330 0 22
Accumulated net realized gain (loss) on
investments (12,095) (7,716) (4,488) 62
-------------------------------------------------------------------------
NET ASSETS $ 67,275,408 $ 98,027,322 $ 58,874,563 $ 49,832,764
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET ASSET VALUE, offering price and
redemption price per share (2) $1.00 $1.00 $1.00 $1.00
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
(1) Including repurchase agreements for the U.S. Treasury Money Market, U.S.
Government Money Market, Municipal Money Market,
and Cash Reserve Portfolios in the amounts of $28,118,000, $8,162,000, $0
and $5,522,000 respectively.
<TABLE>
<CAPTION>
(2) Shares Outstanding
Net $.001 par value, unlimited
Assets shares authorized)
------ -----------------
<S> <C> <C>
U.S. Treasury Money Market
Class I $ 6,140,644 6,152,126
Class III 61,134,764 61,135,377
U.S. Government Money Market
Class I 94,540,958 94,548,461
Class III 3,486,364 3,486,247
Municipal Money Market
Class I 45,988,119 45,992,546
Class III 12,886,444 12,886,505
Cash Reserve
Class I 14,241,230 14,241,280
Class III 35,591,534 35,591,400
</TABLE>
The accompanying notes are an integral part of the financial statements.
- -----------------------------------------------------------------------------12
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended June 30, 1997
<TABLE>
<CAPTION>
GROWTH & INCOME BOND TENNESSEE TAX-FREE
PORTFOLIO PORTFOLIO PORTFOLIO
-----------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 3,549,904 $ 0 $ 0
Interest 1,184,381 8,012,928 676,407
-----------------------------------------------------------------
Total investment income 4,734,285 8,012,928 676,407
-----------------------------------------------------------------
EXPENSES:
Management fee (Note 3) 1,520,039 658,049 65,349
Administration fee (Note 4) 350,778 179,468 19,605
Co-administration fee (Note 4) 116,926 59,823 6,535
Fund accounting/Transfer agent fee:
Class I 107,513 75,225 13,517
Class II 8,476 825 5,935
Class III 66,637 4,892 4,571
Blue Sky fee:
Class I 3,246 2,043 1,201
Class II 237 343 1,201
Class III 3,193 1,030 1,201
Distribution fee:
Class III 314,518 21,842 18,797
Shareholder servicing fee:
Class II 17,386 1,260 0
Class III 104,839 7,281 0
Custodian fee 56,839 30,951 5,119
Trustees fee 18,563 9,924 930
Registration fee 10,876 0 2,400
Audit 19,374 15,522 19,052
Legal 9,676 2,787 480
Reports to Shareholders 21,032 13,068 466
Miscellaneous 37,478 20,526 2,578
-----------------------------------------------------------------
Total expenses before waiver 2,787,626 1,104,859 168,937
Waiver of expenses (Note 5) (350,778) (478,581) (95,481)
Fees reimbursed by administrator 0 0 (57,769)
-----------------------------------------------------------------
Total expenses 2,436,848 626,278 15,687
Custodian fees paid indirectly (1,335) (3,983) (702)
-----------------------------------------------------------------
Net expenses 2,435,513 622,295 14,985
-----------------------------------------------------------------
NET INVESTMENT INCOME 2,298,772 7,390,633 661,422
-----------------------------------------------------------------
Net realized gain(loss) on investments 14,550,673 289,070 (28,586)
Change in net unrealized appreciation/
depreciation 43,526,139 1,087,850 422,965
-----------------------------------------------------------------
Net gain on investments 58,076,812 1,376,920 394,379
-----------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 60,375,584 $ 8,767,553 $ 1,055,801
-----------------------------------------------------------------
-----------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statement.
13------------------------------------------------------------------------------
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended June 30, 1997
<TABLE>
<CAPTION>
U.S. TREASURY U.S. GOVERNMENT MUNICIPAL
MONEY MARKET MONEY MARKET MONEY MARKET CASH RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME $ 4,448,708 $ 5,194,535 $ 2,820,920 $ 2,705,888
-------------------------------------------------------------------------
EXPENSES:
Management fee (Note 3) 206,512 237,756 196,108 122,479
Administration fee (Note 4) 61,953 71,327 58,833 36,744
Co-administration fee (Note 4) 41,302 47,551 39,222 24,496
Fund accounting/Transfer agent fee
Class I 32,468 44,579 41,486 13,561
Class III 8,838 880 3,094 22,904
Blue sky fee:
Class I 4,978 5,323 5,149 2,679
Class III 1,185 682 1,103 2,493
Distribution fee:
Class III 42,470 3,636 12,924 77,234
Custodian fee 42,079 35,323 19,859 23,173
Trustees fee 7,154 8,009 6,541 4,216
Amortization of organization costs 4,420 6,468 3,873 0
Audit 20,073 24,849 15,907 10,971
Legal 4,362 3,122 1,437 2,501
Reports to shareholders 8,477 9,213 5,515 4,436
Miscellaneous 11,343 9,148 15,137 8,649
-------------------------------------------------------------------------
Total expenses before waiver 497,614 507,866 426,188 356,536
Waiver of expenses (Note 5) (144,558) (166,429) (137,276) (85,736)
-------------------------------------------------------------------------
Total expenses 353,056 341,437 288,912 270,800
Custodian fees paid indirectly (2,643) (4,015) (2,535) (1,678)
-------------------------------------------------------------------------
Net expenses 350,413 337,422 286,377 269,122
-------------------------------------------------------------------------
NET INVESTMENT INCOME 4,098,295 4,857,113 2,534,543 2,436,766
-------------------------------------------------------------------------
Net realized loss on investments (8,150) (5,138) (1,475) 0
-------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 4,090,145 $ 4,851,975 $ 2,533,068 $ 2,436,766
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------14
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH & INCOME BOND TENNESSEE TAX-FREE
PORTFOLIO PORTFOLIO PORTFOLIO
-----------------------------------------------------------------------------------------------
For the
For the Year Period From
For the Year Ended June 30, For the Year Ended June 30, Ended June 30, December 15, 1995
1997 1996 1997 1996 1997 to June 30, 1996
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
OPERATIONS:
Net investment income $ 2,298,772 $ 1,980,877 $ 7,390,633 $ 6,115,145 $ 661,422 $ 109,242
Net realized gain (loss) on
investments 14,550,673 13,237,842 289,070 423,779 (28,586) (7,688)
Change in net unrealized
appreciation/depreciation 43,526,139 19,574,675 1,087,850 (2,870,969) 422,965 (153,211)
-----------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets from operations 60,375,584 34,793,394 8,767,553 3,667,955 1,055,801 (51,657)
-----------------------------------------------------------------------------------------------
DISTRIBUTIONS:
From net investment income:
Class I (2,145,885) (1,889,477) (7,213,796) (5,960,426) (364,252) (79,345)
Class II (48,979) (3,654) (30,004) (818) (173,237) (14,474)
Class III (103,908) (136,801) (146,985) (154,608) (123,185) (15,423)
From net realized gain:
Class I (9,969,819) (6,655,167) 0 0 0 0
Class II (309,364) (250) 0 0 0 0
Class III (2,220,318) (1,542,598) 0 0 0 0
-----------------------------------------------------------------------------------------------
Net decrease in net assets
from distributions (14,798,273) (10,227,947) (7,390,785) (6,115,852) (660,674) (109,242)
-----------------------------------------------------------------------------------------------
SHARE TRANSACTIONS (NOTE 2):
Proceeds from sales of shares 51,974,255 50,948,844 17,933,516 23,774,506 17,035,878 9,584,335
Reinvested dividends 14,030,548 9,854,367 6,757,582 5,846,105 255,022 24,578
Cost of shares redeemed (21,710,132) (20,775,834) (10,833,267) (8,318,523) (5,755,651) (751,709)
-----------------------------------------------------------------------------------------------
Net increase in net assets
from share transactions 44,294,671 40,027,377 13,857,831 21,302,088 11,535,249 8,857,204
-----------------------------------------------------------------------------------------------
Total increase in net assets 89,871,982 64,592,824 15,234,599 18,854,191 11,930,376 8,696,305
NET ASSETS:
Beginning of period 197,955,827 133,363,003 111,344,102 92,489,911 8,696,305 0
-----------------------------------------------------------------------------------------------
End of period* $287,827,809 $197,955,827 $126,578,701 $111,344,102 $20,626,681 $ 8,696,305
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
*Includes (over)undistributed
net investment income of $ 0 $ 0 $ (49,220) $ (36,367) $ 748 $ 0
</TABLE>
The accompanying notes are an integral part of the financial statements.
15------------------------------------------------------------------------------
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
U.S. TREASURY MONEY U.S. GOVERNMENT MONEY
MARKET PORTFOLIO MARKET PORTFOLIO
--------------------------------------------------------------------------
For the Year Ended June 30, For the Year Ended June 30,
1997 1996 1997 1996
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 4,098,295 $ 4,346,582 $ 4,857,113 $ 5,109,635
Net realized loss on investments (8,150) (6,105) (5,138) (2,691)
--------------------------------------------------------------------------
Net increase in net assets from
operations 4,090,145 4,340,477 4,851,975 5,106,944
--------------------------------------------------------------------------
DISTRIBUTIONS:
From net investment income
Class I (3,282,521) (4,239,680) (4,786,653) (5,104,189)
Class III (815,774) (106,902) (70,130) (5,446)
--------------------------------------------------------------------------
Net decrease in net assets from
distributions (4,098,295) (4,346,582) (4,856,783) (5,109,635)
--------------------------------------------------------------------------
SHARE TRANSACTIONS AT NET ASSET VALUE
OF $1.00 PER SHARE (NOTE 2):
Proceeds from sales of shares 414,876,674 328,560,842 162,950,792 174,127,519
Reinvested dividends 150,378 87,904 66,833 10,490
Cost of shares redeemed (426,975,015) (316,787,797) (153,324,382) (173,853,608)
--------------------------------------------------------------------------
Net increase (decrease) in net assets
from share transactions (11,947,963) 11,860,949 9,693,243 284,401
--------------------------------------------------------------------------
Total increase (decrease) in net assets (11,956,113) 11,854,844 9,688,435 281,710
NET ASSETS:
Beginning of period 79,231,521 67,376,677 88,338,887 88,057,177
--------------------------------------------------------------------------
End of period* $ 67,275,408 $ 79,231,521 $ 98,027,322 $ 88,338,887
--------------------------------------------------------------------------
--------------------------------------------------------------------------
*Includes undistributed net investment
income of $ 0 $ 0 $ 330 $ 0
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------16
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MUNICIPAL MONEY CASH RESERVE
MARKET PORTFOLIO PORTFOLIO
-------------------------------------------------------------------------
For the Year Ended June 30, For the Year Ended June 30,
1997 1996 1997 1996
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 2,534,543 $ 3,375,450 $ 2,436,766 $ 1,420,633
Net realized loss on investments (1,475) 0 0 (26)
-------------------------------------------------------------------------
Net increase in net assets from
operations 2,533,068 3,375,450 2,436,766 1,420,607
-------------------------------------------------------------------------
DISTRIBUTIONS:
From net investment income
Class I (2,378,120) (3,296,898) (927,206) (853,244)
Class III (156,423) (78,552) (1,509,538) (567,389)
-------------------------------------------------------------------------
Net decrease in net assets from
distributions (2,534,543) (3,375,450) (2,436,744) (1,420,633)
-------------------------------------------------------------------------
SHARE TRANSACTIONS AT NET ASSET VALUE
OF $1.00 PER SHARE (NOTE 2):
Proceeds from sales of shares 136,289,737 148,776,685 132,549,772 82,609,913
Reinvested dividends 165,874 70,601 1,571,520 478,625
Cost of shares redeemed (152,149,764) (168,355,382) (124,848,130) (57,988,532)
-------------------------------------------------------------------------
Net increase (decrease) in net assets
from share transactions (15,694,153) (19,508,096) 9,273,162 25,100,006
-------------------------------------------------------------------------
Total increase (decrease) in net assets (15,695,628) (19,508,096) 9,273,184 25,099,980
NET ASSETS:
Beginning of period 74,570,191 94,078,287 40,559,580 15,459,600
-------------------------------------------------------------------------
End of period* $ 58,874,563 $ 74,570,191 $ 49,832,764 $ 40,559,580
-------------------------------------------------------------------------
-------------------------------------------------------------------------
*Includes undistributed net investment
income of $ 0 $ 0 $ 22 $ 0
</TABLE>
The accompanying notes are an integral part of the financial statements.
17------------------------------------------------------------------------------
<PAGE>
FINANCIAL HIGHLIGHTS
GROWTH & INCOME PORTFOLIO
<TABLE>
<CAPTION>
CLASS I
-----------------------------------------------------
For the Year Ended June 30,
-----------------------------------------------------
1997 1996 1995 1994**
---- ---- ---- ------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 14.12 $ 12.22 $ 10.53 $ 10.00
-----------------------------------------------------
Income from investment operations:
Net investment income 0.18 0.19 0.23 0.17
Net realized and unrealized gain on investments 3.75 2.58 2.21 0.57
-----------------------------------------------------
Total from investment operations 3.93 2.77 2.44 0.74
-----------------------------------------------------
Distributions:
Net investment income (0.18) (0.19) (0.23) (0.17)
Net realized gain (0.84) (0.68) (0.52) (0.04)
-----------------------------------------------------
Total distributions (1.02) (0.87) (0.75) (0.21)
-----------------------------------------------------
Net asset value, end of period $ 17.03 $ 14.12 $ 12.22 $ 10.53
-----------------------------------------------------
-----------------------------------------------------
TOTAL RETURN+ 28.83% 23.54% 24.20% 7.39%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $221,136 $159,146 $114,000 $82,751
Ratio of expenses to average daily net assets(1) 0.83% 0.76% 0.47% 0.34%*
Ratio of net investment income to average net assets 1.19% 1.40% 2.12% 1.83%*
Portfolio turnover rate 25% 41% 33% 83%*
Average commission rate ^ $ 0.0604 n/a n/a n/a
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had such
waivers not occurred is as follows. 0.98% 1.00% 0.99% 1.05%*
<CAPTION>
CLASS II CLASS III
--------------------------- -------------------------------------------
For the Year Ended June 30, For the Year Ended June 30,
--------------------------- -------------------------------------------
1997 1996** 1997 1996 1995 1994**
---- ------ ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 14.12 $ 13.05 $ 14.11 $ 12.23 $ 10.51 $ 10.60
------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.13 0.09 0.02 0.03 0.06 0.06
Net realized and unrealized gain (loss) on investments 3.76 1.74 3.74 2.60 2.24 (0.05)
------------------------------------------------------------------------
Total from investment operations 3.89 1.83 3.76 2.63 2.30 0.01
------------------------------------------------------------------------
Distributions:
Net investment income (0.12) (0.08) (0.04) (0.07) (0.06) (0.06)
Net realized gain (0.84) (0.68) (0.84) (0.68) (0.52) (0.04)
------------------------------------------------------------------------
Total distributions (0.96) (0.76) (0.88) (0.75) (0.58) (0.10)
------------------------------------------------------------------------
Net asset value, end of period $ 17.05 $ 14.12 $ 16.99 $ 14.11 $ 12.23 $ 10.51
------------------------------------------------------------------------
------------------------------------------------------------------------
TOTAL RETURN+ 28.48%*** 14.71%# 27.44% 22.19% 22.61% 0.08%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 16,514 $1,918 $50,178 $36,892 $19,363 $ 2,094
Ratio of expenses to average daily net assets (1) 1.14% 1.06%* 1.94% 1.87% 1.72% 1.83%*
Ratio of net investment income to average net assets 0.88% 1.10%* 0.08% 0.29% 0.87% 0.34%*
Portfolio turnover rate 25% 41% 25% 41% 33% 83%*
Average commission rate ^ $ 0.0604 n/a $0.0604 n/a n/a n/a
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had such
waivers not occurred is as follows. 1.29% 1.30%* 2.09% 2.11% 2.26% 6.03%*
</TABLE>
^ For fiscal years beginning on or after September 1, 1995, a fund that
invests more than 10% of the value of its average net assets in equity
securities is required to disclose its average commission rate per share
for security trades on which commissions are charged.
* Annualized.
** Classes I, II and III commenced operations on August 2, 1993, December 20,
1995 and December 9, 1993, respectively.
*** Class II total return does not include the one time sales charge.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------18
<PAGE>
FINANCIAL HIGHLIGHTS
BOND PORTFOLIO
<TABLE>
<CAPTION>
CLASS I
-----------------------------------------------------
For the Year Ended June 30,
-----------------------------------------------------
1997 1996 1995 1994**
---- ---- ---- ------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 9.73 $ 9.91 $ 9.41 $ 10.00
-----------------------------------------------------
Income from investment operations:
Net investment income 0.61 0.60 0.57 0.45
Net realized and unrealized gain (loss) on investments 0.11 (0.18) 0.50 (0.57)
-----------------------------------------------------
Total from investment operations 0.72 0.42 1.07 (0.12)
-----------------------------------------------------
Distributions:
Net investment income (0.61) (0.60) (0.57) (0.46)
Net realized gain - - - (0.01)
-----------------------------------------------------
Total distributions (0.61) (0.60) (0.57) (0.47)
-----------------------------------------------------
Net asset value, end of period $ 9.84 $9.73 $ 9.91 $ 9.41
-----------------------------------------------------
-----------------------------------------------------
TOTAL RETURN+ 7.58% 4.23% 11.87% (1.38)%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $123,184 $107,832 $ 90,574 $ 75,686
Ratio of expenses to average daily net assets (1) 0.49% 0.41% 0.35% 0.36%*
Ratio of net investment income to average net assets 6.20% 5.99% 6.07% 5.07%*
Portfolio turnover rate 56% 56% 23% 36%*
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had such
waivers not occurred is as follows. 0.89% 0.91% 0.91% 0.96%*
<CAPTION>
CLASS II CLASS III
--------------------------- ------------------------------------------
For the Year Ended June 30, For the Year Ended June 30,
--------------------------- ------------------------------------------
1997 1996** 1997 1996 1995 1994**
---- ------ ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 9.71 $ 10.18 $ 9.71 $ 9.89 $ 9.40 $ 10.04
-----------------------------------------------------------------------
Income from investment operations:
Net investment income 0.57 0.29 0.49 0.49 0.43 0.21
Net realized and unrealized gain (loss) on investments 0.10 (0.47) 0.11 (0.18) 0.49 (0.62)
-----------------------------------------------------------------------
Total from investment operations 0.67 (0.18) 0.60 0.31 0.92 (0.41)
-----------------------------------------------------------------------
Distributions:
Net investment income (0.57) (0.29) (0.49) (0.49) (0.43) (0.22)
Net realized gain - - - - - (0.01)
-----------------------------------------------------------------------
Total distributions (0.57) (0.29) (0.49) (0.49) (0.43) (0.23)
-----------------------------------------------------------------------
Net asset value, end of period $9.81 $ 9.71 $ 9.82 $ 9.71 $ 9.89 $ 9.40
-----------------------------------------------------------------------
-----------------------------------------------------------------------
TOTAL RETURN+ 7.12%*** (1.75)%# 6.37% 3.11% 10.12% (4.19)%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 841 $67 $2,553 $3,445 $ 1,916 $ 923
Ratio of expenses to average daily net assets(1) 0.90% 0.80%* 1.63% 1.49% 1.84% 1.82%*
Ratio of net investment income to average net assets 5.79% 5.61%* 5.07% 4.92% 4.58% 3.61%*
Portfolio turnover rate 56% 56% 56% 56% 23% 36%*
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had such
waivers not occurred is as follows. 1.30% 1.30%* 2.03% 1.99% 3.35% 6.36%*
</TABLE>
* Annualized.
** Classes I, II and III commenced operations on August 2, 1993, December 20,
1995 and December 2, 1993, respectively.
*** Class II total return does not include the one time sales charge.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
The accompanying notes are an integral part of the financial statements.
19------------------------------------------------------------------------------
<PAGE>
FINANCIAL HIGHLIGHTS
TENNESSEE TAX-FREE PORTFOLIO
<TABLE>
<CAPTION>
CLASS I CLASS II CLASS III
---------------------------------------------------------------------------------
For the Year For the Year For the Year
Ended June 30, Ended June 30, Ended June 30,
---------------------------------------------------------------------------------
1997 1996** 1997 1996** 1997 1996**
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $9.71 $10.00 $9.73 $10.06 $9.72 $10.00
----------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.50 0.23 0.51 0.21 0.50 0.19
Net realized and unrealized gain (loss)
on investments 0.28 (0.29) 0.28 (0.33) 0.28 (0.28)
----------------------------------------------------------------------------------
Total from investment operations 0.78 (0.06) 0.79 (0.12) 0.78 (0.09)
----------------------------------------------------------------------------------
Distributions:
Net investment income (0.50) (0.23) (0.51) (0.21) (0.50) (0.19)
Net realized gain - - - - - -
----------------------------------------------------------------------------------
Total distributions (0.50) (0.23) (0.51) (0.21) (0.50) (0.19)
----------------------------------------------------------------------------------
Net asset value, end of period $9.99 $9.71 $10.01 $9.73 $10.00 $9.72
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
TOTAL RETURN+ 8.26% (0.65)%# 8.37%*** (1.25)%# 8.20% (0.87)%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $8,935 $5,925 $5,941 $1,875 $5,750 $896
Ratio of expenses to average daily
net assets (1) 0.07% 0.50%* 0.12% 0.49%* 0.23% 0.98%*
Ratio of net investment income to
average net assets 5.09% 4.31%* 5.03% 4.32%* 4.93% 3.83%*
Portfolio turnover rate 122% 8%* 122% 8%* 122% 8%*
(1) During the period, various fees were
waived. The ratio of expenses to
average net assets had such waivers
not occurred is as follows. 1.14% 1.42% 1.14% 1.42% 1.91% 1.91%
</TABLE>
* Annualized.
** Class I and III commenced operations on December 15, 1995. Class II
commenced operations on December 29, 1995.
*** Class II total return does not include the one time sales charge.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------20
<PAGE>
FINANCIAL HIGHLIGHTS
U.S. TREASURY MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
CLASS I CLASS III
-------------------------------------------------------- -----------------------
For the Year For the Year
Ended June 30, Ended June 30,
-------------------------------------------------------- -----------------------
1997 1996 1995 1994 1993** 1997 1996**
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-----------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.050 0.052 0.050 0.030 0.018 0.047 0.044
-----------------------------------------------------------------------------------
Distributions:
Net investment income (0.050) (0.052) (0.050) (0.030) (0.018) (0.047) (0.044)
-----------------------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
TOTAL RETURN+ 5.09% 5.30% 5.10% 3.06% 1.76%# 4.84% 4.47%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $6,141 $75,703 $67,377 $100,868 $59,326 $61,135 $3,528
Ratio of expenses to average net assets (1) 0.37% 0.36% 0.36% 0.33% 0.39%* 0.62% 0.62%*
Ratio of net investment income to average
net assets 5.01% 5.19% 5.00% 3.04% 2.73%* 4.76% 4.93%*
(1) During the period, various fees were
waived. The ratio of expenses to
average net assets had such waivers
not occurred is as follows. 0.55% 0.56% 0.63% 0.60% 0.65%* 0.80% 0.82%*
</TABLE>
* Annualized.
** Classes I and III commenced operations on November 12, 1992 and August 8,
1995, respectively.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
The accompanying notes are an integral part of the financial statements.
21------------------------------------------------------------------------------
<PAGE>
FINANCIAL HIGHLIGHTS
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
CLASS I CLASS III
------------------------------------------------------- --------------------
For the Year For the Year
Ended June 30, Ended June 30,
------------------------------------------------------- --------------------
1997 1996 1995 1994 1993** 1997 1996**
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-----------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.051 0.053 0.053 0.032 0.019 0.048 0.044
-----------------------------------------------------------------------------------
Distributions:
Net investment income (0.051) (0.053) (0.053) (0.032) (0.019) (0.048) (0.044)
-----------------------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
TOTAL RETURN+ 5.23% 5.37% 5.39% 3.23% 1.87%# 4.91% 4.49%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $94,541 $88,111 $88,057 $67,854 $94,903 $3,486 $228
Ratio of expenses to average net assets (1) 0.35% 0.33% 0.31% 0.28% 0.27%* 0.65% 0.65%*
Ratio of net investment income to average
net assets 5.11% 5.28% 5.27% 3.18% 2.98%* 4.81% 4.96%*
(1)During the period, various fees were
waived. The ratio of expenses to average
net assets had such waivers not occurred
is as follows. 0.53% 0.53% 0.58% 0.55% 0.55%* 0.83% 0.85%*
</TABLE>
* Annualized.
** Classes I and III commenced operations on November 12, 1992 and August 8,
1995, respectively.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
The accompanying notes are in integral part of the financial statements.
- ------------------------------------------------------------------------------22
<PAGE>
FINANCIAL HIGHLIGHTS
MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
CLASS I CLASS III
----------------------------------------------- -----------------
For the Year For the Year
Ended June 30, Ended June 30,
----------------------------------------------- -----------------
1997 1996 1995 1994 1993** 1997 1996**
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-------------------------------------------------------------------
Income from investment operations:
Net investment income 0.033 0.035 0.034 0.024 0.014 0.030 0.030
-------------------------------------------------------------------
Distributions:
Net investment income (0.033) (0.035) (0.034) (0.024) (0.014) (0.030) (0.030)
-------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-------------------------------------------------------------------
-------------------------------------------------------------------
TOTAL RETURN+ 3.32% 3.52% 3.48% 2.40% 1.40%# 3.03% 3.03%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $45,988 $71,665 $94,078 $76,231 $74,362 $12,886 $2,905
Ratio of expenses to average net assets (1) 0.35% 0.32% 0.30% 0.28% 0.31%* 0.62% 0.58%*
Ratio of net investment income to average
net assets 3.25% 3.50% 3.44% 2.39% 2.26%* 2.98% 3.24%*
(1)During the period, various fees were
waived. The ratio of expenses to average
net assets had such waivers not occurred
is as follows. 0.53% 0.52% 0.57% 0.55% 0.58%* 0.79% 0.78%*
</TABLE>
* Annualized.
** Classes I and III commenced operations on November 12, 1992 and July 28,
1995, respectively.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
The acccompanying notes are an integral part of the financial statements.
23------------------------------------------------------------------------------
<PAGE>
FINANCIAL HIGHLIGHTS
CASH RESERVE PORTFOLIO
<TABLE>
<CAPTION>
CLASS I CLASS III
---------------------------------------- ------------------------
For the Year For the Year
Ended June 30, Ended June 30,
---------------------------------------- ------------------------
1997 1996 1995** 1997 1996**
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------------
Income from investment operations:
Net investment income 0.051 0.053 0.042 0.049 0.047
---------------------------------------------------------------------
Distributions:
Net investment income (0.051) (0.053) (0.042) (0.049) (0.047)
---------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------------
---------------------------------------------------------------------
TOTAL RETURN+ 5.23% 5.39% 4.27%# 5.00% 4.78%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $14,241 $16,369 $15,460 $35,592 $24,190
Ratio of expenses to average net assets (1) 0.40% 0.42% 0.43%* 0.64% 0.62%*
Ratio of net investment income to average
net assets 5.13% 5.22% 5.48%* 4.88% 5.02%*
(1)During the period, various fees were
waived. The ratio of expenses to average
net assets had such waivers not occurred
is as follows. 0.57% 0.61% 0.70%* 0.82% 0.81%*
</TABLE>
* Annualized.
** Classes I and III commenced operations on September 26, 1994 and July 28,
1995, respectively.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
The acccompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------24
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING AND OPERATING POLICIES
First Funds (the Trust) is registered under the Investment Company Act of 1940,
as amended (the 1940 Act), as an open-ended 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 Trust currently has seven active investment portfolios (each referred to as
a "Portfolio"). The Trust's financial statements are prepared in accordance with
generally accepted accounting principles. This requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
The following summarizes the significant accounting policies for the Trust.
Each Portfolio may offer three classes of shares (Class I, Class II and Class
III). As of June 30, 1997, Class II shares have been issued only for the Growth
& Income (formerly Total Return Equity), Bond (formerly Total Return Fixed
Income), and Tennessee Tax-Free Portfolios. Class I and Class III shares have
been issued for all Portfolios. Each Class of shares has equal rights as to
earnings, assets and voting privileges except that each Class bears different
distribution, shareholder service, transfer agent/fund accounting and blue sky
expenses. Each Class has exclusive voting rights with respect to its
Distribution Plans and Shareholder Servicing Plans. Income, expenses (other than
expenses incurred under each Class Distribution and Service Plans and other
class specific expenses) and realized and unrealized gains or losses on
investments are allocated to each Class of shares based upon their relative net
assets or dividend assets.
SECURITY VALUATION:
GROWTH & INCOME, BOND AND TENNESSEE TAX-FREE PORTFOLIOS: Securities held in the
Growth & Income Portfolio for which exchange quotations are readily available
are valued at the last sale price, or if no sale price or if traded on the
over-the-counter market, at the closing bid price. Securities held in the Bond
and Tennessee Tax-Free Portfolios are valued based upon a computerized matrix
system and/or appraisals by a pricing service, both of which consider market
transactions and dealer-supplied valuations. Securities for which quotations are
not readily available are valued using dealer-supplied valuations or at the fair
value as determined in good faith under consistently applied procedures under
the general supervision of the Board of Trustees. Short-term securities maturing
within sixty days are valued at amortized cost or original cost plus accrued
interest, both of which approximate current value.
MONEY MARKET PORTFOLIOS: Each of the Money Market Portfolios values securities
utilizing the amortized cost method of valuation under Rule 2a-7 of the 1940
Act, pursuant to which each Money Market Portfolio must adhere to certain
conditions. Under this method, investments are valued initially at cost and
thereafter assume a constant amortization to maturity of any discount or
premium.
ORGANIZATIONAL COSTS: Costs incurred by the Trust in connection with its
initial share registration were deferred and amortized on a straight-line basis
over 5 years.
REPURCHASE AGREEMENTS: Each Portfolio, through its custodian, receives delivery
of underlying securities, whose market value, including interest, is required
to be at least equal to 102% of the resale price. The Trust's sub-advisers,
under the supervision of the investment adviser, First Tennessee Bank (First
Tennessee), are responsible for determining that the value of these underlying
securities remains at least equal to 102% of the resale price. If the seller
defaults, each Portfolio would suffer a loss to the extent that the proceeds
from the sale of the underlying securities were less than the repurchase price.
INCOME TAXES: As a qualified regulated investment company under Subchapter M of
the Internal Revenue Code, each Portfolio is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal year.
INTEREST INCOME: Interest income, which includes amortization of premium and
accretion of discount, is accrued as earned. For the Municipal Money Market
Portfolio, accretion of market discount represents unrealized gain until
realized at the time of security disposition or maturity. Dividend income is
recorded on the ex-dividend date.
EXPENSES: Most expenses of the Trust can be directly attributed to a Portfolio.
Expenses which cannot be directly attributed are apportioned among the
Portfolios based on average net assets. For the year ended June 30, 1997, total
Trust expenses were reduced $16,891 under expense offset arrangements with the
Custodian. The Trust could have invested a portion of the assets utilized in
connection with the offset arrangements in an income producing asset.
DISTRIBUTIONS TO SHAREHOLDERS: For the Money Market Portfolios, Bond Portfolio
and Tennessee Tax-Free Portfolio, distributions are declared daily and paid
monthly from net investment income. Distributions for Growth & Income Portfolio
are declared and paid monthly. Any net capital gains earned by each Portfolio
are distributed at least annually to the extent necessary to avoid federal
income and excise taxes.
Income and capital gains to be distributed are determined in accordance with
income tax regulations which may differ from income and gains reported under
generally accepted accounting principles. For the year ended June 30, 1997, the
effects of certain differences due to net paydown losses were reclassified by
the Bond Portfolio to reflect an increase in accumulated net investment loss of
$12,701 and a decrease in accumulated net realized loss on investments of
$12,701. The calculation of net investment income in the Financial Highlights
excludes this adjustment.
25------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING AND OPERATING POLICIES (CONTINUED)
OTHER: Investment security transactions are accounted for as of trade date.
Realized gains and losses from securities transactions are determined using the
identified cost basis for both financial reporting and income tax purposes.
2. SHARES OF BENEFICIAL INTEREST
<TABLE>
<CAPTION>
GROWTH & INCOME BOND TENNESSEE TAX-FREE
PORTFOLIO PORTFOLIO PORTFOLIO
-----------------------------------------------------------------------------------------
For the Year For the Year For the Year
Ended June 30, Ended June 30, Ended June 30,
1997 1996 1997 1996 1997 1996*
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dollars issued and redeemed:
Class I:
Issued $ 28,624,247 $ 32,703,374 $ 17,022,861 $ 21,362,353 $ 7,234,437 $ 6,254,616
Distributions reinvested 11,375,774 8,189,401 6,594,162 5,699,923 19,739 686
Redeemed (14,039,927) (15,914,561) (9,607,777) (7,447,448) (4,456,397) (210,724)
-----------------------------------------------------------------------------------------
Net increase $ 25,960,094 $ 24,978,214 $ 14,009,246 $ 19,614,828 $ 2,797,779 $ 6,044,578
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Class II:**
Issued $ 13,350,241 $ 1,882,420 $ 770,186 $ 69,932 $ 4,505,744 $ 1,887,494
Distributions reinvested 353,865 3,869 28,502 656 141,816 10,271
Redeemed (659,970) (21,582) (25,432) (3,000) (680,046) (14,693)
-----------------------------------------------------------------------------------------
Net increase $ 13,044,136 $ 1,864,707 $ 773,256 $ 67,588 $ 3,967,514 $ 1,883,072
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Class III:
Issued $ 9,999,767 $ 16,363,050 $ 140,469 $ 2,342,221 $ 5,295,697 $ 1,442,225
Distributions reinvested 2,300,909 1,661,097 134,918 145,526 93,467 13,621
Redeemed (7,010,235) (4,839,691) (1,200,058) (868,075) (619,208) (526,292)
-----------------------------------------------------------------------------------------
Net increase (decrease) $ 5,290,441 $ 13,184,456 ($ 924,671) $ 1,619,672 $ 4,769,956 $ 929,554
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Shares issued and redeemed:
Class I:
Issued 1,875,264 2,523,867 1,746,590 2,117,107 733,904 631,913
Distributions reinvested 754,234 645,878 673,294 572,716 1,999 70
Redeemed (919,542) (1,227,208) (981,496) (747,397) (451,365) (21,867)
-----------------------------------------------------------------------------------------
Net increase 1,709,956 1,942,537 1,438,388 1,942,426 284,538 610,116
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Class II:**
Issued 850,780 137,126 78,480 7,145 455,421 193,243
Distributions reinvested 23,380 279 2,913 67 14,328 1,056
Redeemed (41,752) (1,547) (2,590) (295) (69,180) (1,503)
-----------------------------------------------------------------------------------------
Net increase 832,408 135,858 78,803 6,917 400,569 192,796
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Class III:
Issued 647,961 1,263,416 14,410 234,519 535,937 144,921
Distributions reinvested 152,701 131,783 13,810 14,645 9,446 1,390
Redeemed (461,201) (363,695) (122,936) (88,078) (62,659) (54,063)
-----------------------------------------------------------------------------------------
Net increase (decrease) 339,461 1,031,504 (94,716) 161,086 482,724 92,248
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
</TABLE>
* For Tennessee Tax-Free Portfolio, Classes I and III commenced operations on
December 15, 1995. Class II commenced operations on December 29, 1995.
** For Growth & Income and Bond Portfolios, Class II commenced operations on
December 20, 1995.
- ------------------------------------------------------------------------------26
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
<TABLE>
<CAPTION>
U.S. TREASURY U.S. GOVERNMENT
MONEY MARKET PORTFOLIO MONEY MARKET PORTFOLIO
-----------------------------------------------------------------------------------------
For the Year For the Year
Ended June 30, Ended June 30,
1997 1996* 1997 1996*
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares/Dollars issued and
redeemed:
Class I:
Issued 288,035,908 319,601,543 148,660,358 173,136,867
Distributions reinvested 1,910 1,639 2,235 6,070
Redeemed (357,592,644) (311,270,747) (142,227,950) (173,086,183)
-----------------------------------------------------------------------------------------
Net increase (decrease) (69,554,826) 8,332,435 6,434,643 56,754
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Class III:
Issued 126,840,766 8,959,299 14,290,434 990,652
Distributions reinvested 148,468 86,265 64,598 4,420
Redeemed (69,382,371) (5,517,050) (11,096,432) (767,425)
-----------------------------------------------------------------------------------------
Net increase 57,606,863 3,528,514 3,258,600 227,647
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
* For U.S. Treasury Money Market and U.S. Government Money Market Portfolios,
Class III commenced operations on August 8, 1995.
<CAPTION>
MUNICIPAL CASH RESERVE
MONEY MARKET PORTFOLIO PORTFOLIO
-----------------------------------------------------------------------------------------
For the Year For the Year
Ended June 30, Ended June 30,
1997 1996** 1997 1996**
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares/Dollars issued and
redeemed:
Class I:
Issued 110,038,524 139,423,634 32,622,397 24,743,027
Distributions reinvested 1,233 1,090 1 0
Redeemed (135,715,106) (161,838,128) (34,750,381) (23,833,276)
-----------------------------------------------------------------------------------------
Net increase (decrease) (25,675,349) (22,413,404) (2,127,983) 909,751
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Class III:*
Issued 26,251,213 9,353,051 99,927,375 57,866,886
Distributions reinvested 164,641 69,511 1,571,519 478,625
Redeemed (16,434,658) (6,517,254) (90,097,749) (34,155,256)
-----------------------------------------------------------------------------------------
Net increase 9,981,196 2,905,308 11,401,145 24,190,255
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
</TABLE>
** For Municipal Money Market and Cash Reserve Portfolios, Class III commenced
operations on July 28, 1995.
3. INVESTMENT ADVISORY AND MANAGEMENT AND SUB-ADVISORY AGREEMENTS
For managing its investment and business affairs, Growth & Income Portfolio,
Bond Portfolio and Tennessee Tax-Free Portfolio each pay First Tennessee Bank
National Association ("First Tennessee"), a monthly management fee at the
annual rate of .65%, .55% and .50% respectively, of its average net assets. For
managing its investment and business affairs, each of the Money Market
Portfolios pays First Tennessee its pro-rated portion of a monthly management
fee at the annual rate of .25% of aggregate average monthly net assets of all
Money Market Portfolios of the Trust managed by First Tennessee through $1
billion, and .22% on amounts greater than $1 billion. Under the Investment
Advisory and Management Agreement, First Tennessee is authorized, at its own
expense, to hire sub-advisers to provide investment advice to it and to each
Portfolio.
For the Growth & Income and Bond Portfolios, Highland Capital Management Corp.
(Highland) serves as the sub-adviser of each Portfolio pursuant to the authority
granted to it under its Sub-Advisory Agreement with First Tennessee. Highland is
an affiliate of First Tennessee and is a wholly-owned subsidiary of First
Tennessee National Corporation. Highland is paid by First Tennessee a monthly
sub-advisory fee at the annual rate of .38% of Growth & Income Portfolio's
average net assets and .33% of Bond Portfolio's average net assets. For the
Money Market Portfolios, PNC Institutional Management Corporation (PIMC) serves
as the sub-adviser of each Portfolio pursuant to the authority granted to it
under its Sub-Advisory Agreement with the First Tennessee. PIMC is a
wholly-owned subsidiary of PNC Bank National Association. PIMC is paid by First
Tennessee a monthly sub-advisory fee at the annual rate of .08% of each
Portfolio's average net assets through $500 million, .06% of the next $500
million, and .05% of net assets greater than $1 billion.
27------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. ADMINISTRATOR, CO-ADMINISTRATOR AND DISTRIBUTOR
ALPS Mutual Funds Services, Inc. serves as Administrator and Distributor for the
Trust under separate Administration and General Distribution Agreements. ALPS'
duties include distribution services, providing office space and various legal
and accounting services in connection with the regulatory requirements
applicable to each Portfolio. ALPS is entitled to receive administration fees
from each of the Money Market Portfolios at the annual rate of .075% of average
net assets and, from the Growth & Income, Bond and Tennessee Tax-Free
Portfolios, at the annual rate of .15% of average net assets.
First Tennessee serves as the Co-Administrator for each Portfolio. As the
Co-Administrator, First Tennessee assists in each Portfolio's operation,
including but not limited to, providing non-investment related research and
statistical data and various operational and administrative services. First
Tennessee is entitled to receive co-administration fees from each Portfolio at
the annual rate of .05% of average net assets.
The Trustees have adopted a Distribution Plan on behalf of Class III of each
Portfolio pursuant to Rule 12b-1 under the Investment Company Act of 1940, as
amended. Each Distribution Plan provides for payment of a fee to ALPS at the
annual rate of up to .75% of the average net assets of Class III of the Growth &
Income, Bond and Tennessee Tax-Free Portfolios, and .25% of the average net
assets of Class III of each of the Money Market Portfolios. The Trustees have
also adopted Shareholder Servicing Plans on behalf of Class II and III of the
Growth & Income and Bond Portfolios under which Investment Professionals are
paid at the annual rate of .25% of each Class' average net assets for
shareholder services and account maintenance.
5. WAIVER OF FEES
GROWTH & INCOME AND BOND PORTFOLIOS:
For the year ended June 30, 1997, First Tennessee voluntarily agreed to waive
its management fee for the Growth & Income and Bond Portfolios to .50% and .15%
of average net assets, respectively. Pursuant to the voluntary waiver agreement,
for the year ended June 30, 1997, First Tennessee waived management fees of
$350,778 and $478,581 for the Growth & Income and Bond Portfolios, respectively.
TENNESSEE TAX-FREE PORTFOLIO:
Since the Fund's inception, First Tennessee Bank National Association (First
Tennessee), as Investment Adviser, has voluntarily agreed to waive its entire
investment advisory and co-administration fees. Effective April 1, 1997, First
Tennessee eliminated its waiver of co-administration fees which amount to 0.05%.
For the year ended June 30, 1997, the 12b-1 fee charged by Class III of the
Tennessee Tax-Free Portfolio was waived to .50% of average net assets.
From January 1, 1996 through July 28, 1996, ALPS voluntarily agreed to waive its
administration fee and reimburse the Tennessee Tax-Free Portfolio for fund
accounting/transfer agent fees as well as custody out-of-pocket fees. From July
29, 1996 through March 31, 1997, ALPS voluntarily agreed to waive its
administration fee and assume all expenses of the Tennessee Tax-Free Portfolio
in order to maintain an expense ratio of 0.00% for all classes of the Portfolio,
after taking into consideration waivers by First Tennessee. Effective April 1,
1997, ALPS began to phase out the assumption of Portfolio expenses while
continuing to waive its administration fee. The reimbursement of non-12b-1
expenses for each Class of the Portfolio was reduced by 0.15% as of April 1,
1997, and was further reduced by 0.10% on the first business day of each month
thereafter until July 1, 1997 when all remaining reimbursements of non-12b-1
expenses by ALPS were discontinued. For Class III of the Tennessee Tax-Free
Portfolio, the reimbursement of 12b-1 fees by ALPS decreased by 0.125% on April
1, 1997, by 0.05% on the first business day of May and June and by 0.025% on
July 1, 1997. Thereafter, 12b-1 fees for Class III will be voluntarily
maintained at 0.25% by ALPS.
Pursuant to the voluntary waiver and reimbursement agreements, for the year
ended June 30, 1997, fees were waived and reimbursed for the Tennessee Tax-Free
Portfolio as follows:
Management fees waived $65,349
Co-administration fees waived $ 4,227
Administration fees waived $19,605
Reimbursement by administrator $57,769
12b-1 fees waived $ 6,300
MONEY MARKET PORTFOLIOS:
For the year ended June 30, 1997, First Tennessee voluntarily agreed to waive a
portion of its management and co-administration fees payable by each of the
Money Market Portfolios so that each Money Market Portfolio pays .10% and .025%,
respectively, of its average net assets. For the year ended June 30, 1997, the
expense waivers were as follows:
Management Fee Co-Administration Fee
-------------- ---------------------
U.S. Treasury Money Market $123,907 $20,651
U.S. Government Money Market $142,654 $23,775
Municipal Money Market $117,665 $19,611
Cash Reserve $ 73,488 $12,248
- ------------------------------------------------------------------------------28
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. OTHER
As of June 30, 1997, one shareholder owned 35.7% of the Growth & Income
Portfolio and 54.7% of the Bond Portfolio. Additionally, as of June 30, 1997,
one shareholder owned 27.6% of the U.S. Treasury Money Market Portfolio, one
shareholder owned 18.8% of the Municipal Money Market Portfolio and one
shareholder owned 56.9% of the Cash Reserve Portfolio.
The Trustees of the Trust receive an annual Trustees fee of $4,000 and an
additional fee for each Trustee's meeting attended.
29------------------------------------------------------------------------------
<PAGE>
[LOGO]
370 Seventeenth Street
Suite 2700
Denver, Colorado 80202
www.firstfunds.com
INVESTMENT ADVISER AND CO-ADMINISTRATOR
First Tennessee Bank National Association
Memphis, Tennessee
SUB-ADVISER - MONEY MARKET PORTFOLIOS
PNC Institutional Management Corporation
Wilmington, Delaware
SUB-ADVISER - GROWTH & INCOME AND BOND PORTFOLIOS
Highland Capital Management Corporation
Memphis, Tennessee
OFFICERS
Richard C. Rantzow, President
James Hyatt, Secretary
Jeremy 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, Colorado
TRANSFER AND SHAREHOLDER SERVICING AGENT
Chase Global Funds Services Company
Boston, Massachusetts
CUSTODIAN
Chase Manhattan Bank, N.A.
New York, New York
NOT FDIC INSURED
[LOGO] FIRST TENNESSEE
HERE FOR YOU
Investment Advisor
[LOGO] MUTUAL FUNDS SERVICES
SPONSOR AND DISTRIBUTOR
