<PAGE>
As Filed with the Securities and Exchange Commission on February 27, 1998
Registration Nos. 33-46374
811-6589
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 14 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 /X/
AMENDMENT NO. __ / /
(Check appropriate box or boxes)
----------------------------
First Funds
(Exact Name of Registrant as Specified in Charter)
370 Seventeenth Street, Suite 2700
Denver, Colorado 80202
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 303-623-2577
James V. Hyatt, Esq.
370 Seventeenth Street, Suite 2700
Denver, Colorado 80202
(Name and Address of Agent for Service)
Copy to:
Daniel B. Hatzenbuehler, Esq.
Baker, Donelson, Bearman & Caldwell
165 Madison Avenue, Suite 2100
Memphis, TN 38103
It is proposed that this filing will become effective (check appropriate box):
_X__ immediately upon filing pursuant to paragraph (b)
____ on (date) pursuant to paragraph (b)
____ 60 days after filing pursuant to paragraph (a)
____ 75 days after filing pursuant to paragraph (a)(2)
____ on (date) pursuant to paragraph (a) of Rule 485
Registrant registered an indefinite number of shares pursuant to regulation
24f-2 under the Investment Company Act of 1940 on August 28, 1997.
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<PAGE>
FIRST FUNDS
CAPITAL APPRECIATION PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III PROSPECTUS
<TABLE>
Form N-1A Item Number
- ---------------------
Part A Prospectus Caption
- ------ ------------------
<S> <C>
1........................................................................Cover Page
2.....................................................Summary of Portfolio Expenses
3 a,b..........................................................Financial Highlights
c..................................................How is Performance Calculated?
4 a(i)..............................................How is the Portfolio Organized?
a(ii),b,c.....................What is the Investment Objective of the Portfolio?;
What are the Portfolio's Investment Policies and Limitations?;
Investment Instruments,Strategies, Transactions and Risks;
Is the Portfolio a Suitable Investment?
5 a.................................................How is the Portfolio Organized?
b,c,d,e......................What Advisory and Other Fees does the Portfolio Pay?
f..........................................................Portfolio Transactions
6 a(i)..............................................How is the Portfolio Organized?
a(ii)........................How are Investments, Exchanges and Redemptions Made?
a(iii)............................................How is the Portfolio Organized?
b,c,d...........................................................................*
e................Cover Page; How are Investments, Exchanges and Redemptions Made?
f,g.........................How are Investments, Exchanges and Redemptions Made?;
What is the Effect of Income Tax on this Investment?
7 a............................What Advisory and Other Fees does the Portfolio Pay?
b(i, ii, iii, iv, v), c, d...How are Investments, Exchanges and Redemptions Made?
e, f(i, ii)..................What Advisory and Other Fees does the Portfolio Pay?
f(iii)..........................................................................*
8..............................How are Investments, Exchanges and Redemptions Made?
9.................................................................................*
* Not Applicable
</TABLE>
<PAGE>
FIRST FUNDS
GROWTH & INCOME PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
BOND PORTFOLIO
INTERMEDIATE BOND PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III
STATEMENT OF ADDITIONAL INFORMATION
Form N-1A Item Number Statement of Additional Information Caption
- --------------------- -------------------------------------------
10, 11................................................................Cover Page
12......................................................Description of the Trust
13 a, b, c.......Investment Restrictions and Limitations; Investment Instruments
d...........................................................................*
14 a, b, c.................................................Trustees and Officers
c...........................................................................*
15 a, b, c..............................................Description of the Trust
16 a(i, ii)................Investment Advisory Agreements; Trustees and Officers
a(iii), b, c, d................................Investment Advisory Agreements
e, f.............................Administration Agreement and Other Contracts
g...........................................................................*
h....................................................Description of the Trust
i................................Administration Agreement and Other Contracts
17 a......................................................Portfolio Transactions
b...........................................................................*
c......................................................Portfolio Transactions
d, e........................................................................*
18 a....................................................Description of the Trust
b...........................................................................*
19 a..............................Additional Purchase and Redemption Information
b...........................................Valuation of Portfolio Securities
c...........................................................................*
20.......................................................Distributions and Taxes
21 a(i, ii).........................Administration Agreement and Other Contracts
a(iii), b, c................................................................*
22 a...........................................................................*
b.................................................................Performance
23...............Financial Information for the annual period ended June 30, 1997
.............and the semi-annual period ended December 31, 1997 for the Growth &
Income and Bond Portfolios is incorporated by reference to the
Trust's Annual Report dated June 30, 1997 and Semi-Annual Report
(unaudited) dated December 31, 1997. Financial Information for the
Capital Appreciation Portfolio for the semi-annual period ended December 31,
1997 is incorporated by reference to the Trust's Semi-Annual Report
(unaudited) dated December 31, 1997. As of December 31, 1997, the
Intermediate Bond Portfolio had not commenced operations.
* Not Applicable
<PAGE>
The prospectus for the First Funds Capital Appreciation Portfolio (the
"Portfolio") dated October 24, 1997 is incorporated herein by reference to
Post-Effective Amendment No. 13 to Trust's Registration Statement on Form
N-1A (File Nos. 33-46374 and 811-6589) filed with the U.S. Securities and
Exchange Commission on October 24, 1997. The prospectus is supplemented by
the Financial Highlights as of December 31, 1997 filed herein to comply with
the Trust's undertaking to file a post-effective amendment containing
reasonably current financial statements which need not be audited within six
months of its effective date or commencement of operations, whichever is
later.
<PAGE>
FIRST FUNDS
CAPITAL APPRECIATION PORTFOLIO
SUPPLEMENT DATED FEBRUARY 27, 1998
TO THE PROSPECTUS DATED OCTOBER 24, 1997
This Supplement is provided to update and should be read in conjunction with
the information contained in the above-dated Prospectus for the First Funds
Capital Appreciation Portfolio.
The Financial Highlights table set forth in this Supplement should be
considered to be included in the Prospectus for the Capital Appreciation
Portfolio.
FINANCIAL HIGHLIGHTS
CAPITAL APPRECIATION PORTFOLIO
<TABLE>
<CAPTION>
CLASS I CLASS II CLASS III
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For the Period For the Period For the Period
Ended December 31**, Ended December 31,** Ended December 31,**
(Unaudited) (Unaudited) (Unaudited)
1997 1997 1997
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SELECTED PER-SHARE DATA<S> <C> <C> <C>
Net asset value, beginning of period $10.00 $10.49 $10.49
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Income from investment operations:
Net investment income (0.01) (0.01) (0.02)
Net realized and unrealized gain (loss) on
investments (0.09) (0.60) (0.61)
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Total from investment operations (0.10) (0.61) (0.63)
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Net asset value, end of period $9.90 $9.88 $9.86
----------------------------------------------------------------
----------------------------------------------------------------
TOTAL RETURN+ (1.00)%# (1.20)%#*** (1.40)%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $22,007 $765 $463
Ratio of expenses to average daily net assets(1) 1.20%* 1.56%* 2.35%*
Ratio of net investment income to average net
assets (0.27)%* (0.63)%* (1.42)%*
Portfolio turnover rate 7% 7% 7%
Average commission rate $ 0.0600 $ 0.0600 $ 0.0600
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 1.44%* 1.79%* 2.59%*
</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.
<PAGE>
FIRST FUNDS
GROWTH & INCOME PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
BOND PORTFOLIO
INTERMEDIATE BOND PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION FOR CLASS I, CLASS II, AND CLASS III
OCTOBER 24, 1997
AS AMENDED FEBRUARY 27, 1998
This Statement is not a prospectus but should be read in conjunction with the
current Prospectus for each Class of First Funds: Growth & Income, Capital
Appreciation, Bond and Intermediate Bond Portfolios dated October 24 , 1997.
Please retain this Statement for future reference. The financial statements
and financial highlights of the Growth & Income and Bond Portfolios are
included in the Annual Report for the fiscal year ended June 30, 1997 and the
Semi-Annual Report for the period ended December 31, 1997 and are
incorporated herein by reference. The financial statements and financial
highlights of the Capital Appreciation Portfolio are included in the
Semi-Annual Report for the period ended December 31, 1997 and are
incorporated herein by reference. The Intermediate Bond Portfolio had not
commenced operations as of December 31, 1997 and therefore is not included in
the Annual or Semi-Annual Reports. To obtain additional free copies of this
Statement, the Annual or Semi-Annual Reports or the Prospectuses for each
Portfolio, please call the Distributor at 1-800-442-1941, option 1 or write
to the Distributor at 370 17th Street, Suite 3100, Denver CO 80202.
TABLE OF CONTENTS PAGE
Investment Restrictions and Limitations. . . . . . . . . .2
Investment Instruments . . . . . . . . . . . . . . . . . 3
Portfolio Transactions . . . . . . . . . . . . . . . . . .8
Valuation of Portfolio Securities. . . . . . . . . . . . .9
Performance. . . . . . . . . . . . . . . . . . . . . . . 10
Additional Purchase and Redemption Information . . . . . 12
Distributions and Taxes. . . . . . . . . . . . . . . . . 13
Trustees and Officers. . . . . . . . . . . . . . . . . . 13
Investment Advisory Agreements . . . . . . . . . . . . . 15
Administration Agreements and Other Contracts. . . . . . 15
Description of the Trust . . . . . . . . . . . . . . . . 18
Financial Statements . . . . . . . . . . . . . . . . . . 19
Appendix . . . . . . . . . . . . . . . . . . . . . . . . 20
INVESTMENT ADVISER (Growth & Income, Bond and Intermediate Bond Portfolios)
First Tennessee Bank National Association (First Tennessee)
SUB-ADVISER (Growth & Income, Bond and Intermediate BondPortfolios)
Highland Capital Management Corp. (Highland or the Sub-Adviser)
CO-INVESTMENT ADVISERS (Capital Appreciation Portfolio)
First Tennessee Bank National Association (First Tennessee)
Investment Advisers, Inc. (IAI)
ADMINISTRATOR AND DISTRIBUTOR
ALPS Mutual Funds Services, Inc. (ALPS or the Administrator and Distributor)
CO-ADMINISTRATOR
First Tennessee Bank National Association (First Tennessee or the
Co-Administrator)
TRANSFER AGENT & SHAREHOLDER SERVICING AGENT
Chase Global Funds Services Company (CGFSC or the Transfer Agent)
CUSTODIAN
Chase Manhattan Bank, N.A. (Chase or the Custodian)
1
<PAGE>
INVESTMENT RESTRICTIONS AND LIMITATIONS
The following policies and limitations supplement those set forth in the
Portfolios' Prospectuses. Unless otherwise noted, whenever an investment policy
or limitation states a maximum percentage of a Portfolio's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of a Portfolio's acquisition of such security
or other asset. Accordingly, any subsequent change in values, net assets, or
other circumstances will not be considered when determining whether the
investment complies with a Portfolio's investment policies and limitations. With
respect to illiquid securities, any investment in such securities that exceeds
15% of a Portfolio's net assets will be reduced promptly to meet such
limitation.
Fundamental policies and investment limitations cannot be changed without
approval by a "majority of the outstanding voting securities" (as defined in the
Investment Company Act of 1940) of that Portfolio. However, except for the
fundamental investment limitations set forth below, the investment policies and
limitations described in this Statement of Additional Information are not
fundamental and may be changed without shareholder approval.
INVESTMENT LIMITATIONS OF THE GROWTH & INCOME, CAPITAL APPRECIATION, BOND AND
INTERMEDIATE BOND PORTFOLIOS
THE FOLLOWING ARE THE FUNDAMENTAL LIMITATIONS FOR EACH PORTFOLIO, SET FORTH IN
THEIR ENTIRETY. EACH PORTFOLIO MAY NOT:
(1) with respect to 75% of a Portfolio's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by
the U.S. government or any of its agencies or instrumentalities) if, as
a result, (a) more than 5% of a Portfolio's total assets would be
invested in the securities of that issuer; or (b) such a Portfolio would
hold more than 10% of the outstanding voting securities of that issuer;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(3) borrow money, except that each Portfolio may borrow money for temporary
or emergency purposes (not for leveraging or investment) in an amount
not exceeding 33 1/3% of its total assets (including the amount
borrowed) less liabilities (other than borrowings). Any borrowings that
come to exceed this amount will be reduced within three days (not
including Sundays and holidays) to the extent necessary to comply with
the 33 1/3% limitation;
(4) underwrite securities issued by others, except to the extent that each
Portfolio may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities;
(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, 25% or more of such a Portfolio's
total assets would be invested in the securities of companies whose
principal business activities are in the same industry;
(6) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent a Portfolio
from investing in securities or other instruments backed by real estate
or securities of companies engaged in the real estate business);
(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent
a Portfolio from purchasing or selling options and futures contracts or
from investing in securities or other instruments backed by physical
commodities); or
(8) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this limit
does not apply to purchases of debt securities or to repurchase
agreements.
(9) Each Portfolio may, notwithstanding any other fundamental investment
policy or limitation, invest all of its assets in the securities of a
single open-end or closed-end management investment company with
substantially the same fundamental investment objectives, policies, and
limitations as the Portfolio.
THE FOLLOWING LIMITATIONS OF EACH PORTFOLIO ARE NOT FUNDAMENTAL AND MAY BE
CHANGED WITHOUT SHAREHOLDER APPROVAL.
(i) Each Portfolio does not currently intend during the coming year to
purchase securities on margin, except that each Portfolio may obtain
such short-term credits as are necessary for the clearance of
transactions, and provided that margin payments in connection with
futures contracts and options on futures contracts shall not constitute
purchasing securities on margin.
2
<PAGE>
(ii) Each Portfolio may borrow money only (a) from a bank or (b) by engaging
in reverse repurchase agreements with any party (reverse repurchase
agreements are treated as borrowings for purposes of fundamental
investment limitation 3). The Portfolio will not purchase any security
while borrowings representing more than 5% of its total assets are
outstanding.
(iii) Each Portfolio does not currently intend during the coming year to
purchase any security, if, as a result, more than 15% of its net assets
would be invested in securities that are deemed to be illiquid because
they are subject to legal or contractual restrictions on resale or
because they cannot be sold or disposed of in the ordinary course of
business at approximately the prices at which they are valued.
(iv) Each Portfolio does not currently intend during the coming year to
purchase or sell futures contracts. This limitation does not apply to
securities that incorporate features similar to futures contracts.
(v) Each Portfolio does not currently intend during the coming year to make
loans, but this limitation does not apply to purchases of debt
securities.
(vi) Each Portfolio does not currently intend during the coming year to
invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental
investment objectives, policies, and limitations as the Portfolio.
INVESTMENT INSTRUMENTS
First Tennessee Bank National Association (First Tennessee), serves as
Investment Adviser to the Growth & Income, Bond and Intermediate Bond Portfolios
and, with the prior approval of the Board of Trustees (the Trustees), has
engaged Highland Capital Management Corp. (the Sub-Adviser) to act as
Sub-Adviser to these Portfolios. First Tennessee and Investment Advisers, Inc.
(IAI) act as Co-Advisers to the Capital Appreciation Portfolio. The activities
of the Sub-Adviser and IAI include providing investment research and credit
analysis concerning Portfolio investments and conducting a continuous program of
investment of Portfolio assets in accordance with the investment policies and
objectives of each Portfolio.
DELAYED-DELIVERY TRANSACTIONS. Each Portfolio may buy and sell securities on a
delayed-delivery or when-issued basis. These transactions involve a commitment
by each Portfolio to purchase or sell specific securities at a predetermined
price and/or yield, with payment and delivery taking place after the customary
settlement period for that type of security (and more than seven days in the
future). Typically, no interest accrues to the purchaser until the security is
delivered. Each Portfolio may receive fees for entering into delayed delivery
transactions.
When purchasing securities on a delayed-delivery basis, each Portfolio assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. Because a Portfolio is not required to pay for securities until
the delivery date, these risks are in addition to the risks associated with such
Portfolio's other investments. If a Portfolio remains substantially fully
invested at a time when delayed-delivery purchases are outstanding, the
delayed-delivery purchases may result in a form of leverage. When
delayed-delivery purchases are outstanding, a Portfolio will set aside
appropriate liquid assets in a segregated custodial account to cover its
purchase obligations. When a Portfolio has sold a security on a
delayed-delivery basis, a Portfolio does not participate in further gains or
losses with respect to the security. If the
other party to a delayed-delivery transaction fails to deliver or pay for the
securities, such Portfolio could miss a favorable price or yield opportunity, or
could suffer a loss.
Each Portfolio may renegotiate delayed-delivery transactions after they are
entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.
FOREIGN INVESTMENTS. Foreign investments purchased by each Portfolio can
involve significant risks in addition to the risks inherent in U.S.
investments. The value of securities denominated in or indexed to foreign
currencies, and of dividends and interest from such securities, can change
significantly when foreign currencies strengthen or weaken to the U.S.
dollar. Foreign securities markets generally have less trading volume and
less liquidity than U.S. markets, and prices on some foreign markets can be
highly volatile. Many foreign countries lack uniform accounting and
disclosure standards comparable to those applicable to U.S. companies, and it
may be more difficult to obtain reliable information regarding an issuer's
financial condition and operations. In addition, the costs of foreign
investing, including withholding taxes, brokerage commissions, and custodial
costs, are generally higher than for U.S. investments.
3
<PAGE>
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal
rights in foreign countries.
Investing abroad also involves different political and economic risks. Foreign
investments may be affected by actions of foreign governments adverse to the
interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restriction on U.S. investment
or on the ability to repatriate assets or convert currency into U.S. dollars, or
other government intervention. There may be a greater possibility of default by
foreign governments or foreign government-sponsored enterprises. Investments in
foreign countries also involve a risk of local political, economic, or social
instability, military action or unrest, or adverse diplomatic developments.
There is no assurance that a Portfolio's investment adviser will be able to
anticipate or counter these potential events.
The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.
Each Portfolio may invest in foreign securities that impose restrictions on
transfer within the U.S. or to U.S. persons. Although securities subject to
transfer restrictions may be marketable abroad, they may be less liquid than
foreign securities of the same class that are not subject to such restrictions.
American Depository Receipts and European Depository Receipts (ADRs and EDRs)
are certificates evidencing ownership of shares of a foreign-based corporation
held in trust by a bank or similar financial institution. Designed for use in
U.S. and European securities markets, respectively, ADRs and EDRs are
alternatives to the purchase of the underlying securities in their national
markets and currencies.
FOREIGN CURRENCY TRANSACTIONS. The Portfolios may conduct foreign currency
transactions on a spot (i.e., cash) basis or by entering into forward contracts
to purchase or sell foreign currencies at a future date and price. The
Portfolios will convert currency on a spot basis from time to time, and
investors should be aware of the costs of currency conversion. Although
foreign exchange dealers generally do not charge a fee for conversion, they do
realize a profit based on the difference between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the fund at one rate, while offering a lesser rate of
exchange should the portfolio desire to resell that currency to the dealer.
Forward contracts are generally traded in an interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. The parties to a forward contract may agree to offset or terminate
the contract before its maturity, or may hold the contract to maturity and
complete the contemplated currency exchange.
Each Portfolio may use currency forward contracts for any purpose consistent
with its investment objective. The following discussion summarizes the
principal currency management strategies involving forward contracts that
could be used by the Portfolio. The Portfolios may also use swap agreements,
indexed securities, and options and futures contracts relating to foreign
currencies for the same purposes.
When a Portfolio agrees to buy or sell a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for the purchase or sale, for a fixed amount
of U.S. dollars, of the amount of foreign currency involved in the underlying
security transaction, the Portfolio will be able to protect itself against an
adverse change in foreign currency values between the date the security is
purchased or sold and the date on which payment is made or received. This
technique is sometimes referred to as a "settlement hedge" or "transaction
hedge." The Portfolio may also enter into forward contracts to purchase or
sell a foreign currency in anticipation of future purchases or sales of
securities denominated in foreign currency, even if the specific investments
have not yet been selected by the the Portfolio's investment adviser.
A Portfolio may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example, if
a Portfolio owned securities denominated in pounds sterling, it could enter
into a forward contract to sell pounds sterling in return for U.S. dollars to
hedge against possible declines in the pound's value. Such a hedge, sometimes
referred to as a "position hedge," would tend to offset both positive and
negative currency fluctuations, but would not offset changes in security values
caused by other factors. A Portfolio could also hedge the position by selling
another currency expected to perform similarly to the pound sterling - for
example, by entering into a forward contract to sell Deutsche marks or European
Currency Units in return for U.S. dollars. This type of hedge, sometimes
referred to as a "proxy hedge," could offer advantages in terms of cost, yield,
or efficiency, but generally would not hedge currency exposure as effectively
as a simple hedge into U.S. dollars. Proxy hedges may result in losses if the
currency
4
<PAGE>
used to hedge does not perform similarly to the currency in which the hedged
securities are denominated. A Portfolio may enter into forward contracts to
shift its investment exposure from one currency into another. This may
include shifting exposure from U.S. dollars to a foreign currency, or from
one foreign currency to another foreign currency. For example, if a
Portfolio held investments denominated in Deutsche marks, such Portfolio
could enter into forward contracts to sell Deutsche marks and purchase Swiss
Francs. This type of strategy, sometimes known as a "cross hedge," will tend
to reduce or eliminate exposure to the currency that is sold, and increase
exposure to the currency that is purchased, much as if the Portfolio had sold
a security denominated in one currency and purchased an equivalent security
denominated in another. Cross-hedges protect against losses resulting from a
decline in the hedged currency, but will cause the Portfolio to assume the
risk of fluctuations in the value of the currency it purchases.
Under certain conditions, Securities and Exchange Commission (SEC) guidelines
require mutual funds to set aside cash or other appropriate liquid assets in a
segregated custodial account to cover currency forward contracts. As required
by SEC guidelines, the Portfolios will segregate assets to cover currency
forward contracts, if any, whose purpose is essentially speculative. The
Portfolios will not segregate assets to cover forward contracts entered into
for hedging purposes, including settlement hedges, position hedges, and proxy
hedges.
Successful use of forward currency contracts will depend on an investment
adviser's skill in analyzing and predicting currency values. Forward contracts
may substantially change a Portfolio's investment exposure to changes in
currency exchange rates, and could result in losses to a Portfolio if
currencies do not perform as the investment adviser anticipates. For example,
if a currency's value rose at a time when the investment adviser had hedged a
Portfolio by selling that currency in exchange for dollars, a Portfolio would
be unable to participate in the currency's appreciation. If the investment
adviser hedges currency exposure through proxy hedges, a Portfolio could
realize currency losses from the hedge and the security position at the same
time if the two currencies do not move in tandem. Similarly, if the investment
adviser increases a Portfolio's exposure to a foreign currency, and that
currency's value declines, the Portfolio will realize a loss. There is no
assurance that an investment adviser's use of forward currency contracts will
be advantageous to a Portfolio or that it will hedge at an appropriate time.
The policies described in this section are non-fundamental policies of each
Portfolio.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are
valued. Under guidelines established by the Trustees, the Sub-Adviser, under
the supervision of First Tennessee, and IAI determines the liquidity of each
respective Portfolio's investments and, through reports from the Sub-Adviser and
IAI, the Trustees monitor investments in illiquid instruments. In determining
the liquidity of each Portfolio's investments, the Sub-Adviser and IAI may
consider various factors including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the security (including
any demand or tender features) and (5) the nature of the marketplace for trades
(including the ability to assign or offset each Portfolio's rights and
obligations relating to the investment). Investments currently considered by
each Portfolio to be illiquid include repurchase agreements not entitling the
holder to payment of principal and interest within seven days, over-the-counter
options, and some restricted securities determined by the Sub-Adviser or IAI to
be illiquid. However, with respect to over-the-counter options that each
Portfolio writes, all or a portion of the value of the underlying instrument may
be illiquid depending on the assets held to cover the option and the nature and
terms of any agreement each Portfolio may have to close out the option before
expiration. In the absence of market quotations, illiquid investments are
priced at fair value as determined in good faith by the Trustees. If through a
change in values, net assets or other circumstances, each Portfolio was in a
position where more than 15% of its net assets were invested in illiquid
securities, the Trustees would seek to take appropriate steps to protect
liquidity.
REAL ESTATE INVESTMENT TRUSTS. The Growth & Income and Capital Appreciation
Portfolio (Equity Portfolios) may purchase interests in real estate investment
trusts. Real estate industry companies include, among others, equity real
estate investment trusts, which own properties, and mortgage real estate
investment trusts, which make construction, development, and long-term mortgage
loans. Equity real estate investment trusts may be affected by changes in the
value of the underlying property owned by the trusts, while mortgage real
estate investment trusts may be affected by the quality of credit extended.
Equity and mortgage real estate investment trusts are dependent upon management
skill, are not diversified, and are subject to the risks of financing projects.
Such trusts are also subject to heavy cash flow dependency, defaults by
borrowers, self liquidation, and the possibilities of failing to qualify for
tax-free pass-through of income under the Internal Revenue Code and failing to
maintain exemption from the Investment Company Act of 1940 (the 1940 Act).
REPURCHASE AGREEMENTS are transactions in which a Portfolio purchases a security
and simultaneously commits to resell that security at an agreed upon price and
date within a number of days from the date of purchase. The resale price
reflects the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or maturity of the purchased security. A
repurchase agreement involves the obligation of the seller to pay the agreed
upon price. This obligation
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<PAGE>
is in effect secured by the underlying security having a value at least equal to
the amount of the agreed upon resale price. Each Portfolio may enter into a
repurchase agreement with respect to any security in which it is authorized to
invest. While it presently does not appear possible to eliminate all risks from
the transactions (particularly the possibility of a decline in the market value
of the underlying securities, as well as delay and costs to each Portfolio in
connection with bankruptcy proceedings), it is the policy of each Portfolio to
limit repurchase agreements to those parties whose creditworthiness has been
reviewed and found satisfactory by the Sub-Adviser or IAI, as the case may be.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a Portfolio
sells a portfolio security to another party, such as a bank or broker-dealer, in
return for cash and agrees to repurchase the instrument at a particular price
and time. While a reverse repurchase agreement is outstanding, each Portfolio
will maintain appropriate high grade liquid assets in a segregated custodial
account to cover its obligation under the agreement. Each Portfolio will enter
into reverse repurchase agreements only with parties whose creditworthiness has
been found satisfactory by the Sub-Adviser or IAI, as the case may be. Such
transactions may increase fluctuations in the market values of each Portfolio's
assets and may be viewed as a form of leverage.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is
required, each Portfolio may be obligated to pay all or part of the registration
expense and a considerable period may elapse between the time it decides to seek
registration and the time each Portfolio may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, each Portfolio might obtain a less favorable
price than prevailed when it decided to seek registration of the security.
SECURITIES LENDING. Each Portfolio may lend securities to parties such as
broker-dealers or institutional investors. Securities lending allows the
Portfolios to retain ownership of the securities loaned and, at the same time,
to earn additional income. Since there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied should the borrower
fail financially, loans will be made only to parties deemed by the Sub-Adviser
or IAI to be of good standing. Furthermore, they will only be made if, in the
Sub-Adviser's or IAI's judgment, the consideration to be earned from such loans
would justify the risk.
First Tennessee, Highland and IAI understand that it is the current view of the
SEC that each Portfolio may engage in loan transactions only under the following
conditions: (1) each Portfolio must receive 100% collateral in the form of cash
or cash equivalents (e.g., U.S. Treasury bills or notes) from the borrower; (2)
the borrower must increase the collateral whenever the market value of the
securities loaned (determined on a daily basis) rises above the value of the
collateral; (3) after giving notice, each Portfolio must be able to terminate
the loan at any time; (4) each Portfolio must receive reasonable interest on the
loan or a flat fee from the borrower, as well as amounts equivalent to any
dividends, interest, or other distributions on the securities loaned and to any
increase in market value; (5) each Portfolio may pay only reasonable custodian
fees in connection with the loan; and (6) the Trustees must be able to vote
proxies on the securities loaned, either by terminating the loan or by entering
into an alternative arrangement with the borrower.
Cash received through loan transactions may be invested in any security in which
the Portfolios are authorized to invest. Investing this cash subjects that
investment, as well as the security loaned, to market forces (i.e., capital
appreciation or depreciation).
VARIABLE AND FLOATING RATE DEMAND OBLIGATIONS (VRDOS/FRDOS) are obligations that
bear variable or floating interest rates and carry rights that permit holders to
demand payment of the unpaid principal balance plus accrued interest from the
issuers or certain financial intermediaries. Floating rate instruments have
interest rates that change whenever there is a change in a designated base rate
while variable rate obligations provide for a specified periodic adjustment in
the interest rate. These formulas are designed to result in a market value for
the VRDO or FRDO that approximates its par value. The Bond and Intermediate
Bond Portfolios (the Bond Portfolios) may invest in fixed-rate bonds that are
subject to third party puts and in participation interests in such bonds held by
a bank in trust or otherwise. These bonds and participation interests have
tender options or demand features that permit these Portfolios to tender (or
put) their bonds to an institution at periodic intervals and to receive the
principal amount thereof. These Portfolios consider variable rate instruments
structured in this way (Participating VRDOs) to be essentially equivalent to
other VRDOs they purchase.
WARRANTS. The Equity Portfolios may invest in warrants which entitle the holder
to buy equity securities at a specific price during a specific period of time.
Warrants may be considered more speculative than certain other types of
investments in that they do not entitle a holder to dividends or voting rights
with respect to the securities which may be purchased, nor do they represent any
rights in the assets of the issuing company. The value of a warrant may be more
volatile than the value of the securities underlying the warrants. Also, the
value of the warrant does not necessarily change with the value
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<PAGE>
of the underlying securities and a warrant ceases to have value if it is not
exercised prior to the expiration date. Warrants may be allowed to expire if
the Sub-Adviser or IAI deems it undesirable to exercise or sell.
LIMITATIONS ON OPTIONS TRANSACTIONS. Each Portfolio will not: (a) purchase put
options or write call options if, as a result, more than 25% of a Portfolio's
total assets would be hedged with options under normal conditions; (b) write put
options if, as a result, a Portfolio's total obligations upon settlement or
exercise of written put options would exceed 25% each of their total assets; or
(c) purchase call options if, as a result, the current value of option premiums
for call options purchased by each Portfolio would exceed 5% of total assets.
These limitations do not apply to options attached to or acquired or traded
together with their underlying securities, and do not apply to securities that
incorporate features similar to options.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, a Portfolio
obtains the right (but not the obligation) to sell the option's underlying
instrument at a fixed strike price. In return for this right, a Portfolio pays
the current market price for the option (known as the option premium). Options
have various types of underlying instruments, including specific securities and
indexes of securities prices. A Portfolio may terminate its position in a put
option it has purchased by allowing them to expire or by exercising the option.
If the option is allowed to expire, a Portfolio will lose the entire premium it
paid. If a Portfolio exercises the option, it completes the sale of the
underlying instrument at the strike price. A Portfolio may also terminate a put
option position by closing it out in the secondary market at its current price,
if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those of put options,
except that the purchaser of a call option obtains the right to purchase, rather
than sell, the underlying instrument at the option's strike price. A call buyer
typically attempts to participate in potential price increases of the underlying
instrument with risk limited to the cost of the option if security prices fall.
At the same time, the buyer can expect to suffer a loss if security prices do
not rise sufficiently to offset the cost of the option.
WRITING PUT AND CALL OPTIONS. When a Portfolio writes a put option, it takes
the opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the Portfolio assumes the obligation to pay the strike
price for the option's underlying instrument if the other party to the option
chooses to exercise it. The Portfolios may seek to terminate their positions in
put options they write before exercise by closing out the options in the
secondary market at their current price. If the secondary market is not liquid
for a put option a Portfolio has written, however, the Portfolio must continue
to be prepared to pay the strike price while the option is outstanding,
regardless of price changes, and must continue to set aside assets to cover its
position.
If security prices rise, a put writer would generally expect to profit, although
its gain would be limited to the amount of the premium it received. If security
prices remain the same over time, it is likely that the writer will also profit,
because it should be able to close out the option at a lower price. If security
prices fall, the put writer would expect to suffer a loss. This loss should be
less than the loss from purchasing the underlying instrument directly, however,
because the premium received for writing the option should mitigate the effects
of the decline.
Writing a call option obligates each Portfolio to sell or deliver the option's
underlying instrument, in return for the strike price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS. Each Portfolio may purchase and write options in
combination with each other, or in combination with forward contracts, to adjust
the risk and return characteristics of the overall position. For example, the
Portfolios may purchase a put option and write a call option on the same
underlying instrument, in order to construct a combined position whose risk and
return characteristics are similar to selling a futures contract. Another
possible combined position would involve writing a call option at one strike
price and buying a call option at a lower price, in order to reduce the risk of
the written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
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CORRELATION OF PRICE CHANGES. Because there are a limited number of types of
exchange-traded options contracts, it is likely that the standardized contracts
available will not match the Portfolios' current or anticipated investments
exactly. Each Portfolio may invest in options contracts based on securities
with different issuers, maturities, or other characteristics from the securities
in which each typically invests.
Options prices can also diverge from the prices of their underlying instruments,
even if the underlying instruments match the Portfolios' investments well.
Options prices are affected by such factors as current and anticipated
short-term interest rates, changes in volatility of the underlying instrument,
and the time remaining until expiration of the contract, which may not affect
security prices the same way. Imperfect correlation may also result from
differing levels of demand in the options markets and the securities markets,
from structural differences in how options and securities are traded, or from
imposition of daily price fluctuation limits or trading halts. The Portfolios
may purchase or sell options contracts with a greater or lesser value than the
securities it wishes to hedge or intends to purchase in order to attempt to
compensate for differences in volatility between the contract and the
securities, although this may not be successful in all cases. If price changes
in the Portfolios' options positions are poorly correlated with its other
investments, the positions may fail to produce anticipated gains or result in
losses that are not offset by gains in other investments.
LIQUIDITY OF OPTIONS. There is no assurance a liquid secondary market will
exist for any particular options contract at any particular time. Options may
have relatively low trading volume and liquidity if their strike prices are not
close to the underlying instrument's current price. On volatile trading days
when the price fluctuation limit is reached or a trading halt is imposed, it may
be impossible for the Portfolios to enter into new positions or close out
existing positions. If the secondary market for a contract is not liquid
because of price fluctuation limits or otherwise, it could prevent prompt
liquidation of unfavorable positions, and potentially could require the
Portfolios to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, the Portfolios' access to
other assets held to cover its options or futures positions could also be
impaired.
OTC OPTIONS. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size, and strike
price, the terms of over-the-counter options (options not traded on exchanges)
generally are established through negotiation with the other party to the option
contract. While this type of arrangement allows the Portfolios greater
flexibility to tailor an option to its needs, OTC options generally involve
greater credit risk than exchange-traded options, which are guaranteed by the
clearing organization of the exchanges where they are traded.
ASSET COVERAGE FOR OPTIONS POSITIONS. The Portfolios will comply with
guidelines established by the SEC with respect to coverage of options strategies
by mutual funds and, if the guidelines so require, will set aside appropriate
liquid assets in a segregated custodial account in the amount prescribed.
Securities held in a segregated account cannot be sold while the option strategy
is outstanding, unless they are replaced with other suitable assets. As a
result, there is a possibility that segregation of a large percentage of the
Portfolios' assets could impede portfolio management or the Portfolios' ability
to meet redemption requests or other current obligations.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of securities are placed on behalf of the
respective Portfolios by First Tennessee, the Sub-Adviser and IAI (collectively,
the Advisers) pursuant to authority contained in each Portfolio's Investment
Advisory Agreement, Sub-Advisory Agreement or Co-Advisory Agreement, as the case
may be. The Advisers are also responsible for the placement of transaction
orders for other investment companies and accounts for which they or their
affiliates act as investment adviser. In selecting broker-dealers, subject to
applicable limitations of the federal securities laws, the Advisers consider
various relevant factors, including, but not limited to, the broker's execution
capability; the broker's perceived financial stability; the broker's
responsiveness to the Advisers' transaction requests; and the broker's clearance
and settlement capability. Commissions for foreign investments traded on
foreign exchanges will generally be higher than for U.S. investments and may not
be subject to negotiation.
Each Portfolio may execute portfolio transactions with broker-dealers who
provide research and execution services to the Portfolios or other accounts over
which the Advisers or their affiliates exercise investment discretion. Such
services may include research-related computer hardware and software; and
furnishing analyses and reports concerning issuers, industries, and economic
factors and trends.
The receipt of research from broker-dealers that execute transactions on behalf
of each Portfolio may be useful to the Advisers in rendering investment
management services to each Portfolio and/or its other clients, and conversely,
such information provided by broker-dealers who have executed transaction orders
on behalf of other clients may be useful to
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the Advisers in carrying out its obligations to each Portfolio. The receipt of
such research has not reduced the Advisers' normal independent research
activities; however, it enables the Advisers to avoid the additional expenses
that could be incurred if they tried to develop comparable information through
their own efforts.
Subject to applicable limitations of the federal securities laws, broker-dealers
may receive commissions for agency transactions that are higher than the
commission of other broker-dealers in recognition of their research and
execution services. In order to cause each Portfolio to pay such higher
commissions, the Advisers must determine in good faith that such commissions are
reasonable in relation to the value of the brokerage and research services
provided by such executing broker-dealers viewed in terms of a particular
transaction or the Advisers' overall responsibilities to each Portfolio and its
other clients. In reaching this determination, the Advisers will not attempt to
place a specific dollar value on the brokerage and research services provided or
to determine what portion of the compensation should be related to those
services.
The Advisers are authorized to use research services provided by and to place
portfolio transactions, to the extent permitted by law, with brokerage firms
that have provided assistance in the distribution of shares of each Portfolio.
The Trustees periodically review the Advisers' performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of each Portfolio and review the commissions paid by each Portfolio over
representative periods of time to determine if they are reasonable in relation
to the benefits to each Portfolio.
For the fiscal years ended June 30, 1997 and 1996, the portfolio turnover rates
were 25% and 41% for the Growth & Income Portfolio, and 56% and 56% for the Bond
Portfolio. The Growth & Income Portfolio paid brokerage commissions in the
amounts of $147,563, $276,190 and $146,176 during the fiscal years ended June
30, 1997, 1996 and 1995, respectively. During the fiscal years ended June 30,
1997, 1996 and 1995, no brokerage commissions were paid by the Growth & Income
Portfolio to an affiliated broker of the Trust. No brokerage commissions were
paid by the Bond Portfolio during the last three fiscal years. The Capital
Appreciation and Intermediate Bond Portfolios had not commenced operations as of
June 30, 1997.
From time to time the Trustees will review whether the recapture for the benefit
of each Portfolio of some portion of the brokerage commissions or similar fees
paid by each Portfolio on portfolio transactions is legally permissible and
advisable. Each Portfolio seeks to recapture soliciting broker-dealer fees on
the tender of portfolio securities, but at present no other recapture
arrangements are in effect. The Trustees intend to continue to review whether
recapture opportunities are available and are legally permissible and, if so, to
determine, in the exercise of their business judgment, whether it would be
advisable for each Portfolio to seek such recapture.
When two or more Portfolios are simultaneously engaged in the purchase or sale
of the same security, the prices and amounts are allocated in accordance with a
formula considered by the Trustees and each Portfolio's respective investment
adviser to be equitable to each Portfolio. In some cases this system could have
a detrimental effect on the price or value of the security as far as each
Portfolio is concerned. In other cases, however, the ability of each Portfolio
to participate in volume transactions will produce better executions for each
Portfolio. It is the current opinion of the Trustees that the desirability of
retaining the Portfolios' investment advisers outweighs any disadvantages to the
Portfolios that may be said to exist from exposure to simultaneous transactions.
VALUATION OF PORTFOLIO SECURITIES
Securities owned by each Portfolio are appraised by various methods depending
on the market or exchange on which they trade. Securities traded on the New
York Stock Exchange (NYSE) or the American Stock Exchange are appraised at
the last sale price, or if no sale has occurred, at the closing bid price.
Securities traded on other exchanges are appraised as nearly as possible in
the same manner. Securities and other assets for which exchange quotations
are not readily available are valued on the basis of closing over-the-counter
bid prices, if available, or at their fair value as determined in good faith
under consistently applied procedures under the general supervision of the
Trustees. Short-term securities maturing in 60 days are valued either at
amortized cost or at original cost plus accrued interest, both of which
approximate current value. Convertible securities and fixed-income securities
are valued primarily by a pricing service that uses a vendor security
valuation matrix which incorporates both dealer-supplied valuations and
electronic data processing techniques. This two-fold approach is believed to
more accurately reflect fair value because it takes into account appropriate
factors such as institutional trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics, and
other market data, without exclusive reliance upon quoted, exchange, or
over-the-counter prices.
Use of pricing services has been approved by the Trustees. Securities and
other assets for which there is no readily available market are valued in
good faith by a committee appointed by the Trustees. The procedures set
forth above need not be used to determine the value of the securities owned
by a Portfolio if, in the opinion of a committee appointed by the Trustees.
The procedures set forth above need not be used to determine the value of the
securities owned by a Portfolio if, in the opinion of a committee appointed
by the
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Trustees, some other method (e.g., closing over-the-counter bid prices in the
case of debt instruments traded on an exchange) would more accurately reflect
the fair market value of such securities.
Generally, the valuation of foreign and domestic equity securities, as well as
corporate bonds, U.S. government securities, money market instruments, and
repurchase agreements, is substantially completed each day at the close of the
NYSE. The values of any such securities held by the Portfolios are determined
as of such time for the purpose of computing the Portfolios' net asset values
per share (NAV). Foreign security prices are furnished by independent brokers
or quotation services which express the value of securities in their local
currency. Chase Global Funds Services Company, the Transfer Agent, gathers all
exchange rates daily at the close of the NYSE using the last quoted price on
the local currency and then translates the value of foreign securities from
their local currency into U.S. dollars. Any changes in the value of forward
contracts due to exchange rate fluctuations and days to maturity are included in
the calculation of the net asset value. If an extraordinary event that is
expected to materially affect the value of a portfolio security occurs after the
close of an exchange on which that security is traded, then the security will be
valued as determined in good faith.
PERFORMANCE
For each Class of the Portfolios, YIELDS used in advertising are computed by
dividing interest income for a given 30-day or one-month period, net of
expenses, by the average number of shares entitled to receive dividends during
the period, dividing this figure by the NAV at the end of the period and
annualizing the result (assuming compounding of income) in order to arrive at an
annual percentage rate. Income is calculated for purposes of yield quotations
in accordance with standardized methods applicable to all bond funds. In
general, interest income is reduced with respect to bonds trading at a premium
over their par value by subtracting a portion of the premium from income on a
daily basis, and is increased with respect to bonds trading at a discount by
adding a portion of the discount to daily income. Capital gains and losses
generally are excluded from the calculation.
Income calculated for the purposes of determining yields differs from income as
determined for other accounting purposes. Because of the different accounting
methods used, and because of the compounding of income assumed in yield
calculations, yield may not equal its distribution rate, the income paid to an
account, or income reported in financial statements.
Yield information may be useful in reviewing performance and in providing a
basis for comparison with other investment alternatives. Yield will fluctuate,
unlike investments that pay a fixed interest rate over a stated period of time.
Investors should give consideration to the quality and maturity of portfolio
securities of the respective investment companies when comparing investments.
Investors should recognize that in periods of declining interest rates, yield
will tend to be somewhat higher than prevailing market rates, and in periods of
rising interest rates, yield will tend to be somewhat lower. Also, when
interest rates are falling, the inflow of net new money from the continuous
sale of its shares will likely be invested in instruments producing lower yields
than the balance of the holdings, thereby reducing the current yield. In
periods of rising interest rates, the opposite can be expected to occur. As of
December 31, 1997, the 30-day yields for Class I, II and III of Bond Portfolio
were 5.96%, 5.47% and 4.79%, respectively. The Intermediate Bond Portfolio had
not commenced operations as of June 30, 1997.
TOTAL RETURNS for each Class of each Portfolio quoted in advertising reflect all
aspects of return, including the effect of reinvesting dividends and capital
gain distributions (if any), and any change in NAV over the period. AVERAGE
ANNUAL TOTAL RETURNS are calculated by determining the growth or decline in
value of a hypothetical historical investment over a stated period, and then
calculating the annually compounded percentage rate that would have produced the
same result if the rate of growth or decline in value had been constant over the
period. For example, a cumulative total return of 100% over ten years would
produce an average annual total return of 7.18%, which is the steady annual rate
of return that would equal 100% growth on a compounded basis in ten years.
While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that performance is not
constant over time, but changes from year to year, and that average annual total
returns represent averaged figures as opposed to the actual year-to-year
performance. Average annual returns covering periods of less than one year are
calculated by determining total return for the period, extending that return for
a full year (assuming that performance remains constant over the year), and
quoting the result as an annual return. The following table shows total returns
as of December 31, 1997 for each Class of the Growth & Income, Capital
Appreciation and Bond Portfolios (the Intermediate Bond Portfolio had not
commenced operations as December 31, 1997):
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<TABLE>
<CAPTION>
Class I Average Class II Average Class III Average
Annual Total Return Annual Total Return Annual Total Return
------------------- ------------------- -------------------
One Since One Since One Since
Year Inception Year Inception Year Inception
---- --------- ---- --------- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Growth & Income Portfolio 36.16% 23.06 % 28.05% 21.28 % 34.68% 21.74 %
Bond Portfolio 9.28% 6.42 % 5.01% 5.29 % 8.02% 5.17 %
Capital Appreciation N/A (1.00)% NA (6.88)% N/A (1.40)%
</TABLE>
CUMULATIVE TOTAL RETURNS reflect the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
as a percentage or as a dollar amount, and may be calculated for a single
investment, a series of investments, or a series of redemptions, over any time
period. Total returns may be broken down into their components of income and
capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration. Where applicable,
sales loads may or may not be included.
Each Portfolio may compare the performance of each of its Classes or the
performance of securities in which it or each of its Classes may invest to other
mutual funds, especially to those with similar investment objectives. These
comparisons may be based on data published by IBC USA (Publications), Inc. of
Ashland, MA or by Lipper Analytical Services, Inc. (Lipper, sometimes referred
to as Lipper Analytical Services), an independent service located in Summit, New
Jersey that monitors the performance of mutual funds. Lipper generally ranks
funds on the basis of total return, assuming reinvestment of distributions, but
does not take sales charges or redemption fees into consideration, and is
prepared without regard to tax consequences. Lipper may also rank funds based
on yield. In addition to the mutual fund rankings, the Portfolio's performance
may be compared to mutual fund performance indices prepared by Lipper. The BOND
FUND REPORT AVERAGES' which is reported in the BOND FUND REPORT, covers taxable
bond funds. When evaluating comparisons to money market funds, investors should
consider the relevant differences in investment objectives and policies.
Specifically, money market funds invest in short-term, high-quality instruments
and seek to maintain a stable $1.00 share price. The Bond Portfolios, however,
invest in longer-term instruments and their share price changes daily in
response to a variety of factors. Investors should give consideration to the
quality and maturity of the portfolio securities of the respective investment
companies when comparing investment alternatives.
MOVING AVERAGES. The Portfolios may illustrate performance using moving
averages. A long-term moving average is the average of each week's adjusted
closing NAV for a specified period. A short-term moving average is the average
of each day's adjusted closing NAV for a specified period. Moving Average
Activity Indicators combine adjusted closing NAVs from the last business day of
each week with moving averages for a specified period to produce indicators
showing when an NAV has crossed, stayed above, or stayed below its moving
average.
NET ASSET VALUE. Charts and graphs using the Portfolios' net asset values,
adjusted net asset values, and benchmark indices may be used to exhibit
performance. An adjusted NAV includes any distributions paid by the Portfolio
and reflects all elements of its return. Unless otherwise indicated, the
Portfolio's adjusted NAVs are not adjusted for sales charges, if any.
From time to time, each Portfolio's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals. For
example, the Portfolios may quote Morningstar, Inc. in its advertising
materials. Morningstar, Inc. is a mutual fund rating service that rates mutual
funds on the basis of risk-adjusted performance.
Each Portfolio may be compared in advertising to certificates of deposits (CDs)
or other investments issued by banks. Mutual funds differ from bank investments
in several respects. For example, the Portfolios may offer greater liquidity or
higher potential returns than CDs, and the Portfolio does not guarantee your
principal or your return.
Ibbotson Associates of Chicago, Illinois (Ibbotson) provides historical returns
of the capital markets in the United States, including common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation
(based on the Consumer Price Index), and combinations of various capital
markets. The performance of these capital markets is based on the return of
different indices.
Growth & Income Portfolio may compare its performance to that of the Standard &
Poor's Composite Index of 500 stocks (S&P 500), a widely recognized, unmanaged
index of the combined performance of the stocks of 500 American companies. The
Capital Appreciation Portfolio may compare its performance to that of the S&P
500, the Standard & Poor's 400 Midcap Index, the Russell 2000 Index or the
Russell 2500 Growth Index. The Bond Portfolio may compare its performance to
that
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of the Lehman Brothers Government Bond Index, an index comprised of all public
obligations of the U.S. Treasury, U.S. government agencies, quasi-federal
corporations, and corporate debt guaranteed by the U.S. government, and the
Lehman Brothers Corporate Bond Index, an index comprised of all public,
fixed-rate, non-convertible investment-grade domestic corporate debt. Issues
included in this index are rated at least Baa by Moody's or BBB by S&P, or in
the case of non-rated bonds, BBB by Fitch Investors Service. The Government
Bond Index and the Corporate Bond Index are combined to form the
Government/Corporate Bond Index.The Intermediate Bond Portfolio may compare its
performance to that of the Lehman Brothers Government/Corporate Intermediate
Bond Index, which consists of the Government/Corporate Bond Index securities
with maturities less than ten years. Each Portfolio may also quote mutual fund
rating services in its advertising materials, including data from a mutual fund
rating service which rates mutual funds on the basis of risk adjusted
performance. Because the fees for Class II and Class III are higher than the
fees for Class I, yields and returns for those classes will be lower than for
Class I.
Each Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, the
investor invests a fixed dollar amount at periodic intervals, thereby purchasing
fewer shares when prices are high and more shares when prices are low. While
such a strategy does not assure a profit nor guard against loss in a declining
market, the investor's average cost per share can be lower than if fixed numbers
of shares had been purchased at those intervals. In evaluating such a plan,
investors should consider their ability to continue purchasing shares through
periods of low price levels.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The following holiday closings have been scheduled: Veterans' Day, Thanksgiving
Day, Christmas Day, New Year's Day, Dr. Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, and Columbus Day.
Although First Tennessee expects the same holiday schedule to be observed in the
future, the New York Stock Exchange and the Federal Reserve Bank of New York
(New York Federal Reserve) may modify their holiday schedules at any time.
If the Trustees determine that existing conditions make cash payment
undesirable, redemption payments may be made in whole or in part in securities
or other property, valued for this purpose as they are valued in computing each
Portfolio's NAV. Shareholders receiving securities or other property on
redemption may realize a gain or loss for tax purposes and will incur any costs
of sale, as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, each Portfolio is required to give
shareholders at least 60 days' notice prior to terminating or modifying each
Portfolio's exchange privilege. Under Rule 11a-3, the 60-day notification
requirement may be waived if (i) the only effect of a modification would be to
reduce or eliminate an administrative fee, redemption fee or deferred sales
charge ordinarily payable at the time of exchange, or (ii) under extraordinary
circumstances, a Portfolio temporarily suspends the offering of shares as
permitted under the 1940 Act or by the SEC or because it is unable to invest
amounts effectively in accordance with its investment objective and policies.
This exchange limit may be modified for accounts in certain institutional
retirement plans to conform to plan exchange limits and Department of Labor
Regulations.
ADDITIONAL CLASS II AND CLASS III INFORMATION
SYSTEMATIC INVESTING PROGRAM. Investors can make regular investments in Class
II and Class III with Systematic Investing by completing the appropriate section
on the account application and attaching a voided personal check. If the bank
account is jointly owned, make sure that all owners sign. Investments may be
made monthly by automatically deducting $25 or more from your checking account.
This monthly purchase amount may be changed at any time. There is a $250
minimum initial investment requirement for this option. For employees of First
Tennessee Bank National Association or any of its affiliates, who participate in
the Systematic Investing Program, the minimum initial investment requirement is
$50. Accounts will be drafted on or about the first business day of every
month. Systematic Investing may be canceled at any time without payment of a
cancellation fee. Investors will receive a confirmation from their securities
broker or financial institution (Investment Professional), or from the Transfer
Agent for every transaction, and a debit entry will appear on your bank
statement.
SYSTEMATIC WITHDRAWAL PLAN. Investors can have monthly, quarterly or
semi-annual checks sent from their account to you, to a person named by them, or
to their bank checking account. The Systematic Withdrawal Plan payments are
drawn from share redemptions and must be in the amount of $100 or more per
Portfolio per transaction. If Systematic Withdrawal Plan redemptions exceed
income dividends earned on shares, an account eventually may be exhausted.
Contact the Investment Professional for more information.
12
<PAGE>
DISTRIBUTIONS AND TAXES
DIVIDENDS. A portion of the income distributed by the Equity Portfolios may
qualify for the dividends-received deduction available to corporate
shareholders to the extent that the Portfolios' income is derived from
qualifying dividends. Because the Portfolios may also earn other types of
income, such as interest, income from securities loans, non-qualifying
dividends and short-term capital gains, the percentage of dividends from each
Portfolio that qualifies for the deduction will generally be less than 100%.
Each Portfolio will notify corporate shareholders annually of the percentage
of portfolio dividends which qualify for the dividends received deduction.
Because the income earned by the Bond Portfolios is primarily derived from
interest, dividends from each such Portfolio generally will not qualify for
the dividends-received deduction available to corporations. A portion of
each Portfolio's dividends derived from certain U.S. government obligations
may be exempt from state and local taxation. Gains (losses) attributable to
foreign currency fluctuations are generally taxable as ordinary income and
therefore increase (decrease) dividend distributions. Each Portfolio will
send each shareholder a notice in January describing the tax status of
dividends and capital gain distributions for the prior year.
CAPITAL GAIN DISTRIBUTIONS. Long-term capital gains realized by each Portfolio
on the sale of securities, if any, and distributed to shareholders are federally
taxable as long-term capital gains regardless of the length of time that
shareholders have held their shares. If a shareholder receives a long-term
capital gain distribution on shares of each Portfolio, and such shares are held
less than six months and are sold at a loss, the portion of the loss equal to
the amount of the long-term capital gain distribution will be considered a
long-term loss for tax purposes.
Short-term capital gains distributed by each Portfolio, if any, are taxable to
shareholders as dividends, not as capital gains. Distributions from short-term
capital gains do not qualify for the dividends received deduction.
FOREIGN TAXES. Foreign governments may withhold taxes on dividends and interest
paid with respect to foreign securities. Because each Portfolio does not
currently anticipate that securities of foreign corporations will constitute
more than 50% of each Portfolio's total assets at the end of its fiscal year,
shareholders should not expect to claim a foreign tax credit or deduction on
their federal income tax returns with respect to foreign taxes withheld.
TAX STATUS OF THE TRUST. Each Portfolio has qualified and intends to qualify as
a "regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the Code), so that each Portfolio will not be liable for
federal income or excise taxes on net investment income or capital gains to the
extent that these are distributed to shareholders in accordance with applicable
provisions of the Code. In order to qualify as a regulated investment company
and avoid being subject to federal income or excise taxes, each Portfolio
intends to distribute substantially all of its net investment income and net
realized capital gains within each calendar year as well as on a fiscal year
basis. Each Portfolio also intends to comply with other tax rules applicable to
regulated investment companies, including a requirement that capital gains from
the sale of securities held for less than three months must constitute less than
30% of each Portfolio's gross income for each fiscal year.
Gains from some forward currency contracts and options are included in this 30%
calculation, which may limit each Portfolio's investments in such instruments.
If the Portfolios purchase shares in certain foreign investment entities, called
passive foreign investment companies (PFICs), they may be subject to U.S.
federal income tax on a portion of any excess distribution or gain from the
disposition of such shares. Interest charges may also be imposed on the
Portfolios with respect to deferred taxes arising from such distributions or
gains.
OTHER TAX INFORMATION. The information above is only a summary of some of the
tax consequences generally affecting each Portfolio and its shareholders, and no
attempt has been made to discuss individual tax consequences. In addition to
federal income taxes, shareholders may be subject to state and local taxes on
distributions received from each Portfolio. Investors should consult their tax
advisors to determine whether each Portfolio is suitable to their particular tax
situation.
Federal income tax will be withheld at a 20% rate on any eligible rollover
distributions that are not transferred directly to another qualified plan or
IRA. Actual income tax may be higher or lower and will be due when tax forms
for the year are filed. Taxes will not be withheld in cases of direct rollover
into an IRA or another qualified plan.
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust are listed below. Each Trustee
or officer that is an "interested person" (as defined in the 1940 Act) by virtue
of his affiliation with First Tennessee or ALPS, is indicated by an asterisk
(*).
13
<PAGE>
THOMAS M. BATCHELOR, Trustee, 4325 Woodcrest Drive, Memphis, TN, who presently
operates a management consultant business on a limited basis, retired after
owning and operating two General Insurance Companies agencies for over thirty
years. He was one of the founders and served as a director of First American
State Bank in Memphis, TN (now part of United American Bank of Memphis). He
currently serves as Chairman, Memphis Union Mission, TN, as well as a charity
and a non-profit foundation.
JOHN A. DECELL, Trustee, 5178 Wheelis Dr., Suite 2, Memphis, TN is Proprietor,
DeCell & Company (real estate and business consulting), and President of Capital
Advisers, Inc. (real estate consulting and asset management).
*L. R. JALENAK, JR., Trustee, 6094 Apple Tree Drive, Suite 11, Memphis, TN was
Chairman of the Board (1990 - 1993 (retired)), Cleo Inc. (manufacturer of
gift-related products), a Gibson Greetings Company. Mr. Jalenak is also a
Director of Perrigo Company (1988 - present), Lufkin Industries (1990 -
present), Dyersburg Corporation (1990 - present), was President and CEO (until
1990) of Cleo Inc., and was a Director of Gibson Greetings, Inc. from 1983 to
1991.
LARRY W. PAPASAN, Trustee, 5114 Winton Place, Memphis, TN is President of Smith
& Nephew, Inc. (orthopedic implants). Mr. Papasan is a former Director of
First American National Bank of Memphis and The West Tennessee Board of First
American National Bank (1988 - 1991) and was President of Memphis Light Gas and
Water Division of the City of Memphis (1984 - 1991). Mr. Papasan is also a
member of the Board of the Plough Foundation, a non-profit trust.
*RICHARD C. RANTZOW, President and Trustee, 5790 Shelby Avenue, Memphis, TN is
Vice President/Director, Ron Miller Associates, Inc. (manufacturer). Mr.
Rantzow was Managing Partner (until 1990) of the Memphis office of Ernst &
Young.
*JEREMY O. MAY, Treasurer, is a Fund Controller at ALPS Mutual Funds Services,
Inc. (ALPS), the Administrator and Distributor. Prior to joining ALPS, Mr. May
was an auditor with Deloitte & Touche LLP in their Denver office.
*JAMES V. HYATT, Secretary, is General Counsel of ALPS . Prior to joining ALPS,
Mr. Hyatt served as Senior Legal Counsel for Fidelity Investments and Clerk for
Fidelity Management Trust Company.
The Trustees of the Trust each receive from the Trust an annual fee of $4,000
and a fee in the amount of $1,250 for attending each regularly scheduled
quarterly meeting of the Trustees and $500 for each unscheduled meeting. The
Trustees were compensated as follows for their services provided during the
Trust's fiscal year ended June 30, 1997:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Pension Or Aggregate
Retirement Estimated Compensation
Aggregate Benefits Annual From The Trust
Compensation Accrued As Benefits and Fund
From the Part of Fund Upon Complex Paid
Trust Expenses Retirement to Trustees
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Batchelor
Trustee $10,000 $0 $0 $10,000
- ------------------------------------------------------------------------------------
John A. DeCell
Trustee $10,000 $0 $0 $10,000
- ------------------------------------------------------------------------------------
L.R. Jalenak, Jr.
Trustee $10,000 $0 $0 $10,000
- ------------------------------------------------------------------------------------
Larry W. Papasan,
Trustee $8,750 $0 $0 $8,750
- ------------------------------------------------------------------------------------
Richard C. Rantzow
Trustee $10,000 $0 $0 $10,000
- ------------------------------------------------------------------------------------
</TABLE>
As of September 30, 1997, the officers and Trustees of the Trust owned less than
1% of the outstanding shares of any Portfolio.
14
<PAGE>
INVESTMENT ADVISORY AGREEMENTS
The Growth & Income, Bond and Intermediate Bond Portfolios employ First
Tennessee Bank National Association, Memphis, Tennessee, to furnish investment
advisory and other services to each such Portfolio. Under the Investment
Advisory and Management Agreement with each such Portfolio, First Tennessee is
authorized to appoint one or more sub-advisers at First Tennessee's expense.
Highland Capital Management Corp., Memphis, Tennessee, acts as Sub-Adviser to
the Growth & Income, Bond and Intermediate Bond Portfolios. Subject to the
direction of the Trustees and of First Tennessee, the Sub-Adviser will direct
the investments of these Portfolios in accordance with their respective
investment objective, policies and limitations.
First Tennessee and Investment Advisers, Inc., Minneapolis, Minnesota, act as
Co-Advisers to the Capital Appreciation Portfolio. Subject to the direction of
the Trustees and monitoring by First Tennessee, IAI directs the investments of
this Portfolio in accordance with the Portfolio's investment objective, policies
and limitations.
In addition to First Tennessee's and IAI's fees and the fees payable to the
Transfer Agent, Pricing and Accounting Agent, and to the Administrator, each
Portfolio pays for all its expenses, without limitation, that are not assumed by
these parties. Each Portfolio pays for typesetting, printing and mailing of
proxy material to existing shareholders, legal expenses, and the fees of the
custodian, auditor and Trustees. Other expenses paid by each Portfolio include:
interest, taxes, brokerage commissions, the Portfolio's proportionate share of
insurance premiums and Investment Company Institute dues, and costs of
registering shares under federal and state securities laws. Each Portfolio also
is liable for such nonrecurring expenses as may arise, including costs of
litigation to which each Portfolio is a party, and its obligation under the
Declaration of Trust to indemnify its officers and Trustees with respect to such
litigation.
For managing the investment and business affairs of the Growth & Income, Capital
Appreciation, Bond and Intermediate Bond Portfolios, First Tennessee is entitled
to receive a monthly management fee at the annual rate of .65%, .15%, .55% and
.50% of each Portfolio's average net assets, respectively. For the fiscal years
ended June 30, 1997, 1996 and 1995, First Tennessee earned $1,520,039,
$1,076,198 and $686,850 from the Growth & Income Portfolio, respectively, before
waiving $350,778, $358,250 and $532,648 of its fees, respectively. First
Tennessee has voluntarily agreed to waive its fee to .50%, .00%, .15% and .00%
of the average net assets of the Growth & Income, Capital Appreciation, Bond and
Intermediate Bond Portfolios, respectively. The fee waivers may be discontinued
at any time. For the fiscal years ended June 30, 1997, 1996 and 1995, First
Tennessee earned $658,049, $563,748 and $447,309 from the Bond Portfolio,
respectively, before waiving $478,581, $482,559 and $447,309 of its fees,
respectively. The Capital Appreciation and Intermediate Bond Portfolios had not
commenced operations as of June 30, 1997.
Under its Investment Advisory and Management Agreement with each of the Growth &
Income, Bond and Intermediate Bond Portfolios, First Tennessee is authorized, at
its own expense, to hire sub-advisers to provide investment advice to each such
Portfolio. The Sub-Adviser, is entitled to receive from First Tennessee a
monthly sub-advisory fee at the annual rate of .38% of Growth & Income
Portfolio's average net assets, .33% of Bond Portfolio's average net assets and
.30% of Intermediate Bond Portfolio's average net assets. As Co-Adviser to the
Capital Appreciation Portfolio, IAI is entitled to receive .70% of that
Portfolio's average net assets up to $50 million and .65% thereafter. Under the
terms of each sub-advisory agreement with First Tennessee and IAI's Investment
Advisory and Management Agreement with the Trust, the Sub-Adviser, subject to
the supervision of First Tennessee, and IAI supervise the day-to-day operations
of their respective Portfolios and provide investment research and credit
analysis concerning their respective Portfolios' investments, conduct a
continual program of investment of their respective Portfolios' assets and
maintain the books and records required in connection with their duties under
their advisory agreements. In addition, the Sub-Adviser and IAI keep First
Tennessee informed of the developments materially affecting each Portfolio. The
Sub-Adviser is currently waiving some or all of the fees it is entitled to
receive from First Tennessee.
ADMINISTRATION AGREEMENT AND OTHER CONTRACTS
ADMINISTRATOR AND DISTRIBUTOR. ALPS Mutual Funds Services, Inc. (ALPS, the
Administrator and Distributor), is the Administrator and Distributor to each
Portfolio. ALPS, a Colorado corporation, is a broker-dealer registered under the
Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc.
As the Administrator, ALPS assists in each Portfolio's administration and
operation, including, but not limited to, providing office space and various
legal and accounting services in connection with the regulatory requirements
applicable to each Portfolio. ALPS is entitled to and receives from each
Portfolio a monthly fee at the annual rate of .15% of average net assets.
15
<PAGE>
For the fiscal years ended June 30, 1997 and 1996, ALPS earned administration
fees in the amount of $350,778 and $248,353 from the Growth & Income Portfolio.
For the fiscal years ended June 30, 1997 and 1996, ALPS earned administration
fees in the amount of $179,468 and $153,749 from the Bond Portfolio,
respectively. The Capital Appreciation and Intermediate Bond Portfolios had not
commenced operations as of June 30, 1997. For the fiscal year ended June 30,
1995, National Financial Services Corporation (NFSC) served as the Administrator
and Distributor for the Growth & Income and Bond Portfolios. As Administrator,
NFSC earned fees from each Portfolio computed daily and payable monthly at an
annual rate of .20% of average net assets through $100 million, .15% above $100
million and through $200 million, and .10% over $200 million. For the fiscal
year ended June 30, 1995, NFSC earned administration fees in the amount of
$208,504 and $162,658 from the Growth & Income Portfolio and the Bond Portfolio,
respectively.
First Tennessee serves as the Co-Administrator for each Portfolio. As the
Co-Administrator, First Tennessee assists in each Portfolio's operation,
including, but not limited to, providing non-investment related research and
statistical data and various operational and administrative services. First
Tennessee is entitled to receive from each Portfolio a monthly fee at the annual
rate of .05% of average net assets. For the fiscal years ended June 30, 1997 and
1996, First Tennessee earned co-administration fees in the amount of $116,926
and $82,965 from the Growth & Income Portfolio, respectively before waiving $0
and $34,639 of its fees, respectively. For the fiscal years ended June 30, 1997
and 1996, First Tennessee earned co-administration fees in the amount of $59,823
and $51,198 from the Bond Portfolio, respectively, before waiving $0 and
$23,882, respectively.
As the Distributor, ALPS sells shares of Class I as agent on behalf of the Trust
at no additional cost to the Trust. Class III is obligated to pay ALPS monthly
a 12b-1 fee at the annual rate of .75% of average net assets, all or a portion
of which may be paid out to broker-dealers or others involved in the
distribution of Class III shares. See "Administration Agreements and contracts -
Distribution Plan." Classes II and III pay shareholder servicing fees to
Investment Professionals at an annual rate of .25% of average net assets as more
fully described under the section "Administration Agreements and Other Contracts
- - Shareholder Services Plans". First Tennessee and its affiliates neither
participate in nor are responsible for the underwriting of Portfolio shares.
Consistent with applicable law, affiliates of First Tennessee may receive
commissions or asset-based fees.
TRANSFER AGENT, FUND ACCOUNTING AND CUSTODIAN. Chase Global Funds Services
Company (CGFSC or the Transfer Agent), provides transfer agent and shareholder
services for each Portfolio, and calculates the NAV and dividends of each Class
of each Portfolio and maintains the portfolio and general accounting records.
For such services, CGFSG is entitled to receive from each Class of each
Portfolio, fees at the annual rate of .07% of each Class' average net assets
through $50 million and .05% over $50 million plus out-of-pocket expenses. Chase
Manhattan Bank (Chase or the Custodian) is Custodian of the assets of the
Portfolios. The Custodian is responsible for the safekeeping of the Portfolio's
assets and the appointment of sub-custodian banks and clearing agencies. For
such services, Chase is entitled to receive from each Portfolio fees at the
annual rate of .018% of average net assets plus out-of-pocket expenses. The
Custodian takes no part in determining the investment policies of the Portfolios
or in deciding which securities are purchased or sold by the Portfolios. The
Portfolios, however, may invest in obligations of the Custodian and may purchase
securities from or sell securities to the Custodian.
DISTRIBUTION PLAN. The Trustees of the Trust have adopted a Distribution Plan
on behalf of Class III of each Portfolio (each Class III Plan) pursuant to Rule
12b-1 (the Rule) under the 1940 Act. The Rule provides in substance that a
mutual fund may not engage directly or indirectly in financing any activity that
is intended primarily to result in the sale of shares of the fund except
pursuant to a plan adopted by the fund under the Rule. The Trustees have
adopted the Plans to allow each class and ALPS to incur distribution expenses.
ALPS receives a Distribution and Service fee (12b-1 fee) of up to 0.75% of the
average net assets of Class III of each Portfolio. (These fees are in addition
to the fees paid to ALPS under the Administration Agreement.) The Trust or
ALPS, on behalf of Class III of each Portfolio, may enter into servicing
agreements (Service Agreements) with banks, broker-dealers or other institutions
(Agency Institutions). Each Class III Plan provides that ALPS may use its fees
and other resources to make payments to Agency Institutions for performance of
distribution-related services, including those enumerated above. The Service
Agreements further provide for compensation to broker-dealers for their efforts
to sell Class III shares. The distribution-related services include, but are
not limited to, the following: formulation and implementation of marketing and
promotional activities, such as mail promotions and television, radio,
newspaper, magazine and other mass media advertising; preparation, printing and
distribution of sales literature; preparation, printing and distribution of
prospectuses of each Portfolio and reports to recipients other than existing
shareholders of each Portfolio; obtaining such information, analyzes and reports
with respect to marketing and promotional activities as ALPS may from time to
time, deem advisable; making payments to securities dealers and others engaged
in the sales of Class III Shares; and providing training, marketing and support
to such dealers and others with respect to the sale of Class III Shares. Each
Class III Plan recognizes ALPS may use its fees and other resources to pay
expenses associated with the promotion and administration of activities
primarily intended to result in the sale of shares.
16
<PAGE>
Each Plan has been approved by the Trustees, including the majority of
disinterested Trustees. As required by the Rule, the Trustees carefully
considered all pertinent factors relating to the implementation of the Plans
prior to its approval, and have determined that there is a reasonable
likelihood that each Plan will benefit each Portfolio and its shareholders.
To the extent that the Class III Plans give ALPS greater flexibility in
connection with the distribution of shares of the class, additional sales of
shares may result.
The Class III Plans could be construed as compensation plans because ALPS is
paid a fixed fee and is given discretion concerning what expenses are payable
under the Plans. ALPS may spend more for marketing and distribution than it
receives in fees and reimbursements from each Portfolio. However, to the extent
fees received exceed expenses, including indirect expenses such as overhead,
ALPS could be said to have received a profit. For example, if ALPS pays $1 for
Class III distribution-related expenses and receives $2 under a Class III Plan,
the $1 difference could be said to be a profit for ALPS. (Because ALPS is
reimbursed for its out-of-pocket direct promotional expenses, a Class III Plan
also could be construed as a reimbursement plan. Until the issue is resolved by
the SEC, unreimbursed expenses incurred in one year will not be carried over to
a subsequent year.) If after payments by ALPS for marketing and distribution
there are any remaining fees attributable to a Class III Plan, these may be used
as ALPS may elect. Since the amount payable under a Class III Plan will be
commingled with ALPS's general funds, including the revenues it receives in the
conduct of its business, it is possible that certain of ALPS's overhead expenses
will be paid out of Plan fees and that these expenses may include items such as
the costs of leases, depreciation, communications, salaries, training and
supplies. Each Portfolio believes that such expenses, if paid, will be paid
only indirectly out of the fees being paid under the Plan.
For the fiscal year ended June 30, 1997, Class III of the Growth & Income
Portfolio and the Bond Portfolio paid distribution fees in the amounts of
$314,518 and $21,842, respectively. All of these fees were paid as compensation
to dealers. The Capital Appreciation and Bond Portfolios had not commenced
operations as of June 30, 1997.
SHAREHOLDER SERVICES PLANS. In addition to the Rule 12b-1 Distribution Plans
described above, Class II and Class III have adopted Shareholder Services Plans
to compensate Agency Institutions for individual shareholder services and
account maintenance. These functions include: maintaining account records for
each shareholder who beneficially owns Class II or Class III Shares; answering
questions and handling correspondence from shareholders about their accounts;
handling the transmission of funds representing the purchase price or redemption
proceeds; issuing confirmations for transactions in Class II or Class III Shares
by shareholders; assisting customers in completing application forms;
communicating with the transfer agent; and providing account maintenance and
account level support for all transactions. For these services the
participating Agency Institutions are paid a service fee at the annual rate of
up to .25% of average net assets of Class II and Class III.
For the fiscal year ended June 30, 1997, the Growth & Income Portfolio and the
Bond Portfolio paid shareholder servicing fees in the following amounts (the
Capital Appreciation and Intermediate Bond Portfolios had not commenced
operations as of June 30, 1997):
Growth & Income Bond
Portfolio Portfolio
--------- ---------
Class II $ 17,386 $1,260
Class III $104,839 $7,281
Banking laws and regulations, including the Glass-Steagall Act as currently
interpreted by the Board of Governors of the Federal Reserve System, prohibit a
bank holding company registered under the Bank Holding Company Act of 1956 or
any affiliate thereof from sponsoring, organizing, controlling, or distributing
the shares of a registered, open-end investment company continuously engaged in
the issuance of its shares and prohibit banks generally from issuing,
underwriting, selling or distributing securities. The same laws and regulations
generally permit a bank or bank affiliate to act as an investment adviser and
co-administrator and to purchase shares of the investment company as agent for
and upon the order of a customer. In the Trust's and Investment Adviser's
opinion, banks and their affiliates may be paid for investment advisory,
shareholder servicing, recordkeeping and co-administration functions. Changes
in federal or state statutes and regulations pertaining to the permissible
activities of banks and their affiliates or subsidiaries, as well as further
judicial or administrative decisions or interpretations, could prevent a bank
from continuing to perform all or a part of the contemplated services. If a
bank or its affiliates were prohibited from so acting, the Trustees would
consider what actions, if any, would be necessary to continue to provide
efficient and effective shareholder services. In such event, changes in the
operation of the Portfolios might occur, including possible termination of any
automatic investment or redemption or other services then being provided by any
bank. It is not expected that shareholders would suffer any adverse financial
consequences as a result of any of these occurrences. The Portfolios may
execute portfolio transactions with and purchase securities
17
<PAGE>
issued by depository institutions that receive payments under the Plans. No
preference will be shown in the selection of investments for the instruments of
such depository institutions. In addition, state securities laws on this issue
may differ from the interpretations of federal law expressed herein, and banks
and other financial institutions may be required to register as dealers pursuant
to state law.
DESCRIPTION OF THE TRUST
TRUST ORGANIZATION. Growth & Income Portfolio and Bond Portfolio are Portfolios
of First Funds (formerly The Masters Group of Mutual Funds), an open-end
management investment company organized as a Massachusetts business trust by a
Declaration of Trust dated March 6, 1992, as amended and restated on September
4, 1992. The Declaration of Trust permits the Trustees to create additional
Portfolios and Classes. There are nine Portfolios of the Trust, each with three
Classes.
The assets of the Trust received for the issue or sale of shares of each
Portfolio and all income, earnings, profits, and proceeds thereof, subject only
to the rights of creditors, are specially allocated to such Portfolio, and
constitute the underlying assets of such Portfolio. The underlying assets of
each Portfolio are segregated on the books of account, and are to be charged
with the liabilities with respect to such Portfolio and with a share of the
general expenses of the Trust. Expenses with respect to the Trust are to be
allocated in proportion to the asset value of the respective Portfolios except
where allocations of direct expense can otherwise be fairly made. The officers
of the Trust, subject to the general supervision of the Trustees, have the power
to determine which expenses are allocable to a given Portfolio, or which are
general or allocable to all of the Portfolios. In the event of the dissolution
or liquidation of the Trust, shareholders of a Portfolio are entitled to receive
as a class the underlying assets of such Portfolio available for distribution.
SHAREHOLDER AND TRUSTEE LIABILITY. The Trust is an entity of the type commonly
known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The Declaration of Trust
provides that the Trust shall not have any claim against shareholders except for
the payment of the purchase price of shares and requires that each agreement,
obligation, or instrument entered into or executed by the Trust or the Trustees
shall include a provision limiting the obligations created thereby to the Trust
and its assets. The Declaration of Trust provides for indemnification out of
each Portfolio's property of any shareholders held personally liable for the
obligations of each Portfolio. The Declaration of Trust also provides that each
Portfolio shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of a Portfolio and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Portfolio itself
would be unable to meet its obligations. The Trustees believe that, in view of
the above, the risk of personal liability to shareholders is remote.
The Declaration of Trust further provides that the Trustees, if they have
exercised reasonable care, will not be liable for any neglect or wrongdoing, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
As of September 30, 1997, the following shareholders owned more than 5% of the
outstanding shares of the indicated Class of the Portfolios:
Name and Address Portfolio Class % of Class Held
- ---------------- --------- ----- ---------------
First Tennessee National Corp. Growth & Income I 47%
D/B Pension Plan Bond I 57%
Memphis, TN Capital Appreciation I 92%
First Tennessee National Corp. Growth & Income I 10%
401K Savings - Fund A Bond I 6%
Memphis, TN Capital Appreciation I 6%
Memphis Commerce Square Growth & Income II 13%
FBO National Bank of Commerce
Memphis, TN
Giobbi Turner Trust #1 Bond II 26%
1277 East Massey
Memphis, TN 38120
18
<PAGE>
Janet Forbes Misner Trust Bond II 20%
76 Walnut Grove Circle
Memphis, TN 38117
Harvey B. Jackson, IRT Bond II 16%
4274 Fox Race Cv.
Memphis, TN 38141
Bank of Bolivar County PS Fixed Bond II 12%
P.O. Box 88
Shelby, MS 38774
James G. Wills Rollover IRA Bond II 11%
241 Sea Marsh Drive
Kiawah Island, SC 29455
Charles S. Hughs Rollover IRT Bond II 10%
P.O. Box 771596
Memphis, TN 38177
The Smith Trust Bond II 6%
Joe G. Bagwell, Trustee
8560 Kingston Pike Ste C-202
Knoxville, TN 38919
Effie W. Porter and Bond II 5%
Leslie F. Heun, JT TEN
6920 Amberly Rd.
Memphis, TN 38119
VOTING RIGHTS. Each Portfolio's capital consists of shares of beneficial
interest. The shares have no preemptive or conversion rights; the voting and
dividend rights, the right of redemption, and the privilege of exchange are
described in the Prospectus. Shares are fully paid and nonassessable, except as
set forth under the heading "Shareholder and Trustee Liability" above.
Shareholders representing 10% or more of the Trust or a Portfolio may, as set
forth in the Declaration of Trust, call meetings of the Trust or a Portfolio for
any purpose related to the Trust or Portfolio, as the case may be, including, in
the case of a meeting of the entire Trust, the purpose of voting on removal of
one or more Trustees. The Trust or any Portfolio may be terminated upon the
sale of its assets to another open-end management investment company, or upon
liquidation and distribution of its assets, if approved by vote of the holders
of a majority of the outstanding shares of the Trust or that Portfolio. If not
so terminated, the Trust and each Portfolio will continue indefinitely.
CLASSES. Pursuant to the Declaration of Trust, the Trustees have authorized
additional Classes of shares for each Portfolio of the Trust. Although the
investment objective for each separate Class of a particular Portfolio is the
same, fee structures are different such that one Class may have a higher yield
than another Class of the same Portfolio at any particular time. Shareholders
of the Trust will vote together in the aggregate and not separately by
Portfolio, or by Class thereof, except as otherwise required by law or when the
Trustees determine that the matter to be voted upon affects only the interests
of the shareholders of a particular Portfolio or a Class thereof. Pursuant to a
vote by the Board of Trustees, the Trust has adopted Rule 18f-3 under the Act
and has issued multiple Classes of shares with respect to each of its
Portfolios. Accordingly, the rights, privileges and obligations of each such
Class will be determined in accordance with such rule.
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 160 Federal Street, Boston,
Massachusetts, serves as the Trust's independent accountant. The independent
accountant examines the annual financial statements for the Trust and provides
other audit, tax, and related services.
FINANCIAL STATEMENTS
The Growth & Income and Bond Portfolios' financial statements and financial
highlights for the fiscal year ended June 30, 1997 and the six months ended
December 31, 1997 are included in the Trust's Annual and Semi-Annual Reports,
respectively, which are separate reports supplied independent of this
Statement of Additional Information. The Capital Appreciation Portfolio's
unaudited financial statements and financial highlights for the fiscal period
ended December 31, 1997 are included in the Trust's Semi-Annual Report.
The Intermediate Bond Portfolio had not commenced operations as of
December 31, 1997. The Growth & Income, Capital Appreciation and Bond
Portfolios' financial statements and financial highlights are incorporated
herein by reference.
19
<PAGE>
APPENDIX
DOLLAR-WEIGHTED AVERAGE MATURITY for Bond Portfolio is derived by multiplying
the value of each investment by the number of days remaining to its maturity,
adding these calculations, and then dividing the total by the value of the
Portfolio. An obligation's maturity is typically determined on a stated final
maturity basis, although there are some exceptions to this rule.
For example, if it is probable that the issuer of an instrument will take
advantage of a maturity-shortening device, such as a call, refunding, or
redemption provision, the date on which the instrument will probably be called,
refunded, or redeemed may be considered to be its maturity date. Also, the
maturities of mortgage-backed securities and some asset-backed securities, such
as collateralized mortgage obligations, are determined on a weighted average
life basis, which is the average time for principal to be repaid. For a
mortgage security, this average time is calculated by assuming a constant
prepayment rate for the life of the mortgage. The weighted average life of
these securities is likely to be substantially shorter than their stated final
maturity.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS:
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protections may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered as medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through Baa in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S CORPORATE BOND RATINGS:
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated debt issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in highest-rated categories.
The ratings from AA to BBB may be modified by the addition of a plus or minus to
show relative standing within the major rating categories.
20
<PAGE>
PART C. OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements for the fiscal year ended June 30, 1997 and the six
months ended December 31, 1997 for the Growth & Income and Bond Portfolios
are incorporated herein by reference to the Trust's Annual Report on
Form N-30D dated June 30, 1997 and Semi-Annual Report (unaudited) dated
December 31, 1997, respectively.
Unaudited Financial Highlights for the Capital Appreciation Portfolio for
the period ended December 31, 1997 included in Part A for such Portfolio
are filed herein. Unaudited Financial Statements for such Portfolio for
the period ended December 31, 1997 are incorporated by reference to the
Trust's Semi-Annual Report dated December 31, 1997.
(b) Exhibits:
(1) (a) Declaration of Trust dated as of March 6, 1992 is incorporated
herein by reference to Exhibit 1 to the Trust's Registration
Statement.
(b) Supplement to the Declaration of Trust effective April 24, 1992
is incorporated herein by reference to Exhibit 1(b) to Pre-
Effective Amendment No. 1 to the Trust's Registration Statement.
(c) Amended and Restated Declaration of Trust dated is of September
4, 1992 is incorporated herein by reference to Exhibit 1 (c) to
Post-Effective Amendment No. 1 to the Trust's Registration
Statement.
(d) Supplement to The Declaration of Trust effective August 1, 1993
is incorporated herein by reference to Exhibit 1 (d) to Post-
Effective Amendment No. 4 to the Trust's Registration Statement.
(2) (a) Bylaws of the Trust are incorporated herein by reference to
Exhibit 2 to Post-Effective Amendment No. 1 to the Trust's
Registration Statement.
(b) Amendment to the Bylaws dated November 17, 1992 is incorporated
herein by reference to Exhibit 2(a) to Post-Effective Amendment
No. 1 to the Trust's Registration Statement.
(3) Not Applicable.
(4) Not Applicable.
(5) (a) Investment Advisory and Management Agreements between the First
Funds on behalf of U.S. Treasury Money Market Portfolio, U.S.
Government Money Market Portfolio, and Municipal Money Market
Portfolio, and First Tennessee Bank National Association dated
September 4, 1992 are incorporated herein by reference to Exhibit
5(a) to Post-Effective Amendment No. 1 to the Trust's
Registration Statement.
(b) Sub-Advisory Agreements between Provident Institutional
Management Corporation and First Tennessee Bank National
Association on behalf of U.S. Treasury Money Market Portfolio,
U.S. Government Money Market Portfolio, and Municipal Money
Market Portfolio, dated September 4, 1992 are incorporated herein
by reference to Exhibit 5(b) to Post-Effective Amendment No. 1 to
the Trust's Registration Statement.
(c) Investment Advisory and Management Agreement between the First
Funds on behalf of Cash Reserve Portfolio, Total Return Equity
Portfolio, and Total Return Fixed Income Portfolio, and First
Tennessee Bank National Association dated February 15, 1993 are
incorporated herein by reference to Exhibit 5(c) to Post-
Effective Amendment No. 3 to the Trust's Registration Statement.
(d) Sub-Advisory Agreements between First Tennessee Investment
Management, Inc. and First Tennessee Bank National Association on
behalf of Total Return Equity Portfolio and Total Return Fixed
Income Portfolio, dated May 4, 1993 are incorporated herein by
reference to Exhibit 5(d) to Post-Effective
<PAGE>
Amendment No. 5 to the Trust's Registration Statement.
(e) Investment Advisory and Management Agreement between First Funds
on behalf of Tennessee Tax-Free Portfolio and First Tennessee
Bank National Association dated October 25, 1995 is incorporated
herein by reference to Exhibit 5(e) to Post-Effective Amendment
No. 9 to the Trust's Registration Statement.
(f) Form of Co-Investment Advisory and Management Agreement between
First Funds on behalf of Capital Appreciation Portfolio and First
Tennessee Bank National Association is incorporated herein by
reference to Exhibit 5(f) to Post-Effective Amendment No. 11
to the Trust's Registration Statement.
(g) Form of Investment Advisory and Management Agreement between
First Funds on behalf of Intermediate Bond Portfolio is
incorporated herein by reference to Exhibit 5(g) to Post-
Effective Amendment No. 10 to the Trust's Registration Statement.
(h) Form of Sub-Advisory Agreement between First Funds on behalf of
Intermediate Bond Portfolio and Highland Capital Management is
incorporated herein by reference to Exhibit 5(h) to Post-
Effective Amendment No. 10 to the Trust's Registration Statement.
(i) Form of Investment Advisory and Management Agreement between
First Funds on behalf of Capital Appreciation Portfolio and
Investment Advisers, Inc. is incorporated herein by reference
to Exhibit 5(i) to Post-Effective Amendment No. 11 to the
Trust's Registration Statement.
(6) (a) General Distribution Agreement between First Funds on behalf of
all Portfolios, and ALPS Mutual Funds Services, Inc., dated
July 1, 1995 is incorporated herein by reference to Exhibit 6(a)
to Post-Effective Amendment No. 8 to the Trust's Registration
Statement.
(b) Administration Agreement between First Funds on behalf of all
Portfolios, and ALPS Mutual Funds Services, Inc., dated July 1,
1995 is incorporated herein by reference to Exhibit 6(b) to Post-
Effective Amendment No. 8 to the Trust's Registration Statement.
(c) Co-Administration Agreement between First Funds on behalf of all
Portfolios, and First Tennessee Bank National Association, dated
July 1, 1995 is incorporated herein by reference to Exhibit 6 (c)
to Post-Effective Amendment No. 9 to the Trust's Registration
Statement.
(d) Form of Servicing Agreement between ALPS Mutual Funds Services,
Inc. and an Agency Institution is incorporated herein by
reference to Exhibit 6(d) to Post-Effective Amendment No. 8 to
the Trust's Registration Statement.
(7) Not Applicable.
(8) (a) Mutual Fund Custody Agreement between the First Funds and Chase
Manhattan Bank of New York dated October 12, 1992 is incorporated
herein by reference to Exhibit 8(a) to Post-Effective Amendment
No.1 to the Trust's Registration Statement.
(b) Mutual Fund Transfer Agency Agreement between the First Funds and
United States Trust Company of New York dated November 10, 1992
is incorporated herein by reference to Exhibit 8(b) to Post-
Effective Amendment No. 1 to the Trust's Registration Statement.
(c) Amendment to Exhibit 8(b) above dated July 28, 1995 is
incorporated herein by reference to Exhibit 8(c) to Post-
Effective Amendment No. 8 to the Trust's Registration Statement.
(d) Amendment to Exhibit 8(b) above dated December 7, 1995 is
incorporated herein by reference to Exhibit 8(d) to Post-
Effective Amendment No. 9 to the Trust's Registration Statement.
(9) (a) Fund Accounting and Pricing Services Agreement between the First
Funds and Chase Manhattan Bank of New York dated November 10,
1992 is incorporated herein by reference to Exhibit 9 to Post-
Effective Amendment No. 1 to the Trust's Registration Statement.
(b) Amendment to Exhibit 9(a) above dated July 28, 1995 is
incorporated herein by reference to Exhibit 9(b) to Post-
Effective Amendment No. 8 to the Trust's Registration Statement.
(c) Amendment to Exhibit 9(a) above dated December 7, 1995 is
incorporated herein by reference to Exhibit 9(c) of Post-
Effective Amendment No. 9 to the Trust's Registration Statement.
(10) Not Applicable.
(11) Opinion of Baker, Danelson, Bearman & Caldwell, counsel to the
Registrant, is filed herein as Exhibit 11.
<PAGE>
(12) Not Applicable
(13) Written assurances that purchase representing initial capital was
made for investment purposes without any present intention of
redeeming or reselling is incorporated herein by reference to
Exhibit 13 to Pre-Effective Amendment No. 2 to the Trust's
Registration Statement.
(14) Form of Individual Retirement Account plan documents is
incorporated herein by reference to Exhibit 14 to Post-Effective
Amendment No. 13 to the Trust's Registration Statement.
(15) (a) Distribution and Service Plan Agreements on behalf of all
Portfolios, are incorporated herein by reference to Exhibit 15(a)
to Post-Effective Amendment No. 8 to the Trust's Registration
Statement.
(b) Shareholder Servicing Plan on behalf of Class II and III of each
Portfolio, dated March 20, 1993, is incorporated herein by
reference to Exhibit 15(b) to Post-Effective Amendment No. 8 to
the Trust's Registration Statement.
(16) Schedule of Yield Computations is incorporated herein by
reference to Exhibit 16 to Post-Effective Amendment No. 1 to the
Trust's Registration Statement.
(17) Financial Data Schedule for Class I, II and III of the Growth
& Income, Bond and Tennessee Tax-Free Portfolios, and Class I and
II of the U.S. Treasury Money Market, U.S. Government Money
Market, Municipal Money Market and Cash Reserve Portfolios are
incorporated by reference to Exhibit 27 to Post-Effective
Amendment No. 13 to the Trust's Registration Statement. Financial
Data Schedules for the Capital Appreciation Portfolio are filed
herein as Exhibit 27.
(18) Plan Providing for Multiple Classes of Shares pursuant to
Rule 18f-3 is incorporated herein by reference to Exhibit (12) to
Post-Effective Amendment No. 8 to the Trust's Registration
Statement.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
Item 26. NUMBER OF HOLDERS OF SECURITIES
December 31, 1997
Title of Class: Shares of Beneficial Interest Number of Recordholders
- --------------------------------------------- -----------------------
CLASS I
U.S. Treasury Money Market Portfolio 4
U.S. Government Money Market Portfolio 4
Municipal Money Market Portfolio 4
Cash Reserve Portfolio 3
Growth & Income Portfolio 5
Bond Portfolio 5
Tennessee Tax-Free Portfolio 2
Capital Appreciation Portfolio 6
CLASS II
Growth and Income Portfolio 1526
Bond Portfolio 21
Tennessee Tax-Free Portfolio 151
Capital Appreciation Portfolio 118
CLASS III
Growth & Income Portfolio 2,602
Capital Appreciation Portfolio 26
<PAGE>
Bond Portfolio 193
Tennessee Tax-Free Portfolio 106
Treasury Money Market Portfolio 29
Government Money Market Portfolio 21
Municipal Money Market Portfolio 32
Cash Reserve Portfolio 275
Item 27. INDEMNIFICATION
Article XI, Section 2 of the Declaration of Trust sets forth the reasonable and
fair means for determining whether indemnification shall be provided to any past
or present Trustee or officer. It states that the Registrant shall indemnify
any present or past Trustee, or officer to the fullest extent permitted by law
against liability and all expenses reasonably incurred by him in connection with
any claim, action suit or proceeding in which he is involved by virtue of his
service as a trustee, officer, or both. Additionally, amounts paid or incurred
in settlement of such matters are covered by this indemnification.
Indemnification will not be provided in certain circumstances, however. These
include instances of willful misfeasance, bad faith, gross negligence, and
reckless disregard of the duties involved in the conduct of the particular
office involved.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy is expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT MANAGER
First Tennessee Bank National Association serves as Investment Adviser or
Co-Investment Adviser to the Registrant on behalf of each Portfolio.
Investment Advisers Inc. served as Investment Adviser to the Capital
Appreciation Portfolio. The directors and officers of First Tennessee have
held, during the past two fiscal years, the following positions of a
substantial nature:
<PAGE>
First Tennessee Bank National Association (FTB) - Investment Adviser
<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- -------- ---- -------------- --------
<S> <C> <C> <C>
Director Robert C. Blattberg Polk Brothers Distinguished Education
Professor of Retailing
J.L. Kellogg Graduate School
of Management
Northwestern University(1)
Director, Factory Card Outlet of Retail
America(2)
Director Carlos H. Cantu President, Chief Executive Consumer services and
Officer, The ServiceMaster Company, supportive management
L.P.(3) services
Director, Haggar Corporation(4) Apparel
Director George E. Cates Chairman of the Board and Chief Real estate investment
Executive Officer, Mid-America Apartment trust
Communities, Inc.(5)
Director, President, J. Kenneth Glass Executive Vice President, FTNC(6) Bank holding company
Tennessee Banking
Group Director, Norlen Life Insurance Credit life insurance
Company(6)
Director, FT Mortgage Companies(7) Mortgage company
Director, FT Mortgage Holding Corporation(8) Mortgage company
Director, FT Mortgage Services, Inc.(9) Mortgage company
Director, Highland Capital Management Investment Advisor
Corp.(10)
Chairman and Director, "A" PLUS Consumer access/discount
Strategic Alliances, Inc.(11) card program and finder
Director, Corona National Life Insurance(12) Credit life insurance
Director, First Tennessee Merchant Merchant processing
Services, Inc.(13)
Director, First Tennessee Merchant Merchant processing
Equipment, Inc.(14)
Director, Federal Flood Certification Corp.(15) Flood insurance
Director James A. Haslam, III Chief Executive Officer and Chief Operating Retail operator of
Officer, Pilot Corporation(16) convenience stores and
travel centers
Director, Plasti-Line, Inc.(17) Sign manufacturer
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- -------- ---- -------------- --------
<S> <C> <C> <C>
President, Chairman Ralph Horn President, Chairman of the Board, Chief Bank holding company
of the Board, Chief Executive Officer and Director, FTNC(6)
Executive Officer
and Director Vice President and Director, National bank
First Tennessee Bank National
Association Mississippi(18)
Director, Harrah's Entertainment, Casino, entertainment
Inc.(19)
Director, President, John C. Kelley, Jr. Executive Vice President, FTNC(6) Bank holding company
Memphis Banking
Group Director, Check Consultants, Inc.(6) Check processing and
related services
Director, Check Consultants Company Check processing and
of Tennessee(6) related services
Director, First Tennessee Housing Public welfare investments
Corporation(20)
Director, First Tennessee Equipment Equipment financing
Finance Corporation(37)
Director, First Tennessee Bank National National bank
Association Mississippi(18)
Director R. Brad Martin Chairman of the Board, Chief Retail
Executive Officer, Proffits, Inc.(21)
Director, Harrah's Entertainment, Inc.(18) Casino, entertainment
Director, Pilot Corporation(15) Retail operator of
convenience stores and
travel centers
Director Joseph Orgill, III Chairman of the Board, Distributor and
West Union Corporation(22) manufacturer for
construction industry
Director, Chairman of the Board Wholesale hardware
Orgill, Inc.(23) distributor
Director Vicki R. Palmer Corporate Vice President and Treasurer of Bottler of soft drink
Coca Cola Enterprises, Inc.(24) products
Director Michael D. Rose Chairman of the Board, Promus Hotel Hotel franchisor and
Corporation(25) operator
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- -------- ---- -------------- --------
<S> <C> <C> <C>
Director, General Mills, Inc.(26) Food processing
Director, Ashland Inc.(27) Oil company
Director, Darden Restaurants, Inc.(28) Restaurant
Director, Stein Mart, Inc.(29) Retail
Director William B. Sansom Chairman of the Board and Chief Wholesale distributor
Executive Officer, The H.T.
Hackney Company(30)
Director, Martin Marietta Materials(31) Construction aggregate
materials producer
Director, Astec Industries, Inc.(32) Construction aggregate
materials producer
Director Gordon P. Street, Jr. Chairman of the Board, Chief Manufacturing
Executive Officer and President,
North American Royalties, Inc.(33)
Position Other Business Type of
with FTB Name connections* Business
- -------- ---- -------------- --------
<S> <C> <C> <C>
Executive Vice Susan Schmidt Bies Executive Vice President, FTNC(6) Bank holding
President company
Executive Vice Harry A. Johnson, III Executive Vice President Bank holding company
President and General and General Counsel of FTNC(6)
Counsel
Executive Vice George Perry Lewis Director, First Tennessee Broker Dealer
President - Group Brokerage, Inc.(34)
Manager, Money
Management Director, Highland Capital
Management, Corp.(10) Investment Advisor
Director, Hickory Venture Venture Capital
Capital Corporation(35)
Director, Hickory Capital Venture Capital
Corporation(36)
Executive Vice John P. O'Connor, Jr. Executive Vice President and Chief Bank holding company
President and Credit Officer of FTNC(6)
Chief Credit Officer
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- -------- ---- -------------- --------
<S> <C> <C> <C>
Executive Vice G. Robert Vezina Executive Vice President of Bank holding company
President FTNC(6)
Executive Vice Elbert L. Thomas, Jr. Executive Vice President and Chief Bank holding company
President, Chief Financial Officer of FTNC(6)
Financial Officer
Executive Vice E. Kelton Morris Director, Highland Capital Management Investment Advisor
President Corp.(10)
Executive Vice David L. Berry None
President
Executive Vice Carey H. Brown None
President
Executive Vice Charles Burkett None
President
Senior Vice President Wayne C. Marsh None
Senior Vice President Deborah McDonald None
Senior Vice President Yvonne Watson None
Senior Vice President C. Douglas Kelso None
Senior Vice President David M. Taylor None
Senior Vice President David B. Lantz None
Senior Vice President William E. Woodson None
Senior Vice President Steven J. McNally None
Senior Vice President Scott Bovee None
Senior Vice President Gary L. Hoemann None
Senior Vice President Suzanne Donaldson None
Vice President William J. Branta None
Vice President O. Norris Avey None
Vice President Edward C. Dellinger None
Vice President Otis M. Clayton None
Vice President Ralph W. Herbert None
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- -------- ---- -------------- --------
<S> <C> <C> <C>
Vice President John C. Miller None
Vice President Claudette S.Sanders None
Vice President Rosemary Manning None
Vice President Kenneth Koster None
Vice President Maureen MacIver None
Vice President John Barringer None
Investment Analyst Karen Kruse None
Investment Officer Jeff Smith None
Administrative Assistant Joey Brewer None
Chairman and CEO Larry B. Martin None
First Tennessee Bank-Knoxville
President, First Lew Weems None
Tennessee Bank-Knoxville
President, First J. Kenneth Youngblood None
Tennessee Bank-Maryville
President, First Anderson L. Smith None
Tennessee Bank-Morristown
</TABLE>
NOTES:
* All directors of FTB are also directors of its parent, First Tennessee
National Corporation, which controls FTB. Messrs. Glass, Horn, Johnson,
Keen, Kelley, Lewis, O'Connor, Thomas and Vezina and Ms. Bies are
considered executive officers of FTNC.
(1) J.L. Kellogg Graduate School of Management, 875 N. Michigan Ave., Suite
2945, Chicago, IL 60611
(2) Factory Card Outlet of America, 745 Birbinal Drive, Bensenville, IL
60106-1212
(3) ServiceMaster Company, L.P., One ServiceMaster Way, Downers Grove, IL
30515
(4) Haggar Corporation, 6113 Lemmon Ave., Dallas, TX 75209
(5) Mid-America Apartment Communities, Inc., 6584 Poplar Ave., Ste. 340,
Memphis, TN 38138
(6) First Tennessee Bank National Association and First Tennessee National
Corporation, 165 Madison Avenue, Memphis, TN 38103
(7) FT Mortgage Companies, 2974 LBJ Freeway, Dallas, TX 75234
(8) FT Mortgage Holding Corporation, 165 Madison Ave., Memphis, TN 38103
(9) FT Mortgage Services, Inc., 165 Madison Ave., Memphis, TN 38103
<PAGE>
(10) Highland Capital Management Corp., 6077 Primacy Parkway, Suite 228,
Memphis, TN 38117
(11) "A" PLUS Strategic Alliances, Inc., 1700 Rambling Road, Richmond, VA
23235
(12) Corona National Life Insurance, 1421 E. Thomas Road, Phoenix, AZ 85014
(13) First Tennessee Merchant Services, Inc., 300 Court Ave., Memphis, TN
38103
(14) First Tennessee Merchant Equipment, Inc., 300 Court Ave., Memphis, TN
38103
(15) Federal Flood Certification Corporation, 6220 Gaston Ave., Dallas, TX
75214
(16) Pilot Corporation, 5508 Lonas Road, Knoxville, TN 37909
(17) Plasti-Line, Inc., P O Box 59043, Knoxville, TN 37950-9043
(18) First Tennessee Bank National Association Mississippi, 579 Goodman Road
East, Southaven, MS 38671
(19) Harrah's Entertainment, Inc., 1023 Cherry Road, Memphis, TN 38117
(20) First Tennessee Housing Corporation, 165 Madison Ave., Memphis,
TN 38103
(21) Profitt's Inc., 5810 Shelby Oaks Drive, Memphis, TN 38134
(22) West Union Corporation, 35 Union Ave., Suite 300, Memphis, TN 38103
(23) Orgill, Inc., 2100 Latham Street, Memphis, TN 38109
(24) Coca Cola Enterprises, Inc., 2500 Windy Ridge Pkwy, Marietta,
GA 30067
(25) Promus Companies, Inc., 1023 Cherry Road, Memphis, TN 38117
(26) General Mills, Inc., 9200 Wayzata Blvd., Minneapolis, MN 55426
(27) Ashland Co., 2351 Channel Ave., Memphis, TN
(28) Darden Restaurants, Inc., 5900 Lake Ellenor Drive, Orlando, FL 32809
(29) Stein Mart, Inc., 1200 Riverplace Blvd., Jacksonville, FL 32207
(30) The H. T. Hackney Company, Fidelity Bldg., 502 S. Gay Street, Suite
300, Knoxville, TN 37902
(31) Martin Marietta Materials, P. O. Box 30013, Raleigh, NC 27622-0013
(32) Astec Industries, Inc., P O Box 72787, Chattanooga, TN 37407
(33) North American Royalties, 200 E. 8th Street, Chattanooga, TN 37402
(34) First Tennessee Brokerage, Inc., 5100 Poplar Avenue, Memphis, TN 38117
(35) Hickory Venture Capital Corporation, 200 West Court Square, Suite 100,
Huntsville, AL 35801
(36) Hickory Capital Corporation, 200 West Court Square, Suite 100,
Huntsville, AL 35801
(37) First Tennessee Equipment Finance Corporation, 165 Madison Ave.,
Memphis, TN 38103
<PAGE>
Highland Capital Management Corp. (Highland)
6077 Primacy Parkway, Memphis, TN
<TABLE>
<CAPTION>
Position Other Business
with Highland Name Connections
------------- ---- -----------
<S> <C> <C>
Director, President Edward J. Goldstein (1) Director,
NexAir, LLC
Director, Chairman of the Board Steven Wishnia (1) None
Director, Executive Vice President,
Secretary James M. Weir (1) None
Director, Executive Vice President
Treasurer Paul H. Berz (1) None
Director, Executive Vice President Charles Thomas Whitman (1) None
Director J. Kenneth Glass see FTB listing
Director E. Kelton Morris see FTB listing
Director George Perry Lewis see FTB listing
Senior Vice President Steven T. Ashby None
Senior Vice President David L. Thompson None
Senior Vice President James R. Turner None
Vice President Donald J. Norsworthy None
</TABLE>
(1) Previously, Managing Director of Highland Capital Management Corp.,
6077 Primacy Parkway, Memphis, TN 38119
(2) NexAir, LLC, 1385 Corporate Avenue, Memphis, TN 38186-1182, distributor of
industrial gases, welding supplies and medical product
The senior officers and directors of IAI and their titles are as follows:
Name Title
- ---- -----
Jeffrey R. Applebaum Senior Vice President
Scott Allen Bettin Senior Vice President
Archie Campbell Black, III Senior Vice President/Treasurer
Iain D. Cheyne Chairman/Director
Stephen C. Coleman Senior Vice President
Larry Ray Hill Executive Vice President
Richard A. Holway Senior Vice President
Irving Philip Knelman President/Chief Operating Officer/Director
Kevin McKendry Director
Timothy A. Palmer Senior Vice President
Peter Phillips Director
Noel Paul Rahn Chief Executive Officer/Director
James S. Sorenson Senior Vice President
R. David Spreng Senior Vice President
Christopher John Smith Senior Vice President/Secretary
<PAGE>
All of such persons have been affiliated with IAI for more than two years
except Messrs. Cheyne, McKendry and Phillips. Prior to being appointed to the
Board in 1996, Mr. Cheyne was General Manager of Corporate Banking of Lloyds
Bank plc, and currently is Managing Director, International Banking, Lloyds TSB
Group plc, St. George's House, 6-8 Eastcheap, London, England EC3M 1LL since
1972. Prior to being appointed to the Board in 1996, Mr. McKendry was and
remains Bank Counsel to Lloyds Bank Plc, P.O. Box 2008, One Seaport Plaza,
199 Water Street, New York, NY 10038, since 1979. Prior to being appointed to
the Board in 1996, Mr. Phillips was and remains Executive Vice President and
General Manager of Lloyds Bank Plc, P.O. Box 2008, One Seaport Plaza, 199 Water
Street, New York, NY 10038, since 1993.
The address of the officers and directors of IAI is that of IAI, which is
3700 First Bank Place, P. O. Box 357, Minneapolis, Minnesota 55440.
Certain of the officers and directors of IAI also serve as officers and
directors of IAI International Ltd. Both IAI and IAI International's ultimate
corporate parent is Lloyds TSB Group plc, a publicly-held financial services
<PAGE>
organization based in London, England. The senior officers and directors of IAI
International and their titles are as follows:
Name Title
- ---- -----
Noel Paul Rahn Chairman of the Board of Directors
Roy C. Gillson Chief Investment Officer/Director
Iain D. Cheyne Director
Irving Philip Knelman Director
Hilary Fane Deputy Chief Investment Officer/Director
Feidhlim O'Broin Associate Director
Certain of the officers and directors of IAI also serve as officers and
directors of IAI Trust Company, a wholly-owned subsidiary of IAI. The officers
and directors of IAI Trust Company and their titles are as follows:
Name Title
- ------ ------
Archie C. Black Chairman of the Board/President/Treasurer
Christopher J. Smith Director/Vice President
Susan J. Haedt Vice President/Director
Darcy Kent Supervisor of Trust Services
Steven G. Lentz Secretary/Director
<PAGE>
Item 29. Principal Underwriters
(a) The sole principal underwriter for the Fund is ALPS Mutual Funds Services,
Inc. which acts as distributor for the Registrant and the following other
funds: Westcore Trust, FGIC Public Trust, and Countrybaskets-TM- Index
Fund, Inc.
(b) To the best of Registrant's knowledge, the directors and executive officers
of ALPS Mutual Funds Services, Inc., the distributor for Registrant, are as
follows:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with
Business Address* Positions and Offices with Registrant Underwriter
- ------------------ ------------------------------------- --------------------------
<S> <C> <C>
W. Robert Alexander None Chairman, Chief Executive Officer
and Secretary
Arthur J. L. Lucey None President
Thomas A. Carter None Vice President and
Chief Financial Officer
<PAGE>
Edmund J. Burke None Executive Vice President
William N. Paston None Vice President
James V. Hyatt Secretary General Counsel
Jeremy O. May Treasurer Fund Controller
Rick A. Pederson None Director
Chris Woessner None Director
</TABLE>
* All addresses are 370 Seventeenth Street, Suite 3100, Denver, Colorado 80202.
(c) Not applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS
First Tennessee Bank National Association is located at 4990 Poplar Avenue,
Memphis, Tennessee. Highland Capital Management Corp. is located at 6011
Privacy Parkway, Suite 228, Memphis, Tennessee. PNC Institutional Management
Corporation is located at 103 Bellevue Parkway, Wilmington, Delaware.
Investment Advisers, Inc. is located at 3700 First Bank Place, Minneapolis,
Minnesota. These entities will maintain physical possession of each such
account, book or other documents of the Trust, except for those documents
relating to the custodial functions maintained by the Trust's Custodian,
Chase Manhattan Bank of New York, 114 West 47th Street, New York, New York,
and those transfer agent, pricing and bookkeeping and general accounting
records maintained by the Trust's Transfer Agent and Pricing and Accounting
Agent, Chase Global Funds Services Company, a wholly owned subsidiary of
Chase Manhattan Bank of New York, 73 Tremont Street, Boston, Massachusetts.
Item 31. MANAGEMENT SERVICES
Not Applicable.
<PAGE>
Item 32. UNDERTAKINGS
(a) Capital Appreciation Portfolio and Intermediate Bond Portfolio undertake to
file a Post-Effective Amendment using financial statements, which need not
be certified, within 6 months of each Portfolio's effective date or
commencement of operations, whichever is later.
(b) The Registrant, on behalf of each Portfolio undertakes, provided the
information required by Item 5A is contained in the annual report, to
furnish each person to whom a prospectus has been delivered, upon their
request and without charge, a copy of the Registrant's latest annual report
to shareholders.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for the effectiveness of this Registration statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment No. 14 to the Registration Statement to be signed on
its behalf by the undersigned, hereunto duly authorized, in the City of
Memphis, and State of Tennessee, on the 26th day of February, 1998.
FIRST FUNDS
By /c/ Richard C. Rantzow, President*
------------------------------------
Richard C. Rantzow, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
/c/ Richard C. Rantzow* President and Trustee February 26, 1998
- --------------------------
Richard C. Rantzow
/c/ Jeremy O. May Treasurer (Principal February 26, 1998
- -------------------------- Financial Officer)
Jeremy O. May
/c/ Thomas M. Batchelor* Trustee February 26, 1998
- --------------------------
Thomas M. Batchelor
/c/ John A. DeCell* Trustee February 26, 1998
- --------------------------
John A. DeCell
/c/ Larry W. Papasan* Trustee February 26, 1998
- --------------------------
Larry W. Papasan
* Signature affixed by Daniel B. Hatzenbuehler pursuant to a power of attorney
dated June 22, 1992 and filed herewith.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
=============================================================================
EXHIBITS
to
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
AND
THE INVESTMENT COMPANY ACT OF 1940
=============================================================================
FIRST FUNDS
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
- ------- --------
11 Opinion of Baker, Danelson, Bearman & Caldwell, Counsel to the
Registrant.
27 Financial Data Schedules
1) Capital Appreciation Portfolio Class I
2) Capital Appreciation Portfolio Class II
3) Capital Appreciation Portfolio Class III
<PAGE>
Exhibit 11
Baker Donelson Bearman & Caldwell
First Tennessee Building
Suite 2000
165 Madison Avenue
Memphis, Tennessee 38103
DANIEL B. HATZENBUEHLER
DIRECT DIAL: (901) 577-2306
February 26, 1998
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Re: FIRST FUNDS (THE TRUST): U.S. GOVERNMENT MONEY MARKET PORTFOLIO;
U.S. TREASURY MONEY MARKET PORTFOLIO; MUNICIPAL MONEY MARKET PORTFOLIO;
CASH RESERVE PORTFOLIO; GROWTH AND INCOME PORTFOLIO (FORMERLY TOTAL RETURN
EQUITY PORTFOLIO); BOND PORTFOLIO (FORMERLY TOTAL RETURN FIXED INCOME
PORTFOLIO); CAPITAL APPRECIATION PORTFOLIO; INTERMEDIATE BOND PORTFOLIO AND
TENNESSEE TAX-FREE PORTFOLIO (EACH, A PORTFOLIO)
File No. 33-46374
Post-Effective Amendment No. 14
Dear Sirs:
We serve as counsel to the above-referenced Trust. In that capacity, we
have reviewed the Post-Effective Amendment No. 14 to the Trust's Registration
Statement on Form N-1A which accompanies this letter ("Amendment"), including
the covering letter thereto. The Amendment was prepared by ALPS Mutual Fund
Services, Inc. ("ALPS"), the Trust's Administrator, and, as stated in the
covering letter to the Amendment, is being filed for the principal purpose of
fulfilling the Trust's undertaking to file a Post-Effective Amendment, using
financial statements which need not be audited, within six months of the
effective date or the commencement of operations of the Trust's Capital
Appreciation Portfolio, whichever is later. The changes are noted in the
covering letter to the Amendment. Pursuant to paragraph (e) of Rule 485,
we represent that, to the best of our knowledge based upon the statements of
ALPS contained in the covering letter to the Amendment and our review of the
Amendment and the changes as marked therein, the Amendment does not contain
disclosures which would render it ineligible to become effective pursuant to
Rule 485(b).
<PAGE>
Securities and Exchange Commission
February 26, 1998
Page 2
Further, we consent to the use of our name in the Registration Statement
under the caption of the prospectus for the Tennessee Tax-Free Portfolio
entitled "What is the Effect of Income Tax On This Investment?" and elsewhere it
may appear.
Very truly yours,
Daniel B. Hatzenbuehler
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 431
<NAME> CLASS I
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 23863784
<INVESTMENTS-AT-VALUE> 23611670
<RECEIVABLES> 9809
<ASSETS-OTHER> 65
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 23621544
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 386761
<TOTAL-LIABILITIES> 386761
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23513942
<SHARES-COMMON-STOCK> 2223977
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (19935)
<ACCUMULATED-NET-GAINS> (7110)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (252114)
<NET-ASSETS> 23234783
<DIVIDEND-INCOME> 10340
<INTEREST-INCOME> 54348
<OTHER-INCOME> 0
<EXPENSES-NET> 84623
<NET-INVESTMENT-INCOME> (19935)
<REALIZED-GAINS-CURRENT> (7110)
<APPREC-INCREASE-CURRENT> (252114)
<NET-CHANGE-FROM-OPS> (279159)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2241155
<NUMBER-OF-SHARES-REDEEMED> (17178)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 23234783
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 101312
<AVERAGE-NET-ASSETS> 20542521
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (0.01)
<PER-SHARE-GAIN-APPREC> (0.09)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.90
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 422
<NAME> CLASS II
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 23863784
<INVESTMENTS-AT-VALUE> 23611670
<RECEIVABLES> 9809
<ASSETS-OTHER> 65
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 23621544
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 386761
<TOTAL-LIABILITIES> 386761
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23513942
<SHARES-COMMON-STOCK> 77400
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (19935)
<ACCUMULATED-NET-GAINS> (7110)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (252114)
<NET-ASSETS> 23234783
<DIVIDEND-INCOME> 10340
<INTEREST-INCOME> 54348
<OTHER-INCOME> 0
<EXPENSES-NET> 84623
<NET-INVESTMENT-INCOME> (19935)
<REALIZED-GAINS-CURRENT> (7110)
<APPREC-INCREASE-CURRENT> (252114)
<NET-CHANGE-FROM-OPS> (279159)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 77555
<NUMBER-OF-SHARES-REDEEMED> (155)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 23234783
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 62165
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 101312
<AVERAGE-NET-ASSETS> 285006
<PER-SHARE-NAV-BEGIN> 10.49
<PER-SHARE-NII> (0.01)
<PER-SHARE-GAIN-APPREC> (0.60)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.88
<EXPENSE-RATIO> 1.56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 413
<NAME> CLASS III
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 23863784
<INVESTMENTS-AT-VALUE> 23611670
<RECEIVABLES> 9809
<ASSETS-OTHER> 65
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 23621544
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 386761
<TOTAL-LIABILITIES> 386761
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23513942
<SHARES-COMMON-STOCK> 46983
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (19935)
<ACCUMULATED-NET-GAINS> (7110)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (252114)
<NET-ASSETS> 23234783
<DIVIDEND-INCOME> 10340
<INTEREST-INCOME> 54348
<OTHER-INCOME> 0
<EXPENSES-NET> 84623
<NET-INVESTMENT-INCOME> (19935)
<REALIZED-GAINS-CURRENT> (7110)
<APPREC-INCREASE-CURRENT> (252114)
<NET-CHANGE-FROM-OPS> (279152)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 46991
<NUMBER-OF-SHARES-REDEEMED> (8)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 23234783
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 62165
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 101312
<AVERAGE-NET-ASSETS> 220252
<PER-SHARE-NAV-BEGIN> 10.49
<PER-SHARE-NII> (0.02)
<PER-SHARE-GAIN-APPREC> (0.61)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.86
<EXPENSE-RATIO> 2.35
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
