<PAGE>
JUNE 30, 1998
ANNUAL REPORT TO SHAREHOLDERS
OF
FIRST FUNDS
DISCIPLINE, CONSISTENCY, PATIENCE -SM-
[PHOTO]
[LOGO]
<PAGE>
LETTER FROM THE PRESIDENT
Dear Shareholder:
We hope that you enjoy reading the First Funds Annual Report for the year
ending June 30, 1998. This report contains a comprehensive group of financial
statements for each Portfolio including the holdings of each Portfolio at the
end of the period. The commentaries at the beginning of this report review the
markets over the past year and illustrate how the mutual funds performed. The
Portfolio Managers also explain their current investment strategy and outlook
for the future. We feel that this insight can be valuable to both shareholders
and prospective shareholders who want to learn more about First Funds.
We have made great strides in diversifying the First Funds Family of Mutual
Funds. Two new Portfolios were added over the past year. Last fall we
commenced operations of the Capital Appreciation Portfolio, whose objective is
to seek long-term capital appreciation by investing at least 65% of its total
assets in equity securities of medium and smaller capitalization companies
(generally those with market capitalizations less than $5 billion). The
Portfolio contrasts nicely with the Growth & Income Portfolio, which tends to
invest in larger company stocks. Smaller company stocks have historically
offered greater reward than large company stocks in exchange for greater
volatility (risk).
In the fixed income category, the Intermediate Bond Portfolio was added in
March, offering investors monthly income, generally less volatility (risk)
compared to a portfolio of longer-term bonds, and potential for capital
appreciation. The Portfolio seeks high current income consistent with
preservation of capital. This complements our Bond Portfolio, which holds
longer-term bonds that tend to offer higher yields, yet are generally more
volatile than shorter-term bonds.
With five Portfolios to choose from in addition to the Money Market
Portfolios, First Funds now goes even further in providing you with the
investment tools necessary to meet your personal goals. In addition to a
variety of portfolios, our commitment is to achieve long-term success 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 benefit investors by providing them with the means to stay the
course over the long term. With experience in a number of good and bad market
cycles, First Funds' team of investment professionals has developed an
investment approach that fully encompasses this principle. Our tagline,
"Discipline, Consistency, Patience", exhibits our commitment to this belief.
Feel free to offer us your comments on how First Funds is doing. You can
call us toll free at 1-800-442-1941, write us at 370 17th Street, Suite 3100,
Denver, Colorado 80202, or visit our web site at www.firstfunds.com.
Thank you for choosing the First Funds Family of Mutual Funds to help you reach
your financial goals.
Sincerely,
/s/ Richard C. Rantzow
Richard C. Rantzow
President
- -------------------------------------------------------------------------------
FIRST FUNDS
- - Are NOT insured by the FDIC 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.
- -------------------------------------------------------------------------------
i
<PAGE>
FIRST FUNDS GROWTH & INCOME PORTFOLIO
[PHOTO]
GROWTH & INCOME PORTFOLIO MANAGERS
EDWARD GOLDSTEIN AND DAVID THOMPSON, CFA
Mr. Goldstein is Director and President of Highland Capital Management Corp.,
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 Senior Vice President with Highland Capital Management Corp. and
a Chartered Financial Analyst. After graduating from the University of
Mississippi in 1981, he worked as an analyst for Gulf Oil for three years, then
went on to receive his MBA from the University of North Carolina at Chapel Hill
in 1986. With ten years of experience managing both individual and
institutional investment portfolios at major regional banks, Mr. Thompson joined
Highland Capital's equity team in 1995.
YEAR IN REVIEW
PERFORMANCE
For the year ended June 30, 1998, the First Funds Growth & Income Portfolio,
Class I, II and III, returned 32.55%, 24.57%, and 31.16% respectively, net of
fees and sales charges, versus 30.16% for the S&P 500.
MARKET REVIEW
While the market was good to investors over the preceding 12 months, it also
provided some excitement. The latter half of 1997 saw the market shrugging off
earlier worries over inflation, but increased volatility meant investors had to
work for each quarters' gains. The first quarter of 1998 was by far the
strongest of the period, with the S&P 500 charging ahead 13.9%. The second
calendar quarter, however, found investors in a distinctly more cautious mood.
Throughout the period, a limited number of themes dominated the market.
Foremost on everyone's mind was inflation. Unemployment remains well below the
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.*
ii
<PAGE>
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.*
level economists have long warned is unsustainable, and consumers are confident
and spending money freely. Traditionally, both served as signs of impending
inflation, yet it remains subdued. Why? One answer is that neither labor nor
producers currently have much pricing power. "U.S. capacity" has been replaced
with global capacity, and there's simply too much of it at present. However,
the increase in mergers and acquisitions in the U.S. and Europe provides
evidence that industries are themselves tackling the issue.
Also of note is the outperformance of the so-called "nifty fifty." Reminiscent
of the late 1960's, a relatively small number of dominant industry players have
been commanding the lion's share of investors' attention. Contributing factors
include the popularity of "indexing," resulting in a fairly steady demand for
upper-tier stocks; global mergers and acquisitions activity, played by--and
benefiting--many of these industry giants; and the Asian "flight to quality."
Global economic interdependence is no longer just a theory. While the U.S.
economy currently is benefiting from low inflation, the first government budget
surplus in three decades, and a healthy consumer base, its companies are
beginning to show symptoms of the Asian Flu. Corporate earnings are affected as
Asian customers can no longer afford U.S. goods. Profits are impacted further
as low-priced Asian goods force U.S. companies to cut prices in their own
backyard. Clearly, interdependence can be a double-edged sword.
[CHART]
<TABLE>
<CAPTION>
GROWTH & INCOME PORTFOLIO
ASSET TYPE PROFILE AS OF JUNE 30, 1998
<S> <C>
BASIC MATERIALS 2.5%
CAPITAL GOODS 5.2%
COMMUNICATION SERVICES 14.4%
CONSUMER CYCLICALS 7.1%
CONSUMER STAPLES 11.0%
ENERGY 8.3%
FINANCE & INSURANCE 18.2%
HEALTH CARE 16.0%
TECHNOLOGY 13.9%
SHORT-TERM INVESTMENTS 3.4%
</TABLE>
PORTFOLIO UPDATE
Communication, financial, and health care stocks were overweighted sectors
within the Portfolio in the last year, an allocation that was beneficial to our
performance. Pharmaceuticals such as Schering Plough Corp. and Merck & Co.,
Inc. performed well due to strong unit volume growth, minimal price increases,
and new products introduced into the marketplace. Communications stocks also
rose as consolidation continued in that industry. Airtouch Communications,
Inc., a wireless provider, gained 40% in 1998 alone.
iii
<PAGE>
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.*
Aside from stock picks and sector allocation, we had a low level of turnover in
the past year and expect that trend to continue.
CURRENT STRATEGY AND OUTLOOK
We still favor the financial and health care sectors. Financial stocks should
continue to do well in the current low inflation and low interest rate
environment. We expect the bank stocks we own to generate earnings growth of
10% or better, easily beating the 4 - 6% growth rate that we see for the overall
market. We also believe pharmaceutical stocks should continue to do well, with
strong earnings from new drug introductions and solid unit volume growth. We
are still underweighted in cyclical areas of the market due to our belief that
the economy is beginning to slow. Energy has been another weak sector of the
market so far this year, as oil prices have collapsed. However, we expect them
to strengthen as the year progresses, and expect a rebound in energy stocks by
late in the fourth quarter of this year.
Overall, Asia remains the focus of U.S. markets. Their troubles provide a
damper for inflation and a drag on U.S. earnings growth. If the Japanese
experience is any guide, the situation is likely to limp along for some time.
Beyond that, mergers and acquisition activity in key industries will continue to
provide some excitement at times, as well as improve the current level of global
capacity. In general, we believe that earnings will continue to grow, albeit at
a slower pace. With the market continuing to sell at approximately 24x 1998
earnings, a dramatic slowdown in earnings growth could present problems for the
market.
<TABLE>
<CAPTION>
GROWTH & INCOME PORTFOLIO
Cumulative Average Annual
Total Return* Total Return*
SINCE 1 YEAR SINCE
INCEPTION INCEPTION
- ------------------------------------------------------------------
<S> <C> <C> <C>
CLASS I 181.37% 32.55% 23.38%
CLASS II 163.36% 24.57% 21.74%
CLASS III 166.93% 31.16% 22.07%
S&P 500 183.56% 30.16% 23.61%
</TABLE>
* TOTAL RETURNS ARE FOR THE PERIOD ENDED JUNE 30, 1998 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.
iv
<PAGE>
FIRST FUNDS CAPITAL APPRECIATION PORTFOLIO
[PHOTO]
CAPITAL APPRECIATION PORTFOLIO MANAGER
MARTIN J. CALIHAN, MBA, CFA
Martin J. Calihan is Vice President with Investment Advisers, Inc. (IAI) in
Minneapolis, Minnesota, co-adviser to the Portfolio. Marty received his
bachelor's degree from Amherst College in 1986, and earned his MBA in 1990 from
Dartmouth College where he was a Tuck Scholar. A Chartered Financial Analyst,
Marty's investment career began in 1986 as Research Analyst for Aetna Life &
Casualty. In 1990, he became Equity Research Analyst for State Street Research &
Management Co., then moved to Morgan Stanley in 1991 where he researched and
analyzed emerging growth stocks. Marty joined IAI in 1992, and has served as
Portfolio Manager of the Capital Appreciation Portfolio since its inception in
1997.
YEAR IN REVIEW
PERFORMANCE
The Capital Appreciation Portfolio Class I shares started operations on
September 2, 1997, and returned 7.40% since inception. This performance
compares quite favorably to a return of 4.13% on the Russell 2500 Growth Index,
the Fund's primary benchmark. However, larger capitalization stocks continued
to outpace smaller issues as evidenced by the gain of 27.66% in the S&P 500
Index during this same period. Class II and III shares began on October 2, 1997
and returned (3.95)% and 1.24% respectively. All Portfolio returns are net of
fees and sales charges.
MARKET REVIEW
The economic backdrop has been very favorable for the U.S. stock market over the
last several months. Moderate economic growth, low inflation, and falling
interest rates have all combined to support the equity market. However, all
stocks have not been treated equally by investors over the past year. Large cap
stocks have led the rise in the market, and their gains have dominated the
returns for small cap stocks. The economic turmoil in Asia that surfaced last
Fall sparked a "flight-to-quality" that has led both foreign and domestic
investors to seek the relative safety of the large blue chip stocks. Foreign
investors, shifting their capital to the U.S., have favored the recognizable
names of the
COMPARISON OF CHANGE IN VALUE OF A $100,000 INVESTMENT IN THE FIRST FUNDS
CAPITAL APPRECIATION PORTFOLIO (CLASS I) AND THE RUSSELL 2500 GROWTH INDEX.
[GRAPH]
PLEASE NOTE: CLASS I INCEPTION IS SEPTEMBER 2, 1997. PAST PERFORMANCE IS NOT
PREDICTIVE OF FUTURE RESULTS.*
v
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE FIRST FUNDS CAPITAL
APPRECIATION PORTFOLIO (CLASS II) AND THE RUSSELL 2500 GROWTH INDEX.
[GRAPH]
PLEASE NOTE: CLASS II INCEPTION IS OCTOBER 2, 1997. 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.*
blue chip companies along with U.S. Treasury bonds. Domestic investors have
also gravitated to the increased liquidity of large cap stocks in case the
"Asian Flu" spreads to the U.S. Small cap stocks have been ignored largely due
to this phenomenon.
Within the small cap segment of the market, value stocks have overshadowed small
cap growth stocks like those in the Portfolio. The technology, capital goods,
and energy sectors within the Russell 2500 Growth Index have all suffered losses
over the period. Conversely, the financial sector within the value index has
performed extremely well due largely to the merger mania in the banking
industry. The combination of the large cap effect and the disparity between
value and growth has made small cap growth stocks the worst performing asset
class over the last year.
PORTFOLIO UPDATE
The Portfolio's outperformance relative to its benchmark has been driven by
superior stock selection across most of the economic sectors of the market.
Stock picks within the health care, transportation, consumer staples, and
communications areas were particularly successful. One of the biggest
contributors to performance over the last several months was Centennial
Cellular Corp., a provider of rural cellular phone service, that agreed to be
acquired by a buyout firm. Another strong performer was Watsco, Inc., a
distributor of residential heating and air conditioning equipment, that is
benefiting from the warmer weather. The only sector in which we
significantly under-performed was the technology sector. Two stocks, Artesyn
Technologies, Inc., a maker of power supply systems for networking equipment,
and CCC Information Services Group, a software and services provider to the
automotive insurance industry, announced disappointing earnings due to
slowing business conditions. We continue to have a great deal of
[CHART]
<TABLE>
<CAPTION>
CAPITAL APPRECIATION PORTFOLIO
ASSET TYPE PROFILE AS OF JUNE 30, 1998
<S> <C>
BASIC MATERIALS 2.5%
CAPITAL GOODS 12.2%
COMMUNICATION SERVICES 3.3%
CONSUMER CYCLICALS 20.3%
CONSUMER STAPLES 10.3%
ENERGY 4.1%
FINANCIAL 9.2%
HEALTH CARE 14.4%
TECHNOLOGY 19.2%
SHORT-TERM INVESTMENTS 4.5%
</TABLE>
vi
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE FIRST FUNDS CAPITAL
APPRECIATION PORTFOLIO (CLASS III) AND THE RUSSELL 2500 GROWTH INDEX.
[GRAPH]
PLEASE NOTE: CLASS III INCEPTION IS OCTOBER 2, 1997. PAST PERFORMANCE IS NOT
PREDICTIVE OF FUTURE RESULTS.*
confidence in the long term prospects of these companies and view the price
declines as an opportunity to add to both positions.
We recently initiated positions in a few new companies. We bought JLK Direct
Distribution, Inc., a rapidly growing Detroit-based specialty distributor of
metal working products, a stock that suffered from concerns over the General
Motors strike. Another new addition is Nielsen Media Research, the television
ratings service company, which was spun off by Cognizant effective July 1, and
has a near monopoly standing in its industry.
CURRENT STRATEGY AND OUTLOOK
We have approached this year cautiously, believing that there could be a risk of
weaker corporate profits in many sectors. Recent signs that our caution is
reflected fairly well in the prices of the small cap growth market, however,
have led us to become more positive about prospects for our style. Indeed, by
some measures, valuations of small cap growth stocks are now at rock bottom
relative to large caps. However, relative investment performance tends to run
in cycles, and low valuations alone may not be enough to start the next wave of
small cap outperformance.
Regardless of the near-term prospects for the sector as a whole, we are
confident that the Portfolio consists of well managed companies with sustainable
competitive advantages in stable, growing markets. Thus we are optimistic about
the outlook for strong relative performance regardless of the market
environment.
<TABLE>
<CAPTION>
CAPITAL APPRECIATION PORTFOLIO
Cumulative Average Annual
Total Return* Total Return*
SINCE 1 YEAR SINCE
INCEPTION INCEPTION
- --------------------------------------------------------------------
<S> <C> <C> <C>
CLASS I 7.40% N/A N/A
CLASS II (3.95)% N/A N/A
CLASS III 1.24% N/A N/A
RUSSELL 2500 4.13% N/A N/A
GROWTH
INDEX
</TABLE>
* TOTAL RETURNS ARE FOR THE PERIOD ENDED JUNE 30, 1998 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 SEPTEMBER
2, 1997. THE PORTFOLIO COMMENCED SALES OF CLASS II SHARES ON OCTOBER 2, 1997.
THESE SHARES INCLUDE A HIGHER TRANSFER AGENCY FEE AND A .25% SHAREHOLDER
SERVICES FEE. ON OCTOBER 2, 1997, 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. PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE
RESULTS.
vii
<PAGE>
FIRST FUNDS BOND PORTFOLIO
[PHOTO]
BOND PORTFOLIO MANAGERS
JAMES TURNER AND STEVEN WISHNIA
Mr. Turner, CFA, is Senior Vice President with Highland Capital Management Corp.
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 Investment Management in 1986, he was part
of that group's merger with Highland Capital in 1994. He has co-managed the
Portfolio since its inception.
Mr. Wishnia is Director and Chairman of the Board of Highland Capital Management
Corp. 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
co-managed the Portfolio since its inception.
YEAR IN REVIEW
PERFORMANCE
For the year ended June 30, 1998, the Class I, II, and III shares of the First
Funds Bond Portfolio, returned 11.02%, 6.59%, and 9.72% respectively, net of
fees and sales charges, versus a return of 11.28% for the Lehman Brothers
Government/Corporate Bond Index.
MARKET REVIEW
For the last year, the dominant theme impacting the bond market has been the
atypical nature of the economic expansion. With the economy in its seventh year
of uninterrupted growth, tight labor markets, wages gradually rising, a booming
housing market, and strong capital spending, one would expect inflation to be a
serious problem. By past standards it would have been, with interest rates
rising. For the past twelve months, however, the overall trend in rates has
been down due to the lowest inflation in decades. The consumer price index was
up only 1.7% for the 12 months ending June 30, 1998, while wholesale prices
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.*
viii
<PAGE>
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.*
dropped 0.8%. Two important factors contributing to weak inflation were falling
oil prices (down 30% for the year) and stiff global competition. Asian
countries have been trying to export their way out of their difficulties by
selling goods at ever-lower prices. Domestic producers have had to meet those
price levels or lose market share. This deflationary influence has overshadowed
any inflation fears from our own robust economy. Bonds have clearly benefited.
In mid-June, 30-year Treasury yields hit a record low of 5.56%
PORTFOLIO UPDATE
In the past year there were changes in every sector of the Portfolio. The
biggest change was in government obligations, which increased from 25% to 33% of
the Portfolio. Reductions occurred in corporate bonds (63% to 62%),
mortgage-backed securities (7% to 4%), and cash equivalents (4% to 1%).
Government and corporate bonds had similar returns (11.25% vs. 11.38%) for the
year. Although corporates generally provide somewhat higher returns than
governments, Asian buying buoyed Treasury bond performance to nearly equal that
of corporates. Couple that demand with falling interest rates and a slowing of
new supply in some maturities, and we have all the ingredients for a good boost
in price.
[CHART]
<TABLE>
<CAPTION>
BOND PORTFOLIO
ASSET TYPE PROFILE AS OF JUNE 30, 1998
<S> <C>
MONEY MARKET MUTUAL FUNDS 1.1%
CORPORATE BONDS 62.1%
U.S. GOVERNMENT & AGENCY OBLIGATIONS 33.2%
MORTGAGE-BACKED OBLIGATIONS 3.8%
</TABLE>
Meanwhile, declining yields made it very attractive for corporations to issue
bonds. The increased supply caused corporate bonds' price performance to lag
that of governments, subsequently giving up most of the return advantage of
their higher yields.
Bringing up the rear was mortgage-backed debt with a return of 8.93%. Because
declining interest rates prompted homeowners to refinance, investors shunned
mortgage investments for fear of premature redemptions.
ix
<PAGE>
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 average credit quality at period end was AA, up from A+ last
year. Average maturity of the Portfolio increased slightly from 8.4 years to
8.8 years.
CURRENT STRATEGY AND OUTLOOK
Probably the most important determinant for the bond market going forward is
Asia. Japan is the most critical country--the world's second largest economy
has been stagnant for seven long years. It trades extensively with other
countries in Asia, which need a strong Japan in order to revitalize their own
economies.
So far, efforts to stimulate Japan's economy have had little success. Remedies
are supposedly underway with new leadership. If the bond market perceives an
economic rebound in Japan's foreseeable future, foreign investors are apt to
shift assets from U.S. Treasuries back into Asian markets. This could put
upward pressure on domestic interest rates. However, continuing failure to
jump-start Japan's economy would benefit our fixed income markets.
The Portfolio reflects no bias regarding the direction of interest rates.
Instead we will focus on selectively adding to the corporate bond position to
increase yield. Relative to Treasuries, corporates are at their best value in
six years. As new cash flows into the Portfolio, we'll add to the Portfolio
where the best opportunities exist.
<TABLE>
<CAPTION>
BOND PORTFOLIO
Cumulative Average Annual
Total Return* Total Return*
SINCE 1 YEAR SINCE
INCEPTION INCEPTION
- ------------------------------------------------------------------
<S> <C> <C> <C>
CLASS I 37.36% 11.02% 6.66%
CLASS II 30.71% 6.59% 5.59%
CLASS III 29.57% 9.72% 5.40%
LEHMAN BROS. 38.57% 11.28% 6.86%
GOV'T/CORP.
BOND INDEX
</TABLE>
* TOTAL RETURNS ARE FOR THE PERIOD ENDED JUNE 30, 1998 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 INCLUDE A HIGHER TRANSFER AGENCY
FEE, A .75% DISTRIBUTION FEE AND A .25% SHAREHOLDER SERVICES FEE. PERFORMANCE
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 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.
x
<PAGE>
FIRST FUNDS INTERMEDIATE BOND PORTFOLIO
[PHOTO]
INTERMEDIATE BOND PORTFOLIO MANAGERS
RALPH W. HERBERT AND TED L. FLICKINGER, JR.
Mr. Herbert, Vice President and Portfolio Manager for Martin & Company, is a
graduate of the University of Tennessee. In 1979, he began his career with
First American Bank and in 1987 he joined Culver Securities as a municipal debt
underwriter. Mr. Herbert became Portfolio Manager for Valley Fidelity Bank in
1989 and three years later the bank merged with First Tennessee Bank. In 1998,
Mr. Herbert joined Martin & Company as that firm became a subsidiary of First
Tennessee National Corporation and has co-managed the Intermediate Bond
Portfolio since its inception this year.
Mr. Flickinger, CFA, is Senior Vice President and Portfolio Manager for Martin &
Company. Prior to joining the firm in 1990, he was Assistant Manager of the
investment department of Home Federal Bank of Tennessee for six years. His
21-year career includes management positions in the investment departments of
The Park National Bank and Fidelity Federal Savings and Loan of Knoxville. Mr.
Flickinger has co-managed the Intermediate Bond Portfolio since its inception.
YEAR IN REVIEW
PERFORMANCE
Inception date for Class I shares of the Portfolio is March 2, 1998. As of June
30, 1998, Class I returned 2.17%, net of fees and sales charges, comparing quite
favorably with the Lehman Brothers Government/
Corporate Intermediate Bond Index return of 2.21% over the same period. Class
II shares of the Portfolio began on March 9, 1998, and returned (1.77)%, net of
fees and sales charges, to the period ended June 30. Class III shares began on
May 19, 1998, and returned 0.92%, net of fees and sales charges.
MARKET REVIEW
The past twelve months have been good for bond markets. The benevolent nature
of U.S. economic growth is evident in four straight quarters of positive bond
returns. While pointing to a single factor as the catalyst for such performance
would usually be difficult, in this instance it is fairly clear: the U.S. is
experiencing a sustained period of very low inflation. Significantly more
difficult to pinpoint is how the U.S. economy has achieved this favorable
balance. "Conventional Wisdom" (fast becoming an oxymoron in this economy)
COMPARISON OF CHANGE IN VALUE OF A $100,000 INVESTMENT IN THE FIRST FUNDS
INTERMEDIATE BOND PORTFOLIO (CLASS I) AND THE LEHMAN BROTHERS
GOVERNMENT/CORPORATE BOND INDEX.
[GRAPH]
PLEASE NOTE: CLASS I INCEPTION IS MARCH 2, 1998. PAST PERFORMANCE IS NOT
PREDICTIVE OF FUTURE RESULTS.*
xi
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE FIRST FUNDS
INTERMEDIATE BOND PORTFOLIO (CLASS II) AND THE LEHMAN BROTHERS
GOVERNMENT/CORPORATE BOND INDEX.
[GRAPH]
PLEASE NOTE: CLASS II INCEPTION IS MARCH 9, 1998. CLASS II IS SUBJECT TO A
MAXIMUM INITIAL FRONT-END 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.*
told us all year that the low rate of unemployment was inflationary, but that
did not take into account the continuing high rate of productivity growth or the
increasingly international nature of the labor market. That both of these
factors have an effect is undeniable, but still difficult to measure.
Putting a damper on price inflation is the financial crisis in Asia. With Asian
currencies falling against the dollar, U.S. goods have become very expensive in
those countries. This forces U.S. companies to cut prices in an attempt to
retain market share. Conversely, Asian goods are much cheaper in dollar terms,
placing pricing pressure on competing goods in this country. With both prices
and wages under control, the Federal Reserve has been able to leave interest
rates unchanged for twelve straight meetings. Other positive changes include
the government's shift from budget deficit to surplus, with an accompanying
reduction in new government debt issued. Couple that reduced supply with the
heightened demand from Asian investors, and we are left with bond price
increases and the lowest yields on 30-year Treasuries since they were first
issued in 1977.
PORTFOLIO UPDATE
Upon inception, the Portfolio had a duration of about 2.8 years, somewhat
shorter than our targeted duration of 3.2 years, and the average maturity was
3.6 years. In order to increase both duration and yield without affecting the
Portfolio's overall quality, we began purchasing 9- and 10-year investment grade
bonds, primarily corporates and agencies. The recent high rate of corporate and
agency debt issuance has made yields in both these sectors quite attractive in
comparison to Treasury bonds with similar levels of maturity. We took advantage
of this yield disparity through "swaps", where Treasuries were sold from the
Portfolio and exchanged for select corporate and/or agency bonds. At the end
of the period, duration was 3.17 years, average maturity was 3.8 years, and the
average quality of the Portfolio remained at AA.
[CHART]
<TABLE>
<CAPTION>
INTERMEDIATE BOND PORTFOLIO
ASSET TYPE PROFILE AS OF JUNE 30, 1998
<S> <C>
MONEY MARKET MUTUAL FUNDS 2.5%
CORPORATE BONDS 47.2%
U.S. GOVERNMENT & AGENCY OBLIGATIONS 48.5%
MORTGAGE-BACKED OBLIGATIONS 1.8%
</TABLE>
xii
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE FIRST FUNDS
INTERMEDIATE BOND PORTFOLIO (CLASS III) AND THE LEHMAN BROTHERS
GOVERNMENT/CORPORATE BOND INDEX.
[GRAPH]
PLEASE NOTE: CLASS III INCEPTION IS MAY 19, 1998. PAST PERFORMANCE IS NOT
PREDICTIVE OF FUTURE RESULTS.*
CURRENT STRATEGY AND OUTLOOK
At present, corporate and agency bond yields have widened their spread over
Treasury notes. We take advantage of this disparity whenever it benefits the
Portfolio. As we still have a higher weighting in Treasuries than we would
like, we will continue to swap these positions as the opportunity arises. Over
time, this should further enhance both the total return and yield of the
Portfolio.
The benchmark for the Portfolio is the Lehman Brothers Government/Corporate
Intermediate Bond Index. At present, the duration of this index is 3.33 years.
Currently, the target duration for the Portfolio is 95% of that, which at
present equates to 3.16 years with an average maturity of 3.8 years. In our
view, there is not a lot of reason to be heavily weighted in the long end of the
yield curve at this juncture. In point of fact, as of June 30, 1998, the
10-year and 2-year Treasury notes have yields of 5.38% and 5.41% respectively.
Clearly, bond holders are not being paid to take on additional interest rate
risk.
In general, as long as inflation remains at bay and interest rates remain at
current levels or lower, bonds should continue to perform well. Fixed income
instruments continue to offer historically attractive real rates of return.
Demand is strong, and while supply from corporates and agencies has risen
somewhat to meet that demand, the government has ceased issuing certain maturity
Treasuries altogether. This decrease in government competition for available
capital is another sign of health in the economy, and bodes well for the future
of fixed income markets.
<TABLE>
<CAPTION>
INTERMEDIATE BOND PORTFOLIO
Cumulative Average Annual
Total Return* Total Return*
SINCE 1 YEAR SINCE
INCEPTION INCEPTION
- ----------------------------------------------------------------------
<S> <C> <C> <C>
CLASS I 2.17% N/A N/A
CLASS II (1.77)% N/A N/A
CLASS III 0.92% N/A N/A
LEHMAN BROS. 2.21% N/A N/A
GOV'T/CORP.
INTERMEDIATE
BOND INDEX
</TABLE>
* TOTAL RETURNS ARE FOR THE PERIOD ENDED JUNE 30, 1998 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 MARCH 2, 1998. THE PORTFOLIO COMMENCED SALES OF CLASS II
SHARES ON MARCH 9, 1998. THESE SHARES INCLUDE A HIGHER TRANSFER AGENCY FEE
AND A .25% SHAREHOLDER SERVICES FEE. ON MAY 19, 1998, 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. PAST PERFORMANCE IS NOT
PREDICTIVE OF FUTURE RESULTS.
xiii
<PAGE>
FIRST FUNDS TENNESSEE TAX-FREE PORTFOLIO
[PHOTO]
TENNESSEE TAX-FREE PORTFOLIO MANAGERS
RALPH W. HERBERT AND TED L. FLICKINGER, JR.
Mr. Herbert, Vice President and Portfolio Manager for Martin & Company, is a
graduate of the University of Tennessee. In 1979, he began his career with
First American Bank and in 1987 he joined Culver Securities as a municipal debt
underwriter. Mr. Herbert became Portfolio Manager for Valley Fidelity Bank in
1989 and three years later the bank merged with First Tennessee Bank. In 1998,
Mr. Herbert joined Martin & Company as that firm became a subsidiary of First
Tennessee National Corporation and has managed/co-managed the Tennessee Tax-Free
Portfolio since its inception.
Mr. Flickinger, CFA, is Senior Vice President and Portfolio Manager for Martin &
Company. Prior to joining the firm in 1990, he was Assistant Manager of the
investment department of Home Federal Bank of Tennessee for six years. His
21-year career includes management positions in the investment departments of
The Park National Bank and Fidelity Federal Savings and Loan of Knoxville. Mr.
Flickinger has co-managed the Tennessee Tax-Free Portfolio since March, 1998.
YEAR IN REVIEW
PERFORMANCE
For the year ended June 30, 1998, the Class I, II, and III shares of the
Tennessee Tax-Free Portfolio returned 8.16%, 4.16%, and 7.86% respectively, net
of fees and sales charges, versus a return of 8.48% for the Lehman Brothers
10-Year Municipal Bond Index.
MARKET REVIEW
As with most financial asset classes, the past twelve months have been good
for Tennessee municipal bonds. Yields dropped .30% to .40% in the five- to
ten-year maturity sector, primarily in the last half of 1997. The supply
problems that we experienced early in 1997 disappeared by the second half of
the year, as several new issues came to the market. This surge of new issues
has continued into the new year, creating a positive environment for
portfolio managers. The source of the new debt was primarily a result of
municipalities refinancing existing debt as interest rates fell in the last
quarter of 1997. Institutional portfolios
COMPARISON OF CHANGE IN VALUE OF A $100,000 INVESTMENT IN THE FIRST FUNDS
TENNESSEE TAX-FREE PORTFOLIO (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.*
xiv
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 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.*
benefit from refundings, as they are usually very large issues, and often have
to be sold at attractive spreads in order to place the bonds into institutional
portfolios.
Overall, the municipal market is as much a beneficiary of the current U.S.
economic environment as other fixed income instruments, if not more. They
continue to offer attractive, tax-adjusted real rates of return. There is also
a good deal of demand, and the supply part of the equation has risen somewhat to
help meet that demand. With the federal budget in surplus, the government has
stopped issuing certain maturity Treasuries altogether, benefiting other fixed
income securities in general.
PORTFOLIO UPDATE
We have taken advantage of the opportunities in the market over the past year to
good result. During the third quarter of 1997, we were buying 15- to 17-year
bonds in an effort to get as much yield and appreciation potential as possible
while limiting the risk at the long end of the yield curve. In the fourth
quarter of 1997, we began pulling the duration down, and in 1998 have continued
shortening the average maturity of the Portfolio to further reduce interest rate
risk. At this point, we are purchasing only 10-year maturities or less. The
refundings mentioned above had two positive effects on the Portfolio. First, we
were able to acquire some very large blocks of bonds, usually difficult to do
with municipals in Tennessee. Second, we were able to buy these bonds at very
favorable yields in comparison to Treasuries. Historically, municipal bonds in
the 10-year maturity range have delivered about 75% of yields available from
U.S. Treasury notes of the same maturity. However, due to the supply of bonds
being sold, we were able to buy municipals at 80% to 85% of the corresponding
Treasury. This tightening of municipal-to-Treasury spread was also a function
of the "flight to quality" during 1998. This forced Treasury yields to drop as
municipal yields rose or stayed the same.
[CHART]
<TABLE>
<CAPTION>
TENNESSEE TAX-FREE PORTFOLIO
ASSET TYPE PROFILE AS OF JUNE 30, 1998
<S> <C>
MONEY MARKET MUTUAL FUNDS 2.9%
TENNESSEE GENERAL OBLIGATION BONDS 47.6%
TENNESSEE REVENUE BONDS 43.1%
OTHER STATE GENERAL OBLIGATION BONDS 3.7%
OTHER STATE REVENUE BONDS 2.7%
</TABLE>
xv
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE FIRST FUNDS
TENNESSEE TAX-FREE PORTFOLIO (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.*
CURRENT STRATEGY AND OUTLOOK
As mentioned earlier, inflation remaining subdued is the key. Factors such as
the Asian financial crisis--as long as it does not appreciably worsen--and the
federal budget surplus are strong positives for fixed income markets overall.
Our targeted duration is 1.2% of normal, as tax-adjusted real rates of return
remain attractive. This equates to an average maturity of approximately 5.2
years. Presently, our average maturity is longer than this. In our view, risk
makes the long end of the yield curve less attractive. Even though these rates
may be enticing, we remain cautious and have shifted the Portfolio to the
shorter end of the yield curve. This is accomplished by purchasing 10-year or
less maturities with new money and maturing bonds. If conditions were to
warrant, we would not be opposed to selling longer maturity bonds.
<TABLE>
<CAPTION>
TENNESSEE TAX-FREE PORTFOLIO
Cumulative Average Annual
Total Return* Total Return*
SINCE 1 YEAR SINCE
INCEPTION INCEPTION
- -------------------------------------------------------------------
<S> <C> <C> <C>
CLASS I 16.34% 8.16% 6.13%
CLASS II 12.06% 4.16% 4.58%
CLASS III 15.71% 7.86% 5.90%
LEHMAN BROS. 17.84% 8.48% 6.56%
10-YEAR
MUNICIPAL
BOND INDEX
</TABLE>
* TOTAL RETURNS ARE FOR THE PERIOD ENDED JUNE 30, 1998 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.
xvi
<PAGE>
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 Growth & Income, Bond, Intermediate Bond, Tennessee Tax-Free, and
all the Money Market Portfolios pay dividends monthly. The Capital Appreciation
Portfolio pays dividends annually.
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.
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/or interest of the issuer. Examples of such
companies would be MBIA (Municipal Bond Investors Assurance Corporation), or
AMBAC (American Municipal Bond Assurance Corporation).
GENERAL OBLIGATION BONDS
General Obligation Bonds (GOs) are debt 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.
<TABLE>
<CAPTION>
MOODY'S INVESTORS STANDARD & POOR'S CORP
----------------- -----------------------
SERVICES, INC. (PLUS (+) OR MINUS (-))
----------------- -----------------------
<S> <C> <C>
Prime Aaa AAA
Excellent Aa AA
Good A A
Average Baa BBB
Fair Ba BB
Poor B B
Marginal Caa C
</TABLE>
xvii
<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. This index includes only investment-grade bonds with maturities over one
year.
LEHMAN BROTHERS GOVERNMENT/CORPORATE INTERMEDIATE BOND INDEX, an unmanaged
index, is a broad measure of bond performance, and includes reinvestment of
dividends and capital gains. This index includes only investment-grade bonds
with maturities of up to ten years.
LEHMAN BROTHERS 10-YEAR MUNICIPAL BOND INDEX, an unmanaged index, is a broad
measure of shorter-term municipal bond performance and includes reinvestment of
dividends and capital gains.
RUSSELL 2500 INDEX, an unmanaged index, measures performance of the 2,500
smallest companies in the Russell 3000 Index which represents approximately 23%
of the total market capitalization of the Russell 3000. As of the latest
reconstitution, the average market capitalization was approximately $659
million; the median market capitalization was approximately $438 million. The
largest company in the index had an approximate market capitalization of $2.6
billion.
The Russell 2500 Index is broken down further into a growth component and a
value component. The Capital Appreciation Portfolio uses the Russell 2500 Growth
Index as a benchmark.
The RUSSELL 2500 GROWTH INDEX measures the performance of those Russell 2500
companies with higher price-to-book ratios and higher forecasted growth values.
xviii
<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, the
Capital Appreciation Portfolio, the Bond Portfolio, the Intermediate Bond
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, 1998, 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, 1998 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
August 21, 1998
xix
<PAGE>
GROWTH & INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1998
(Showing Percentage of Total Value of Investments)
<TABLE>
<CAPTION>
Value
Shares (Note 1)
-------- ----------
<S> <C> <C>
COMMON STOCKS - 96.6%
BASIC MATERIALS - 2.5%
Morton International, Inc.* 778,700 $ 19,467,500
------------
CAPITAL GOODS - 5.2%
Belden, Inc. 513,375 15,722,109
General Electric Co. 269,900 24,560,900
------------
TOTAL CAPITAL GOODS 40,283,009
------------
COMMUNICATION SERVICES - 14.4%
Airtouch Communications, Inc.* 663,250 38,758,672
GTE Corp. 569,375 31,671,484
MCI Communications Corp. 247,150 14,350,147
Sprint Corp. 379,700 26,768,850
------------
TOTAL COMMUNICATION SERVICES 111,549,153
------------
CONSUMER CYCLICALS - 7.1%
Federated Department Stores, Inc.* 483,700 26,029,106
Interpublic Group of Companies, Inc. 483,600 29,348,475
------------
TOTAL CONSUMER CYCLICALS 55,377,581
------------
CONSUMER STAPLES - 11.0%
Archer Daniels Midland Co. 163,985 3,177,209
Belo (A.H.) Corp., Class A 773,600 18,856,500
Pepsico, Inc. 412,300 16,981,606
Sara Lee Corp. 302,400 16,915,500
Sysco Corp. 1,162,400 29,786,500
------------
TOTAL CONSUMER STAPLES 85,717,315
------------
ENERGY - 8.3%
Input/Output, Inc.* 719,175 12,810,304
Repsol S.A. ADR 226,117 12,436,435
Texaco, Inc. 325,100 19,404,406
YPF S.A. ADR 649,650 19,530,103
------------
TOTAL ENERGY 64,181,248
------------
FINANCE & INSURANCE - 18.2%
American International Group, Inc. 80,000 11,680,000
BankBoston Corp. 558,000 31,038,750
Chase Manhattan Corp. 412,050 31,109,775
Fannie Mae 388,800 23,619,600
Norwest Corp. 689,200 25,758,850
UNUM Insurance Corp. 335,700 18,631,350
------------
TOTAL FINANCE & INSURANCE 141,838,325
------------
HEALTH CARE - 16.0%
Abbott Laboratories 480,800 19,652,700
Elan Corp., plc ADR* 492,850 31,696,417
Medtronic, Inc. 351,975 22,438,407
Merck & Co., Inc. 190,100 25,425,875
Schering-Plough Corp. 270,600 24,793,725
------------
TOTAL HEALTH CARE 124,007,124
------------
TECHNOLOGY - 13.9%
Electronic Data Systems Corp. 534,300 21,372,000
EMC Corp.* 712,700 31,937,869
Grainger (W.W.), Inc. 425,260 21,183,265
<CAPTION>
Value
Shares (Note 1)
------- -----------
<S> <C> <C>
Intel Corp. 152,300 $ 11,279,719
LSI Logic Corp.* 163,100 3,761,494
Motorola, Inc. 357,750 18,804,234
------------
TOTAL TECHNOLOGY 108,338,581
------------
TOTAL COMMON STOCKS
(Cost $483,521,943) 750,759,836
------------
SHORT-TERM INVESTMENTS - 3.4%
MONEY MARKET MUTUAL FUNDS - 3.4%
Vista Cash Money Market Fund 13,176,245 13,176,245
Vista Prime Money Market Fund 13,176,245 13,176,245
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $26,352,490) 26,352,490
------------
TOTAL INVESTMENTS - 100%
(Cost $509,874,433) $777,112,326
------------
------------
*Non-income producing security
ADR - American Depository Receipt
INCOME TAX INFORMATION:
At June 30, 1998, the net unrealized appreciation based on cost for income tax
purposes of $509,921,979 was as follows:
Aggregate gross unrealized appreciation for
all investments in which there was an excess
of value over tax cost $273,231,054
Aggregate gross unrealized depreciation for
all investments in which there was an excess
of tax cost over value (6,040,707)
------------
Net unrealized appreciation $267,190,347
------------
------------
OTHER INFORMATION:
Purchases and sales of securities, other than short-term securities, for the
year ended June 30, 1998 aggregated $96,570,011 and $31,070,414, respectively.
UNAUDITED INCOME TAX INFORMATION:
For the year ended June 30, 1998, 100% of the Growth & Income Portfolio's
dividends from investment income qualify for the 70% dividend received deduction
for corporations.
For the fiscal year ended June 30, 1998, the Growth & Income Portfolio
distributed long-term capital gain dividends as follows:
28% rate gain distributions $5,692,129
20% rate gain distributions $5,032,145
</TABLE>
The accompanying notes are an integral part of the financial statements.
1
<PAGE>
CAPITAL APPRECIATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1998
(Showing Percentage of Total Value of Investments)
<TABLE>
<CAPTION>
Value
Shares (Note 1)
------ --------
<S> <C> <C>
COMMON STOCKS - 95.5%
BASIC MATERIALS - 2.5%
Flanders Corp.* 75,900 $ 351,038
Minerals Technologies, Inc. 11,900 605,412
------------
TOTAL BASIC MATERIALS 956,450
------------
CAPITAL GOODS - 12.2%
Advanced Lighting Technologies, Inc.* 36,100 839,325
Aptar Group, Inc. 7,500 466,406
Danka Business Systems PLC-ADR 42,300 499,669
Decrane Aircraft Holdings, Inc. 11,700 198,900
JLK Direct Distribution, Inc., Class A* 35,900 785,312
Kennametal, Inc. 6,000 250,500
Quanta Services, Inc.* 21,500 315,781
Zebra Technologies Corp. - Class A* 33,300 1,423,575
------------
TOTAL CAPITAL GOODS 4,779,468
------------
COMMUNICATION SERVICES - 3.3%
Centennial Cellular Corp. - Class A* 15,100 563,419
Clear Channel Communications, Inc.* 6,700 731,138
------------
TOTAL COMMUNICATION SERVICES 1,294,557
------------
CONSUMER CYCLICALS - 20.3%
Aftermarket Technology Corp.* 74,700 1,400,625
Catalina Marketing Corp.* 20,100 1,043,944
Coach USA, Inc.* 8,300 378,688
Heilig Meyers Co. 21,000 258,563
Lithia Motors, Inc., Class A* 24,000 348,000
Nielsen Media Research* - WI 56,000 255,500
Oakwood Homes Corp. 17,000 510,000
Polymer Group, Inc.* 74,000 841,750
Right Management Consultants, Inc.* 39,000 502,124
Scientific Games Holding Corp.* 21,300 489,900
Service Experts, Inc.* 33,700 1,162,650
Watsco, Inc. 20,100 707,269
------------
TOTAL CONSUMER CYCLICALS 7,899,013
------------
CONSUMER STAPLES - 10.3%
Barnett, Inc.* 24,500 490,000
G & K Services, Inc. - Class A 14,600 636,925
Schweitzer-Mauduit Int'l, Inc. 14,600 423,400
Strayer Education, Inc. 39,000 1,401,562
Valassis Communications, Inc.* 28,000 1,079,750
------------
TOTAL CONSUMER STAPLES 4,031,637
------------
ENERGY - 4.1%
Forecenergy, Inc.* 44,700 796,219
Petroleum Geo-Services ASA-ADR* 26,400 805,200
------------
TOTAL ENERGY 1,601,419
------------
FINANCIAL - 9.2%
Amerin Corp.* 37,700 1,098,013
CMAC Investment Corp.* 9,000 553,500
Credit Acceptance Corp.* 45,000 382,500
Enhance Financial Services Group, Inc. 29,000 978,750
First Int'l Bancorp, Inc. 9,800 140,875
Homegold Financial* 34,700 125,787
MBIA, Inc. 4,207 314,999
------------
<CAPTION>
Value
Shares (Note 1)
------ --------
<S> <C> <C>
TOTAL FINANCIAL $ 3,594,424
------------
HEALTH CARE- 14.4%
First Commonwealth, Inc.* 30,000 442,500
Mentor Corp.* 41,300 996,363
Patterson Dental Co.* 22,800 835,050
Perclose, Inc.* 24,300 686,475
Respironics, Inc.* 66,200 1,017,825
R. P. Scherer Corp.* 6,900 611,513
Xomed Surgical Products, Inc.* 33,600 1,033,200
------------
TOTAL HEALTH CARE 5,622,926
------------
TECHNOLOGY - 19.2%
American Management Systems, Inc.* 38,200 1,141,224
Artesyn Technologies, Inc.* 97,594 1,549,305
The Bisys Group, Inc.* 12,800 524,800
Black Box Corp.* 36,300 1,204,706
CCC Information Services Group, Inc.* 76,000 1,263,500
Microchip Technology, Inc.* 4,600 120,463
PPT Vision, Inc.* 20,000 150,000
PRT Group, Inc.* 61,000 640,500
Tollgrade Communications,Inc.* 11,600 295,800
UBICS, Inc.* 41,500 570,624
------------
TOTAL TECHNOLOGY 7,460,922
------------
TOTAL COMMON STOCKS
(Cost $37,034,744) 37,240,816
------------
SHORT-TERM INVESTMENTS - 4.5%
MONEY MARKET MUTUAL FUNDS - 4.5%
Vista Cash Money Market Fund 874,097 874,097
Vista Prime Money Market Fund 874,097 874,097
------------
TOTAL MONEY MARKET MUTUAL FUNDS 1,748,194
(Cost $1,748,194) ------------
TOTAL INVESTMENTS - 100%
(Cost $38,782,938) $ 38,989,010
------------
------------
*Non-income producing security
ADR - American Depository Receipt
WI - When-issued
INCOME TAX INFORMATION:
At June 30, 1998, the net unrealized appreciation based on cost for income tax
purposes of $38,845,227 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there was an excess of value
over tax cost $ 3,619,024
Aggregate gross unrealized depreciation for all
investments in which there was an excess of tax
cost over value (3,475,241)
------------
Net unrealized appreciation $ 143,783
------------
------------
OTHER INFORMATION:
Purchases and sales of securities, other than short-term securities, for the
year ended June 30, 1998 aggregated $45,586,276 and $9,436,431, respectively.
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1998
(Showing Percentage of Total Value of Investments)
<TABLE>
<CAPTION>
Due Principal Value
Date Coupon Amount (Note 1)
- ---- ------ --------- --------
<S> <C> <C> <C>
U.S GOVERNMENT & AGENCY OBLIGATIONS - 33.2%
U.S. TREASURY BONDS
05/15/16 7.250% $12,120,000 $14,203,125
08/15/23 6.250% 12,180,000 13,036,412
U.S. TREASURY NOTES
04/30/00 6.750% 7,260,000 7,412,010
05/31/01 6.500% 8,280,000 8,489,592
02/28/02 6.250% 1,100,000 1,125,094
08/15/02 6.375% 2,945,000 3,034,272
10/31/02 5.750% 2,500,000 2,520,313
08/15/03 5.750% 3,750,000 3,789,844
02/15/04 5.875% 2,915,000 2,969,656
08/15/05 6.500% 1,675,000 1,768,172
11/15/05 5.875% 540,000 550,463
02/15/06 5.625% 3,850,000 3,865,643
08/15/07 6.125% 1,500,000 1,561,407
FEDERAL HOME LOAN BANK
11/06/02 6.250% 2,200,000 2,217,923
11/19/02 6.220% 2,225,000 2,226,253
11/20/02 6.170% 1,100,000 1,106,403
FEDERAL HOME LOAN MORTGAGE CORPORATION
11/12/02 6.340% 1,100,000 1,103,595
FEDERAL NATIONAL MORTGAGE ASSOCIATION
10/11/06 7.150% 2,000,000 2,070,836
-----------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost $70,596,327) 73,051,013
-----------
CORPORATE BONDS & NOTES - 62.1%
BANKS - 4.2%
Barnett Cap II
12/01/26 7.950% 3,125,000 3,422,703
First Chicago Corp.
01/15/03 7.625% 3,250,000 3,442,114
First Empire Cap Tr I
02/01/27 8.234% 2,200,000 2,411,042
-----------
TOTAL BANKS 9,275,859
-----------
BASIC MATERIALS - 0.8%
USX Corp.
01/21/99 8.050% 1,765,000 1,784,773
-----------
BROKER/DEALERS - 7.7%
Bear Stearns CO.
08/01/02 6.500% 2,500,000 2,534,730
Donaldson, Lufkin & Jenrette, Inc.
11/01/05 6.875% 1,000,000 1,032,923
02/15/16 5.625% 2,000,000 1,995,318
Lehman Brothers, Inc.
02/26/01 6.000% 2,500,000 2,490,950
04/15/03 7.250% 3,500,000 3,646,825
Merrill Lynch, Inc.
01/15/07 7.000% 2,125,000 2,236,212
Morgan Stanley Group, Inc.
10/01/03 6.125% 2,950,000 2,949,617
-----------
TOTAL BROKER/DEALERS 16,886,575
-----------
<CAPTION>
Due Principal Value
Date Coupon Amount (Note 1)
- ---- ------ --------- --------
<S> <C> <C> <C>
CAPITAL GOODS - 9.3%
Arrow Electronics, Inc.
01/15/07 7.000% $ 3,150,000 $ 3,319,817
Dover Corp.
11/15/05 6.450% 2,825,000 2,891,243
Lockheed Martin Corp.
05/15/01 6.850% 2,095,000 2,136,460
03/15/03 6.750% 3,500,000 3,591,914
Raytheon Co.
07/15/05 6.500% 3,525,000 3,597,291
Tyco International Limited
11/01/01 6.500% 2,550,000 2,587,686
06/15/28 7.000% 2,300,000 2,337,623
-----------
TOTAL CAPITAL GOODS 20,462,034
-----------
CONSUMER NON-DURABLES - 3.6%
Anheuser Busch, Inc.
06/01/05 6.750% 1,000,000 1,018,911
09/01/05 7.000% 2,300,000 2,361,286
Coca-Cola Enterprises, Inc.
10/15/36 6.700% 2,250,000 2,356,220
Philip Morris, Inc.
12/01/99 7.125% 2,200,000 2,227,258
-----------
TOTAL CONSUMER NON-DURABLES 7,963,675
-----------
CONSUMER SERVICES - 11.5%
Airtouch Communications, Inc.
05/01/08 6.650% 4,450,000 4,542,751
Belo (AH) Corp.
06/01/02 6.875% 3,625,000 3,724,684
Price/Costco, Inc.
06/15/05 7.125% 3,600,000 3,782,707
USA Waste Services, Inc.
10/01/04 7.000% 3,000,000 3,093,312
WMX Technologies, Inc.
10/15/00 6.250% 2,500,000 2,502,333
Wal-Mart Stores, Inc.
02/01/10 5.650% 3,800,000 3,799,821
Waste Management Step Bond
10/01/02 7.700% 3,675,000 3,848,026
-----------
TOTAL CONSUMER SERVICES 25,293,634
-----------
FINANCIAL SERVICES - 14.2%
Aon Capital Trust
01/01/27 8.205% 2,700,000 3,125,363
Associates Corp. of North America
09/17/99 6.680% 1,905,000 1,920,669
10/15/02 6.375% 1,000,000 1,011,074
05/15/37 5.960% 1,500,000 1,518,012
BHP Finance USA
03/01/06 6.690% 3,350,000 3,371,805
CNA Financial Corp.
11/15/03 6.250% 2,725,000 2,715,542
Countrywide Home Loans, Inc.
10/22/04 6.840% 2,500,000 2,561,600
Ford Motor Credit Co.
09/25/01 7.000% 3,345,000 3,433,398
General Motors Acceptance Corp.
02/15/01 5.625% 2,925,000 2,899,164
Mellon Financial
02/15/10 6.375% 2,500,000 2,509,428
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1998
(Showing Percentage of Total Value of Investments)
<TABLE>
<CAPTION>
Due Principal Value
Date Coupon Amount (Note 1)
- ---- ------ --------- -------
<S> <C> <C> <C>
CORPORATE BONDS & NOTES (CONTINUED)
FINANCIAL SERVICES (CONTINUED)
Nationwide Mutual
Insurance Co. 144A*
02/15/04 6.500% $ 1,000,000 $ 1,014,638
Provident Companies, Inc.
03/15/28 7.250% 2,600,000 2,677,532
Sun Canada Financial Co. 144A*
12/15/07 6.625% 2,500,000 2,564,183
-------------
TOTAL FINANCIAL SERVICES 31,322,408
-------------
TRAVEL & TRANSPORTATION - 5.3%
Continental Airlines, Inc. Series 974B
01/02/17 6.900% 3,000,000 3,086,250
Norfolk Southern Corp.
02/15/04 7.875% 2,400,000 2,594,978
Northwest Airlines Corp.
01/02/15 7.670% 2,244,890 2,482,579
Union Pacific Corp.
01/15/04 6.125% 3,500,000 3,452,631
-------------
TOTAL TRAVEL & TRANSPORTATION 11,616,438
-------------
UTILITIES - 5.5%
BellSouth Corp.
06/01/28 6.375% 2,225,000 2,216,245
GTE Corp.
04/15/06 6.360% 4,400,000 4,419,875
11/01/08 6.900% 3,150,000 3,279,515
Public Service Electric & Gas Co.
11/01/01 7.875% 2,000,000 2,096,688
-------------
TOTAL UTILITIES 12,012,323
-------------
TOTAL CORPORATE BONDS & NOTES
(Cost $132,960,904) 136,617,719
-------------
MORTGAGE-BACKED OBLIGATIONS - 3.6%
Federal National Mortgage Association,
1994-M3, Class B
04/25/06 7.710% 1,321,889 1,347,086
Federal National Mortgage Association,
1997-M5, Class C
08/25/07 6.740% 3,400,000 3,557,521
Federal National Mortgage Association,
Pool #250885
04/01/27 7.500% 2,815,066 2,887,182
Government National Mortgage Association,
Pool #26825
09/15/08 9.000% 90,470 96,802
-------------
TOTAL MORTGAGE-BACKED OBLIGATIONS
(Cost $7,710,320) 7,888,591
-------------
MONEY MARKET MUTUAL FUNDS - 1.1%
Vista Cash Money Market Fund 1,259,509 1,259,509
Vista Prime Money Market Fund 1,259,509 1,259,509
-------------
TOTAL MONEY MARKET MUTUAL FUNDS 2,519,018
(Cost $2,519,018) -------------
TOTAL INVESTMENTS - 100%
(Cost $213,786,569) $ 220,076,341
-------------
-------------
*Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional buyers. At June 30, 1998, these securities amounted
to a value of $3,578,821 or 1.6% of net assets.
INCOME TAX INFORMATION:
At June 30, 1998, the net unrealized appreciation based on cost for income tax
purposes of $213,788,351 was as follows:
Aggregate gross unrealized appreciation for
all investments in which there was an excess
of value over tax cost $ 6,307,136
Aggregate gross unrealized depreciation for
all investments in which there was an excess
of tax cost over value (19,146)
-------------
Net unrealized appreciation $ 6,287,990
-------------
-------------
OTHER INFORMATION:
Purchases and sales of securities, other than short-term securities, for the
year ended June 30, 1998 aggregated $89,098,838 and $39,722,991, respectively.
Purchases and sales of U.S. Government and Agency securities, other than
short-term securities, for the year ended June 30, 1998 aggregated $44,332,508
and $23,100,626, respectively.
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
INTERMEDIATE BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1998
(Showing Percentage of Total Value of Investments)
<TABLE>
<CAPTION>
Due Principal Value
Date Coupon Amount (Note 1)
- ---- ------ ------------- -------------
<S> <C> <C> <C>
U.S GOVERNMENT & AGENCY OBLIGATIONS - 48.5%
U.S. TREASURY NOTES
07/31/98 5.250% $ 2,000,000 $ 2,000,000
03/31/99 6.250% 1,000,000 1,005,625
04/30/99 6.500% 1,700,000 1,713,282
09/30/99 7.125% 4,000,000 4,075,000
02/15/00 5.875% 1,000,000 1,005,313
02/29/00 7.125% 1,500,000 1,537,500
04/30/00 6.750% 7,000,000 7,146,566
05/15/00 6.375% 1,000,000 1,015,000
05/31/00 6.250% 6,000,000 6,078,750
06/30/00 5.875% 5,000,000 5,035,940
08/31/00 6.250% 3,000,000 3,044,064
10/31/00 5.750% 3,000,000 3,015,000
04/30/01 6.250% 2,000,000 2,036,876
08/31/01 6.500% 8,000,000 8,215,000
10/31/01 6.250% 5,000,000 5,103,125
05/31/02 6.500% 2,000,000 2,066,250
08/15/02 6.375% 1,000,000 1,030,313
10/31/02 5.750% 2,000,000 2,016,250
08/15/05 6.500% 5,000,000 5,278,125
FEDERAL HOME LOAN BANK
09/20/00 6.125% 3,000,000 3,029,049
11/06/02 6.250% 600,000 604,888
11/19/02 6.220% 1,400,000 1,400,788
11/20/02 6.170% 700,000 704,075
FEDERAL HOME LOAN MORTGAGE CORPORATION
11/12/02 6.340% 700,000 702,288
FEDERAL NATIONAL MORTGAGE ASSOCIATION
09/20/00 6.110% 2,000,000 2,019,367
03/15/01 5.625% 5,000,000 4,995,295
01/15/03 5.250% 5,000,000 4,924,600
11/13/06 6.950% 2,100,000 2,171,465
08/27/07 6.480% 4,000,000 4,209,420
STUDENT LOAN MARKETING ASSOCIATION
02/10/99 5.400% 5,000,000 4,992,380
TENNESSEE VALLEY AUTHORITY
11/01/00 6.000% 4,000,000 4,030,516
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost $95,713,687) 96,202,110
------------
CORPORATE BONDS & NOTES - 47.2%
BANKS - 5.6%
BancOne Corp.
05/01/07 7.600% 725,000 788,358
Bank One Texas
02/15/08 6.250% 5,000,000 4,977,400
First Chicago Corp.
01/15/03 7.625% 1,525,000 1,615,146
National City Corp.
03/01/04 6.625% 1,650,000 1,694,872
Wachovia Corp.
02/20/01 5.400% 2,000,000 1,979,858
------------
TOTAL BANKS 11,055,634
------------
<CAPTION>
Due Principal Value
Date Coupon Amount (Note 1)
- ---- ------ --------- --------
<S> <C> <C> <C>
BASIC MATERIALS - 4.3%
Aluminum Co. of America
02/01/01 5.750% $ 2,000,000 $ 1,991,494
E.I. du Pont de Nemours & Co.
10/11/00 6.210% 2,000,000 2,019,104
09/01/02 6.500% 3,000,000 3,061,380
USX Corp.
01/21/99 8.050% 1,425,000 1,440,964
------------
TOTAL BASIC MATERIALS 8,512,942
------------
BROKER/DEALERS - 6.0%
Lehman Brothers, Inc.
02/01/01 6.125% 1,400,000 1,400,724
Merrill Lynch & Co., Inc.
02/12/03 6.000% 4,000,000 3,997,548
08/01/04 6.550% 1,400,000 1,434,231
Morgan Stanley Group, Inc.
03/01/07 6.875% 5,000,000 5,166,625
------------
TOTAL BROKER/DEALERS 11,999,128
------------
CAPITAL GOODS - 2.7%
Lockheed Martin Corp.
05/15/01 6.850% 650,000 662,864
03/15/03 6.750% 1,300,000 1,334,139
Raytheon Co.
08/15/02 6.450% 1,350,000 1,370,389
Rockwell International Corp.
09/15/02 6.750% 2,000,000 2,057,240
------------
TOTAL CAPITAL GOODS 5,424,632
------------
CONSUMER NON-DURABLES - 3.7%
Coca-Cola Enterprises, Inc.
09/15/98 7.875% 1,000,000 1,003,426
J C Penney & Company, Inc.
06/15/99 6.875% 2,000,000 2,012,118
Nike, Inc.
06/16/00 6.510% 2,000,000 2,024,584
Philip Morris, Inc.
01/01/01 9.000% 1,250,000 1,325,644
Sara Lee Corp.
10/18/99 6.400% 1,000,000 1,007,544
------------
TOTAL CONSUMER NON-DURABLES 7,373,316
------------
CONSUMER SERVICES - 7.4%
Belo (AH) Corp.
06/01/02 6.875% 1,650,000 1,695,373
CPC International, Inc.
09/19/00 6.200% 2,000,000 2,018,526
Pitney Bowes, Inc.
07/16/01 6.780% 1,000,000 1,023,804
02/01/05 5.950% 5,000,000 4,994,155
Price/Costco, Inc.
06/15/05 7.125% 1,375,000 1,444,784
Safeway, Inc.
09/15/04 6.850% 1,400,000 1,440,267
Wal-Mart Stores, Inc.
05/15/02 6.750% 2,000,000 2,056,752
------------
TOTAL CONSUMER SERVICES 14,673,661
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
INTERMEDIATE BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1998
(Showing Percentage of Total Value of Investments)
<TABLE>
<CAPTION>
Due Principal Value
Date Coupon Amount (Note 1)
- ---- ------ ---------- ---------
<S> <C> <C> <C>
CORPORATE BONDS & NOTES (CONTINUED)
FINANCIAL SERVICES - 10.7%
Associates Corp. of North America
08/01/98 8.800% $ 500,000 $ 500,971
BHP Finance USA
03/01/06 6.690% 1,350,000 1,358,787
CNA Financial Corp.
11/15/03 6.250% 2,000,000 1,993,058
Capital Holdings Corp.
10/21/99 8.90% 1,450,000 1,503,789
Cigna Corp.
01/15/06 6.375% 1,350,000 1,350,185
Dow Jones & Co., Inc.
12/01/00 5.750% 1,000,000 997,332
Ford Motor Credit Co.
11/08/00 6.250% 2,000,000 2,014,168
09/25/01 7.000% 1,000,000 1,026,427
General Electric Capital Corp.
04/15/02 7.450% 2,000,000 2,108,120
12/15/07 6.290% 2,000,000 2,024,504
05/01/18 6.660% 2,000,000 2,028,048
Household Finance Corp.
06/30/00 6.375% 250,000 252,026
International Lease Finance
11/01/99 6.125% 2,000,000 2,003,220
Norwest Corp.
04/01/00 7.125% 2,000,000 2,040,482
-------------
TOTAL FINANCIAL SERVICES 21,201,117
-------------
TRAVEL & TRANSPORTATION - 1.0%
Norfolk Southern Corp.
05/15/07 7.350% 1,775,000 1,903,324
-------------
UTILITIES - 5.8%
National Rural Utilities
04/01/01 6.450% 2,000,000 2,022,618
Duke Energy Corp.
11/01/99 8.000% 1,000,000 1,025,456
GTE Corp.
11/01/08 6.900% 3,500,000 3,643,906
Kentucky Utilities Co.
06/15/00 5.950% 2,000,000 2,001,046
New York Telephone
02/15/04 6.250% 875,000 882,501
Texas Utilities Co.
10/01/02 6.200% 2,000,000 2,011,676
-------------
TOTAL UTILITIES 11,587,203
-------------
TOTAL CORPORATE BONDS & NOTES
(Cost $92,293,837) 93,730,957
-------------
MORTGAGE-BACKED OBLIGATIONS - 1.8%
Federal Home Loan Mortgage Corporation
Series 1665
07/15/00 6.500% 180,376 181,290
Federal Home Loan Mortgage Corporation
1698
10/15/06 6.000% 3,000,000 3,003,180
Federal National Mortgage Association
Series 1994-27, Class PK
06/25/00 6.500% 354,120 354,500
<CAPTION>
Due Principal Value
Date Coupon Amount (Note 1)
- ---- ------ --------- --------
<S> <C> <C> <C>
Federal National Mortgage Association
1989-46, Class D
11/25/18 9.000% $ 35,378 $ 35,393
-------------
TOTAL MORTGAGE-BACKED OBLIGATIONS
(Cost $3,568,700) 3,574,363
-------------
MONEY MARKET MUTUAL FUNDS - 2.5%
Vista U.S. Government
Money Market Fund 4,964,291 4,964,291
-------------
TOTAL MONEY MARKET MUTUAL FUNDS 4,964,291
(Cost $4,964,291) -------------
TOTAL INVESTMENTS - 100%
(Cost $196,540,515) $ 198,471,721
-------------
-------------
INCOME TAX INFORMATION:
At June 30, 1998, the net unrealized appreciation based on cost for income tax
purposes of $196,540,515 was as follows:
Aggregate gross unrealized appreciation for
all investments in which there was an excess
of value over tax cost $ 2,270,331
Aggregate gross unrealized depreciation for
all investments in which there was an excess
of tax cost over value (339,125)
-------------
Net unrealized appreciation $ 1,931,206
-------------
-------------
OTHER INFORMATION:
Purchases and sales of securities, other than short-term securities, for the
year ended June 30, 1998 aggregated $25,602,509 and $6,189,835, respectively.
Purchases and sales of U.S. Government and Agency securities, other than
short-term securities, for the year ended June 30, 1998 aggregated $9,334,659
and $4,518,191, respectively.
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
TENNESSEE TAX-FREE PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1998
(Showing Percentage of Total Value of Investments)
<TABLE>
<CAPTION>
Due Bond Rating Principal Value
Date Coupon Moody/S&P Amount (Note 1)
- ---- ------ ----------- --------- --------
<S> <C> <C> <C> <C>
TENNESSEE MUNICIPAL OBLIGATIONS - 90.7%
GENERAL OBLIGATION BONDS - 47.6%
Anderson County
Refunding & Improvement -
Rural Elementary School
03/01/08 5.150%, FGIC Aaa/AAA $ 500,000 $ 516,575
Chattanooga
09/01/02 5.000% Aa3/AA 1,900,000 1,964,827
11/01/06 5.600% Aa3/AA 500,000 533,130
05/01/08 5.400%, FSA Aaa/AAA 500,000 525,894
Crockett County
04/01/11 5.000% Aaa/NR 500,000 508,470
Franklin City
Special School District
06/01/12 5.100% Aa3/NR 2,500,000 2,546,700
Franklin County
03/01/13 5.250%, MBIA Aaa/AAA 750,000 771,877
Gatlinburg
11/01/04 4.500%, FGIC Aaa/NR 3,000,000 3,044,459
Grundy County
05/01/06 5.350%, FGIC Aaa/AAA 300,000 320,502
Hamilton County
07/01/03 5.200% Aa2/NR 1,000,000 1,047,460
07/01/05 5.400% Aa2/NR 500,000 535,135
Jackson
Refunding & Improvement
03/01/14 5.125%, MBIA Aaa/NR 3,100,000 3,134,378
Johnson City
03/01/04 6.500% A1/NR 250,000 264,660
06/01/07 4.350%, FGIC Aaa/AAA 3,000,000 2,995,500
06/01/08 5.600%, FSA Aaa/AAA 500,000 531,320
06/01/12 5.900%, FSA Aaa/AAA 245,000 261,366
05/01/14 5.500%, FGIC Aaa/AAA 2,250,000 2,365,244
Kingsport
09/01/02 5.500% A1/NR 1,000,000 1,051,140
09/01/07 5.900% A1/A+ 1,000,000 1,077,960
Knox County
04/01/08 5.100% Aa/AA 2,000,000 2,058,500
02/01/12 5.000% Aa3/AA 2,000,000 2,016,240
Knoxville
Refunding & Improvement
05/01/01 5.150% Aa3/AA 1,000,000 1,019,400
05/01/07 5.250%, MBIA Aaa/AAA 3,000,000 3,171,360
05/01/08 5.300%, MBIA Aaa/AAA 1,350,000 1,416,029
Lawrence County
08/01/99 5.900%, AMBAC Aaa/AAA 1,000,000 1,023,820
Maury County
04/01/07 5.125%, AMBAC Aaa/AAA 2,000,000 2,089,140
Memphis
08/01/06 5.200% Aa/AA 500,000 519,165
11/01/10 5.200% Aa/AA 1,000,000 1,036,880
07/01/12 5.250% Aa/AA 3,000,000 3,079,620
11/01/13 5.250% Aa/AA 1,000,000 1,025,020
Metropolitan Nashville & Davidson
12/01/06 6.600% Aa/AA 1,350,000 1,429,421
05/15/07 5.700% Aa/AA 1,000,000 1,063,430
12/01/07 5.000% Aa/AA 1,000,000 1,047,400
11/15/10 5.125% Aa2/AA 500,000 517,890
11/15/11 5.125% Aa2/AA 1,000,000 1,027,500
Monroe County
05/01/03 5.200%, AMBAC Aaa/AAA 500,000 518,235
Montgomery County
04/01/02 6.900% Aaa/AAA 500,000 534,570
05/01/03 5.300% A/NR 1,000,000 1,023,140
</TABLE>
<TABLE>
<CAPTION>
Due Bond Rating Principal Value
Date Coupon Moody/S&P Amount (Note 1)
- ---- ------ ----------- --------- --------
<S> <C> <C> <C> <C>
Murfreesboro
05/01/00 6.250% A1/NR $ 250,000 $ 259,665
08/01/04 5.500% A1/NR 1,000,000 1,053,320
Oak Ridge
07/01/08 5.400% Aa/A+ 1,000,000 1,051,710
07/01/10 5.550% Aa/A+ 500,000 520,680
Putnam County, MBIA
04/01/05 5.250% Aaa/AAA 3,000,000 3,167,100
04/01/07 5.100% Aaa/AAA 1,540,000 1,604,110
Rutherford County
04/01/08 5.200% Aa3/AA- 2,000,000 2,074,220
04/01/09 5.250% Aa3/AA- 500,000 522,280
Sevier County, FGIC
04/01/08 5.250% Aaa/AAA 750,000 774,420
04/01/12 5.600% Aaa/AAA 400,000 414,280
Shelby County
04/01/03 5.000% Aa2/AA+ 500,000 517,255
03/01/04 5.550% Aa2/AA+ 1,000,000 1,038,860
04/01/09 5.500% Aa2/AA+ 1,500,000 1,587,090
06/01/09 5.625% Aa2/AA+ 1,000,000 1,067,020
11/01/09 5.300% Aa2/AA+ 3,000,000 3,143,850
04/01/10 5.500% Aa2/AA+ 750,000 788,055
04/01/14 5.625% Aa2/AA+ 2,000,000 2,087,860
Tennessee State
03/01/01 5.600% Aaa/AA+ 1,000,000 1,016,270
06/01/05 6.700% Aaa/AA+ 1,000,000 1,085,870
03/01/06 5.300% Aaa/AAA 2,500,000 2,659,100
05/01/06 5.000% Aaa/AA+ 600,000 628,878
03/01/07 5.400% Aaa/AA+ 240,000 255,720
05/01/08 5.000% Aaa/AAA 5,000,000 5,257,550
05/01/09 4.750% Aaa/AA+ 2,000,000 2,039,220
05/01/13 5.300% Aaa/AA+ 750,000 784,890
Tipton County
04/01/12 5.250%, AMBAC Aaa/NR 500,000 519,145
Weakley County
05/01/09 5.000%, FGIC Aaa/AAA 350,000 359,142
White House
02/01/12 5.300%, MBIA Aaa/AAA 1,000,000 1,022,730
Williamson County
04/01/06 5.500% Aa1/NR 2,000,000 2,112,180
05/01/10 4.800% Aa1/NR 1,000,000 1,002,270
Wilson County
03/30/07 5.000%, FSA Aaa/NR 2,000,000 2,064,220
04/01/07 5.250% A1/NR 1,000,000 1,046,740
06/01/13 5.500%, FGIC Aaa/AAA 500,000 512,885
------------
TOTAL GENERAL OBLIGATION BONDS 93,651,942
------------
REVENUE BONDS - 43.1%
AIRPORT AUTHORITY - 2.3%
Memphis - Shelby County
09/01/12 5.350% Baa2/BBB 500,000 519,640
Metropolitan Nashville, FGIC
07/01/98 5.800% Aaa/AAA 1,000,000 1,000,060
07/01/99 5.900% Aaa/AAA 2,000,000 2,040,940
07/01/08 4.600% Aaa/AAA 1,000,000 1,008,780
------------
TOTAL AIRPORT AUTHORITY 4,569,420
------------
HEALTH & EDUCATION - 12.1%
ANDERSON COUNTY
METHODIST MEDICAL CENTER
07/01/05 5.500% A1/NR 1,400,000 1,470,686
07/01/08 5.700% A1/NR 1,000,000 1,049,700
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
TENNESSEE TAX-FREE PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1998
(Showing Percentage of Total Value of Investments)
<TABLE>
<CAPTION>
Due Bond Rating Principal Value
Date Coupon Moody/S&P Amount (Note 1)
- ---- ------ ----------- --------- ---------
<S> <C> <C> <C> <C>
TENNESSEE MUNICIPAL OBLIGATIONS (CONTINUED)
REVENUE BONDS (CONTINUED)
HEALTH & EDUCATION (CONTINUED)
Bradley County
03/01/06 5.300%, MBIA Aaa/AAA $ 500,000 $ 515,920
Bristol
Memorial Hospital
09/01/13 5.125%, FGIC Aaa/AAA 1,500,000 1,534,200
Jackson
04/01/06 5.300% A1/A+ 1,000,000 1,063,910
04/01/07 5.300% A1/A+ 2,000,000 2,132,440
04/01/10 5.500%, AMBAC Aaa/AAA 400,000 423,304
Knox County
Ft. Sanders, MBIA
01/01/99 6.700% Aaa/AAA 250,000 253,640
01/01/04 7.000% Aaa/AAA 500,000 531,545
Knox County
Baptist Health
04/15/02 4.600%, AMBAC Aaa/AAA 500,000 508,315
04/15/11 5.500%, CONLEE NR/AAA 3,000,000 3,196,350
Metropolitan Nashville & Davidson
Baptist Hospital
11/01/05 5.000%, MBIA Aaa/AAA 1,000,000 1,032,780
Metropolitan Nashville & Davidson
Meharry
12/01/04 7.875% Aaa/NR 240,000 269,722
Shelby County
Methodist Healthcare, MBIA
04/01/02 5.000% Aaa/AAA 2,700,000 2,775,978
04/01/03 5.000% Aaa/Aaa 2,000,000 2,063,800
08/01/12 5.500% Aaa/AAA 2,000,000 2,096,020
08/01/15 5.300% Aaa/AAA 1,000,000 1,017,580
Sullivan County
Holston Valley Healthcare, MBIA
02/15/09 7.200% Aaa/AAA 750,000 802,155
02/15/13 5.750% Aaa/AAA 1,000,000 1,053,310
------------
TOTAL HEALTH & EDUCATION 23,791,355
------------
HOUSING - 1.0%
Metropolitan Nashville & Davidson
Multi-Family Housing
02/01/21 5.200%, FSA NR/AAA 1,000,000 1,032,340
Tennessee Housing
Development Agency
07/01/03 6.700% Aa2/AA 190,000 200,868
01/01/11 5.800% Aa2/AA 400,000 426,244
07/01/13 5.800% Aa2/AA 350,000 365,533
------------
TOTAL HOUSING 2,024,985
------------
INDUSTRIAL DEVELOPMENT - 1.1%
Cocke County
08/01/98 7.000% A2/NR 560,000 561,495
Hamilton County
09/01/01 5.300%, FGIC Aaa/AAA 1,000,000 1,036,170
Memphis Shelby County
03/15/05 5.400% NR/AA- 500,000 532,320
------------
TOTAL INDUSTRIAL DEVELOPMENT 2,129,985
------------
</TABLE>
<TABLE>
<CAPTION>
Due Bond Rating Principal Value
Date Coupon Moody/S&P Amount (Note 1)
- ---- ------ ----------- --------- --------
<S> <C> <C> <C> <C>
PUBLIC BUILDING AUTHORITY - 1.5%
Gatlinburg
12/01/01 6.500%, AMBAC Aaa/AAA $ 500,000 $ 539,225
Johnson City
09/01/14 5.000%, MBIA Aaa/AAA 1,000,000 1,003,890
Montgomery County
12/15/00 7.500% A1/AA- 110,000 110,245
Sevier County, AMBAC
09/01/06 5.500% Aaa/AAA 775,000 827,708
09/01/10 5.400% Aaa/NR 500,000 523,595
------------
TOTAL PUBLIC BUILDING AUTHORITY 3,004,663
------------
STATE AUTHORITY - 4.6%
Tennessee State Local
Development Authority
03/01/01 6.600% A2/AA- 250,000 270,518
10/01/02 5.600% NR/A 400,000 424,772
03/01/03 6.700% A2/AA- 750,000 813,435
03/01/05 5.500% A2/AA- 2,500,000 2,680,850
03/01/11 5.750% A2/AA- 250,000 265,008
03/01/14 5.125%, MBIA Aaa/AAA 2,000,000 2,025,740
10/01/14 6.450% NR/A 1,000,000 1,089,940
Tennessee State School
Board Authority
05/01/06 5.750% A1/AA 455,000 455,496
05/01/11 5.500% A1/AA 500,000 527,435
05/01/11 6.875% A1/AA 500,000 532,650
------------
TOTAL STATE AUTHORITY 9,085,844
------------
UTILITY - 20.5%
Clarksville
Water, Sewer & Gas, MBIA
02/01/01 5.500% AAA/AAA 500,000 517,735
02/01/10 5.300% AAA/NR 900,000 944,595
Collierville
Water & Sewer
11/01/10 5.300%, MBIA AAA/AAA 475,000 493,772
Dickson
Electric
09/01/11 5.625%, MBIA AAA/AAA 1,000,000 1,080,600
Fayetteville
Electric
04/01/11 5.250% A/NR 1,750,000 1,804,915
Franklin
Water & Sewer
09/01/11 5.000% AA2/NR 750,000 766,718
Harpeth Valley
Utility District
09/01/03 5.250% A1/A 1,000,000 1,050,170
09/01/06 5.500% A1/A 500,000 534,820
09/01/11 5.500% A1/A 1,650,000 1,724,333
Jackson
Water & Sewer
07/01/98 6.900%, AMBAC AAA/AAA 300,000 300,024
Johnson City
Electric, MBIA
05/01/10 5.400% AAA/AAA 500,000 524,025
05/01/12 5.100% AAA/AAA 1,500,000 1,527,780
Knox Chapman
Water & Sewer
01/01/04 5.500%, MBIA AAA/AAA 605,000 641,457
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
TENNESSEE TAX-FREE PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1998
(Showing Percentage of Total Value of Investments)
<TABLE>
<CAPTION>
Due Bond Rating Principal Value
Date Coupon Moody/S&P Amount (Note 1)
- ---- ------ ----------- --------- --------
<S> <C> <C> <C> <C>
TENNESSEE MUNICIPAL OBLIGATIONS (CONTINUED)
REVENUE BONDS (CONTINUED)
Utility (Continued)
Knoxville
Electric
07/01/12 5.700% Aa3/AA $ 500,000 $ 525,750
Knoxville
Gas
03/01/03 5.300% Aa3/AA 1,000,000 1,047,680
03/01/14 5.350% Aa3/AA 2,760,000 2,824,998
Knoxville
Waste Water
04/01/01 4.375% Aa3/AA 2,000,000 2,016,920
La Follette
Electric, AMBAC
06/01/11 5.800% Aaa/AAA 430,000 463,089
03/01/15 5.250% Aaa/NR 1,000,000 1,022,280
La Vergne
Water & Sewer
03/01/14 5.400% A1/NR 500,000 518,165
Lawrenceburg
Electric
07/01/06 5.200%, MBIA Aaa/AAA 345,000 363,685
Lenoir City
Electric
06/01/07 5.000%, AMBAC Aaa/NR 2,000,000 2,083,180
Madison
Utility District
02/01/10 5.600%, MBIA Aaa/AAA 500,000 535,980
Memphis
Electric
01/01/03 5.800% Aa/AA 1,000,000 1,065,440
01/01/10 5.000% Aa/AA 1,000,000 1,027,320
Memphis
Sanitation Sewer System
01/01/05 5.250% Aa2/AA+ 2,250,000 2,383,223
Memphis
Water
01/01/01 6.900% Aa/AA 250,000 255,188
Metropolitan Nashville & Davidson
Electric
05/15/06 4.700% Aa3/AA 2,000,000 2,020,900
Metropolitan Nashville & Davidson
Water & Sewer
01/01/08 5.000%, FGIC Aaa/AAA 4,000,000 4,165,840
01/01/13 5.200%, FGIC Aaa/AAA 1,500,000 1,573,380
01/01/15 5.750%, AMBAC Aaa/AAA 1,000,000 1,069,320
Rutherford County
Water Works
02/01/11 5.100%, FGIC Aaa/NR 500,000 509,470
Sevier County
Gas
05/01/11 5.400%, AMBAC Aaa/NR 1,000,000 1,043,460
Sumner County
Solid Waste
08/01/04 5.125%, AMBAC Aaa/AA 1,500,000 1,571,745
------------
TOTAL UTILITY 39,997,957
------------
TOTAL REVENUE BONDS 84,604,209
------------
TOTAL TENNESSEE MUNICIPAL OBLIGATIONS
(Cost $171,750,759) 178,256,151
------------
</TABLE>
<TABLE>
<CAPTION>
Due Bond Rating Principal Value
Date Coupon Moody/S&P Amount (Note 1)
- ---- ------ ----------- --------- --------
<S> <C> <C> <C> <C>
OTHER STATE MUNICIPAL OBLIGATIONS - 6.4%
GENERAL OBLIGATION BONDS - 3.7%
Austin, Texas
09/01/06 7.000% Aa/AA $ 750,000 $ 797,220
Florida State
Board of Education
06/01/09 7.000% Aaa/AA+ 600,000 645,894
Harris County, Texas
08/15/15 6.500% NR/NR 300,000 331,644
08/15/15 6.500% Aa2/AA 785,000 855,281
Huntsville, Alabama
02/01/10 6.750% Aa/NR 500,000 530,775
Illinois State
06/01/05 6.750% Aa3/AA 500,000 535,085
Indiana
02/01/04 5.500% NR/AAA 500,000 530,515
King County, Washington
12/01/06 7.000% NR/NR 500,000 534,955
Las Vegas, Nevada
10/01/09 6.600%, FGIC Aaa/AAA 1,000,000 1,101,760
Louisiana State
05/01/07 6.500%, AMBAC Aaa/AAA 1,250,000 1,374,925
------------
TOTAL GENERAL OBLIGATIONS BONDS 7,238,054
------------
REVENUE BONDS - 2.7%
HEALTH & EDUCATION - 0.6%
Wisconsin State
Health & Education Facilities
11/15/10 6.250% NR/AA+ 1,000,000 1,086,030
------------
TRANSPORTATION - 0.7%
Arizona State
Transportation Board
07/01/02 7.300% Aaa/AA- 300,000 306,030
Indianapolis
Public Improvement Transportation
07/01/10 6.000% Aa/AA- 950,000 1,016,472
------------
TOTAL TRANSPORTATION 1,322,502
------------
UTILITY - 1.4%
Washington State
Public Power Supply
07/01/01 7.000%, FGIC Aaa/AAA 1,250,000 1,350,713
07/01/04 4.800%, MBIA Aaa/AAA 500,000 511,245
Wisconsin State
Clean Water
06/01/05 6.700% NR/AA+ 1,000,000 1,090,310
------------
TOTAL UTILITY 2,952,268
------------
TOTAL REVENUE BONDS 5,360,800
------------
TOTAL OTHER STATE MUNICIPAL OBLIGATIONS
(Cost $12,618,041) 12,598,854
------------
Shares
------
MONEY MARKET MUTUAL FUNDS - 2.9%
Federated Tennessee Municipal Cash Trust 5,691,872 5,691,872
(Cost $5,691,872) ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
TENNESSEE TAX-FREE PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1998
(Showing Percentage of Total Value of Investments)
TOTAL INVESTMENTS - 100%
(Cost $190,060,672) $ 196,546,877
------------
------------
The Portfolio had the following insurance concentration greater than 10% at June
30, 1998 (as a percentage of net assets):
MBIA 17.3%
FGIC 13.4%
INCOME TAX INFORMATION:
At June 30, 1998, the net unrealized appreciation based on cost for income tax
purposes of $190,060,672 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there was an excess of value
over tax cost $ 6,534,206
Aggregate gross unrealized depreciation for all
investments in which there was an excess of tax
cost over value (48,001)
------------
Net unrealized appreciation $ 6,486,205
------------
------------
OTHER INFORMATION:
Purchases and sales of securities, other than short-term securities, for the
year ended June 30, 1998 aggregated $43,340,127 and $11,057,756, respectively.
RATINGS:
The Moody's and S&P ratings are believed to be the most recent ratings at June
30, 1998. Ratings are not covered by the Report of Independent Accountants.
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.
U.S. TREASURY MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1998
(Showing Percentage of Total Value of Investments)
<TABLE>
<CAPTION>
Due Discount Rate or Principal Value
Date Coupon Rate Amount (Note 1)
- ---- ---------------- --------- --------
<S> <C> <C> <C>
U.S. TREASURY OBLIGATIONS - 55.7%
U.S. TREASURY NOTES
07/31/98 6.25% $ 1,000,000 $ 1,000,464
08/31/98 4.75% 2,000,000 1,997,173
09/30/98 4.75% 2,000,000 1,995,529
10/31/98 5.88% 1,000,000 1,000,863
02/15/99 8.88% 1,000,000 1,020,159
02/28/99 5.88% 2,000,000 2,004,127
04/30/99 6.38% 2,300,000 2,315,758
06/30/99 6.00% 3,000,000 3,013,135
U.S. TREASURY BILLS
07/09/98 4.55% 18,000,000 17,981,800
07/23/98 4.70% 2,000,000 1,994,256
------------
TOTAL U.S. TREASURY OBLIGATIONS 34,323,264
------------
Maturity
Amount
--------
REPURCHASE AGREEMENTS - 44.3%
BZW, 5.60%, dated 06/30/98, due
07/01/98, collateralized by $8,280,000
U.S. Treasury Bond, 7.13% due
02/15/23 9,773,520 9,772,000
HSBC Securities Inc., 5.60%, dated
06/30/98, due 07/01/98, collateralized
by $7,847,000 U.S. Treasury Note,
5.75%, due 10/31/02 7,809,215 7,808,000
Merrill Lynch, Inc., 5.60%, dated
06/30/98, due 07/01/98, collateralized
by $9,575,000 U.S. Treasury Note,
6.38%, due 01/15/00 9,773,520 9,772,000
------------
TOTAL REPURCHASE AGREEMENTS 27,352,000
------------
TOTAL INVESTMENTS - 100% $ 61,675,264
------------
------------
</TABLE>
INCOME TAX INFORMATION:
Total cost for Federal income tax purposes - $61,675,264
As of June 30, 1998, the U.S. Treasury MoneyMarket Portfolio had capital loss
carryovers of approximately $10,000 and $8,000 available to offset capital gains
to the extent provided in regulations, which will expire on June 30, 2005 and
June 30, 2006, respectively.
The U.S. Treasury Money Market Portfolio intends to elect to defer to its fiscal
year ending June 30, 1999 $5,695 of losses recognized during the period November
1, 1997 to June 30, 1998.
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1998
(Showing Percentage of Total Value of Investments)
<TABLE>
<CAPTION>
Due Discount Rate or Principal Value
Date Coupon Rate Amount (Note 1)
- ---- ---------------- --------- --------
<S> <C> <C> <C>
U.S. TREASURY OBLIGATIONS - 1.1%
U.S TREASURY NOTES
08/31/98 4.75% $ 1,000,000 $ 998,537
------------
TOTAL U.S. TREASURY OBLIGATIONS 998,537
------------
U.S. GOVERNMENT OBLIGATIONS - 91.2%
Federal Farm Credit Bank
07/01/98 5.50%* 5,000,000 4,997,612
11/03/98 5.70% 5,000,000 5,000,725
Federal Home Loan Bank
09/25/98 6.11% 3,000,000 3,002,559
01/22/99 5.39% 2,000,000 1,997,687
02/26/99 5.56% 1,000,000 1,000,000
03/12/99 5.61% 3,000,000 2,999,298
03/23/99 5.55% 1,030,000 1,029,094
Federal Home Loan Mortgage Corp.
07/14/98 5.44% 440,000 439,137
07/24/98 5.43% 1,090,000 1,086,212
Federal National Mortgage Association
07/01/98 5.63%* 10,000,000 9,992,908
07/07/98 5.26%* 5,000,000 5,000,000
07/10/98 5.30% 1,000,000 998,642
07/10/98 5.22% 4,000,000 3,999,589
07/17/98 5.44%* 10,000,000 9,995,032
07/31/98 5.68% 2,000,000 2,000,006
10/08/98 5.30% 2,191,000 2,159,066
10/09/98 5.46% 2,000,000 1,969,666
11/02/98 5.39% 976,000 957,880
11/09/98 5.38% 2,000,000 1,960,846
12/07/98 5.30% 2,000,000 1,953,183
03/10/99 9.55% 1,000,000 1,025,903
Student Loan Marketing Association
07/07/98 5.51%* 10,000,000 9,997,358
07/07/98 5.63%* 5,000,000 4,999,369
12/17/98 5.74% 3,000,000 3,001,686
06/30/99 5.63% 1,000,000 999,408
------------
TOTAL U.S. GOVERNMENT OBLIGATIONS 82,562,866
------------
Maturity
Amount
REPURCHASE AGREEMENTS - 7.7% ---------
HSBC Securities Inc., 5.60%, dated
06/30/98, due 07/01/98, collateralized
by $3,248,000 U.S. Treasury Note, 6.88%,
due 05/15/06 3,462,539 3,462,000
Donaldson, Lufkin & Jenrette Securities
Corp., 5.50%, dated 06/30/98, due
07/01/98, collateralized by $2,409,000
U.S. Treasury Bond, 9.88%, due
11/15/15 3,462,529 3,462,000
------------
TOTAL REPURCHASE AGREEMENTS 6,924,000
------------
TOTAL INVESTMENTS - 100% $ 90,485,403
------------
------------
</TABLE>
*Floating or variable rate security - rate disclosed as of June 30,
1998. Maturity date represents the next interest reset date.
INCOME TAX INFORMATION:
Total cost for Federal income tax purposes - $90,485,403
As of June 30, 1998, the U.S. Government MoneyMarket Portfolio had capital loss
carryovers of approximately $7,000 and $1,000 available to offset capital gains
to the extent provided in regulations, which will expire on June 30, 2005 and
June 30, 2006, respectively.
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
MUNICIPAL MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1998
(Showing Percentage of Total Value of Investments)
<TABLE>
<CAPTION>
Due Discount Rate or Principal Value
Date Coupon Rate Amount (Note 1)
- ---- ----------- --------- --------
<S> <C> <C> <C>
MUNICIPAL BONDS & NOTES - 100.0%
ALABAMA - 2.5%
Montgomery
Special Care Facilities
07/07/98 3.50%* $ 1,000,000 $ 1,000,000
------------
ALASKA - 3.7%
City of Valdez
10/08/98 3.55% 1,500,000 1,500,000
------------
ARIZONA - 3.7%
Maricopa County, Pollution Control
10/15/98 3.55% 1,500,000 1,500,000
------------
FLORIDA - 8.5%
City of Jacksonville
10/13/98 3.60% 2,000,000 2,000,000
Sunshine State Government
Finance Commission
08/19/98 3.55% 1,400,000 1,400,000
------------
3,400,000
------------
GEORGIA - 7.9%
Burke County
Development Authority, Pollution Control
07/01/98 3.80%* 900,000 900,000
Cobb County Housing Authority
Post Bridge Project
07/07/98 3.60%* 550,000 550,000
Georgia
Municipal Gas Authority
07/07/98 3.50%* 1,000,000 1,000,000
Smyrna Housing Authority
Post Valley Project
07/07/98 3.60%* 700,000 700,000
------------
3,150,000
------------
KANSAS - 2.5%
BURLINGTON, POLLUTION CONTROL
07/10/98 3.60% 1,000,000 1,000,000
------------
MICHIGAN - 5.7%
Michigan State Strategic Fund
07/01/98 3.80%* 900,000 900,000
Royal Oak
Hospital Finance Authority
07/01/98 4.00%* 1,400,000 1,400,000
------------
2,300,000
------------
MISSOURI - 2.0 %
Kansas City
Industrial Development
07/07/98 3.60%* 800,000 800,000
------------
NEVADA - 2.5%
Clark County, Airport Authority
07/07/98 3.40%* 990,000 990,000
------------
NEW HAMPSHIRE - 1.7%
New Hampshire
Health & Education
07/07/98 3.60%* 700,000 700,000
------------
</TABLE>
<TABLE>
<CAPTION>
Due Discount Rate or Principal Value
Date Coupon Rate Amount (Note 1)
- ---- ---------------- --------- ---------
<S> <C> <C> <C>
NEW YORK - 3.5%
New York City
07/01/98 4.00%* $ 1,000,000 $ 1,000,000
07/01/98 4.10%* 100,000 100,000
New York & New Jersey
Port Authority
07/01/98 3.75%* 200,000 200,000
New York City
Water & Sewer System
07/01/98 4.10%* 100,000 100,000
------------
1,400,000
------------
NORTH CAROLINA - 5.1%
Greensboro
Public Improvement
07/07/98 3.45%* 1,850,000 1,850,000
Raleigh Durham Airport Authority
American Airlines
07/01/98 3.85%* 200,000 200,000
------------
2,050,000
------------
OHIO - 9.5%
Medina County Housing
Oaks at Medina
07/07/98 3.60%* 1,800,000 1,800,000
Parma Bond Anticipation Notes
08/04/98 4.95% 1,000,000 1,000,942
08/05/98 4.95% 1,000,000 1,001,233
------------
3,802,175
------------
TENNESSEE - 24.5%
Chattanooga Health, Education & Housing
Baylor
07/07/98 3.65%* 1,225,000 1,225,000
Clarksville Public Building Authority
07/07/98 3.60%* 1,600,000 1,600,000
Knox County
Industrial Development
07/15/98 3.44%* 1,400,000 1,400,000
Memphis
07/01/98 3.70%* 1,200,000 1,200,000
07/07/98 3.70%* 700,000 700,000
Metro. Gov't Nashville
Airport
07/07/98 3.55%* 800,000 800,000
Metro. Gov't Nashville & Davidson
07/07/98 3.60%* 1,700,000 1,700,000
Washington County
Industrial Development Springbrook
Property
07/07/98 3.60%* 1,150,000 1,150,000
------------
9,775,000
------------
TEXAS - 10.5%
Texas State Tax & Revenue
Anticipation Notes
08/31/98 4.75% 2,000,000 2,003,168
Texas Water Development
07/01/98 4.00%* 700,000 700,000
University of Texas
Board of Regents
10/13/98 3.60% 1,500,000 1,500,000
------------
4,203,168
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
MUNICIPAL MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1998
(Showing Percentage of Total Value of Investments)
<TABLE>
<CAPTION>
Due Discount Rate or Principal Value
Date Coupon Rate Amount (Note 1)
- ---- ---------------- --------- --------
<S> <C> <C> <C>
MUNICIPAL BONDS & NOTES (CONTINUED)
VIRGINIA - 5.0%
Roanoke
Industrial Development
07/01/98 3.80%* $ 2,000,000 $ 2,000,000
------------
[cad 217]WYOMING - 1.2%
Lincoln County
Pollution Control, Exxon
07/01/98 3.80%* 500,000 500,000
------------
TOTAL MUNICIPAL BONDS & NOTES 40,070,343
------------
TOTAL INVESTMENTS - 100% $ 40,070,343
------------
------------
</TABLE>
*Floating or variable rate security - rate disclosed as of June 30,
1998. Maturity date represents the next interest rate reset.
INCOME TAX INFORMATION:
Total cost for Federal income tax purposes - $40,070,343
As of June 30, 1998, the Municipal MoneyMarket Portfolio had capital loss
carryovers of approximately $3,000 and $1,000 available to offset capital gains
to the extent provided in regulations, which will expire on June 30, 2002 and
June 30, 2006, respectively.
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.
CASH RESERVE PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1998
(Showing Percentage of Total Value of Investments)
<TABLE>
<CAPTION>
Due Discount Rate or Principal Value
Date Coupon Rate Amount (Note 1)
- ---- ---------------- --------- --------
<S> <C> <C> <C>
COMMERCIAL PAPER - 78.0%
AMUSEMENT - 2.0%
Walt Disney Co.
07/20/98 5.46% $ 2,000,000 $ 1,994,236
------------
ASSET-BACKED SECURITIES - 16.1%
Beta Finance, Inc.
10/15/98 5.48% 2,500,000 2,459,661
CC USA, Inc.
09/21/98 5.51% 2,500,000 2,468,624
CXC, Inc.
09/16/98 5.47% 3,000,000 2,964,901
Ciesco L. P.
07/24/98 5.47% 3,000,000 2,989,515
Corporate Receivables Corp.
08/17/98 5.52% 2,000,000 1,985,587
Windmill Funding Corp.
08/14/98 5.63% 3,000,000 2,979,357
------------
TOTAL ASSET-BACKED SECURITIES 15,847,645
------------
BUSINESS CREDIT INSTITUTIONS - 9.0%
Enterprise Funding Corp.
08/04/98 5.52% 2,000,000 1,989,574
General Electric Capital Corp.
10/15/98 5.52% 4,000,000 3,934,987
National Rural Utility Coop.
09/25/98 5.49% 3,000,000 2,960,655
------------
TOTAL BUSINESS CREDIT INSTITUTIONS 8,885,216
------------
CHEMICAL & ALLIED PRODUCTS - 2.0%
Monsanto Co.
07/15/98 5.46% 2,000,000 1,995,753
------------
FINANCIAL LESSORS - 2.0%
IBM Credit Corp.
09/28/98 5.46% 2,000,000 1,973,003
------------
FOOD - 3.0%
Diageo Capital PLC
08/31/98 5.47% 3,000,000 2,972,194
------------
HOUSEHOLD AUDIO & VIDEO EQUIPMENT - 3.0%
Panasonic Finance, Inc.
09/04/98 5.50% 3,000,000 2,970,208
------------
INSURANCE - 7.0%
American General Corp.
08/26/98 5.50% 3,000,000 2,974,333
Prudential Funding Corp.
08/05/98 5.47% 1,750,000 1,740,693
10/22/98 5.51% 2,250,000 2,211,086
------------
TOTAL INSURANCE 6,926,112
------------
MANUFACTURING - 4.1%
Fortune Brands, Inc.
07/01/98 6.25% 4,000,000 4,000,000
------------
MOTOR & GENERATORS - 3.0%
BTR Dunlop Finance, Inc.
07/09/98 5.42% 3,000,000 2,996,387
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
CASH RESERVE PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1998
(Showing Percentage of Total Value of Investments)
<TABLE>
<CAPTION>
Due Discount Rate or Principal Value
Date Coupon Rate Amount (Note 1)
- ---- ---------------- --------- --------
<S> <C> <C> <C>
COMMERCIAL PAPER (CONTINUED)
PAPER MILLS - 4.1%
Sonoco Products Co.
07/01/98 6.25% $ 4,000,000 $ 4,000,000
------------
PERSONAL CREDIT INSTITUTIONS - 3.1%
American Express Credit Corp.
07/29/98 5.45% 3,000,000 2,987,284
------------
PERSONAL SERVICES - 4.0%
Block Financial Corp.
08/17/98 5.53% 4,000,000 3,971,121
------------
PETROLEUM REFINING - 4.1%
Koch Industries
07/01/98 6.25% 4,000,000 4,000,000
------------
PIPELINES - 3.0%
Colonial Pipeline Co.
10/27/98 5.52% 3,000,000 2,945,719
------------
SECURITY BROKER/DEALERS - 4.0%
Merrill Lynch & Co., Inc.
10/23/98 5.52% 4,000,000 3,930,080
------------
SWITCHGEAR & SWITCHBOARD APPARATUS - 4.5%
Cooper Industries, Inc.
07/01/98 6.50% 4,425,000 4,425,000
------------
TOTAL COMMERCIAL PAPER 76,819,958
------------
VARIABLE RATE NOTES - 17.2%
FINANCIAL SERVICES - 3.1%
BancOne Corp.
09/18/98 5.63%* 3,000,000 2,999,923
------------
PERSONAL CREDIT INSTITUTIONS - 12.1%
American Honda Finance Corp.
07/16/98 5.66%* 3,000,000 3,000,000
Associates Corp. of North America
09/10/98 5.51%* 4,000,000 3,956,532
Beneficial Corp.
08/04/98 5.66%* 3,000,000 2,999,785
Dean Witter, Discover & Co.
07/21/98 5.69%* 2,000,000 2,000,150
------------
TOTAL PERSONAL CREDIT INSTITUTIONS 11,956,467
------------
SECURITY BROKER/DEALERS - 2.0%
Bear Stearns Co.
08/07/98 5.64%* 2,000,000 2,000,000
------------
TOTAL VARIABLE RATE NOTES 16,956,390
------------
Maturity
Amount
--------
REPURCHASE AGREEMENT - 4.8%
HSBC Securities Inc., 5.60%, dated
06/30/98, due 07/01/98, collateralized
by $4,288,000 U.S. Treasury Note, 7.50%,
due 02/15/05 4,760,740 4,760,000
------------
TOTAL INVESTMENTS - 100% $98,536,348
------------
------------
</TABLE>
*Floating or variable rate security - rate disclosed as of June 30,
1998. Maturity date represents the next interest rate reset.
INCOME TAX INFORMATION:
Total cost for income tax purposes - $98,536,348
The Cash Reserve Portfolio intends to elect to defer to its fiscal year ending
June 30, 1999, $3,292 of losses recognized during the period November 1, 1997 to
June 30, 1998.
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998
<TABLE>
<CAPTION>
GROWTH & INCOME CAPITAL APPRECIATION
PORTFOLIO PORTFOLIO
----------------------------------------------
<S> <C> <C>
ASSETS:
Investments, at value (cost-see below)(Note 1) $ 777,112,326 $ 38,989,010
Receivable for investments sold 1,271,958 487,966
Receivable for portfolio shares sold 460,076 6,321
Dividends receivable 578,616 7,371
Interest receivable 109,269 7,576
Other assets 16,102 0
----------------------------------------------
Total assets 779,548,347 39,498,244
----------------------------------------------
LIABILITIES:
Payable for investments purchased 885,815 423,567
Payable for portfolio shares redeemed 272,695 0
Accrued advisory fee 315,883 21,896
Accrued administration fee 92,282 7,311
Accrued co-administration fee 31,324 1,633
Accrued 12b-1 fee 63,806 290
Accrued shareholder servicing fee 31,904 419
Other payables and accrued expenses 269,231 38,358
----------------------------------------------
Total liabilities 1,962,940 493,474
----------------------------------------------
NET ASSETS $ 777,585,407 $ 39,004,770
----------------------------------------------
----------------------------------------------
NET ASSETS CONSIST OF:
Paid in capital $ 502,991,638 $ 38,039,708
Undistributed net investment income 11,160 0
Accumulated net realized gain on
investments 7,344,716 758,990
Net unrealized appreciation
in value of investments 267,237,893 206,072
----------------------------------------------
NET ASSETS $ 777,585,407 $ 39,004,770
----------------------------------------------
----------------------------------------------
COST OF INVESTMENTS $ 509,874,433 $ 38,782,938
----------------------------------------------
----------------------------------------------
NET ASSET VALUE PER SHARE
Net Assets
Class I $ 651,362,866 $ 37,014,467
Class II $ 46,862,506 $ 1,399,982
Class III $ 79,360,035 $ 590,321
----------------------------------------------
Shares outstanding of $.001 par value capital
stock, unlimited shares authorized
Class I 30,205,361 3,446,954
Class II 2,171,145 130,766
Class III 3,696,416 55,481
----------------------------------------------
Net Asset Value and redemption price per
share
Class I $21.56 $10.74
Class II $21.58 $10.71
Class III $21.47 $10.64
----------------------------------------------
Maximum offering price per share
Class I (no sales charge) $21.56 $10.74
Class II (net asset value plus maximum
sales charge of 5.75% of offering price) $22.90 $11.36
Class III (no sales charge) $21.47 $10.64
----------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998
<TABLE>
<CAPTION>
BOND INTERMEDIATE BOND TENNESSEE TAX-FREE
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments, at value (cost-see below)(Note 1) $ 220,076,341 $ 198,471,721 $ 196,546,877
Receivable for portfolio shares sold 18,015 14,398 89,369
Interest receivable 3,502,180 3,005,684 2,856,743
Other assets 7,861 5,927 1,144
------------------------------------------------------------------
Total assets 223,604,397 201,497,730 199,494,133
------------------------------------------------------------------
LIABILITIES:
Payable for investments purchased 104,677 0 3,548,168
Payable for portfolio shares redeemed 2,722 23,124 43,000
Accrued advisory fee 27,091 0 0
Accrued administration fee 27,942 23,861 16,469
Accrued co-administration fee 9,310 8,401 8,045
Dividends payable 349,220 545,394 672,636
Accrued 12b-1 fee 2,007 10 5,571
Accrued shareholder servicing fee 996 175 0
Other payables and accrued expenses 79,066 84,302 73,092
------------------------------------------------------------------
Total liabilities 603,031 685,267 4,366,981
------------------------------------------------------------------
NET ASSETS $ 223,001,366 $ 200,812,463 $ 195,127,152
------------------------------------------------------------------
------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in capital $ 215,034,757 $ 198,529,977 $ 188,115,530
(Over) Undistributed net investment income (24,216) 135,043 32,059
Accumulated net realized gain on
investments 1,701,053 216,237 493,358
Net unrealized appreciation in value of
investments 6,289,772 1,931,206 6,486,205
------------------------------------------------------------------
NET ASSETS $ 223,001,366 $ 200,812,463 $ 195,127,152
------------------------------------------------------------------
------------------------------------------------------------------
COST OF INVESTMENTS $ 213,786,569 $ 196,540,515 $ 190,060,672
------------------------------------------------------------------
------------------------------------------------------------------
NET ASSET VALUE PER SHARE
Net Assets
Class I $ 219,087,651 $ 199,872,487 $ 176,884,262
Class II $ 1,800,517 $ 923,229 $ 8,973,118
Class III $ 2,113,198 $ 16,747 $ 9,269,772
------------------------------------------------------------------
Shares outstanding of $.001 par value capital
stock, unlimited shares authorized
Class I 21,295,177 19,951,080 17,149,538
Class II 175,460 92,160 868,150
Class III 205,810 1,671 897,838
------------------------------------------------------------------
Net Asset Value and redemption price per
share
Class I $10.29 $10.02 $10.31
Class II $10.26 $10.02 $10.34
Class III $10.27 $10.02 $10.32
------------------------------------------------------------------
Maximum offering price per share
Class I (no sales charge) $10.29 $10.02 $10.31
Class II (net asset value plus maximum
sales charge of 3.75% of offering price) $10.66 $10.41 $10.74
Class III (no sales charge) $10.27 $10.02 $10.32
------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998
<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) $ 61,675,264 $ 90,485,403 $ 40,070,343 $ 98,536,348
Cash 409 680 0 947
Receivable for portfolio shares sold 0 0 0 99,460
Interest receivable 193,669 725,397 328,768 91,994
Other assets 3,594 4,567 4,920 2,871
----------------------------------------------------------------------------
Total assets 61,872,936 91,216,047 40,404,031 98,731,620
----------------------------------------------------------------------------
LIABILITIES:
Payable for shares redeemed 0 0 0 6,500
Dividends payable 223,103 377,805 101,317 179,953
Accrued management fee 4,003 7,404 3,154 7,669
Accrued administration fee 3,467 5,544 2,354 5,748
Accrued co-administration fee 1,181 1,896 949 1,924
Accrued 12b-1 fee 12,851 5,366 2,091 14,587
Other payables and accrued expenses 26,317 49,508 85,195 30,069
----------------------------------------------------------------------------
Total liabilities 270,922 447,523 195,060 246,450
----------------------------------------------------------------------------
NET ASSETS $ 61,602,014 $ 90,768,524 $ 40,208,971 $ 98,485,170
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in capital $ 61,622,631 $ 90,776,013 $ 40,212,881 $ 98,488,378
Undistributed net investment income 80 331 0 22
Accumulated net realized loss
on investments (20,697) (7,820) (3,910) (3,230)
----------------------------------------------------------------------------
NET ASSETS $ 61,602,014 $ 90,768,524 $ 40,208,971 $ 98,485,170
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 $27,352,000, $6,924,000, $0 and $4,760,000 respectively.
<TABLE>
<CAPTION>
(2) Shares Outstanding
Net ($.001 par value, unlimited
Assets shares authorized)
------ ------------------
<S> <C> <C>
U.S. Treasury Money Market
Class I $ 19,314,017 19,326,535
Class III 42,287,997 42,296,096
U.S. Government Money Market
Class I 88,255,063 88,262,665
Class III 2,513,461 2,513,348
Municipal Money Market
Class I 36,279,473 36,283,395
Class III 3,929,498 3,929,486
Cash Reserve
Class I 40,242,478 40,243,265
Class III 58,242,692 58,245,113
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended June 30, 1998
<TABLE>
<CAPTION>
GROWTH & INCOME CAPITAL APPRECIATION
PORTFOLIO PORTFOLIO*
---------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 5,792,627 $ 33,209
Interest 1,982,416 104,195
---------------------------------------------------
Total investment income 7,775,043 137,404
---------------------------------------------------
EXPENSES:
Management fee (Note 3) 3,169,117 186,828
Administration fee (Note 4) 731,335 32,970
Co-administration fee (Note 4) 243,778 10,990
Fund accounting/Transfer agent fee:
Class I 209,867 23,071
Class II 31,672 1,155
Class III 71,931 536
Blue Sky fee:
Class I 5,327 9,615
Class II 3,650 562
Class III 2,375 373
Distribution fee:
Class III 481,934 2,508
Shareholder servicing fee:
Class II 76,175 1,631
Class III 160,645 836
Custodian fee 99,998 6,462
Trustees fee 26,737 725
Registration fee 72,994 6,660
Audit 20,623 16,946
Legal 15,680 923
Reports to Shareholders 11,352 1,033
Miscellaneous 55,446 3,232
---------------------------------------------------
Total expenses before waiver 5,490,636 307,056
Waiver of expenses (Note 5) (731,335) (43,750)
---------------------------------------------------
Net expenses 4,759,301 263,306
---------------------------------------------------
NET INVESTMENT INCOME (LOSS) 3,015,742 (125,902)
---------------------------------------------------
Net realized gain on investments 10,927,323 884,892
Change in net unrealized appreciation/
depreciation 103,659,235 206,072
---------------------------------------------------
Net gain on investments 114,586,558 1,090,964
---------------------------------------------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 117,602,300 $ 965,062
---------------------------------------------------
---------------------------------------------------
</TABLE>
*For the period September 2, 1997 through June 30, 1998.
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended June 30, 1998
<TABLE>
<CAPTION>
BOND INTERMEDIATE BOND TENNESSEE TAX-FREE
PORTFOLIO PORTFOLIO* PORTFOLIO
------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME $ 10,436,356 $ 4,009,736 $ 4,010,664
------------------------------------------------------------------
EXPENSES:
Management fee (Note 3) 887,260 320,973 398,898
Administration fee (Note 4) 241,980 96,292 119,670
Co-administration fee (Note 4) 80,660 32,087 39,890
Fund accounting/Transfer agent fee:
Class I 96,119 37,651 43,699
Class II 1,318 192 8,262
Class III 5,265 1 5,843
Blue Sky fee:
Class I 7,725 1,854 1,201
Class II 1,117 57 1,201
Class III 487 0 1,201
Distribution fee:
Class III 17,602 10 45,138
Shareholder servicing fee:
Class II 3,587 639 0
Class III 5,867 3 0
Custodian fee 44,118 13,994 12,440
Trustees fee 8,679 1,990 3,471
Registration fee 9,080 38,258 25,377
Audit 19,841 4,429 13,907
Legal 6,913 2,504 2,068
Reports to Shareholders 3,231 2,760 1,798
Miscellaneous 22,177 9,309 9,256
------------------------------------------------------------------
Total expenses before waiver 1,463,026 563,013 733,320
Waiver of expenses (Note 5) (645,280) (326,568) (446,090)
Fees reimbursed by administrator (Note 5) 0 0 (15,046)
------------------------------------------------------------------
Net expenses 817,746 236,445 272,184
------------------------------------------------------------------
NET INVESTMENT INCOME 9,618,610 3,773,291 3,738,480
------------------------------------------------------------------
Net realized gain on investments 2,329,047 351,280 560,943
Change in net unrealized appreciation/
depreciation 4,587,848 16,917 286,177
------------------------------------------------------------------
Net gain on investments 6,916,895 368,197 847,120
------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 16,535,505 $ 4,141,488 $ 4,585,600
------------------------------------------------------------------
------------------------------------------------------------------
</TABLE>
*For the period March 2, 1998 through June 30, 1998.
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended June 30, 1998
<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>
INTEREST INCOME $ 3,060,400 $ 5,343,377 $ 1,925,199 $ 3,796,912
----------------------------------------------------------------------------
EXPENSES:
Management fee (Note 3) 137,999 238,922 131,526 166,825
Administration fee (Note 4) 41,400 71,676 39,458 50,048
Co-administration fee (Note 4) 27,600 47,784 26,305 33,365
Fund accounting/Transfer agent fee
Class I 7,463 45,027 32,408 13,035
Class III 25,136 2,887 6,531 29,718
Blue sky fee:
Class I 4,022 4,301 5,442 2,796
Class III 1,981 1,925 1,420 3,457
Distribution fee:
Class III 117,407 11,375 23,088 120,021
Custodian fee 40,556 42,181 9,962 25,268
Trustees fee 3,664 5,824 5,195 3,727
Audit 8,600 22,214 17,282 11,928
Legal 1,038 4,884 4,474 2,701
Reports to shareholders 0 0 4,363 632
Miscellaneous 9,857 14,069 8,984 8,786
----------------------------------------------------------------------------
Total expenses before waiver 426,723 513,069 316,438 472,307
Waiver of expenses (Note 5) (96,599) (167,245) (92,068) (116,777)
----------------------------------------------------------------------------
Net expenses 330,124 345,824 224,370 355,530
----------------------------------------------------------------------------
NET INVESTMENT INCOME 2,730,276 4,997,553 1,700,829 3,441,382
----------------------------------------------------------------------------
Net realized gain (loss) on investments (8,602) (104) 578 (3,292)
----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM
OPERATIONS $ 2,721,674 $ 4,997,449 $ 1,701,407 $ 3,438,090
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH & INCOME CAPITAL APPRECIATION
PORTFOLIO PORTFOLIO
-----------------------------------------------------------------------
For the Period
For the Year For the Year September 2, 1997
Ended June 30, Ended June 30, to June 30,
1998 1997 1998
-----------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ 3,015,742 $ 2,298,772 $ (125,902)
Net realized gain on
Investments 10,927,323 14,550,673 884,892
Change in net unrealized
appreciation/depreciation 103,659,235 43,526,139 206,072
-----------------------------------------------------------------------
Net increase in net assets from
operations 117,602,300 60,375,584 965,062
-----------------------------------------------------------------------
DISTRIBUTIONS:
From net investment income:
Class I (2,843,865) (2,145,885) 0
Class II (160,717) (48,979) 0
Class III 0 (103,908) 0
From net realized gain:
Class I (10,122,599) (9,969,819) 0
Class II (1,037,908) (309,364) 0
Class III (2,240,676) (2,220,318) 0
-----------------------------------------------------------------------
Net decrease in net assets
from distributions (16,405,765) (14,798,273) 0
-----------------------------------------------------------------------
SHARE TRANSACTIONS (NOTE 2):
Proceeds from sales of shares 137,051,702 51,974,255 38,987,569
Proceeds from shares issued in
connection with common trust
fund and collective investment
pool conversion (Note 6) 336,944,637 0 0
Reinvested dividends 14,882,981 14,030,548 0
Cost of shares redeemed (100,318,257) (21,710,132) (947,861)
-----------------------------------------------------------------------
Net increase in net assets
from share transactions 388,561,063 44,294,671 38,039,708
-----------------------------------------------------------------------
Total increase in net assets 489,757,598 89,871,982 39,004,770
NET ASSETS:
Beginning of period 287,827,809 197,955,827 0
-----------------------------------------------------------------------
End of period* $777,585,407 $287,827,809 $39,004,770
-----------------------------------------------------------------------
-----------------------------------------------------------------------
*Includes undistributed
net investment income of $ 11,160 $ 0 $ 0
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
BOND INTERMEDIATE BOND TENNESSEE TAX-FEE
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------------------------------------------------------
For the Period
For the Year For the Year March 2, 1998 For the Year For the Year
Ended June 30, Ended June 30, to June 30, Ended June 30, Ended June 30,
1998 1997 1998 1998 1997
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
OPERATIONS:
Net investment income $ 9,618,610 $ 7,390,633 $ 3,773,291 $ 3,738,480 $ 661,422
Net realized gain (loss) on
investments 2,329,047 289,070 351,280 560,943 (28,586)
Change in net unrealized
appreciation/depreciation 4,587,848 1,087,850 16,917 286,177 422,965
------------------------------------------------------------------------------------
Net increase in net assets
from operations 16,535,505 8,767,553 4,141,488 4,585,600 1,055,801
------------------------------------------------------------------------------------
DISTRIBUTIONS:
From net investment income:
Class I (9,451,778) (7,213,796) (3,758,861) (3,130,378) (364,252)
Class II (82,660) (30,004) (14,367) (344,269) (173,237)
Class III (112,904) (146,985) (63) (263,833) (123,185)
------------------------------------------------------------------------------------
Net decrease in net assets
from distributions (9,647,342) (7,390,785) (3,773,291) (3,738,480) (660,674)
------------------------------------------------------------------------------------
SHARE TRANSACTIONS (NOTE 2):
Proceeds from sales of shares 49,650,869 17,933,516 29,636,640 46,234,728 17,035,878
Proceeds from shares issued in
connection with common trust
fund and collective investment
pool conversion (Note 6) 48,681,990 0 184,904,888 148,766,645 0
Reinvested dividends 7,562,651 6,757,582 1,629,713 521,092 255,022
Cost of shares redeemed (16,361,008) (10,833,267) (15,726,975) (21,869,114) (5,755,651)
------------------------------------------------------------------------------------
Net increase in net assets
from share transactions 89,534,502 13,857,831 200,444,266 173,653,351 11,535,249
Total increase in net assets 96,422,665 15,234,599 200,812,463 174,500,471 11,930,376
NET ASSETS:
Beginning of period 126,578,701 111,344,102 0 20,626,681 8,696,305
------------------------------------------------------------------------------------
End of period* $ 223,001,366 $ 126,578,701 $ 200,812,463 $ 195,127,152 $ 20,626,681
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
*Includes (over) undistributed
net investment income of $ (24,216) $ (49,220) $ 135,043 $ 32,059 $ 748
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
U.S. TREASURY MONEY U.S. GOVERNMENT MONEY
MARKET PORTFOLIO MARKET PORTFOLIO
---------------------------------------------------------------------------
For the Year For the Year For the Year For the Year
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
1998 1997 1998 1997
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 2,730,276 $ 4,098,295 $ 4,997,553 $ 4,857,113
Net realized loss on investments (8,602) (8,150) (104) (5,138)
---------------------------------------------------------------------------
Net increase in net assets from
operations 2,721,674 4,090,145 4,997,449 4,851,975
---------------------------------------------------------------------------
DISTRIBUTIONS:
From net investment income
Class I (418,272) (3,282,521) (4,772,745) (4,786,653)
Class III (2,311,924) (815,774) (224,807) (70,130)
---------------------------------------------------------------------------
Net decrease in net assets from
distributions (2,730,196) (4,098,295) (4,997,552) (4,856,783)
---------------------------------------------------------------------------
SHARE TRANSACTIONS AT NET ASSET VALUE
OF $1.00 PER SHARE (NOTE 2):
Proceeds from sales of shares 195,269,967 414,876,674 178,096,113 162,950,792
Reinvested dividends 168,849 150,378 212,777 66,833
Cost of shares redeemed (201,103,688) (426,975,015) (185,567,585) (153,324,382)
---------------------------------------------------------------------------
Net increase (decrease) in net assets
from share transactions (5,664,872) (11,947,963) (7,258,695) 9,693,243
---------------------------------------------------------------------------
Total increase (decrease) in
net assets (5,673,394) (11,956,113) (7,258,798) 9,688,435
NET ASSETS:
Beginning of period 67,275,408 79,231,521 98,027,322 88,338,887
---------------------------------------------------------------------------
End of period* $ 61,602,014 $ 67,275,408 $ 90,768,524 $ 98,027,322
---------------------------------------------------------------------------
---------------------------------------------------------------------------
*Includes undistributed net
investment income of $ 80 $ 0 $ 331 $ 330
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MUNICIPAL MONEY CASH RESERVE
MARKET PORTFOLIO PORTFOLIO
---------------------------------------------------------------------------
For the Year For the Year For the Year For the Year
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
1998 1997 1998 1997
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 1,700,829 $ 2,534,543 $ 3,441,382 $ 2,436,766
Net realized gain (loss) on
investments 578 (1,475) (3,292) 0
---------------------------------------------------------------------------
Net increase in net assets from
operations 1,701,407 2,533,068 3,438,090 2,436,766
---------------------------------------------------------------------------
DISTRIBUTIONS:
From net investment income
Class I (1,422,183) (2,378,120) (997,201) (927,206)
Class III (278,646) (156,423) (2,444,181) (1,509,538)
---------------------------------------------------------------------------
Net decrease in net assets from
distributions (1,700,829) (2,534,543) (3,441,382) (2,436,744)
---------------------------------------------------------------------------
SHARE TRANSACTIONS AT NET ASSET VALUE
OF $1.00 PER SHARE (NOTE 2):
Proceeds from sales of shares 92,913,367 136,289,737 214,585,155 132,549,772
Reinvested dividends 273,909 165,874 2,394,995 1,571,520
Cost of shares redeemed (111,853,446) (152,149,764) (168,324,452) (124,848,130)
---------------------------------------------------------------------------
Net increase (decrease) in net assets
from share transactions (18,666,170) (15,694,153) 48,655,698 9,273,162
---------------------------------------------------------------------------
Total increase (decrease)
in net assets (18,665,592) (15,695,628) 48,652,406 9,273,184
---------------------------------------------------------------------------
NET ASSETS:
Beginning of period 58,874,563 74,570,191 49,832,764 40,559,580
---------------------------------------------------------------------------
End of period* $ 40,208,971 $ 58,874,563 $ 98,485,170 $ 49,832,764
---------------------------------------------------------------------------
---------------------------------------------------------------------------
*Includes undistributed net investment
income of $ 0 $ 0 $ 22 $ 22
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
FINANCIAL HIGHLIGHTS
GROWTH & INCOME PORTFOLIO
<TABLE>
<CAPTION>
CLASS I
---------------------------------------------------------------------
For the Year Ended June 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994**
---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 17.03 $ 14.12 $ 12.22 $ 10.53 $ 10.00
---------------------------------------------------------------------
Income from investment operations:
Net investment income 0.17 0.18 0.19 0.23 0.17
Net realized and unrealized gain on investments 5.25 3.75 2.58 2.21 0.57
---------------------------------------------------------------------
Total from investment operations 5.42 3.93 2.77 2.44 0.74
---------------------------------------------------------------------
Distributions:
Net investment income (0.17) (0.18) (0.19) (0.23) (0.17)
Net realized gain (0.72) (0.84) (0.68) (0.52) (0.04)
---------------------------------------------------------------------
Total distributions (0.89) (1.02) (0.87) (0.75) (0.21)
---------------------------------------------------------------------
Net asset value, end of period $ 21.56 $ 17.03 $ 14.12 $ 12.22 $ 10.53
---------------------------------------------------------------------
---------------------------------------------------------------------
TOTAL RETURN+ 32.55% 28.83% 23.54% 24.20% 7.39%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $651,363 $221,136 $159,146 $114,000 $ 82,751
Ratio of expenses to average daily net assets(1) 0.82% 0.83% 0.76% 0.47% 0.34%*
Ratio of net investment income to average net assets 0.78% 1.19% 1.40% 2.12% 1.83%*
Portfolio turnover rate 7% 25% 41% 33% 83%*
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.97% 0.98% 1.00% 0.99% 1.05%*
<CAPTION>
CLASS II
---------------------------------------------------------------------
For the Year Ended June 30,
---------------------------------------------------------------------
1998 1997 1996**
---- ---- ------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 17.05 $ 14.12 $ 13.05
---------------------------------------------------------------------
Income from investment operations:
Net investment income 0.10 0.13 0.09
Net realized and unrealized gain on investments 5.27 3.76 1.74
---------------------------------------------------------------------
Total from investment operations 5.37 3.89 1.83
---------------------------------------------------------------------
Distributions:
Net investment income (0.12) (0.12) (0.08)
Net realized gain (0.72) (0.84) (0.68)
---------------------------------------------------------------------
Total distributions (0.84) (0.96) (0.76)
---------------------------------------------------------------------
Net asset value, end of period $ 21.58 $ 17.05 $ 14.12
---------------------------------------------------------------------
---------------------------------------------------------------------
TOTAL RETURN+ 32.17%*** 28.48%*** 14.71%#***
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 46,863 $ 16,514 $ 1,918
Ratio of expenses to average daily net assets(1) 1.13% 1.14% 1.06%*
Ratio of net investment income to average net assets 0.47% 0.88% 1.10%*
Portfolio turnover rate 7% 25% 41%
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 1.28% 1.29% 1.30%*
</TABLE>
* Annualized.
** Classes I and II commenced operations on August 2, 1993 and December 20,
1995, respectively.
*** Class II total return does not include the one time front-end 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.
25
<PAGE>
FINANCIAL HIGHLIGHTS
GROWTH & INCOME PORTFOLIO (CONTINUED)
<TABLE>
<CAPTION>
CLASS III
---------------------------------------------------------------------
For the Year Ended June 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994**
---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 16.99 $ 14.11 $ 12.23 $ 10.51 $ 10.60
---------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.04) 0.02 0.03 0.06 0.06
Net realized and unrealized gain (loss) on
investments 5.24 3.74 2.60 2.24 (0.05)
---------------------------------------------------------------------
Total from investment operations 5.20 3.76 2.63 2.30 0.01
---------------------------------------------------------------------
Distributions:
Net investment income 0.00 (0.04) (0.07) (0.06) (0.06)
Net realized gain (0.72) (0.84) (0.68) (0.52) (0.04)
---------------------------------------------------------------------
Total distributions (0.72) (0.88) (0.75) (0.58) (0.10)
---------------------------------------------------------------------
Net asset value, end of period $ 21.47 $ 16.99 $ 14.11 $ 12.23 $ 10.51
---------------------------------------------------------------------
---------------------------------------------------------------------
TOTAL RETURN+ 31.16% 27.44% 22.19% 22.61% 0.08%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 79,360 $ 50,178 $ 36,892 $ 19,363 $ 2,094
Ratio of expenses to average daily net assets(1) 1.87% 1.94% 1.87% 1.72% 1.83%*
Ratio of net investment income to average net assets (0.28)% 0.08% 0.29% 0.87% 0.34%*
Portfolio turnover rate 7% 25% 41% 33% 83%*
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 2.02% 2.09% 2.11% 2.26% 6.03%*
</TABLE>
* Annualized.
** Class III commenced operations on December 9, 1993.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
FINANCIAL HIGHLIGHTS
CAPITAL APPRECIATION PORTFOLIO
<TABLE>
<CAPTION>
CLASS I CLASS II CLASS III
------------------------------------------------------------------------
For the Period For the Period For the Period
Ended June 30,** Ended June 30,** Ended June 30,**
------------------------------------------------------------------------
1998 1998 1998
---- ---- ----
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.00 $ 10.51 $ 10.51
------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.03) (0.05) (0.10)
Net realized and unrealized gain on
investments 0.77 0.25 0.23
------------------------------------------------------------------------
Total from investment operations 0.74 0.20 0.13
------------------------------------------------------------------------
Net asset value, end of period $ 10.74 $ 10.71 $10.64
------------------------------------------------------------------------
------------------------------------------------------------------------
TOTAL RETURN+ 7.40%# 1.90%#*** 1.24%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 37,014 $ 1,400 $ 590
Ratio of expenses to average daily net assets(1) 1.16%* 1.52%* 2.28%*
Ratio of net investment loss to average net assets (0.54)%* (0.90)%* (1.65)%*
Portfolio turnover rate 44%* 44%* 44%*
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 1.36%* 1.72%* 2.47%*
</TABLE>
* Annualized.
** Class I commenced operations on September 2, 1997 and Classes II and III
commenced operations on October 2, 1997.
*** 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.
27
<PAGE>
FINANCIAL HIGHLIGHTS
BOND PORTFOLIO
<TABLE>
<CAPTION>
CLASS I
--------------------------------------------------------------------
For the Year Ended June 30,
--------------------------------------------------------------------
1998 1997 1996 1995 1994**
---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 9.84 $ 9.73 $ 9.91 $ 9.41 $ 10.00
--------------------------------------------------------------------
Income from investment operations:
Net investment income 0.61 0.61 0.60 0.57 0.45
Net realized and unrealized gain (loss) on
investments 0.45 0.11 (0.18) 0.50 (0.57)
--------------------------------------------------------------------
Total from investment operations 1.06 0.72 0.42 1.07 (0.12)
--------------------------------------------------------------------
Distributions:
Net investment income (0.61) (0.61) (0.60) (0.57) (0.46)
Net realized gain - - - - (0.01)
--------------------------------------------------------------------
Total distributions (0.61) (0.61) (0.60) (0.57) (0.47)
--------------------------------------------------------------------
Net asset value, end of period $ 10.29 $ 9.84 $ 9.73 $ 9.91 $ 9.41
--------------------------------------------------------------------
--------------------------------------------------------------------
TOTAL RETURN+ 11.02% 7.58% 4.23% 11.87% (1.38)%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $219,088 $123,184 $107,832 $ 90,574 $ 75,686
Ratio of expenses to average daily net assets (1) 0.49% 0.49% 0.41% 0.35% 0.36%*
Ratio of net investment income to average net assets 5.98% 6.20% 5.99% 6.07% 5.07%*
Portfolio turnover rate 26% 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% 0.89% 0.91% 0.91% 0.96%*
<CAPTION>
CLASS I
---------------------------------------------------------------------
For the Year Ended June 30,
---------------------------------------------------------------------
1998 1997 1996**
---- ---- ------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 9.81 $ 9.71 $10.18
---------------------------------------------------------------------
Income from investment operations:
Net investment income 0.57 0.57 0.29
Net realized and unrealized gain (loss) on
investments 0.46 0.10 (0.47)
---------------------------------------------------------------------
Total from investment operations 1.03 0.67 (0.18)
---------------------------------------------------------------------
Distributions:
Net investment income (0.58) (0.57) (0.29)
---------------------------------------------------------------------
Total distributions (0.58) (0.57) (0.29)
---------------------------------------------------------------------
Net asset value, end of period $10.26 $ 9.81 $ 9.71
---------------------------------------------------------------------
---------------------------------------------------------------------
TOTAL RETURN+ 10.72%*** 7.12%*** (1.75)%#***
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $1,801 $ 841 $ 67
Ratio of expenses to average daily net assets(1) 0.84% 0.90% 0.80%*
Ratio of net investment income to average net assets 5.63% 5.79% 5.61%*
Portfolio turnover rate 26% 56% 56%
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 1.24% 1.30% 1.30%*
</TABLE>
* Annualized.
** Classes I and II commenced operations on August 2, 1993 and December 20,
1995, 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.
28
<PAGE>
FINANCIAL HIGHLIGHTS
BOND PORTFOLIO (CONTINUED)
<TABLE>
<CAPTION>
CLASS I
---------------------------------------------------------------------
For the Year Ended June 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994**
---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 9.82 $ 9.71 $ 9.89 $ 9.40 $10.04
---------------------------------------------------------------------
Income from investment operations:
Net investment income 0.48 0.49 0.49 0.43 0.21
Net realized and unrealized gain (loss) on
investments 0.46 0.11 (0.18) 0.49 (0.62)
---------------------------------------------------------------------
Total from investment operations 0.94 0.60 0.31 0.92 (0.41)
---------------------------------------------------------------------
Distributions:
Net investment income (0.49) (0.49) (0.49) (0.43) (0.22)
Net realized gain - - - - (0.01)
---------------------------------------------------------------------
Total distributions (0.49) (0.49) (0.49) (0.43) (0.23)
---------------------------------------------------------------------
Net asset value, end of period $10.27 $ 9.82 $ 9.71 $ 9.89 $ 9.40
---------------------------------------------------------------------
---------------------------------------------------------------------
TOTAL RETURN+ 9.72% 6.37% 3.11% 10.12% (4.19)%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $2,113 $2,553 $3,445 $1,916 $ 923
Ratio of expenses to average daily net assets(1) 1.67% 1.63% 1.49% 1.84% 1.82%*
Ratio of net investment income to average net assets 4.80% 5.07% 4.92% 4.58% 3.61%*
Portfolio turnover rate 26% 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. 2.07% 2.03% 1.99% 3.35% 6.36%*
</TABLE>
* Annualized.
** Class III commenced operations on December 2, 1993.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
FINANCIAL HIGHLIGHTS
INTERMEDIATE BOND PORTFOLIO
<TABLE>
<CAPTION>
CLASS I CLASS II CLASS III
----------------------------------------------------------------------------
For the Period For the Period For the Period
Ended June 30**, Ended June 30,** Ended June 30,**
----------------------------------------------------------------------------
1998 1998 1998
---- ---- ----
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.00 $ 9.99 $ 9.99
----------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.19 0.18 0.06
Net realized and unrealized gain (loss) on
investments 0.02 0.03 0.03
----------------------------------------------------------------------------
Total from investment operations 0.21 0.21 0.09
----------------------------------------------------------------------------
Distributions:
Net investment income (0.19) (0.18) (0.06)
----------------------------------------------------------------------------
Total distributions (0.19) (0.18) (0.06)
----------------------------------------------------------------------------
Net asset value, end of period $ 10.02 $ 10.02 $ 10.02
----------------------------------------------------------------------------
----------------------------------------------------------------------------
TOTAL RETURN+ 2.17%# 2.07%#*** 0.92%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $199,872 $ 923 $ 17
Ratio of expenses to average daily net assets(1) 0.37%* 0.65%* 1.35%*
Ratio of net investment income to average net assets 5.87%* 5.59%* 4.89%*
Portfolio turnover rate 9%* 9%* 9%*
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.87%* 1.16%* 1.86%*
</TABLE>
* Annualized.
** Class I commenced operations on March 2, 1998, Classes II commenced
operations on March 9, 1998 and Class III commenced
operations on May 19, 1998.
*** 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.
30
<PAGE>
FINANCIAL HIGHLIGHTS
TENNESSEE TAX-FREE PORTFOLIO
<TABLE>
<CAPTION>
CLASS I
---------------------------------------------------------------------
For the Year Ended June 30,
---------------------------------------------------------------------
1998 1997 1996**
---- ---- ------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 9.99 $ 9.71 $ 10.00
---------------------------------------------------------------------
Income from investment operations:
Net investment income 0.48 0.50 0.23
Net realized and unrealized gain (loss) on
investments 0.32 0.28 (0.29)
---------------------------------------------------------------------
Total from investment operations 0.80 0.78 (0.06)
---------------------------------------------------------------------
Distributions:
Net investment income (0.48) (0.50) (0.23)
---------------------------------------------------------------------
Total distributions (0.48) (0.50) (0.23)
---------------------------------------------------------------------
Net asset value, end of period $ 10.31 $ 9.99 $ 9.71
---------------------------------------------------------------------
---------------------------------------------------------------------
TOTAL RETURN+ 8.16% 8.26% (0.65)%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $176,884 $ 8,935 $ 5,925
Ratio of expenses to average daily net assets (1) 0.31% 0.07% 0.50%*
Ratio of net investment income to average net assets 4.71% 5.09% 4.31%*
Portfolio turnover rate 15% 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. 0.85% 1.14% 1.42%*
CLASS II
---------------------------------------------------------------------
For the Year Ended June 30,
---------------------------------------------------------------------
1998 1997 1996**
---- ---- ------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.01 $ 9.73 $ 10.06
---------------------------------------------------------------------
Income from investment operations:
Net investment income 0.48 0.51 0.21
Net realized and unrealized gain (loss) on
investments 0.33 0.28 (0.33)
---------------------------------------------------------------------
Total from investment operations 0.81 0.79 (0.12)
---------------------------------------------------------------------
Distributions:
Net investment income (0.48) (0.51) (0.21)
---------------------------------------------------------------------
Total distributions (0.48) (0.51) (0.21)
---------------------------------------------------------------------
Net asset value, end of period $ 10.34 $ 10.01 $ 9.73
---------------------------------------------------------------------
---------------------------------------------------------------------
TOTAL RETURN+ 8.22%*** 8.37%*** (1.25)%#***
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 8,973 $ 5,941 $ 1,875
Ratio of expenses to average daily
net assets (1) 0.37% 0.12% 0.49%*
Ratio of net investment income to average net assets 4.65% 5.03% 4.32%*
Portfolio turnover rate 15% 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. 0.91% 1.14% 1.42%*
</TABLE>
* Annualized.
** Class I 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.
31
<PAGE>
FINANCIAL HIGHLIGHTS
TENNESSEE TAX-FREE PORTFOLIO (CONTINUED)
<TABLE>
<CAPTION>
CLASS III
---------------------------------------------------------------------
For the Year Ended June 30,
---------------------------------------------------------------------
1998 1997 1996**
---- ---- ------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $10.00 $9.72 $10.00
---------------------------------------------------------------------
Income from investment operations:
Net investment income 0.45 0.50 0.19
Net realized and unrealized gain (loss) on
investments 0.32 0.28 (0.28)
---------------------------------------------------------------------
Total from investment operations 0.77 0.78 (0.09)
Distributions: ---------------------------------------------------------------------
Net investment income (0.45) (0.50) (0.19)
---------------------------------------------------------------------
Total distributions (0.45) (0.50) (0.19)
---------------------------------------------------------------------
Net asset value, end of period $10.32 $10.00 $9.72
---------------------------------------------------------------------
---------------------------------------------------------------------
TOTAL RETURN+ 7.86% 8.20% (0.87)%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $9,270 $5,750 $896
Ratio of expenses to average daily
net assets (1) 0.61% 0.23% 0.98%*
Ratio of net investment income to average net assets 4.41% 4.93% 3.83%*
Portfolio turnover rate 15% 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. 1.65% 1.91% 1.91%*
</TABLE>
* Annualized.
** Class III commenced operations on December 15, 1995.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
The accompanying notes are an integral part of the financial statements.
32
<PAGE>
FINANCIAL HIGHLIGHTS
U.S. TREASURY MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
CLASS I
---------------------------------------------------------------------
For the Year Ended June 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<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 0.050 0.052 0.050 0.030
---------------------------------------------------------------------
Distributions:
Net investment income (0.051) (0.050) (0.052) (0.050) (0.030)
---------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------------
---------------------------------------------------------------------
TOTAL RETURN+ 5.19% 5.09% 5.30% 5.10% 3.06%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $19,314 $6,141 $75,703 $67,377 $100,868
Ratio of expenses to average net assets (1) 0.45% 0.37% 0.36% 0.36% 0.33%
Ratio of net investment income to average net assets 5.09% 5.01% 5.19% 5.00% 3.04%
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.63% 0.55% 0.56% 0.63% 0.60%
<CAPTION>
CLASS III
---------------------------------------------------------------------
For the Year Ended June 30,
---------------------------------------------------------------------
1998 1997 1996**
---- ---- ------
<S> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $1.00 $1.00 $1.00
---------------------------------------------------------------------
Income from investment operations:
Net investment income 0.049 0.047 0.044
---------------------------------------------------------------------
Distributions:
Net investment income (0.049) (0.047) (0.044)
---------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00
---------------------------------------------------------------------
---------------------------------------------------------------------
TOTAL RETURN+ 5.03% 4.84% 4.47%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $42,288 $61,135 $3,528
Ratio of expenses to average net assets (1) 0.62% 0.62% 0.62%*
Ratio of net investment income to average net assets 4.92% 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. 0.80% 0.80% 0.82%*
</TABLE>
* Annualized.
** Class III commenced operations on August 8, 1995.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
The accompanying notes are an integral part of the financial statements.
33
<PAGE>
FINANCIAL HIGHLIGHTS
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
CLASS I
---------------------------------------------------------------------
For the Year Ended June 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------------
Income from investment operations:
Net investment income 0.052 0.051 0.053 0.053 0.032
---------------------------------------------------------------------
Distributions:
Net investment income (0.052) (0.051) (0.053) (0.053) (0.032)
---------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------------
---------------------------------------------------------------------
TOTAL RETURN+ 5.37% 5.23% 5.37% 5.39% 3.23%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $88,255 $94,541 $88,111 $88,057 $67,854
Ratio of expenses to average net assets (1) 0.35% 0.35% 0.33% 0.31% 0.28%
Ratio of net investment income to average net assets 5.24% 5.11% 5.28% 5.27% 3.18%
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.52% 0.53% 0.53% 0.58% 0.55%
<CAPTION>
CLASS III
---------------------------------------------------------------------
For the Year Ended June 30,
---------------------------------------------------------------------
1998 1997 1996**
---- ---- ------
<S> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $1.00 $1.00 $1.00
---------------------------------------------------------------------
Income from investment operations:
Net investment income 0.049 0.048 0.044
---------------------------------------------------------------------
Distributions:
Net investment income (0.049) (0.048) (0.044)
---------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00
---------------------------------------------------------------------
---------------------------------------------------------------------
TOTAL RETURN+ 5.05% 4.91% 4.49%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $2,513 $3,486 $228
Ratio of expenses to average net assets (1) 0.65% 0.65% 0.65%*
Ratio of net investment income to average net assets 4.94% 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. 0.82% 0.83% 0.85%*
</TABLE>
* Annualized.
** Class III commenced operations on August 8, 1995.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
The accompanying notes are an integral part of the financial statements.
34
<PAGE>
FINANCIAL HIGHLIGHTS
MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
CLASS I
---------------------------------------------------------------------
For the Year Ended June 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<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 0.033 0.033 0.035 0.034 0.024
---------------------------------------------------------------------
Distributions:
Net investment income (0.033) (0.033) (0.035) (0.034) (0.024)
---------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------------
---------------------------------------------------------------------
TOTAL RETURN+ 3.33% 3.32% 3.52% 3.48% 2.40%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $36,279 $45,988 $71,665 $94,078 $76,231
Ratio of expenses to average net assets (1) 0.38% 0.35% 0.32% 0.30% 0.28%
Ratio of net investment income to average net assets 3.28% 3.25% 3.50% 3.44% 2.39%
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.56% 0.53% 0.52% 0.57% 0.55%
<CAPTION>
CLASS III
---------------------------------------------------------------------
For the Year Ended June 30,
---------------------------------------------------------------------
1998 1997 1996**
---- ---- ------
<S> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $1.00 $1.00 $1.00
---------------------------------------------------------------------
Income from investment operations:
Net investment income 0.030 0.030 0.030
---------------------------------------------------------------------
Distributions:
Net investment income (0.030) (0.030) (0.030)
---------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00
---------------------------------------------------------------------
---------------------------------------------------------------------
TOTAL RETURN+ 3.06% 3.03% 3.03%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $3,929 $12,886 $2,905
Ratio of expenses to average net assets (1) 0.63% 0.62% 0.58%*
Ratio of net investment income to average net assets 3.03% 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. 0.81% 0.79% 0.78%*
</TABLE>
* Annualized.
** Class III commenced operations on July 28, 1995.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
The accompanying notes are an integral part of the financial statements.
35
<PAGE>
FINANCIAL HIGHLIGHTS
CASH RESERVE PORTFOLIO
<TABLE>
<CAPTION>
CLASS I
---------------------------------------------------------------------
For the Year Ended June 30,
---------------------------------------------------------------------
1998 1997 1996 1995**
---- ---- ---- ------
<S> <C> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------------
Income from investment operations:
Net investment income 0.053 0.051 0.053 0.042
---------------------------------------------------------------------
Distributions:
Net investment income (0.053) (0.051) (0.053) (0.042)
---------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------------
---------------------------------------------------------------------
TOTAL RETURN+ 5.46% 5.23% 5.39% 4.27%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $40,242 $14,241 $16,369 $15,460
Ratio of expenses to average net assets (1) 0.36% 0.40% 0.42% 0.43%*
Ratio of net investment income to average net assets 5.33% 5.13% 5.22% 5.48%*
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.54% 0.57% 0.61% 0.70%*
<CAPTION>
CLASS III
---------------------------------------------------------------------
For the Year Ended June 30,
---------------------------------------------------------------------
1998 1997 1996**
---- ---- ------
<S> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $1.00 $1.00 $1.00
---------------------------------------------------------------------
Income from investment operations:
Net investment income 0.051 0.049 0.047
---------------------------------------------------------------------
Distributions:
Net investment income (0.051) (0.049) (0.047)
---------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00
---------------------------------------------------------------------
---------------------------------------------------------------------
TOTAL RETURN+ 5.21% 5.00% 4.78%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $58,243 $35,592 $24,190
Ratio of expenses to average net assets (1) 0.60% 0.64% 0.62%*
Ratio of net investment income to average net assets 5.09% 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. 0.77% 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 accompanying notes are an integral part of the financial statements.
36
<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 nine 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, 1998, Class II shares have not been issued for the Money
Market 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, CAPITAL APPRECIATION, BOND, INTERMEDIATE BOND AND TENNESSEE
TAX-FREE PORTFOLIOS: Securities held in the Growth & Income and Capital
Appreciation Portfolios 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,
Intermediate 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.
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 advisers 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 Intermediate Bond,
Tennessee Tax-Free and Municipal Money Market Portfolios, accretion of market
discount represents unrealized gain until realized at the time of security
disposition or maturity. For the Intermediate Bond Portfolio, amortization of
market premium represents unrealized loss 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.
DISTRIBUTIONS TO SHAREHOLDERS: For the Money Market Portfolios, Bond Portfolio,
Intermediate Bond Portfolio and Tennessee Tax-Free Portfolio, distributions are
declared daily and paid monthly from net investment income. Distributions for
the Growth & Income Portfolio are declared and paid monthly. Distributions for
the Capital Appreciation Portfolio are declared and paid annually. 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, 1998. For
the year ended June 30, 1998, the effects of certain differences due to net
paydown losses and market discount reclasses were reclassified. The Bond
Portfolio reflected a decrease in undistributed net investment income and an
increase in accumulated net realized gain on investments of $33,667. The
Intermediate Bond Portfolio increased undistributed net investment income by
$135,015 and decreased accumulated net realized gain on
37
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING AND OPERATING POLICIES
investments by $135,015. The Tennessee Tax-Free Portfolio increased
undistributed net investment income by $31,311 and decreased accumulated net
realized gain on investments by $31,311. The calculation of net investment
income in the Financial Highlights excludes these adjustments.
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 PORTFOLIO CAPITAL APPRECIATION PORTFOLIO
------------------------------------------------------------------------------------------------------
For the Year Ended June 30, For the Period Ended June 30,
1998 1997 1998
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollars issued and redeemed:
Class I:*
Issued $86,107,454 $28,624,247 $36,806,365
Conversion (Note 6) 336,944,637 0 0
Distributions reinvested 11,495,391 11,375,774 0
Redeemed (84,830,917) (14,039,927) (664,722)
------------------------------------------------------------------------------------------------------
Net increase $349,716,565 $25,960,094 $36,141,643
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Class II:**
Issued $28,599,520 $13,350,241 $1,442,812
Distributions reinvested 1,190,189 353,865 0
Redeemed (5,829,163) (659,970) (90,116)
------------------------------------------------------------------------------------------------------
Net increase $23,960,546 $13,044,136 $1,352,696
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Class III:**
Issued $22,344,728 $9,999,767 $738,392
Distributions reinvested 2,197,401 2,300,909 0
Redeemed (9,658,177) (7,010,235) (193,023)
------------------------------------------------------------------------------------------------------
Net increase $14,883,952 $5,290,441 $545,369
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Shares issued and redeemed:
Class I:*
Issued 4,294,210 1,875,264 3,510,847
Conversion (Note 6) 16,404,315 0 0
Distributions reinvested 597,853 754,234 0
Redeemed (4,074,239) (919,542) (63,893)
------------------------------------------------------------------------------------------------------
Net increase 17,222,139 1,709,956 3,446,954
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Class II:**
Issued 1,425,388 850,780 139,460
Distributions reinvested 61,918 23,380 0
Redeemed (284,427) (41,752) (8,694)
------------------------------------------------------------------------------------------------------
Net increase 1,202,879 832,408 130,766
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Class III:**
Issued 1,117,289 647,961 73,185
Distributions Reinvested 114,866 152,701 0
Redeemed (489,406) (461,201) (17,704)
------------------------------------------------------------------------------------------------------
Net increase 742,749 339,461 55,481
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
*Capital Appreciation Portfolio Class I commenced operations on September 2, 1997.
**Capital Appreciation Portfolio Class II and III commenced operations on October 2, 1997.
</TABLE>
38
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
<TABLE>
<CAPTION>
BOND INTERMEDIATE BOND TENNESSEE TAX-FREE
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------------------------------------------------------------------------
For the Year Ended June 30, For the Period Ended June 30, For the Year Ended June 30,
1998 1997 1998 1998 1997
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dollars issued and redeemed:
Class I:*
Issued $46,340,246 $17,022,861 $28,713,805 $33,623,138 $7,234,437
Conversion (Note 6) 48,681,990 0 184,904,888 148,766,645 0
Distributions reinvested 7,380,447 6,594,162 1,616,030 40,522 19,739
Redeemed (13,222,635) (9,607,777) (15,726,975) (14,953,896) (4,456,397)
------------------------------------------------------------------------------------------------------
Net increase $89,180,048 $14,009,246 $199,507,748 $167,476,409 $2,797,779
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Class II:**
Issued $2,812,425 $770,186 $906,154 $3,978,499 $4,505,744
Distributions reinvested 76,219 28,502 13,622 256,834 141,816
Redeemed (1,986,006) (25,432) 0 (1,411,935) (680,046)
------------------------------------------------------------------------------------------------------
Net increase $902,638 $773,256 $919,776 $2,823,398 $3,967,514
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Class III:***
Issued $498,198 $140,469 $16,681 $8,633,091 $5,295,697
Distributions reinvested 105,985 134,918 61 223,736 93,467
Redeemed (1,152,367) (1,200,058) 0 (5,503,283) (619,208)
------------------------------------------------------------------------------------------------------
Net increase (decrease) $(548,184) $(924,671) $16,742 $3,353,544 $4,769,956
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Shares issued and redeemed:
Class I:*
Issued 4,572,530 1,746,590 2,872,017 3,276,947 733,904
Conversion (Note 6) 4,782,121 0 18,490,489 14,429,355 0
Distributions reinvested 727,742 673,294 161,641 3,956 1,999
Redeemed (1,308,146) (981,496) (1,573,067) (1,455,374) (451,365)
------------------------------------------------------------------------------------------------------
Net increase 8,774,247 1,438,388 19,951,080 16,254,884 284,538
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Class II:**
Issued 278,620 78,480 90,798 387,208 455,421
Distributions reinvested 7,526 2,913 1,362 25,004 14,328
Redeemed (196,406) (2,590) 0 (137,427) (69,180)
------------------------------------------------------------------------------------------------------
Net Increase 89,740 78,803 92,160 274,785 400,569
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Class III:***
Issued 49,250 14,410 1,665 840,009 535,937
Distributions Reinvested 10,482 13,810 6 21,795 9,446
Redeemed (113,964) (122,936) 0 (538,938) (62,659)
------------------------------------------------------------------------------------------------------
Net Increase (decrease) (54,232) (94,716) 1,671 322,866 482,724
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
*Intermediate Bond Portfolio Class I commenced operations on March 2, 1998.
**Intermediate Bond Portfolio Class II commenced operations on March 9, 1998.
***Intermediate Bond Portfolio Class III commenced operations on May 19, 1998.
</TABLE>
39
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
<TABLE>
<CAPTION>
U.S. TREASURY MONEY MARKET PORTFOLIO U.S. GOVERNMENT MONEY MARKET PORTFOLIO
----------------------------------------------------------------------------------------------------
For the Year Ended June 30, For the Year Ended June 30,
1998 1997 1998 1997
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares/Dollars issued and
redeemed:
Class I:
Issued $28,322,040 $288,035,908 $149,805,484 $148,660,358
Distributions reinvested 4,022 1,910 351 2,235
Redeemed (15,151,653) (357,592,644) (156,091,631) (142,227,950)
----------------------------------------------------------------------------------------------------
Net increase (decrease) $13,174,409 $(69,554,826) $(6,285,796) $6,434,643
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Class III:
Issued $166,947,927 $126,840,766 $28,290,629 $14,290,434
Distributions reinvested 164,827 148,468 212,426 64,598
Redeemed (185,952,035) (69,382,371) (29,475,954) (11,096,432)
----------------------------------------------------------------------------------------------------
Net increase (decrease) $(18,839,281) $57,606,863 $(972,899) $3,258,600
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO CASH RESERVE PORTFOLIO
----------------------------------------------------------------------------------------------------
For the Year Ended June 30, For the Year Ended June 30,
1998 1997 1998 1997
----------------------------------------------------------------------------------------------------
Shares/Dollars issued and
redeemed:
Class I:
Issued $78,625,128 $110,038,524 75,241,145 $32,622,397
Distributions reinvested 159 1,233 0 1
Redeemed (88,334,438) (135,715,106) (49,239,160) (34,750,381)
----------------------------------------------------------------------------------------------------
Net increase (decrease) $(9,709,151) $(25,675,349) $26,001,985 $(2,127,983)
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Class III:
Issued $14,288,239 $26,251,213 139,344,010 $99,927,375
Distributions reinvested 273,750 164,641 2,394,995 1,571,519
Redeemed (23,519,008) (16,434,658) (119,085,292) (90,097,749)
----------------------------------------------------------------------------------------------------
Net increase (decrease) $(8,957,019) $9,981,196 $22,653,713 $11,401,145
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>
3. INVESTMENT ADVISORY AND MANAGEMENT AND SUB-ADVISORY AGREEMENTS
For managing its investment and business affairs, Growth & Income Portfolio,
Bond Portfolio, Intermediate 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%, .50% 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.
First Tennessee and Investment Advisers, Inc. ("IAI") serve as co-advisers of
the Capital Appreciation Portfolio pursuant to the authority granted to them
under their respective Co-Advisory Agreements with the Portfolio. The Capital
Appreciation Portfolio is obligated to pay First Tennessee monthly management
fees at the annual rate of .15% of its average net assets. The Capital
Appreciation Portfolio is obligated to pay IAI monthly management fees at the
annual rate of .70% for the first $50 million of the Portfolio's average net
assets and .65% on average net assets of the Portfolio in excess of $50 million.
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 Intermediate Bond and Tennessee Tax-Free Portfolios, Martin & Company,
Inc. ("Martin") serves as sub-adviser of each Portfolio pursuant to the
authority granted to it under its Sub-Advisory Agreement with First Tennessee.
Martin is an affiliate of First Tennessee and is a wholly-owned subsidiary of
First Tennessee National Corp. Martin is paid by First Tennessee a monthly
sub-advisory fee at the annual rate of .30% of Intermediate Bond Portfolio's
average net assets and .30% of Tennessee Tax-Free Portfolio's average net
assets.
40
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT ADVISORY AND MANAGEMENT AND SUB-ADVISORY AGREEMENTS (CONTINUED)
For the Money Market Portfolios, BlackRock Institutional Management Corporation
("BlackRock") (formerly PNC Institutional Management Corporation) serves as the
sub-adviser of each Portfolio pursuant to the authority granted to it under its
Sub-Advisory Agreement with First Tennessee. BlackRock is a wholly-owned
subsidiary of PNCBank National Association. BlackRock 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.
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, Capital Appreciation, Bond,
Intermediate 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, Capital Appreciation, Bond, Intermediate 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, Capital Appreciation, Bond
and Intermediate 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, 1998, 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, 1998, First Tennessee waived management
fees of $731,335 and $645,280 for the Growth & Income and Bond Portfolios,
respectively.
CAPITAL APPRECIATION AND INTERMEDIATE BOND PORTFOLIOS:
Since each Portfolio's inception, First Tennessee has voluntarily agreed to
waive its entire management fee. Pursuant to this voluntary waiver agreement,
for the period ended June 30, 1998, First Tennessee waived management fees of
$32,970 and $320,973 for the Capital Appreciation and Intermediate Bond
Portfolios, respectively.
From the inception of the Capital Appreciation Portfolio through September 30,
1997, ALPS waived its entire administrative fee. For the next six months of
Portfolio operations, ALPS has waived its administration fee to .075% on the
first $20 million of average net assets in the Portfolio, .1125% on the next $5
million and .15% of the average net assets in excess of $25 million. Pursuant
to this waiver agreement, for the period ended June 30, 1998, ALPS waived
administration fees of $10,780.
For the first six months of operations for the Intermediate Bond Portfolio, ALPS
is waiving its administration fee to .075% of the first $20 million of average
net assets in the Portfolio, .1125% on the next $5 million and .15% of the
average net assets in excess of $25 million. Pursuant to this waiver agreement
for the period ended June 30, 1998, ALPS waived administration fees of $5,595.
TENNESSEE TAX-FREE PORTFOLIO:
Since the Portfolio's inception, First Tennessee, as Investment Adviser, has
voluntarily agreed to waive its entire management fee.
For the year ended June 30, 1998, the 12b-1 fee charged by Class III of the
Tennessee Tax-Free Portfolio was waived to .50% of average net assets.
For the period from July 1, 1997 through March 31, 1998, ALPS voluntarily agreed
to waive its administration fee to 0.05% of average net assets.
For the year ended June 30, 1998, ALPS agreed to voluntarily reimburse Class III
of the Tennessee Tax-Free Portfolio for half of the 0.50% 12b-1 fee charged by
that Class or 0.25% of that Class' average net assets.
41
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. WAIVER OF FEES (CONTINUED)
Pursuant to the voluntary waiver and reimbursement agreements, for the year
ended June 30, 1998, fees were waived and reimbursed for the Tennessee Tax-Free
Portfolio as follows:
<TABLE>
<CAPTION>
<S> <C>
Management fees waived $ 398,898
Administration fees waived $ 32,146
Reimbursement by administrator $ 15,046
12b-1 fees waived $ 15,046
</TABLE>
MONEY MARKET PORTFOLIOS:
For the year ended June 30, 1998, 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, 1998, the
expense waivers were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Management Fee Co-Administration Fee
-------------- ---------------------
U.S. Treasury Money Market $82,799 $13,800
U.S. Government Money Market $143,353 $23,892
Municipal Money Market $78,915 $13,153
Cash Reserve $100,095 $16,682
</TABLE>
6. CONVERSION OF COMMON TRUST FUNDS AND COLLECTIVE INVESTMENT POOLS
On March 2, 1998, the Growth & Income Portfolio issued shares in a tax-free
conversion to acquire the net assets of the Common Stock - Total Return Fund,
the Common Stock - Stable Value Fund and the Common Trust Fund 1 of First
Tennessee Bank. The following is a summary of shares issued, net assets
acquired, net asset value per share and unrealized appreciation as of the date
acquired.
<TABLE>
<CAPTION>
<S> <C>
Shares issued 11,062,850
Net assets acquired $ 227,230,934
Net asset value $ 20.54
Unrealized appreciation $ 83,270,056
</TABLE>
On March 2, 1998, the Growth & Income Portfolio issued shares in a taxable
conversion to acquire the net assets of the Pooled Equity Fund and the Common
Trust Fund 3 of First Tennessee Bank. The following is a summary of shares
issued, net assets acquired and net asset value per share. Because the
conversion was taxable, no unrealized appreciation was acquired.
<TABLE>
<CAPTION>
<S> <C>
Shares issued 5,341,465
Net assets acquired $ 109,713,703
Net asset value $ 20.54
</TABLE>
On March 2, 1998, the Bond Portfolio issued shares in a tax-free conversion to
acquire the net assets of the Common Fixed Income - Total Return Fund of First
Tennessee Bank. The following is a summary of shares issued, net assets
acquired, net asset value per share and unrealized appreciation as of the date
acquired.
<TABLE>
<CAPTION>
<S> <C>
Shares issued 4,782,121
Net assets acquired $ 48,681,990
Net asset value $ 10.18
Unrealized appreciation $ 2,173,653
</TABLE>
On March 2, 1998, the Intermediate Bond Portfolio issued shares in a tax-free
conversion to acquire the net assets of the Common Fixed Income - Stable Value
Fund, the Pooled Intermediate Bond Fund, the Common Trust Fund 2 and the Common
Trust Fund 4 of First Tennessee Bank. The following is a summary of shares
issued, net assets acquired, net asset value per share and unrealized
appreciation as of the date acquired.
<TABLE>
<CAPTION>
<S> <C>
Shares issued 18,490,489
Net assets acquired $ 184,904,888
Net asset value $ 10.00
Unrealized appreciation $ 1,914,289
</TABLE>
42
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CONVERSION OF COMMON TRUST FUNDS AND COLLECTIVE INVESTMENT POOLS (CONTINUED)
On March 2, 1998, the Tennessee Tax-Free Portfolio issued shares in a tax-free
conversion to acquire the net assets of the Common Tax-Exempt - Total Return
Fund, the Common Tax-Exempt - Stable Value Fund and the Common Trust Fund 5 of
First Tennessee Bank. The following is a summary of shares issued, net assets
acquired, net asset value per share and unrealized appreciation as of the date
acquired.
<TABLE>
<CAPTION>
<S> <C>
Shares issued 14,429,355
Net assets acquired $ 148,766,645
Net asset value $ 10.31
Unrealized appreciation $ 5,930,274
</TABLE>
7. OTHER
As of June 30, 1998, one shareholder owned 19% of the Growth & Income Portfolio,
92% of the Capital Appreciation Portfolio and 50% of the Bond Portfolio.
Additionally, as of June 30, 1998, one shareholder owned 16% of the U.S.
Treasury Money Market Portfolio, one shareholder owned 11% of the Municipal
Money Market Portfolio and two shareholders owned 62% of the Cash Reserve
Portfolio.
The Trustees of the Trust receive an annual Trustees fee of $6,000 and an
additional fee for each Trustee's meeting attended.
A proposal to approve a Sub-Advisory Agreement for the Tennessee Tax-Free
Portfolio (the "Portfolio") between First Tennessee Bank National Association,
the Portfolio's investment adviser, and its affiliate, Martin & Company, Inc.,
acting as sub-adviser, was passed by the required majority of shareholders of
the Portfolio at a Special Shareholders meeting held on February 27, 1998 for
the purpose of voting on the proposal. 2,360,540 shares were voted for the
proposal, 4,955 against and 28,098 shares abstained from voting.
43
<PAGE>
<TABLE>
<CAPTION>
FIRST 370 SEVENTEENTH STREET
FUNDS SUITE 3100
DENVER, COLORADO 80202
WWW.FIRSTFUNDS.COM
<S> <C>
INVESTMENT ADVISER - ALL PORTFOLIOS EXCEPT TRANSFER AND SHAREHOLDER SERVICING
CAPITAL APPRECIATION PORTFOLIO AGENT
First Tennessee Bank National Association Chase Global Funds Services Company
Memphis, Tennessee Boston, Massachusetts
CO-INVESTMENT ADVISERS - CAPITAL APPRECIATION CUSTODIAN
PORTFOLIO
Chase Manhattan Bank, N.A.
First Tennessee Bank National Association New York, New York
Memphis, Tennessee
OFFICERS
Investment Advisers, Inc.
Minneapolis, Minnesota Richard C. Rantzow, President
James Hyatt, Secretary
SUB-ADVISER - MONEY MARKET PORTFOLIOS Jeremy May, Treasurer
BlackRock Institutional Management Corporation TRUSTEES
Wilmington, Delaware
Thomas M. Batchelor
SUB-ADVISER - GROWTH & INCOME AND BOND John A. DeCell
PORTFOLIOS L.R. Jalenak, Jr.
Larry W. Papasan
Highland Capital Management Corporation Richard C. Rantzow
Memphis, Tennessee
SUB-ADVISER - INTERMEDIATE BOND AND TENNESSEE
TAX-FREE PORTFOLIOS
Martin & Company, Inc.
Knoxville, Tennessee
ADMINISTRATOR AND DISTRIBUTOR
ALPS Mutual Funds Services, Inc.
Denver, Colorado
CO-ADMINISTRATOR
First Tennessee Bank National Association
Memphis, Tennessee
[LOGO] [LOGO]
NOT FDIC INSURED
</TABLE>
