<PAGE>
As filed with the Securities and Exchange Commission on August 27, 1998
FILE NOs. 811-6589
33-46374
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
- --------------------------------------------------------------------------------
FORM N-1A
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
POST EFFECTIVE AMENDMENT NO. 15 [X]
And
THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. __
- --------------------------------------------------------------------------------
FIRST FUNDS
(Exact name of registrant as specified in its charter)
370 17/th/ Street, Suite 3100
Denver, Colorado 80202
(Address of principal executive offices)(Zip Code)
Registrant's Telephone Number, including Area Code: 303-623-2577
James V. Hyatt, Secretary
First Funds
370 17/th/ Street, Suite 3100
Denver, Colorado 80202
(Name and address of agent for service)
Copy to:
Charles T. Tuggle, Jr., Esq.
Baker, Donelson, Bearman & Caldwell
165 Madison Avenue, Suite 2100
Memphis, TN 38103
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(i)
[X] on October 26, 1998 pursuant to paragraph (a)(i)
[_] 75 days after filing pursuant to paragraph (a) (ii)
[_] on (date) pursuant to paragraph (a)(ii) of rule 485
IF APPROPRIATE; CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of securities being registered: Shares of Beneficial Interest, $1.00 par
value.
Registrant registered an indefinite number of shares pursuant to regulation 24f-
2 under the Investment Company Act of 1940 on August 28, 1997.
================================================================================
<PAGE>
EXPLANATORY NOTE
This amendment to the Registration Statement of First Funds contains the
following:
1. One Prospectus for the Growth & Income Portfolio;
2. One Prospectus for the Capital Appreciation Portfolio;
3. One Prospectus for the Bond Portfolio;
4. One Prospectus for the Intermediate Bond Portfolio;
5. One Prospectus for the Tennessee Tax-Free Portfolio;
6. One Statement of Additional Information for the Growth & Income
Portfolio, Capital Appreciation Portfolio, Bond Portfolio and
Intermediate Bond Portfolio;
7. One Statement of Additional Information for the Tennessee Tax-Free
Portfolio; and
8. One Part C of the Registration Statement.
This amendment does not amend the following portions of the Registration
Statement:
1. Prospectuses for the four Money Market Portfolios; and
2. Statement of Additional Information for the four Money Market
Portfolios.
<PAGE>
FIRST FUNDS
GROWTH & INCOME PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III PROSPECTUS
<TABLE>
<CAPTION>
Form N-1A Item Number
- ---------------------
Part A Prospectus Caption
- ------ ------------------
<S> <C>
1............................................................................................Cover Page
2.........................................................................Summary of Portfolio Expenses
3 a,b.................................................................................................*
c......................................................................How is Performance Calculated?
4 a(i)..................................................................How is the Portfolio Organized?
a(ii),b,c.........................................What is the Investment Objective of the Portfolio?;
What are the Portfolio's Investment Policies and Limitations?;
Investment Instruments, Strategies, Transactions and Risks;
Is the Portfolio a Suitable Investment?
5 a.....................................................................How is the Portfolio Organized?
b,c,d,e..........................................What Advisory and Other Fees does the Portfolio Pay?
f..............................................................................Portfolio Transactions
6 a(i)..................................................................How is the Portfolio Organized?
a(ii)............................................How are Investments, Exchanges and Redemptions Made?
a(iii)................................................................How is the Portfolio Organized?
b,c,d...............................................................................................*
e....................................Cover Page; How are Investments, Exchanges and Redemptions Made?
f,g.............................................How are Investments, Exchanges and Redemptions Made?;
What is the Effect of Federal Income Tax on this Investment?
7 a................................................What Advisory and Other Fees does the Portfolio Pay?
b(i, ii, iii, iv, v), c, d.......................How are Investments, Exchanges and Redemptions Made?
e, f(i, ii)......................................What Advisory and Other Fees does the Portfolio Pay?
f(iii)...............................................................................................*
8..................................................How are Investments, Exchanges and Redemptions Made?
9.....................................................................................................*
</TABLE>
* Not Applicable
<PAGE>
FIRST FUNDS
CAPITAL APPRECIATION PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III PROSPECTUS
<TABLE>
<CAPTION>
Form N-1A Item Number
- ---------------------
<S> <C>
Part A Prospectus Caption
- ------ ------------------
1............................................................................................Cover Page
2.........................................................................Summary of Portfolio Expenses
3 a,b.................................................................................................*
c......................................................................How is Performance Calculated?
4 a(i)..................................................................How is the Portfolio Organized?
a(ii),b,c.........................................What is the Investment Objective of the Portfolio?;
What are the Portfolio's Investment Policies and Limitations?;
Investment Instruments, Strategies, Transactions and Risks;
Is the Portfolio a Suitable Investment?
5 a.....................................................................How is the Portfolio Organized?
b,c,d,e..........................................What Advisory and Other Fees does the Portfolio Pay?
f..............................................................................Portfolio Transactions
6 a(i)..................................................................How is the Portfolio Organized?
a(ii)............................................How are Investments, Exchanges and Redemptions Made?
a(iii)................................................................How is the Portfolio Organized?
b,c,d...............................................................................................*
e....................................Cover Page; How are Investments, Exchanges and Redemptions Made?
f,g.............................................How are Investments, Exchanges and Redemptions Made?;
What is the Effect of Federal Income Tax on this Investment?
7 a................................................What Advisory and Other Fees does the Portfolio Pay?
b(i, ii, iii, iv, v), c, d.......................How are Investments, Exchanges and Redemptions Made?
e, f(i, ii)......................................What Advisory and Other Fees does the Portfolio Pay?
f(iii)..............................................................................................*
8..................................................How are Investments, Exchanges and Redemptions Made?
9.....................................................................................................*
</TABLE>
* Not Applicable
<PAGE>
FIRST FUNDS
BOND PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III PROSPECTUS
<TABLE>
<CAPTION>
Form N-1A Item Number
- ---------------------
<S> <C>
Part A Prospectus Caption
- ------ ------------------
1............................................................................................Cover Page
2.........................................................................Summary of Portfolio Expenses
3 a,b.................................................................................................*
c......................................................................How is Performance Calculated?
4 a(i)..................................................................How is the Portfolio Organized?
a(ii),b,c.........................................What is the Investment Objective of the Portfolio?;
What are the Portfolio's Investment Policies and Limitations?;
Investment Instruments, Strategies, Transactions and Risks;
Is the Portfolio a Suitable Investment?
5 a.....................................................................How is the Portfolio Organized?
b,c,d,e..........................................What Advisory and Other Fees does the Portfolio Pay?
f..............................................................................Portfolio Transactions
6 a(i)..................................................................How is the Portfolio Organized?
a(ii)............................................How are Investments, Exchanges and Redemptions Made?
a(iii)................................................................How is the Portfolio Organized?
b,c,d...............................................................................................*
e....................................Cover Page; How are Investments, Exchanges and Redemptions Made?
f,g.............................................How are Investments, Exchanges and Redemptions Made?;
What is the Effect of Federal Income Tax on this Investment?
7 a................................................What Advisory and Other Fees does the Portfolio Pay?
b(i, ii, iii, iv, v), c, d.......................How are Investments, Exchanges and Redemptions Made?
e, f(i, ii)......................................What Advisory and Other Fees does the Portfolio Pay?
f(iii)..............................................................................................*
8..................................................How are Investments, Exchanges and Redemptions Made?
9.....................................................................................................*
</TABLE>
* Not Applicable
<PAGE>
FIRST FUNDS
INTERMEDIATE BOND PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III PROSPECTUS
<TABLE>
<CAPTION>
Form N-1A Item Number
- ---------------------
<S> <C>
Part A Prospectus Caption
- ------ ------------------
1............................................................................................Cover Page
2.........................................................................Summary of Portfolio Expenses
3 a,b.................................................................................................*
c......................................................................How is Performance Calculated?
4 a(i)..................................................................How is the Portfolio Organized?
a(ii),b,c.........................................What is the Investment Objective of the Portfolio?;
What are the Portfolio's Investment Policies and Limitations?;
Investment Instruments, Strategies, Transactions and Risks;
Is the Portfolio a Suitable Investment?
5 a.....................................................................How is the Portfolio Organized?
b,c,d,e..........................................What Advisory and Other Fees does the Portfolio Pay?
f..............................................................................Portfolio Transactions
6 a(i)..................................................................How is the Portfolio Organized?
a(ii)............................................How are Investments, Exchanges and Redemptions Made?
a(iii)................................................................How is the Portfolio Organized?
b,c,d...............................................................................................*
e....................................Cover Page; How are Investments, Exchanges and Redemptions Made?
f,g.............................................How are Investments, Exchanges and Redemptions Made?;
What is the Effect of Federal Income Tax on this Investment?
7 a................................................What Advisory and Other Fees does the Portfolio Pay?
b(i, ii, iii, iv, v), c, d.......................How are Investments, Exchanges and Redemptions Made?
e, f(i, ii)......................................What Advisory and Other Fees does the Portfolio Pay?
f(iii)..............................................................................................*
8..................................................How are Investments, Exchanges and Redemptions Made?
9.....................................................................................................*
</TABLE>
* Not Applicable
<PAGE>
FIRST FUNDS
TENNESSEE TAX-FREE PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III PROSPECTUS
<TABLE>
<CAPTION>
Form N-1A Item Number
- ---------------------
<S> <C>
Part A Prospectus Caption
- ------ ------------------
1............................................................................................Cover Page
2.........................................................................Summary of Portfolio Expenses
3 a,b.................................................................................................*
c......................................................................How is Performance Calculated?
4 a(i)..................................................................How is the Portfolio Organized?
a(ii),b,c.........................................What is the Investment Objective of the Portfolio?;
What are the Portfolio's Investment Policies and Limitations?;
Investment Instruments, Strategies, Transactions and Risks;
Is the Portfolio a Suitable Investment?
5 a.....................................................................How is the Portfolio Organized?
b,c,d,e..........................................What Advisory and Other Fees does the Portfolio Pay?
f..............................................................................Portfolio Transactions
6 a(i)..................................................................How is the Portfolio Organized?
a(ii)............................................How are Investments, Exchanges and Redemptions Made?
a(iii)................................................................How is the Portfolio Organized?
b,c,d...............................................................................................*
e....................................Cover Page; How are Investments, Exchanges and Redemptions Made?
f,g.............................................How are Investments, Exchanges and Redemptions Made?;
What is the Effect of Federal Income Tax on this Investment?
7 a................................................What Advisory and Other Fees does the Portfolio Pay?
b(i, ii, iii, iv, v), c, d.......................How are Investments, Exchanges and Redemptions Made?
e, f(i, ii)......................................What Advisory and Other Fees does the Portfolio Pay?
f(iii)..............................................................................................*
8..................................................How are Investments, Exchanges and Redemptions Made?
9.....................................................................................................*
</TABLE>
* Not Applicable
<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
<TABLE>
<CAPTION>
Form N-1A Item Number Statement of Additional Information Caption
- --------------------- -------------------------------------------
<S> <C>
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..................................................................................*
</TABLE>
* Not Applicable
<PAGE>
FIRST FUNDS
TENNESSEE TAX-FREE PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Form N-1A Item Number Statement of Additional Information Caption
- --------------------- -------------------------------------------
<S> <C>
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..................................................................................*
</TABLE>
* Not Applicable
<PAGE>
FIRST FUNDS 370 17th Street
Suite 3100
GROWTH & INCOME PORTFOLIO Denver, Colorado 80202
- --------------------------------------------------------------------------------
PROSPECTUS FOR CLASS I, II, AND III
October __, 1998
- --------------------------------------------------------------------------------
First Funds (the Trust) offers investors a convenient and economical means of
investing in a professionally managed equity mutual fund. The objective of the
Growth & Income Portfolio (the Portfolio) is to achieve maximum total return
through a combination of capital appreciation and dividend income consistent
with reasonable risk by investing primarily in equity securities. The
Portfolio's net asset value per share will fluctuate in response to changes in
the value of its investments.
This Prospectus is designed to provide you with information that you should
know before investing. Please read and retain this document for future
reference. This Prospectus offers Class I, II and III shares of the Portfolio.
Class I shares are designed exclusively for investment of monies held in non-
retail trust, advisory, agency, custodial or similar accounts (Institutional
Accounts). Class I shares may be purchased for Institutional Accounts by
financial institutions, business organizations, corporations, municipalities,
non-profit institutions and other entities serving in trust, advisory, agency,
custodial or similar capacities (each, an Institutional Investor and
collectively, Institutional Investors) that meet the investment threshold for
this Class of shares. Class II and III shares are designed for individuals and
other investors who seek mutual fund investment convenience plus a lower
investment minimum. These Classes offer investors differing expense and sales
load structures to choose between. See "Expense Summary."
A Statement of Additional Information (dated October __, 1998) for the
Portfolio has been filed with the Securities and Exchange Commission (SEC) and
is incorporated herein by reference. This Prospectus, the Annual Report and the
Statement of Additional Information are available free upon request from ALPS
Mutual Funds Services, Inc., (ALPS), the Portfolio's Distributor. The Annual
Report for the fiscal period ended June 30, 1997 for the Portfolio is
incorporated into the Statement of Additional Information by reference. Please
call ALPS at 1-800-442-1941 (option 1) for more information concerning each
Class of shares. If you are investing through a broker, other financial
institution or adviser (Investment Professional), please contact that
institution directly.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY,
FIRST TENNESSEE BANK NATIONAL ASSOCIATION OR ANY DEPOSITORY INSTITUTION. SHARES
ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD, OR
ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY STATE
OR JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER IN
SUCH STATE OR JURISDICTION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY OF PORTFOLIO EXPENSES.................................. 3
FINANCIAL HIGHLIGHTS........................................... 4
WHAT IS THE INVESTMENT OBJECTIVE OF THE PORTFOLIO?............. 7
IS THE PORTFOLIO A SUITABLE INVESTMENT?; INVESTMENT RISKS...... 7
WHAT ARE THE PORTFOLIO'S INVESTMENT POLICIES AND LIMITATIONS?.. 8
HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?........... 9
HOW IS PERFORMANCE CALCULATED?................................. 19
PORTFOLIO TRANSACTIONS......................................... 19
WHAT IS THE EFFECT OF FEDERAL INCOME TAX ON THIS INVESTMENT?... 19
WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY?........... 20
HOW IS THE PORTFOLIO ORGANIZED?................................ 22
INVESTMENT INSTRUMENTS, TRANSACTIONS, STRATEGIES AND RISKS..... 22
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF PORTFOLIO EXPENSES
- --------------------------------------------------------------------------------
The purpose of the table below is to assist you in understanding the various
costs and expenses that you would bear, directly or indirectly, by investing in
the Portfolio. This standard format was developed for use by all mutual funds to
help you make your investment decisions. The information below is based upon the
Portfolio's expenses for the fiscal year ended June 30, 1997 adjusted to reflect
new servicing arrangements. This expense information should be considered along
with other important information, such as the Portfolio's investment objective.
A. EXPENSE SUMMARY
<TABLE>
<CAPTION>
GROWTH & INCOME
PORTFOLIO
SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
Maximum Sales Load on Purchases
(as a percentage of offering price) None 5.75% None
Sales Load Imposed on Reinvested
Distributions None None None
Deferred Sales Load None None None
Redemption Fees None None None
Exchange Fee None None None
ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees* .50% .50% .50%
12b-1 Fees .00% .00% .75%
Other Expenses .33% .64% .69%
--- ----- -----
Total Portfolio Operating Expenses* .83% 1.14% 1.94%
=== ==== ====
</TABLE>
*After expense waivers
ANNUAL PORTFOLIO OPERATING EXPENSES. The Portfolio is obligated to pay
Management Fees to First Tennessee Bank National Association (First Tennessee)
for managing the Portfolio's investments. First Tennessee, as Investment
Adviser, has voluntarily agreed to waive its investment advisory fee down to
.50% of the Portfolio's average net assets; however, there is no guarantee that
the waiver will continue. The Portfolio incurs Other Expenses, including
Administration and Co-Administration Fees, for maintaining shareholder records,
furnishing shareholder statements and reports, and other services. ALPS, as
Administrator, is entitled to and charges .15% of the Portfolio's average net
assets for administration services. First Tennessee, as Co-Administrator, is
entitled to and charges .05% of the Portfolio's average net assets for co-
administration services. Other Expenses also include Shareholder Servicing Fees
of 0.25% with respect to Class II and Class III of the Portfolio.
3
<PAGE>
If the waivers were not in effect, Management Fees would be .65% for the
current fiscal year for each Class. Total Portfolio Operating Expenses would be
as follows:
GROWTH & INCOME
PORTFOLIO
------------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
Total Portfolio Operating Expenses .98% 1.29% 2.09%
There is no guarantee that any waivers will continue at their stated levels.
Management Fees, 12b-1 Fees, Shareholder Servicing Fees, and Other Expenses,
are reflected in the Portfolio's share price and are not charged directly to
individual accounts. 12b-1 Fees are paid by Class III of the Portfolio to ALPS
for services and expenses in connection with distribution. Shareholder Servicing
Fees are paid by Class II and III of the Portfolio to Investment Professionals
for services and expenses incurred in connection with providing personal service
to shareholders and/or maintenance of shareholder accounts. Long-term
shareholders may pay more than the economic equivalent of the maximum 8.50%
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. (NASD) due to 12b-1 fees applicable to Class III shares. Please
see "What Advisory And Other Fees Does The Portfolio Pay - Distribution Plan and
Shareholder Servicing Plans for further information.
B. EXAMPLE: You would pay the following expenses for every $1,000 investment
in each Class of shares of the Growth & Income Portfolio assuming (1) 5% annual
return, (2) redemption at the end of each time period, (3) that operating
expenses (net of expense waivers) are the same as described above, and (4)
reinvestment of all dividends and distributions. THE RETURN OF 5% AND EXPENSES
SHOULD NOT BE CONSIDERED INDICATIVE OF ACTUAL OR EXPECTED PERFORMANCE OR
PORTFOLIO OPERATING EXPENSES, BOTH OF WHICH MAY VARY SIGNIFICANTLY:
GROWTH & INCOME
PORTFOLIO
------------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
1 year $ 9 $ 69* $ 20
3 years $ 27 $ 92* $ 61
5 years $ 46 $117* $106
10 years $103 $189* $228
*Reflects imposition of maximum sales charge at the beginning of the period.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The table that follows is included in the Annual Report for the Portfolio
dated June 30, 1997 and has been audited by PricewaterhouseCoopers LLP,
independent accountants. Their report on the financial statements and the
financial highlights for the Portfolio is included in the Annual Report. The
financial statements and financial highlights are incorporated by reference into
the Portfolio's Statement of Additional
4
<PAGE>
Information. The Annual Report contains additional performance information and
will be made available upon request and without charge.
GROWTH & INCOME PORTFOLIO
<TABLE>
<CAPTION>
CLASS I
-------
For the Year Ended June 30,
--------------------------------
1997 1996 1995 1994**
---- ---- ---- ------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 14.12 $ 12.22 $ 10.53 $ 10.00
-------- -------- -------- --------
Income from investment operations:
Net investment income 0.18 0.19 0.23 0.17
Net realized and unrealized gain on investments 3.75 2.58 2.21 0.57
-------- -------- -------- --------
Total from investment operations 3.93 2.77 2.44 0.74
-------- -------- -------- --------
Distributions:
Net investment income (0.18) (0.19) (0.23) (0.17)
Net realized gain (0.84) (0.68) (0.52) (0.04)
-------- -------- -------- --------
Total distributions (1.02) (0.87) (0.75) (0.21)
-------- -------- -------- --------
Net asset value, end of period $ 17.03 $ 14.12 $ 12.22 $ 10.53
======== ======== ======== ========
TOTAL RETURN+ 28.83% 23.54% 24.20% 7.39%*
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $221,136 $159,146 $114,000 $ 82,751
Ratio of expenses to average daily net assets(1) 0.83% 0.76% 0.47% 0.34%*
Ratio of net investment income to average net assets 1.19% 1.40% 2.12% 1.83%*
Portfolio turnover rate 25% 41% 33% 83%*
Average commission rate $ 0.0604 n/a n/a n/a
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had such
waivers not occurred is as follows. 0.98% 1.00% 0.99% 1.05%*
</TABLE>
5
<PAGE>
GROWTH & INCOME PORTFOLIO
<TABLE>
<CAPTION>
CLASS II CLASS III
-------- ---------
For the Year Ended June 30, For the Year Ended June 30,
--------------------------- --------------------------
1997 1996** 1997 1996 1995 1994**
---- ------ ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 14.12 $ 13.05 $ 14.11 $ 12.23 $ 10.51 $ 10.60
---------- -------- ------- ------- ------- -------
Income from investment operations:
Net investment income 0.13 0.09 0.02 0.03 0.06 0.06
Net realized and unrealized gain (loss)
on investments 3.76 1.74 3.74 2.60 2.24 (0.05)
---------- -------- ------- ------- ------- -------
Total from investment operations 3.89 1.83 3.76 2.63 2.30 0.01
---------- -------- ------- ------- ------- -------
Distributions:
Net investment income (0.12) (0.08) (0.04) (0.07) (0.06) (0.06)
Net realized gain (0.84) (0.68) (0.84) (0.68) (0.52) (0.04)
---------- -------- ------- ------- ------- -------
Total distributions (0.96) (0.76) (0.88) (0.75) (0.58) (0.10)
---------- -------- ------- ------- ------- -------
Net asset value, end of period $ 17.05 $ 14.12 $ 16.99 $ 14.11 $ 12.23 $ 10.51
========== ======== ======= ======= ======= =======
TOTAL RETURN+ 28.48%*** 14.71%# 27.44% 22.19% 22.61% 0.08%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 16,514 $ 1,918 $50,178 $36,892 $19,363 $ 2,094
Ratio of expenses to average daily
net assets (1) 1.14% 1.06%* 1.94% 1.87% 1.72% 1.83%*
Ratio of net investment income to
average net assets 0.88% 1.10%* 0.08% 0.29% 0.87% 0.34%*
Portfolio turnover rate 25% 41% 25% 41% 33% 83%*
Average commission rate $ 0.0604 n/a $0.0604 n/a n/a n/a
During the period, various fees were
waived. The ratio of expenses to
average net assets had such
waivers not occurred is as follows. 1.29% 1.30%* 2.09% 2.11% 2.26% 6.03%*
</TABLE>
For fiscal years beginning on or after September 1, 1995, a fund that invests
more than 10% of the value of its average net assets in equity securities is
required to disclose its average commission rate per share for security trades
on which commissions are charged.
* Annualized.
** Classes I, II and III commenced operations on August 2, 1993, December 20,
1995 and December 9, 1993, respectively.
*** Class II total return does not include the one time sales charge.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
6
<PAGE>
- --------------------------------------------------------------------------------
WHAT IS THE INVESTMENT OBJECTIVE OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
First Tennessee serves as Investment Adviser to the Portfolio and, with the
prior approval of the Board of Trustees (the Trustees), has engaged Highland
Capital Management Corp. (Highland), to act as Sub-Adviser to the Portfolio.
Subject to First Tennessee's supervision, Highland is responsible for the day-
to-day investment management of the Portfolio, including providing investment
research and credit analysis concerning Portfolio investments and conducting a
continuous program of investment of Portfolio assets in accordance with the
investment policies and objectives of the Portfolio. For additional information
about the Portfolio's investment advisory arrangements, see "What Advisory And
Other Fees Does The Portfolio Pay? - Investment Advisory and Management and Sub-
Advisory Agreements."
The investment objective of the Portfolio is to achieve maximum total return
through a combination of capital appreciation and dividend income by investing
at least 65% of its total assets in equity securities. However, the Investment
Adviser and Sub-Adviser currently intend, under normal circumstances, to invest
at least 80% of the Portfolio's total assets in equity securities, except where
prevailing market conditions require a more defensive posture. There is no
assurance that the Portfolio will achieve its investment objective. The
permitted investments of the Portfolio are as follows:
The Portfolio invests primarily in common stock and American Depository
Receipts (ADRs) of U.S. and international companies that trade on major
exchanges (NYSE, ASE, NASDAQ). Highland will analyze the fundamental values both
of particular companies and industries. Fundamental analysis considers a
company's essential soundness and future prospects, as well as overall industry
outlook.
The Portfolio may also invest in convertible preferred stock, bonds and
debentures that are convertible into common stock, options and may sell short
securities it owns. The Portfolio may engage in repurchase agreements and
reverse repurchase agreements, may buy and sell securities on a when-issued or
delayed-delivery basis, and may purchase warrants, interests in real estate
investment trusts, forward currency contracts, illiquid and restricted
securities, and shares in other investment companies. The Portfolio may, for
temporary defensive purposes, invest without limit in short-term money market
securities including, but not limited to, U.S. government obligations,
commercial paper, and certificates of deposit.
- --------------------------------------------------------------------------------
IS THE PORTFOLIO A SUITABLE INVESTMENT?; INVESTMENT RISKS
- --------------------------------------------------------------------------------
By itself, the Portfolio does not constitute a balanced investment plan. The
Growth & Income Portfolio emphasizes maximizing total return through a
combination of capital appreciation and dividend income by investing primarily
in equity securities. An investment in the Portfolio may involve greater risk
than is inherent in other types of investments since it seeks capital
appreciation, and the value of its investments will generally fluctuate in
response to stock market conditions. Further, investment in the securities of
issuers in any foreign country involves special risks and considerations not
typically associated with investing in U.S. issuers. The Portfolio's share
price, yield and total return will fluctuate. An investment in the Portfolio may
be worth more or less than the original cost when shares are redeemed.
In addition, the Portfolio may invest in instruments and securities generally
known as derivative investments. These investments may include the use of
forward currency contracts, put and call option
7
<PAGE>
contracts, zero coupon bonds and stripped fixed-income obligations. Highland may
not buy all of these instruments or use all of these techniques unless it
believes that doing so will help the Portfolio achieve its investment objective.
Use of these instruments and techniques can alter the risk and return
characteristics of the Portfolio. They may increase the Portfolio's volatility
and may involve the investment of small amounts of cash relative to the
magnitude of the risk assumed. This is called leverage. They may also result in
a loss of principal if Highland judges market conditions incorrectly or employs
a strategy that does not correlate well with the Portfolio's investment
strategy. Positions in options involve the risk that such options may fail as a
hedging technique and that closing transactions may not be effected where a
liquid secondary market does not exist.
Further information about the types of securities in which the Portfolio may
invest and their related risks, as well as the investment policies of the
Portfolio in general are set forth in the section "Investment Instruments,
Transactions, Strategies And Risks " and in the Statement of Additional
Information.
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIO'S INVESTMENT POLICIES AND LIMITATIONS?
- --------------------------------------------------------------------------------
INVESTMENT LIMITATIONS. The Portfolio has adopted the following investment
limitations:
(1) With respect to 75% of the Portfolio's assets, the Portfolio will not
purchase a security, other than U.S. government securities, if, as a result,
(a) more than 5% of its total assets would be invested in the securities of
any single issuer; or (b) the Portfolio would own more than 10% of the voting
securities of any single issuer.
(2) The Portfolio will not invest 25% or more of its total assets in a
particular industry, other than U.S. government obligations.
(3) (a) The Portfolio may borrow money solely for temporary or emergency
purposes, but not in an amount exceeding 33 1/3% of its total assets. (b) The
Portfolio may borrow money from banks, or by engaging in reverse repurchase
agreements. (c) The Portfolio will not purchase securities when borrowings
exceed 5% of its total assets. If the Portfolio borrows money, its share price
may be subject to greater fluctuation until the borrowing is paid off. To this
extent, purchasing securities when borrowings are outstanding may involve an
element of leverage.
(4) (a) The Portfolio may temporarily lend its portfolio securities to
broker-dealers and institutions, but only when the loans are fully
collateralized. (b) Loans, in the aggregate, will be limited to 33 1/3% of the
Portfolio's total assets.
Unless otherwise noted, the Portfolio's policies and limitations are not
fundamental and may be changed by the Trustees without shareholder approval. The
fundamental policies of the Portfolio that require shareholder approval prior to
any changes are: the Portfolio's investment objective, and limitations (1), (2),
(3)(a), and (4)(b) above. With the exception of the Portfolio's policies and
limitations regarding borrowing and investments in illiquid securities, these
limitations and the Portfolio's policies are considered at the time of purchase
of securities; the sale of securities is not required in the event of a
subsequent change in circumstances.
The investment policies and limitations set forth above are supplemented by
the investment policies and limitations in the Statement of Additional
Information. No assurance can be made that the Portfolio will achieve its
objective, but it will follow the investment style described in this Prospectus.
8
<PAGE>
From time to time, the Portfolio, to the extent consistent with its investment
objective, policies, and restrictions, may invest in securities of companies
with which First Tennessee or any affiliates have lending relationships.
- --------------------------------------------------------------------------------
HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?
- --------------------------------------------------------------------------------
CLASS I
- -------
WHO MAY INVEST?
Class I shares are designed exclusively for investment of monies held in non-
retail trust, advisory, agency, custodial or similar Institutional Accounts.
Class I shares may be purchased for Institutional Accounts by financial
institutions, business organizations, corporations, municipalities, non-profit
institutions, and other Institutional Investors serving in a trust, advisory,
agency, custodial or similar capacity who meet the investment threshold for this
Class of shares.
HOW IS AN INSTITUTIONAL ACCOUNT ESTABLISHED?
An initial investment must be preceded by or made in conjunction with the
establishment of an Institutional Account with an Institutional Investor.
Establishment of an Institutional Account may require that documents and
applications be completed and signed before the investment can be implemented.
The Institutional Investor may require that certain documents be provided prior
to making a redemption from the Portfolio. Institutional Investors may charge
fees in addition to those described herein. Fee schedules for Institutional
Accounts are available upon request from the Institutional Investor and are
detailed in the agreements by which each client opens an account with an
Institutional Investor.
HOW ARE INVESTMENTS MADE?
Each Institutional Investor will transmit orders to the Transfer Agent, Chase
Global Funds Services Company (CGFSC). If an order is received by CGFSC prior to
4:00 p.m. Eastern Time on any Business Day (as defined in the section "How Are
Investments, Exchanges And Redemptions Made - Class I, II and III - How Are
Portfolio Shares Valued?") and the funds are received by CGFSC that day, the
investment will earn dividends declared, if any, on the day of purchase.
Institutional Investors will wire funds through the Federal Reserve System.
Purchases will be processed at the net asset value per share (NAV) calculated
after an order is received and accepted by CGFSC. The Portfolio requires advance
notification of all wire purchases. To secure same day acceptance of federal
funds (monies transferred from one bank to another through the Federal Reserve
System with same-day availability), an Institutional Investor must call CGFSC at
1-800-442-1941, (option 2) prior to 4:00 p.m. Eastern Time on any Business Day
to advise it of the wire. The Trust may discontinue offering its shares in any
Class of a Portfolio without notice to shareholders.
MINIMUM INVESTMENT AND ACCOUNT BALANCE. The minimum initial investment for
each Institutional Investor is $750,000. Institutional Investors may satisfy the
minimum investment by aggregating their Institutional Accounts within the
Portfolio. Subsequent investments may be in any amount. If an Institutional
Investor's Class I account falls below $375,000 due to redemption, the Portfolio
may close the account. An Institutional Investor may be notified if the minimum
balance is not being maintained and will be allowed 30 days to make additional
investments before its account is closed.
9
<PAGE>
Shares will be redeemed at the NAV on the day the account is closed, and
proceeds will be sent to the address of record.
Should an Institutional Investor or a beneficial owner of Class I shares cease
to be eligible to participate in this Class, Class I shares held in an
Institutional Account may be converted to shares of another Class. Any such
conversion will be effected on the basis of the relative NAVs of the two Classes
without the imposition of any sales load, fee or other charge. Institutional
Investors or beneficial owners will receive at least 30 days prior notice of any
proposed conversion.
HOW ARE REDEMPTIONS MADE?
Institutional Investors may redeem all or a portion of their account shares on
any Business Day. Shares will be redeemed at the NAV next calculated after CGFSC
has received the redemption request and will earn dividends declared, if any,
through the day prior to redemption. If an account is closed, any accrued
dividends will be paid at the beginning of the following month.
Institutional Investors may make redemptions by wire provided they have
established a wire account with CGFSC. Please call 1-800-442-1941, (option 2) to
advise CGFSC of the wire. If telephone instructions are received before 4:00
p.m. Eastern Time on any Business Day, proceeds of the redemption will be wired
as federal funds on the next Business Day to the bank account designated with
CGFSC. The Institutional Investor may change the bank account designated to
receive an amount redeemed at any time by sending a letter of instruction with a
signature guarantee to CGFSC at 73 Tremont Street, Boston, Massachusetts, 02108.
Pursuant to the Investment Company Act of 1940, as amended (1940 Act), if
making immediate payment of redemption proceeds could adversely affect the
Portfolio, payments may be made up to seven days later. Also, when the New York
Stock Exchange (NYSE) is closed (or when trading is restricted) for any reason
other than customary weekend or holiday closings, or under any emergency
circumstances as determined by the SEC to merit such action, the right of
redemption may be suspended or the date of payment postponed for a period of
time that may exceed seven days. To the extent Portfolio securities are traded
in other markets on days when either the NYSE or the Federal Reserve Bank of New
York (New York Federal Reserve) is closed, the Portfolio's NAV may be affected
on days when investors do not have access to the Portfolio to purchase or redeem
shares.
If transactions by telephone cannot be executed (for example, during times of
unusual market activity), orders may be placed by mail to CGFSC. In case of
suspension of the right of redemption, the Institutional Investor may either
withdraw its request for redemption or it will receive payment based on the NAV
next determined after the termination of the suspension.
ADDITIONAL INFORMATION
The Portfolio also reserves the right to reject any specific purchase order,
including certain purchases by exchange. Purchase orders may be refused if, in
First Tennessee's opinion, they are of a size that would disrupt management of
the Portfolio.
In order to allow First Tennessee to manage the Portfolio most effectively,
Institutional Investors are strongly urged to initiate all trades (investments,
exchanges and redemptions of shares) as early in the day as possible and to
notify CGFSC at least one day in advance of trades in excess of $1 million. In
making these trade requests, the name of the Institutional Investor and the
account number(s) must be supplied.
Transactions may be initiated by telephone. Please note that the Portfolio and
its agents will not be responsible for any losses resulting from unauthorized
telephone transactions if the Portfolio or its agents
10
<PAGE>
follow reasonable procedures designed to verify the identity of the caller.
These procedures may include requesting additional information or using
personalized security codes. The Portfolio or its agents may also record calls
and an Institutional Investor should verify the accuracy of confirmation
statements immediately after receipt. If an Institutional Investor does not want
to be able to initiate redemptions and exchanges by telephone, please call CGFSC
for instructions.
CLASS II AND III
- ----------------
WHO MAY INVEST?
Class II and III shares are designed for individuals and other investors who
seek mutual fund investment convenience plus a lower investment minimum. These
Classes offer investors differing expense and sales load structures to choose
between. See "Summary Of Portfolio Expenses."
INVESTMENT REQUIREMENTS
The minimum initial investment in Class II or III shares is $1,000. Subsequent
investments may be in any amount greater than $100. If you participate in the
Systematic Investing Program (see "Systematic Investing Program" below) or the
"A Plus Card Program" (a consumer discount card program provided by "A" Plus
Strategic Alliances, Inc., a subsidiary of First Tennessee), the minimum initial
investment is $250, and subsequent investments may be in any amount of $25 or
greater. If you are an employee of First Tennessee or any of its affiliates and
you participate in the Systematic Investing Program, the minimum initial
investment is $50, and subsequent investments may be in any amount of $25 or
greater. If your balance in the Portfolio falls below the applicable minimum
investment requirement due to redemption, you may be given 30 days' notice to
reestablish the minimum balance. If you do not reestablish the minimum balance,
your account may be closed and the proceeds mailed to you at the address on
record. Shares will be redeemed on the day the account is closed.
All purchases must be made in U.S. dollars and checks must be drawn on U.S.
banks. No cash will be accepted. If you make a purchase with more than one
check, each check must have a value of at least $100, and the minimum investment
requirement still applies (excluding the specific circumstances, stated above,
which reduce the minimum investment requirement). The Portfolio reserves the
right to limit the number of checks processed at one time. If your check does
not clear, your purchase will be canceled and you could be liable for any losses
or fees incurred.
You may initiate any transaction either directly or through your Investment
Professional. Please note that the Portfolio and its agents will not be
responsible for any losses resulting from unauthorized transactions if the
Portfolio or its agents follow reasonable procedures designed to verify the
identity of the caller. These procedures may include requesting additional
information or using personalized security codes. Your Investment Professional
may also record calls and you should verify the accuracy of your confirmation
statements immediately after you receive them. If you do not want to be able to
redeem and exchange by telephone, please check the box on your application (if
you invest directly) or, if you invest through an Investment Professional,
please call your Investment Professional for instructions.
HOW DO I SET UP AN ACCOUNT?
You may set up an account directly in the Portfolio or you may invest in the
Portfolio through your Investment Professional (see "How Do I Invest Through My
Investment Professional" below). Shares will be purchased based on the NAV next
calculated after CGFSC has received the request in proper form. If you are
investing through an Investment Professional, transactions that your Investment
Professional initiates should be transmitted to CGFSC before 4:00 p.m. Eastern
Time in order for you to
11
<PAGE>
receive that day's share price. CGFSC must receive payment within three business
days after an order is placed. Otherwise, the purchase order may be canceled and
you could be held liable for the resulting fees and/or losses. An investor will
earn dividends declared, if any, on the day of purchase if the funds are
received by CGFSC that day.
HOW DO I INVEST DIRECTLY?
When opening a new account directly, you must complete and sign an account
application and send it to CGFSC, 73 Tremont Street, Boston, MA 02108. Telephone
representatives are available at 1-800-442-1941, (option 2) between the hours of
8:00 a.m. to 4:00 p.m. Central Time (9:00 a.m. to 5:00 p.m. Eastern Time),
Monday through Friday.
Investments may be made in several ways:
BY MAIL: Make your check payable to First Funds: Growth & Income Portfolio,
and mail it, along with the application, to the address indicated on the
application. Your account will be credited on the business day that CGFSC
receives your application in good order.
BY BANK TRANSFER: Bank transfer allows you to move money between your bank
account and your First Funds account. This automatic service allows you to
transfer money from your bank account via the Automated Clearing House (ACH)
network to your Portfolio account. First, a Portfolio account must be
established, and an application sent to CGFSC. Next, a deposit account must be
opened at a bank providing bank transfer services and you must arrange for this
service to be provided. Once you have completed this process, you can initiate a
bank transfer by contacting a representative from your bank, providing the
required information for the bank, and authorizing the transfer to take place.
Please allow two or three days after the authorization for the transfer to
occur.
BY WIRE: Call 1-800-442-1941, (option 2) to set up your Portfolio account to
accommodate wire transactions. To initiate your wire transaction, call your
depository institution. Federal funds (monies transferred from one bank to
another through the Federal Reserve System with same-day availability) should be
wired to:
Chase Manhattan Bank, N.A.
ABA #021000021
First Funds
Credit DDA #910-2-733335
(Account Registration)
(Account Number)
(Wire Control Number) *See Below*
Prior to sending wires, please be sure to call 1-800-442-1941, (option 2) to
receive a Wire Control Number to be included in the body of the wire (see
above).
Your bank may charge you a fee for this service.
HOW DO I REDEEM SHARES WHEN INVESTING DIRECTLY?
You may redeem all or a portion of your shares on any day that the Portfolio
is open for business. Shares will be redeemed at the NAV next calculated after
CGFSC has received the redemption request and will earn dividends declared, if
any, through the day prior to redemption. If a Portfolio account is closed, any
accrued dividends will be paid at the beginning of the following month.
12
<PAGE>
You may redeem shares in several ways:
BY MAIL: Write a "letter of instruction" with your name, the Portfolio's name,
your Portfolio account number, the dollar amount or number of shares to be
redeemed, and any additional requirements that apply to each particular account.
You will need the letter of instruction signed by all persons required to sign
for transactions, exactly as their names appear on the account application,
along with a signature guarantee as described below.
A signature guarantee is designed to protect you, the Portfolio, and its
agents from fraud. Your written request requires a signature guarantee if you
wish to redeem more than $1,000 worth of shares; if your Portfolio account
registration has changed within the last 30 days; if the check is not being
mailed to the address on your account; if the check is not being made out to the
account owner; or if the redemption proceeds are being transferred to another
First Funds account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public.
BY BANK TRANSFER: When establishing your account in the Portfolio, you must
have indicated this account privilege in order to authorize the redemption of
monies with the proceeds transferred to your bank account. To authorize a
redemption, simply contact CGFSC at 1-800-442-1941, (option 2) and your
redemption will be processed at the NAV next calculated. Please allow two or
three days after the authorization for monies to reach your bank account.
BY WIRE: You may make redemptions by wire provided you have established a
Portfolio account to accommodate wire transactions. If telephone instructions
are received before 4:00 p.m. Eastern Time, proceeds of the redemption will be
wired as federal funds on the next Business Day to the bank account designated
with CGFSC. You may change the bank account designated to receive an amount
redeemed at any time by sending a letter of instruction with a signature
guarantee to CGFSC at 73 Tremont Street, Boston, Massachusetts, 02108.
ADDITIONAL REDEMPTION REQUIREMENTS: The Portfolio may hold payment on
redemptions until it is reasonably satisfied that investments made by check have
been collected, which can take up to seven days. Also, when the NYSE is closed
(or when trading is restricted) for any reason other than its customary weekend
or holiday closings, or under any emergency circumstances as determined by the
SEC to merit such action, the right of redemption may be suspended or the date
of payment postponed for a period of time that may exceed seven days. To the
extent that Portfolio securities are traded in other markets on days when either
the NYSE or the New York Federal Reserve is closed, the Portfolio's NAV may be
affected on days when investors do not have access to the Portfolio to purchase
or redeem shares.
If you are unable to reach CGFSC by telephone (for example, during times of
unusual market activity), consider placing your order by mail directly to CGFSC.
In case of suspension of the right of redemption, you may either withdraw your
request for redemption or you will receive payment based on the NAV next
determined after the termination of the suspension.
HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?
If you are investing through your Investment Professional, you may be required
to set up a brokerage or agency account. Please call your Investment
Professional for information on establishing an account. If you are purchasing
shares of the Portfolio through a program of services offered or administered by
your Investment Professional, you should read the program materials in
conjunction with this Prospectus. Certain features of such programs may impose
additional requirements and charges for the services
13
<PAGE>
rendered. Your Investment Professional may offer any or all of the services
mentioned in this section, and is responsible for initiating all initial
purchase transactions. Please contact your Investment Professional for
information on these services.
SYSTEMATIC INVESTING PROGRAM
The Systematic Investing Program offers a simple way to maintain a regular
investment program. You may arrange automatic transfers (minimum $25 per
transaction) from your bank account to your First Funds account on a periodic
basis. When you participate in this program, the minimum initial investment in
each Portfolio is $250. If you are an employee of First Tennessee or any of its
affiliates, the minimum initial investment in the portfolio is $50. You may
change the amount of your automatic investment, skip an investment, or stop the
Systematic Investing Program by calling CGFSC at 1-800-442-1941, (option 2) or
your Investment Professional at least three Business Days prior to your next
scheduled investment date.
SYSTEMATIC WITHDRAWAL PLAN
You can have monthly, quarterly or semi-annual checks sent from your account
to you, to a person named by you, or to your bank checking account. Your
Systematic Withdrawal Plan payments are drawn from share redemptions and must be
in the amount of $100 or more per Portfolio per month. If Systematic Withdrawal
Plan redemptions exceed income dividends earned on your shares, your account
eventually may be exhausted. Please contact ALPS at 1-800-442-1941 (option 1) or
your Investment Professional for more information.
ADDITIONAL INFORMATION
TAX-DEFERRED RETIREMENT PLANS: Retirement plans can offer significant tax
savings to individuals. Please call ALPS at 1-800-442-1941 (option 1) or your
Investment Professional for more information on the plans and their benefits,
provisions and fees. CGFSC or your Investment Professional can set up your new
account in the Portfolio under one of several tax-deferred plans. These plans
let you invest for retirement and defer the tax on your investment income.
Minimums may differ from those listed previously under "Investment
Requirements". Plans include Individual Retirement Accounts (IRAs), Rollover
IRAs, Keogh Plans, and Simplified Employee Pension Plans (SEP-IRAs).
CLASS II
- --------
PUBLIC OFFERING PRICE
The public offering price for Class II shares is the sum of the NAV plus a
sales load. As indicated below, a portion of this load may be reallowed to
Investment Professionals which have entered into an agreement with ALPS, the
Portfolio's Distributor (Service Organizations). You may calculate your sales
load as follows:
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<TABLE>
<CAPTION>
REALLOWANCE TO
TOTAL SALES LOAD FOR CLASS II SHARES SERVICE ORGANIZATIONS
------------------------------------- ---------------------
AS A % OF OFFERING AS A % AS A % OF OFFERING
AMOUNT OF TRANSACTION PRICE PER SHARE OF NAV PRICE PER SHARE
<S> <C> <C> <C>
Less than $50,000 5.75 6.10 5.00
$50,000 to $99,999 4.50 4.71 4.00
$100,000 to $249,999 3.50 3.63 3.00
$250,000 to $499,999 2.50 2.56 2.25
$500,000 to $999,999 1.50 1.52 1.25
$1,000,000 and over 0.50 0.50 0.40
</TABLE>
The reallowance to Service Organizations may be changed from time to time.
ALPS, at its expense, may provide additional non-cash promotional incentives to
eligible representatives of Service Organizations in the form of attendance at a
sales seminar at a resort. These incentives may be limited to certain eligible
representatives of Service Organizations who have sold significant numbers of
shares of any of the Portfolios of the Trust.
You may purchase Class II shares without a sales load if the purchase will be
(a) through an IRA, 401 Plan, 403 Plan or directed agency account if the
trustee, custodian, or agent thereof is a direct or indirect subsidiary or
franchisee bank of First Tennessee or its affiliates; (b) by registered
representatives, directors, advisory directors, officers and employees (and
their immediate families) of First Tennessee or its affiliates; (c) by a current
or former Trustee, officer or employee of First Funds; the spouse of a First
Funds Trustee, officer or employee; a First Funds Trustee acting as a custodian
for a minor child or grandchild of a First Funds Trustee, officer or employee;
or the child or grandchild of a current or former Trustee, officer or employee
of First Funds who has reached the age of majority; (d) by a charitable
remainder trust or life income pool established for the benefit of a charitable
organization (as defined in Section 501(c)(3) of the Internal Revenue Code); (e)
for use in a financial institution or investment adviser managed account for
which a management or investment advisory fee is charged; (f) with redemption
proceeds from other mutual fund complexes on which the investor has paid a
front-end sales charge within the past 60 days upon presentation of purchase
verification information; or (g) through certain promotions where the load is
waived for investors.
In addition, you will not pay a sales load on the reinvestment of dividends or
distributions in the Portfolio or any other First Funds Portfolio, or in
connection with certain share exchanges as described under "How Are Investments,
Exchanges And Redemptions Made? - Class I, II, and III - How are Exchanges
Made?" Further, you generally will not pay a sales load on Class II shares of
the Portfolio which you buy using proceeds from the redemption of a First Funds
Portfolio which does not charge a front-end load, if you obtained such shares
through an exchange for Class II shares which you purchased with a sales load. A
sales load will apply to your purchase of Class II shares in the foregoing
situation only to the extent that the Portfolio's sales load exceeds the sales
load you paid in the prior purchase of the Class II shares.
In addition, if you purchase Class II shares within 60 days after redeeming
shares of the Portfolio, you will receive credit towards the sales load payable
on the purchase to the extent of the sales load you paid on the shares you
redeemed. This reinstatement privilege may be exercised only with respect to
redemptions and purchases in the same First Funds Portfolio. The reinstatement
privilege can be exercised only one time with respect to any particular
redemption.
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<PAGE>
QUANTITY DISCOUNTS
You may be entitled to reduced sales charges through the Right of Accumulation
or a Letter of Intent, even if you do not make an investment of a size that
would normally qualify for a quantity discount.
To qualify for a reduction of or exception to the sales load, you or your
Investment Professional must notify the Transfer Agent, CGFSC, at the time of
purchase or exchange. The reduction in sales load is subject to confirmation of
your holdings through a check of records. The Trust may modify or terminate
quantity discounts at any time. For more information about quantity discounts,
contact your Service Organization or ALPS at 1-800-442-1941 (option 1).
RIGHT OF ACCUMULATION. The sales charge schedule under the heading "How Are
Investments, Exchanges And Redemptions Made? - Public Offering Price" shows that
the sales load you will pay on Class II shares is reduced as your aggregate
investment increases. The Right of Accumulation allows you to combine certain
First Funds investments to determine your aggregate investment and the
applicable reduced sales load. You may combine the amount of your investment in
the Portfolio's Class II shares with the value of your investment in Class II of
any other First Funds Portfolio you own and on which you paid a sales load. If
you are a participant in a First Funds IRA or if you are a trustee or custodian
of another type of First Funds retirement plan, you may also include as part of
your aggregate investment any holdings through the IRA or in the plan even if a
load was not paid. If, for example, you beneficially own Class II shares of a
First Funds Portfolio with an aggregate current value of $99,000 and you
subsequently purchase shares of the Portfolio having a current value of $1,000,
the load applicable to the subsequent purchase would be reduced to 3.50% of the
offering price. Similarly, each subsequent purchase of First Funds Class II
shares may be added to your aggregate investment at the time of purchase to
determine the applicable sales loads.
LETTER OF INTENT. A Letter of Intent allows you to purchase Class II shares
over a 13-month period at a reduced sales charge. The sales charge is based on
the total amount you intend to purchase plus the total net asset value of Class
II shares which you already own on which you have paid a sales load. If you are
a participant in a First Funds IRA or if you are a trustee or custodian of
another type of First Funds retirement plan, you may also credit towards
completion of your Letter of Intent any Class II shares held through the IRA or
in the plan, even if a load was not paid. Each investment you make during the
period may be made at the reduced sales charge that would apply to the total
amount you intend to invest. The reduced sales load applies only to new
purchases. If you do not invest the total amount within the period, you may pay
the difference between the higher sales charge rate that would have been applied
to the purchases you made and the reduced sales charge rate you have paid.
Shares of the Portfolio equal to 5% of the amount you intend to invest will be
held in escrow and, if you do not pay the difference within 20 days following
the mailing of a request, the Transfer Agent will redeem a sufficient amount of
your escrowed shares to pay the additional sales charge. After the terms of your
Letter of Intent are fulfilled, the Transfer Agent will release your escrowed
shares.
If your purchases qualify for a further sales load reduction in addition to
that indicated in the Letter of Intent, the sales load will be adjusted to
reflect your total purchases. Signing a Letter of Intent does not bind you to
purchase the full amount indicated at the sales load in effect at the time of
signing, but you must complete the intended purchase to obtain the reduced sales
load. To apply, sign the Letter of Intent form at the time you purchase Class II
shares. You will be entitled to the applicable sales load that is in effect at
the date you submit the Letter of Intent until you complete your intended
purchase.
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<PAGE>
QUALIFICATION OF DISCOUNTS. As shown in the schedule of Class II sales
charges, larger purchases may result in lower sales charges to you. For purposes
of determining the amount of purchases using the Right of Accumulation and
Letter of Intent privileges, you may combine your purchase with:
- purchases by your spouse or his, her or your joint account or for the
account of any minor children, and
- the aggregate investment of any trustee or other Institutional Investor
for you and/or your spouse or your minor children.
A trustee or custodian of any qualified pension or profit sharing plan may
combine its aggregate purchases.
OTHER. Class II shares also incur Shareholder Servicing Fees. See discussion
under "What Advisory And Other Fees Does The Portfolio Pay? - Distribution Plan
and Shareholder Servicing Plan."
CLASS III
- ---------
Class III shares are bought without a front-end load; that is, the offering
price for such shares will be their NAV. Class III shares incur Distribution
Fees and Shareholder Servicing Fees. See discussion under "What Advisory And
Other Fees Does The Portfolio Pay? - Distribution Plan and Shareholder Servicing
Plan."
CLASS I, II AND III
- -------------------
HOW ARE PORTFOLIO SHARES VALUED?
The term "net asset value per share," or NAV, means the worth of one share.
The NAV of each Class of the Portfolio is calculated by adding that Class' pro
rata share of the value of all securities and other assets attributable to the
Portfolio, deducting that Class' pro rata share of Portfolio liabilities,
further deducting Class specific liabilities, and dividing the result by the
number of shares outstanding in that Class.
The Portfolio is open for business each day that both the NYSE and the New
York Federal Reserve are open (a Business Day). The NAV is calculated at the
close of the Portfolio's Business Day, which coincides with the close of regular
trading of the NYSE (normally 4:00 p.m. Eastern Time).
The Portfolio's securities and other assets are valued primarily on the basis
of market quotations furnished by pricing services, or if quotations are not
available, by a method that the Trustees believe accurately reflects fair value.
Foreign securities are valued on the basis of quotations from the primary United
States market in which they are traded or, if not traded on a U.S. market, then
their primary foreign market, and translated from foreign market quotations into
U.S. dollars using current exchange rates.
DISTRIBUTION OPTIONS: The Portfolio earns dividends from its stocks and
interest from bond, money market, and other fixed-income investments. These are
passed along as dividend distributions. The Portfolio may realize capital gains
if it sells securities for a higher price than it paid for them. These are
passed along as capital gain distributions. Income dividends for the Portfolio
are declared and paid monthly.
When you fill out your account application, you can specify how you want to
receive your distributions. Currently, there are three available options:
17
<PAGE>
1. REINVESTMENT OPTION. Your dividend distributions and capital gain
distributions, if any, will be automatically reinvested in additional shares of
the Portfolio. Reinvestment of distributions will be made at that day's NAV. If
you do not indicate a choice on your application, you will be assigned this
option.
2. CASH OPTION. You will be sent a check for each dividend and capital gain
distribution, if any. Distribution checks will be mailed no later than seven
days after the last day of the month.
3. INCOME-EARNED OPTION. Your capital gain distributions, if any, will be
automatically reinvested, but you will be sent a check for any dividend
distribution.
HOW ARE EXCHANGES MADE?
An exchange is the redemption of shares of one Portfolio and the purchase of
shares of another. The exchange privilege is a convenient way to sell and buy
shares of other Portfolios registered in an investor's state. Except as noted
below, the Portfolio's shares may be exchanged for the same Class shares of
other First Funds Portfolios. The redemption and purchase will be made at the
next determined NAV after the exchange request is received and accepted by
CGFSC. You may execute exchange transactions by calling CGFSC at 1-800-442-1941
(option 2) prior to 4:00 p.m. Eastern Time on any Business Day.
Class II shares of the First Funds Money Market Portfolios are not currently
available for investment. Investors in Class II shares wishing to exchange into
one of the Money Market Portfolios will receive Class III shares.
When making an exchange or opening an account in another Portfolio by
exchange, the registration and tax identification numbers of the two accounts
must be identical. In order to open a new account through exchange, the minimum
initial investment requirements must be met.
Each exchange may produce a gain or loss for tax purposes. In order to protect
the Portfolio's performance and its shareholders, First Tennessee discourages
frequent exchange activity by investors in response to short-term market
fluctuations. The Portfolio reserves the right to refuse any specific purchase
order, including certain purchases by exchange if, in First Tennessee's opinion,
the Portfolio would be unable to invest effectively in accordance with its
investment objective and policies, or would otherwise be affected adversely.
Exchanges or purchase orders may be restricted or refused if the Portfolio
receives or anticipates individual or simultaneous orders affecting significant
portions of the Portfolio's assets. Although the Portfolio will attempt to give
prior notice whenever it is reasonably able to do so, it may impose these
restrictions at any time. The Portfolio reserves the right to modify or withdraw
the exchange privilege upon 60 days notice and to suspend the offering of shares
in any Class without notice to shareholders. You or your Institutional Investor,
if you are invested in Class I, will receive written confirmation of each
exchange transaction.
Exchanges are generally not permitted from Class I to another Class. Should a
beneficial owner of Class I shares cease to be eligible to purchase shares of
Class I, Class I shares held in an Institutional Account may be converted to
shares of another Class.
STATEMENTS AND REPORTS
You, or if Class I, the Institutional Investor, will receive a monthly
statement and a confirmation after every transaction that affects the account
registration. A statement with tax information will be mailed by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
or, if Class I, the Institutional Investor, will receive the Portfolio's
financial statements. To reduce expenses, only one copy of the Portfolio's
reports (such as the Prospectus and Annual Report) will be mailed to each
investor or, if Class I, each Institutional Investor. Please write to ALPS to
request additional copies.
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<PAGE>
- --------------------------------------------------------------------------------
HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------
From time to time the Portfolio may quote the yield of Class I, II or III
shares in advertisements or in reports or other communications with
shareholders. The YIELD is a way of showing the rate of income that the
Portfolio earns on its investments as the percentage of its share price. To
calculate yield, the Portfolio takes the net investment income it earned from
its portfolio securities for a 30-day period, divides it by the average number
of shares entitled to receive dividends, and expresses the result as an
annualized percentage rate based on share price at the end of the 30-day period.
Yields do not reflect gains or losses from portfolio transactions. Yields are
calculated according to accounting methods that are standardized for all mutual
funds. Because yield accounting methods differ from the methods used for other
accounting purposes, the Portfolio's yield may not equal its distribution rate,
the income paid to an account, or the income reported in financial statements.
TOTAL RETURN for Class I, II or III of the Portfolio is based on the overall
dollar or percentage change in value of a hypothetical investment, assuming
dividends are reinvested. A CUMULATIVE TOTAL RETURN reflects performance over a
stated period of time. An AVERAGE ANNUAL TOTAL RETURN reflects the hypothetical
annually compounded rate that would have produced the same cumulative total
return if performance had been constant over the entire period. Because average
annual returns tend to smooth out variations in performance, you should
recognize that they are not the same as actual year-by-year results. The yield
and total returns of the three Classes of the Portfolio are calculated
separately due to separate expense structures as indicated in the "Summary Of
Portfolio Expenses"; the yields and total returns of Class II and Class III will
be lower than that of Class I.
For additional performance information, contact your Investment Professional
or ALPS for a free Annual Report and Statement of Additional Information for the
Portfolio.
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Broker-dealers are utilized to conduct securities transactions for the
Portfolio and are chosen based upon professional ability and quality of service.
In addition, the Portfolio's investment advisers may consider a broker-dealer's
sales of shares of the Portfolio or recommendations to its customers that they
purchase shares of the Portfolio as a factor in the selection of broker-dealers
to execute transactions for the Portfolio. In placing business with such broker-
dealers, the advisers will seek the best execution of each transaction.
Higher commissions may be paid to firms that provide research services to the
extent permitted by law. The frequency of Portfolio transactions - the portfolio
turnover rate - will vary from year to year depending on market conditions. The
Portfolio's portfolio turnover rate for the fiscal year ended June 30, 1998 was
__%.
- --------------------------------------------------------------------------------
WHAT IS THE EFFECT OF FEDERAL INCOME TAX ON THIS INVESTMENT?
- --------------------------------------------------------------------------------
The Portfolio intends to distribute substantially all of its net investment
income and capital gains, if any, to shareholders within each calendar year as
well as on a fiscal year basis. Any net capital gains
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<PAGE>
realized are normally distributed in December. Income dividends for the
Portfolio, if any, are declared and paid monthly.
FEDERAL TAXES. Distributions of gains from sales of assets held by the
Portfolio for more than one year generally are taxable to shareholders at the
applicable mid-term or long-term capital gains rate, regardless of how long they
have owned their Portfolio shares. Distributions from other sources generally
are taxed as ordinary income. A portion of the Portfolio's dividends may qualify
for the dividends-received deduction for corporations. Distributions are taxable
when they are paid, whether taken in cash or reinvested in additional shares,
except that distributions declared in October, November or December and paid in
January are taxable as if paid on December 31. The Portfolio will send each
investor or, if Class I, each Institutional Investor an IRS Form 1099-DIV by
January 31.
REDEMPTIONS AND EXCHANGES. A capital gain or loss may be realized when shares
of the Portfolio are redeemed or exchanged. For most types of accounts, the
Portfolio will report the proceeds of redemptions to each shareholder or, if
Class I, the Institutional Investor, and the IRS annually. However, the tax
treatment also depends on the purchase price and your personal tax position.
"BUYING A DIVIDEND." On the record date for a distribution of income or
capital gains , the Portfolio's share price is reduced by the amount of the
distribution. If shares are bought just before the record date ("buying a
dividend"), the full price for the shares will be paid, and a portion of the
price will be received back as a taxable distribution.
OTHER TAX INFORMATION. The information above is only a summary of some of the
federal tax consequences generally affecting the Portfolio and its shareholders,
and no attempt has been made to discuss individual tax consequences. In addition
to federal tax, distributions may be subject to state or local taxes.
Institutional Investors and other shareholders should consult their tax
advisers for details and up-to-date information on the tax laws in your state to
determine whether the Portfolio is suitable given your particular tax situation.
It is not anticipated that the Portfolio's distributions will be exempt from
Tennessee personal income tax, except to the extent that any distributions of
income are attributable to interest on bonds or securities of the U.S.
government or any of its agencies or instrumentalities.
When you sign your account application, you will be asked to certify that your
taxpayer identification number is correct and that you are not subject to backup
withholding for failing to report income to the IRS. If you do not comply with
IRS regulations, the IRS can require the Portfolio to withhold 31% of taxable
distributions from your account.
- --------------------------------------------------------------------------------
WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY?
- --------------------------------------------------------------------------------
INVESTMENT ADVISORY AND MANAGEMENT AND SUB-ADVISORY AGREEMENTS. For managing
its investment and business affairs, the Portfolio is obligated to pay First
Tennessee, 4990 Poplar Avenue, Memphis, Tennessee, a monthly management fee at
the annual rate of .65% of its average net assets. First Tennessee has
voluntarily agreed to waive its advisory fees to .50% of the Portfolio's average
net assets. This voluntary waiver can be discontinued at any time.
Under the Investment Advisory and Management Agreement, First Tennessee may,
with the prior approval of the Trustees and the shareholders of the Portfolio,
engage one or more sub-advisers which may have full investment discretion to
make all determinations with respect to the investment and reinvestment of all
or any portion of the Portfolio's assets, subject to the terms and conditions of
the
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<PAGE>
Investment Advisory and Management Agreement and the written agreement with any
such sub-adviser. In the event one or more sub-advisers is appointed by First
Tennessee, First Tennessee shall monitor and evaluate the performance of such
sub-advisers, allocate Portfolio assets to be managed by such sub-advisers,
recommend any changes in or additional sub-advisers when appropriate and
compensate each sub-adviser out of the investment advisory fee received by First
Tennessee from the Portfolio.
First Tennessee has experience as an investment adviser to individual,
corporate and institutional advisory clients, pension plans and collective
investment funds, with approximately $__ billion in assets under administration
(including nondiscretionary accounts) and $__ billion in assets under management
as of June 30, 1998, as well as experience in supervising sub-advisers.
Highland serves as the Sub-Adviser for the Portfolio subject to the
supervision of First Tennessee and pursuant to the authority granted to it under
its Sub-Advisory Agreement with First Tennessee. On March 1, 1994, Highland
merged with and into First Tennessee Investment Management, Inc. (FTIM), an
affiliate of First Tennessee, and changed its name to Highland Capital
Management Corp. FTIM (now Highland), has been a wholly-owned subsidiary of
First Tennessee National Corporation since 1972. First Tennessee and Highland
have a history of investment management that dates back to 1929. Highland has a
total of $__ billion in assets under management as of June 30, 1998. First
Tennessee is obligated to pay Highland a monthly sub-advisory fee at the annual
rate of .38% of the Portfolio's average net assets. Highland is currently
waiving some or all of its fees for the Portfolio.
ADMINISTRATOR AND DISTRIBUTOR. ALPS, 370 17th Street, Suite 3100, Denver,
Colorado 80202, serves as the Administrator and Distributor for the Portfolio.
As Administrator, ALPS assists in the Portfolio's administration and operation,
including but not limited to, providing office space and various legal and
operational services in connection with the regulatory requirements applicable
to the Portfolio. ALPS is entitled to and receives from the Portfolio a monthly
fee at the annual rate of .15% of average net assets.
First Tennessee, serves as the Co-Administrator for the Portfolio. As the Co-
Administrator, First Tennessee assists in the Portfolio's operation, including
but not limited to, providing non-investment related research and statistical
data and various operational and administrative services. First Tennessee is
entitled to and receives from the Portfolio a monthly fee at the annual rate of
.05% of average net assets.
As the Distributor, ALPS sells shares of the Portfolio as agent on behalf of
the Trust at no additional cost to the Trust. First Tennessee and its affiliates
do not participate in and are not responsible for selling as an agent on behalf
of the Trust, underwriting or distributing Trust shares. Consistent with
applicable law, affiliates of First Tennessee may receive commissions or asset-
based fees.
TRANSFER AGENT AND CUSTODIAN. Chase Global Funds Services Company, a division
of Chase Manhattan Bank, N.A. (CGFSC), provides transfer agent and related
services for the Portfolio. Chase Manhattan Bank, N.A. is Custodian of the
Portfolio's assets.
PRICING AND ACCOUNTING. CGFSC also serves as Fund Accountant and thereby
calculates the NAV and dividends of each Class and maintains the Portfolio and
general accounting records.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICING PLAN. The Trustees have adopted a
Distribution Plan on behalf of Class III of the Portfolio pursuant to Rule 12b-1
(the Rule) under the 1940 Act. The NASD subjects asset-based sales charges to
its maximum sales charge rule. Fees paid pursuant to the Portfolio's
Distribution Plan will be limited by the restrictions imposed by the NASD rule.
The Distribution Plan provides for payment of a fee to ALPS at the annual rate
of .75% of the average net assets of Class III. All or a portion of these fees
will in turn be paid to Investment Professionals as compensation for selling
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<PAGE>
shares of Class III and for providing ongoing sales support services. The
Trustees have also adopted Shareholder Servicing Plan on behalf of Class II and
III of the Portfolio, under which Service Organizations are paid at the annual
rate of .25% of each Class' average net assets for shareholder services and
account maintenance, including responding to shareholder inquiries, directing
shareholder communications, account balance maintenance, and dividend posting.
The Distribution Fees are expenses of Class III and the Shareholder Servicing
Fees are expenses of Class II and III in addition to the Management Fee, and the
Administration and Co-Administration Fees, and will reduce the net income and
total return of both Classes.
- --------------------------------------------------------------------------------
HOW IS THE PORTFOLIO ORGANIZED?
- --------------------------------------------------------------------------------
The Portfolio is a diversified portfolio of First Funds, an open-end
management investment company organized as a Massachusetts business trust by a
Declaration of Trust dated March 6, 1992, as amended and restated on September
4, 1992. The Portfolio consists of three separate Classes. The Trustees
supervise the Trust's activities and review its contractual arrangements with
companies that provide the Trust with services. The Trust is not required to
hold annual shareholder meetings, although special meetings may be called for a
specific Portfolio or Class with respect to issues affecting that Portfolio or
Class, or the Trust as a whole, for purposes such as electing or removing
Trustees, changing fundamental policies or approving investment advisory
agreements. Shareholders receive one vote for each share owned and fractional
votes for fractional shares owned. A Portfolio or Class votes separately with
respect to issues affecting only that Portfolio or Class. Pursuant to the
Declaration of Trust, the Trustees have the authority to issue additional
Classes of shares for the Portfolio.
PORTFOLIO MANAGEMENT
Edward J. Goldstein, one of the Portfolio Managers for the Portfolio, is a
Director and Executive Vice President of Highland. He joined Highland in
September, 1989. Mr. Goldstein is a graduate of Boston University and received a
Master of Business Administration from Columbia University.
David L. Thompson, one of the Portfolio Managers for the Portfolio, is Senior
Vice President of Highland. He joined Highland in May 1995 and is Chartered
Financial Analyst. Mr. Thompson is a graduate of the University of Mississippi
and received a Masters of Business Administration from the University of North
Carolina.
- --------------------------------------------------------------------------------
INVESTMENT INSTRUMENTS, TRANSACTIONS, STRATEGIES AND RISKS
- --------------------------------------------------------------------------------
The following paragraphs provide a brief description of the securities in
which the Portfolio may invest and the transactions each may make. The Portfolio
is not limited by this discussion, however, and may purchase other types of
securities and may enter into other types of transactions if they are consistent
with the Portfolio's investment objective and policies.
EQUITY SECURITIES may include common stocks, preferred stocks, convertible
securities, ADRs and warrants. Common stock purchased by the Portfolio is
evidence of ownership of a corporation. Owners typically are entitled to vote on
the selection of directors and other important matters as well as to receive
dividends on their holdings. In the event that a corporation is liquidated, the
claims of secured and
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<PAGE>
unsecured creditors and owners of bonds and preferred stock take precedence over
the claims of those who own common stock. For the most part, however, common
stock has more potential for appreciation. Preferred Stock is a class of capital
stock that pays dividends at a specified rate and that has preference over
common stock in the payment of dividends and the liquidation of assets.
Preferred stock does not ordinarily carry voting rights. Although equity
securities have a history of long-term growth in value, their prices fluctuate
based on changes in a company's financial condition and on overall market and
economic conditions.
FOREIGN INVESTMENTS. The Portfolio may invest in foreign securities, which
may involve additional risks. Foreign securities and securities denominated in
or indexed to foreign currencies may be affected by the strength of foreign
currencies relative to the U.S. dollar, or by political, regulatory, or economic
developments in foreign countries. Foreign companies may not be subject to
accounting standards or governmental supervision comparable to U.S. companies,
and there may be less public information about their operations. Foreign markets
may be less liquid or more volatile than U.S. markets, and may offer less
protection to investors. In addition to the political and economic factors that
can affect foreign securities, a governmental issuer may be unwilling to repay
principal and interest when due, and may require that the conditions for payment
be renegotiated. These factors could make foreign investments, especially those
in developing countries, more volatile. Highland considers these factors in
making foreign investments for the Portfolio.
The Portfolio may also enter into currency forward contracts (agreements to
exchange one currency for another at a future date) to manage currency risks and
to facilitate transactions in foreign securities. Although currency forward
contracts can be used to protect the Portfolio from adverse exchange rate
changes, they involve a risk of loss if Highland fails to predict foreign
currency values correctly or employs a strategy that does not correlate well
with a Portfolio's investments. A loss to the Portfolio may also result if the
counterparty to a transaction fails to perform as obligated. Please see
discussion under "Forwards" below.
DELAYED-DELIVERY AND WHEN-ISSUED TRANSACTIONS. The Portfolio may buy and sell
obligations on a when-issued or delayed-delivery basis, with payment and
delivery taking place at a future date. The market value of obligations
purchased in this way may change before the delivery date, which could increase
fluctuations in the Portfolio's share price, yield, and return. Ordinarily, the
Portfolio will not earn interest on obligations until they are delivered.
FORWARDS. A forward represents a contract that obligates the counterparty to
buy, and the other to sell, a specific underlying asset at a specific price,
amount, and date in the future. Forwards are similar to futures except for the
fact that forwards are privately negotiated. The most common type of forward
contracts are foreign currency exchange contracts.
The Portfolio may enter into forward exchange currency contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its foreign
portfolio holdings and to hedge certain firm purchase and sale commitments
denominated in foreign currencies. A forward exchange currency contract is a
commitment to purchase or sell a foreign currency at a future date at a
negotiated forward rate. The gain or loss arising from the difference between
the original contract and the closing of such contract is included in net
realized gain or loss on foreign currency transactions.
Fluctuations in the value of forward exchange currency contracts are recorded
for financial reporting purposes as unrealized gains or losses by the Portfolio.
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<PAGE>
ILLIQUID SECURITIES. Under guidelines established by the Board of Trustees,
Highland, under First Tennessee's supervision, determines the liquidity of the
Portfolio's investments. The absence of a trading market can make it difficult
to ascertain a market value for illiquid investments. Disposing of illiquid
investments or securities subject to legal restrictions may involve time-
consuming negotiation and legal expenses. It may be difficult or impossible for
the Portfolio to sell illiquid or restricted securities promptly at an
acceptable price. The Portfolio may invest up to 15% of its assets in illiquid
investments.
RESTRICTED SECURITIES. The Portfolio may purchase securities which cannot be
sold to the public without registration under the Securities Act of 1933
(restricted securities). Unless registered for sale, these securities can only
be sold in privately negotiated transactions or pursuant to an exemption from
registration. Provided that the security has a demand feature of seven days or
less, or a dealer or institutional trading market exists, these restricted
securities are not treated as illiquid securities for the purposes of the
Portfolio's investment limitations. Investing in restricted securities could
have the effect of increasing the level of Portfolio illiquidity if qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
MONEY MARKET INSTRUMENTS are high quality instruments that present minimal
credit risk. They may include U.S. government obligations, commercial paper and
other short-term corporate obligations, and certificates of deposit, bankers'
acceptances, bank deposits and other financial institution obligations. These
instruments may carry fixed or variable rates.
OPTIONS CONTRACTS. An option is a contract that gives the owner the right,
but not the obligation, to either buy (call option) or sell (put option) an
underlying security or currency at a fixed price for a specified period of time.
The Portfolio may buy and sell (write) put and call options contracts to manage
its exposure to changing interest rates and security prices. To the extent it
invests in securities denominated in foreign currencies, the Portfolio may also
buy and sell options contracts to manage exposure to currency exchange rates.
Some option strategies, including buying puts and writing calls, tend to hedge
the Portfolio's investments against price fluctuations. Other strategies,
including writing puts and buying calls, tend to increase market exposure.
Options may be combined with each other in order to adjust the risk and return
characteristics of the overall strategy. The Portfolio may enter into forward
contracts for settlement or hedging purposes. The Portfolio may invest in
options based on any type of security, index, or currency, including options
traded on foreign exchanges and options not traded on exchanges.
Options can be volatile investments and involve certain risks. If Highland
applies a hedge at an inappropriate time or judges market conditions
incorrectly, options strategies may result in a loss and lower the Portfolio's
return. The Portfolio could also experience losses if the prices of its options
positions were poorly correlated with its other investments, or if it could not
close out its positions because of an illiquid secondary market. The use of
options may increase the volatility of the Portfolio and may involve the
investment of a small amount of cash relative to the risk assumed.
The Portfolio will be able to hedge its total assets by writing calls or
purchasing puts under normal conditions. In addition, the Portfolio will not
write puts whose underlying value exceeds 25% of total assets, and will not buy
calls with a value exceeding 5% of total assets.
REPURCHASE AGREEMENTS are transactions by which a Portfolio agrees to purchase
a security subject to the seller's agreement to repurchase it at a mutually
agreed upon date and price. In the event of the bankruptcy of the seller, a
Portfolio could experience delays in recovering its cash. In the event of the
bankruptcy of the other party to a repurchase agreement or a securities loan,
the Portfolio could experience delays in recovering its cash or the securities
it lent. To the extent that, in the meantime, the
24
<PAGE>
value of the obligations purchased had decreased, or the value of obligations
lent had increased, the Portfolio could experience a loss. In all cases,
Highland must find the creditworthiness of the other party to the transaction
satisfactory.
U.S. GOVERNMENT OBLIGATIONS purchased by the Portfolio are debt obligations
issued or guaranteed by the U.S. Treasury or by an agency or instrumentality of
the U.S. government. Not all U.S. government obligations are backed by the full
faith and credit of the United States. For example, obligations issued by the
Federal Farm Credit Bank or by the Federal National Mortgage Association are
supported by the agency's right to borrow money from the U.S. Treasury under
certain circumstances. Obligations issued by the Federal Home Loan Bank are
supported only by the credit of the agency. There is no guarantee that the
government will support these types of obligations, and therefore they involve
more risk than other government obligations.
U.S. TREASURY OBLIGATIONS purchased by the Portfolio are obligations issued by
the United States and backed by its full faith and credit.
ZERO COUPON BONDS purchased by the Portfolio do not make regular interest
payments; instead they are sold at a deep discount from their face value and are
redeemed at face value when they mature. Because zero coupon bonds do not pay
current income, their prices can be very volatile when interest rates change. In
calculating its daily dividend, the Portfolio takes into account as income a
portion of the difference between a zero coupon bond's purchase price and its
face value.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corporation (REFCORP) and the
Financing Corporation (FICO) can also be separated in this fashion. The risks of
these securities are similar to those of other debt securities, although they
may be more volatile and the value of certain types of stripped securities may
move in the same direction as interest rates. Original issue zeros are zero
coupon securities originally issued by the U.S. government, a government agency,
or a corporation in zero coupon form.
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INVESTMENT ADVISER AND CO-ADMINISTRATOR
---------------------------------------
First Tennessee Bank National Association
Memphis, TN
SUB-ADVISER
-----------
Highland Capital Management Corp.
Memphis, TN
OFFICERS
--------
Richard C. Rantzow, President
Jeremy O. May, Treasurer
James V. Hyatt, Secretary
TRUSTEES
--------
Thomas M. Batchelor
John A. DeCell
L.R. Jalenak, Jr.
Larry W. Papasan
Richard C. Rantzow
ADMINISTRATOR AND DISTRIBUTOR
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ALPS Mutual Funds Services, Inc.
Denver, CO
TRANSFER AND SHAREHOLDER SERVICING AGENT
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Chase Global Funds Services Company
Boston, MA
CUSTODIAN
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Chase Manhattan Bank, N.A.
New York, NY
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FIRST FUNDS 370 17th Street
Suite 3100
CAPITAL APPRECIATION PORTFOLIO Denver, Colorado 80202
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PROSPECTUS FOR CLASS I, II, AND III
October __, 1998
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First Funds (the Trust) offers investors a convenient and economical means of
investing in a professionally managed equity mutual fund. The objective of the
Capital Appreciation Portfolio (the Portfolio) is to seek long-term capital
appreciation by investing in equity securities of medium and smaller
capitalization companies. The Portfolio's net asset value per share will
fluctuate in response to changes in the value of its investments.
This Prospectus is designed to provide you with information that you should
know before investing. Please read and retain this document for future
reference. This Prospectus offers Class I, II and III shares of the Portfolio.
Class I shares are designed exclusively for investment of monies held in non-
retail trust, advisory, agency, custodial or similar accounts (Institutional
Accounts). Class I shares may be purchased for Institutional Accounts by
financial institutions, business organizations, corporations, municipalities,
non-profit institutions and other entities serving in trust, advisory, agency,
custodial or similar capacities (each, an Institutional Investor and
collectively, Institutional Investors) that meet the investment threshold for
this Class of shares. Class II and III shares are designed for individuals and
other investors who seek mutual fund investment convenience plus a lower
investment minimum. These Classes offer investors differing expense and sales
load structures to choose between. See "Expense Summary."
A Statement of Additional Information (dated October __, 1998) for the
Portfolio has been filed with the Securities and Exchange Commission (SEC) and
is incorporated herein by reference. This Prospectus and the Statement of
Additional Information are available free upon request from ALPS Mutual Funds
Services, Inc., (ALPS), the Portfolio's Distributor. Please call ALPS at 1-800-
442-1941 (option 1) for more information concerning each Class of shares. If you
are investing through a broker, other financial institution or adviser
(Investment Professional), please contact that institution directly.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY,
FIRST TENNESSEE BANK NATIONAL ASSOCIATION OR ANY DEPOSITORY INSTITUTION. SHARES
ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD, OR
ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY STATE
OR JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER IN
SUCH STATE OR JURISDICTION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SUMMARY OF PORTFOLIO EXPENSES.................................. 3
WHAT IS THE INVESTMENT OBJECTIVE OF THE PORTFOLIO?............. 5
IS THE PORTFOLIO A SUITABLE INVESTMENT?; INVESTMENT RISKS...... 5
WHAT ARE THE PORTFOLIO'S INVESTMENT POLICIES AND LIMITATIONS?.. 6
HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?........... 7
HOW IS PERFORMANCE CALCULATED?................................. 17
PORTFOLIO TRANSACTIONS......................................... 17
WHAT IS THE EFFECT OF FEDERAL INCOME TAX ON THIS INVESTMENT?... 18
WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY?........... 18
HOW IS THE PORTFOLIO ORGANIZED?................................ 20
INVESTMENT INSTRUMENTS, TRANSACTIONS, STRATEGIES AND RISKS..... 20
</TABLE>
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SUMMARY OF PORTFOLIO EXPENSES
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The purpose of the table below is to assist you in understanding the various
costs and expenses that you would bear, directly or indirectly, by investing in
the Portfolio. This standard format was developed for use by all mutual funds to
help you make your investment decisions. The information below is based upon
anticipated operating expenses. This expense information should be considered
along with other important information, such as the Portfolio's investment
objective.
A. EXPENSE SUMMARY
<TABLE>
<CAPTION>
CAPITAL APPRECIATION
PORTFOLIO
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SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
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<S> <C> <C> <C>
Maximum Sales Load on Purchases
(as a percentage of offering price) None 5.75% None
Sales Load Imposed on Reinvested
Distributions None None None
Deferred Sales Load None None None
Redemption Fees None None None
Exchange Fee None None None
ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees* .70% .70% .70%
12b-1 Fees .00% .00% .75%
Other Expenses* .49% .84% .85%
----- ---- ----
Total Portfolio Operating Expenses* 1.19% 1.54% 2.30%
===== ==== ====
</TABLE>
*After expense waivers
ANNUAL PORTFOLIO OPERATING EXPENSES. The Portfolio is obligated to pay
Management Fees to First Tennessee Bank National Association (First Tennessee)
and to Investment Advisers, Inc. (IAI). First Tennessee, as Co-Investment
Adviser has voluntarily agreed to waive its entire investment advisory fee which
amounts to .15% of the Portfolio's average net assets; however, there is no
guarantee that the waiver will continue. The Portfolio incurs Other Expenses,
including Administration and Co-Administration Fees, for maintaining shareholder
records, furnishing shareholder statements and reports, and other services.
ALPS, as Administrator, is entitled to .15% of the Portfolio's average net
assets for administration services. First Tennessee, as Co-Administrator, is
entitled to and charges .05% of the Portfolio's average net assets for co-
administration services. Other Expenses also include Shareholder Servicing Fees
of 0.25% with respect to Class II and Class III of the Portfolio.
If the waivers were not in effect, Management Fees would be .85% for the
current fiscal year for each Class. Other Expenses and Total Portfolio
Operating Expenses would be as follows:
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<TABLE>
<CAPTION>
CAPITAL APPRECIATION
PORTFOLIO
--------------------------------
CLASS I CLASS II CLASS III
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<S> <C> <C> <C>
Other Expenses (estimated) .52% .87% .88%
Total Portfolio Operating Expenses 1.38% 1.73% 2.49%
</TABLE>
There is no guarantee that any waivers will continue at their stated levels.
Management Fees, 12b-1 Fees, Shareholder Servicing Fees, and Other Expenses
are reflected in the Portfolio's share price and are not charged directly to
individual accounts. 12b-1 Fees are paid by Class III of the Portfolio to ALPS
for services and expenses in connection with distribution. Shareholder Servicing
Fees are paid by Class II and III of the Portfolio to Investment Professionals
for services and expenses incurred in connection with providing personal service
to shareholders and/or maintenance of shareholder accounts. Long-term
shareholders may pay more than the economic equivalent of the maximum 8.50%
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. (NASD) due to 12b-1 fees applicable to Class III shares. "What
Advisory And Other Fees Does The Portfolio Pay - Distribution Plan and
Shareholder Servicing Plans" for further information.
B. EXAMPLE: You would pay the following expenses for every $1,000 investment
in each Class of shares of the Capital Appreciation Portfolio assuming (1) 5%
annual return, (2) redemption at the end of each time period, (3) that operating
expenses (net of expense waivers) are the same as described above, and (4)
reinvestment of all dividends and distributions. THE RETURN OF 5% AND EXPENSES
SHOULD NOT BE CONSIDERED INDICATIVE OF ACTUAL OR EXPECTED PERFORMANCE OR
PORTFOLIO OPERATING EXPENSES, BOTH OF WHICH MAY VARY SIGNIFICANTLY:
<TABLE>
<CAPTION>
CAPITAL APPRECIATION
PORTFOLIO
--------------------------------
CLASS I CLASS II CLASS III
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<S> <C> <C> <C>
1 year $12 $ 72* $24
3 years $36 $100* $69
</TABLE>
*Reflects imposition of maximum sales charge at the beginning of the period.
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FINANCIAL HIGHLIGHTS
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[To be inserted]
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WHAT IS THE INVESTMENT OBJECTIVE OF THE PORTFOLIO?
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First Tennessee and IAI serve as Co-Investment Advisers to the Portfolio.
First Tennessee, among other things, provides investment management evaluations
to the Board of Trustees, monitors the activities of IAI, including IAI's
Portfolio transactions, and coordinates IAI's activities with the Portfolio's
custodian, transfer agent, Administrator and independent accountants. IAI is
responsible for the day-to-day investment management of the Portfolio, including
providing investment research and credit analysis concerning Portfolio
investments and conducting a continuous program of investment of Portfolio
assets in accordance with the investment policies and objective of the
Portfolio. For additional information about the Portfolio's investment advisory
arrangements, see "What Advisory And Other Fees Does The Portfolio Pay? -
Investment Advisory and Management Agreements".
The investment objective of the Portfolio is to seek long-term capital
appreciation by investing at least 65% of its total assets in equity securities
of medium and smaller capitalization companies (companies which generally have
market capitalizations less than $5 billion). However, the Investment Advisers
currently intend, under normal circumstances, to invest at least 80% of the
Portfolio's total assets in equity securities of companies with market
capitalizations generally between $100 million and $1 billion, except where
prevailing market conditions require a more defensive posture. There is no
assurance that the Portfolio will achieve its investment objective. The
permitted investments of the Portfolio are as follows:
Capital Appreciation Portfolio will invest primarily in common stock,
convertible preferred stock, and bonds and debentures convertible into common
stock of U.S.-based corporations of all sizes, industries and geographical
markets. IAI will analyze the fundamental values both of particular companies
and industries. Fundamental analysis considers a company's essential soundness
and future prospects, as well as overall industry outlook. The Portfolio may
also invest in foreign securities that IAI believes possess unusual values,
although they may involve greater risk.
Capital Appreciation Portfolio also may invest in options, and may sell short
securities it owns. The Portfolio may engage in repurchase agreements and may
buy and sell securities on a when-issued or delayed-delivery basis, and may
purchase warrants, interests in real estate investment trusts, forward currency
contracts, illiquid and restricted securities, and shares in other investment
companies.The Portfolio may, for temporary defensive purposes, invest without
limit in short-term securities including U.S. government obligations, commercial
paper, and certificates of deposit.
See "Investment Instruments, Transactions, Strategies and Risks" for a further
discussion of the Portfolio's investments.
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IS THE PORTFOLIO A SUITABLE INVESTMENT?; INVESTMENT RISKS
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By itself, the Portfolio does not constitute a balanced investment plan. The
Portfolio emphasizes long-term capital appreciation by investing primarily in
equity securities of medium and smaller capitalization companies. Any income
received from securities held by the Portfolio will be incidental. An investment
in the Portfolio may involve greater risk than is inherent in other types of
investments since it seeks capital appreciation and the value of its investments
will generally fluctuate in response to stock market conditions. Investors
should realize that equity securities of small to medium-sized companies may
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involve greater risk than is associated with investing in more established
companies. Further, investment in the securities of issuers in any foreign
country involves special risks and considerations not typically associated with
investing in U.S. issuers. The Portfolio's share price, yield and total return
will fluctuate. An investment in the Portfolio may be worth more or less than
the original cost when shares are redeemed.
In addition, the Portfolio may invest in instruments and securities generally
known as derivative investments. These investments may include the use of
forward currency contracts, put and call option contracts, zero coupon bonds,
and stripped fixed-income obligations. IAI may not buy all of these instruments
or use all of these techniques unless it believes that doing so will help the
Portfolio achieve its investment objective. Use of these instruments and
techniques can alter the risk and return characteristics of the Portfolio. They
may increase the Portfolio's volatility and may involve the investment of small
amounts of cash relative to the magnitude of the risk assumed. This is called
leverage. They may also result in a loss of principal if IAI judges market
conditions incorrectly or employs a strategy that does not correlate well with
the Portfolio's investment strategy. Positions in options involve the risk that
such options may fail as a hedging technique and that closing transactions may
not be effected where a liquid secondary market does not exist.
Further information about the types of securities in which the Portfolio may
invest and their related risks, as well as the investment policies of the
Portfolio in general, are set forth in the section "Investment Instruments,
Transactions, Strategies And Risks " and in the Statement of Additional
Information.
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WHAT ARE THE PORTFOLIO'S INVESTMENT POLICIES AND LIMITATIONS?
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INVESTMENT LIMITATIONS. The Portfolio has adopted the following investment
limitations:
(1) With respect to 75% of the Portfolio's assets, the Portfolio will not
purchase a security, other than U.S. government securities, if, as a result;
(a) more than 5% of its total assets would be invested in the securities of
any single issuer; or (b) the Portfolio would own more than 10% of the voting
securities of any single issuer.
(2) The Portfolio will not invest 25% or more of its total assets in a
particular industry, other than U.S. government obligations.
(3) (a) The Portfolio may borrow money solely for temporary or emergency
purposes, but not in an amount exceeding 33 1/3% of its total assets; (b) the
Portfolio may borrow money from banks, or by engaging in reverse repurchase
agreements; (c) the Portfolio will not purchase securities when borrowings
exceed 5% of its total assets. If the Portfolio borrows money, its share price
may be subject to greater fluctuation until the borrowing is paid off. To this
extent, purchasing securities when borrowings are outstanding may involve an
element of leverage.
(4) (a) The Portfolio may temporarily lend its portfolio securities to
broker-dealers and institutions, but only when the loans are fully
collateralized; and (b) loans, in the aggregate, will be limited to 33 1/3% of
the Portfolio's total assets.
Unless otherwise noted, the Portfolio's policies and limitations are not
fundamental and may be changed by the Trustees without shareholder approval. The
fundamental policies of the Portfolio that require shareholder approval prior to
any changes are: the Portfolio's investment objective, and limitations
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(1), (2), (3)(a), and (4)(b) above. With the exception of the Portfolio's
policies and limitations regarding borrowings and investments in illiquid
securities, these limitations and the Portfolio's policies are considered at the
time of purchase of securities; the sale of securities is not required in the
event of a subsequent change in circumstances.
The investment policies and limitations set forth above are supplemented by
the investment policies and limitations in the Statement of Additional
Information. No assurance can be made that the Portfolio will achieve its
objective, but it will follow the investment style described in this Prospectus.
From time to time, the Portfolio, to the extent consistent with its investment
objective, policies, and restrictions, may invest in securities of companies
with which First Tennessee or any of its affiliates have lending relationships.
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HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?
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CLASS I
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WHO MAY INVEST?
Class I shares are designed exclusively for investment of monies held in non-
retail trust, advisory, agency, custodial or similar Institutional Accounts.
Class I shares may be purchased for Institutional Accounts by financial
institutions, business organizations, corporations, municipalities, non-profit
institutions, and other Institutional Investors serving in a trust, advisory,
agency, custodial or similar capacity who meet the investment threshold for this
Class of shares.
HOW IS AN INSTITUTIONAL ACCOUNT ESTABLISHED?
An initial investment must be preceded by or made in conjunction with the
establishment of an Institutional Account with an Institutional Investor.
Establishment of an Institutional Account may require that documents and
applications be completed and signed before the investment can be implemented.
The Institutional Investor may require that certain documents be provided prior
to making a redemption from the Portfolio. Institutional Investors may charge
fees in addition to those described herein. Fee schedules for Institutional
Accounts are available upon request from the Institutional Investor and are
detailed in the agreements by which each client opens an account with an
Institutional Investor.
HOW ARE INVESTMENTS MADE?
Each Institutional Investor will transmit orders to the Transfer Agent, Chase
Global Funds Services Company (CGFSC). If an order is received by CGFSC prior to
4:00 p.m. Eastern Time on any Business Day (as defined in the section "How Are
Investments, Exchanges And Redemptions Made - Class I, II and III - How Are
Portfolio Shares Valued?") and the funds are received by CGFSC that day, the
investment will earn dividends declared, if any, on the day of purchase.
Institutional Investors will wire funds through the Federal Reserve System.
Purchases will be processed at the net asset value per share (NAV) calculated
after an order is received by CGFSC. The Portfolio requires advance notification
of all wire purchases. To secure same day acceptance of federal funds (monies
transferred from one bank to another through the Federal Reserve System with
same-day availability), an Institutional Investor must call CGFSC at 1-800-442-
1941, (option 2) prior to 4:00 p.m. Eastern Time on any Business Day to advise
it of the wire. The Trust may discontinue offering its shares in any Class of a
Portfolio without notice to shareholders.
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MINIMUM INVESTMENT AND ACCOUNT BALANCE. The minimum initial investment for
each Institutional Investor is $750,000. Institutional Investors may satisfy the
minimum investment by aggregating their Institutional Accounts within the
Portfolio. Subsequent investments may be in any amount. If an Institutional
Investor's Class I account falls below $375,000 due to redemption, the Portfolio
may close the account. An Institutional Investor may be notified if the minimum
balance is not being maintained and will be allowed 30 days to make additional
investments before its account is closed. Shares will be redeemed at the NAV on
the day the account is closed, and proceeds will be sent to the address of
record.
Should an Institutional Investor or a beneficial owner of Class I shares cease
to be eligible to participate in this Class, Class I shares held in an
Institutional Account may be converted to shares of another Class. Any such
conversion will be effected on the basis of the relative NAVs of the two Classes
without the imposition of any sales load, fee or other charge. Institutional
Investors or beneficial owners will receive at least 30 days prior notice of any
proposed conversion.
HOW ARE REDEMPTIONS MADE?
Institutional Investors may redeem all or a portion of their account shares on
any Business Day. Shares will be redeemed at the NAV next calculated after CGFSC
has received the redemption request and will earn dividends declared, if any,
through the day prior to redemption. If an account is closed, any accrued
dividends will be paid at the beginning of the following month.
Institutional Investors may make redemptions by wire provided they have
established a wire account with CGFSC. Please call 1-800-442-1941, (option 2) to
advise CGFSC of the wire. If telephone instructions are received before 4:00
p.m. Eastern Time on any Business Day, proceeds of the redemption will be wired
as federal funds on the next Business Day to the bank account designated with
CGFSC. The Institutional Investor may change the bank account designated to
receive an amount redeemed at any time by sending a letter of instruction with a
signature guarantee to CGFSC at 73 Tremont Street, Boston, Massachusetts, 02108.
Pursuant to the Investment Company Act of 1940, as amended (1940 Act), if
making immediate payment of redemption proceeds could adversely affect the
Portfolio, payments may be made up to seven days later. Also, when the New York
Stock Exchange (NYSE) is closed (or when trading is restricted) for any reason
other than customary weekend or holiday closings, or under any emergency
circumstances as determined by the SEC to merit such action, the right of
redemption may be suspended or the date of payment postponed for a period of
time that may exceed seven days. To the extent Portfolio securities are traded
in other markets on days when either the NYSE or the Federal Reserve Bank of New
York (New York Federal Reserve) is closed, the Portfolio's NAV may be affected
on days when investors do not have access to the Portfolio to purchase or redeem
shares.
If transactions by telephone cannot be executed (for example, during times of
unusual market activity), orders may be placed by mail to CGFSC. In case of
suspension of the right of redemption, the Institutional Investor may either
withdraw its request for redemption or it will receive payment based on the NAV
next determined after the termination of the suspension.
ADDITIONAL INFORMATION
The Portfolio also reserves the right to reject any specific purchase order,
including certain purchases by exchange. Purchase orders may be refused if, in
IAI's opinion, they are of a size that would disrupt management of the
Portfolio.
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In order to allow IAI to manage the Portfolio most effectively, Institutional
Investors are strongly urged to initiate all trades (investments, exchanges and
redemptions of shares) as early in the day as possible and to notify CGFSC at
least one day in advance of trades in excess of $1 million. In making these
trade requests, the name of the Institutional Investor and the account number(s)
must be supplied.
Transactions may be initiated by telephone. Please note that the Portfolio and
its agents will not be responsible for any losses resulting from unauthorized
telephone transactions if the Portfolio or its agents follow reasonable
procedures designed to verify the identity of the caller. These procedures may
include requesting additional information or using personalized security codes.
The Portfolio or its agents may also record calls and an Institutional Investor
should verify the accuracy of confirmation statements immediately after receipt.
If an Institutional Investor does not want to be able to initiate redemptions
and exchanges by telephone, please call CGFSC for instructions.
CLASS II AND III
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WHO MAY INVEST?
Class II and III shares are designed for individuals and other investors who
seek mutual fund investment convenience plus a lower investment minimum. These
Classes offer investors differing expense and sales load structures to choose
between. See "Summary Of Portfolio Expenses."
INVESTMENT REQUIREMENTS
The minimum initial investment in Class II or III shares is $1,000. Subsequent
investments may be in any amount greater than $100. If you participate in the
Systematic Investing Program (see "Systematic Investing Program" below) or the A
Plus Card Program, (a consumer discount card program provided by "A" Plus
Strategic Alliances, Inc., a subsidiary of First Tennessee), the minimum initial
investment is $250, and subsequent investments may be in any amount of $25 or
greater. If you are an employee of First Tennessee or any of its affiliates and
you participate in the Systematic Investing Program, the minimum initial
investment is $50, and subsequent investments may be in any amount of $25 or
greater. If your balance in the Portfolio falls below the applicable minimum
investment requirement due to redemption, you may be given 30 days' notice to
reestablish the minimum balance. If you do not reestablish the minimum balance,
your account may be closed and the proceeds mailed to you at the address on
record. Shares will be redeemed on the day the account is closed.
All purchases must be made in U.S. dollars and checks must be drawn on U.S.
banks. No cash will be accepted. If you make a purchase with more than one
check, each check must have a value of at least $100, and the minimum investment
requirement still applies (excluding the specific circumstances, stated above,
which reduce the minimum investment requirement). The Portfolio reserves the
right to limit the number of checks processed at one time. If your check does
not clear, your purchase will be canceled and you could be liable for any losses
or fees incurred.
You may initiate any transaction either directly or through your Investment
Professional. Please note that the Portfolio and its agents will not be
responsible for any losses resulting from unauthorized transactions, if the
Portfolio or its agents follow reasonable procedures designed to verify the
identity of the caller. These procedures may include requesting additional
information or using personalized security codes. Your Investment Professional
may also record calls and you should verify the accuracy of your confirmation
statements immediately after you receive them. If you do not want to be able to
redeem and
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exchange by telephone, please check the box on your application (if you invest
directly) or, if you invest through an Investment Professional, please call your
Investment Professional for instructions.
HOW DO I SET UP AN ACCOUNT?
You may set up an account directly in the Portfolio or you may invest in the
Portfolio through your Investment Professional (see "How Do I Invest Through My
Investment Professional" below). Shares will be purchased based on the NAV next
calculated after CGFSC has received the request in proper form. If you are
investing through an Investment Professional, transactions that your Investment
Professional initiates should be transmitted to CGFSC before 4:00 p.m. Eastern
time in order for you to receive that day's share price. CGFSC must receive
payment within three business days after an order is placed. Otherwise, the
purchase order may be canceled and you could be held liable for the resulting
fees and/or losses. An investor will earn dividends declared, if any, on the day
of purchase if the funds are received by CGFSC that day.
HOW DO I INVEST DIRECTLY?
When opening a new account directly, you must complete and sign an account
application and send it to CGFSC, 73 Tremont Street, Boston, MA 02108. Telephone
representatives are available at 1-800-442-1941, (option 2) between the hours of
8:00 a.m. to 4:00 p.m. Central Time (9:00 a.m. to 5:00 p.m. Eastern Time),
Monday through Friday.
Investments may be made in several ways:
BY MAIL: Make your check payable to First Funds: Capital Appreciation
Portfolio, and mail it, along with the application, to the address indicated on
the application. Your account will be credited on the business day that CGFSC
receives your application in good order.
BY BANK TRANSFER: Bank transfer allows you to move money between your bank
account and your First Funds account. This automatic service allows you to
transfer money from your bank account via the Automated Clearing House (ACH)
network to your Portfolio account. First, a Portfolio account must be
established, and an application sent to CGFSC. Next, a deposit account must be
opened at a bank providing bank transfer services and you must arrange for this
service to be provided. Once you have completed this process, you can initiate a
bank transfer by contacting a representative from your bank, providing the
required information for the bank, and authorizing the transfer to take place.
Please allow two or three days after the authorization for the transfer to
occur.
BY WIRE: Call 1-800-442-1941, (option 2) to set up your Portfolio account to
accommodate wire transactions. To initiate your wire transaction, call your
depository institution. Federal funds (monies transferred from one bank to
another through the Federal Reserve System with same-day availability) should be
wired to:
Chase Manhattan Bank, N.A.
ABA #021000021
First Funds
Credit DDA #910-2-733335
(Account Registration)
(Account Number)
(Wire Control Number) *See Below*
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Prior to sending wires, please be sure to call 1-800-442-1941, (option 2) to
receive a Wire Control Number to be included in the body of the wire (see
above).
Your bank may charge you a fee for this service.
HOW DO I REDEEM SHARES WHEN INVESTING DIRECTLY?
You may redeem all or a portion of your shares on any day that the Portfolio
is open for business. Shares will be redeemed at the NAV next calculated after
CGFSC has received the redemption request and will earn dividends declared, if
any, through the day prior to redemption. If a Portfolio account is closed, any
accrued dividends will be paid at the beginning of the following month.
You may redeem shares in several ways:
BY MAIL: Write a "letter of instruction" with your name, the Portfolio's
name, your Portfolio account number, the dollar amount or number of shares to be
redeemed, and any additional requirements that apply to each particular account.
You will need the letter of instruction signed by all persons required to sign
for transactions, exactly as their names appear on the account application,
along with a signature guarantee as described below.
A signature guarantee is designed to protect you, the Portfolio, and its
agents from fraud. Your written request requires a signature guarantee if you
wish to redeem more than $1,000 worth of shares; if your Portfolio account
registration has changed within the last 30 days; if the check is not being
mailed to the address on your account; if the check is not being made out to the
account owner; or if the redemption proceeds are being transferred to another
First Funds account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public.
BY BANK TRANSFER: When establishing your account in the Portfolio, you must
have indicated this account privilege in order to authorize the redemption of
monies with the proceeds transferred to your bank account. To authorize a
redemption, simply contact CGFSC at 1-800-442-1941, (option 2) and your
redemption will be processed at the NAV next calculated. Please allow two or
three days after the authorization for monies to reach your bank account.
BY WIRE: You may make redemptions by wire provided you have established a
Portfolio account to accommodate wire transactions. If telephone instructions
are received before 4:00 p.m. Eastern time, proceeds of the redemption will be
wired as federal funds on the next Business Day to the bank account designated
with CGFSC. You may change the bank account designated to receive an amount
redeemed at any time by sending a letter of instruction with a signature
guarantee to CGFSC at 73 Tremont Street, Boston, Massachusetts, 02108.
ADDITIONAL REDEMPTION REQUIREMENTS: The Portfolio may hold payment on
redemptions until it is reasonably satisfied that investments made by check have
been collected, which can take up to seven days. Also, when the NYSE is closed
(or when trading is restricted) for any reason other than its customary weekend
or holiday closings, or under any emergency circumstances as determined by the
SEC to merit such action, the right of redemption may be suspended or the date
of payment postponed for a period of time that may exceed seven days. To the
extent that Portfolio securities are traded in other markets on days when either
the NYSE or the New York Federal Reserve is closed, the Portfolio's NAV may be
affected on days when investors do not have access to the Portfolio to purchase
or redeem shares.
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If you are unable to reach CGFSC by telephone (for example, during times of
unusual market activity), consider placing your order by mail directly to CGFSC.
In case of suspension of the right of redemption, you may either withdraw your
request for redemption or you will receive payment based on the NAV next
determined after the termination of the suspension.
HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?
If you are investing through your Investment Professional, you may be required
to set up a brokerage or agency account. Please call your Investment
Professional for information on establishing an account. If you are purchasing
shares of the Portfolio through a program of services offered or administered by
your Investment Professional, you should read the program materials in
conjunction with this Prospectus. Certain features of such programs may impose
additional requirements and charges for the services rendered. Your Investment
Professional may offer any or all of the services mentioned in this section, and
is responsible for initiating all initial purchase transactions. Please contact
your Investment Professional for information on these services.
SYSTEMATIC INVESTING PROGRAM
The Systematic Investing Program offers a simple way to maintain a regular
investment program. You may arrange automatic transfers (minimum $25 per
transaction) from your bank account to your First Funds account on a periodic
basis. When you participate in this program, the minimum initial investment in
each Portfolio is $250. If you are an employee of First Tennessee or any of its
affiliates, the minimum initial investment in the portfolio is $50. You may
change the amount of your automatic investment, skip an investment, or stop the
Systematic Investing Program by calling CGFSC at 1-800-442-1941, (option 2) or
your Investment Professional at least three Business Days prior to your next
scheduled investment date.
SYSTEMATIC WITHDRAWAL PLAN
You can have monthly, quarterly or semi-annual checks sent from your account
to you, to a person named by you, or to your bank checking account. Your
Systematic Withdrawal Plan payments are drawn from share redemptions and must be
in the amount of $100 or more per Portfolio per month. If Systematic Withdrawal
Plan redemptions exceed income dividends earned on your shares, your account
eventually may be exhausted. Please contact ALPS at 1-800-442-1941 (option 1) or
your Investment Professional for more information.
ADDITIONAL INFORMATION
TAX-DEFERRED RETIREMENT PLANS: Retirement plans can offer significant tax
savings to individuals. Please call ALPS at 1-800-442-1941 (option 1) or your
Investment Professional for more information on the plans and their benefits,
provisions and fees. CGFSC or your Investment Professional can set up your new
account in the Portfolio under one of several tax-deferred plans. These plans
let you invest for retirement and defer the tax on your investment income.
Minimums may differ from those listed previously under "Investment
Requirements". Plans include Individual Retirement Accounts (IRAs), Rollover
IRAs, Keogh Plans, and Simplified Employee Pension Plans (SEP-IRAs).
CLASS II
- --------
PUBLIC OFFERING PRICE
The public offering price for Class II shares is the sum of the NAV plus a
sales load. As indicated below, a portion of this load may be reallowed to
Investment Professionals which have entered into an
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agreement with ALPS, the Portfolio's Distributor (Service Organizations). You
may calculate your sales load as follows:
<TABLE>
<CAPTION>
REALLOWANCE TO
TOTAL SALES LOAD FOR CLASS II SHARES SERVICE ORGANIZATIONS
------------------------------------- ---------------------
AS A % OF OFFERING AS A % AS A % OF OFFERING
AMOUNT OF TRANSACTION PRICE PER SHARE OF NAV PRICE PER SHARE
<S> <C> <C> <C>
Less than $50,000 5.75 6.10 5.00
$50,000 to $99,999 4.50 4.71 4.00
$100,000 to $249,999 3.50 3.63 3.00
$250,000 to $499,999 2.50 2.56 2.25
$500,000 to $999,999 1.50 1.52 1.25
$1,000,000 and over 0.50 0.50 0.40
</TABLE>
The reallowance to Service Organizations may be changed from time to time.
ALPS, at its expense, may provide additional non-cash promotional incentives to
eligible representatives of Service Organizations in the form of attendance at a
sales seminar at a resort. These incentives may be limited to certain eligible
representatives of Service Organizations who have sold significant numbers of
shares of any of the Portfolios of the Trust.
You may purchase Class II shares without a sales load if the purchase will be
(a) through an IRA, 401 Plan, 403 Plan or directed agency account if the
trustee, custodian, or agent thereof is a direct or indirect subsidiary or
franchisee bank of First Tennessee or its affiliates; (b) by registered
representatives, directors, advisory directors, officers and employees (and
their immediate families) of First Tennessee or its affiliates; (c) by a current
or former Trustee, officer or employee of First Funds; the spouse of a First
Funds Trustee, officer or employee; a First Funds Trustee acting as a custodian
for a minor child or grandchild of a First Funds Trustee, officer or employee;
or the child or grandchild of a current or former Trustee, officer or employee
of First Funds who has reached the age of majority; (d) by a charitable
remainder trust or life income pool established for the benefit of a charitable
organization (as defined in Section 501(c)(3) of the Internal Revenue Code); (e)
for use in a financial institution or investment adviser managed account for
which a management or investment advisory fee is charged; (f) with redemption
proceeds from other mutual fund complexes on which the investor has paid a
front-end sales charge within the past 60 days upon presentation of purchase
verification information; or (g) through certain promotions where the load is
waived for investors.
In addition, you will not pay a sales load on the reinvestment of dividends or
distributions in the Portfolio or any other First Funds Portfolio, or in
connection with certain share exchanges as described under "How Are Investments,
Exchanges And Redemptions Made? - Class I, II, and III - How are Exchanges
Made?" Further, you generally will not pay a sales load on Class II shares of
the Portfolio which you buy using proceeds from the redemption of a First Funds
Portfolio which does not charge a front-end load, if you obtained such shares
through an exchange for Class II shares which you purchased with a sales load. A
sales load will apply to your purchase of Class II shares in the foregoing
situation only to the extent that the Portfolio's sales load exceeds the sales
load you paid in the prior purchase of the Class II shares.
In addition, if you purchase Class II shares within 60 days after redeeming
shares of the Portfolio, you will receive credit towards the sales load payable
on the purchase to the extent of the sales load you paid on the shares you
redeemed. This reinstatement privilege may be exercised only with respect to
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<PAGE>
redemptions and purchases in the same First Funds Portfolio. The reinstatement
privilege can be exercised only one time with respect to any particular
redemption.
QUANTITY DISCOUNTS
You may be entitled to reduced sales charges through the Right of Accumulation
or a Letter of Intent, even if you do not make an investment of a size that
would normally qualify for a quantity discount.
To qualify for a reduction of or exception to the sales load, you or your
Investment Professional must notify the Transfer Agent, CGFSC, at the time of
purchase or exchange. The reduction in sales load is subject to confirmation of
your holdings through a check of records. The Trust may modify or terminate
quantity discounts at any time. For more information about quantity discounts,
contact your Service Organization or ALPS at 1-800-442-1941 (option 1).
RIGHT OF ACCUMULATION. The sales charge schedule under the heading "How Are
Investments, Exchanges And Redemptions Made? - Public Offering Price" shows that
the sales load you will pay on Class II shares is reduced as your aggregate
investment increases. The Right of Accumulation allows you to combine certain
First Funds investments to determine your aggregate investment and the
applicable reduced sales load. You may combine the amount of your investment in
the Portfolio's Class II shares with the value of your investment in Class II of
any other First Funds Portfolio you own and on which you paid a sales load. If
you are a participant in a First Funds IRA or if you are a trustee or custodian
of another type of First Funds retirement plan, you may also include as part of
your aggregate investment any holdings through the IRA or in the plan even if a
load was not paid. If, for example, you beneficially own Class II shares of a
First Funds Portfolio with an aggregate current value of $99,000 and you
subsequently purchase shares of the Portfolio having a current value of $1,000,
the load applicable to the subsequent purchase would be reduced to 3.50% of the
offering price. Similarly, each subsequent purchase of First Funds Class II
shares may be added to your aggregate investment at the time of purchase to
determine the applicable sales loads.
LETTER OF INTENT. A Letter of Intent allows you to purchase Class II shares
over a 13-month period at a reduced sales charge. The sales charge is based on
the total amount you intend to purchase plus the total net asset value of Class
II shares which you already own on which you have paid a sales load. If you are
a participant in a First Funds IRA or if you are a trustee or custodian of
another type of First Funds retirement plan, you may also credit towards
completion of your Letter of Intent any Class II shares held through the IRA or
in the plan, even if a load was not paid. Each investment you make during the
period may be made at the reduced sales charge that would apply to the total
amount you intend to invest. The reduced sales load applies only to new
purchases. If you do not invest the total amount within the period, you may pay
the difference between the higher sales charge rate that would have been applied
to the purchases you made and the reduced sales charge rate you have paid.
Shares of the Portfolio equal to 5% of the amount you intend to invest will be
held in escrow and, if you do not pay the difference within 20 days following
the mailing of a request, the Transfer Agent will redeem a sufficient amount of
your escrowed shares to pay the additional sales charge. After the terms of your
Letter of Intent are fulfilled, the Transfer Agent will release your escrowed
shares.
If your purchases qualify for a further sales load reduction in addition to
that indicated in the Letter of Intent, the sales load will be adjusted to
reflect your total purchases. Signing a Letter of Intent does not bind you to
purchase the full amount indicated at the sales load in effect at the time of
signing, but you must complete the intended purchase to obtain the reduced sales
load. To apply, sign the Letter of Intent
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<PAGE>
form at the time you purchase Class II shares. You will be entitled to the
applicable sales load that is in effect at the date you submit the Letter of
Intent until you complete your intended purchase.
QUALIFICATION OF DISCOUNTS. As shown in the schedule of Class II sales
charges, larger purchases may result in lower sales charges to you. For purposes
of determining the amount of purchases using the Right of Accumulation and
Letter of Intent privileges, you may combine your purchase with:
- purchases by your spouse or his, her or your joint account or for the
account of any minor children, and
- the aggregate investment of any trustee or other Institutional Investor for
you and/or your spouse or your minor children.
A trustee or custodian of any qualified pension or profit sharing plan may
combine its aggregate purchases.
OTHER. Class II shares also incur Shareholder Servicing Fees. See discussion
under "What Advisory And Other Fees Does The Portfolio Pay? - Distribution Plan
and Shareholder Servicing Plans."
CLASS III
- ---------
Class III shares are bought without a front-end load; that is, the offering
price for such shares will be their NAV. Class III shares incur Distribution
Fees and Shareholder Servicing Fees. See discussion under "What Advisory And
Other Fees Does The Portfolio Pay? - Distribution Plans and Shareholder
Servicing Plans."
CLASS I, II AND III
- -------------------
HOW ARE PORTFOLIO SHARES VALUED?
The term "net asset value per share," or NAV, means the worth of one share.
The NAV of each Class of the Portfolio is calculated by adding that Class' pro
rata share of the value of all securities and other assets attributable to the
Portfolio, deducting that Class' pro rata share of Portfolio liabilities,
further deducting Class specific liabilities, and dividing the result by the
number of shares outstanding in that Class.
The Portfolio is open for business each day that both the NYSE and the New
York Federal Reserve are open (a Business Day). The NAV is calculated at the
close of the Portfolio's Business Day, which coincides with the close of regular
trading of the NYSE (normally 4:00 p.m. Eastern time).
The Portfolio's securities and other assets are valued primarily on the basis
of market quotations furnished by pricing services, or if quotations are not
available, by a method that the Trustees believe accurately reflects fair value.
Foreign securities are valued on the basis of quotations from the primary United
States market in which they are traded or, if not traded on a U.S. market, then
their primary foreign market, and translated from foreign market quotations into
U.S. dollars using current exchange rates.
DISTRIBUTION OPTIONS: The Portfolio earns dividends from its stocks and
interest from bond, money market, and other fixed-income investments. These are
passed along as dividend distributions. The Portfolio may realize capital gains
if it sells securities for a higher price than it paid for them. These are
passed along as capital gain distributions. Income dividends for the Portfolio
are declared and paid monthly.
15
<PAGE>
When you fill out your account application, you can specify how you want to
receive your distributions. Currently, there are three available options:
1. REINVESTMENT OPTION. Your dividend distributions and capital gain
distributions, if any, will be automatically reinvested in additional shares of
the Portfolio. Reinvestment of distributions will be made at that day's NAV. If
you do not indicate a choice on your application, you will be assigned this
option.
2. CASH OPTION. You will be sent a check for each dividend and capital gain
distribution, if any. Distribution checks will be mailed no later than seven
days after the last day of the month.
3. INCOME-EARNED OPTION. Your capital gain distributions, if any, will be
automatically reinvested, but you will be sent a check for any dividend
distribution.
HOW ARE EXCHANGES MADE?
An exchange is the redemption of shares of one Portfolio and the purchase of
shares of another. The exchange privilege is a convenient way to sell and buy
shares of other Portfolios registered in an investor's state. Except as noted
below, the Portfolio's shares may be exchanged for the same Class shares of
other First Funds Portfolios. The redemption and purchase will be made at the
next determined NAV after the exchange request is received and accepted by
CGFSC. You may execute exchange transactions by calling CGFSC at 1-800-442-1941
(option 2) prior to 4:00 p.m. Eastern Time on any Business Day.
Class II shares of the First Funds Money Market Portfolios are not currently
available for investment. Investors in Class II shares wishing to exchange into
one of the Money Market Portfolios will receive Class III shares.
When making an exchange or opening an account in another Portfolio by
exchange, the registration and tax identification numbers of the two accounts
must be identical. In order to open a new account through exchange, the minimum
initial investment requirements must be met.
Each exchange may produce a gain or loss for tax purposes. In order to protect
the Portfolio's performance and its shareholders, First Tennessee and IAI
discourage frequent exchange activity by investors in response to short-term
market fluctuations. The Portfolio reserves the right to refuse any specific
purchase order, including certain purchases by exchange if, in IAI's opinion,
the Portfolio would be unable to invest effectively in accordance with its
investment objective and policies, or would otherwise be affected adversely.
Exchanges or purchase orders may be restricted or refused if the Portfolio
receives or anticipates individual or simultaneous orders affecting significant
portions of the Portfolio's assets. Although the Portfolio will attempt to give
prior notice whenever it is reasonably able to do so, it may impose these
restrictions at any time. The Portfolio reserves the right to modify or withdraw
the exchange privilege upon 60 days notice and to suspend the offering of shares
in any Class without notice to shareholders. You or your Institutional Investor,
if you are invested in Class I will receive written confirmation of each
exchange transaction.
Exchanges are generally not permitted from Class I to another Class. Should a
beneficial owner of Class I shares cease to be eligible to purchase shares of
Class I, Class I shares held in an Institutional Account may be converted to
shares of another Class.
STATEMENTS AND REPORTS
You, or if Class I, the Institutional Investor, will receive a monthly
statement and a confirmation after every transaction that affects the share
balance or the account registration. A statement with tax information will be
mailed by January 31 of each tax year and also will be filed with the IRS. At
least
16
<PAGE>
twice a year, you, or if Class I, the Institutional Investor, will receive the
Portfolio's financial statements. To reduce expenses, only one copy of the
Portfolio's reports (such as the Prospectus and Annual Report) will be mailed to
each investor or, if Class I, each Institutional Investor. Please write to ALPS
to request additional copies.
- --------------------------------------------------------------------------------
HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------
From time to time the Portfolio may quote the yield of Class I, II or III
shares in advertisements or in reports or other communications with
shareholders. The YIELD is a way of showing the rate of income that the
Portfolio earns on its investments as the percentage of its share price. To
calculate yield, the Portfolio takes the net investment income it earned from
its portfolio securities for a 30-day period, divides it by the average number
of shares entitled to receive dividends, and expresses the result as an
annualized percentage rate based on share price at the end of the 30-day period.
Yields do not reflect gains or losses from portfolio transactions. Yields are
calculated according to accounting methods that are standardized for all mutual
funds. Because yield accounting methods differ from the methods used for other
accounting purposes, the Portfolio's yield may not equal its distribution rate,
the income paid to an account, or the income reported in financial statements.
The Portfolio's investment objective is to seek capital appreciation. Therefore,
it does not expect to generate a significant yield.
TOTAL RETURN for Class I, II or III of the Portfolio is based on the overall
dollar or percentage change in value of a hypothetical investment, assuming
dividends are reinvested. A CUMULATIVE TOTAL RETURN reflects performance over a
stated period of time. An AVERAGE ANNUAL TOTAL RETURN reflects the hypothetical
annually compounded rate that would have produced the same cumulative total
return if performance had been constant over the entire period. Because average
annual returns tend to smooth out variations in performance, you should
recognize that they are not the same as actual year-by-year results. The yield
and total returns of the three Classes of the Portfolio are calculated
separately due to separate expense structures as indicated in the "Summary Of
Portfolio Expenses"; the yields and total returns of Class II and Class III will
be lower than that of Class I.
For additional performance information, contact your Investment Professional
or ALPS for a free Statement of Additional Information for the Portfolio.
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Broker-dealers are utilized to conduct securities transactions for the
Portfolio and are chosen based upon professional ability and quality of service.
In addition, the Portfolio's investment advisers may consider a broker-dealer's
sales of shares of the Portfolio or recommendations to its customers that they
purchase shares of the Portfolio as a factor in the selection of broker-dealers
to execute transactions for the Portfolio. In placing business with such broker-
dealers, the advisers will seek the best execution of each transaction.
Higher commissions may be paid to firms that provide research services to the
extent permitted by law. The frequency of portfolio transactions - the
Portfolio's portfolio turnover rate - will vary from year to year depending on
market conditions. The Portfolio's turnover rate for the fiscal period ended
June 30, 1998 was __%.
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- --------------------------------------------------------------------------------
WHAT IS THE EFFECT OF FEDERAL INCOME TAX ON THIS INVESTMENT?
- --------------------------------------------------------------------------------
The Portfolio intends to distribute substantially all of its net investment
income and capital gains, if any, to shareholders within each calendar year as
well as on a fiscal year basis. Any net capital gains realized are normally
distributed in December. Income dividends for the Portfolio, if any, are
declared and paid annually.
FEDERAL TAXES. Distributions of gains from sales of assets held by the
Portfolio for more than one year generally are taxable to shareholders at the
applicable mid-term or long-term capital gains rate, regardless of how long they
have owned their Portfolio shares. Distributions from other sources generally
are taxed as ordinary income. A portion of the Portfolio's dividends may qualify
for the dividends-received deduction for corporations. Distributions are taxable
when they are paid, whether taken in cash or reinvested in additional shares,
except that distributions declared in October, November or December and paid in
January are taxable as if paid on December 31. The Portfolio will send each
investor or, if Class I, each Institutional Investor an IRS Form 1099-DIV by
January 31 of each year.
REDEMPTIONS AND EXCHANGES. A capital gain or loss may be realized when shares
of the Portfolio are redeemed or exchanged. For most types of accounts, the
Portfolio will report the proceeds of redemptions to each shareholder or, if
Class I, the Institutional Investor, and the IRS annually. However, the tax
treatment also depends on the purchase price and your personal tax position.
"BUYING A DIVIDEND." On the record date for a distribution of income or
capital gains, the Portfolio's share price is reduced by the amount of the
distribution. If shares are bought just before the record date ("buying a
dividend"), the full price for the shares will be paid, and a portion of the
price will be received back as a taxable distribution.
OTHER TAX INFORMATION. The information above is only a summary of some of the
federal tax consequences generally affecting the Portfolio and its shareholders,
and no attempt has been made to discuss individual tax consequences. In
addition to federal tax, distributions may be subject to state or local taxes.
Institutional Investors and other shareholders should consult their tax advisor
for details and up-to-date information on the tax laws in your state to
determine whether the Portfolio is suitable given your particular tax situation.
It is not anticipated that the Portfolio's distributions will be exempt from
Tennessee personal income tax, except to the extent that any distributions of
income are attributable to interest on bonds or securities of the U.S.
government or any of its agencies or instrumentalities.
When you sign your account application, you will be asked to certify that your
taxpayer identification number is correct and that you are not subject to backup
withholding for failing to report income to the IRS. If you do not comply with
IRS regulations, the IRS can require the Portfolio to withhold 31% of taxable
distributions from your account.
- --------------------------------------------------------------------------------
WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY?
- --------------------------------------------------------------------------------
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENTS. The Portfolio is obligated to
pay First Tennessee, 4990 Poplar Avenue, Memphis, Tennessee, a monthly
management fee at the annual rate of 0.15% of its average net assets for the
investment advisory services First Tennessee provides. First Tennessee has
voluntarily agreed to waive its entire management fees for the current fiscal
year. This voluntary waiver can be discontinued at any time.
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<PAGE>
Under its Investment Advisory and Management Agreement, First Tennessee
monitors and evaluates the performance of IAI, allocates Portfolio assets to be
managed by multiple, active investment advisers, recommends any changes in or
additional investment advisers when appropriate, coordinates the activities of
the Portfolio's investment advisers with its custodian, transfer agent,
Administrator and independent accountants, and monitors Portfolio purchase and
sale transactions for compliance purposes.
First Tennessee has experience as an investment adviser to individual,
corporate and institutional advisory clients, pension plans and collective
investment funds, with approximately $__ billion in assets under administration
(including nondiscretionary accounts) and $__ billion in assets under management
as of June 30, 1998, as well as experience in supervising sub-advisers.
IAI serves as Adviser for the Portfolio pursuant to the authority granted to
it under its Investment Advisory and Management Agreement with the Trust on
behalf of the Portfolio. IAI is responsible for the day-to-day investment and
reinvestment of the Portfolio's assets in accordance with its investment
objective and policies. IAI is obligated to provide a continual program of
investment of Portfolio assets, to conduct investment research and credit
analysis concerning Portfolio investments, and to place orders for all purchases
and sales on investments on behalf of the Portfolio. As compensation for the
services it provides, IAI is entitled to receive from the Portfolio a monthly
management fee at the annual rate of 0.70% for the first $50 million of the
Portfolio's average net assets and .65% on average daily net assets of the
Portfolio in excess of $50 million.
IAI also furnishes investment advice to other concerns including other
investment companies, pension and profit sharing plans, portfolio of
foundations, religious, educational and charitable institutions, trusts,
municipalities and individuals, having total assets in excess of $__ billion aas
of June 30, 1998. IAI's ultimate corporate parent is Lloyds TSB Group plc, a
publicly-held financial services organization headquartered in London, England.
Lloyds TSB Group plc is one of the largest personal and corporate financial
services groups in the United Kingdom and is engaged in a wide range of
activities including commercial and retail banking. The address of IAI is 3700
First Bank Place, P.O. Box 357, Minneapolis, Minnesota 55440.
ADMINISTRATOR AND DISTRIBUTOR. ALPS, 370 17th Street, Suite 3100, Denver
Colorado, 80202, serves as the Administrator and Distributor for the Portfolio.
As Administrator, ALPS assists in the Portfolio's administration and operation,
including but not limited to, providing office space and various legal and
operational services in connection with the regulatory requirements applicable
to the Portfolio. ALPS is entitled to receive from the Portfolio a monthly fee
at the annual rate of .15% of average net assets. First Tennessee serves as the
Co-Administrator for the Portfolio. As the Co-Administrator, First Tennessee
assists in each Portfolio's operation, including but not limited to, providing
non-investment related research and statistical data and various operational and
administrative services. First Tennessee is entitled to and receives from the
Portfolio a monthly fee at the annual rate of .05% of average net assets.
As the Distributor, ALPS sells shares of the Portfolio as agent on behalf of
the Trust at no additional cost to the Trust. First Tennessee and its
affiliates do not participate in and are not responsible for selling as an agent
on behalf of the Trust, underwriting or distributing Trust shares. Consistent
with applicable law, affiliates of First Tennessee may receive commissions or
asset-based fees.
TRANSFER AGENT AND CUSTODIAN. Chase Global Funds Services Company, a division
of Chase Manhattan Bank, N.A. (CGFSC), provides transfer agent and related
services for the Portfolio. Chase Manhattan Bank, N.A. is Custodian of the
Portfolio's assets.
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<PAGE>
PRICING AND ACCOUNTING. CGFSC also serves as Fund Accountant and thereby
calculates the NAV and dividends of each Class and maintains the portfolio and
general accounting records.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICING PLANS. The Trustees have adopted
a Distribution Plan on behalf of Class III of the Portfolio pursuant to Rule
12b-1 (the Rule) under the 1940 Act. The NASD subjects asset-based sales
charges to its maximum sales charge rule. Fees paid pursuant to the Portfolio's
Distribution Plan will be limited by the restrictions imposed by the NASD rule.
The Distribution Plan provides for payment of a fee to ALPS at the annual rate
of .75% of the average net assets of Class III. All or a portion of these fees
will in turn be paid to Investment Professionals as compensation for selling
shares of Class III and for providing ongoing sales support services. The
Trustees have also adopted Shareholder Servicing Plans on behalf of Class II and
III of the Portfolio, under which Service Organizations are paid at the annual
rate of .25% of each Class' average net assets, for shareholder services and
account maintenance, including responding to shareholder inquiries, directing
shareholder communications, account balance maintenance, and dividend posting.
The Distribution Fees are expenses of Class III and the Shareholder Servicing
Fees are expenses of Class II and III in addition to the Management Fee and the
Administration and Co-Administration Fees, and will reduce the net income and
total return of both Classes.
- --------------------------------------------------------------------------------
HOW IS THE PORTFOLIO ORGANIZED?
- --------------------------------------------------------------------------------
The Portfolio is a diversified portfolio of First Funds, an open-end
management investment company organized as a Massachusetts business trust by a
Declaration of Trust dated March 6, 1992, as amended and restated on September
4, 1992. The Portfolio consists of three separate Classes. The Trustees
supervise the Trust's activities and review its contractual arrangements with
companies that provide the Trust with services. The Trust is not required to
hold annual shareholder meetings, although special meetings may be called for a
specific Portfolio or Class with respect to issues affecting that Portfolio or
Class, or the Trust as a whole, for purposes such as electing or removing
Trustees, changing fundamental policies or approving investment advisory
agreements. Shareholders receive one vote for each share owned and fractional
votes for fractional shares owned. A Portfolio or Class votes separately with
respect to issues affecting only that Portfolio or Class. Pursuant to the
Declaration of Trust, the Trustees have the authority to issue additional
Classes of shares for the Portfolio.
PORTFOLIO MANAGEMENT
Martin Calihan has responsibility for the management of the Portfolio. Mr.
Calihan is a Vice President and has served as an equity analyst for IAI since
1992. Before joining IAI, Mr. Calihan was an equity analyst with Morgan Stanley
and Company from 1991 to 1992, and with State Street Research management from
1990 to 1991. Mr. Calihan has managed the Portfolio since its inception.
- --------------------------------------------------------------------------------
INVESTMENT INSTRUMENTS, TRANSACTIONS, STRATEGIES AND RISKS
- --------------------------------------------------------------------------------
The following paragraphs provide a brief description of the securities in
which the Portfolio may invest and the transactions each may make. The Portfolio
is not limited by this discussion, however, and may purchase other types of
securities and may enter into other types of transactions if they are consistent
with the Portfolio's investment objective and policies.
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EQUITY SECURITIES may include common stocks, preferred stocks, convertible
securities, ADRs and warrants. Common stock purchased by the Portfolio is
evidence of ownership of a corporation. Owners typically are entitled to vote on
the selection of directors and other important matters as well as to receive
dividends on their holdings. In the event that a corporation is liquidated, the
claims of secured and unsecured creditors and owners of bonds and preferred
stock take precedence over the claims of those who own common stock. For the
most part, however, common stock has more potential for appreciation. Preferred
Stock is a Class of capital stock that pays dividends at a specified rate and
that has preference over common stock in the payment of dividends and the
liquidation of assets. Preferred stock does not ordinarily carry voting rights.
Although equity securities have a history of long-term growth in value, their
prices fluctuate based on changes in a company's financial condition and on
overall market and economic conditions.
FOREIGN INVESTMENTS. The Portfolio may invest in foreign securities, which
may involve additional risks. Foreign securities and securities denominated in
or indexed to foreign currencies may be affected by the strength of foreign
currencies relative to the U.S. dollar, or by political, regulatory, or economic
developments in foreign countries. Foreign companies may not be subject to
accounting standards or governmental supervision comparable to U.S. companies,
and there may be less public information about their operations. Foreign markets
may be less liquid or more volatile than U.S. markets, and may offer less
protection to investors. In addition to the political and economic factors that
can affect foreign securities, a governmental issuer may be unwilling to repay
principal and interest when due, and may require that the conditions for payment
be renegotiated. These factors could make foreign investments, especially those
in developing countries, more volatile. IAI considers these factors in making
foreign investments for the Portfolio.
The Portfolio may also enter into currency forward contracts (agreements to
exchange one currency for another at a future date) to manage currency risks and
to facilitate transactions in foreign securities. Although currency forward
contracts can be used to protect the Portfolio from adverse exchange rate
changes, they involve a risk of loss if IAI fails to predict foreign currency
values correctly or employs a strategy that does not correlate well with a
Portfolio's investments. A loss to the Portfolio may also result if the
counterparty to a transaction fails to perform as obligated. Please see
discussion under "Forwards" below.
DELAYED-DELIVERY AND WHEN-ISSUED TRANSACTIONS. The Portfolio may buy and sell
obligations on a when-issued or delayed-delivery basis, with payment and
delivery taking place at a future date. The market value of obligations
purchased in this way may change before the delivery date, which could increase
fluctuations in the Portfolio's share price, yield, and return. Ordinarily, the
Portfolio will not earn interest on obligations until they are delivered.
FORWARDS. A forward represents a contract that obligates the counterparty to
buy, and the other to sell, a specific underlying asset at a specific price,
amount, and date in the future. Forwards are similar to futures except for the
fact that forwards are privately negotiated. The most common type of forward
contracts are foreign currency exchange contracts.
The Portfolio may enter into forward exchange currency contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its foreign
portfolio holdings and to hedge certain firm purchase and sale commitments
denominated in foreign currencies. A forward exchange currency contract is a
commitment to purchase or sell a foreign currency at a future date at a
negotiated forward rate. The gain or loss arising from the difference between
the original contract and the closing of such contract is included in net
realized gain or loss on foreign currency transactions. Fluctuations in the
value
21
<PAGE>
of forward exchange currency contracts are recorded for financial reporting
purposes as unrealized gains or losses by the Portfolio.
RESTRICTED SECURITIES. The Portfolio may purchase securities which cannot be
sold to the public without registration under the Securities Act of 1933
(restricted securities). Unless registered for sale, these securities can only
be sold in privately negotiated transactions or pursuant to an exemption from
registration. Provided that the security has a demand feature of seven days or
less, or a dealer or institutional trading market exists, these restricted
securities are not treated as illiquid securities for the purposes of the
Portfolio's investment limitations. Investing in restricted securities could
have the effect of increasing the level of Portfolio illiquidity if qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
ILLIQUID SECURITIES. Under guidelines established by the Board of Trustees,
IAI determines the liquidity of the Portfolio's investments. The absence of a
trading market can make it difficult to ascertain a market value for illiquid
investments. Disposing of illiquid investments or securities subject to legal
restrictions may involve time-consuming negotiation and legal expenses. It may
be difficult or impossible for the Portfolio to sell illiquid or restricted
securities promptly at an acceptable price. The Portfolio may invest up to 15%
of its net assets in illiquid investments.
MONEY MARKET INSTRUMENTS are high quality instruments that present minimal
credit risk. They may include U.S. government obligations, commercial paper and
other short-term corporate obligations, and certificates of deposit, bankers'
acceptances, bank deposits and other financial institution obligations. These
instruments may carry fixed or variable rates.
OPTIONS CONTRACTS. An option is a contract that gives the owner the right,
but not the obligation, to either buy (call option) or sell (put option) an
underlying security or currency at a fixed price for a specified period of time.
The Portfolio may buy and sell (write) put and call options contracts to manage
its exposure to changing interest rates and security prices. To the extent it
invests in securities denominated in foreign currencies, the Portfolio may also
buy and sell options contracts to manage exposure to currency exchange rates.
Some option strategies, including buying puts and writing calls, tend to hedge
the Portfolio's investments against price fluctuations. Other strategies,
including writing puts and buying calls, tend to increase market exposure.
Options may be combined with each other in order to adjust the risk and return
characteristics of the overall strategy. The Portfolio may enter into forward
contracts for settlement or hedging purposes. The Portfolio may invest in
options based on any type of security, index, or currency, including options
traded on foreign exchanges and options not traded on exchanges.
Options can be volatile investments and involve certain risks. If IAI applies
a hedge at an inappropriate time or judges market conditions incorrectly,
options strategies may result in a loss and lower the Portfolios return. The
Portfolio could also experience losses if the prices of its options positions
were poorly correlated with its other investments, or if it could not close out
its positions because of an illiquid secondary market. The use of options may
increase the volatility of the Portfolio and may involve the investment of a
small amount of cash relative to the risk assumed.
The Portfolio will be able to hedge its total assets by writing calls or
purchasing puts under normal conditions. In addition, the Portfolio will not
write puts whose underlying value exceeds 25% of total assets, and will not buy
calls with a value exceeding 5% of total assets.
REPURCHASE AGREEMENTS are transactions by which a Portfolio agrees to purchase
a security subject to the seller's agreement to repurchase it at a mutually
agreed upon date and price. In the event of the
22
<PAGE>
bankruptcy of the seller, a Portfolio could experience delays in recovering its
cash. In the event of the bankruptcy of the other party to a repurchase
agreement or a securities loan, the Portfolio could experience delays in
recovering its cash or the securities it lent. To the extent that, in the
meantime, the value of the obligations purchased had decreased, or the value of
obligations lent had increased, a Portfolio could experience a loss. In all
cases, IAI must find the creditworthiness of the other party to the transaction
satisfactory.
U.S. GOVERNMENT OBLIGATIONS purchased by the Portfolio are debt obligations
issued or guaranteed by the U.S. Treasury or by an agency or instrumentality of
the U.S. government. Not all U.S. government obligations are backed by the full
faith and credit of the United States. For example, obligations issued by the
Federal Farm Credit Bank or by the Federal National Mortgage Association are
supported by the agency's right to borrow money from the U.S. Treasury under
certain circumstances. Obligations issued by the Federal Home Loan Bank are
supported only by the credit of the agency. There is no guarantee that the
government will support these types of obligations, and therefore they involve
more risk than other government obligations.
U.S. TREASURY OBLIGATIONS purchased by the Portfolio are obligations issued by
the United States and backed by its full faith and credit.
ZERO COUPON BONDS purchased by the Portfolio do not make regular interest
payments; instead they are sold at a deep discount from their face value and are
redeemed at face value when they mature. Because zero coupon bonds do not pay
current income, their prices can be very volatile when interest rates change. In
calculating its daily dividend, the Portfolio takes into account as income a
portion of the difference between a zero coupon bond's purchase price and its
face value.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corporation (REFCORP) and the
Financing Corporation (FICO) can also be separated in this fashion. The risks of
these securities are similar to those of other debt securities, although they
may be more volatile and the value of certain types of stripped securities may
move in the same direction as interest rates. Original issue zeros are zero
coupon securities originally issued by the U.S. government, a government agency,
or a corporation in zero coupon form.
23
<PAGE>
Co-Investment Adviser
---------------------
First Tennessee Bank National Association
Memphis, TN
Investment Adviser
------------------
Investment Advisors, Inc.
Minneapolis, MN
Officers
--------
Richard C. Rantzow, President
James V. Hyatt, Secretary
Jeremy O. May, Treasurer
Trustees
--------
Thomas M. Batchelor
John A. DeCell
L.R. Jalenak, Jr.
Larry W. Papasan
Richard C. Rantzow
Administrator and Distributor
-----------------------------
ALPS Mutual Funds Services, Inc.
Denver, CO
Transfer and Shareholder Servicing Agent
----------------------------------------
Chase Global Funds Services Company
Boston, MA
Custodian
---------
Chase Manhattan Bank, N.A.
New York, NY
24
<PAGE>
FIRST FUNDS 370 17th Street
Suite 3100
BOND PORTFOLIO Denver, Colorado 80202
- --------------------------------------------------------------------------------
PROSPECTUS FOR CLASS I, II, AND III
October __, 1998
- --------------------------------------------------------------------------------
First Funds (the Trust) offers investors a convenient and economical means of
investing in a professionally managed fixed income mutual fund. The objective of
the Bond Portfolio (the Portfolio) is to achieve maximum total return through
high current income, consistent with reasonable risk, by investing primarily in
fixed income securities. The Portfolio's net asset value per share will
fluctuate in response to changes in the value of its investments.
This Prospectus is designed to provide you with information that you should
know before investing. Please read and retain this document for future
reference. This Prospectus offers Class I, II and III shares of the Portfolio.
Class I shares are designed exclusively for investment of monies held in non-
retail trust, advisory, agency, custodial or similar accounts (Institutional
Accounts). Class I shares may be purchased for Institutional Accounts by
financial institutions, business organizations, corporations, municipalities,
non-profit institutions and other entities serving in trust, advisory, agency,
custodial or similar capacities (each, an Institutional Investor and
collectively, Institutional Investors) that meet the investment threshold for
this Class of shares. Class II and III shares are designed for individuals and
other investors who seek mutual fund investment convenience plus a lower
investment minimum. These Classes offer investors differing expense and sales
load structures to choose between. See "Expense Summary.".
A Statement of Additional Information (dated October __, 1998) for the
Portfolio has been filed with the Securities and Exchange Commission (SEC) and
is incorporated herein by reference. This Prospectus, the Annual Report and the
Statement of Additional Information are available free upon request from ALPS
Mutual Funds Services, Inc., (ALPS) the Portfolio's Distributor. The Annual
Report for the fiscal period ended June 30, 1997 for the Portfolio is
incorporated into the Statement of Additional Information by reference. Please
call ALPS at 1-800-442-1941 (option 1) for more information concerning each
Class of shares. If you are investing through a broker, other financial
institution or adviser (Investment Professional), please contact that
institution directly.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY,
FIRST TENNESSEE BANK NATIONAL ASSOCIATION OR ANY DEPOSITORY INSTITUTION. SHARES
ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD, OR
ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY STATE
OR JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER IN
SUCH STATE OR JURISDICTION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY OF PORTFOLIO EXPENSES.................................. 3
FINANCIAL HIGHLIGHTS........................................... 4
WHAT IS THE INVESTMENT OBJECTIVE OF THE PORTFOLIO?............. 7
IS THE PORTFOLIO A SUITABLE INVESTMENT?; INVESTMENT RISKS...... 8
WHAT ARE THE PORTFOLIO'S INVESTMENT POLICIES AND LIMITATIONS?.. 9
HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?........... 9
HOW IS PERFORMANCE CALCULATED?................................. 19
PORTFOLIO TRANSACTIONS......................................... 20
WHAT IS THE EFFECT OF FEDERAL INCOME TAX ON THIS INVESTMENT?... 20
WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY?........... 21
HOW IS THE PORTFOLIO ORGANIZED?................................ 23
INVESTMENT INSTRUMENTS, TRANSACTIONS, STRATEGIES AND RISKS..... 23
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF PORTFOLIO EXPENSES
- --------------------------------------------------------------------------------
The purpose of the table below is to assist you in understanding the various
costs and expenses that you would bear, directly or indirectly, by investing in
the Portfolio. This standard format was developed for use by all mutual funds to
help you make your investment decisions. The information below is based upon the
Portfolio's expenses for the fiscal year ended June 30, 1997. This expense
information should be considered along with other important information such as
the Portfolio's investment objective.
A. EXPENSE SUMMARY
BOND PORTFOLIO
SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------------------------------
Maximum Sales Load on Purchases
(as a percentage of offering price) None 3.75% None
Sales Load Imposed on Reinvested
Distributions None None None
Deferred Sales Load None None None
Redemption Fees None None None
Exchange Fee None None None
ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees* .15% .15% .15%
12b-1 Fees .00% .00% .50%
Other Expenses .34% .75% .73%
--------------------------
Total Portfolio Operating Expenses* .49% .90% 1.63%
*After expense waivers
ANNUAL PORTFOLIO OPERATING EXPENSES. The Portfolio is obligated to pay
Management Fees to First Tennessee Bank National Association (First Tennessee)
for managing the Portfolio's investments. First Tennessee, as Investment
Adviser, has voluntarily agreed to waive its investment advisory fee down to
.15% of the Portfolio's average net assets; however, there is no guarantee that
the waiver will continue. The Portfolio incurs Other Expenses, including
Administration and Co-Administration Fees, for maintaining shareholder records,
furnishing shareholder statements and reports, and other services. ALPS, as
Administrator, is entitled to and charges .15% of the Portfolio's average net
assets for administration services. First Tennessee, as Co-Administrator, is
entitled to and charges .05% of the Portfolio's average net assets for co-
administration services. Other Expenses also include Shareholder Servicing Fees
of 0.25% with respect to Class II and Class III of the Portfolio.
If the waivers were not in effect, Management Fees would be .55% for the
current fiscal year for each Class. In addition, the Board of Trustees has
limited the payment of 12b-1 fees under the Distribution Plan to .50% (see "What
Advisory and Other Fees Does the Portfolio Pay - Distribution Plan and
Shareholder Servicing Plans"). Absent these waivers and limitations, Total
Portfolio Operating Expenses would be as follows:
3
<PAGE>
BOND PORTFOLIO
--------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------- -------- ---------
Total Portfolio Operating Expenses 89% 1.30% 2.03%
There is no guarantee that any waivers will continue at their stated levels.
Management Fees, 12b-1 Fees, Shareholder Servicing Fees, and Other Expenses,
are reflected in the Portfolio's share price and are not charged directly to
individual accounts. 12b-1 Fees are paid by Class III shares of the Portfolio to
ALPS for services and expenses in connection with distribution. Shareholder
Servicing Fees are paid by Class II and III shares of the Portfolio to
Investment Professionals for services and expenses incurred in connection with
providing personal service to shareholders and/or maintenance of shareholder
accounts. Long-term shareholders may pay more than the economic equivalent of
the maximum 8.50% front-end sales charge permitted by the National Association
of Securities Dealers, Inc. (NASD) due to 12b-1 fees applicable to Class III
shares. Please see "What Advisory And Other Fees Does The Portfolio Pay -
Distribution Plan and Shareholder Servicing Plans for further information.
B. EXAMPLE: You would pay the following expenses for every $1,000 investment
in each Class of shares of the Bond Portfolio assuming (1) 5% annual return, (2)
redemption at the end of each time period, (3) that operating expenses (net of
expense waivers) are the same as described above, and (4) reinvestment of all
dividends and distributions. THE RETURN OF 5% AND EXPENSES SHOULD NOT BE
CONSIDERED INDICATIVE OF ACTUAL OR EXPECTED PERFORMANCE OR PORTFOLIO OPERATING
EXPENSES, BOTH OF WHICH MAY VARY SIGNIFICANTLY:
BOND PORTFOLIO
--------------
CLASS I CLASS II CLASS III
------- -------- ---------
1 year $ 5 $ 46* $ 17
3 years $16 $ 65* $ 52
5 years $27 $ 86* $ 89
10 years $62 $144* $194
*Reflects imposition of maximum sales charge at the beginning of the period.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The table that follows is included in the Annual Report for the Portfolio
dated June 30, 1997 and has been audited by PricewaterhouseCoopers LLP,
independent accountants. Their report on the financial statements and the
financial highlights for the Portfolio is included in the Annual Report. The
financial statements and financial highlights are incorporated by reference into
the Portfolio's Statement of Additional Information. The Annual Report contains
additional performance information and will be made available upon request and
without charge.
4
<PAGE>
BOND PORTFOLIO
<TABLE>
<CAPTION>
CLASS I
-------
For the Year Ended June 30,
---------------------------
1997 1996 1995 1994**
---- ---- ---- ------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 9.73 $ 9.91 $ 9.41 $ 10.00
Income from investment operations:
Net investment income 0.61 0.60 0.57 0.45
Net realized and unrealized gain (loss) on investments 0.11 (0.18) 0.50 (0.57)
Total from investment operations 0.72 0.42 1.07 (0.12)
Distributions:
Net investment income (0.61) (0.60) (0.57) (0.46)
Net realized gain - - - (0.01)
Total distributions (0.61) (0.60) (0.57) (0.47)
Net asset value, end of period $ 9.84 $ 9.73 $ 9.91 $ 9.41
TOTAL RETURN+ 7.58% 4.23% 11.87% (1.38)%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $123,184 $107,832 $90,574 $ 75,686
Ratio of expenses to average daily net assets (1) 0.49% 0.41% 0.35% 0.36%*
Ratio of net investment income to average net assets 6.20% 5.99% 6.07% 5.07%*
Portfolio turnover rate 56% 56% 23% 36%*
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had such
waivers not occurred is as follows. 0.89% 0.91% 0.91% 0.96%*
</TABLE>
5
<PAGE>
BOND PORTFOLIO
<TABLE>
<CAPTION>
CLASS II CLASS III
-------- ---------
For the Year Ended June 30, For the Year Ended June 30,
-------------------------- --------------------------
1997 1996** 1997 1996 1995 1994**
---------- ---------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 9.71 $ 10.18 $ 9.71 $ 9.89 $ 9.40 $ 10.04
Income from investment operations:
Net investment income 0.57 0.29 0.49 0.49 0.43 0.21
Net realized and unrealized gain (loss)
on investments 0.10 (0.47) 0.11 (0.18) 0.49 (0.62)
Total from investment operations 0.67 (0.18) 0.60 0.31 0.92 (0.41)
Distributions:
Net investment income (0.57) (0.29) (0.49) (0.49) (0.43) (0.22)
Net realized gain - - - - - (0.01)
Total distributions (0.57) (0.29) (0.49) (0.49) (0.43) (0.23)
Net asset value, end of period $ 9.81 $ 9.71 $ 9.82 $ 9.71 $ 9.89 $ 9.40
TOTAL RETURN+ 7.12%*** (1.75)%# 6.37% 3.11% 10.12% (4.19)%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 841 $ 67 $2,553 $3,445 $1,916 $ 923
Ratio of expenses to average daily
net assets(1) 0.90% 0.80%* 1.63% 1.49% 1.84% 1.82%*
Ratio of net investment income to
average net assets 5.79% 5.61%* 5.07% 4.92% 4.58% 3.61%*
Portfolio turnover rate 56% 56% 56% 56% 23% 36%*
During the period, various fees were
waived. The ratio of expenses to
average net assets had such
waivers not occurred is as follows. 1.30% 1.30%* 2.03% 1.99% 3.35% 6.36%*
</TABLE>
* Annualized.
** Classes I, II and III commenced operations on August 2, 1993, December
20, 1995 and December 2, 1993, respectively.
*** Class II total return does not include the one time sales charge.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
6
<PAGE>
- --------------------------------------------------------------------------------
WHAT IS THE INVESTMENT OBJECTIVE OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
First Tennessee, serves as Investment Adviser to the Portfolio and, with the
prior approval of the Board of Trustees (the Trustees), has engaged Highland
Capital Management Corp. (Highland), to act as Sub-Adviser to the Portfolio.
Subject to First Tennessee's supervision, Highland is responsible for the day-
to-day investment management of the Portfolio, including providing investment
research and credit analysis concerning Portfolio investments and conducting a
continuous program of investment of Portfolio assets in accordance with the
investment policies and objective of the Portfolio. For additional information
about the Portfolio's investment advisory arrangements, see "What Advisory And
Other Fees Does The Portfolio Pay? - Investment Advisory and Management and Sub-
Advisory Agreements."
The investment objective of the Portfolio is to achieve maximum total return
through high current income by investing at least 65% of its total assets in
fixed income securities. There is no assurance that the Portfolio will achieve
its investment objective. The permitted investments of the Portfolio are as
follows:
The Portfolio invests primarily in U.S. government obligations, investment
grade debt of U.S. corporations, mortgage-backed securities, (such as Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA), and Federal Home Loan Mortgage Corporation (Freddie Mac) obligations,
and investment-grade asset-backed securities. Highland expects to invest the
Portfolio in investment-grade debt securities, which are considered to be those
rated Baa or higher by Moody's Investors Service, Inc. (Moody's) or BBB or
higher by Standard & Poor's Corporation (S&P). Investment-grade securities are
generally of medium to high quality. Accordingly, the Portfolio will not invest
in securities judged by Highland to be predominantly speculative or of poor
quality, although it may invest in securities rated in the lower end of the
investment-grade category (Baa/BBB), if Highland deems that such securities
present attractive investment opportunities. Securities rated Baa/BBB have
speculative characteristics and are more sensitive to economic changes and
changes in the financial condition of issuers. The Portfolio may also invest in
unrated securities judged to be of equivalent quality by Highland. Unrated
securities are not necessarily of lower quality than rated securities, but they
may not be attractive to as many buyers. The Portfolio relies more on Highland's
credit analysis when investing in debt securities that are unrated. In the event
the Portfolio owns a security whose rating is subsequently reduced below
investment grade by Moody's or S&P, Highland will determine whether the
Portfolio should continue to hold such security but in no event will the
Portfolio's investments in such securities exceed 5% of its net assets.
The Portfolio also may invest in foreign securities and make foreign
investments in foreign currencies. The Portfolio may buy and sell securities on
a when-issued or delayed-delivery basis, engage in dollar roll transactions,
invest in options, and purchase zero coupon bonds, illiquid and restricted
securities, and shares in other investment companies. The Portfolio may, for
temporary defensive and liquidity purposes, invest without limit in short-term
money market securities including, but not limited to, U.S. government
obligations, commercial paper, and certificates of deposit.
The Portfolio will invest primarily in intermediate to long-term bonds. While
the Portfolio's dollar-weighted average portfolio maturity may range from 5 to
15 years, Highland anticipates that this average maturity, under normal
circumstances, will fluctuate between 7 and 11 years. If Highland determines
that market conditions warrant a shorter or longer average maturity within the
range of 5 to 15 years, the Portfolio's investments will be adjusted
accordingly.
7
<PAGE>
See "Investment Instruments, Transactions, Strategies And Risks" for a further
discussion of the Portfolio's investments.
- --------------------------------------------------------------------------------
IS THE PORTFOLIO A SUITABLE INVESTMENT?; INVESTMENT RISKS
- --------------------------------------------------------------------------------
By itself, the Portfolio does not constitute a balanced investment plan. The
Portfolio emphasizes maximizing total return through high current income by
investing primarily in debt securities. An increase in interest rates generally
will reduce the value of portfolio investments of the Portfolio and a decline in
interest rates will generally increase the value of its portfolio investments.
Short-term obligations (such as instruments with maturities of one year or less)
generally offer greater stability and are less sensitive to interest rate
changes. Long-term bonds of the type in which the Portfolio will invest offer
less stability and are more sensitive to interest rate changes, but generally
offer higher yields. Further, investment in the securities of issuers in any
foreign country involves special risks and considerations not typically
associated with investing in U.S. issuers. The Portfolio's share price, yield
and total return will fluctuate. An investment in the Bond Portfolio may be
worth more or less than the original cost when shares are redeemed.
In addition, the Portfolio may invest in instruments and securities generally
known as derivative investments. These investments may include the use of
forward currency contracts, put and call option contracts, zero coupon bonds
stripped fixed-income obligations and mortgage-backed and asset-backed pass-
through securities. Highland may not buy all of these instruments or use all of
these techniques unless it believes that doing so will help the Portfolio
achieve its investment objective. Use of these instruments and techniques can
alter the risk and return characteristics of the Portfolio. They may increase
the Portfolio's volatility and may involve the investment of small amounts of
cash relative to the magnitude of the risk assumed. This is called leverage.
They may also result in a loss of principal if Highland judges market conditions
incorrectly or employs a strategy that does not correlate well with the
Portfolio's investment strategy. With respect to mortgage-backed securities,
risks include a sensitivity to the rate of prepayments in that, although the
value of fixed-income securities generally increase during periods of falling
interest as a result of prepayments and other factors, this is not always the
case with respect to mortgage-backed securities. Asset-backed securities involve
the risk that such securities do not usually have the benefit of a complete
security interest in the related collateral. Positions in options involve the
risk that such options may fail as a hedging technique and that closing
transactions may not be effected where a liquid secondary market does not exist.
The Portfolio seeks to maximize total return over an interest rate cycle.
Highland believes that by lessening the effect of bond market declines,
investors should experience greater overall returns; accordingly, Highland may
address market risk through a strategy of adjusting the dollar-weighted average
maturity of the Portfolio to reflect changing economic and interest rate
environments. The timing of Portfolio transactions in response to anticipated
changes in interest rate trends is important to the successful application of
such strategies. Bond funds such as the Portfolio are generally subject to two
risk factors: (1) credit risk, and (2) interest rate risk. The Portfolio will
seek to manage credit risk by investing only in investment-grade securities as
described previously. In the event a security's credit rating is downgraded, its
value can be expected to decrease. Highland may elect to continue to hold such
securities. The Portfolio will seek to manage interest rate risk by limiting its
average maturity to 15 years or less.
8
<PAGE>
Further information about the types of securities in which the Portfolio may
invest and their related risks, as well as the investment policies of the
Portfolio in general are set forth in the section "Investment Instruments,
Transactions, Strategies and Risks" and in the Statement of Additional
Information.
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIO'S INVESTMENT POLICIES AND LIMITATIONS?
- --------------------------------------------------------------------------------
INVESTMENT LIMITATIONS. The Portfolio has adopted the following investment
limitations:
(1) With respect to 75% of the Portfolio's assets, the Portfolio will not
purchase a security, other than U.S. government securities, if, as a result,
(a) more than 5% of its total assets would be invested in the securities of
any single issuer; or (b) the Portfolio would own more than 10% of the voting
securities of any single issuer.
(2) The Portfolio will not invest 25% or more of its total assets in a
particular industry, other than U.S. government obligations.
(3) (a) The Portfolio may borrow money solely for temporary or emergency
purposes, but not in an amount exceeding 33 1/3% of its total assets. (b) The
Portfolio may borrow money from banks, or by engaging in reverse repurchase
agreements. (c) The Portfolio will not purchase securities when borrowings
exceed 5% of its total assets. If the Portfolio borrows money, its share price
may be subject to greater fluctuation until the borrowing is paid off. To this
extent, purchasing securities when borrowings are outstanding may involve an
element of leverage.
(4) (a) The Portfolio may temporarily lend its portfolio securities to
broker-dealers and institutions, but only when the loans are fully
collateralized. (b) Loans, in the aggregate, will be limited to 33 1/3% of the
Portfolio's total assets.
Unless otherwise noted, the Portfolio's policies and limitations are not
fundamental and may be changed by the Trustees without shareholder approval. The
fundamental policies of the Portfolio that require shareholder approval prior to
any changes are: the Portfolio's investment objective, and limitations (1), (2),
(3)(a), and (4)(b) above. With the exception of the Portfolio's policies and
limitations regarding borrowing and investments in illiquid securities, these
limitations and the Portfolio's policies are considered at the time of purchase
of securities; the sale of securities is not required in the event of a
subsequent change in circumstances.
The investment policies and limitations set forth above are supplemented by
the investment policies and limitations in the Statement of Additional
Information. No assurance can be made that the Portfolio will achieve its
objective, but it will follow the investment style described in this Prospectus.
From time to time, the Portfolio, to the extent consistent with its investment
objective, policies, and restrictions, may invest in securities of companies
with which First Tennessee or any affiliates have lending relationships.
- --------------------------------------------------------------------------------
HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?
- --------------------------------------------------------------------------------
CLASS I
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9
<PAGE>
WHO MAY INVEST?
Class I shares are designed exclusively for investment of monies held in non-
retail trust, advisory, agency, custodial or similar Institutional Accounts.
Class I shares may be purchased for Institutional Accounts by financial
institutions, business organizations, corporations, municipalities, non-profit
institutions, and other Institutional Investors serving in a trust, advisory,
agency, custodial or similar capacity who meet the investment threshold for this
Class of shares.
HOW IS AN INSTITUTIONAL ACCOUNT ESTABLISHED?
An initial investment must be preceded by or made in conjunction with the
establishment of an Institutional Account with an Institutional Investor.
Establishment of an Institutional Account may require that documents and
applications be completed and signed before the investment can be implemented.
The Institutional Investor may require that certain documents be provided prior
to making a redemption from the Portfolio. Institutional Investors may charge
fees in addition to those described herein. Fee schedules for Institutional
Accounts are available upon request from the Institutional Investor and are
detailed in the agreements by which each client opens an account with an
Institutional Investor.
HOW ARE INVESTMENTS MADE?
Each Institutional Investor will transmit orders to the Transfer Agent, Chase
Global Funds Services Company (CGFSC). If an order is received by CGFSC prior to
4:00 p.m. Eastern Time on any Business Day (as defined in the section "How Are
Investments, Exchanges And Redemptions Made - Class I, II and III - How Are
Portfolio Shares Valued?") and the funds are received by CGFSC that day, the
investment will earn dividends declared, if any, on the day of purchase.
Institutional Investors will wire funds through the Federal Reserve System.
Purchases will be processed at the net asset value per share (NAV) calculated
after an order is received and accepted by CGFSC. The Portfolio requires advance
notification of all wire purchases. To secure same day acceptance of federal
funds (monies transferred from one bank to another through the Federal Reserve
System with same-day availability), an Institutional Investor must call CGFSC at
1-800-442-1941, (option 2) prior to 4:00 p.m. Eastern Time on any Business Day
to advise it of the wire. The Trust may discontinue offering its shares in any
Class of a Portfolio without notice to shareholders.
MINIMUM INVESTMENT AND ACCOUNT BALANCE. The minimum initial investment for
each Institutional Investor is $750,000. Institutional Investors may satisfy the
minimum investment by aggregating their Institutional Accounts within the
Portfolio. Subsequent investments may be in any amount. If an Institutional
Investor's Class I account falls below $375,000 due to redemption, the Portfolio
may close the account. An Institutional Investor may be notified if the minimum
balance is not being maintained and will be allowed 30 days to make additional
investments before its account is closed. Shares will be redeemed at the NAV on
the day the account is closed, and proceeds will be sent to the address of
record.
Should an Institutional Investor or a beneficial owner of Class I shares cease
to be eligible to participate in this Class, Class I shares held in an
Institutional Account may be converted to shares of another Class. Any such
conversion will be effected on the basis of the relative NAVs of the two Classes
without the imposition of any sales load, fee or other charge. Institutional
Investors or beneficial owners will receive at least 30 days prior notice of any
proposed conversion.
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<PAGE>
HOW ARE REDEMPTIONS MADE?
Institutional Investors may redeem all or a portion of their account shares on
any Business Day. Shares will be redeemed at the NAV next calculated after CGFSC
has received the redemption request and will accrue dividends through the day of
redemption. If an account is closed, any accrued dividends will be paid at the
beginning of the following month.
Institutional Investors may make redemptions by wire provided they have
established a wire account with CGFSC. Please call 1-800-442-1941 (option 2) to
advise CGFSC of the wire. If telephone instructions are received before 4:00
p.m. Eastern Time on any Business Day, proceeds of the redemption will be wired
as federal funds on the next Business Day to the bank account designated with
CGFSC. The Institutional Investor may change the bank account designated to
receive an amount redeemed at any time by sending a letter of instruction with a
signature guarantee to CGFSC at 73 Tremont Street, Boston, Massachusetts, 02108.
Pursuant to the Investment Company Act of 1940, as amended (1940 Act), if
making immediate payment of redemption proceeds could adversely affect the
Portfolio, payments may be made up to seven days later. Also, when the New York
Stock Exchange (NYSE) is closed (or when trading is restricted) for any reason
other than customary weekend or holiday closings, or under any emergency
circumstances as determined by the SEC to merit such action, the right of
redemption may be suspended or the date of payment postponed for a period of
time that may exceed seven days. To the extent Portfolio securities are traded
in other markets on days when either the NYSE or the Federal Reserve Bank of New
York (New York Federal Reserve) is closed, the Portfolio's NAV may be affected
on days when investors do not have access to the Portfolio to purchase or redeem
shares.
If transactions by telephone cannot be executed (for example, during times of
unusual market activity), orders may be placed by mail to CGFSC. In case of
suspension of the right of redemption, the Institutional Investor may either
withdraw its request for redemption or it will receive payment based on the NAV
next determined after the termination of the suspension.
ADDITIONAL INFORMATION
The Portfolio also reserves the right to reject any specific purchase order,
including certain purchases by exchange. Purchase orders may be refused if, in
First Tennessee's opinion, they are of a size that would disrupt management of
the Portfolio.
In order to allow First Tennessee to manage the Portfolio most effectively,
Institutional Investors are strongly urged to initiate all trades (investments,
exchanges and redemptions of shares) as early in the day as possible and to
notify CGFSC at least one day in advance of trades in excess of $1 million. In
making these trade requests, the name of the Institutional Investor and the
account number(s) must be supplied.
Transactions may be initiated by telephone. Please note that the Portfolio and
its agents will not be responsible for any losses resulting from unauthorized
telephone transactions if the Portfolio or its agents follow reasonable
procedures designed to verify the identity of the caller. These procedures may
include requesting additional information or using personalized security codes.
The Portfolio or its agents may also record calls, and an Institutional Investor
should verify the accuracy of confirmation statements immediately after receipt.
If an Institutional Investor does not want to be able to initiate redemptions
and exchanges by telephone, please call CGFSC for instructions.
11
<PAGE>
CLASS II AND III
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WHO MAY INVEST?
Class II and III shares are designed for individuals and other investors who
seek mutual fund investment convenience plus a lower investment minimum. These
Classes offer investors differing expense and sales load structures to choose
between. See "Summary Of Portfolio Expenses."
INVESTMENT REQUIREMENTS
The minimum initial investment in Class II or III shares is $1,000. Subsequent
investments may be in any amount greater than $100. If you participate in the
Systematic Investing Program (see "Systematic Investing Program" below) or the
"A Plus Card Program" (a consumer discount card program provided by "A" Plus
Strategic Alliances, Inc., a subsidiary of First Tennessee), the minimum initial
investment is $250, and subsequent investments may be in any amount of $25 or
greater. If you are an employee of First Tennessee or any of its affiliates and
you participate in the Systematic Investing Program, the minimum initial
investment is $50, and subsequent investments may be in any amount of $25 or
greater. If your balance in the Portfolio falls below the applicable minimum
investment requirement due to redemption, you may be given 30 days' notice to
reestablish the minimum balance. If you do not reestablish the minimum balance,
your account may be closed and the proceeds mailed to you at the address on
record. Shares will be redeemed on the day the account is closed.
All purchases must be made in U.S. dollars and checks must be drawn on U.S.
banks. No cash will be accepted. If you make a purchase with more than one
check, each check must have a value of at least $100, and the minimum investment
requirement still applies (excluding the specific circumstances, stated above,
which reduce the minimum investment requirement). The Portfolio reserves the
right to limit the number of checks processed at one time. If your check does
not clear, your purchase will be canceled and you could be liable for any losses
or fees incurred.
You may initiate any transaction either directly or through your Investment
Professional. Please note that the Portfolio and its agents will not be
responsible for any losses resulting from unauthorized transactions if the
Portfolio or its agents follow reasonable procedures designed to verify the
identity of the caller. These procedures may include requesting additional
information or using personalized security codes. Your Investment Professional
may also record calls and you should verify the accuracy of your confirmation
statements immediately after you receive them. If you do not want to be able to
redeem and exchange by telephone, please check the box on your application (if
you invest directly) or, if you invest through an Investment Professional,
please call your Investment Professional for instructions.
HOW DO I SET UP AN ACCOUNT?
You may set up an account directly in the Portfolio or you may invest in the
Portfolio through your Investment Professional (see "How Do I Invest Through My
Investment Professional" below). Shares will be purchased based on the NAV next
calculated after CGFSC has received the request in proper form. If you are
investing through an Investment Professional, transactions that your Investment
Professional initiates should be transmitted to CGFSC before 4:00 p.m. Eastern
Time in order for you to receive that day's share price. CGFSC must receive
payment within three business days after an order is placed. Otherwise, the
purchase order may be canceled and you could be held liable for the resulting
fees and/or losses. An investor will earn dividends declared, if any, on the day
of purchase if the funds are received by CGFSC that day.
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<PAGE>
HOW DO I INVEST DIRECTLY?
When opening a new account directly, you must complete and sign an account
application and send it to CGFSC, 73 Tremont Street, Boston, MA 02108. Telephone
representatives are available at 1-800-442-1941, (option 2) between the hours of
8:00 a.m. to 4:00 p.m. Central Time (9:00 a.m. to 5:00 p.m. Eastern Time),
Monday through Friday.
Investments may be made in several ways:
BY MAIL: Make your check payable to First Funds: Bond Portfolio, and mail it,
along with the application, to the address indicated on the application. Your
account will be credited on the business day that CGFSC receives your
application in good order.
BY BANK TRANSFER: Bank transfer allows you to move money between your bank
account and your First Funds account. This automatic service allows you to
transfer money from your bank account via the Automated Clearing House (ACH)
network to your Portfolio account. First, a Portfolio account must be
established, and an application sent to CGFSC. Next, a deposit account must be
opened at a bank providing bank transfer services and you must arrange for this
service to be provided. Once you have completed this process, you can initiate a
bank transfer by contacting a representative from your bank, providing the
required information for the bank, and authorizing the transfer to take place.
Please allow two or three days after the authorization for the transfer to
occur.
BY WIRE: Call 1-800-442-1941, (option 2) to set up your Portfolio account to
accommodate wire transactions. To initiate your wire transaction, call your
depository institution. Federal funds (monies transferred from one bank to
another through the Federal Reserve System with same-day availability) should be
wired to:
Chase Manhattan Bank, N.A.
ABA #021000021
First Funds
Credit DDA #910-2-733335
(Account Registration)
(Account Number)
(Wire Control Number) *See Below*
Prior to sending wires, please be sure to call 1-800-442-1941, (option 2) to
receive a Wire Control Number to be included in the body of the wire (see
above).
Your bank may charge you a fee for this service.
HOW DO I REDEEM SHARES WHEN INVESTING DIRECTLY?
You may redeem all or a portion of your shares on any day that the Portfolio
is open for business. Shares will be redeemed at the NAV next calculated after
CGFSC has received the redemption request and will earn dividends declared, if
any, through the day prior to redemption. If a Portfolio account is closed, any
accrued dividends will be paid at the beginning of the following month.
You may redeem shares in several ways:
BY MAIL: Write a "letter of instruction" with your name, the Portfolio's
name, your Portfolio account number, the dollar amount or number of shares to be
redeemed, and any additional requirements that apply to each particular account.
You will need the letter of instruction signed by all persons required to
13
<PAGE>
sign for transactions, exactly as their names appear on the account application,
along with a signature guarantee as described below.
A signature guarantee is designed to protect you, the Portfolio, and its
agents from fraud. Your written request requires a signature guarantee if you
wish to redeem more than $1,000 worth of shares; if your Portfolio account
registration has changed within the last 30 days; if the check is not being
mailed to the address on your account; if the check is not being made out to the
account owner; or if the redemption proceeds are being transferred to another
First Funds account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public.
BY BANK TRANSFER: When establishing your account in the Portfolio, you must
have indicated this account privilege in order to authorize the redemption of
monies with the proceeds transferred to your bank account. To authorize a
redemption, simply contact CGFSC at 1-800-442-1941, (option 2) and your
redemption will be processed at the NAV next calculated. Please allow two or
three days after the authorization for monies to reach your bank account.
BY WIRE: You may make redemptions by wire provided you have established a
Portfolio account to accommodate wire transactions. If telephone instructions
are received before 4:00 p.m. Eastern Time, proceeds of the redemption will be
wired as federal funds on the next Business Day to the bank account designated
with CGFSC. You may change the bank account designated to receive an amount
redeemed at any time by sending a letter of instruction with a signature
guarantee to CGFSC at 73 Tremont Street, Boston, Massachusetts, 02108.
ADDITIONAL REDEMPTION REQUIREMENTS: The Portfolio may hold payment on
redemptions until it is reasonably satisfied that investments made by check have
been collected, which can take up to seven days. Also, when the NYSE is closed
(or when trading is restricted) for any reason other than its customary weekend
or holiday closings, or under any emergency circumstances as determined by the
SEC to merit such action, the right of redemption may be suspended or the date
of payment postponed for a period of time that may exceed seven days. To the
extent that Portfolio securities are traded in other markets on days when either
the NYSE or the New York Federal Reserve is closed, the Portfolio's NAV may be
affected on days when investors do not have access to the Portfolio to purchase
or redeem shares.
If you are unable to reach CGFSC by telephone (for example, during times of
unusual market activity), consider placing your order by mail directly to CGFSC.
In case of suspension of the right of redemption, you may either withdraw your
request for redemption or you will receive payment based on the NAV next
determined after the termination of the suspension.
HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?
If you are investing through your Investment Professional, you may be required
to set up a brokerage or agency account. Please call your Investment
Professional for information on establishing an account. If you are purchasing
shares of the Portfolio through a program of services offered or administered by
your Investment Professional, you should read the program materials in
conjunction with this Prospectus. Certain features of such programs may impose
additional requirements and charges for the services rendered. Your Investment
Professional may offer any or all of the services mentioned in this section, and
is responsible for initiating all initial purchase transactions. Please contact
your Investment Professional for information on these services.
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<PAGE>
SYSTEMATIC INVESTING PROGRAM
The Systematic Investing Program offers a simple way to maintain a regular
investment program. You may arrange automatic transfers (minimum $25 per
transaction) from your bank account to your First Funds account on a periodic
basis. When you participate in this program, the minimum initial investment in
each Portfolio is $250. If you are an employee of First Tennessee or any of its
affiliates, the minimum initial investment in the Portfolio is $50. You may
change the amount of your automatic investment, skip an investment, or stop the
Systematic Investing Program by calling CGFSC at 1-800-442-1941, (option 2) or
your Investment Professional at least three Business Days prior to your next
scheduled investment date.
SYSTEMATIC WITHDRAWAL PLAN
You can have monthly, quarterly or semi-annual checks sent from your account
to you, to a person named by you, or to your bank checking account. Your
Systematic Withdrawal Plan payments are drawn from share redemptions and must be
in the amount of $100 or more per Portfolio per month. If Systematic Withdrawal
Plan redemptions exceed income dividends earned on your shares, your account
eventually may be exhausted. Please contact ALPS at 1-800-442-1941 (option 1) or
your Investment Professional for more information.
ADDITIONAL INFORMATION
TAX-DEFERRED RETIREMENT PLANS: Retirement plans can offer significant tax
savings to individuals. Please call ALPS at 1-800-442-1941 (option 1) or your
Investment Professional for more information on the plans and their benefits,
provisions and fees. CGFSC or your Investment Professional can set up your new
account in the Portfolio under one of several tax-deferred plans. These plans
let you invest for retirement and defer the tax on your investment income.
Minimums may differ from those listed previously under "Investment
Requirements". Plans include Individual Retirement Accounts (IRAs), Rollover
IRAs, Keogh Plans, and Simplified Employee Pension Plans (SEP-IRAs).
CLASS II
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PUBLIC OFFERING PRICE
The public offering price for Class II shares is the sum of the NAV plus a
sales load. As indicated below, a portion of this load may be reallowed to
Investment Professionals which have entered into an agreement with ALPS, the
Portfolio's Distributor (Service Organizations). You may calculate your sales
load as follows:
<TABLE>
<CAPTION>
TOTAL SALES LOAD REALLOWANCE TO
FOR CLASS II SHARES SERVICE ORGANIZATIONS
------------------- ---------------------
AS A % OF OFFERING AS A % OF OFFERING
AMOUNT OF TRANSACTION PRICE PER SHARE AS A % OF NAV PRICE PER SHARE
<S> <C> <C> <C>
Less than $100,000 3.75 3.90 3.25
$100,000 to $249,999 3.00 3.09 2.65
$250,000 to $499,999 2.25 2.30 2.00
$500,000 to $999,999 1.50 1.52 1.25
$1,000,000 and over 0.50 0.50 0.40
</TABLE>
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<PAGE>
The reallowance to Service Organizations may be changed from time to time. ALPS,
at its expense, may provide additional non-cash promotional incentives to
eligible representatives of Service Organizations in the form of attendance at a
sales seminar at a resort. These incentives may be limited to certain eligible
representatives of Service Organizations who have sold significant numbers of
shares of any of the Portfolios of the Trust.
You may purchase Class II shares without a sales load if the purchase will be
(a) through an IRA, 401 Plan, 403 Plan or directed agency account if the
trustee, custodian, or agent thereof is a direct or indirect subsidiary or
franchisee bank of First Tennessee or its affiliates; (b) by registered
representatives, directors, advisory directors, officers and employees (and
their immediate families) of First Tennessee or its affiliates; (c) by a current
or former Trustee, officer or employee of First Funds; the spouse of a First
Funds Trustee, officer or employee; a First Funds Trustee acting as a custodian
for a minor child or grandchild of a First Funds Trustee, officer or employee;
or the child or grandchild of a current or former Trustee, officer or employee
of First Funds who has reached the age of majority; (d) by a charitable
remainder trust or life income pool established for the benefit of a charitable
organization (as defined in Section 501(c)(3) of the Internal Revenue Code); (e)
for use in a financial institution or investment adviser managed account for
which a management or investment advisory fee is charged; (f) with redemption
proceeds from other mutual fund complexes on which the investor has paid a
front-end sales charge within the past 60 days upon presentation of purchase
verification information; or (g) through certain promotions where the load is
waived for investors.
In addition, you will not pay a sales load on the reinvestment of dividends or
distributions in the Portfolio or any other First Funds Portfolio, or in
connection with certain share exchanges as described under "How Are Investments,
Exchanges And Redemptions Made? - Class I, II, and III - How are Exchanges
Made?" Further, you generally will not pay a sales load on Class II shares of
the Portfolio which you buy using proceeds from the redemption of a First Funds
Portfolio which does not charge a front-end load, if you obtained such shares
through an exchange for Class II shares which you purchased with a sales load.
A sales load will apply to your purchase of Class II shares in the foregoing
situation only to the extent that the Portfolio's sales load exceeds the sales
load you paid in the prior purchase of the Class II shares.
In addition, if you purchase Class II shares within 60 days after redeeming
shares of the Portfolio, you will receive credit towards the sales load payable
on the purchase to the extent of the sales load you paid on the shares you
redeemed. This reinstatement privilege may be exercised only with respect to
redemptions and purchases in the same First Funds Portfolio. The reinstatement
privilege can be exercised only one time with respect to any particular
redemption.
QUANTITY DISCOUNTS
You may be entitled to reduced sales charges through the Right of Accumulation
or a Letter of Intent, even if you do not make an investment of a size that
would normally qualify for a quantity discount.
To qualify for a reduction of or exception to the sales load, you or your
Investment Professional must notify the Transfer Agent, CGFSC, at the time of
purchase or exchange. The reduction in sales load is subject to confirmation of
your holdings through a check of records. The Trust may modify or terminate
quantity discounts at any time. For more information about quantity discounts,
contact your Service Organization or ALPS at 1-800-442-1941 (option 1).
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<PAGE>
RIGHT OF ACCUMULATION. The sales charge schedule under the heading "How Are
Investments, Exchanges And Redemptions Made? - Public Offering Price" shows that
the sales load you will pay on Class II shares is reduced as your aggregate
investment increases. The Right of Accumulation allows you to combine certain
First Funds investments to determine your aggregate investment and the
applicable reduced sales load. You may combine the amount of your investment in
the Portfolio's Class II shares with the value of your investment in Class II of
any other First Funds Portfolio you own and on which you paid a sales load. If
you are a participant in a First Funds IRA or if you are a trustee or custodian
of another type of First Funds retirement plan, you may also include as part of
your aggregate investment any holdings through the IRA or in the plan even if a
load was not paid. If, for example, you beneficially own Class II shares of a
First Funds Portfolio with an aggregate current value of $99,000 and you
subsequently purchase shares of the Portfolio having a current value of $1,000,
the load applicable to the subsequent purchase would be reduced to 3.50% of the
offering price. Similarly, each subsequent purchase of First Funds Class II
shares may be added to your aggregate investment at the time of purchase to
determine the applicable sales loads.
LETTER OF INTENT. A Letter of Intent allows you to purchase Class II shares
over a 13-month period at a reduced sales charge. The sales charge is based on
the total amount you intend to purchase plus the total net asset value of Class
II shares which you already own on which you have paid a sales load. If you are
a participant in a First Funds IRA or if you are a trustee or custodian of
another type of First Funds retirement plan, you may also credit towards
completion of your Letter of Intent any Class II shares held through the IRA or
in the plan, even if a load was not paid. Each investment you make during the
period may be made at the reduced sales charge that would apply to the total
amount you intend to invest. The reduced sales load applies only to new
purchases. If you do not invest the total amount within the period, you may pay
the difference between the higher sales charge rate that would have been applied
to the purchases you made and the reduced sales charge rate you have paid.
Shares of the Portfolio equal to 5% of the amount you intend to invest will be
held in escrow and, if you do not pay the difference within 20 days following
the mailing of a request, the Transfer Agent will redeem a sufficient amount of
your escrowed shares to pay the additional sales charge. After the terms of your
Letter of Intent are fulfilled, the Transfer Agent will release your escrowed
shares.
If your purchases qualify for a further sales load reduction in addition to
that indicated in the Letter of Intent, the sales load will be adjusted to
reflect your total purchases. Signing a Letter of Intent does not bind you to
purchase the full amount indicated at the sales load in effect at the time of
signing, but you must complete the intended purchase to obtain the reduced sales
load. To apply, sign the Letter of Intent form at the time you purchase Class
II shares. You will be entitled to the applicable sales load that is in effect
at the date you submit the Letter of Intent until you complete your intended
purchase.
QUALIFICATION OF DISCOUNTS. As shown in the schedule of Class II sales
charges, larger purchases may result in lower sales charges to you. For purposes
of determining the amount of purchases using the Right of Accumulation and
Letter of Intent privileges, you may combine your purchase with:
- purchases by your spouse or his, her or your joint account or for the
account of any minor children, and
- the aggregate investment of any trustee or other Institutional Investor
for you and/or your spouse or your minor children.
A trustee or custodian of any qualified pension or profit sharing plan may
combine its aggregate purchases.
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<PAGE>
OTHER. Class II shares also incur Shareholder Servicing Fees. See discussion
under "What Advisory And Other Fees Does The Portfolio Pay? - Distribution Plan
and Shareholder Servicing Plans."
CLASS III
- ---------
Class III shares are bought without a front-end load; that is, the offering
price for such shares will be their NAV. Class III shares incur Distribution
Fees and Shareholder Servicing Fees. See discussion under "What Advisory And
Other Fees Does The Portfolio Pay? - Distribution Plans and Shareholder
Servicing Plans."
CLASS I, II AND III
- --------------------
HOW ARE PORTFOLIO SHARES VALUED?
The term "net asset value per share," or NAV, means the worth of one share.
The NAV of each Class of the Portfolio is calculated by adding that Class' pro
rata share of the value of all securities and other assets attributable to the
Portfolio, deducting that Class' pro rata share of Portfolio liabilities,
further deducting Class-specific liabilities, and dividing the result by the
number of shares outstanding in the Class.
The Portfolio is open for business each day that both the NYSE and the New
York Federal Reserve are open (a Business Day). The NAV is calculated at the
close of the Portfolio's Business Day, which coincides with the close of regular
trading of the NYSE (normally 4:00 p.m. Eastern Time).
The Portfolio's securities and other assets are valued primarily on the basis
of market quotations furnished by pricing services, or if quotations are not
available, by a method that the Trustees believe accurately reflects fair value.
Foreign securities are valued on the basis of quotations from the primary United
States market in which they are traded or, if not traded on a U.S. market, then
their primary foreign market, and translated from foreign market quotations into
U.S. dollars using current exchange rates.
DISTRIBUTION OPTIONS: The Portfolio earns interest from bond, money market,
and other fixed-income investments. These are passed along as dividend
distributions. The Portfolio may realize capital gains if it sells securities
for a higher price than it paid for them. These are passed along as capital gain
distributions. Income dividends for the Portfolio are declared daily and paid
monthly.
When you fill out your account application, you can specify how you want to
receive your distributions. Currently, there are three available options:
1. REINVESTMENT OPTION. Your dividend distributions and capital gain
distributions, if any, will be automatically reinvested in additional shares of
the Portfolio. Reinvestment of distributions will be made at that day's NAV. If
you do not indicate a choice on your application, you will be assigned this
option.
2. CASH OPTION. You will be sent a check for each dividend and capital gain
distribution, if any. Distribution checks will be mailed no later than seven
days after the last day of the month.
3. INCOME-EARNED OPTION. Your capital gain distributions, if any, will be
automatically reinvested, but you will be sent a check for any dividend
distribution.
HOW ARE EXCHANGES MADE?
An exchange is the redemption of shares of one Portfolio and the purchase of
shares of another. The exchange privilege is a convenient way to sell and buy
shares of other Portfolios registered in an investor's state. Except as noted
below, the Portfolio's shares may be exchanged for the same Class shares
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<PAGE>
of other First Funds Portfolios. The redemption and purchase will be made at the
next determined NAV after the exchange request is received and accepted by
CGFSC. You may execute exchange transactions by calling CGFSC at 1-800-442-1941
(option 2) prior to 4:00 p.m. Eastern Time on any Business Day.
Class II shares of the First Funds Money Market Portfolios are not currently
available for investment. Investors in Class II shares wishing to exchange into
one of these Money Market Portfolios will receive Class III shares.
When making an exchange or opening an account in another Portfolio by
exchange, the registration and tax identification numbers of the two accounts
must be identical. In order to open a new account through exchange, the minimum
initial investment requirements must be met.
Each exchange may produce a gain or loss for tax purposes. In order to protect
the Portfolio's performance and its shareholders, First Tennessee discourages
frequent exchange activity by investors in response to short-term market
fluctuations. The Portfolio reserves the right to refuse any specific purchase
order, including certain purchases by exchange if, in First Tennessee's opinion,
the Portfolio would be unable to invest effectively in accordance with its
investment objective and policies, or would otherwise be affected adversely.
Exchanges or purchase orders may be restricted or refused if the Portfolio
receives or anticipates individual or simultaneous orders affecting significant
portions of the Portfolio's assets. Although the Portfolio will attempt to give
prior notice whenever it is reasonably able to do so, it may impose these
restrictions at any time. The Portfolio reserves the right to modify or withdraw
the exchange privilege upon 60 days notice and to suspend the offering of shares
in any Class without notice to shareholders. You or your Institutional Investor,
if you are invested in Class I, will receive written confirmation of each
exchange transaction.
Exchanges are generally not permitted from Class I to another Class. Should a
beneficial owner of Class I shares cease to be eligible to purchase shares of
Class I , Class I shares held in an Institutional Account may be converted to
shares of another Class.
STATEMENTS AND REPORTS
You or, if Class I, the Institutional Investor will receive a monthly
statement and a confirmation after every transaction that affects the account
registration. A statement with tax information will be mailed by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
or, if Class I, the Institutional Investor, will receive the Portfolio's
financial statements. To reduce expenses, only one copy of the Portfolio's
reports (such as the Prospectus and Annual Report) will be mailed to each
investor or, if Class I, each Institutional Investor. Please write to ALPS to
request additional copies.
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HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------
From time to time the Portfolio may quote the yield of Class I, II or III
shares in advertisements or in reports or other communications with
shareholders. he YIELD is a way of showing the rate of income that the
Portfolio earns on its investments as the percentage of its share price. To
calculate yield, the Portfolio takes the net investment income it earned from
its Portfolio securities for a 30-day period, divides it by the average number
of shares entitled to receive dividends, and expresses the result as an
annualized percentage rate based on share price at the end of the 30-day period.
Yields do not reflect gains or losses from portfolio transactions. Yields are
calculated according to accounting methods that are standardized for all mutual
funds. Because yield accounting methods differ from the methods used for other
accounting
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<PAGE>
purposes, the Portfolio's yield may not equal its distribution rate, the income
paid to an account, or the income reported in financial statements.
TOTAL RETURN for Class I, II or III of the Portfolio is based on the overall
dollar or percentage change in value of a hypothetical investment, assuming
dividends are reinvested. A CUMULATIVE TOTAL RETURN reflects performance over a
stated period of time. An AVERAGE ANNUAL TOTAL RETURN reflects the hypothetical
annually compounded rate that would have produced the same cumulative total
return if performance had been constant over the entire period. Because average
annual returns tend to smooth out variations in performance, you should
recognize that they are not the same as actual year-by-year results. The yield
and total returns of the three classes of the Portfolio are calculated
separately due to separate expense structures as indicated in the "Summary Of
Portfolio Expenses"; the yields and total returns of Class II and Class III will
be lower than that of Class I.
For additional performance information, contact your Investment Professional
or ALPS for a free Annual Report and Statement of Additional Information for the
Portfolio.
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Broker-dealers are utilized to conduct securities transactions for the
Portfolio and are chosen based upon professional ability and quality of service.
In addition, the Portfolio's investment advisers may consider a broker-dealer's
sales of shares of the Portfolio or recommendations to its customers that they
purchase shares of the Portfolio as a factor in the selection of broker-dealers
to execute transactions for the Portfolio. In placing business with such broker-
dealers, the advisers will seek the best execution of each transaction.
Higher commissions may be paid to firms that provide research services to the
extent permitted by law. The frequency of Portfolio transactions - the portfolio
turnover rate - will vary from year to year depending on market conditions.
Bond Portfolio's portfolio turnover rate for the fiscal year ended June 30, 1998
was __%.
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WHAT IS THE EFFECT OF FEDERAL INCOME TAX ON THIS INVESTMENT?
- --------------------------------------------------------------------------------
The Portfolio intends to distribute substantially all of its net investment
income and capital gains, if any, to shareholders within each calendar year as
well as on a fiscal year basis. Any net capital gains realized are normally
distributed in December. Income dividends for the Portfolio are declared daily
and paid monthly.
FEDERAL TAXES. Distributions of gains from sales of assets held by the
Portfolio for more than one year generally are taxable to shareholders at the
applicable mid-term or long-term capital gains rate, regardless of how long they
have owned their Portfolio shares. Distributions from other sources generally
are taxed as ordinary income. Distributions are taxable when they are paid,
whether taken in cash or reinvested in additional shares, except that
distributions declared in October, November or December and paid in January are
taxable as if paid on December 31. The Portfolio will send each investor or, if
Class I, each Institutional Investor, an IRS Form 1099-DIV by January 31.
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REDEMPTIONS AND EXCHANGES. A capital gain or loss may be realized when shares
of the Portfolio are redeemed or exchanged. For most types of accounts, the
Portfolio will report the proceeds of redemptions to each shareholder or, if
Class I, the Institutional Investor and the IRS annually. However, the tax
treatment also depends on the purchase price and your personal tax position.
"BUYING A DIVIDEND." On the record date for a distribution of income or
capital gains, the Portfolio's share price is reduced by the amount of the
distribution. If shares are bought just before the record date (buying a
dividend), the full price for the shares will be paid, and a portion of the
price will be received back as a taxable distribution.
OTHER TAX INFORMATION. The information above is only a summary of some of the
federal tax consequences generally affecting the Portfolio and its shareholders,
and no attempt has been made to discuss individual tax consequences. In
addition to federal tax, distributions may be subject to state or local taxes.
Institutional Investors and other shareholders should consult their tax advisers
for details and up-to-date information on the tax laws in your state to
determine whether the Portfolio is suitable given your particular tax situation.
It is not anticipated that the Portfolio's distributions will be exempt from
Tennessee personal income tax, except to the extent that any distributions of
income are attributable to interest on bonds or securities of the U.S.
government or any of its agencies or instrumentalities.
When you sign your account application, you will be asked to certify that your
taxpayer identification number is correct and that you are not subject to backup
withholding for failing to report income to the IRS. If you do not comply with
IRS regulations, the IRS can require the Portfolio to withhold 31% of taxable
distributions from your account.
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WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY?
- --------------------------------------------------------------------------------
INVESTMENT ADVISORY AND MANAGEMENT AND SUB-ADVISORY AGREEMENTS. For managing
its investment and business affairs, the Portfolio is obligated to pay First
Tennessee, 4990 Poplar Avenue, Memphis, Tennessee, a monthly management fee at
the annual rate of .55% of its average net assets. First Tennessee has
voluntarily agreed to waive its advisory fees to .15% of the Portfolio's average
net assets. This voluntary waiver can be discontinued at any time.
Under the Investment Advisory and Management Agreement, First Tennessee may,
with the prior approval of the Trustees and the shareholders of the Portfolio,
engage one or more sub-advisers which may have full investment discretion to
make all determinations with respect to the investment and reinvestment of all
or any portion of the Portfolio's assets, subject to the terms and conditions of
the investment advisory agreement and the written agreement with any such sub-
adviser. In the event one or more sub-advisers is appointed by First Tennessee,
First Tennessee shall monitor and evaluate the performance of such sub-advisers,
allocate Portfolio assets to be managed by such sub-advisers, recommend any
changes in or additional sub-advisers when appropriate and compensate each sub-
adviser out of the investment advisory fee received by First Tennessee from the
Portfolio.
First Tennessee has experience as an investment adviser to individual,
corporate and institutional advisory clients, pension plans and collective
investment funds, with approximately $___ billion in assets under administration
(including nondiscretionary accounts) and $__ billion in assets under management
as of June 30, 1998, as well as experience in supervising sub-advisers.
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<PAGE>
Highland serves as the Sub-Adviser for the Portfolio subject to the
supervision of First Tennessee and pursuant to the authority granted to it under
its Sub-Advisory Agreement with First Tennessee. On March 1, 1994, Highland
merged with and into First Tennessee Investment Management, Inc. (FTIM), an
affiliate of First Tennessee, and changed its name to Highland Capital
Management Corp. FTIM (now Highland) has been a wholly-owned subsidiary of First
Tennessee National Corporation since 1972. First Tennessee and Highland have a
history of investment management since 1929. Highland has a total of $__ billion
in assets under management as of June 30, 1998. First Tennessee is obligated to
pay Highland a monthly sub-advisory fee at the annual rate of .33% of the Bond
Portfolio's average net assets. Highland is currently waiving some or all of its
fees for the Portfolio.
ADMINISTRATOR AND DISTRIBUTOR. ALPS, 370 17th Street, Suite 3100, Denver,
Colorado 80202, serves as the Administrator and Distributor for the Portfolio.
As Administrator, ALPS assists in the Portfolio's administration and operation,
including but not limited to, providing office space and various legal and
operational services in connection with the regulatory requirements applicable
to the Portfolio. ALPS is entitled to and receives from the Portfolio a monthly
fee at the annual rate of .15% of average net assets.
First Tennessee serves as the Co-Administrator for the Portfolio. As the Co-
Administrator, First Tennessee assists in the Portfolio's operation, including
but not limited to, providing non-investment related research and statistical
data and various operational and administrative services. First Tennessee is
entitled to and receives from the Portfolio a monthly fee at the annual rate of
.05% of average net assets.
As the Distributor, ALPS sells shares of the Portfolio as agent on behalf of
the Trust at no additional cost to the Trust. First Tennessee and its affiliates
do not participate in and are not responsible for selling as an agent on behalf
of the Trust, underwriting or distributing Trust shares. Consistent with
applicable law, affiliates of First Tennessee may receive commissions or asset-
based fees.
TRANSFER AGENT AND CUSTODIAN. Chase Global Funds Services Company, a division
of Chase Manhattan Bank, N.A. ("CGFSC"), provides transfer agent and related
services for the Portfolio. Chase Manhattan Bank, N.A. is custodian of the
assets of the Trust.
PRICING AND ACCOUNTING. CGFSC also serves as Fund Accountant and thereby
calculates the NAV and dividends of each class and maintains the portfolio and
general accounting records.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICING PLANS. The Trustees have adopted
a Distribution Plan on behalf of Class III of the Portfolio pursuant to Rule
12b-1 (the Rule) under the 1940 Act. The NASD subjects asset-based sales
charges to its maximum sales charge rule. Fees paid pursuant to the Portfolio's
Distribution Plan will be limited by the restrictions imposed by the NASD rule.
The Distribution Plan provides for payment of a fee to ALPS at the annual rate
of .75% of the average net assets of Class III; however, the Trustees have
limited such fees to .50% of Class III's average net assets. All or a portion of
these fees will in turn be paid to Service Organizations as compensation for
selling shares of Class III and for providing ongoing sales support services.
The Trustees have also adopted Shareholder Servicing Plans on behalf of Class II
and III of the Portfolio, under which Investment Professionals are paid at the
annual rate of .25% of each Class' average net assets, for shareholder services
and account maintenance, including responding to shareholder inquiries,
directing shareholder communications, account balance maintenance, and dividend
posting. The Distribution Fees are expenses of Class III and the Shareholder
Servicing Fees are expenses of Class II and III in addition to the Management
Fee, and the Administration and Co-Administration Fees, and will reduce the net
income and total return of both Classes.
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HOW IS THE PORTFOLIO ORGANIZED?
- --------------------------------------------------------------------------------
The Portfolio is a diversified portfolio of First Funds, an open-end
management investment company organized as a Massachusetts business trust by a
Declaration of Trust dated March 6, 1992, as amended and restated on September
4, 1992. The Portfolio consists of three separate Classes. The Trustees
supervise the Trust's activities and review its contractual arrangements with
companies that provide the Trust with services. The Trust is not required to
hold annual shareholder meetings, although special meetings may be called for a
specific Portfolio or class with respect to issues affecting that Portfolio or
Class, or the Trust as a whole, for purposes such as electing or removing
Trustees, changing fundamental policies or approving investment advisory
agreements. Shareholders receive one vote for each share owned and fractional
votes for fractional shares owned. A Portfolio or Class votes separately with
respect to issues affecting only that Portfolio or Class. Pursuant to the
Declaration of Trust, the Trustees have the authority to issue additional
classes of shares for the Portfolio.
PORTFOLIO MANAGEMENT
James R. Turner is one of the Portfolio Managers for the Bond Portfolio. Mr.
Turner managed the assets of the Portfolio's predecessor account from August
1986 until its conversion in August 1993 to a mutual fund. He also manages
pension and endowment funds. He is a Senior Vice President of Highland and is a
Chartered Financial Analyst. Mr. Turner is a graduate of the U.S. Military
Academy and received a Masters of Science in Industrial Engineering from
Stanford University.
Steven Wishnia, one of the Portfolio Managers for the Bond Portfolio, is a
Director and Chairman of the Board of Highland. He joined Highland in April,
1987. Mr. Wishnia is a graduate of Pace University.
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INVESTMENT INSTRUMENTS, TRANSACTIONS, STRATEGIES AND RISKS
- --------------------------------------------------------------------------------
The following paragraphs provide a brief description of the securities in
which the Portfolio may invest and the transactions each may make. The Portfolio
is not limited by this discussion, however, and may purchase other types of
securities and may enter into other types of transactions if they are consistent
with the Portfolio's investment objective and policies.
ASSET-BACKED AND MORTGAGE SECURITIES purchased by the Portfolio may include
interests in pools of mortgages, loans (including consumer loans), receivables
or other assets. They may also include collateralized mortgage obligations
(CMOs) and stripped mortgage-backed securities. CMOs are pass-through securities
collateralized by mortgages or mortgage-backed securities. CMOs are issued in
classes and series that have different maturities and often are retired in
sequence. Payment of principal and interest may be largely dependent upon the
cash flows generated by the assets backing the securities. The Portfolio may
purchase mortgage-backed securities issued by government and non-government
entities such as banks, mortgage lenders, or other financial institutions. A
mortgage-backed security may be an obligation of the issuer backed by a mortgage
or pool of mortgages or a direct interest in an underlying pool of mortgages.
Some mortgage-backed securities, such as CMOs, make payments of both principal
and interest at a variety of intervals; others make semiannual interest payments
at a predetermined rate and repay principal at maturity (like a typical bond).
Mortgage-backed securities are based on different types of mortgages including
those on commercial real estate or residential properties. Other types of
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<PAGE>
mortgage-backed securities will likely be developed in the future, and the
Portfolio may invest in them if Highland determines they are consistent with the
Portfolio's investment objective and policies.
The value of mortgage-backed securities may change due to changes in the
market's perception of issuers including their credit-worthiness. In addition,
regulatory or tax changes may adversely affect the mortgage securities market as
a whole. Non-government mortgage-backed securities may offer higher yields than
those issued by government entities, but also may be subject to greater price
changes than government issues. Mortgage-backed securities are subject to
prepayment risk. Prepayment, which occurs when unscheduled or early payments are
made on the underlying mortgages, may shorten the effective maturities of these
securities and may lower their total returns. Some securities may have a
structure that makes their reaction to changing interest rates and other factors
difficult to predict and highly volatile.
COMMERCIAL PAPER purchased by the Portfolio are short-term obligations issued
by banks, broker-dealers, corporations and other entities for purposes such as
financing their current operations.
DELAYED-DELIVERY AND WHEN-ISSUED TRANSACTIONS. The Portfolio may buy and sell
obligations on a when-issued or delayed-delivery basis, with payment and
delivery taking place at a future date. The market value of obligations
purchased in this way may change before the delivery date, which could increase
fluctuations in the Portfolio's share price, yield, and return. Ordinarily, the
Portfolio will not earn interest on obligations until they are delivered.
DOLLAR ROLL TRANSACTIONS. In order to enhance portfolio returns and manage
prepayment risks, the Portfolio may engage in dollar roll transactions with
respect to mortgage securities. In a dollar roll transaction, the Portfolio
sells a mortgage security to a financial institution, such as a bank or broker-
dealer, and simultaneously agrees to repurchase a substantially similar (same
type, coupon and maturity) security from the institution at a later date at an
agreed upon price. The mortgage securities that are repurchased will bear the
same interest rate as those sold, but generally will be collateralized by
different pools of mortgages with different prepayment histories. During the
period between the sale and repurchase, the Portfolio will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of the
sale will be invested in short-term instruments. The income from these
investments, together with any price difference at the time of sale, will
determine the net advantage to the Portfolio. When the Portfolio enters into a
dollar roll transaction, liquid assets of the Portfolio, in a dollar amount
sufficient to make payment for the obligations to be repurchased, are segregated
at the trade date. These securities are marked to market daily and are
maintained until the transaction is settled.
FOREIGN INVESTMENTS. The Portfolio may invest in foreign securities, which
may involve additional risks. Foreign securities and securities denominated in
or indexed to foreign currencies may be affected by the strength of foreign
currencies relative to the U.S. dollar, or by political, regulatory or economic
developments in foreign countries. Foreign companies may not be subject to
accounting standards or governmental supervision comparable to U.S. companies,
and there may be less public information about their operations. Foreign markets
may be less liquid or more volatile than U.S. markets, and may offer less
protection to investors. In addition to the political and economic factors that
can affect foreign securities, a governmental issuer may be unwilling to repay
principal and interest when due, and may require that the conditions for payment
be renegotiated. These factors could make foreign investments, especially those
in developing countries, more volatile. Highland considers these factors in
making foreign investments for the Portfolio.
The Portfolio may also enter into currency forward contracts (agreements to
exchange one currency for another at a future date) to manage currency risks and
to facilitate transactions in foreign securities.
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Although currency forward contracts can be used to protect the Portfolio from
adverse exchange rate changes, they involve a risk of loss if Highland fails to
predict foreign currency values correctly or employs a strategy that does not
correlate well with a Portfolio's investments. A loss to the Portfolio may also
result if the counterparty to a transaction fails to perform as obligated.
FORWARDS. A forward represents a contract that obligates the counterparty to
buy, and the other to sell, a specific underlying asset at a specific price,
amount, and date in the future. Forwards are similar to futures except for the
fact that forwards are privately negotiated. The most common type of forward
contracts are foreign currency exchange contracts.
The Portfolio may enter into forward exchange currency contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its foreign
portfolio holdings and to hedge certain firm purchase and sale commitments
denominated in foreign currencies. A forward exchange currency contract is a
commitment to purchase or sell a foreign currency at a future date at a
negotiated forward rate. The gain or loss arising from the difference between
the original contract and the closing of such contract is included in net
realized gain or loss on foreign currency transactions. Fluctuations in the
value of forward exchange currency contracts are recorded for financial
reporting purposes as unrealized gains or losses by the Portfolio.
ILLIQUID SECURITIES. Under guidelines established by the Board of Trustees,
Highland, under First Tennessee's supervision, determines the liquidity of the
Portfolio's investments. The absence of a trading market can make it difficult
to ascertain a market value for illiquid investments. Disposing of illiquid
investments or securities subject to legal restrictions may involve time-
consuming negotiation and legal expenses. It may be difficult or impossible for
the Portfolio to sell illiquid or restricted securities promptly at an
acceptable price. The Portfolio may invest up to 15% of its assets in illiquid
investments.
RESTRICTED SECURITIES. The Portfolio may purchase securities which cannot be
sold to the public without registration under the Securities Act of 1933
(restricted securities). Unless registered for sale, these securities can only
be sold in privately negotiated transactions or pursuant to an exemption from
registration. Provided that the security has a demand feature of seven days or
less, or a dealer or institutional trading market exists, these restricted
securities are not treated as illiquid securities for the purposes of the
Portfolio's investment limitations. Investing in restricted securities could
have the effect of increasing the level of Portfolio illiquidity if qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
MONEY MARKET INSTRUMENTS are high quality instruments that present minimal
credit risk. They may include U.S. government obligations, commercial paper and
other short-term corporate obligations, and certificates of deposit, bankers'
acceptances, bank deposits and other financial institution obligations. These
instruments may carry fixed or variable rates.
OPTIONS CONTRACTS. An option is a contract that gives the owner the right,
but not the obligation, to either buy (call option) or sell (put option) an
underlying security or currency at a fixed price for a specified period of time.
The Portfolio may buy and sell put and call options contracts to manage its
exposure to changing interest rates and security prices. To the extent it
invests in securities denominated in foreign currencies, the Portfolio may also
buy and sell options contracts to manage exposure to currency exchange rates.
Some option strategies, including buying puts and writing calls, tend to hedge
the Portfolio's investments against price fluctuations. Other strategies,
including writing puts and buying calls, tend to increase market exposure.
Options may be combined with each other in order to adjust the risk and return
characteristics of the overall strategy. The Portfolio may enter into forward
contracts for
25
<PAGE>
settlement or hedging purposes. The Portfolio may invest in options based on any
type of security, index, or currency, including options traded on foreign
exchanges and options not traded on exchanges.
Options can be volatile investments and involve certain risks. If Highland
applies a hedge at an inappropriate time or judges market conditions
incorrectly, options strategies may result in a loss and lower the Portfolio's
return. The Portfolio could also experience losses if the prices of its options
positions were poorly correlated with its other investments, or if it could not
close out its positions because of an illiquid secondary market. The use of
options may increase the volatility of the Portfolio and may involve the
investment of a small amount of cash relative to the risk assumed.
The Portfolio will be able to hedge its total assets by writing calls or
purchasing puts under normal conditions. In addition, the Portfolio will not
write puts whose underlying value exceeds 25% of total assets, and will not buy
calls with a value exceeding 5% of total assets.
REPURCHASE AGREEMENTS AND SECURITIES LOANS. In a repurchase agreement, the
Portfolio agrees to purchase a security subject to the seller's agreement to
repurchase it at a mutually agreed upon date and price. The Portfolio may also
make securities loans to broker-dealers and institutional investors. In the
event of the bankruptcy of the other party to a repurchase agreement or a
securities loan, the Portfolio could experience delays in recovering its cash or
the securities it lent. To the extent that, in the meantime, the value of the
obligations purchased had decreased, or the value of obligations lent had
increased, the Portfolio could experience a loss. In all cases, First Tennessee
must find the creditworthiness of the other party to the transaction
satisfactory.
U.S. GOVERNMENT OBLIGATIONS purchased by the Portfolio are debt obligations
issued or guaranteed by the U.S. Treasury or by an agency or instrumentality of
the U.S. government. Not all U.S. government obligations are backed by the full
faith and credit of the United States. For example, obligations issued by the
Federal Farm Credit Bank or by the Federal National Mortgage Association are
supported by the agency's right to borrow money from the U.S. Treasury under
certain circumstances. Obligations issued by the Federal Home Loan Bank are
supported only by the credit of the agency. There is no guarantee that the
government will support these types of obligations, and therefore they involve
more risk than other government obligations.
U.S. TREASURY OBLIGATIONS purchased by the Portfolio are obligations issued by
the United States and backed by its full faith and credit.
VARIABLE AND FLOATING RATE INSTRUMENTS purchased by the Bond Portfolio,
including certain participation interests in municipal obligations, have
interest rate adjustment formulas that help to stabilize their market values.
Many variable or floating rate instruments also carry demand features that
permit the Portfolio to sell them at par value plus accrued interest on short
notice. When determining its average weighted portfolio maturity, the Portfolio
will look to the interest readjustment date, rather than the maturity date, of
the instrument.
ZERO COUPON BONDS purchased by the Portfolio do not make regular interest
payments; instead they are sold at a deep discount from their face value and are
redeemed at face value when they mature. Because zero coupon bonds do not pay
current income, their prices can be very volatile when interest rates change. In
calculating its daily dividend, the Portfolio takes into account as income a
portion of the difference between a zero coupon bond's purchase price and its
face value.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on
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Treasury Securities), TIGRs (Treasury Investment Growth Receipts), and TRs
(Treasury Receipts) are examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corporation (REFCORP) and the
Financing Corporation (FICO) can also be separated in this fashion. The risks of
these securities are similar to those of other debt securities, although they
may be more volatile and the value of certain types of stripped securities may
move in the same direction as interest rates. Original issue zeros are zero
coupon securities originally issued by the U.S. government, a government agency,
or a corporation in zero coupon form.
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INVESTMENT ADVISER AND CO-ADMINISTRATOR
---------------------------------------
First Tennessee Bank National Association
Memphis, TN
SUB-ADVISER
-----------
Highland Capital Management Corp.
Memphis, TN
OFFICERS
--------
Richard C. Rantzow, President
Jeremy O. May, Treasurer
James V. Hyatt, Secretary
TRUSTEES
--------
Thomas M. Batchelor
John A. DeCell
L.R. Jalenak, Jr.
Larry W. Papasan
Richard C. Rantzow
ADMINISTRATOR AND DISTRIBUTOR
-----------------------------
ALPS Mutual Funds Services, Inc.
Denver, CO
TRANSFER AND SHAREHOLDER SERVICING AGENT
----------------------------------------
Chase Global Funds Services Company
Boston, MA
CUSTODIAN
---------
Chase Manhattan Bank, N.A.
New York, NY
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<PAGE>
FIRST FUNDS 370 17th Street
Suite 3100
Intermediate Bond Portfolio Denver, Colorado 80202
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Prospectus for Class I, II, and III
October __, 1998
- --------------------------------------------------------------------------------
First Funds (the Trust) offers investors a convenient and economical means of
investing in a professionally managed fixed income mutual fund. The objective of
the Intermediate Bond Portfolio (the Portfolio) is to seek high current income
consistent with preservation of capital. Under normal circumstances, the
Portfolio will maintain a dollar-weighted average maturity of between three and
ten years. The Portfolio's net asset value per share will fluctuate in response
to changes in the value of its investments.
This Prospectus is designed to provide you with information that you should
know before investing. Please read and retain this document for future
reference. This Prospectus offers Class I, II and III shares of the Portfolio.
Class I shares are designed exclusively for investment of monies held in non-
retail trust, advisory, agency, custodial or similar accounts (Institutional
Accounts). Class I shares may be purchased for Institutional Accounts by
financial institutions, business organizations, corporations, municipalities,
non-profit institutions and other entities serving in trust, advisory, agency,
custodial or similar capacities (each, an Institutional Investor and
collectively, Institutional Investors) that meet the investment threshold for
this Class of shares. Class II and III shares are designed for individuals and
other investors who seek mutual fund investment convenience plus a lower
investment minimum. These Classes offer investors differing expense and sales
load structures to choose between. See "Expense Summary."
A Statement of Additional Information (dated October __, 1998) for the
Portfolio has been filed with the Securities and Exchange Commission (SEC) and
is incorporated herein by reference. This Prospectus and the Statement of
Additional Information are available free upon request from ALPS Mutual Funds
Services, Inc., (ALPS) the Portfolio's Distributor. Please call ALPS at 1-800-
442-1941 (option 1) for more information concerning each class of shares. If you
are investing through a broker, other financial institution or adviser
(Investment Professional), please contact that institution directly.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY,
FIRST TENNESSEE BANK NATIONAL ASSOCIATION OR ANY DEPOSITORY INSTITUTION. SHARES
ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD, OR
ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY STATE
OR JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER IN
SUCH STATE OR JURISDICTION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY OF PORTFOLIO EXPENSES.................................. 3
WHAT IS THE INVESTMENT OBJECTIVE OF THE PORTFOLIO?............. 5
IS THE PORTFOLIO A SUITABLE INVESTMENT?; INVESTMENT RISKS...... 6
WHAT ARE THE PORTFOLIO'S INVESTMENT POLICIES AND LIMITATIONS?.. 7
HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?........... 8
HOW IS PERFORMANCE CALCULATED?................................. 18
PORTFOLIO TRANSACTIONS......................................... 18
WHAT IS THE EFFECT OF FEDERAL INCOME TAX ON THIS INVESTMENT?... 18
WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY?........... 19
HOW IS THE PORTFOLIO ORGANIZED?................................ 21
INVESTMENT INSTRUMENTS, TRANSACTIONS, STRATEGIES AND RISKS..... 21
</TABLE>
2
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- --------------------------------------------------------------------------------
SUMMARY OF PORTFOLIO EXPENSES
- --------------------------------------------------------------------------------
The purpose of the table below is to assist you in understanding the various
costs and expenses that you would bear, directly or indirectly, by investing in
the Portfolio. This standard format was developed for use by all mutual funds to
help you make your investment decisions. The information below is based upon
anticipated operating expenses.
A. EXPENSE SUMMARY
INTERMEDIATE
BOND PORTFOLIO
--------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------- -------- ---------
Maximum Sales Load on Purchases
(as a percentage of offering price) None 3.75% None
Sales Load Imposed on Reinvested
Distributions None None None
Deferred Sales Load None None None
Redemption Fees None None None
Exchange Fee None None None
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management Fees* .00% .00% .00%
12b-1 Fees .00% .00% .50%
Other Expenses* .32% .74% .67%
---- ---- ----
Total Portfolio Operating Expenses* .32% .74% 1.42%
==== ==== ====
*After expense waivers
ANNUAL PORTFOLIO OPERATING EXPENSES. The Portfolio is obligated to pay
Management Fees to First Tennessee Bank National Association (First Tennessee)
for managing the Portfolio's investments. First Tennessee has voluntarily agreed
to waive its entire investment advisory fee; however, there is no guarantee that
the waiver will continue. The Portfolio incurs Other Expenses, including
Administration and Co-Administration Fees, for maintaining shareholder records,
furnishing shareholder statements and reports, and other services. ALPS, as
Administrator, is entitled to .15% of the Portfolio's average net assets for
administration services. For the first six months of the Portfolio's operations,
ALPS has voluntarily agreed to waive its administration fee to .075% of the
Portfolio's average net assets up to $20,000,000, .1125% on the next $5,000,000
and .15% thereafter. First Tennessee, as Co-Administrator, is entitled to and
charges .05% of the Portfolio's average net assets for co-administration
services. Other Expenses also include Shareholder Servicing Fees of 0.25% with
respect to Class II and Class III of the Portfolio.
If the waivers were not in effect, Management Fees would be .50% for the
current fiscal year for each Class. In addition, the Board of Trustees has
limited payments of 12b-1 fees under the Distribution Plan
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<PAGE>
to .50% (see "What Advisory and Other Fees Does the Portfolio Pay - Distribution
Plan and Shareholder Servicing Plans"). Without this limitation, 12b-1 fees
would be .75% of average net assets for Class III for the current fiscal year.
Absent these waivers and limitations, Other Expenses and Total Portfolio
Operating Expenses would be as follows:
INTERMEDIATE
BOND PORTFOLIO
--------------
CLASS I CLASS II CLASS III
------- -------- ---------
Other Expenses (estimated) .35% .77% .70%
Total Portfolio Operating Expenses .85% 1.28% 1.95%
There is no guarantee that any waivers will continue at their stated levels.
Management Fees, 12b-1 Fees, Shareholder Servicing Fees, and Other Expenses,
are reflected in the Portfolio's share price and are not charged directly to
individual accounts. 12b-1 Fees are paid by Class III shares of the Portfolio to
ALPS for services and expenses in connection with distribution. Shareholder
Servicing Fees are paid by Class II and III shares of the Portfolio to
Investment Professionals for services and expenses incurred in connection with
providing personal service to shareholders and/or maintenance of shareholder
accounts. Long-term shareholders may pay more than the economic equivalent of
the maximum 8.50% front-end sales charge permitted by the National Association
of Securities Dealers, Inc. (NASD) due to 12b-1 fees applicable to Class III
shares. Please see "What Advisory And Other Fees Does The Portfolio Pay -
Distribution Plan and Shareholder Servicing Plans" for further information.
B. EXAMPLE: You would pay the following expenses for every $1,000 investment
in each Class of shares of the Intermediate Bond Portfolio assuming (1) 5%
annual return, (2) redemption at the end of each time period, (3) that operating
expenses (net of expense waivers) are the same as described above, and (4)
reinvestment of all dividends and distributions. THE RETURN OF 5% AND EXPENSES
SHOULD NOT BE CONSIDERED INDICATIVE OF ACTUAL OR EXPECTED PERFORMANCE OR
PORTFOLIO OPERATING EXPENSES, BOTH OF WHICH MAY VARY SIGNIFICANTLY:
INTERMEDIATE
BOND PORTFOLIO
--------------
CLASS I CLASS II CLASS III
------- -------- ---------
1 year $ 3 $45* $15
3 years $12 $62* $48
*Reflects imposition of maximum sales charge at the beginning of the period.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
[TO BE INSERTED]
4
<PAGE>
- --------------------------------------------------------------------------------
WHAT IS THE INVESTMENT OBJECTIVE OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
First Tennessee Bank National Association (First Tennessee) serves as
Investment Adviser to the Portfolio and, with prior approval of the Board of
Trustees (the Trustees), has engaged Martin & Company, Inc. (Martin), to act as
Sub-Adviser to the Portfolio. Subject to First Tennessee's supervision, Martin
is responsible for the day-to-day investment management of the Portfolio,
including providing investment research and credit analysis concerning Portfolio
investments and conducting a continuous program of investment of Portfolio
assets in accordance with the investment policies and objective of the
Portfolio. For additional information about the Portfolio's investment advisory
arrangements, see "What Advisory And Other Fees Does The Portfolio Pay? -
Investment Advisory and Management Agreements".
The investment objective of the Portfolio is to seek high current income
consistent with the preservation of capital. Although the Portfolio can invest
in securities of any maturity, under normal circumstances the Portfolio
maintains a dollar-weighted average maturity of between three and ten years.
There is no assurance that the Portfolio will achieve its investment objective.
The permitted investments of the Portfolio are as follows:
The Portfolio will invest primarily in U.S. government obligations; investment
grade debt of U.S. corporations; mortgage-backed securities, such as Government
National Mortgage Association, Federal National Mortgage Association, and
Federal Home Loan Mortgage Corporation obligations, and investment grade asset-
backed securities. The Sub-Adviser expects to invest the Portfolio in investment
grade debt securities, which are considered to be those rated Baa or higher by
Moody's Investors Service, Inc. (Moody's) or BBB or higher by Standard & Poor's
Corporation (S&P). Investment grade securities are generally of medium to high
quality. Accordingly, the Portfolio will not invest in securities judged by the
Sub-Adviser to be predominantly speculative or of poor quality, although it may
invest in securities rated in the lower end of the investment grade category
(Baa/BBB), if the Sub-Adviser deems that such securities present attractive
investment opportunities. Securities rated Baa/BBB have speculative
characteristics and may be more sensitive to economic changes in the financial
conditions of issuers. The Portfolio may also invest in unrated securities
judged to be of equivalent quality by Martin. Unrated securities are not
necessarily of lower quality than rated securities, but they may not be
attractive to as many buyers. The Portfolio relies more on the Sub-Adviser's
credit analysis when investing in debt securities that are unrated. In the event
the Portfolio owns a security whose rating is subsequently reduced below
investment grade by Moody's or S&P, the Sub-Adviser will determine whether the
Portfolio should continue to hold such security, but in no event will the
Portfolio's investments in such securities exceed 5% or more of its net assets.
The Portfolio also may invest in foreign securities and make investments in
foreign securities. The Portfolio may buy or sell securities on a when-issued or
delayed-delivery basis, engage in dollar roll transactions, invest in options,
and purchase zero coupon bonds, illiquid and restricted securities, and shares
in other investment companies. The Portfolio may, for temporary defensive
purposes, invest without limit in short-term money market securities.
The Portfolio will generally invest primarily in short to intermediate bonds.
While it may invest in obligations of any maturity, its dollar-weighted average
portfolio maturity will range between 3 and 6 years depending on the interest
rate and investment environment. If the Sub-Adviser determines that market
conditions warrant a shorter or longer average maturity within the range, the
Portfolio's investments will be adjusted accordingly.
5
<PAGE>
See "Investment Instruments, Transactions, Strategies And Risks" for a further
discussion of the Portfolio's investments.
- --------------------------------------------------------------------------------
IS THE PORTFOLIO A SUITABLE INVESTMENT?; INVESTMENT RISKS
- --------------------------------------------------------------------------------
By itself, the Portfolio does not constitute a balanced investment plan. The
Portfolio emphasizes current income by investing primarily in intermediate-term,
fixed income securities. An increase in interest rates generally will reduce the
value of portfolio investments of the Portfolio and a decline in interest rates
will generally increase the value of its portfolio investments. Short-term
obligations (such as instruments with maturities of one year or less) generally
offer greater stability and are less sensitive to interest rate changes.
Intermediate-term bonds of the type in which the Portfolio will invest offer
less stability and are more sensitive to interest rate changes, but generally
offer higher yields. Further, investment in the securities of issuers in any
foreign country involves special risks and considerations not typically
associated with investing in U.S. issuers. The Portfolio's share price, yield
and total return will fluctuate. An investment in the Intermediate Bond
Portfolio may be worth more or less than the original cost when shares are
redeemed.
In addition, the Portfolio may invest in instruments and securities generally
known as derivative investments. These investments may include the use of put
and call option contracts, zero coupon bonds, stripped fixed-income obligations
and mortgage-backed and asset-backed pass-through securities. Martin may not buy
all of these instruments or use all of these techniques unless it believes that
doing so will help the Portfolio achieve its investment objective. Use of these
instruments and techniques can alter the risk and return characteristics of the
Portfolio. They may increase the Portfolio's volatility and may involve the
investment of small amounts of cash relative to the magnitude of the risk
assumed. This is called leverage. They may also result in a loss of principal if
Martin judges market conditions incorrectly or employs a strategy that does not
correlate well with the Portfolio's investment strategy. With respect to
mortgage-backed securities, risks include a sensitivity to the rate of
prepayments in that, although the value of fixed-income securities generally
increase during periods of falling interest as a result of prepayments and other
factors, this is not always the case with respect to mortgage-backed securities.
Asset-backed securities involve the risk that such securities do not usually
have the benefit of a complete security interest in the related collateral.
Positions in options involve the risk that such options may fail as a hedging
technique and that closing transactions may not be effected where a liquid
secondary market does not exist.
Martin believes that by lessening the effect of bond market declines,
investors should experience greater overall returns; accordingly, Martin may
address market risk through a strategy of adjusting the dollar-weighted average
maturity of the Portfolio to reflect changing economic and interest rate
environments. The timing of Portfolio transactions in response to anticipated
changes in interest rate trends is important to the successful application of
such strategies. Bond funds such as the Portfolio are generally subject to two
risk factors: (1) credit risk, and (2) interest rate risk. The Portfolio will
seek to manage credit risk by investing only in investment-grade securities as
described previously. In the event a security's credit rating is downgraded, its
value can be expected to decrease. Martin may elect to continue to hold such
securities. The Portfolio will seek to manage interest rate risk by limiting its
dollar-weighted average portfolio maturity to between 3 and 6 years.
6
<PAGE>
Further information about the types of securities in which the Portfolio may
invest and their related risks, as well as the investment policies of the
Portfolio in general are set forth in the section "Investment Instruments,
Transactions, Strategies and Risks" and in the Statement of Additional
Information.
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIO'S INVESTMENT POLICIES AND LIMITATIONS?
- --------------------------------------------------------------------------------
INVESTMENT LIMITATIONS. The Portfolio has adopted the following investment
limitations:
(1) With respect to 75% of the Portfolio's assets, the Portfolio will not
purchase a security, other than U.S. government securities, if, as a result,
(a) more than 5% of its total assets would be invested in the securities of
any single issuer; or (b) the Portfolio would own more than 10% of the voting
securities of any single issuer.
(2) The Portfolio will not invest 25% or more of its total assets in a
particular industry, other than U.S. government obligations.
(3) (a) The Portfolio may borrow money solely for temporary or emergency
purposes, but not in an amount exceeding 33 1/3% of its total assets. (b) The
Portfolio may borrow money from banks, or by engaging in reverse repurchase
agreements. (c) The Portfolio will not purchase securities when borrowings
exceed 5% of its total assets. If the Portfolio borrows money, its share price
may be subject to greater fluctuation until the borrowing is paid off. To this
extent, purchasing securities when borrowings are outstanding may involve an
element of leverage.
(4) (a) The Portfolio may temporarily lend its portfolio securities to
broker-dealers and institutions, but only when the loans are fully
collateralized. (b) Loans, in the aggregate, will be limited to 33 1/3% of the
Portfolio's total assets.
Unless otherwise noted, the Portfolio's policies and limitations are not
fundamental and may be changed by the Trustees without shareholder approval. The
fundamental policies of the Portfolio that require shareholder approval prior to
any changes are: the Portfolio's investment objective, and limitations (1), (2),
(3)(a), and (4)(b) above. With the exception of the Portfolio's policies and
limitations regarding borrowing and investments in illiquid securities, these
limitations and the Portfolio's policies are considered at the time of purchase
of securities; the sale of securities is not required in the event of a
subsequent change in circumstances.
The investment policies and limitations set forth above are supplemented by
the investment policies and limitations in the Statement of Additional
Information. No assurance can be made that the Portfolio will achieve its
objective, but it will follow the investment style described in this Prospectus.
From time to time, the Portfolio, to the extent consistent with its investment
objective, policies, and restrictions, may invest in securities of companies
with which First Tennessee or any affiliates have lending relationships.
7
<PAGE>
- --------------------------------------------------------------------------------
HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?
- --------------------------------------------------------------------------------
CLASS I
- -------
WHO MAY INVEST?
Class I shares are designed exclusively for investment of monies held in non-
retail trust, advisory, agency, custodial or similar Institutional Accounts.
Class I shares may be purchased for Institutional Accounts by financial
institutions, business organizations, corporations, municipalities, non-profit
institutions, and other Institutional Investors serving in a trust, advisory,
agency, custodial or similar capacity who meet the investment threshold for this
Class of shares.
HOW IS AN INSTITUTIONAL ACCOUNT ESTABLISHED?
An initial investment must be preceded by or made in conjunction with the
establishment of an Institutional Account with an Institutional Investor.
Establishment of an Institutional Account may require that documents and
applications be completed and signed before the investment can be implemented.
The Institutional Investor may require that certain documents be provided prior
to making a redemption from the Portfolio. Institutional Investors may charge
fees in addition to those described herein. Fee schedules for Institutional
Accounts are available upon request from the Institutional Investor and are
detailed in the agreements by which each client opens an account with an
Institutional Investor.
HOW ARE INVESTMENTS MADE?
Each Institutional Investor will transmit orders to the Transfer Agent, Chase
Global Funds Services Company (CGFSC). If an order is received by CGFSC prior to
4:00 p.m. Eastern Time on any Business Day (as defined in the section "How Are
Investments, Exchanges and Redemptions Made - Class I, II and III - How Are
Portfolio Shares Valued?") and the funds are received by CGFSC that day, the
investment will earn dividends declared, if any, on the day of purchase.
Institutional Investors will wire funds through the Federal Reserve System.
Purchases will be processed at the net asset value per share (NAV) calculated
after an order is received by CGFSC. The Portfolio requires advance notification
of all wire purchases. To secure same day acceptance of federal funds (monies
transferred from one bank to another through the Federal Reserve System with
same-day availability), an Institutional Investor must call CGFSC at 1-800-442-
1941, (option 2) prior to 4:00 p.m. Eastern Time on any Business Day to advise
it of the wire. The Trust may discontinue offering its shares in any Class of a
Portfolio without notice to shareholders.
MINIMUM INVESTMENT AND ACCOUNT BALANCE. The minimum initial investment for
each Institutional Investor is $750,000. Institutional Investors may satisfy the
minimum investment by aggregating their Institutional Accounts within the
Portfolio. Subsequent investments may be in any amount. If an Institutional
Investor's Class I account falls below $375,000 due to redemption, the Portfolio
may close the account. An Institutional Investor may be notified if the minimum
balance is not being maintained and will be allowed 30 days to make additional
investments before its account is closed. Shares will be redeemed at the NAV on
the day the account is closed, and proceeds will be sent to the address of
record.
Should an Institutional Investor or a beneficial owner of Class I shares cease
to be eligible to participate in this Class, Class I shares held in an
Institutional Account may be converted to shares of another Class. Any such
conversion will be effected on the basis of the relative NAVs of the two Classes
8
<PAGE>
without the imposition of any sales load, fee or other charge. Institutional
Investors or beneficial owners will receive at least 30 days prior notice of any
proposed conversion.
HOW ARE REDEMPTIONS MADE?
Institutional Investors may redeem all or a portion of their account shares on
any Business Day. Shares will be redeemed at the NAV next calculated after CGFSC
has received the redemption request and will accrue dividends through the day of
redemption. If an account is closed, any accrued dividends will be paid at the
beginning of the following month.
Institutional Investors may make redemptions by wire provided they have
established a wire account with CGFSC. Please call 1-800-442-1941 (option 2) to
advise CGFSC of the wire. If telephone instructions are received before 4:00
p.m. Eastern Time on any Business Day, proceeds of the redemption will be wired
as federal funds on the next Business Day to the bank account designated with
CGFSC. The Institutional Investor may change the bank account designated to
receive an amount redeemed at any time by sending a letter of instruction with a
signature guarantee to CGFSC at 73 Tremont Street, Boston, Massachusetts, 02108.
Pursuant to the Investment Company Act of 1940, as amended (1940 Act), if
making immediate payment of redemption proceeds could adversely affect the
Portfolio, payments may be made up to seven days later. Also, when the New York
Stock Exchange (NYSE) is closed (or when trading is restricted) for any reason
other than customary weekend or holiday closings, or under any emergency
circumstances as determined by the SEC to merit such action, the right of
redemption may be suspended or the date of payment postponed for a period of
time that may exceed seven days. To the extent Portfolio securities are traded
in other markets on days when either the NYSE or the Federal Reserve Bank of New
York (New York Federal Reserve) is closed, the Portfolio's NAV may be affected
on days when investors do not have access to the Portfolio to purchase or redeem
shares.
If transactions by telephone cannot be executed (for example, during times of
unusual market activity), orders may be placed by mail to CGFSC. In case of
suspension of the right of redemption, the Institutional Investor may either
withdraw its request for redemption or it will receive payment based on the NAV
next determined after the termination of the suspension.
ADDITIONAL INFORMATION
The Portfolio also reserves the right to reject any specific purchase order,
including certain purchases by exchange. Purchase orders may be refused if, in
First Tennessee's opinion, they are of a size that would disrupt management of
the Portfolio.
In order to allow First Tennessee to manage the Portfolio most effectively,
Institutional Investors are strongly urged to initiate all trades (investments,
exchanges and redemptions of shares) as early in the day as possible and to
notify CGFSC at least one day in advance of trades in excess of $1 million. In
making these trade requests, the name of the Institutional Investor and the
account number(s) must be supplied.
Transactions may be initiated by telephone. Please note that the Portfolio and
its agents will not be responsible for any losses resulting from unauthorized
telephone transactions if the Portfolio or its agents follow reasonable
procedures designed to verify the identity of the caller. These procedures may
include requesting additional information or using personalized security codes.
The Portfolio or its agents may also record calls, and an Institutional Investor
should verify the accuracy of confirmation statements immediately after receipt.
If an Institutional Investor does not want to be able to initiate redemptions
and exchanges by telephone, please call CGFSC for instructions.
9
<PAGE>
CLASS II AND III
- ----------------
WHO MAY INVEST?
Class II and III shares are designed for individuals and other investors who
seek mutual fund investment convenience plus a lower investment minimum. These
Classes offer investors differing expense and sales load structures to choose
between. See "Summary Of Portfolio Expenses."
INVESTMENT REQUIREMENTS
The minimum initial investment in Class II or III shares is $1,000. Subsequent
investments may be in any amount greater than $100. If you participate in the
Systematic Investing Program (see "Systematic Investing Program" below) or the
"A Plus Card Program" (a consumer discount card program provided by "A" Plus
Strategic Alliances, Inc., a subsidiary of First Tennessee), the minimum initial
investment is $250, and subsequent investments may be in any amount of $25 or
greater. If you are an employee of First Tennessee or any of its affiliates and
you participate in the Systematic Investing Program, the minimum initial
investment is $50, and subsequent investments may be in any amount of $25 or
greater. If your balance in the Portfolio falls below the applicable minimum
investment requirement due to redemption, you may be given 30 days' notice to
reestablish the minimum balance. If you do not reestablish the minimum balance,
your account may be closed and the proceeds mailed to you at the address on
record. Shares will be redeemed on the day the account is closed.
All purchases must be made in U.S. dollars and checks must be drawn on U.S.
banks. No cash will be accepted. If you make a purchase with more than one
check, each check must have a value of at least $100, and the minimum investment
requirement still applies (excluding the specific circumstances, stated above,
which reduce the minimum investment requirement). The Portfolio reserves the
right to limit the number of checks processed at one time. If your check does
not clear, your purchase will be canceled and you could be liable for any losses
or fees incurred.
You may initiate any transaction either directly or through your Investment
Professional. Please note that the Portfolio and its agents will not be
responsible for any losses resulting from unauthorized transactions if the
Portfolio or its agents follow reasonable procedures designed to verify the
identity of the caller. These procedures may include requesting additional
information or using personalized security codes. Your Investment Professional
may also record calls and you should verify the accuracy of your confirmation
statements immediately after you receive them. If you do not want to be able to
redeem and exchange by telephone, please check the box on your application (if
you invest directly) or, if you invest through an Investment Professional,
please call your Investment Professional for instructions.
HOW DO I SET UP AN ACCOUNT?
You may set up an account directly in the Portfolio or you may invest in the
Portfolio through your Investment Professional (see "How Do I Invest Through My
Investment Professional" below). Shares will be purchased based on the NAV next
calculated after CGFSC has received the request in proper form. If you are
investing through an Investment Professional, transactions that your Investment
Professional initiates should be transmitted to CGFSC before 4:00 p.m. Eastern
time in order for you to receive that day's share price. CGFSC must receive
payment within three business days after an order is placed. Otherwise, the
purchase order may be canceled and you could be held liable for the resulting
fees and/or losses. An investment will begin accruing dividends on the day
following purchase.
10
<PAGE>
HOW DO I INVEST DIRECTLY?
When opening a new account directly, you must complete and sign an account
application and send it to CGFSC, 73 Tremont Street, Boston, MA 02108. Telephone
representatives are available at 1-800-442-1941 between the hours of 8:00 a.m.
to 4:00 p.m. Central Time (9:00 a.m. to 5:00 p.m. Eastern Time), Monday through
Friday.
Investments may be made in several ways:
BY MAIL: Make your check payable to First Funds: Intermediate Bond Portfolio,
and mail it, along with the application, to the address indicated on the
application. Your account will be credited on the business day that CGFSC
receives your application in good order.
BY BANK TRANSFER: Bank transfer allows you to move money between your bank
account and your First Funds account. This automatic service allows you to
transfer money from your bank account via the Automated Clearing House (ACH)
network to your Portfolio account. First, a Portfolio account must be
established, and an application sent to CGFSC. Next, a deposit account must be
opened at a bank providing bank transfer services and you must arrange for this
service to be provided. Once you have completed this process, you can initiate a
bank transfer by contacting a representative from your bank, providing the
required information for the bank, and authorizing the transfer to take place.
Please allow two or three days after the authorization for the transfer to
occur.
BY WIRE: Call 1-800-442-1941 (option 2) to set up your Portfolio account to
accommodate wire transactions. To initiate your wire transaction, call your
depository institution. Federal funds (monies transferred from one bank to
another through the Federal Reserve System with same-day availability) should be
wired to:
Chase Manhattan Bank, N.A.
ABA #021000021
First Funds
Credit DDA #910-2-733335
(Account Registration)
(Account Number)
(Wire Control Number) *See Below*
Prior to sending wires, please be sure to call 1-800-442-1941 (option 2) to
receive a Wire Control Number to be included in the body of the wire (see
above).
Your bank may charge you a fee for this service.
HOW DO I REDEEM SHARES WHEN INVESTING DIRECTLY?
You may redeem all or a portion of your shares on any day that the Portfolio
is open for business. Shares will be redeemed at the NAV next calculated after
CGFSC has received the redemption request and will accrue dividends through the
day of redemption. If a Portfolio account is closed, any accrued dividends will
be paid at the beginning of the following month.
You may redeem shares in several ways:
BY MAIL: Write a "letter of instruction" with your name, the Portfolio's
name, your Portfolio account number, the dollar amount or number of shares to be
redeemed, and any additional requirements that apply to each particular account.
You will need the letter of instruction signed by all persons required to
11
<PAGE>
sign for transactions, exactly as their names appear on the account application,
along with a signature guarantee as described below.
A signature guarantee is designed to protect you, the Portfolio, and its
agents from fraud. Your written request requires a signature guarantee if you
wish to redeem more than $1,000 worth of shares; if your Portfolio account
registration has changed within the last 30 days; if the check is not being
mailed to the address on your account; if the check is not being made out to the
account owner; or if the redemption proceeds are being transferred to another
First Funds account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public.
BY BANK TRANSFER: When establishing your account in the Portfolio, you must
have indicated this account privilege in order to authorize the redemption of
monies with the proceeds transferred to your bank account. To authorize a
redemption, simply contact CGFSC at 1-800-442-1941, (option 2) and your
redemption will be processed at the NAV next calculated. Please allow two or
three days after the authorization for monies to reach your bank account.
BY WIRE: You may make redemptions by wire provided you have established a
Portfolio account to accommodate wire transactions. If telephone instructions
are received before 4:00 p.m. Eastern time, proceeds of the redemption will be
wired as federal funds on the next Business Day to the bank account designated
with CGFSC. You may change the bank account designated to receive an amount
redeemed at any time by sending a letter of instruction with a signature
guarantee to CGFSC at 73 Tremont Street, Boston, Massachusetts, 02108.
ADDITIONAL REDEMPTION REQUIREMENTS: The Portfolio may hold payment on
redemptions until it is reasonably satisfied that investments made by check have
been collected, which can take up to seven days. Also, when the NYSE is closed
(or when trading is restricted) for any reason other than its customary weekend
or holiday closings, or under any emergency circumstances as determined by the
SEC to merit such action, the right of redemption may be suspended or the date
of payment postponed for a period of time that may exceed seven days. To the
extent that Portfolio securities are traded in other markets on days when either
the NYSE or the New York Federal Reserve is closed, the Portfolio's NAV may be
affected on days when investors do not have access to the Portfolio to purchase
or redeem shares.
If you are unable to reach CGFSC by telephone (for example, during times of
unusual market activity), consider placing your order by mail directly to CGFSC.
In case of suspension of the right of redemption, you may either withdraw your
request for redemption or you will receive payment based on the NAV next
determined after the termination of the suspension.
HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?
If you are investing through your Investment Professional, you may be required
to set up a brokerage or agency account. Please call your Investment
Professional for information on establishing an account. If you are purchasing
shares of the Portfolio through a program of services offered or administered by
your Investment Professional, you should read the program materials in
conjunction with this Prospectus. Certain features of such programs may impose
additional requirements and charges for the services rendered. Your Investment
Professional may offer any or all of the services mentioned in this section, and
is responsible for initiating all initial purchase transactions. Please contact
your Investment Professional for information on these services.
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<PAGE>
SYSTEMATIC INVESTING PROGRAM
The Systematic Investing Program offers a simple way to maintain a regular
investment program. You may arrange automatic transfers (minimum $25 per
transaction) from your bank account to your First Funds account on a periodic
basis. When you participate in this program, the minimum initial investment in
each Portfolio is $250. If you are an employee of First Tennessee or any of its
affiliates, the minimum initial investment is $50. You may change the amount of
your automatic investment, skip an investment, or stop the Systematic Investing
Program by calling CGFSC at 1-800-442-1941 (option 2) or your Investment
Professional at least three Business Days prior to your next scheduled
investment date.
SYSTEMATIC WITHDRAWAL PLAN
You can have monthly, quarterly or semi-annual checks sent from your account
to you, to a person named by you, or to your bank checking account. Your
Systematic Withdrawal Plan payments are drawn from share redemptions and must be
in the amount of $100 or more per Portfolio per transaction. If Systematic
Withdrawal Plan redemptions exceed income dividends earned on your shares, your
account eventually may be exhausted. Please contact ALPS at 1-800-442-1941
(option 1) or your Investment Professional for more information.
ADDITIONAL INFORMATION
TAX-DEFERRED RETIREMENT PLANS: Retirement plans can offer significant tax
savings to individuals. Please call ALPS at 1-800-442-1941 (option 1) or your
Investment Professional for more information on the plans and their benefits,
provisions and fees. CGFSC or your Investment Professional can set up your new
account in the Portfolio under one of several tax-deferred plans. These plans
let you invest for retirement and defer the tax on your investment income.
Minimums may differ from those listed previously under "Investment
Requirements". Plans include Individual Retirement Accounts (IRAs), Rollover
IRAs, Keogh Plans, and Simplified Employee Pension Plans (SEP-IRAs).
CLASS II
- --------
PUBLIC OFFERING PRICE
The public offering price for Class II shares is the sum of the NAV plus a
sales load. As indicated below, a portion of this load may be reallowed to
Investment Professionals which are financial institutions which have entered
into an agreement with ALPS, the Portfolio's Distributor (Service
Organizations). You may calculate your sales load as follows:
<TABLE>
<CAPTION>
REALLOWANCE TO
TOTAL SALES LOAD FOR CLASS II SHARES SERVICE ORGANIZATIONS
------------------------------------- ---------------------
AS A % OF OFFERING AS A % AS A % OF OFFERING
AMOUNT OF TRANSACTION PRICE PER SHARE OF NAV PRICE PER SHARE
<S> <C> <C> <C>
Less than $100,000 3.75 3.90 3.25
$100,000 to $249,999 3.00 3.09 2.65
$250,000 to $499,999 2.25 2.30 2.00
$500,000 to $999,999 1.50 1.52 1.25
$1,000,000 and over 0.50 0.50 0.40
</TABLE>
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<PAGE>
The reallowance to Service Organizations may be changed from time to time.
ALPS, at its expense, may provide additional non-cash promotional incentives to
eligible representatives of Service Organizations in the form of attendance at a
sales seminar at a resort. These incentives may be limited to certain eligible
representatives of Service Organizations who have sold significant numbers of
shares of any of the Portfolios of the Trust.
You may purchase Class II shares without a sales load if the purchase will be
(a) through an IRA, 401 Plan, 403 Plan or directed agency account if the
trustee, custodian, or agent thereof is a direct or indirect subsidiary or
franchisee bank of First Tennessee or its affiliates; (b) by registered
representatives, directors, advisory directors, officers and employees (and
their immediate families) of First Tennessee or its affiliates; (c) by a current
or former Trustee, officer or employee of First Funds; the spouse of a First
Funds Trustee, officer or employee; a First Funds Trustee acting as a custodian
for a minor child or grandchild of a First Funds Trustee, officer or employee;
or the child or grandchild of a current or former Trustee, officer or employee
of First Funds who has reached the age of majority; (d) by a charitable
remainder trust or life income pool established for the benefit of a charitable
organization (as defined in Section 501(c)(3) of the Internal Revenue Code); (e)
for use in a financial institution or investment adviser managed account for
which a management or investment advisory fee is charged; (f) with redemption
proceeds from other mutual fund complexes on which the investor has paid a
front-end sales charge within the past 60 days upon presentation of purchase
verification information; or (g) through certain promotions where the load is
waived for investors.
In addition, you will not pay a sales load on the reinvestment of dividends or
distributions in the Portfolio or any other First Funds Portfolio, or in
connection with certain share exchanges as described under "How Are Investments,
Exchanges And Redemptions Made? - Class I, II, and III - How are Exchanges
Made?" Further, you generally will not pay a sales load on Class II shares of
the Portfolio which you buy using proceeds from the redemption of a First Funds
Portfolio which does not charge a front-end load, if you obtained such shares
through an exchange for Class II shares which you purchased with a sales load.
A sales load will apply to your purchase of Class II shares in the foregoing
situation only to the extent that the Portfolio's sales load exceeds the sales
load you paid in the prior purchase of the Class II shares.
In addition, if you purchase Class II shares within 60 days after redeeming
shares of the Portfolio, you will receive credit towards the sales load payable
on the purchase to the extent of the sales load you paid on the shares you
redeemed. This reinstatement privilege may be exercised only with respect to
redemptions and purchases in the same First Funds Portfolio. The reinstatement
privilege can be exercised only one time with respect to any particular
redemption.
QUANTITY DISCOUNTS
You may be entitled to reduced sales charges through the Right of Accumulation
or a Letter of Intent, even if you do not make an investment of a size that
would normally qualify for a quantity discount.
To qualify for a reduction of or exception to the sales load, you or your
Investment Professional must notify the Transfer Agent, CGFSC, at the time of
purchase or exchange. The reduction in sales load is subject to confirmation of
your holdings through a check of records. The Trust may modify or terminate
quantity discounts at any time. For more information about quantity discounts,
contact your Service Organization or ALPS at 1-800-442-1941 (option 1).
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<PAGE>
RIGHT OF ACCUMULATION. The sales charge schedule under the heading "How Are
Investments, Exchanges And Redemptions Made? - Public Offering Price" shows that
the sales load you will pay on Class II shares is reduced as your aggregate
investment increases. The Right of Accumulation allows you to combine certain
First Funds investments to determine your aggregate investment and the
applicable reduced sales load. You may combine the amount of your investment in
the Portfolio's Class II shares with the value of your investment in Class II of
any other First Funds Portfolio you own and on which you paid a sales load. If
you are a participant in a First Funds IRA or if you are a trustee or custodian
of another type of First Funds retirement plan, you may also include as part of
your aggregate investment any holdings through the IRA or in the plan even if a
load was not paid. If for example, you beneficially own Class II shares of a
First Funds Portfolio with an aggregate current value of $99,000 and you
subsequently purchase shares of the Portfolio having a current value of $1,000,
the load applicable to the subsequent purchase would be reduced to 3.00% of the
offering price. Similarly, each subsequent purchase of First Funds Class II
shares may be added to your aggregate investment at the time of purchase to
determine the applicable sales loads.
LETTER OF INTENT. A Letter of Intent allows you to purchase Class II shares
over a 13-month period at a reduced sales charge. The sales charge is based on
the total amount you intend to purchase plus the total net asset value of Class
II shares which you already own on which you have paid a sales load. If you are
a participant in a First Funds IRA or if you are a trustee or custodian of
another type of First Funds retirement plan, you may also credit towards
completion of your Letter of Intent any Class II shares held through the IRA or
in the plan, even if a load was not paid. Each investment you make during the
period may be made at the reduced sales charge that would apply to the total
amount you intend to invest. The reduced sales load applies only to new
purchases. If you do not invest the total amount within the period, you may pay
the difference between the higher sales charge rate that would have been applied
to the purchases you made and the reduced sales charge rate you have paid.
Shares of the Portfolio equal to 5% of the amount you intend to invest will be
held in escrow and, if you do not pay the difference within 20 days following
the mailing of a request, the Transfer Agent will redeem a sufficient amount of
your escrowed shares to pay the additional sales charge. After the terms of your
Letter of Intent are fulfilled, the Transfer Agent will release your escrowed
shares.
If your purchases qualify for a further sales load reduction in addition to
that indicated in the Letter of Intent, the sales load will be adjusted to
reflect your total purchases. Signing a Letter of Intent does not bind you to
purchase the full amount indicated at the sales load in effect at the time of
signing, but you must complete the intended purchase to obtain the reduced sales
load. To apply, sign the Letter of Intent form at the time you purchase Class
II shares. You will be entitled to the applicable sales load that is in effect
at the date you submit the Letter of Intent until you complete your intended
purchase.
QUALIFICATION OF DISCOUNTS. As shown in the schedule of Class II sales
charges, larger purchases may result in lower sales charges to you. For purposes
of determining the amount of purchases using the Right of Accumulation and
Letter of Intent privileges, you may combine your purchase with:
- purchases by your spouse or his, her or your joint account or for the
account of any minor children, and
- the aggregate investment of any trustee or other Institutional Investor
for you and/or your spouse or your minor children.
A trustee or custodian of any qualified pension or profit sharing plan may
combine its aggregate purchases.
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<PAGE>
OTHER. Class II shares also incur Shareholder Servicing Fees. See discussion
under "What Advisory And Other Fees Does The Portfolio Pay? - Distribution Plan
and Shareholder Servicing Plans."
CLASS III
- ---------
Class III shares are bought without a front-end load; that is, the offering
price for such shares will be their NAV. Class III shares incur Distribution
Fees and Shareholder Servicing Fees. See discussion under "What Advisory And
Other Fees Does The Portfolio Pay? - Distribution Plan and Shareholder Servicing
Plans."
CLASS I, II AND III
- --------------------
HOW ARE PORTFOLIO SHARES VALUED?
The term "net asset value per share," or NAV, means the worth of one share.
The NAV of each Class of the Portfolio is calculated by adding that Class' pro
rata share of the value of all securities and other assets attributable to the
Portfolio, deducting that Class' pro rata share of Portfolio liabilities,
further deducting Class-specific liabilities, and dividing the result by the
number of shares outstanding in the Class.
The Portfolio is open for business each day that both the NYSE and the New
York Federal Reserve are open (a Business Day). The NAV is calculated at the
close of the Portfolio's Business Day, which coincides with the close of regular
trading of the NYSE (normally 4:00 p.m. Eastern Time).
The Portfolio's securities and other assets are valued primarily on the basis
of market quotations furnished by pricing services, or if quotations are not
available, by a method that the Trustees believe accurately reflects fair value.
Foreign securities are valued on the basis of quotations from the primary United
States market in which they are traded or, if not traded on a U.S. market, then
their primary foreign market, and translated from foreign market quotations into
U.S. dollars using current exchange rates.
DISTRIBUTION OPTIONS: The Portfolio earns interest from bond, money market,
and other fixed-income investments and dividends from its stocks. These are
passed along as dividend distributions. The Portfolio may realize capital gains
if it sells securities for a higher price than it paid for them. These are
passed along as capital gain distributions. Income dividends for the Total
Return Fixed Income Portfolio are declared daily and paid monthly.
When you fill out your account application, you can specify how you want to
receive your distributions. Currently, there are three available options:
1. REINVESTMENT OPTION. Your dividend distributions and capital gain
distributions, if any, will be automatically reinvested in additional shares of
the Portfolio. Reinvestment of distributions will be made at that day's NAV. If
you do not indicate a choice on your application, you will be assigned this
option.
2. CASH OPTION. You will be sent a check for each dividend and capital gain
distribution, if any. Distribution checks will be mailed no later than seven
days after the last day of the month.
3. INCOME-EARNED OPTION. Your capital gain distributions, if any, will be
automatically reinvested, but you will be sent a check for any dividend
distribution.
16
<PAGE>
HOW ARE EXCHANGES MADE?
An exchange is the redemption of shares of one Portfolio and the purchase of
shares of another. The exchange privilege is a convenient way to sell and buy
shares of other Portfolios registered in an investor's state. Except as noted
below, each Portfolio's shares may be exchanged for the same class shares of
other First Funds Portfolios. The redemption and purchase will be made at the
next determined NAV after the exchange request is received and accepted by
CGFSC. You may execute exchange transactions by calling CGFSC at 1-800-442-1941
(option 2) prior to 4:00 p.m. Eastern Time on any Business Day.
Class II shares of the First Funds Money Market Portfolios are not currently
available for investment. Investors in Class II shares wishing to exchange into
one of these Money Market Portfolios will receive Class III shares.
When making an exchange or opening an account in another Portfolio by
exchange, the registration and tax identification numbers of the two accounts
must be identical. In order to open a new account through exchange, the minimum
initial investment requirements must be maintained.
Each exchange may produce a gain or loss for tax purposes. In order to protect
the Portfolio's performance and its shareholders, First Tennessee discourages
frequent exchange activity in response to short-term market fluctuations. The
Portfolio reserves the right to refuse any specific purchase order, including
certain purchases by exchange if, in First Tennessee's opinion, the Portfolio
would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise be affected adversely. Exchanges or
purchase orders may be restricted or refused if the Portfolio receives or
anticipates individual or simultaneous orders affecting significant portions of
the Portfolio's assets. Although the Portfolio will attempt to give prior notice
whenever it is reasonably able to do so, it may impose these restrictions at any
time. The Portfolio reserves the right to modify or withdraw the exchange
privilege upon 60 days notice and to suspend the offering of shares in any class
without notice to shareholders. You or your Institutional Investor will receive
written confirmation of each exchange transaction.
Exchanges are generally not permitted from Class I to another Class. Should a
beneficial owner of Class I shares cease to be eligible to purchase shares of
Class I , Class I shares held in an Institutional Account may be converted to
shares of another class.
STATEMENTS AND REPORTS
You or, if Class I, the Institutional Investor will receive a monthly
statement and a confirmation after every transaction that affects the share
balance or the account registration. A statement with tax information will be
mailed by January 31 of each tax year and also will be filed with the IRS. At
least twice a year, you or, if Class I, the Institutional Investor, will receive
the Portfolio's financial statements. To reduce expenses, only one copy of the
Portfolio's reports (such as the Prospectus and Annual Report) will be mailed to
each investor or, if Class I, each Institutional Investor. Please write to ALPS
at the address indicated on the previous page to request additional copies.
17
<PAGE>
- --------------------------------------------------------------------------------
HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------
From time to time the Portfolio may quote the yield of Class I, II or III
shares in advertisements or in reports or other communications with
shareholders. The YEILD is a way of showing the rate of income that the
Portfolio earns on its investments as the percentage of its share price. To
calculate yield, the Portfolio takes the interest income it earned from its
portfolio securities for a 30-day period (net of expenses), divides it by the
average number of shares entitled to receive dividends, and expresses the result
as an annualized percentage rate based on share price at the end of the 30-day
period. Yields do not reflect gains or losses from portfolio transactions.
Yields are calculated according to accounting methods that are standardized for
all mutual funds. Because yield accounting methods differ from the methods used
for other accounting purposes, the Portfolio's yield may not equal its
distribution rate, the income paid to an account, or the income reported in
financial statements.
TOTAL RETURN for Class I, II or III of the Portfolio is based on the overall
dollar or percentage change in value of a hypothetical investment, assuming
dividends are reinvested. A CUMULATIVE TOTAL RETURN reflects performance over a
stated period of time. AN AVERAGE ANNUAL TOTAL RETURN reflects the hypothetical
annually compounded rate that would have produced the same cumulative total
return if performance had been constant over the entire period. Because average
annual returns tend to smooth out variations in performance, you should
recognize that they are not the same as actual year-by-year results. The yield
and total returns of the three classes of the Portfolio are calculated
separately due to separate expense structures as indicated in the "Summary Of
Portfolio Expenses"; the yields and total returns of Class II and Class III will
be lower than that of Class I.
For additional performance information, contact your Investment Professional
or ALPS for a free Statement of Additional Information for the Portfolio.
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Broker-dealers are utilized to conduct securities transactions for the
Portfolio and are chosen based upon professional ability and quality of service.
In addition, the Portfolio's investment advisers may consider a broker-dealer's
sales of shares of the Portfolio or recommendations to its customers that they
purchase shares of the Portfolio as a factor in the selection of broker-dealers
to execute transactions for the Portfolio. In placing business with such broker-
dealers, the advisers will seek the best execution of each transaction.
Higher commissions may be paid to firms that provide research services to the
extent permitted by law. The frequency of portfolio transactions - the
Portfolio's portfolio turnover rate - will vary from year to year depending on
market conditions. The Portfolio's turnover rate for the fiscal period ended
June 30, 1998 was ___%.
- --------------------------------------------------------------------------------
WHAT IS THE EFFECT OF FEDERAL INCOME TAX ON THIS INVESTMENT?
- --------------------------------------------------------------------------------
The Portfolio intends to distribute substantially all of its net investment
income, and capital gains, if any, to shareholders within each calendar year as
well as on a fiscal year basis. Any net capital gains realized are normally
distributed in December. Income dividends for the Portfolio are declared daily
and paid monthly.
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<PAGE>
FEDERAL TAXES. Distributions of gains from sales of assets held by the
Portfolio for more than one year generally are taxable to shareholders at the
applicable mid-term or long-term capital gains rate, regardless of how long they
have owned their Portfolio shares. Distributions from other sources generally
are taxed as ordinary income. Distributions are taxable when they are paid,
whether taken in cash or reinvested in additional shares, except that
distributions declared in October, November or December and paid in January are
taxable as if paid on December 31. The Portfolio will send each investor or, if
Class I, each Institutional Investor an IRS Form 1099-DIV by January 31.
REDEMPTIONS AND EXCHANGES. A capital gain or loss may be realized when shares
of the Portfolio are redeemed or exchanged. For most types of accounts, the
Portfolio will report the proceeds of redemptions to each shareholder or, if
Class I, the Institutional Investor, and the IRS annually. However, the tax
treatment also depends on the purchase price and your personal tax position.
"BUYING A DIVIDEND." On the record date for a distribution of income or
capital gains, the Portfolio's share price is reduced by the amount of the
distribution. If shares are bought just before the record date (buying a
dividend), the full price for the shares will be paid, and a portion of the
price will be received back as a taxable distribution.
OTHER TAX INFORMATION. The information above is only a summary of some of the
federal tax consequences generally affecting the Portfolio and its shareholders,
and no attempt has been made to discuss individual tax consequences. In addition
to federal tax, distributions may be subject to state or local taxes.
Institutional Investors and other shareholders should consult their tax advisor
for details and up-to-date information on the tax laws in your state to
determine whether the Portfolio is suitable given your particular tax situation.
It is not anticipated that the Portfolio's distributions will be exempt from
Tennessee personal income tax, except to the extent that any distributions of
income are attributable to interest on bonds or securities of the U.S.
government or any of its agencies or instrumentalities.
When you sign your account application, you will be asked to certify that your
taxpayer identification number is correct and that you are not subject to backup
withholding for failing to report income to the IRS. If you do not comply with
IRS regulations, the IRS can require the Portfolio to withhold 31% of taxable
distributions from your account.
- --------------------------------------------------------------------------------
WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY?
- --------------------------------------------------------------------------------
INVESTMENT ADVISORY AND MANAGEMENT AND SUB-ADVISORY AGREEMENTS. For managing
its investment and business affairs, the Portfolio is obligated to pay First
Tennessee, 4990 Poplar Avenue, Memphis, Tennessee, a monthly management fee at
the annual rate of .50% of its average net assets. First Tennessee has
voluntarily agreed to waive its entire advisory fee. This voluntary waiver can
be discontinued at any time.
Under the Investment Advisory and Management Agreement, First Tennessee may,
with the prior approval of the Trustees and the shareholders of the Portfolio,
engage one or more sub-advisers which may have full investment discretion to
make all determinations with respect to the investment and reinvestment of all
or any portion of the Portfolio's assets, subject to the terms and conditions of
the Investment Advisory and Management Agreement and the written agreement with
any such sub-adviser. In the event one or more sub-advisers is appointed by
First Tennessee, First Tennessee shall monitor and evaluate the performance of
such sub-advisers, allocate Portfolio assets to be managed by such sub-
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<PAGE>
advisers, recommend any changes in or additional sub-advisers when appropriate
and compensate each sub-adviser out of the investment advisory fee received by
First Tennessee from the Portfolio.
First Tennessee has experience as an investment adviser to individual,
corporate and institutional advisory clients, pension plans and collective
investment funds, with approximately $___ billion in assets under administration
(including nondiscretionary accounts) and $___ billion in assets under
management as of June 30, 1998, as well as experience in supervising sub-
advisers.
Martin serves as the Sub-Adviser for the Portfolio subject to the supervision
of First Tennessee and pursuant to the authority granted to it under its Sub-
Advisory Agreement with First Tennessee. In January 1998, Martin became an
investment advisory subsidiary of First Tennessee National Corporation, which
also owns First Tennessee. Martin and its predecessors have been in the
investment advisory business for over 8 years and have considerable experience
in securities selection, including expertise in the selection of fixed-income
securities. Martin has not previously advised or sub-advised a registered
investment company such as First Funds, although Martin is subject to the
supervision of First Tennessee, which has a history of investment management
since 1929 and has served as the investment adviser to First Funds since its
inception in 1992. First Tennessee is obligated to pay Martin a monthly sub-
advisory fee at the annual rate of 0.30% of the Portfolio's average net assets.
The Portfolio is not responsible for paying any portion of Martin's sub-advisory
fee. Martin has agreed to voluntarily waive its sub-advisory fee, although this
waiver could be discontinued in whole or in part at any time. Martin's principal
office is located at Two Centre Square, Suite 200, 625 South Gay Street,
Knoxville, TN 37902.
ADMINISTRATOR AND DISTRIBUTOR. ALPS, 370 17th Street, Suite 3100, Denver
Colorado, 80202, serves as the Administrator and Distributor for the Portfolio.
As Administrator, ALPS assists in the Portfolio's administration and operation,
including but not limited to, providing office space and various legal and
operational services in connection with the regulatory requirements applicable
to the Portfolio. ALPS is entitled to receive from the Portfolio a monthly fee
at the annual rate of .15% of average net assets. ALPS has voluntarily agreed to
waive its full administration fee for the first six months of the portfolio's
operation.
First Tennessee serves as the Co-Administrator for the Portfolio. As the Co-
Administrator, First Tennessee assists in the Portfolio's operation, including
but not limited to, providing non-investment related research and statistical
data and various operational and administrative services. First Tennessee is
entitled to receive from the Portfolio a monthly fee at the annual rate of .05%
of average net assets.
As the Distributor, ALPS sells shares of each Portfolio as agent on behalf of
the Trust at no additional cost to the Trust. First Tennessee and its affiliates
do not participate in and are not responsible for selling as an agent on behalf
of the Trust, underwriting or distributing Trust shares. Consistent with
applicable law, affiliates of First Tennessee may receive commissions or asset-
based fees.
TRANSFER AGENT AND CUSTODIAN. Chase Global Funds Services Company, a division
of Chase Manhattan Bank, N.A. ("CGFSC"), provides transfer agent and related
services for the Portfolio. Chase Manhattan Bank, N.A. is custodian of the
assets of the Trust.
PRICING AND ACCOUNTING. CGFSC also serves as the Fund Accountant and thereby
calculates the NAV and dividends of each class and maintains the portfolio and
general accounting records.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING PLANS. The Trustees have adopted
a Distribution Plan on behalf of Class III of the Portfolio pursuant to Rule
12b-1 (the Rule) under the 1940 Act. The NASD subjects asset-based sales
charges to its maximum sales charge rule. Fees paid pursuant to the Portfolio's
Distribution Plan will be limited by the restrictions imposed by the NASD rule.
The
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<PAGE>
Distribution Plan provides for payment of a fee to ALPS at the annual rate of
.75% of the average net assets of Class III; however, the Trustees have limited
such fees to .50% of Class III's average net assets. All or a portion of these
fees will in turn be paid to Investment Professionals as compensation for
selling shares of Class III and for providing ongoing sales support services.
The Trustees have also adopted Shareholder Servicing Plans on behalf of Class II
and III of the Portfolio, under which Service Organizations are paid at the
annual rate of .25% of each Class' average net assets, for shareholder services
and account maintenance, including responding to shareholder inquiries,
directing shareholder communications, account balance maintenance, and dividend
posting. The Distribution Fees are expenses of Class III and the Shareholder
Servicing Fees are expenses of Class II and III in addition to the Management
Fee, and the Administration Fee and Co-Administration Fees, and will reduce the
net income and total return of both Classes.
- --------------------------------------------------------------------------------
HOW IS THE PORTFOLIO ORGANIZED?
- --------------------------------------------------------------------------------
The Portfolio is a diversified portfolio of First Funds, an open-end
management investment company organized as a Massachusetts business trust by a
Declaration of Trust dated March 6, 1992, as amended and restated on September
4, 1992. The Portfolio consists of three separate classes. The Trustees
supervise the Trust's activities and review its contractual arrangements with
companies that provide the Trust with services. The Trust is not required to
hold annual shareholder meetings, although special meetings may be called for a
specific Portfolio or class with respect to issues affecting that Portfolio or
class, or the Trust as a whole, for purposes such as electing or removing
Trustees, changing fundamental policies or approving investment advisory
agreements. Shareholders receive one vote for each share owned and fractional
votes for fractional shares owned. A Portfolio or class votes separately with
respect to issues affecting only that Portfolio or class. Pursuant to the
Declaration of Trust, the Trustees have the authority to issue additional
classes of shares for the Portfolio.
PORTFOLIO MANAGEMENT
Ralph W. Herbert, Vice President and Portfolio Manager with Martin, is a co-
manager for the Intermediate Bond Portfolio. Mr. Herbert has over 19 years of
experience in the financial services industry and specializes in fixed-income
securities. Mr. Herbert is a 1977 graduate of The University of Tennessee.
Ted L. Flickinger, Jr., Vice President and Fixed Income Portfolio Manager with
Martin, co-manages the Intermediate Bond Portfolio with Mr. Herbert. Mr.
Flickinger is a Chartered Financial Analyst and has over 14 years of experience
in the investment management industry, at least 7 of which have been with Martin
concentrating on fixed-income securities. Mr. Flickinger is a 1977 graduate of
The University of Tennessee.
- --------------------------------------------------------------------------------
INVESTMENT INSTRUMENTS, TRANSACTIONS, STRATEGIES AND RISKS
- --------------------------------------------------------------------------------
The following paragraphs provide a brief description of the securities in
which the Portfolio may invest and the transactions each may make. The Portfolio
is not limited by this discussion, however, and may purchase other types of
securities and may enter into other types of transactions if they are consistent
with the Portfolio's investment objective and policies.
21
<PAGE>
ASSET-BACKED AND MORTGAGE SECURITIES purchased by the Portfolio may include
interests in pools of mortgages, loans (including consumer loans), receivables
or other assets. They may also include collateralized mortgage obligations
(CMOs) and stripped mortgage-backed securities. CMOs are pass-through securities
collateralized by mortgages or mortgage-backed securities. CMOs are issued in
classes and series that have different maturities and often are retired in
sequence. Payment of principal and interest may be largely dependent upon the
cash flows generated by the assets backing the securities. The Portfolio may
purchase mortgage-backed securities issued by government and non-government
entities such as banks, mortgage lenders, or other financial institutions. A
mortgage-backed security may be an obligation of the issuer backed by a mortgage
or pool of mortgages or a direct interest in an underlying pool of mortgages.
Some mortgage-backed securities, such as CMOs, make payments of both principal
and interest at a variety of intervals; others make semiannual interest payments
at a predetermined rate and repay principal at maturity (like a typical bond).
Mortgage-backed securities are based on different types of mortgages including
those on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the
Portfolio may invest in them if Martin determines they are consistent with the
Portfolio's investment objective and policies.
The value of mortgage-backed securities may change due to changes in the
market's perception of issuers including their credit-worthiness. In addition,
regulatory or tax changes may adversely affect the mortgage securities market as
a whole. Non-government mortgage-backed securities may offer higher yields than
those issued by government entities, but also may be subject to greater price
changes than government issues. Mortgage-backed securities are subject to
prepayment risk. Prepayment, which occurs when unscheduled or early payments are
made on the underlying mortgages, may shorten the effective maturities of these
securities and may lower their total returns. Some securities may have a
structure that makes their reaction to changing interest rates and other factors
difficult to predict and highly volatile.
COMMERCIAL PAPER purchased by the Portfolio are short-term obligations issued
by banks, broker-dealers, corporations and other entities for purposes such as
financing their current operations.
DELAYED-DELIVERY AND WHEN-ISSUED TRANSACTIONS. The Portfolio may buy and sell
obligations on a when-issued or delayed-delivery basis, with payment and
delivery taking place at a future date. The market value of obligations
purchased in this way may change before the delivery date, which could increase
fluctuations in the Portfolio's share price, yield, and return. Ordinarily, the
Portfolio will not earn interest on obligations until they are delivered.
DOLLAR ROLL TRANSACTIONS. In order to enhance portfolio returns and manage
prepayment risks, the Portfolio may engage in dollar roll transactions with
respect to mortgage securities. In a dollar roll transaction, the Portfolio
sells a mortgage security to a financial institution, such as a bank or broker-
dealer, and simultaneously agrees to repurchase a substantially similar (same
type, coupon and maturity) security from the institution at a later date at an
agreed upon price. The mortgage securities that are repurchased will bear the
same interest rate as those sold, but generally will be collateralized by
different pools of mortgages with different prepayment histories. During the
period between the sale and repurchase, the Portfolio will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of the
sale will be invested in short-term instruments. The income from these
investments, together with any price difference at the time of sale, will
determine the net advantage to the Portfolio. When the Portfolio enters into a
dollar roll transaction, liquid assets of the Portfolio, in a dollar amount
sufficient to make payment for the obligations to be repurchased, are segregated
at the trade date. These securities are marked to market daily and are
maintained until the transaction is settled.
22
<PAGE>
FOREIGN INVESTMENTS. The Portfolio may invest in foreign securities, which
may involve additional risks. Foreign securities and securities denominated in
or indexed to foreign currencies may be affected by the strength of foreign
currencies relative to the U.S. dollar, or by political, regulatory or economic
developments in foreign countries. Foreign companies may not be subject to
accounting standards or governmental supervision comparable to U.S. companies,
and there may be less public information about their operations. Foreign markets
may be less liquid or more volatile than U.S. markets, and may offer less
protection to investors. In addition to the political and economic factors that
can affect foreign securities, a governmental issuer may be unwilling to repay
principal and interest when due, and may require that the conditions for payment
be renegotiated. These factors could make foreign investments, especially those
in developing countries, more volatile. Martin considers these factors in making
foreign investments for the Portfolio.
The Portfolio may also enter into currency forward contracts (agreements to
exchange one currency for another at a future date) to manage currency risks and
to facilitate transactions in foreign securities. Although currency forward
contracts can be used to protect the Portfolio from adverse exchange rate
changes, they involve a risk of loss if Martin fails to predict foreign currency
values correctly or employs a strategy that does not correlate well with a
Portfolio's investments. A loss to the Portfolio may also result if the
counterparty to a transaction fails to perform as obligated. Please see
discussion under "Forwards" below.
FORWARDS. A forward represents a contract that obligates the counterparty to
buy, and the other to sell, a specific underlying asset at a specific price,
amount, and date in the future. Forwards are similar to futures except for the
fact that forwards are privately negotiated. The most common type of forward
contracts are foreign currency exchange contracts.
The Portfolio may enter into forward exchange currency contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its foreign
portfolio holdings and to hedge certain firm purchase and sale commitments
denominated in foreign currencies. A forward exchange currency contract is a
commitment to purchase or sell a foreign currency at a future date at a
negotiated forward rate. The gain or loss arising from the difference between
the original contract and the closing of such contract is included in net
realized gain or loss on foreign currency transactions. Fluctuations in the
value of forward exchange currency contracts are recorded for financial
reporting purposes as unrealized gains or losses by the Portfolio.
RESTRICTED SECURITIES. The Portfolio may purchase securities which cannot be
sold to the public without registration under the Securities Act of 1933
(restricted securities). Unless registered for sale, these securities can only
be sold in privately negotiated transactions or pursuant to an exemption from
registration. Provided that the security has a demand feature of seven days or
less, or a dealer or institutional trading market exists, these restricted
securities are not treated as illiquid securities for the purposes of the
Portfolio's investment limitations. Investing in restricted securities could
have the effect of increasing the level of Portfolio illiquidity if qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
ILLIQUID SECURITIES. Under guidelines established by the Board of Trustees,
Martin, under First Tennessee 's supervision, determines the liquidity of the
Portfolio's investments. The absence of a trading market can make it difficult
to ascertain a market value for illiquid investments. Disposing of illiquid
investments or securities subject to legal restrictions may involve time-
consuming negotiation and legal expenses. It may be difficult or impossible for
the Portfolio to sell illiquid or restricted securities promptly at an
acceptable price. The Portfolio may invest up to 15% of its net assets in
illiquid investments.
23
<PAGE>
MONEY MARKET INSTRUMENTS are high quality instruments that present minimal
credit risk. They may include U.S. government obligations, commercial paper and
other short-term corporate obligations, and certificates of deposit, bankers'
acceptances, bank deposits and other financial institution obligations. These
instruments may carry fixed or variable rates.
OPTIONS CONTRACTS. An option is a contract that gives the owner the right,
but not the obligation, to either buy (call option) or sell (put option) an
underlying security or currency at a fixed price for a specified period of time.
The Portfolio may buy and sell (write) put and call options contracts to manage
its exposure to changing interest rates and security prices. To the extent it
invests in securities denominated in foreign currencies, the Portfolio may also
buy and sell options contracts to manage exposure to currency exchange rates.
Some option strategies, including buying puts and writing calls, tend to hedge
the Portfolio's investments against price fluctuations. Other strategies,
including writing puts and buying calls, tend to increase market exposure.
Options may be combined with each other in order to adjust the risk and return
characteristics of the overall strategy. The Portfolio may enter into forward
contracts for settlement or hedging purposes. The Portfolio may invest in
options based on any type of security, index, or currency, including options
traded on foreign exchanges and options not traded on exchanges.
Options can be volatile investments and involve certain risks. If Martin
applies a hedge at an inappropriate time or judges market conditions
incorrectly, options strategies may result in a loss and lower the Portfolios
return. The Portfolio could also experience losses if the prices of its options
positions were poorly correlated with its other investments, or if it could not
close out its positions because of an illiquid secondary market. The use of
options may increase the volatility of the Portfolio and may involve the
investment of a small amount of cash relative to the risk assumed.
The Portfolio will be able to hedge its total assets by writing calls or
purchasing puts under normal conditions. In addition, the Portfolio will not
write puts whose underlying value exceeds 25% of total assets, and will not buy
calls with a value exceeding 5% of total assets.
REPURCHASE AGREEMENTS are transactions by which a Portfolio agrees to purchase
a security subject to the seller's agreement to repurchase it at a mutually
agreed upon date and price. In the event of the bankruptcy of the seller, a
Portfolio could experience delays in recovering its cash. In the event of the
bankruptcy of the other party to a repurchase agreement or a securities loan,
the Portfolio could experience delays in recovering its cash or the securities
it lent. To the extent that, in the meantime, the value of the obligations
purchased had decreased, or the value of obligations lent had increased, a
Portfolio could experience a loss. In all cases, Martin must find the
creditworthiness of the other party to the transaction satisfactory.
U.S. GOVERNMENT OBLIGATIONS purchased by the Portfolio are debt obligations
issued or guaranteed by the U.S. Treasury or by an agency or instrumentality of
the U.S. government. Not all U.S. government obligations are backed by the full
faith and credit of the United States. For example, obligations issued by the
Federal Farm Credit Bank or by the Federal National Mortgage Association are
supported by the agency's right to borrow money from the U.S. Treasury under
certain circumstances. Obligations issued by the Federal Home Loan Bank are
supported only by the credit of the agency. There is no guarantee that the
government will support these types of obligations, and therefore they involve
more risk than other government obligations.
U.S. TREASURY OBLIGATIONS purchased by the Portfolio are obligations issued by
the United States and backed by its full faith and credit.
24
<PAGE>
VARIABLE AND FLOATING RATE INSTRUMENTS purchased by the Intermediate Bond
Portfolio, including certain participation interests in municipal obligations,
have interest rate adjustment formulas that help to stabilize their market
values. Many variable or floating rate instruments also carry demand features
that permit the Portfolio to sell them at par value plus accrued interest on
short notice. When determining its average weighted portfolio maturity, the
Portfolio will look to the interest readjustment date, rather than the maturity
date, of the instrument.
ZERO COUPON BONDS purchased by the Portfolio do not make regular interest
payments; instead they are sold at a deep discount from their face value and are
redeemed at face value when they mature. Because zero coupon bonds do not pay
current income, their prices can be very volatile when interest rates change. In
calculating its daily dividend, the Portfolio takes into account as income a
portion of the difference between a zero coupon bond's purchase price and its
facpe value.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corporation (REFCORP) and the
Financing Corporation (FICO) can also be separated in this fashion. The risks of
these securities are similar to those of other debt securities, although they
may be more volatile and the value of certain types of stripped securities may
move in the same direction as interest rates. Original issue zeros are zero
coupon securities originally issued by the U.S. government, a government agency,
or a corporation in zero coupon form.
25
<PAGE>
INVESTMENT ADVISER
------------------
First Tennessee Bank National Association
Memphis, TN
SUB-ADVISER
-----------
Martin & Company, Inc.
Knoxville, TN
OFFICERS
--------
Richard C. Rantzow, President
James V. Hyatt, Secretary
Jeremy O. May, Treasurer
TRUSTEES
--------
Thomas M. Batchelor
John A. DeCell
L.R. Jalenak, Jr.
Larry W. Papasan
Richard C. Rantzow
ADMINISTRATOR AND DISTRIBUTOR
-----------------------------
ALPS Mutual Funds Services, Inc.
Denver, CO
TRANSFER AND SHAREHOLDER SERVICING AGENT
----------------------------------------
Chase Global Funds Services Company
Boston, MA
CUSTODIAN
---------
Chase Manhattan Bank, N.A.
New York, NY
26
<PAGE>
FIRST FUNDS 370 17th Street
Suite 3100
TENNESSEE TAX-FREE PORTFOLIO Denver, Colorado 80202
- --------------------------------------------------------------------------------
PROSPECTUS FOR CLASS I, II, AND III
October , 1998
- --------------------------------------------------------------------------------
First Funds (the Trust) offers investors a convenient and economical means of
investing in a professionally managed mutual fund. The objective of the
Tennessee Tax-Free Portfolio (the Portfolio) is to seek a high level of current
income, which is exempt from federal and Tennessee personal income tax, by
investing in a portfolio consisting primarily of Tennessee tax-exempt
obligations. The Portfolio's net asset value per share will fluctuate in
response to changes in the value of its investments.
This Prospectus is designed to provide you with information that you should
know before investing. Please read and retain this document for future
reference. This Prospectus offers Class I, II and III shares of the Portfolio.
Class I shares are designed exclusively for investment of monies held in non-
retail trust, advisory, agency, custodial or similar accounts (Institutional
Accounts). Class I shares may be purchased for Institutional Accounts by
financial institutions, business organizations, corporations, municipalities,
non-profit institutions and other entities serving in trust, advisory, agency,
custodial or similar capacities (each, an Institutional Investor and
collectively, Institutional Investors) that meet the investment threshold for
this Class of shares. Class II and III shares are designed for individuals and
other investors who seek mutual fund investment convenience plus a lower
investment minimum. These Classes offer investors differing expense and sales
load structures to choose between. See "Expense Summary."
A Statement of Additional Information (dated October , 1998) for the
Portfolio has been filed with the Securities and Exchange Commission (SEC) and
is incorporated herein by reference. This Prospectus, the Annual Report and the
Statement of Additional Information are available free upon request from ALPS
Mutual Funds Services, Inc., (ALPS), the Portfolio's Distributor. The Annual
Report for the fiscal period ended June 30, 1998 for the Portfolio is
incorporated into the Statement of Additional Information by reference. Please
call ALPS at 1-800-442-1941 (option 1) for more information concerning each
Class of shares. If you are investing through a broker, other financial
institution or adviser (Investment Professional), please contact that
institution directly.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY,
FIRST TENNESSEE BANK NATIONAL ASSOCIATION OR ANY DEPOSITORY INSTITUTION. SHARES
ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD, OR
ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY STATE
OR JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER IN
SUCH STATE OR JURISDICTION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
SUMMARY OF PORTFOLIO EXPENSES............................................. 3
FINANCIAL HIGHLIGHTS...................................................... 5
WHAT IS THE INVESTMENT OBJECTIVE OF THE PORTFOLIO?........................ 6
IS THE PORTFOLIO A SUITABLE INVESTMENT?; INVESTMENT RISKS................. 7
WHAT ARE THE PORTFOLIO'S INVESTMENT POLICIES AND LIMITATIONS?............. 8
HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?...................... 10
HOW IS PERFORMANCE CALCULATED?............................................ 20
PORTFOLIO TRANSACTIONS.................................................... 20
WHAT IS THE EFFECT OF INCOME TAX ON THIS INVESTMENT?...................... 21
WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY?...................... 22
HOW IS THE PORTFOLIO ORGANIZED?........................................... 24
INVESTMENT INSTRUMENTS, TRANSACTIONS, STRATEGIES AND RISKS................ 24
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF PORTFOLIO EXPENSES
- --------------------------------------------------------------------------------
The purpose of the table below is to assist you in understanding the various
costs and expenses that you would bear, directly or indirectly, by investing in
the Portfolio. This standard format was developed for use by all mutual funds to
help you make your investment decisions. The information below is based upon the
Portfolio's expenses for the fiscal year ended June 30, 1998 adjusted to reflect
new servicing arrangements. This expense information should be considered along
with other important information, such as the Portfolio's investment objective.
<TABLE>
<CAPTION>
A. EXPENSE SUMMARY
TENNESSEE TAX-FREE
PORTFOLIO
---------------------------------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
Maximum Sales Load on Purchases
(as a percentage of offering price) None 3.75% None
Sales Load Imposed on Reinvested
Distributions None None None
Deferred Sales Load None None None
Redemption Fees None None None
Exchange Fee None None None
ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees* .00% .00% 00%
12b-1 Fees* .00% .00% .25%
Other Expenses* .64% .64% .66%
Total Portfolio Operating Expenses* .64% .64% .91%
=== === ===
</TABLE>
*After expense waivers and/or reimbursements.
ANNUAL PORTFOLIO OPERATING EXPENSES. The Portfolio is obligated to pay
Management Fees to First Tennessee Bank National Association (First Tennessee)
for managing the Portfolio's investments. First Tennessee, as Investment
Adviser, has voluntarily agreed to waive its entire investment advisory fee;
however, there is no guarantee that the waiver will continue. The Portfolio
incurs Other Expenses, including Administrative and Co-Administrative Fees, for
maintaining shareholder records, furnishing shareholder statements and reports,
and other services. ALPS, as Administrator, is entitled to and charges .15% of
the Portfolio's average net assets for administration services. ALPS has agreed
to voluntarily waive one half of the .50% 12b-1 fee applicable to Class III of
the Portfolio (see "What Advisory and Other Fees Does The Portfolio Pay -
Distribution Plan and Shareholder Servicing Plans") or .25% of that Class'
average net assets. ALPS reserves the right to modify or terminate this waiver
of 12b-1 expenses at any time. First Tennessee, as Co-Administrator, is entitled
to and charges .05% of the Portfolio's average net assets for co-administration
services.
3
<PAGE>
If the waivers were not in effect, Management Fees would be .50% of average
net assets for each Class. In addition, the Board of Trustees has limited
payments of 12b-1 fees under the Distribution Plan to.50% (see "What Advisory
and Other Fees Does The Portfolio Pay - Distribution Plan and Shareholder
Servicing Plans"). Without this limitation, 12b-1 fees would be .75% of average
net assets for Class III for the current fiscal year. Absent these waivers and
limitations, Other Expenses and Total Portfolio Operating Expenses would be as
follows:
<TABLE>
<CAPTION>
TENNESSEE TAX-FREE
PORTFOLIO
-----------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
Other Expenses .64% .89% .91%
Total Portfolio Operating Expenses 1.14% 1.39% 2.16%
</TABLE>
There is no guarantee that any waivers or assumptions of expenses will
continue at their stated levels.
Management Fees, 12b-1 Fees, Shareholder Servicing Fees, and Other Expenses,
are reflected in the Portfolio's share price and are not charged directly to
individual accounts. 12b-1 Fees are paid by Class III to ALPS for services and
expenses in connection with distribution. Shareholder Servicing Fees are paid by
Class II and III to Investment Professionals for services and expenses incurred
in connection with providing personal service to shareholders and/or maintenance
of shareholder accounts. Long-term shareholders may pay more than the economic
equivalent of the maximum 8.50% front-end sales charge permitted by the National
Association of Securities Dealers, Inc. (NASD) due to 12b-1 fees applicable to
Class III shares. Please see "What Advisory And Other Fees Does The Portfolio
Pay - Distribution Plan and Shareholder Servicing Plans" for further
information.
B. EXAMPLE: You would pay the following expenses for every $1,000 investment
in each Class of shares of the Tennessee Tax-Free Portfolio assuming (1) 5%
annual return, (2) redemption at the end of each time period, (3) that operating
expenses (net of expense waivers) are the same as described above, and (4)
reinvestment of all dividends and distributions. The return of 5% and expenses
should not be considered indicative of actual or expected performance or
Portfolio operating expenses, both of which may vary significantly:
<TABLE>
<CAPTION>
TENNESSEE TAX-FREE
PORTFOLIO
-----------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
1 year $ 7 $ 44* $ 9
3 years $21 $ 57* $ 29
5 years $36 $ 72* $ 51
10 years $80 $115* $112
</TABLE>
*Reflects imposition of maximum sales charge at the beginning of the period.
4
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The table that follows is included in the Annual Report for the Portfolio
dated June 30, 1997 and has been audited by PricewaterhouseCoopers LLP,
independent accountants. Their report on the financial statements and the
financial highlights for the Portfolio is included in the Annual Report. The
financial statements and financial highlights are incorporated by reference into
the Portfolio's Statement of Additional Information. The Annual Report contains
additional performance information and will be made available upon request and
without charge.
TENNESSEE TAX-FREE PORTFOLIO
<TABLE>
<CAPTION>
CLASS I CLASS II CLASS III
-------------------------------------------------------------------
For the Year For the Year For the Year
Ended June 30, Ended June 30, Ended June 30,___
-------------------------------------------------------------------
1997 1996** 1997 1996** 1997 1996**
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 9.71 $ 10.00 $ 9.73 $ 10.06 $ 9.72 $ 10.00
Income from investment operations:
Net investment income 0.50 0.23 0.51 0.21 0.50 0.19
Net realized and unrealized gain (loss)
on investments 0.28 (0.29) 0.28 (0.33) 0.28 (0.28)
------ --------- ------ ------- ------ ---------
TOTAL FROM INVESTMENT OPERATIONS 0.78 (0.06) 0.79 (0.12) 0.78 (0.09)
------ --------- ------ ------- ------ ---------
Distributions:
Net investment income (0.50) (0.23) (0.51) (0.21) (0.50) (0.19)
Net realized gain - - - - - -
Total distributions (0.50) (0.23) (0.51) (0.21) (0.50) (0.19)
------ --------- ------ ------- ------ ---------
Net asset value, end of period $ 9.99 $ 9.71 $10.01 $ 9.73 $10.00 $ 9.72
====== ========= ====== ======= ====== =========
TOTAL RETURN+ 8.26% (0.65)%# 8.37%*** (1.25)%# 8.20% (0.87)%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $8,935 $ 5,925 $5,941 $ 1,875 $5,750 $ 896
Ratio of expenses to average daily
net assets (1) 0.07% 0.50%* 0.12% 0.49%* 0.23% 0.98%*
Ratio of net investment income to
average net assets 5.09% 4.31%* 5.03% 4.32%* 4.93% 3.83%*
Portfolio turnover rate 122% 8%* 122% 8%* 122% 8%*
</TABLE>
5
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(1) During the period, various fees were
waived. The ratio of expenses to
average net assets had such waivers
not occurred is as follows. 1.14% 1.42% 1.14% 1.42% 1.91% 1.91%
</TABLE>
* Annualized.
** Class I and III commenced operations on December 15, 1995. Class II
commenced operations on
December 29, 1995.
*** Class II total return does not include the one time sales charge.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
- --------------------------------------------------------------------------------
WHAT IS THE INVESTMENT OBJECTIVE OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
The Tennessee Tax-Free Portfolio's investment objective is to provide a high
level of current income, which is exempt from federal and Tennessee personal
income tax, by investing in a Portfolio consisting primarily of Tennessee tax-
free obligations. There is no assurance that the Portfolio will achieve its
investment objective.
The Portfolio invests in securities rated at least investment grade by Moody's
Investors Services, Inc. (Moody's) or Standard & Poor's Corporation (S&P), or
another nationally recognized statistical rating service, or in unrated
securities deemed by Martin & Company, Inc., the Portfolio's Sub-Adviser
(Martin) to be of comparable quality, issued by the State of Tennessee or any
city, county, school district or any other political agency or sub-division of
the State of Tennessee. These may include tax, revenue, or bond anticipation
notes; tax-exempt commercial paper; general obligation or revenue bonds
(including municipal lease obligations and resource recovery bonds); industrial
development bonds; private activity securities; standby commitments; and tender
option bonds. It is a non-fundamental investment policy of the Portfolio that
under normal conditions, it will invest its assets so that at least 65% of its
income will be exempt from Tennessee personal income tax, and it is a
fundamental policy of the Portfolio that at least 80% of its income will be
exempt from federal income tax. As a non-fundamental investment policy, the
Portfolio will invest its assets on an ongoing basis to achieve as fully as
possible income that is tax-exempt for both Tennessee and federal income tax
purposes.
Municipal obligations are issued to raise money for various public purposes,
including general purpose financing for state and local governments as well as
financing for specific projects or public facilities. Municipal obligations may
be backed by the full taxing power of a municipality or by the revenues from a
specific project or the credit of a private organization. Some municipal
obligations are insured by private insurance companies, while others may be
supported by letters of credit furnished by domestic or foreign banks.
It is anticipated that the Portfolio normally will be invested in
intermediate-to-long term bonds, and its dollar-weighted average maturity
generally will be between 5 and 15 years, although it may invest in obligations
of any maturity. If Martin determines that market conditions warrant a shorter
or longer average maturity within the range of 5 to 15 years, the Portfolio's
investments will be adjusted accordingly. The dollar-weighted average maturity
of the Portfolio since inception has been between 5 and 15 years. At the
6
<PAGE>
beginning of March, 1998, assets were transferred in-kind into the Portfolio,
which shortened the dollar-weighted average maturity of the Portfolio from
approximately 9.4 years to approximately 6.6 years. In addition, Martin became
Sub-Adviser to the Portfolio effective that date. As a fixed-income securities
adviser, Martin has historically favored securities with a maturity range
between 3 and 10 years. Consequently, the Portfolio's average maturity may
decrease further over time.
The Portfolio does not intend to invest in federally taxable obligations under
normal conditions; however, it may, for temporary defensive purposes, invest in
high quality taxable money market instruments, including U.S. government
obligations; U.S. Treasury bills, notes and bonds; commercial paper; repurchase
agreements; and reverse repurchase agreements. The Portfolio may also buy and
sell securities on a when-issued or delayed delivery basis, and may purchase
zero coupon bonds.
See "Investment Instruments, Transactions, Strategies And Risks" for a further
discussion of the Portfolio's investments.
- --------------------------------------------------------------------------------
IS THE PORTFOLIO A SUITABLE INVESTMENT?; INVESTMENT RISKS
- --------------------------------------------------------------------------------
By itself, the Portfolio does not constitute a balanced investment plan. The
Portfolio emphasizes both federal and Tennessee personal tax-free income. Bond
funds such as the Portfolio are generally subject to two risk factors: (1)
credit risk and (2) interest rate risk. the portfolio will seek to manage credit
risk by investing only in securities as described previously in "What is the
Investment Objective of the Portfolio?" In the event a security's credit rating
is downgraded, its value can be expected to decrease. Martin may elect to
continue to hold such securities. The Portfolio will seek to manage interest
rate risk by limiting its average maturity to 15 years or less. An increase in
interest rates will generally reduce the value of portfolio investments and a
decline in interest rates will generally increase the value of portfolio
investments. Shorter-term obligations (such as instruments with maturities of
one year or less) generally offer greater stability and are less sensitive to
interest rate changes. Longer-term bonds of the type in which the Portfolio will
invest offer less stability and are more sensitive to interest rate changes, but
generally offer higher yields. The Portfolio's share price, yield and total
return will fluctuate, and an investment may be worth more or less than the
original cost when shares are redeemed.
In general, the secondary market for Tennessee obligations is less liquid than
that for taxable debt obligations or for large issues of municipal obligations
that trade in a national market. There is, however, an established resale market
for Tennessee obligations in which the Portfolio may invest. These
considerations may have the effect of restricting the availability of such
obligations for the Portfolio to purchase, may affect the choice of securities
sold to meet redemption requests and may have the effect of limiting the ability
of the Portfolio to sell or dispose of such securities. Also, valuation of such
obligations may be more difficult.
SPECIAL FACTORS CONCERNING THE STATE OF TENNESSEE
Because the Portfolio will ordinarily invest 65% or more of its total assets
in Tennessee obligations, it is more susceptible to factors affecting Tennessee
issuers than is a comparable fund not concentrated in the obligations located in
a single state.
Tennessee contains four geographically separated cities and a number of small
towns spread throughout the state. The demography of the State is such that its
economic strength is concentrated in Nashville,
7
<PAGE>
Memphis, Knoxville, and Chattanooga. The different geographic influences of
these cities, strongly affect the economic growth and diversity of surrounding
counties. The state also contains a number of emerging economic centers such as
Johnson City/Bristol/Kingsport (Tri-Cities), Jackson, and Cookeville. Most of
the remaining counties have more isolated and rural economies. Although rural,
most of these economies often include some diversified, small scale
manufacturing concerns which are often the cornerstone of local employment and
personal income.
Tennessee's industrialized economy is dominated by diverse manufacturing,
which includes automotive, fabricated metals, non-electrical machinery,
electronic equipment, chemicals and textiles. The State's industrial expansion
has left Tennessee vulnerable to national economic cycles and foreign
competition. Consequently, Tennessee has focused on developing growth in the
services sector. The State unemployment rate for 1997 averaged 5.4% versus 5.2%
for 1996 which was higher than the national average of 4.95% in 1997 but lower
than the national average of 5.4% in 1996. Per capita income has steadily
increased and in 1997 was 90% of the national average, up from 85% in 1990 and
83% in 1985.
TennCare, the State-provided healthcare plan, replaced Medicaid and insures
all qualified uninsured individuals in the State. This has caused a strain in
the past on the State's finances; however, the costs associated with the program
have stabilized in fiscal 1997.
Tennessee has revamped its education aid program, the Basic Education Program.
In 1993, it increased the State sales tax rate from 5.5% to 6%, with the
additional half percent dedicated to education. Funding under the Basic
Education Program was completed in fiscal year 1997-1998.
Tennessee's financial operations are considerably different than most other
states because there is no state payroll income tax. This factor, together with
the State's reliance on the sales tax for approximately 60% of general fund
receipts, exposes total State tax collections to considerably more volatility
than would otherwise be the case and, in the event of an economic downswing,
could affect the State's ability to pay principal and interest in a timely
manner. The second largest revenue generator is the gasoline tax. The General
Fund balance, which was drawn down to $7.3 million in 1991, has since grown to
$345 million in 1997. The State economy remains moderately strong. Estimated
growth in the current year is expected to be sufficient to meet increased
expenditures. Although the State continues to experience balanced financial
operations, there can be no assurance that Tennessee's relatively favorable
economic performance will continue.
As of the date of this Prospectus, general obligations of the State of
Tennessee are currently rated "AAA," "Aaa" and "AAA" by S&P, Moody's and Fitch
Investors Service, respectively. There can be no assurance that the economic
conditions on which these ratings are based will continue or that particular
bond issues may not be adversely affected by changes in economic, political or
other conditions. There are no material state tax considerations for
shareholders of this Portfolio other than those set forth under the section
"What Is The Effect Of Federal Income Tax On This Investment?"
Further information about the types of securities in which the Portfolio may
invest and their related risks, as well as the investment policies of the
Portfolio in general are set forth in the section "Investment Instruments,
Transactions, Strategies And Risks" and in the Statement of Additional
Information.
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WHAT ARE THE PORTFOLIO'S INVESTMENT POLICIES AND LIMITATIONS?
- --------------------------------------------------------------------------------
8
<PAGE>
INVESTMENT LIMITATIONS. The Portfolio has adopted the following investment
limitations:
(1) The Portfolio will not invest 25% or more of its total assets in a
particular industry, other than U.S. government obligations.
(2) (a) The Portfolio may borrow money solely for temporary or emergency
purposes, but not in an amount exceeding 33 1/3% of its total assets. (b) The
Portfolio may borrow money from banks or by engaging in reverse repurchase
agreements. (c) The Portfolio will not purchase securities when borrowings
exceed 5% of its total assets. If the Portfolio borrows money, its share price
may be subject to greater fluctuation until the borrowing is paid off. To this
extent, purchasing securities when borrowings are outstanding may involve an
element of leverage.
Unless otherwise noted, the Portfolio's policies and limitations are not
fundamental and may be changed by the Trustees without shareholder approval. The
fundamental policies of the Portfolio that require shareholder approval prior to
any changes are: the Portfolio's investment objective, the Portfolio's policy
that, under normal conditions, at least 80% of its income will be exempt from
federal income tax, and limitations (1) and (2)(a) above. With the exception of
the Portfolio's policies and limitations regarding borrowing and investments in
illiquid securities, these limitations and the Portfolio's policies are
considered at the time of purchase of securities; the sale of securities is not
required in the event of a subsequent change in circumstances.
Tennessee Tax-Free Portfolio is classified under the Investment Company Act of
1940, as amended (1940 Act) as a "non-diversified" investment company, which
allows it to invest more than 5% of its assets in the securities of any issuer,
subject to satisfaction of certain tax requirements. Due to the relatively small
number of issuers of Tennessee obligations, the Portfolio is likely to invest a
greater percentage of its assets in the securities of a single issuer than is an
investment company which invests in a broad range of municipal obligations on a
national scale. The Portfolio is, therefore, more susceptible than a diversified
portfolio to any single adverse economic or political occurrence or development
affecting Tennessee issuers. The Portfolio will also be subject to an
incremental risk of loss if the issuer is unable to make interest or principal
payments or if the market value of such securities declines. It is also possible
that there will not be sufficient availability of suitable Tennessee tax-exempt
obligations for the Portfolio to achieve its objective of providing income
exempt from Tennessee personal income taxes.
The Portfolio may also invest 25% or more of its total assets in municipal
securities whose revenue sources are from similar types of projects, e.g.,
education, electric utilities, health care, housing, transportation, or water,
sewer, and gas utilities. There may be economic, business or political
developments or changes that affect all securities of a similar type.
Martin defines the issuer of a security depending on its terms and conditions.
In identifying the issuer, Martin will consider the entity or entities
responsible for payment of interest and repayment of principal and the source of
such payments; the way in which assets and revenues of an issuing political
subdivision are separated from those of other political entities; and whether a
governmental body is guaranteeing the security.
9
<PAGE>
It is the current position of the SEC staff that the Portfolio may not derive
more than 20% of its income from municipal obligations that pay interest that is
a preference item for purposes of the federal alternative minimum tax (AMT).
To the extent that the Portfolio invests in private activity obligations,
individuals who are subject to the AMT will be required to report a portion of
the Portfolio's dividends as a "tax preference item" in determining their
federal tax. Income distributions that are a tax preference item for purposes of
the federal AMT are considered to be exempt from federal income tax for purposes
of the Portfolio's fundamental policy that at least 80% of its income will be
federally tax-exempt.
The investment policies and limitations set forth above are supplemented by
the investment policies and limitations in the Statement of Additional
Information. No assurance can be made that the Portfolio will achieve its
objective, but it will follow the investment style described in this Prospectus.
From time to time, the Portfolio to the extent consistent with its investment
objective, policies and restrictions, may invest in securities of cities,
counties or municipalities with which First Tennessee or its affiliates have
lending relationships and may engage in agency brokerage transactions with First
Tennessee. Subject to the terms of the SEC exemptive order received by the
Portfolio on July 15, 1996 , the Portfolio may invest in securities underwritten
by First Tennessee and may engage in brokerage transactions with First Tennessee
acting as principal.
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HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?
- --------------------------------------------------------------------------------
CLASS I
- -------
WHO MAY INVEST?
Class I shares are designed exclusively for investment of monies held in non-
retail trust, advisory, agency, custodial or similar Institutional Accounts.
Class I shares may be purchased for Institutional Accounts by financial
institutions, business organizations, corporations, municipalities, non-profit
institutions, and other Institutional Investors serving in a trust, advisory,
agency, custodial or similar capacity who meet the investment threshold for this
Class of shares.
HOW IS AN INSTITUTIONAL ACCOUNT ESTABLISHED?
An initial investment must be preceded by or made in conjunction with the
establishment of an Institutional Account with an Institutional Investor.
Establishment of an Institutional Account may require that documents and
applications be completed and signed before the investment can be implemented.
The Institutional Investor may require that certain documents be provided prior
to making a redemption from the Portfolio. Institutional Investors may charge
fees in addition to those described herein. Fee schedules for Institutional
Accounts are available upon request from the Institutional Investor and are
detailed in the agreements by which each client opens an account with an
Institutional Investor.
HOW ARE INVESTMENTS MADE?
Each Institutional Investor will transmit orders to the Transfer Agent, Chase
Global Funds Services Company (CGFSC). If an order is received by CGFSC prior to
4:00 p.m. Eastern Time on any Business Day
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<PAGE>
(as defined in the section "How Are Investments, Exchanges And Redemptions
Made - Class I, II and III - How Are Portfolio Shares Valued?") and the funds
are received by CGFSC that day, the investment will earn dividends declared, if
any, on the day of purchase. Institutional Investors will wire funds through the
Federal Reserve System. Purchases will be processed at the net asset value per
share (NAV) calculated after an order is received and accepted by CGFSC. The
Portfolio requires advance notification of all wire purchases. To secure same
day acceptance of federal funds (monies transferred from one bank to another
through the Federal Reserve System with same-day availability), an Institutional
Investor must call CGFSC at 1-800-442-1941, (option 2) prior to 4:00 p.m.
Eastern Time on any Business Day to advise it of the wire. The Trust may
discontinue offering its shares in any Class of a Portfolio without notice to
shareholders.
MINIMUM INVESTMENT AND ACCOUNT BALANCE. The minimum initial investment for
each Institutional Investor is $750,000. Institutional Investors may satisfy the
minimum investment by aggregating their Institutional Accounts within the
Portfolio. Subsequent investments may be in any amount. If an Institutional
Investor's Class I account falls below $375,000 due to redemption, the Portfolio
may close the account. An Institutional Investor may be notified if the minimum
balance is not being maintained and will be allowed 30 days to make additional
investments before its account is closed. Shares will be redeemed at the NAV on
the day the account is closed, and proceeds will be sent to the address of
record.
Should an Institutional Investor or a beneficial owner of Class I shares cease
to be eligible to participate in this Class, Class I shares held in an
Institutional Account may be converted to shares of another Class. Any such
conversion will be effected on the basis of the relative NAVs of the two classes
without the imposition of any sales load, fee or other charge. Institutional
Investors or beneficial owners will receive at least 30 days prior notice of any
proposed conversion.
HOW ARE REDEMPTIONS MADE?
Institutional Investors may redeem all or a portion of their account shares on
any Business Day. Shares will be redeemed at the NAV next calculated after CGFSC
has received the redemption request and will accrue dividends through the day of
redemption. If an account is closed, any accrued dividends will be paid at the
beginning of the following month.
Institutional Investors may make redemptions by wire provided they have
established a wire account with CGFSC. Please call 1-800-442-1941 (option 2) to
advise CGFSC of the wire. If telephone instructions are received before 4:00
p.m. Eastern time on any Business Day, proceeds of the redemption will be wired
as federal funds on the next Business Day to the bank account designated with
CGFSC. An Institutional Investor may change the bank account designated to
receive an amount redeemed at any time by sending a letter of instruction with a
signature guarantee to CGFSC, 73 Tremont Street, Boston, Massachusetts, 02108.
Shares redeemed will earn dividends declared, if any, through the date of
redemption.
Pursuant to the 1940 Act, if making immediate payment of redemption proceeds
could adversely affect the Portfolio, payments may be made up to seven days
later. Also, when the New York Stock Exchange (NYSE) is closed (or when trading
is restricted) for any reason other than its customary weekend or holiday
closings, or under any emergency circumstances as determined by the SEC to merit
such action, the right of redemption may be suspended or the date of payment
postponed for a period of time that may exceed seven days. To the extent
Portfolio securities are traded in other markets on days when either the NYSE or
the Federal Reserve Bank of New York (New York Federal Reserve) is closed, the
Portfolio's NAV may be affected on days when investors do not have access to the
Portfolio to purchase or redeem shares.
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<PAGE>
If transactions by telephone cannot be executed (for example, during times of
unusual market activity), orders may be placed by mail to CGFSC. In case of
suspension of the right of redemption, an Institutional Investor may either
withdraw its request for redemption, or it will receive payment based on the NAV
next determined after the termination of the suspension.
ADDITIONAL INFORMATION
The Portfolio also reserves the right to reject any specific purchase order,
including certain purchases by exchange. Purchase orders may be refused if, in
Martin's opinion, they are of a size that would disrupt management of the
Portfolio.
In order to allow Martin to manage the Portfolio most effectively,
Institutional Investors are strongly urged to initiate all trades (investments,
exchanges and redemptions of shares) as early in the day as possible and to
notify CGFSC at least one day in advance of trades in excess of $1 million. In
making these trade requests, the name of the Institutional Investor and the
account number(s) must be supplied.
Transactions may be initiated by telephone. Please note that the Portfolio and
its agents will not be responsible for any losses resulting from unauthorized
telephone transactions if the Portfolio or its agents follow reasonable
procedures designed to verify the identity of the caller. These procedures may
include requesting additional information or using personalized security codes.
The Portfolio or its agents may also record calls and an Institutional Investor
should verify the accuracy of confirmation statements immediately after receipt.
If an Institutional Investor does not want to be able to initiate redemptions
and exchanges by telephone, please call CGFSC for instructions.
CLASS II AND III
- ----------------
MAY INVEST WHO?
Class II and III shares are designed for individuals and other investors who
seek mutual fund investment convenience plus a lower investment minimum. These
Classes offer investors differing expense and sales load structures to choose
between. See "Summary Of Portfolio Expenses."
INVESTMENT REQUIREMENTS
The minimum initial investment in Class II or III shares is $1,000. Subsequent
investments may be in any amount greater than $100. If you participate in the
Systematic Investing Program (see "Systematic Investing Program" below) or the
"A Plus Card Program" (a consumer discount card program provided by "A" Plus
Strategic Alliances, Inc., a subsidiary of First Tennessee), the minimum initial
investment is $250, and subsequent investments may be in any amount of $25 or
greater. If you are an employee of First Tennessee or any of its affiliates and
you participate in the Systematic Investing Program, the minimum initial
investment is $50, and subsequent investments may be in any amount of $25 or
greater. If your balance in the Portfolio falls below the applicable minimum
investment requirement due to redemption, you may be given 30 days' notice to
reestablish the minimum balance. If you do not reestablish the minimum balance,
your account may be closed and the proceeds mailed to you at the address on
record. Shares will be redeemed on the day the account is closed.
All purchases must be made in U.S. dollars and checks must be drawn on U.S.
banks. No cash will be accepted. If you make a purchase with more than one
check, each check must have a value of at least $100, and the minimum investment
requirement still applies (excluding the specific circumstances, stated above,
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<PAGE>
which reduce the minimum investment requirement). The Portfolio reserves the
right to limit the number of checks processed at one time. If your check does
not clear, your purchase will be canceled, and you could be liable for any
losses or fees incurred.
You may initiate any transaction either directly or through your Investment
Professional. Please note that the Portfolio and its agents will not be
responsible for any losses resulting from unauthorized transactions if the
Portfolio or its agents follow reasonable procedures designed to verify the
identity of the caller. These procedures may include requesting additional
information or using personalized security codes. Your Investment Professional
may also record calls, and you should verify the accuracy of your confirmation
statements immediately after you receive them. If you do not want to be able to
redeem and exchange by telephone, please check the box on your application (if
you invest directly) or, if you invest through an Investment Professional,
please call your Investment Professional for instructions.
HOW DO I SET UP AN ACCOUNT?
You may set up an account directly in the Portfolio or you may invest in the
Portfolio through your Investment Professional (see "How Do I Invest Through My
Investment Professional" below). Shares will be purchased based on the NAV next
calculated after CGFSC has received the request in proper form. If you are
investing through an Investment Professional, transactions that your Investment
Professional initiates should be transmitted to CGFSC before 4:00 p.m. Eastern
Time in order for you to receive that day's share price. CGFSC must receive
payment within three business days after an order is placed. Otherwise, the
purchase order may be canceled and you could be held liable for the resulting
fees and/or losses. An investment will begin accruing dividends on the day
following purchase.
HOW DO I INVEST DIRECTLY?
When opening a new account directly, you must complete and sign an account
application and send it to CGFSC, 73 Tremont Street, Boston, MA 02108. Telephone
representatives are available at 1-800-442-1941, (option 2) between the hours of
8:00 a.m. to 4:00 p.m. Central Time (9:00 a.m. to 5:00 p.m. Eastern Time),
Monday through Friday.
Investments may be made in several ways:
BY MAIL: Make your check payable to First Funds: Tennessee Tax-Free, and mail
it, along with the application, to the address indicated on the application.
Your account will be credited on the business day that CGFSC receives your
application in good order.
BY BANK TRANSFER: Bank transfer allows you to move money between your bank
account and your First Funds account. This automatic service allows you to
transfer money from your bank account via the Automated Clearing House (ACH)
network to your Portfolio account. First, a Portfolio account must be
established, and an application sent to CGFSC. Next, a deposit account must be
opened at a bank providing bank transfer services and you must arrange for this
service to be provided. Once you have completed this process, you can initiate a
bank transfer by contacting a representative from your bank, providing the
required information for the bank, and authorizing the transfer to take place.
Please allow two or three days after the authorization for the transfer to
occur.
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<PAGE>
BY WIRE: Call 1-800-442-1941, (option 2) to set up your Portfolio account to
accommodate wire transactions. To initiate your wire transaction, call your
depository institution. Federal funds (monies transferred from one bank to
another through the Federal Reserve System with same-day availability) should be
wired to:
Chase Manhattan Bank, N.A.
ABA #021000021
First Funds
Credit DDA #910-2-733335
(Account Registration)
(Account Number)
(Wire Control Number) *See Below*
Prior to sending wires, please be sure to call 1-800-442-1941, (option 2) to
receive a Wire Control Number to be included in the body of the wire (see
above).
Your bank may charge you a fee for this service.
HOW DO I REDEEM SHARES WHEN INVESTING DIRECTLY?
You may redeem all or a portion of your shares on any day that the Portfolio
is open for business. Shares will be redeemed at the NAV next calculated after
CGFSC has received the redemption request and will earn dividends declared, if
any, through the day prior to redemption. If a Portfolio account is closed, any
accrued dividends will be paid at the beginning of the following month.
You may redeem shares in several ways:
BY MAIL: Write a "letter of instruction" with your name, the Portfolio's
name, your Portfolio account number, the dollar amount or number of shares to be
redeemed, and any additional requirements that apply to each particular account.
You will need the letter of instruction signed by all persons required to sign
for transactions, exactly as their names appear on the account application,
along with a signature guarantee as described below.
A signature guarantee is designed to protect you, the Portfolio, and its
agents from fraud. Your written request requires a signature guarantee if you
wish to redeem more than $1,000 worth of shares; if your Portfolio account
registration has changed within the last 30 days; if the check is not being
mailed to the address on your account; if the check is not being made out to the
account owner; or if the redemption proceeds are being transferred to another
First Funds account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public.
BY BANK TRANSFER: When establishing your account in the Portfolio, you must
have indicated this account privilege in order to authorize the redemption of
monies with the proceeds transferred to your bank account. To authorize a
redemption, simply contact CGFSC at 1-800-442-1941, (option 2) and your
redemption will be processed at the NAV next calculated. Please allow two or
three days after the authorization for monies to reach your bank account.
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<PAGE>
BY WIRE: You may make redemptions by wire provided you have established a
Portfolio account to accommodate wire transactions. If telephone instructions
are received before 4:00 p.m. Eastern Time, proceeds of the redemption will be
wired as federal funds on the next Business Day to the bank account designated
with CGFSC. You may change the bank account designated to receive an amount
redeemed at any time by sending a letter of instruction with a signature
guarantee to CGFSC at 73 Tremont Street, Boston, Massachusetts, 02108.
ADDITIONAL REDEMPTION REQUIREMENTS: The Portfolio may hold payment on
redemptions until it is reasonably satisfied that investments made by check have
been collected, which can take up to seven days. Also, when the NYSE is closed
(or when trading is restricted) for any reason other than its customary weekend
or holiday closings, or under any emergency circumstances as determined by the
SEC to merit such action, the right of redemption may be suspended or the date
of payment postponed for a period of time that may exceed seven days. To the
extent that Portfolio securities are traded in other markets on days when either
the NYSE or the New York Federal Reserve is closed, the Portfolio's NAV may be
affected on days when investors do not have access to the Portfolio to purchase
or redeem shares.
If you are unable to reach CGFSC by telephone (for example, during times of
unusual market activity), consider placing your order by mail directly to CGFSC.
In case of suspension of the right of redemption, you may either withdraw your
request for redemption or you will receive payment based on the NAV next
determined after the termination of the suspension.
HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?
If you are investing through your Investment Professional, you may be required
to set up a brokerage or agency account. Please call your Investment
Professional for information on establishing an account. If you are purchasing
shares of the Portfolio through a program of services offered or administered by
your Investment Professional, you should read the program materials in
conjunction with this Prospectus. Certain features of such programs may impose
additional requirements and charges for the services rendered. Your Investment
Professional may offer any or all of the services mentioned in this section, and
is responsible for initiating all initial purchase transactions. Please contact
your Investment Professional for information on these services.
SYSTEMATIC INVESTING PROGRAM
The Systematic Investing Program offers a simple way to maintain a regular
investment program. You may arrange automatic transfers (minimum $25 per
transaction) from your bank account to your First Funds account on a periodic
basis. When you participate in this program, the minimum initial investment in
each Portfolio is $250. If you are an employee of First Tennessee or any of its
affiliates, the minimum initial investment in the Portfolio is $50. You may
change the amount of your automatic investment, skip an investment, or stop the
Systematic Investing Program by calling CGFSC at 1-800-442-1941, (option 2) or
your Investment Professional at least three Business Days prior to your next
scheduled investment date.
SYSTEMATIC WITHDRAWAL PLAN
You can have monthly, quarterly or semi-annual checks sent from your account
to you, to a person named by you, or to your bank checking account. Your
Systematic Withdrawal Plan payments are drawn from share redemptions and must be
in the amount of $100 or more per Portfolio per month. If Systematic Withdrawal
Plan redemptions exceed income dividends earned on your shares, your account
eventually may be exhausted. Please contact ALPS at 1-800-442-1941 (option 1) or
your Investment Professional for more information.
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CLASS II
- --------
PUBLIC OFFERING PRICE
The public offering price for Class II shares is the sum of the NAV plus a
sales load. As indicated below, a portion of this load may be reallowed to
Investment Professionals which have entered into an agreement with ALPS, the
Portfolio's Distributor (Service Organizations). You may calculate your sales
load as follows:
<TABLE>
<CAPTION>
TOTAL SALES LOAD REALLOWANCE TO
FOR CLASS II SHARES SERVICE ORGANIZATIONS
AS A % OF OFFERING AS A % OF OFFERING
------------------- ---------------------
AMOUNT OF TRANSACTION PRICE PER SHARE AS A % OF NAV PRICE PER SHARE
<S> <C> <C> <C>
Less than $100,000 3.75 3.90 3.25
$100,000 to $249,999 3.00 3.09 2.65
$250,000 to $499,999 2.25 2.30 2.00
$500,000 to $999,999 1.50 1.52 1.25
$1,000,000 and over 0.50 0.50 0.40
</TABLE>
The reallowance to Service Organizations may be changed from time to time. ALPS,
at its expense, may provide additional non-cash promotional incentives to
eligible representatives of Service Organizations in the form of attendance at a
sales seminar at a resort. These incentives may be limited to certain eligible
representatives of Service Organizations who have sold significant numbers of
shares of any of the Portfolios of the Trust.
You may purchase Class II shares without a sales load if the purchase will be
(a) through an IRA, 401 Plan, 403 Plan or directed agency account if the
trustee, custodian, or agent thereof is a direct or indirect subsidiary or
franchisee bank of First Tennessee or its affiliates; (b) by registered
representatives, directors, advisory directors, officers and employees (and
their immediate families) of First Tennessee or its affiliates; (c) by a current
or former Trustee, officer or employee of First Funds; the spouse of a First
Funds Trustee, officer or employee; a First Funds Trustee acting as a custodian
for a minor child or grandchild of a First Funds Trustee, officer or employee;
or the child or grandchild of a current or former Trustee, officer or employee
of First Funds who has reached the age of majority; (d) by a charitable
remainder trust or life income pool established for the benefit of a charitable
organization (as defined in Section 501(c)(3) of the Internal Revenue Code); (e)
for use in a financial institution or investment adviser managed account for
which a management or investment advisory fee is charged; (f) with redemption
proceeds from other mutual fund complexes on which the investor has paid a
front-end sales charge within the past 60 days upon presentation of purchase
verification information; or (g) through certain promotions where the load is
waived for investors.
In addition, you will not pay a sales load on the reinvestment of dividends or
distributions in the Portfolio or any other First Funds Portfolio, or in
connection with certain share exchanges as described under "How Are Investments,
Exchanges And Redemptions Made? - Class I, II, and III - How are Exchanges
Made?" Further, you generally will not pay a sales load on Class II shares of
the Portfolio which you buy using proceeds from the redemption of a First Funds
Portfolio which does not charge a front-end load, if you obtained such shares
through an exchange for Class II shares which you purchased with a sales
16
<PAGE>
load. A sales load will apply to your purchase of Class II shares in the
foregoing situation only to the extent that the Portfolio's sales load exceeds
the sales load you paid in the prior purchase of the Class II shares.
In addition, if you purchase Class II shares within 60 days after redeeming
shares of the Portfolio, you will receive credit towards the sales load payable
on the purchase to the extent of the sales load you paid on the shares you
redeemed. This reinstatement privilege may be exercised only with respect to
redemptions and purchases in the same First Funds Portfolio. The reinstatement
privilege can be exercised only one time with respect to any particular
redemption.
QUANTITY DISCOUNTS
You may be entitled to reduced sales charges through the Right of Accumulation
or a Letter of Intent, even if you do not make an investment of a size that
would normally qualify for a quantity discount.
To qualify for a reduction of or exception to the sales load, you or your
Investment Professional must notify the Transfer Agent, CGFSC, at the time of
purchase or exchange. The reduction in sales load is subject to confirmation of
your holdings through a check of records. The Trust may modify or terminate
quantity discounts at any time. For more information about quantity discounts,
contact your Service Organization or ALPS at 1-800-442-1941 (option 1).
RIGHT OF ACCUMULATION. The sales charge schedule under the heading "How Are
Investments, Exchanges And Redemptions Made? - Public Offering Price" shows that
the sales load you will pay on Class II shares is reduced as your aggregate
investment increases. The Right of Accumulation allows you to combine certain
First Funds investments to determine your aggregate investment and the
applicable reduced sales load. You may combine the amount of your investment in
the Portfolio's Class II shares with the value of your investment in Class II of
any other First Funds Portfolio you own and on which you paid a sales load. If
you are a participant in a First Funds IRA or if you are a trustee or custodian
of another type of First Funds retirement plan, you may also include as part of
your aggregate investment any holdings through the IRA or in the plan even if a
load was not paid. If, for example, you beneficially own Class II shares of a
First Funds Portfolio with an aggregate current value of $99,000 and you
subsequently purchase shares of the Portfolio having a current value of $1,000,
the load applicable to the subsequent purchase would be reduced to 3.50% of the
offering price. Similarly, each subsequent purchase of First Funds Class II
shares may be added to your aggregate investment at the time of purchase to
determine the applicable sales loads.
LETTER OF INTENT. A Letter of Intent allows you to purchase Class II shares
over a 13-month period at a reduced sales charge. The sales charge is based on
the total amount you intend to purchase plus the total net asset value of Class
II shares which you already own on which you have paid a sales load. If you are
a participant in a First Funds IRA or if you are a trustee or custodian of
another type of First Funds retirement plan, you may also credit towards
completion of your Letter of Intent any Class II shares held through the IRA or
in the plan, even if a load was not paid. Each investment you make during the
period may be made at the reduced sales charge that would apply to the total
amount you intend to invest. The reduced sales load applies only to new
purchases. If you do not invest the total amount within the period, you may pay
the difference between the higher sales charge rate that would have been applied
to the purchases you made and the reduced sales charge rate you have paid.
Shares of the Portfolio equal to 5% of the amount you intend to invest will be
held in escrow and, if you do not pay the difference within 20 days following
the mailing of a request, the Transfer Agent will redeem a sufficient amount of
your escrowed shares to pay the additional sales charge. After the terms of your
Letter of Intent are fulfilled, the Transfer Agent will release your escrowed
shares.
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If your purchases qualify for a further sales load reduction in addition to
that indicated in the Letter of Intent, the sales load will be adjusted to
reflect your total purchases. Signing a Letter of Intent does not bind you to
purchase the full amount indicated at the sales load in effect at the time of
signing, but you must complete the intended purchase to obtain the reduced sales
load. To apply, sign the Letter of Intent form at the time you purchase Class
II shares. You will be entitled to the applicable sales load that is in effect
at the date you submit the Letter of Intent until you complete your intended
purchase.
QUALIFICATION OF DISCOUNTS. As shown in the schedule of Class II sales
charges, larger purchases may result in lower sales charges to you. For purposes
of determining the amount of purchases using the Right of Accumulation and
Letter of Intent privileges, you may combine your purchase with:
- purchases by your spouse or his, her or your joint account or for the
account of any minor children, and
- the aggregate investment of any trustee or other Institutional Investor
for you and/or your spouse or your minor children.
A trustee or custodian of any qualified pension or profit sharing plan may
combine its aggregate purchases.
OTHER. Class II shares also incur Shareholder Servicing Fees. See discussion
under "What Advisory And Other Fees Does The Portfolio Pay? - Distribution Plan
and Shareholder Servicing Plans."
CLASS III
- ---------
Class III shares are bought without a front-end load; that is, the offering
price for such shares will be their NAV. Class III shares incur Distribution
Fees and Shareholder Servicing Fees. See discussion under "What Advisory And
Other Fees Does The Portfolio Pay? - Distribution Plan and Shareholder Servicing
Plans."
CLASS I, II AND III
- -------------------
HOW ARE PORTFOLIO SHARES VALUED?
The term "net asset value per share," or NAV, means the worth of one share.
The NAV of each Class is calculated by adding that Class' pro rata share of the
value of all securities and other assets attributable to the Portfolio,
deducting that Class' pro rata share of Portfolio liabilities, further deducting
Class specific liabilities, and dividing the result by the number of shares
outstanding in that Class.
The Portfolio is open for business each day that both the NYSE and the New
York Federal Reserve are open (a Business Day). The NAV is calculated at the
close of the Portfolio's Business Day, which coincides with the close of regular
trading of the NYSE (normally 4:00 p.m. Eastern Time).
The Portfolio's securities and other assets are valued primarily on the basis
of market quotations furnished by pricing services, or, if quotations are not
available, by a method that the Trustees believe accurately reflects fair value.
DISTRIBUTION OPTIONS: The Portfolio earns interest from its bond, money
market, and other fixed-income investments. These are passed along as dividend
distributions. The Portfolio may realize capital gains
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if it sells securities for a higher price than it paid for them. These are
passed along as capital gain distributions. Income dividends for the Tennessee
Tax-Free Portfolio are declared daily and paid monthly.
When you fill out your account application, you can specify how you want to
receive your distributions. Currently, there are two available options:
1. REINVESTMENT OPTION. Your dividend distributions and capital gain
distributions, if any, will be automatically reinvested in additional shares of
the Portfolio. Reinvestment of distributions will be made at that day's NAV. If
you do not indicate a choice on your application, you will be assigned this
option.
2. CASH OPTION. You will be sent a check for each dividend and capital gain
distribution, if any. Distribution checks will be mailed no later than seven
days after the last day of the month.
3. INCOME-EARNED OPTION. Your capital gain distributions, if any, will be
automatically reinvested, but you will be sent a check for any dividend
distribution.
HOW ARE EXCHANGES MADE?
An exchange is the redemption of shares of one Portfolio and the purchase of
shares of another. The exchange privilege is a convenient way to sell and buy
shares of other Portfolios registered in an investor's state. Except as noted
below, the Portfolio's shares may be exchanged for the same Class shares of
other First Funds Portfolios. The redemption and purchase will be made at the
next determined NAV after the exchange request is received and accepted by
CGFSC. You may execute exchange transactions by calling CGFSC at 1-800-442-1941
(option 2) prior to 4:00 p.m. Eastern Time on any Business Day.
Class II shares of the First Funds Money Market Portfolios are not currently
available for investment. Investors in Class II shares wishing to exchange into
one of the Money Market Portfolios will receive Class III shares.
When making an exchange or opening an account in another Portfolio by
exchange, the registration and tax identification numbers of the two accounts
must be identical. In order to open a new account through exchange, the minimum
initial investment requirements must be met.
Each exchange may produce a gain or loss for tax purposes. In order to protect
the Portfolio's performance and its shareholders, Martin discourages frequent
exchange activity by investors in response to short-term market fluctuations.
The Portfolio reserves the right to refuse any specific purchase order,
including certain purchases by exchange if, in Martin's opinion, the Portfolio
would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise be affected adversely. Exchanges or
purchase orders may be restricted or refused if the Portfolio receives or
anticipates individual or simultaneous orders affecting significant portions of
the Portfolio's assets. Although the Portfolio will attempt to give prior notice
whenever it is reasonably able to do so, it may impose these restrictions at any
time. The Portfolio reserves the right to modify or withdraw the exchange
privilege upon 60 days notice and to suspend the offering of shares in any Class
without notice to shareholders. You or your Institutional Investor, if you are
invested in Class I, will receive written confirmation of each exchange
transaction.
Exchanges are generally not permitted from Class I to another Class. Should a
beneficial owner of Class I shares cease to be eligible to purchase shares of
Class I, Class I shares held in an Institutional Account may be converted for
shares of another Class.
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STATEMENTS AND REPORTS
You or, if Class I, the Institutional Investor, will receive a monthly
statement and a confirmation after every transaction that affects the account
registration. A statement with tax information will be mailed by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
or, if Class I, the Institutional Investor, will receive the Portfolio's
financial statements. To reduce expenses, only one copy of the Portfolio's
reports (such as the Prospectus and Annual Report) will be mailed to each
investor or, if Class I, each Institutional Investor. Please write to ALPS to
request additional copies.
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HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------
From time to time the Portfolio may quote the yield of Class I, II or III
shares in advertisements or in reports or other communications with
shareholders. The YIELD is a way of showing the rate of income that the
Portfolio earns on its investments as the percentage of its share price. To
calculate yield, the Portfolio takes the net investment income it earned from
its Portfolio securities for a 30-day period, divides it by the average number
of shares entitled to receive dividends, and expresses the result as an
annualized percentage rate based on share price at the end of the 30-day period.
Yields do not reflect gains or losses from portfolio transactions. Yields are
calculated according to accounting methods that are standardized for all mutual
funds. Because yield accounting methods differ from the methods used for other
accounting purposes, the Portfolio's yield may not equal its distribution rate,
the income paid to an account, or the income reported in financial statements.
The Portfolio also may quote the TAX EQUIVALENT YIELD, which shows the taxable
yield an investor would have to earn, before taxes, to equal the tax-free yield.
A tax equivalent yield is calculated by dividing the tax-exempt current yield by
the result of one minus a combined federal and Tennessee tax rate.
TOTAL RETURN for Class I, II or III of the Portfolio is based on the overall
dollar or percentage change in value of a hypothetical investment, assuming
dividends are reinvested. A CUMULATIVE TOTAL RETURN reflects performance over a
stated period of time. An AVERAGE ANNUAL TOTAL RETURN reflects the hypothetical
annually compounded rate that would have produced the same cumulative total
return if performance had been constant over the entire period. Because average
annual returns tend to smooth out variations in performance, you should
recognize that they are not the same as actual year-by-year results. The yield
and total returns of the three Classes of the Portfolio are calculated
separately due to separate expense structures as indicated in the "Summary Of
Portfolio Expenses"; the yields and total returns of Class II and Class III will
be lower than that of Class I.
For additional performance information, contact your Investment Professional
or ALPS for a free Annual Report and Statement of Additional Information for the
Portfolio.
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PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Municipal obligations and other fixed income securities are generally traded
in the over-the-counter market through broker-dealers. Broker-dealers are
utilized to conduct securities transactions for the Portfolio and are chosen
based upon professional ability and quality of service. In addition, the
Portfolio's
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investment advisers may consider a broker-dealer's sales of shares of the
Portfolio or recommendations to its customers that they purchase shares of the
Portfolio as a factor in the selection of broker-dealers to execute transactions
for the Portfolio. In placing business with such broker-dealers, the advisers
will seek the best execution of each transaction.
Higher commissions may be paid to firms that provide research services to the
extent permitted by law. The frequency of Portfolio transactions - the portfolio
turnover rate - will vary from year to year depending on market conditions. The
Portfolio's portfolio turnover rate for the fiscal year ended June 30, 1998 was
______% .
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WHAT IS THE EFFECT OF INCOME TAX ON THIS INVESTMENT?
- --------------------------------------------------------------------------------
The Portfolio intends to distribute substantially all of its net investment
income, and capital gains, if any, to shareholders within each calendar year as
well as on a fiscal year basis. Any net capital gains realized are normally
distributed in December. Income dividends for the Portfolio are declared daily
and paid monthly.
FEDERAL TAXES. Distributions of gains from the sale of assets held by the
Portfolio for more than one year generally are taxable to shareholders at the
applicable mid-term or long-term capital gains rate, regardless of how long they
have owned their Portfolio shares. Distributions from other sources generally
are taxed as ordinary income. Distributions are taxable when they are paid,
whether taken in cash or reinvested in additional shares, except that
distributions declared in October, November or December and paid in January are
taxable as if paid on December 31. The Portfolio will send each investor or, if
Class I, each Institutional Investor, an IRS Form 1099-DIV by January 31.
Federally tax-free interest earned by the Portfolio is federally tax-free when
distributed as income dividends. If the Portfolio earns federally taxable income
from any of its investments, it will be distributed as a taxable dividend. Gains
from the sale of tax-free bonds held by the Portfolio for more than one year
results in a taxable capital gain distribution. Short-term capital gains and a
portion of the gain on bonds purchased at a discount are taxed as dividends.
STATE TAXES. In the opinion of Fund counsel, Baker, Donelson, Bearman &
Caldwell, Memphis, Tennessee, distributions received from the Portfolio will not
be subject to Tennessee personal income taxes to the extent such distributions
are attributable to interest on bonds or securities of the U.S. government or
any of its agencies or instrumentalities, or on bonds or securities issued by
the State of Tennessee or any county, municipality or political subdivision of
Tennessee, including any agency, board, authority or commission thereof, without
regard to maturity.
REDEMPTIONS AND EXCHANGES. A capital gain or loss may be realized when shares
of the Portfolio are redeemed or exchanged. For most types of accounts, the
Portfolio will report the proceeds of redemptions to each shareholder or, if
Class I, each Institutional Investor and the IRS annually. However, the tax
treatment also depends on the purchase price and the shareholder's personal tax
position ."BUYING A DIVIDEND." On the record date for a distribution of income
of capital gains, the Portfolio's share price is reduced by the amount of the
distribution. If shares are bought just before the record date ("buying a
dividend"), the full price for the shares will be paid, and a portion of the
price may be received back as a taxable distribution. Consult your tax advisor
for more information.
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OTHER TAX INFORMATION. The information above is only a summary of some of the
federal and Tennessee tax consequences generally affecting the Portfolio and its
shareholders, and no attempt has been made to discuss individual tax
consequences. You should consult your tax adviser for details and up-to-date
information on the tax laws in your state to determine whether the Portfolio is
suitable given a your particular tax situation.
When you sign an account application, you will be asked to certify that your
taxpayer identification number is correct and that you are not subject to backup
withholding for failing to report income to the IRS. If you do not comply with
IRS regulations, the IRS can require the Portfolio to withhold 31% of
distributions from your account.
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WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY?
- --------------------------------------------------------------------------------
INVESTMENT ADVISORY AND MANAGEMENT AND SUB-ADVISORY AGREEMENTS. For managing
its investment and business affairs, the Tennessee Tax-Free Portfolio is
obligated to pay First Tennessee a monthly management fee at the annual rate of
.50% of its average net assets. First Tennessee has voluntarily agreed to waive
its entire fee. This voluntary waiver can be discontinued at any time.
Under the Investment Advisory and Management Agreement, First Tennessee may,
with the prior approval of the Trustees and the shareholders of the Portfolio,
engage one or more sub-advisers which may have full investment discretion to
make all determinations with respect to the investment and reinvestment of all
or any portion of the Portfolio's assets, subject to the terms and conditions of
the investment advisory agreement and the written agreement with any such sub-
adviser. In the event one or more sub-advisers is appointed by First Tennessee,
First Tennessee shall monitor and evaluate the performance of such sub-advisers,
allocate Portfolio assets to be managed by such sub-advisers, recommend any
changes in or additional sub-advisers when appropriate and compensate each sub-
adviser out of the investment advisory fee received by First Tennessee from the
Portfolio.
First Tennessee has experience as an investment adviser to individual,
corporate and institutional advisory clients, pension plans and collective
investment funds, with approximately $ billion in assets under
administration (including nondiscretionary accounts) and $ billion in
assets under management as of June 30, 1998, as well as experience in
supervising sub-advisers.
Martin serves as Sub-Adviser subject to the supervision of First Tennessee and
pursuant to the authority granted to it under its Sub-Advisory Agreement with
First Tennessee. In January 1998, Martin became an investment advisory
subsidiary of First Tennessee National Corporation, which also owns First
Tennessee. Martin and its predecessors have been in the investment advisory
business for over 8 years and have considerable experience in securities
selection, including expertise in the selection of fixed-income securities.
Martin has not previously advised or sub-advised a registered investment company
-
such as First Funds, although Martin is subject to the supervision of First
Tennessee, which has a history of investment management since 1929 and has
served as the investment adviser to First Funds since its inception in 1992.
First Tennessee is obligated to pay Martin a monthly sub-advisory fee at the
annual rate of 0.30% of the Portfolio's average net assets. The Portfolio is
not responsible for paying any portion of Martin's sub-advisory fee. Martin has
agreed to voluntarily waive its sub-advisory fee, although this waiver could be
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discontinued in whole or in part at any time. Martin's principal office is
located at Two Centre Square, Suite 200, 625 South Gay Street, Knoxville, TN
37902.
ADMINISTRATOR AND DISTRIBUTOR. ALPS, 370 17th Street, Suite 3100, Denver,
Colorado 80202, serves as the Administrator and Distributor for the Portfolio.
As Administrator, ALPS assists in the Portfolio's administration and operation,
including but not limited to, providing office space and various legal and
operational services in connection with the regulatory requirements applicable
to each Portfolio. ALPS is entitled to and receives from the Portfolio a monthly
fee at the annual rate of .15% of average net assets. ALPS has agreed to
voluntarily waive one half of the .50% 12b-1 fee applicable to Class III of the
Portfolio or .25% of that Class' average net assets. ALPS reserves the right to
modify or terminate this waiver of 12b-1 expense at any time.
First Tennessee serves as the Co-Administrator for the Portfolio. As the Co-
Administrator, First Tennessee assists in the Portfolio's operation, including
but not limited to, providing non-investment related research and statistical
data and various operational and administrative services. First Tennessee is
entitled to and receives from the Portfolio a monthly fee at the annual rate of
.05% of average net assets.
As the Distributor, ALPS sells shares of the Portfolio as agent on behalf of
the Trust at no additional cost to the Trust. First Tennessee and its affiliates
do not participate in and are not responsible for selling as an agent on behalf
of the Trust, underwriting or distributing Trust shares. Consistent with
applicable law, affiliates of First Tennessee may receive commissions or asset-
based fees.
TRANSFER AGENT AND CUSTODIAN. Chase Global Funds Services Company, a division
of Chase Manhattan Bank, N.A. (CGFSC), provides transfer agent and related
services for the Portfolio. Chase Manhattan Bank, N. A. is Custodian of the
Portfolio's assets.
PRICING AND ACCOUNTING. CGFSC also serves as the Fund Accountant and thereby
calculates the NAV and dividends of each class and maintains the portfolio and
general accounting records.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICING PLANS. The Trustees have adopted
a Distribution Plan on behalf of Class III of the Portfolio pursuant to Rule
12b-1 (the Rule) under the 1940 Act, as amended. The NASD subjects asset-based
sales charges to its maximum sales charge rule. Fees paid pursuant to the
Portfolio's Distribution Plan will be limited by the restrictions imposed by the
NASD rule. The Distribution Plan provides for payment of a fee to ALPS at the
annual rate of up to .75% of the average net assets of Class III; however, the
Trustees have limited such fees to .50% of Class III's average net assets. ALPS
has agreed to voluntarily waive one half of the 0.50% 12b-1 fee applicable to
Class III of the Portfolio or 0.25% of that Class' average net assets. All or a
portion of these fees will in turn be paid to Investment Professionals as
compensation for selling shares of Class III and for providing ongoing sales
support services. The Trustees have also adopted Shareholder Servicing Plans on
behalf of Class II and Class III of the Portfolio under which Investment
Professionals may be paid at an annual rate of up to .25% of the average net
assets of each Class for shareholder services and account maintenance including
responding to shareholder inquiries, directing shareholder communications,
account balance maintenance and dividend posting. Shareholder Servicing Fees for
Class II or Class III have not currently been authorized by the Board of
Trustees although such fees may become effective at a future time. The
Distribution Fees are expenses of Class III, and the Shareholder Servicing Fees
would be expenses of Class II and III in addition to the Management Fee, and
Administration and Co-Administration Fees, and would reduce the net income and
total return of both Classes.
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HOW IS THE PORTFOLIO ORGANIZED?
- --------------------------------------------------------------------------------
The Tennessee Tax-Free Portfolio is a non-diversified portfolio of First
Funds, an open-end management investment company organized as a Massachusetts
business trust by a Declaration of Trust dated March 6, 1992, as amended and
restated on September 4, 1992. The Portfolio consists of three separate Classes.
The Trustees supervise the Trust's activities and review its contractual
arrangements with companies that provide the Trust with services. The Trust is
not required to hold annual shareholder meetings, although special meetings may
be called for a specific Portfolio or class with respect to issues affecting
that Portfolio or Class, or the Trust as a whole, for purposes such as electing
or removing Trustees, changing fundamental policies or approving investment
advisory agreements. Shareholders receive one vote for each share owned and
fractional votes for fractional shares owned. A Portfolio or Class votes
separately with respect to issues affecting only that Portfolio or Class.
Pursuant to the Declaration of Trust, the Trustees have the authority to issue
additional Classes of shares for the Portfolio.
PORTFOLIO MANAGEMENT
Ralph W. Herbert, Vice President and Fixed Income Portfolio Manager with
Martin, is a co-manager for the Tennessee Tax-Free Portfolio. Mr. Herbert has
over 19 years of experience in the financial services industry and specializes
in fixed-income securities. Mr. Herbert is a 1977 graduate of The University of
Tennessee. Ted L. Flickinger, Jr., Senor Vice President and Fixed_Income
Portfolio Manager with Martin, co-manages the Tennessee Tax-Free Portfolio with
Mr. Herbert. Mr. Flickinger is a Chartered Financial Analyst and has over 20
years of experience in the investment management industry, at least 8 of which
have been with Martin concentrating on fixed-income securities. Mr. Flickinger
is a 1977 graduate of The University of Tennessee.
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INVESTMENT INSTRUMENTS, TRANSACTIONS, STRATEGIES AND RISKS.
- --------------------------------------------------------------------------------
The following paragraphs provide a brief description of the securities in
which the Portfolio may invest and the transactions it may make. The Portfolio
is not limited by this discussion, however, and may purchase other types of
securities and may enter into other types of transactions if they are consistent
with the Portfolio's investment objective and policies.
DELAYED DELIVERY TRANSACTIONS. The Portfolio may buy and sell obligations on
a when-issued or delayed delivery basis, with payment and delivery taking place
at a future date. The market value of obligations purchased in this way may
change before the delivery date, which could increase fluctuations in the
Portfolio's share price, yield, and return. Ordinarily, the Portfolio will not
earn interest on obligations until they are delivered.
DEMAND FEATURES AND STAND-BY COMMITMENTS. A demand feature is a put that
entitles the security holder to repayment of the principal amount of the
underlying security at any time or at specified intervals. A standby commitment
is a put that entitles the security holder to same-day settlement at amortized
cost plus accrued interest.
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ILLIQUID INVESTMENTS. Under guidelines established by the Trustees, Martin
determines the liquidity of the Portfolio's investments. The absence of a
trading market can make it difficult to ascertain a market value for illiquid
investments. Disposing of illiquid investments may involve time-consuming
negotiation and legal expense, and it may be difficult or impossible for the
Portfolio to sell them promptly at an acceptable price. The Portfolio may invest
up to 15% of its assets in illiquid investments and private placements.
RESTRICTED SECURITIES. The Portfolio may purchase securities which cannot be
sold to the public without registration under the Securities Act of 1933
(restricted securities). Unless registered for sale, these securities can only
be sold in privately negotiated transactions or pursuant to an exemption from
registration. Provided that the security has a demand feature of seven days or
less, or a dealer or institutional trading market exists, these restricted
securities are not treated as illiquid securities for the purposes of the
Portfolio's investment limitations. Investing in restricted securities could
have the effect of increasing the level of Portfolio illiquidity if qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
LETTERS OF CREDIT. Issuers or financial intermediaries who provide demand
features or standby commitments often support their ability to buy obligations
on demand by obtaining LETTERS OF CREDIT (LOCs) or other guarantees from
domestic or foreign banks. LOCs also may be used as credit supports for
municipal instruments. Martin may rely upon its evaluation of a bank's credit
in determining whether to purchase an instrument supported by an LOC. In
evaluating a foreign bank's credit, Martin will consider whether adequate
public information about the bank is available and whether the bank may be
subject to unfavorable political or economic developments, currency controls, or
other governmental restrictions that might affect the bank's ability to honor
its credit commitment.
MUNICIPAL LEASE OBLIGATIONS are issued by a state and local government or
authority to acquire land and a wide variety of equipment and facilities. These
obligations typically are not fully backed by the municipality's credit, and
their interest may become taxable if the lease is assigned. If funds are not
appropriated for the following year's lease payments, the lease may terminate,
with the possibility of significant loss to the Portfolio. CERTIFICATES OF
PARTICIPATION in municipal lease obligations or installment sales contracts
entitle the holder to a proportionate interest in the lease- purchase payments
made.
MUNICIPAL REFUNDING COLLATERALIZED MORTGAGE OBLIGATIONS (MR CMOs) are CMOs
originated from revenue bonds issued to fund low interest rate mortgages for
first time home buyers with low to moderate incomes. The security is considered
a "mortgage related security" for investment purposes; therefore, banks have no
investment limitations or restrictions for purchasing the security for their own
account. MR CMOs are attractive for investors seeking triple-A credit quality
with above average yield.
CMOs are pass-through securities collateralized by mortgages or mortgage-
backed securities. CMOs are issued in classes and series that have different
maturities and often are retired in sequence. Payment of principal and interest
may be largely dependent upon the cash flows generated by the assets backing the
securities.
MUNICIPAL SECURITIES include GENERAL OBLIGATION SECURITIES, which are backed
by the full taxing power of a municipality, and REVENUE SECURITIES, which are
backed by the revenues of a specific tax, project, or facility. INDUSTRIAL
REVENUE BONDS are a type of revenue bond backed by the credit and security of a
private issuer and may involve greater risk. PRIVATE ACTIVITY MUNICIPAL
SECURITIES, which may be subject to the federal alternative minimum tax, include
securities issued to finance housing projects, student loans, and
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privately owned solid waste disposal and water and sewage treatment facilities.
TAX AND REVENUE ANTICIPATION NOTES are issued by municipalities in expectation
of future tax or other revenues and are payable from those specific taxes or
revenues. BOND ANTICIPATION NOTES normally provide interim financing in advance
of an issue of bonds or notes, the proceeds of which are used to repay the
anticipation notes.
TAX-EXEMPT COMMERCIAL PAPER are promissory notes issued by municipalities to
help finance short-term capital or operating needs.
RESOURCE RECOVERY BONDS are a type of revenue bond issued to build facilities
such as solid waste incinerators or waste-to-energy plants. Typically, a private
corporation will be involved, at least during the construction phase, and the
revenue stream will be secured by fees or rents paid by municipalities for use
of the facilities. The viability of a resource recovery project, environmental
protection regulations, and project operator tax incentives may affect the value
and credit quality of resource recovery bonds.
REFUNDING CONTRACTS. The Portfolio may purchase securities on a when-issued
basis in connection with the refinancing of an issuer's outstanding
indebtedness. Refunding contracts require the issuer to sell and the Portfolio
to buy refunded municipal obligations at a stated price and yield on a
settlement date that may be several months or several years in the future.
Although the Portfolio may sell its rights under a refunding contract, these
contracts are relatively new and the secondary market for them may be less
liquid than the secondary market for other types of municipal securities.
REPURCHASE AGREEMENTS AND SECURITIES LOANS. In a repurchase agreement, the
Portfolio agrees to purchase a security subject to the seller's agreement to
repurchase it at a mutually agreed upon date and price. The Portfolio may also
make securities loans to broker-dealers and institutional investors. In the
event of the bankruptcy of the other party to a repurchase agreement or a
securities loan, the Portfolio could experience delays in recovering its cash or
the securities it lent. To the extent that, in the meantime, the value of the
obligations purchased had decreased, or the value of obligations lent had
increased, the Portfolio could experience a loss. In all cases, Martin must
find the creditworthiness of the other party to the transaction satisfactory.
U.S. GOVERNMENT OBLIGATIONS are debt obligations issued or guaranteed by the
U.S. Treasury or by an agency or instrumentality of the U.S. government. Not all
U.S. government obligations are backed by the full faith and credit of the
United States. For example, obligations issued by the Federal Farm Credit Bank
or by the Federal National Mortgage Association are supported by the agency's
right to borrow money from the U.S. Treasury under certain circumstances.
Obligations issued by the Federal Home Loan Bank are supported only by the
credit of the agency. There is no guarantee that the government will support
these types of obligations, and ,therefore, they involve more risk than other
government obligations.
U.S. TREASURY OBLIGATIONS are obligations issued by the United States and
backed by its full faith and credit.
VARIABLE AND FLOATING RATE INSTRUMENTS, including certain participation
interests in municipal obligations, have interest rate adjustment formulas that
help to stabilize their market values. Many variable or floating rate
instruments also carry demand features that permit the Portfolio to sell them at
par value plus accrued interest on short notice.
26
<PAGE>
INVESTMENT ADVISER AND CO-ADMINISTRATOR
---------------------------------------
First Tennessee Bank National Association
Memphis, TN
SUB-INVESTMENT ADVISER
----------------------
Martin & Company, Inc.
----------------------
Knoxville, TN
-------------
OFFICERS
--------
Richard C. Rantzow, President
Jeremy O. May, Treasurer
James V. Hyatt, Secretary
TRUSTEES
--------
Thomas M. Batchelor
John A. DeCell
L.R. Jalenak, Jr.
Larry W. Papasan
Richard C. Rantzow
ADMINISTRATOR AND DISTRIBUTOR
-----------------------------
ALPS Mutual Funds Services, Inc.
Denver, CO
TRANSFER AND SHAREHOLDER SERVICING AGENT
----------------------------------------
Chase Global Funds Services Company
Boston, MA
CUSTODIAN
---------
Chase Manhattan Bank, N.A.
New York, NY
27
<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 __, 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 __, 1998, as
it may be amended or supplemented from time to time. Please retain this
Statement for future reference. The financial statements and financial
highlights of the Growth & Income, Capital Appreciation and Bond Portfolios are
included in the Annual Report for the fiscal year ended June 30, 1998 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
Intermediate Bond Portfolio are included in the Annual Report for the fiscal
year ended June 30, 1998 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 Semi-Annual Report for that period. 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 4
PORTFOLIO TRANSACTIONS 12
VALUATION OF PORTFOLIO SECURITIES 13
PERFORMANCE 14
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION 17
DISTRIBUTIONS AND TAXES 18
TRUSTEES AND OFFICERS 19
INVESTMENT ADVISORY AGREEMENTS 21
ADMINISTRATION AGREEMENT AND OTHER CONTRACTS 22
DESCRIPTION OF THE TRUST 25
FINANCIAL STATEMENTS 28
APPENDIX 28
Investment Adviser (Growth & Income, Bond and Intermediate Bond Portfolios)
- ------------------
First Tennessee Bank National Association (First Tennessee)
Sub-Adviser (Growth & Income and Bond Portfolios)
- -----------
Highland Capital Management Corp. (Highland or a Sub-Adviser)
Sub-Adviser (Intermediate Bond Portfolio)
- -----------
Martin & Company, Inc.(Martin or a Sub-Adviser)
1
<PAGE>
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)
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;
2
<PAGE>
(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.
(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
3
<PAGE>
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. (Highland or a Sub-Adviser) to act as
Sub-Adviser to the Growth & Income and Bond Portfolios, and has engaged Martin &
Company, Inc. (Martin or a Sub-Adviser) as Sub-Adviser to the Intermediate Bond
Portfolio. First Tennessee and Investment Advisers, Inc. (IAI) act as Co-
Advisers to the Capital Appreciation Portfolio. The activities of the Sub-
Advisers 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
4
<PAGE>
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.
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.
5
<PAGE>
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 Portfolio's investment adviser.
A Portfolio may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example, if a
Portfolio owned securities denominated in pounds sterling, it could enter into a
forward contract to sell pounds sterling in return for U.S. dollars to hedge
against possible declines in the pound's value. Such a hedge, sometimes referred
to as a "position hedge," would tend to offset both positive and negative
currency fluctuations, but would not offset changes in security values caused by
other factors. A Portfolio could also hedge the position by selling another
currency expected to perform similarly to the pound sterling - for example, by
entering into a forward contract to sell Deutsche marks or European Currency
Units in return for U.S. dollars. This type of hedge, sometimes referred to as a
"proxy hedge," could offer advantages in terms of cost, yield, or efficiency,
but generally would not hedge currency exposure as effectively as a simple hedge
into U.S. dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedged securities
are denominated.
A Portfolio may enter into forward contracts to shift its investment exposure
from one currency into another. This may include shifting exposure from U.S.
dollars to a foreign currency, or from one foreign currency to another foreign
currency. For example, if a Portfolio held investments denominated in Deutsche
marks, such Portfolio could enter into forward contracts to sell Deutsche marks
and purchase Swiss Francs. This type of strategy, sometimes known as a "cross
hedge," will tend to reduce or eliminate exposure to the currency that is sold,
and increase exposure to the currency that is purchased, much as if
6
<PAGE>
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 advisers 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 appropriate 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, a
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 appropriate 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,
7
<PAGE>
among others, equity real estate investment trusts, which own properties, and
mortgage real estate investment trusts, which make construction, development,
and long-term mortgage loans. Equity real estate investment trusts may be
affected by changes in the value of the underlying property owned by the trusts,
while mortgage real estate investment trusts may be affected by the quality of
credit extended. Equity and mortgage real estate investment trusts are dependent
upon management skill, are not diversified, and are subject to the risks of
financing projects. Such trusts are also subject to heavy cash flow dependency,
defaults by borrowers, self liquidation, and the possibilities of failing to
qualify for tax-free pass-through of income under the Internal Revenue Code and
failing to maintain exemption from the Investment Company Act of 1940 (the 1940
Act).
Repurchase Agreements are transactions in which a Portfolio purchases a security
and simultaneously commits to resell that security at an agreed upon price and
date within a number of days from the date of purchase. The resale price
reflects the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or maturity of the purchased security. A repurchase
agreement involves the obligation of the seller to pay the agreed upon price.
This obligation is in effect secured by the underlying security having a value
at least equal to the amount of the agreed upon resale price. Each Portfolio may
enter into a repurchase agreement with respect to any security in which it is
authorized to invest. While it presently does not appear possible to eliminate
all risks from the transactions (particularly the possibility of a decline in
the market value of the underlying securities, as well as delay and costs to
each Portfolio in connection with bankruptcy proceedings), it is the policy of
each Portfolio to limit repurchase agreements to those parties whose
creditworthiness has been reviewed and found satisfactory by the appropriate
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 appropriate 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 appropriate
Sub-Adviser or IAI to be of good standing. Furthermore, they will only be made
if, in the appropriate Sub-Adviser's or IAI's judgment, the consideration to be
earned from such loans would justify the risk.
8
<PAGE>
First Tennessee, Highland, Martin 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 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
appropriate 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
9
<PAGE>
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.
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<PAGE>
COMBINED POSITIONS. Each Portfolio may purchase and write options in
- -------------------
combination with each other, or in combination with forward contracts, to adjust
the risk and return characteristics of the overall position. For example, the
Portfolios may purchase a put option and write a call option on the same
underlying instrument, in order to construct a combined position whose risk and
return characteristics are similar to selling a futures contract. Another
possible combined position would involve writing a call option at one strike
price and buying a call option at a lower price, in order to reduce the risk of
the written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types of
- -----------------------------
exchange-traded options contracts, it is likely that the standardized contracts
available will not match the Portfolios' current or anticipated investments
exactly. Each Portfolio may invest in options contracts based on securities
with different issuers, maturities, or other characteristics from the securities
in which each typically invests.
Options prices can also diverge from the prices of their underlying instruments,
even if the underlying instruments match the Portfolios' investments well.
Options prices are affected by such factors as current and anticipated short-
term interest rates, changes in volatility of the underlying instrument, and the
time remaining until expiration of the contract, which may not affect security
prices the same way. Imperfect correlation may also result from differing levels
of demand in the options markets and the securities markets, from structural
differences in how options and securities are traded, or from imposition of
daily price fluctuation limits or trading halts. The Portfolios may purchase or
sell options contracts with a greater or lesser value than the securities it
wishes to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in the Portfolios' options
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
LIQUIDITY OF OPTIONS. There is no assurance a liquid secondary market will
- ---------------------
exist for any particular options contract at any particular time. Options may
have relatively low trading volume and liquidity if their strike prices are not
close to the underlying instrument's current price. On volatile trading days
when the price fluctuation limit is reached or a trading halt is imposed, it may
be impossible for the Portfolios to enter into new positions or close out
existing positions. If the secondary market for a contract is not liquid because
of price fluctuation limits or otherwise, it could prevent prompt liquidation of
unfavorable positions, and potentially could require the Portfolios to continue
to hold a position until delivery or expiration regardless of changes in its
value. As a result, the Portfolios' access to other assets held to cover its
options or futures positions could also be impaired.
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
11
<PAGE>
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, Highland, Martin 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 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.
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<PAGE>
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, 1998 and 1997, the portfolio turnover rates
were __% and 25% for the Growth & Income Portfolio, and __% and 56% for the
Bond Portfolio. The Growth & Income Portfolio paid brokerage commissions in the
amounts of $_____________, $147,563 and $276,190 during the fiscal years ended
June 30, 1998, 1997 and 1996, respectively. For the fiscal year ended June 30,
1998, the portfolio turnover rate was __% for the Capital Appreciation
Portfolio. The Capital Appreciation Portfolio paid brokerage commissions in the
amount of $______________ for the fiscal year ended June 30, 1998. During the
fiscal years ended June 30, 1998, 1997 and 1996, 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 and Intermediate Bond Portfolios
during the last three fiscal years.
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
13
<PAGE>
accurately reflect fair value because it takes into account appropriate factors
such as institutional trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other market
data, without exclusive reliance upon quoted, exchange, or over-the-counter
prices.
Use of pricing services has been approved by the Trustees. Securities and other
assets for which there is no readily available market are valued in good faith
by a committee appointed by the Trustees. The procedures set forth above need
not be used to determine the value of the securities owned by a Portfolio if, in
the opinion of a committee appointed by the Trustees, some other method (e.g.,
closing over-the-counter bid prices in the case of debt instruments traded on an
exchange) would more accurately reflect the fair market value of such
securities.
Generally, the valuation of foreign and domestic equity securities, as well as
corporate bonds, U.S. government securities, money market instruments, and
repurchase agreements, is substantially completed each day at the close of the
NYSE. The values of any such securities held by the Portfolios are determined
as of such time for the purpose of computing the Portfolios' net asset values
per share (NAV). Foreign security prices are furnished by independent brokers or
quotation services which express the value of securities in their local
currency. Chase Global Funds Services Company, the Transfer Agent, gathers all
exchange rates daily at the close of the NYSE using the last quoted price on
the local currency and then translates the value of foreign securities from
their local currency into U.S. dollars. Any changes in the value of forward
contracts due to exchange rate fluctuations and days to maturity are included in
the calculation of the net asset value. If an extraordinary event that is
expected to materially affect the value of a portfolio security occurs after the
close of an exchange on which that security is traded, then the security will be
valued as determined in good faith.
PERFORMANCE
For each Class of the Portfolios, YIELDS used in advertising are computed by
dividing interest income for a given 30-day or one-month period, net of
expenses, by the average number of shares entitled to receive dividends during
the period, dividing this figure by the NAV at the end of the period and
annualizing the result (assuming compounding of income) in order to arrive at an
annual percentage rate. Income is calculated for purposes of yield quotations in
accordance with 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.
14
<PAGE>
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 June 30,
1998, the 30-day yields for Class I, II and III of the Bond Portfolio were
___%, ___% and ___%, respectively; and ___%, ___% and ___% for the Intermediate
Bond Portfolio, respectively.
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 June
30, 1998 for each Class of the Growth & Income, Capital Appreciation, Bond and
Intermediate Bond Portfolios :
<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)% N/A (6.88)% N/A (1.40)%
Intermediate Bond
</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
15
<PAGE>
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 of the Lehman Brothers
16
<PAGE>
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.
17
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ADDITIONAL CLASS II AND CLASS III INFORMATION
- ---------------------------------------------
SYSTEMATIC INVESTING PROGRAM. Investors can make regular investments in Class
- -----------------------------
II and Class III with Systematic Investing by completing the appropriate section
on the account application and attaching a voided personal check. If the bank
account is jointly owned, make sure that all owners sign. Investments may be
made monthly by automatically deducting $25 or more from your checking account.
This monthly purchase amount may be changed at any time. There is a $250 minimum
initial investment requirement for this option. For employees of First Tennessee
Bank National Association or any of its affiliates, who participate in the
Systematic Investing Program, the minimum initial investment requirement is $50.
Accounts will be drafted on or about the first business day of every month.
Systematic Investing may be canceled at any time without payment of a
cancellation fee. Investors will receive a confirmation from their securities
broker or financial institution (Investment Professional), or from the Transfer
Agent for every transaction, and a debit entry will appear on your bank
statement.
SYSTEMATIC WITHDRAWAL PLAN. Investors can have monthly, quarterly or semi-
- ---------------------------
annual checks sent from their account to you, to a person named by them, or to
their bank checking account. The Systematic Withdrawal Plan payments are drawn
from share redemptions and must be in the amount of $100 or more per Portfolio
per transaction. If Systematic Withdrawal Plan redemptions exceed income
dividends earned on shares, an account eventually may be exhausted. Contact the
Investment Professional for more information.
DISTRIBUTIONS AND TAXES
DIVIDENDS. A portion of the income distributed by the Equity Portfolios may
- ----------
qualify for the dividends-received deduction available to corporate shareholders
to the extent that the Portfolios' income is derived from qualifying dividends.
Because the Portfolios may also earn other types of income, such as interest,
income from securities loans, non-qualifying dividends and short-term capital
gains, the percentage of dividends from each Portfolio that qualifies for the
deduction will generally be less than 100%. Each Portfolio will notify corporate
shareholders annually of the percentage of portfolio dividends which qualify for
the dividends received deduction. Because the income earned by the Bond
Portfolios is primarily derived from interest, dividends from each such
Portfolio generally will not qualify for the dividends-received deduction
available to corporations. A portion of each Portfolio's dividends derived from
certain U.S. government obligations may be exempt from state and local taxation.
Gains (losses) attributable to foreign currency fluctuations are generally
taxable as ordinary income and therefore increase (decrease) dividend
distributions. Each Portfolio will send each shareholder a notice in January
describing the tax status of dividends and capital gain distributions for the
prior year.
CAPITAL GAIN DISTRIBUTIONS. Distributions of gains from the sale of assets held
- ---------------------------
by a Portfolio for more than one year generally are taxable to shareholders of
that Portfolio at the applicable mid-term or long-term capital gains rate, as
designated by the Portfolio, regardless of how long the shareholders have owned
their Portfolio shares.
Short-term capital gains distributed by a 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.
18
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REDEMPTIONS AND EXCHANGES. A loss on the redemption or exchange of Portfolio
- -----------------------------
shares may not be deductible if the shareholder invests in the Portfolio within
thirty days before or after the redemption. Any loss on the or exchange of
Portfolio shares held for six months or less will be disallowed to the extent of
the amount of any tax-free dividends received on the shares. Future Treasury
Regulations may shorten this six-month period to 31 days. In addition, loss on
the redemption or exchange of Portfolio shares held for six months or less will
be treated as long-term capital loss to the extent of any long-term capital gain
distributions received on the shares.
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.
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.
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust are listed below. Each Trustee
or officer that is an "interested person" (as defined in the 1940 Act) by virtue
of his affiliation with First Tennessee or ALPS, is indicated by an asterisk
(*).
THOMAS M. BATCHELOR, age 76, 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.
19
<PAGE>
JOHN A. DECELL, age 62, 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., age 68, 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, age 57, 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, age 60, 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, age 27, 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, age 47, 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, 1998:
<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
- --------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
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 June 30, 1998, the officers and Trustees of the Trust owned less than 1%
of the outstanding shares of any Portfolio.
INVESTMENT ADVISORY AGREEMENTS
The Growth & Income, Bond and Intermediate Bond Portfolios employ First
Tennessee Bank National Association, Memphis, Tennessee, to furnish investment
advisory and other services to each such Portfolio. Under the Investment
Advisory and Management Agreement with each such Portfolio, First Tennessee is
authorized to appoint one or more sub-advisers at First Tennessee's expense.
Highland Capital Management Corp., Memphis, Tennessee, acts as Sub-Adviser to
the Growth & Income and Bond Portfolios. Martin & Company, Inc., Memphis,
Tennessee, acts as Sub-Adviser to the Intermediate Bond Portfolio. Subject to
the direction of the Trustees and of First Tennessee, the Sub-Advisers 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, 1998, 1997 and 1996, First Tennessee earned $___________,
$1,520,039 and $1,076,198 from the Growth & Income Portfolio, respectively,
before waiving $_________, $350,778 and $358,250 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
21
<PAGE>
Intermediate Bond Portfolios, respectively. The fee waivers may be discontinued
at any time. For the fiscal years ended June 30, 1998, 1997 and 1996, First
Tennessee earned $________, $658,049 and $563,748 from the Bond Portfolio,
respectively, before waiving $________, $478,581 and $482,559 of its fees,
respectively. For the fiscal year ended June 30, 1998, First Tennessee earned
$__________ and $_________, respectively, from the Capital Appreciation and
Intermediate Bond Portfolios before waiving these amounts. For the fiscal year
ended June 30, 1998, IAI earned $_________ from the Capital Appreciation
Portfolio and Martin earned $_____________ from the Intermediate Bond Portfolio.
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. As Sub-Adviser, Highland 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 and .33% of Bond Portfolio's average net assets.
As Sub-Adviser, Martin is entitled to receive from First Tennessee a monthly
sub-advisory fee at the annual rate of .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-Advisers, 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-Advisers
and IAI keep First Tennessee informed of the developments materially affecting
each Portfolio. The Sub-Advisers are currently waiving some or all of the fees
they are entitled to receive from First Tennessee.
ADMINISTRATION AGREEMENT AND OTHER CONTRACTS
ADMINISTRATOR AND DISTRIBUTOR. ALPS Mutual Funds Services, Inc. (ALPS, the
- ------------------------------
Administrator and Distributor), is the Administrator and Distributor to each
Portfolio. ALPS, a Colorado corporation, is a broker-dealer registered under the
Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc.
As the Administrator, ALPS assists in each Portfolio's administration and
operation, including, but not limited to, providing office space and various
legal and accounting services in connection with the regulatory requirements
applicable to each Portfolio. ALPS is entitled to and receives from each
Portfolio a monthly fee at the annual rate of .15% of average net assets.
For the fiscal years ended June 30, 1998, 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, 1998, 1997 and
1996, ALPS earned administration fees in the amount of $________, $179,468 and
$153,749 from the Bond Portfolio, respectively.. For the fiscal year ended June
30, 1998, ALPS earned administration fees in the amount of $________ from the
Intermediate Bond Portfolio. For the fiscal year ended June 30, 1998, ALPS
earned administration fees in the amount of $________ from the Capital
Appreciation Portfolio.
22
<PAGE>
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, 1998, 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, 1998, 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. For the
fiscal year ended June 30, 1998, First Tennessee earned co-administration fees
in the amount of $_____, from the Intermediate Bond Portfolio before waiving
$_____ For the fiscal year ended June 30, 1998, First Tennessee earned co-
administration fees in the amount of $_____from the Capital Appreciation
Portfolio before waiving $_____.
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, CGFSC 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, although the Trustees may
limit such fees from time to time for one or more Portfolios (see the current
Prospectus for each Portfolio for information concerning such limitations).
(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).
23
<PAGE>
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.
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, 1998, Class III of the Growth & Income, Bond,
Capital Appreciation and Intermediate Bond Portfolios paid distribution fees in
the amounts of $314,518 and $21,842, $___________ and $____________,
respectively. All of these fees were paid as compensation to dealers.
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
24
<PAGE>
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, 1998, the Growth & Income, Bond, Intermediate
Bond and Capital Appreciation Portfolios paid shareholder servicing fees in the
following amounts:
<TABLE>
Growth & Income Bond Intermediate Bond Capital Appreciation
Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- ---------
<S> <C> <C> <C>
</TABLE>
Class II
Class III
Banking laws and regulations, including the Glass-Steagall Act as currently
interpreted by the Board of Governors of the Federal Reserve System, prohibit a
bank holding company registered under the Bank Holding Company Act of 1956 or
any affiliate thereof from sponsoring, organizing, controlling, or distributing
the shares of a registered, open-end investment company continuously engaged in
the issuance of its shares and prohibit banks generally from issuing,
underwriting, selling or distributing securities. The same laws and regulations
generally permit a bank or bank affiliate to act as an investment adviser and
co-administrator and to purchase shares of the investment company as agent for
and upon the order of a customer. In the Trust's and Investment Adviser's
opinion, banks and their affiliates may be paid for investment advisory,
shareholder servicing, recordkeeping and co-administration functions. Changes in
federal or state statutes and regulations pertaining to the permissible
activities of banks and their affiliates or subsidiaries, as well as further
judicial or administrative decisions or interpretations, could prevent a bank
from continuing to perform all or a part of the contemplated services. If a bank
or its affiliates were prohibited from so acting, the Trustees would consider
what actions, if any, would be necessary to continue to provide efficient and
effective shareholder services. In such event, changes in the operation of the
Portfolios might occur, including possible termination of any automatic
investment or redemption or other services then being provided by any bank. It
is not expected that shareholders would suffer any adverse financial
consequences as a result of any of these occurrences. The Portfolios may execute
portfolio transactions with and purchase securities issued by depository
institutions that receive payments under the Plans. No preference will be shown
in the selection of investments for the instruments of such depository
institutions. In addition, state securities laws on this issue may differ from
the interpretations of federal law expressed herein, and banks and other
financial institutions may be required to register as dealers pursuant to state
law.
DESCRIPTION OF THE TRUST
TRUST ORGANIZATION. Growth & Income Portfolio, Bond Portfolio, Capital
- ------------------
Appreciation Portfolio and Intermediate Bond Portfolio are Portfolios of First
Funds (formerly The Masters Group of Mutual Funds), an open-end management
investment company organized as a Massachusetts business trust by a Declaration
of Trust dated March 6, 1992, as amended and restated on September 4, 1992. The
Declaration of Trust permits the Trustees to create additional Portfolios and
Classes. There are nine Portfolios of the Trust, each with three Classes.
The assets of the Trust received for the issue or sale of shares of each
Portfolio and all income, earnings, profits, and proceeds thereof, subject only
to the rights of creditors, are specially allocated to such Portfolio, and
constitute the underlying assets of such Portfolio. The underlying assets of
each Portfolio are segregated on the books of account, and are to be charged
with the liabilities with respect to such
25
<PAGE>
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 July 31, 1998, the following shareholders owned more than 5% of the
outstanding shares of the indicated Class of the Portfolios:
<TABLE>
<CAPTION>
Name and Address Portfolio Class % of Class Held
- ---------------- --------- ----- ---------------
<S> <C> <C> <C>
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
</TABLE>
26
<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
27
<PAGE>
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, 1998 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 independently of this
Statement of Additional Information. The Capital Appreciation Portfolio's
unaudited financial statements and financial highlights for the six months ended
December 31, 1997 are included in the Trust's Semi-Annual Report. The Capital
Appreciation Portfolio's and Intermediate Bond Portfolio's financial statements
and financial highlights for the fiscal year ended June 30, 1998 are included in
the Trust's Annual Report. The Growth & Income, Bond, Capital Appreciation and
Intermediate Bond Portfolios' financial statements and financial highlights are
incorporated herein by reference.
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
28
<PAGE>
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.
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FIRST FUNDS
TENNESSEE TAX-FREE PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION FOR CLASS I, CLASS II, AND CLASS III
OCTOBER ,1998
This Statement is not a prospectus but should be read in conjunction with the
current Prospectus for each Class of Tennessee Tax-Free Portfolio dated October
, 1998. Please retain this Statement for future reference. The Portfolio's
financial statements and financial highlights, included in the Annual Report for
the fiscal year ended June 30, 1998, are incorporated herein by reference. To
obtain additional free copies of this Statement, the Annual Report or the
Prospectus, 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>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
INVESTMENT RESTRICTIONS AND LIMITATIONS 2
INVESTMENT INSTRUMENTS 3
SPECIAL CONSIDERATIONS AFFECTING TENNESSEE 7
PORTFOLIO TRANSACTIONS 8
VALUATION OF PORTFOLIO SECURITIES 10
PERFORMANCE 10
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION 13
DISTRIBUTIONS AND TAXES 14
TRUSTEES AND OFFICERS 16
INVESTMENT ADVISORY AGREEMENT 18
ADMINISTRATION AGREEMENT AND OTHER CONTRACTS 18
DESCRIPTION OF THE TRUST 21
FINANCIAL STATEMENTS 23
APPENDIX 23
</TABLE>
Investment Adviser
- ------------------
First Tennessee Bank National Association (First Tennessee or the Investment
Adviser)
Sub-Investment Adviser
- ----------------------
Martin & Company, Inc. (Martin on the Sub-Adviser)
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)
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INVESTMENT RESTRICTIONS AND LIMITATIONS
The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of the Portfolio's assets that may be invested in
any security or other asset, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined immediately after and
as a result of the Portfolio's acquisition of such security or other asset.
Accordingly, any subsequent change in values, net assets, or other circumstances
will not be considered when determining whether the investment complies with the
Portfolio's investment policies and limitations.
Fundamental policies and investment limitations cannot be changed without
approval by a "majority of the outstanding voting securities" (as defined in the
Investment Company Act of 1940) of the Portfolio. However, except for the
fundamental investment limitations set forth below, the investment policies and
limitations described in this Statement of Additional Information are not
fundamental and may be changed without shareholder approval.
INVESTMENT LIMITATIONS OF TENNESSEE TAX-FREE PORTFOLIO
------------------------------------------------------
THE FOLLOWING ARE TENNESSEE TAX-FREE PORTFOLIO'S FUNDAMENTAL LIMITATIONS SET
FORTH IN THEIR ENTIRETY. THE PORTFOLIO MAY NOT:
(1) issue senior securities, except as permitted under the Investment Company
Act of 1940;
(2) borrow money, except that the Portfolio may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not
exceeding 33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that come to exceed
this amount will be reduced within three days (not including Sundays and
holidays) to the extent necessary to comply with the 33 1/3% limitation;
(3) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities;
(4) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities, or tax-exempt obligations issued or guaranteed by a U.S.
territory or possession or the state of Tennessee or any county,
municipality, or political subdivision of any of the foregoing, including
any agency, board authority, or commission of the foregoing) if, as a
result, 25% or more of the Portfolio's total assets would be invested in
securities of companies whose principal business activities are in the same
industry;
(5) purchase or sell real estate, unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business);
(6) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent
the Portfolio from purchasing or selling options and futures contracts or
from investing in securities or other instruments backed by physical
commodities); or
2
<PAGE>
(7) lend any security or make any other loan if, as a result, more than 33 1/3%
of its total assets would be lent to other parties, but this limit does not
apply to purchases of debt securities or to repurchase agreements.
(8) The Portfolio may, notwithstanding any other fundamental investment policy
or limitation, invest all of its assets in the securities of a single open-
end management investment company with substantially the same fundamental
investment objectives, policies, and limitations as the Portfolio.
THE FOLLOWING LIMITATIONS OF TENNESSEE TAX-FREE PORTFOLIO ARE NOT FUNDAMENTAL
AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL:
(i) To meet federal tax requirements for qualification as a "regulated
investment company," the Portfolio limits its investments so that at the
close of each quarter of its taxable year: (a) with regard to at least
50% of total assets, no more than 5% of total assets are invested in the
securities of a single issuer, and (b) no more than 25% of total assets
are invested in the securities of a single issuer. Limitations (a) and
(b) do not apply to "government securities" as defined for federal tax
purposes.
(ii) The Portfolio does not currently intend during the coming year to
purchase securities on margin, except that the Portfolio may obtain such
short-term credits as are necessary for the clearance of transactions,
and provided that margin payments in connection with futures contracts
and options on futures contracts shall not constitute purchasing
securities on margin.
(iii) The Portfolio may borrow money only (a) from a bank, or (b) by engaging
in reverse repurchase agreements with any party (reverse repurchase
agreements are treated as borrowings for purposes of fundamental
investment limitation 2). The Portfolio will not purchase any security
while borrowings representing more than 5% of its total assets are
outstanding.
(iv) The Portfolio does not currently intend during the coming year to
purchase any security, if, as a result, more than 15% of its net assets
would be invested in securities that are deemed to be illiquid because
they are subject to legal or contractual restrictions on resale or
because they cannot be sold or disposed of in the ordinary course of
business at approximately the prices at which they are valued.
(v) The Portfolio does not currently intend during the coming year to engage
in repurchase agreements or make loans, but this limitation does not
apply to purchases of debt securities.
INVESTMENT INSTRUMENTS
DELAYED DELIVERY TRANSACTIONS. The Portfolio may buy and sell securities on a
- -----------------------------
delayed delivery or when-issued basis. These transactions involve a commitment
by the Portfolio to purchase or sell specific securities at a predetermined
price and/or yield, with payment and delivery taking place after the customary
settlement period for that type of security (and more than seven days in the
future). Typically, no interest accrues to the purchaser until the security is
delivered. The Portfolio may receive fees for entering into delayed delivery
transactions.
3
<PAGE>
When purchasing securities on a delayed delivery basis, the Portfolio assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. Because the Portfolio is not required to pay for securities until
the delivery date, these risks are in addition to the risks associated with the
Portfolio's other investments. If the Portfolio remains substantially fully
invested at a time when delayed delivery purchases are outstanding, the delayed
delivery purchases may result in a form of leverage. When delayed delivery
purchases are outstanding, the Portfolio will set aside appropriate liquid
assets in a segregated custodial account to cover its purchase obligations.
When the Portfolio has sold a security on a delayed delivery basis, the
Portfolio does not participate in further gains or losses with respect to the
security. If the other party to a delayed delivery transaction fails to deliver
or pay for the securities, the Portfolio could miss a favorable price or yield
opportunity, or could suffer a loss.
The Portfolio may renegotiate delayed delivery transactions after they are
entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.
FEDERALLY-TAXABLE OBLIGATIONS. Tennessee Tax-Free Portfolio does not intend to
- -----------------------------
invest in securities whose interest is federally taxable; however, from time to
time, the Portfolio may invest a portion of its assets on a temporary basis in
fixed-income obligations whose interest is subject to federal income tax. As an
operating policy, the Portfolio intends to invest its assets to achieve as fully
as possible tax exempt income for both Tennessee state and federal purposes.
For example, the Portfolio may invest in obligations whose interest is federally
taxable pending the investment or reinvestment in municipal securities of
proceeds from the sale of its shares or sales of portfolio securities.
Should the Portfolio invest in taxable obligations, it would purchase securities
which in the judgment of Martin are of high quality. These would include
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, obligations of domestic banks, and repurchase agreements.
The Portfolio's standards for high-quality taxable obligations are essentially
the same as those described by Moody's Investors Service, Inc. (Moody's) in
rating corporate obligations within its two highest ratings of Aaa and Aa, and
those described by Standard and Poor's Corporation (S&P) in rating corporate
obligations within its two highest ratings of AAA and AA.
Proposals to restrict or eliminate the federal income tax exemption for interest
on municipal obligations are introduced before Congress from time to time.
Proposals also may be introduced before the Tennessee General Assembly that
would affect the state tax treatment of the Portfolio's distributions. If such
proposals were enacted, the availability of municipal obligations and the value
of the Portfolio's holdings would be affected and the Board of Trustees (the
Trustees) would reevaluate the Portfolio's investment objective and policies.
Tennessee Tax-Free Portfolio anticipates being as fully invested as practicable
in municipal securities; however, there may be occasions when as a result of
maturities of portfolio securities, or sales of Portfolio shares, or in order to
meet redemption requests, the Portfolio may hold cash that is not earning
income. In addition, there may be occasions when, in order to raise cash to
meet redemptions, the Portfolio may be required to sell securities at a loss.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in the
- --------------------
ordinary course of business at approximately the prices at which they are
valued. Under guidelines established by the Trustees, Martin determines the
liquidity of Tennessee Tax-Free Portfolio's investments and, through reports
from Martin, the Trustees monitor investments in illiquid instruments. In
determining the
4
<PAGE>
liquidity of the Portfolio's investments, Martin may consider various factors
including (1) the frequency of trades and quotations, (2) the number of dealers
and prospective purchasers in the marketplace, (3) dealer undertakings to make a
market, (4) the nature of the security (including any demand or tender features)
and (5) the nature of the marketplace for trades (including the ability to
assign or offset the Portfolio's rights and obligations relating to the
investment). Investments currently considered by the Portfolio to be illiquid
include repurchase agreements not entitling the holder to payment of principal
and interest within seven days, and some restricted securities determined by
Martin to be illiquid. In the absence of market quotations, illiquid investments
are valued at fair value as determined in good faith by the Trustees. If through
a change in values, net assets or other circumstances, the Portfolio were in a
position where more than 15% of its net assets were invested in illiquid
securities, the Trustees would seek to take appropriate steps to protect
liquidity.
MUNICIPAL LEASE OBLIGATIONS. The Portfolio may invest a portion of its assets
- ---------------------------
in municipal leases and participation interests therein. These obligations,
which may take the form of a lease, an installment purchase, or a conditional
sale contract, are issued by state and local governments and authorities to
acquire land and a wide variety of equipment and facilities. Generally, the
Portfolio will not hold such obligations directly as a lessor of the property,
but will purchase a participation interest in a municipal obligation from a bank
or other third party. A participation interest gives a Portfolio a specified,
undivided interest in the obligation in proportion to its purchased interest in
the total amount of the obligation.
Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt. These may
include voter referenda, interest rate limits, or public sale requirements.
Leases, installment purchase, or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. Many leases and contracts include "non-appropriation clauses"
providing that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Non-
appropriation clauses free the issuer from debt issuance limitations.
REFUNDING CONTRACTS. Tennessee Tax-Free Portfolio generally will not be
- --------------------
obligated to pay the full purchase price if it fails to perform under a
refunding contract. Instead, refunding contracts generally provide for payment
of liquidated damages to the issuer (currently 15 - 20% of the purchase price).
The Portfolio may secure its obligations under a refunding contract by
depositing collateral or a letter of credit equal to the liquidated damages
provisions of the refunding contract. When required by Securities and Exchange
Commission (SEC) guidelines, the Portfolio will place liquid assets in a
segregated custodial account equal in amount to its obligations under refunding
contracts.
REPURCHASE AGREEMENTS are transactions in which the Portfolio purchases a
- ---------------------
security and simultaneously commits to resell that security at an agreed upon
price and date within a number of days from the date of purchase. The resale
price reflects the purchase price plus an agreed upon market rate of interest
which is unrelated to the coupon rate or maturity of the purchased security. A
repurchase agreement involves the obligation of the seller to pay the agreed
upon price. This obligation is in effect secured by the underlying security
having a value at least equal to the amount of the agreed upon resale price.
The Portfolio may enter into a repurchase agreement with respect to any security
in which it is authorized to
5
<PAGE>
invest. While it presently does not appear possible to eliminate all risks from
the transactions (particularly the possibility of a decline in the market value
of the underlying securities, as well as delay and costs to the Portfolio in
connection with bankruptcy proceedings), it is the policy of the Portfolio to
limit repurchase agreements to those parties whose creditworthiness has been
reviewed and found satisfactory by Martin.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, the 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, the Portfolio
will maintain appropriate high grade liquid assets in a segregated custodial
account to cover its obligation under the agreement. The Portfolio will enter
into reverse repurchase agreements only with parties whose creditworthiness has
been found satisfactory by Martin. As a result, such transactions may increase
fluctuations in the market values of the Portfolio's assets and may be viewed as
a form of leverage.
RESTRICTED SECURITIES generally can be sold in privately negotiated
- ---------------------
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is
required, Tennessee Tax-Free Portfolio may be obligated to pay all or part of
the registration expense and a considerable period may elapse between the time
each decides to seek registration and the time the Portfolio may be permitted to
sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Portfolio might obtain a
less favorable price than prevailed when it decided to seek registration of the
security.
STANDBY COMMITMENTS are puts that entitle holders to same-day settlement at an
- -------------------
exercise price equal to the amortized cost of the underlying security plus
accrued interest, if any, at the time of exercise. Tennessee Tax-Free Portfolio
may acquire standby commitments to enhance the liquidity of portfolio
securities, but only when the issuers of the commitments present minimal risk of
default.
Ordinarily, the Portfolio will not transfer a standby commitment to a third
party, although it could sell the underlying municipal security to a third party
at any time. The Portfolio may purchase standby commitments separate from or in
conjunction with the purchase of securities subject to such commitments. In the
latter case, the Portfolio would pay a higher price for the securities acquired,
thus reducing their yield to maturity.
Standby commitments are subject to certain risks, including the ability of
issuers to pay for securities at the time the commitments are exercised , the
fact that standby commitments are not marketable by the Portfolio , and that the
maturities of the underlying securities may be different from those of the
commitments.
TENDER OPTION BONDS are created by coupling an intermediate or long-term fixed-
- -------------------
rate tax-exempt bond (generally held pursuant to a custodial arrangement) with a
tender agreement that gives the holder the option to tender the bond at its face
value. As consideration for providing the tender option, the sponsor (usually a
bank, broker-dealer, or other financial institution) receives periodic fees
equal to the difference between the bond's fixed coupon rate and the rate
(determined by a remarketing or similar agent) that would cause the bond,
coupled with the tender option, to trade at par on the date of such
determination. After payment of the tender option fee, Tennessee Tax-Free
Portfolio effectively holds a demand obligation that bears interest at the
prevailing short-term tax-exempt rate. In selecting tender option
6
<PAGE>
bonds for the Portfolio, Martin will consider the creditworthiness of the issuer
of the underlying bond, the custodian, and the third party provider of the
tender option. In certain instances, a sponsor may terminate a tender option if,
for example, the issuer of the underlying bond defaults on interest payments.
VARIABLE AND FLOATING RATE DEMAND OBLIGATIONS (VRDOS/FRDOS) are obligations that
- -----------------------------------------------------------
bear variable or floating interest rates and carry rights that permit holders to
demand payment of the unpaid principal balance plus accrued interest from the
issuers or certain financial intermediaries. Floating rate instruments have
interest rates that change whenever there is a change in a designated base rate
while variable rate obligations provide for a specified periodic adjustment in
the interest rate. These formulas are designed to result in a market value for
the VRDO or FRDO that approximates its par value.
Tennessee Tax-Free Portfolio may invest in fixed-rate bonds that are subject to
third party puts and in participation interests in such bonds held by a bank in
trust or otherwise. These bonds and participation interests have tender options
or demand features that permit the Portfolio to tender (or put) their bonds to
an institution at periodic intervals and to receive the principal amount
thereof. The Portfolio considers variable rate instruments structured in this
way (Participating VRDOs) to be essentially equivalent to other VRDOs they
purchase.
ZERO COUPON BONDS do not make regular interest payments; instead they are sold
- -----------------
at a deep discount from their face value and are redeemed at face value when
they mature. Because zero coupon bonds do not pay current income, their prices
can be very volatile when interest rates change. In calculating its daily
dividend, the Portfolio takes into account as income a portion of the difference
between a zero coupon bond's purchase price and its face value.
A broker-dealer creates a DERIVATIVE ZERO by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered Interest
and Principal of Securities) by separating the interest and principal components
of an outstanding U.S. Treasury bond and selling them as individual securities.
Bonds issued by the Resolution Funding Corporation (REFCORP) and the Financing
Corporation (FICO) can also be separated in this fashion. ORIGINAL ISSUE ZEROS
are zero coupon securities originally issued by the U.S. government, a
government agency, or a corporation in zero coupon form.
SPECIAL CONSIDERATIONS AFFECTING TENNESSEE
TENNESSEE OBLIGATIONS. The following information as to certain Tennessee
- ----------------------
considerations is given to investors in view of the Portfolio's policy of
concentrating its investments in Tennessee issuers. Such information is derived
from sources that are generally available to investors and is believed to be
accurate. Such information constitutes only a brief summary, does not purport
to be a complete description and is based on information from official
statements relating to securities offerings of Tennessee issuers. Neither the
Trust or the Portfolio has independently verified this information.
In 1978, the voters of the State of Tennessee approved an amendment to the State
Constitution requiring that (1) the total expenditures of the State for any
fiscal year shall not exceed the State's revenues and
7
<PAGE>
reserves, including the proceeds of debt obligations issued to finance capital
expenditures and (2) in no year shall the rate of growth of appropriations from
State tax revenues exceed the estimated rate of growth of the State's economy.
In the past the Governor and the General Assembly have had to restrict
expenditures to comply with the State Constitution.
While the financial operations of the State were negatively impacted by the
national economic downturn, the State's finances have stabilized in recent
years. The General Fund balance was reduced to $7.3 million in 1991; however,
operating surpluses for the past several years have built up a Portfolio balance
of $345 million by the end of fiscal year 1997.
Several new programs could have a negative impact on the financial operations of
the State. A half percent increase in the sales tax rate, imposed in fiscal
1993, was dedicated to a new Basic Education Program. This increase has since
been made permanent. Tennessee will provide health care to the entire Medicaid
population as well as the uninsured population in the State. A service tax that
was implemented to help fund this program was repealed in connection with the
implementation of the expanded health care program although recently, the costs
of this healthcare plan have stabilized..
The Tennessee economy is largely based on manufacturing and services, which
accounts for approximately 50% of all jobs in the State. The location of General
Motors' Saturn project in Tennessee is believed to demonstrate the continuing
viability of manufacturing in the State. Other important segments of the State
economy include the wholesale and retail trade, transportation, and the
government sector. The State unemployment rate for 1997 averaged 5.4% versus
5.2% for 1996. This was higher than the national average of 4.95% in 1997 but
lower than the national average of 5.4% in 1996. There can be no assurance that
Tennessee's relatively favorable economic performance will continue.
As of the date of this Statement of Additional Information, general obligations
of the State of Tennessee are rated "AAA," "Aaa" and "AAA" by S&P, Moody's and
Fitch. There can be no assurance that the economic conditions on which these
ratings are based will continue or that particular bond issues may not be
adversely affected by changes in economic, political or other conditions.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of securities are placed on behalf of the
Portfolio by Martin pursuant to authority contained in the Portfolio's
Investment Advisory and Management Agreement. Martin is also responsible for
the placement of transaction orders for other investment companies and accounts
for which it or its affiliates act as investment advisor. In selecting broker-
dealers, subject to applicable limitations of the federal securities laws,
Martin considers various relevant factors, including, but not limited to, the
broker's execution capability; the broker's perceived financial stability; the
broker's responsiveness to the Martin's transaction requests; and the broker's
clearance and settlement capability.
The Portfolio may execute portfolio transactions with broker-dealers who provide
research and execution services to the Portfolio or other accounts over which
First Tennessee or its affiliates exercise investment discretion. Such services
may include research-related computer hardware and software; furnishing analyses
and reports concerning issuers, industries, and economic factors and trends.
The receipt of research from broker-dealers that execute transactions on behalf
of the Portfolio may be useful to Martin in rendering investment management
services to the Portfolio and/or its other clients,
8
<PAGE>
and conversely, such information provided by broker-dealers who have executed
transaction orders on behalf of other clients may be useful to Martin in
carrying out its obligations to the Portfolio. The receipt of such research has
not reduced First Tennessee's normal independent research activities; however,
it enables Martin to avoid the additional expenses that could be incurred if it
tried to develop comparable information through its own efforts.
Subject to applicable limitations of the federal securities laws, broker-dealers
may receive commissions for agency transactions that are higher than the
commission of another broker-dealer who might have charged for their research
and execution services. In order to cause the Portfolio to pay such higher
commissions, Martin 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 Martin's overall responsibilities to the Portfolio and its other
clients. In reaching this determination, Martin 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.
Martin is authorized to use research services provided by and to place portfolio
transactions to the extent permitted by law, with brokerage firms that have
provided assistance in the distribution of shares of the Portfolio.
The Trustees periodically review Martin's performance of its responsibilities
in connection with the placement of portfolio transactions on behalf of the
Portfolio and review the commissions paid by the Portfolio over representative
periods of time to determine if they are reasonable in relation to the benefits
to the Portfolio.
For the fiscal periods ended June 30, 1998, 1997 and 1996, the portfolio
turnover rate was %, 122% and 8%, respectively. The increase in portfolio
turnover rate is due primarily to the fact that the 1996 rate reflects only the
first six months of the Portfolio's operations. No brokerage commissions were
paid by the Portfolio during the fiscal periods ended June 30, 1998, 1997 and
1996.
From time to time the Trustees will review whether the recapture for the benefit
of the Portfolio of some portion of the brokerage commissions or similar fees
paid by the Portfolio on portfolio transactions is legally permissible and
advisable. The Portfolio seeks to recapture soliciting broker-dealer fees on the
tender of portfolio securities, but at present no other recapture arrangements
are in effect. The Trustees intend to continue to review whether recapture
opportunities are available and are legally permissible and, if so, to
determine, in the exercise of their business judgment, whether it would be
advisable for the Portfolio to seek such recapture.
When two or more Portfolios are simultaneously engaged in the purchase or sale
of the same security, the prices and amounts are allocated in accordance with a
formula considered by the Trustees and First Tennessee and Martin to be
equitable to each Portfolio. In some cases this system could have a detrimental
effect on the price or value of the security as far as the Portfolio is
concerned. In other cases, however, the ability of the Portfolio to participate
in volume transactions will produce better executions for the Portfolio. It is
the current opinion of the Trustees that the desirability of retaining First
Tennessee and Martin as investment adviser to the Portfolio outweighs any
disadvantages that may be said to exist from exposure to simultaneous
transactions.
9
<PAGE>
VALUATION OF PORTFOLIO SECURITIES
Valuations of securities furnished by the pricing service employed by the
Portfolio are based upon a computerized matrix system and/or appraisals by the
independent pricing service, in each case in reliance upon information
concerning market transactions and quotations from recognized securities
dealers. The methods used by the pricing service and the quality of valuations
so established are reviewed by officers of the Portfolio and the Portfolio's
pricing agent under general supervision of the Trustees.
Use of pricing services has been approved by the Board of Trustees. Securities
and other assets for which there is no readily available market are valued in
good faith by a committee appointed by the Board of Trustees. The procedures
set forth above need not be used to determine the value of the securities owned
by the fund if, in the opinion of a committee appointed by the Board of
Trustees, some other method (e.g., closing over-the-counter- bid prices in the
case of debt instruments traded on an exchange) would more accurately reflect
the fair market value of such securities.
PERFORMANCE
For each class of the Portfolio, YIELDS used in advertising are computed by
dividing interest income for a given 30-day or one-month period, net of
expenses, by the average number of shares entitled to receive dividends during
the period, dividing this figure by the net asset value per share (NAV) at the
end of the period and annualizing the result (assuming compounding of income) in
order to arrive at an annual percentage rate. Income is calculated for purposes
of yield quotations in accordance with standardized methods applicable to all
bond funds. In general, interest income is reduced with respect to bonds
trading at a premium over their par value by subtracting a portion of the
premium from income on a daily basis, and is increased with respect to bonds
trading at a discount by adding a portion of the discount to daily income.
Capital gains and losses generally are excluded from the calculation.
Income calculated for the purposes of determining yields differs from income as
determined for other accounting purposes. Because of the different accounting
methods used, and because of the compounding of income assumed in yield
calculations, yield may not equal its distribution rate, the income paid to an
account, or income reported in financial statements.
Yield information may be useful in reviewing performance and in providing a
basis for comparison with other investment alternatives. Yield will fluctuate,
unlike investments that pay a fixed interest rate over a stated period of time.
Investors should give consideration to the quality and maturity of portfolio
securities of the respective investment companies when comparing investments.
Investors should recognize that in periods of declining interest rates, yield
will tend to be somewhat higher than prevailing market rates, and in periods of
rising interest rates yield will tend to be somewhat lower. Also, when interest
rates are falling, the inflow of net new money from the continuous sale of its
shares will likely be invested in instruments producing lower yields than the
balance of the holdings, thereby reducing the current yield. In periods of
rising interest rates, the opposite can be expected to occur.
As of June 30, 1998, the 30-day yield was %, % and % for Class I,
II and III, respectively.
10
<PAGE>
Tennessee Tax-Free Portfolio also may quote the TAX-EQUIVALENT YIELD for each
class, which shows the taxable yield an investor would have to earn, before
taxes, to equal the tax-free yield. Tax-equivalent yield is the current yield
that would have to be earned, in the investor's tax bracket, to match the tax-
free yields shown below after taking federal income taxes into account. Tax-
equivalent yields are calculated by dividing current yield by the result of one
minus a stated federal or combined federal and state tax rate. It gives the
approximate yield a taxable security must provide at various income brackets to
produce after-tax yields equivalent to those of tax-exempt obligations yielding
from 2.0% to 8.0%. Of course, no assurance can be given that each class will
achieve any specific tax-exempt yield. While the Portfolio invests principally
in municipal obligations whose interest is not includable in gross income for
purposes of calculating federal income tax, other income received by the
Portfolio may be taxable.
The following table shows the effect of a shareholder's tax status on effective
yield under the federal income tax laws for 1998:
1998 TAX RATES AND TAX-EQUIVALENT YIELDS
----------------------------------------
<TABLE>
<CAPTION>
Taxable Federal
Income * Tax If individual tax-exempt yield is:
Bracket ** 2.00% 3.00% 4.00%
<S> <C> <C> <C> <C> <C>
single return joint return Then taxable equivalent yield is:
$0 - $24,650 $0 - $41,200 15% 2.35% 3.53% 4.71%
$24,651 - $59,750 $41,201 - $99,600 28% 2.78% 4.17% 5.56%
$59,751 - $124,650 $99,601 - $151,750 31% 2.90% 4.35% 5.80%
$124,651 - $271,050 $151,751 - $271,050 36% 3.13% 4.69% 6.25%
$271,051 - above $271,051 - above 39.6% 3.31% 4.97% 6.62%
</TABLE>
* Taxable income (gross income after all exemptions, adjustments, and
deductions) based on 1998 tax rates.
** Excludes the impact of the phaseout of personal exemptions, limitation on
itemized deductions, and other credits, exclusions, and adjustments which
may raise a taxpayer's marginal tax rate. an increase in a shareholder's
marginal tax rate would increase that shareholder's tax-equivalent yield.
Tennessee individual income tax is levied at a flat rate of 6%. The tax is
levied on dividend and interest income.
If your effective combined federal and Tennessee state tax rate in 1998 is:
20.10% 32.32% 35.14% 39.84% 43.22%
Then your tax-equivalent yield is:
Tax-Equivalent Yield*
- ----------------------
2.0% 2.50% 2.96% 3.08% 3.32% 3.52%
3.0% 3.75% 4.43% 4.63% 4.99% 5.28%
4.0% 5.01% 5.91% 6.17% 6.65% 7.04%
5.0% 6.26% 7.39% 7.71% 8.31% 8.81%
6.0% 7.51% 8.87% 9.25% 9.97% 10.57%
7.0% 8.76% 10.34% 10.79% 11.64% 12.33%
8.0% 10.01% 11.82% 12.33% 13.30% 14.09%
11
<PAGE>
*The Portfolio may invest a portion of its assets in obligations that are
subject to state or federal income tax. When the Portfolio invests in these
obligations, its tax-equivalent yield will be lower. In the table above, tax-
equivalent yields are calculated assuming investments are 100% federally and
state tax-free.
TOTAL RETURNS for each Class of the Portfolio quoted in advertising reflect all
aspects of return, including the effect of reinvesting dividends and capital
gain distributions (if any), and any change in NAV over the period. AVERAGE
ANNUAL TOTAL RETURNS are calculated by determining the growth or decline in
value of a hypothetical historical investment over a stated period, and then
calculating the annually compounded percentage rate that would have produced the
same result if the rate of growth or decline in value had been constant over the
period. For example, a cumulative total return of 100% over ten years would
produce an average annual total return of 7.18%, which is the steady annual rate
of return that would equal 100% growth on a compounded basis in ten years.
While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that performance is not
constant over time, but changes from year to year, and that average annual total
returns represent averaged figures as opposed to the actual year-to-year
performance. Average annual returns covering periods of less than one year are
calculated 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 June 30, 1998 for each Class of the Portfolio:
<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>
Tennessee Tax-Free 8.26% 4.84% 4.29% 2.28% 8.20 4.64%
</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.
The Portfolio may compare the performance of its Classes or the performance of
securities in which it or its Classes may invest to other mutual funds,
especially to those with similar investment objectives. These comparisons may
be based on data published by IBC/Donoghue's Money Fund Report of Ashland, MA
01721, or by Lipper Analytical Services, Inc. (Lipper, sometimes referred to as
Lipper Analytical Services), an independent service located in Summit, New
Jersey that monitors the performance of mutual funds. Lipper generally ranks
funds on the basis of total return, assuming reinvestment of distributions, but
does not take sales charges or redemption fees into consideration, and is
prepared without regard to tax consequences. Lipper may also rank funds based
on yield. In addition to the mutual fund rankings, the Portfolio's performance
may be compared to mutual fund performance indices prepared by Lipper. The BOND
FUND REPORT AVERAGES' which is reported in the BOND FUND
12
<PAGE>
REPORT, covers taxable bond funds. Investors should give consideration to the
quality and maturity of the portfolio securities of the respective investment
companies when comparing investment alternatives.
From time to time, the Portfolio's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals. For
example, the Portfolio may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance.
The Portfolio may be compared in advertising to certificates of deposits (CDs)
or other investments issued by banks. Mutual funds differ from bank investments
in several respects. For example, the Portfolio may offer greater liquidity or
higher potential returns than CDs, and the Portfolio does not guarantee your
principal or your return.
Ibbotson Associates of Chicago, Illinois (Ibbotson) provides historical returns
of the capital markets in the United States, including common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation
(based on the Consumer Price Index), and combinations of various capital
markets. The performance of these capital markets is based on the return of
different indices.
The Portfolio may compare its performance to that of the Lehman Brothers
Municipal Bond Index, an index comprised of revenue bonds and state government
obligations. The Portfolio may also compare its performance to that of the
Lehman Brothers General Obligation Bond Index, an index comprised of all public,
fixed-rate, non-convertible investment-grade domestic corporate debt. The
Portfolio may also quote mutual fund rating services in its advertising
materials, including data from a mutual fund rating service which rates mutual
funds on the basis of risk adjusted performance. Because the fees for Class II
and Class III are higher than the fees for Class I, yields and returns for those
classes will be lower than for Class I.
The Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, the
investor invests a fixed dollar amount at periodic intervals, thereby purchasing
fewer shares when prices are high and more shares when prices are low. While
such a strategy does not assure a profit nor guard against loss in a declining
market, the investor's average cost per share can be lower than if fixed numbers
of shares had been purchased at those intervals. In evaluating such a plan,
investors should consider their ability to continue purchasing shares through
periods of low price levels.
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 (NYSE) and the Federal Reserve Bank of New
York (New York Federal Reserve) may modify their holiday schedules at any time.
If the Trustees determine that existing conditions make cash payment
undesirable, redemption payments may be made in whole or in part in securities
or other property, valued for this purpose as they are valued in computing the
Portfolio's NAV. Shareholders receiving securities or other property on
redemption
13
<PAGE>
may realize a gain or loss for tax purposes and will incur any costs of sale, as
well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, the Portfolio is required to give
shareholders at least 60 days' notice prior to terminating or modifying the
Portfolio's exchange privilege. Under Rule 11a-3, the 60 day notification
requirement may be waived if (i) the only effect of a modification would be to
reduce or eliminate an administrative fee, redemption fee or deferred sales
charge ordinarily payable at the time of exchange, or (ii) under extraordinary
circumstances, a Portfolio temporarily suspends the offering of shares as
permitted under the 1940 Act or by the SEC or because it is unable to invest
amounts effectively in accordance with its investment objective and policies.
This exchange limit may be modified for accounts in certain institutional
retirement plans to conform to plan exchange limits and Department of Labor
Regulations.
ADDITIONAL CLASS II AND CLASS III INFORMATION
- ---------------------------------------------
PURCHASE INFORMATION. As provided for in Rule 22d-1 under the 1940 Act, ALPS
Mutual Funds Services, Inc. (ALPS or the Distributor), exercises its right to
waive the Portfolio's Class II shares' maximum 3.75% sales charge in connection
with the Portfolio's merger with or acquisition of any investment company or
trust.
SYSTEMATIC INVESTING PROGRAM. Investors can make regular investments in Class
II and Class III with Systematic Investing by completing the appropriate section
on the account application and attaching a voided personal check. If the bank
account is jointly owned, make sure that all owners sign. Investments may be
made monthly by automatically deducting $25 or more from your checking account.
This monthly purchase amount may be changed at any time. There is a $50 minimum
initial investment requirement for this option. 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 month. If Systematic Withdrawal Plan redemptions exceed income dividends
earned on shares, an account eventually may be exhausted. Contact the
Investment Professional for more information.
DISTRIBUTIONS AND TAXES
DIVIDENDS. To the extent that the Portfolio's income is derived from federally
- ----------
tax-exempt interest, the daily dividends declared by the Portfolio are also
federally tax-exempt provided that the Portfolio meets the investment and
distribution requirements for treatment as a "regulated investment company" and,
at the close of each quarter of the taxable year, at least 50% of the value of
its total assets consists of tax-exempt state or local bonds. The Portfolio
intends to meet these tests so that its federally tax-free interest will remain
federally tax-free when distributed. The Portfolio will send each shareholder a
notice
14
<PAGE>
in January describing the tax status of dividends and capital gain
distributions, if any, for the prior year. Dividends derived from Tennessee Tax-
Free Portfolio's tax-exempt income are not subject to federal income tax, but
must be reported to the IRS by shareholders. Exempt-interest dividends are
included in income for purposes of computing the portion of social security and
railroad retirement benefits that may be subject to federal tax. If the
Portfolio earns taxable income or capital gains from its investments, these
amounts will be designated as taxable distributions. Dividends derived from
taxable investment income and short-term capital gains are taxable as ordinary
income. The Portfolio will send a tax statement showing the amount of tax-exempt
distributions for the past calendar year, and will send an IRS Form 1099-DIV by
January 31 if the Portfolio makes any taxable distributions.
The Portfolio purchases municipal obligations based on opinions of bond counsel
regarding the federal income tax status of the obligations. These opinions
generally will be based upon covenants by the issuers regarding continuing
compliance with federal tax requirements. If the issuer of an obligation fails
to comply with its covenants at any time, interest on the obligation could
become federally taxable retroactive to the date the obligation was issued.
Interest on certain "specified private activity" bonds is subject to the federal
alternative minimum tax (AMT), although the interest continues to be excludable
from gross income for other purposes. Interest from specified private activity
bonds will be considered tax-exempt for purposes of the Portfolio's policies of
investing so that at least 80% of its income is free from federal income tax.
Interest from specified private activity bonds is a tax preference item for the
purpose of determining whether a taxpayer is subject to the AMT and the amount
of AMT to be paid, if any. Private activity bonds issued after August 7, 1986
to benefit a private or industrial user or to finance a private facility are
affected by this rule. A portion of the gain on bonds purchased at a discount
after April 30, 1993 (other than original issue discount) and all short-term
capital gains distributed by the Portfolio are taxable to shareholders as
dividends, not as capital gains. Distributions from short-term capital gains do
not qualify for the dividends received deduction. Dividend distributions
resulting from a re-characterization of gain from the sale of bonds purchased at
a discount after April 30, 1993 are not considered income for the purposes of
the Portfolio's policy of investing so that at least 80% of its income is free
from federal income tax.
STATE TAXES. In the opinion of fund counsel, Baker, Donelson, Bearman &
- ------------
Caldwell, investments in Tennessee Tax-Free Portfolio will not be subject to
Tennessee personal income taxes on distributions received from the Portfolio to
the extent such distributions are attributable to interest on bonds or
securities of the U.S. government or any of its agencies or instrumentalities,
or in bonds or other securities of the State of Tennessee or any county,
municipality or political subdivision, including any agency, board, authority or
commission. Other distributions from the Portfolio, including dividends
attributable to obligations of issuers in other states, and all long-term and
short-term capital gains, will not be exempt from personal income taxes in
Tennessee. The Portfolio will report annually the percentage and source, on a
state-by-state basis, of interest income received by the Portfolio on municipal
bonds during the preceding year.
CAPITAL GAIN DISTRIBUTIONS. Distributions of gains from the sale of assets held
- ---------------------------
by the Portfolio for more than one year generally are taxable to shareholders of
the Portfolio at the applicable mid-term capital gains rate, as designated by
the Portfolio, regardless of how long the shareholders have owned their
Portfolio shares.
15
<PAGE>
REDEMPTIONS AND EXCHANGES. A loss on the redemption or exchange of Portfolio
- -----------------------------
shares may not be deductible if the shareholder invests in the Portfolio within
thirty days before or after the redemption. Any loss on the or exchange of
Portfolio shares held for six months or less will be disallowed to the extent of
the amount of any tax-free dividends received on the shares. Future Treasury
Regulations may shorten this six-month period to 31 days. In addition, loss on
the redemption or exchange of Portfolio shares held for six months or less will
be treated as long-term capital loss to the extent of any long-term capital gain
distributions received on the shares.
TAX STATUS OF THE TRUST. The Portfolio intends to qualify as a "regulated
- ------------------------
investment company" under the Internal Revenue Code of 1986, as amended (the
Code), so that the Portfolio will not be liable for federal income or excise
taxes on net investment income or capital gains to the extent that these are
distributed to shareholders in accordance with applicable provisions of the
Code. In order to qualify as a regulated investment company and avoid being
subject to federal income or excise taxes, the Portfolio intends to distribute
substantially all of its net investment income and net realized capital gains
within each calendar year as well as on a fiscal year basis. The Portfolio also
intends to comply with other tax rules applicable to regulated investment
companies, including a requirement that capital gains from the sale of
securities held for less than three months must constitute less than 30% of the
Portfolio's gross income for each fiscal year.
OTHER TAX INFORMATION. The information above is only a summary of some of the
- ----------------------
tax consequences generally affecting the Portfolio and its shareholders, and no
attempt has been made to discuss individual tax consequences. In addition to
federal income taxes, shareholders of the Portfolio may be subject to state and
local taxes on distributions received from the Portfolio. Investors should
consult their tax advisors to determine whether the Portfolio is suitable to
their particular tax situation.
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust are listed below. Each Trustee
or officer that is an "interested person" (as defined in the 1940 Act) by virtue
of his affiliation with First Tennessee or ALPS is indicated by an asterisk (*).
THOMAS M. BATCHELOR, Trustee, 4325 Woodcrest Drive, Memphis, TN, who presently
operates a management consultant business on a limited basis, retired after
owning and operating two General Insurance Companies agencies for over thirty
years. He was one of the founders and served as a director of First American
State Bank in Memphis, TN (now part of United American Bank of Memphis). He
currently serves as Chairman, Memphis Union Mission, TN, as well as a charity
and a non-profit foundation.
JOHN A. DECELL, Trustee, 5178 Wheelis 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 -
16
<PAGE>
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, 1998:
<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>
17
<PAGE>
As of September 30, 1998, the officers and Trustees of the Trust owned less than
1% of the outstanding shares of any Portfolio.
INVESTMENT ADVISORY AGREEMENT
The Portfolio employs First Tennessee Memphis, Tennessee, to furnish investment
advisory and other services to the Portfolio. Under the Investment Advisory and
Management Agreement with the Portfolio, First Tennessee is authorized to
appoint one or more sub-advisers at First Tennessee's expense. Pursuant to a
Sub-Investment and Advisory Agreement, Martin, Knoxville, Tennessee, acts as
Sub-Adviser and day-to-day manager of the Portfolio.
In addition to the fee payable to First Tennessee and the fees payable to the
Transfer Agent and Pricing and Accounting Agent, and to the Administrator, the
Portfolio pays for all its expenses, without limitation, that are not assumed by
these parties. The Portfolio pays for typesetting, printing and mailing of
proxy material to existing shareholders, legal expenses, and the fees of the
custodian, auditor and Trustees. Other expenses paid by the Portfolio include:
interest, taxes, brokerage commissions, the Portfolio's proportionate share of
insurance premiums and Investment Company Institute dues, and costs of
registering shares under federal and state securities laws. The Portfolio also
is liable for such nonrecurring expenses as may arise, including costs of
litigation to which the Portfolio is a party, and its obligation under the
Declaration of Trust to indemnify its officers and Trustees with respect to such
litigation.
For managing its investment and business affairs, Tennessee Tax-Free Portfolio
pays First Tennessee a monthly management fee at the annual rate of .50% of
average net assets. Under its sub-advisory agreement, Martin is entitled to
receive a monthly fee at the annual rate of .30% of average net assets from
First Tennessee. First Tennessee and Martin voluntarily agreed to waive their
entire fees for the Portfolio. These fee waivers may be discontinued at any
time. For the fiscal periods ended June 30, 1998, 1997 and 1996, First
Tennessee earned $ , $65,349 and $12,692, respectively, before waiving
its entire fee. For the fiscal period ended June 30, 1998, Martin earned
$_______ before waivers.
ADMINISTRATION AGREEMENT AND OTHER CONTRACTS
ADMINISTRATOR AND DISTRIBUTOR. ALPS Mutual Funds Services, Inc. (ALPS, the
Administrator and Distributor), is the Administrator and Distributor to the
Portfolio under an Administration and General Distribution Agreement. ALPS, a
Colorado corporation, is a broker-dealer registered under the Securities
Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc.
As the Administrator, ALPS assists in the Portfolio's administration and
operation, including, but not limited to, providing office space and various
legal and accounting services in connection with the regulatory requirements
applicable to the Portfolio. ALPS is entitled to and receives from the
Portfolio a monthly fee at the annual rate of .15% of average net assets. From
January 1, 1996 through July 28, 1996, ALPS voluntarily agreed to waive its
administration fee and reimburse the Portfolio for fund accounting/transfer
agent fees as well as custody out-of-pocket fees. From July 29, 1996 through
March 31, 1997, ALPS voluntarily agreed to waive its administration fee and
assume all expenses of the Portfolio in order to maintain an expense ratio of
0.00% for all classes of the Portfolio, after taking into consideration waivers
by First Tennessee. Effective April 1, 1997, ALPS began to phase out the
18
<PAGE>
assumption of Portfolio expenses while continuing to waive its administration
fee. The reimbursement of non-12b-1 expenses for each Class of the Portfolio was
reduced by 0.15% as of April 1, 1997, and was further reduced 0.10% on the first
business day of each month thereafter until July 1, 1997 when all remaining
reimbursements of non-12b-1 expenses by ALPS were discontinued. For Class III of
the Portfolio, the reimbursement of 12b-1 fees by ALPS decreased by 0.125% on
April 1, 1997, by 0.05% on the first business day of May and June and by 0.025%
on July 1, 1997. Thereafter, ALPS has voluntarily agreed to waive one half of
the 0.50% 12b-1 fee applicable to Class III of the Portfolio or 0.25% of that
Class' average net assets. ALPS reserves the right to modify or terminate this
waiver of 12b-1 expense at any time.
First Tennessee serves as the Co-Administrator for the Portfolio. As the Co-
Administrator, First Tennessee assists in the Portfolio's operation, including,
but not limited to, providing non-investment related research and statistical
data and various operational and administrative services. First Tennessee is
entitled to and receives from the Portfolio a monthly fee at the annual rate of
.05% of average net assets.
As the Distributor, ALPS sells shares of Class I as agent on behalf of the Trust
at no additional cost to the Trust. Class III is obligated to pay ALPS monthly a
12b-1 fee at the annual rate of up to .75% of the average net assets of Class
III, 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 Other Contracts - Distribution Plan." Class II and III pay shareholder
servicing fees to Investment Professionals at an annual rate of up to .25% of
average net assets as more fully described under the section "Administration
Agreement 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 the Portfolio, and calculates the NAV and dividends of each Class
and maintains the portfolio and general accounting records. For such services,
CGFSG is entitled to receive from each Class fees at the annual rate of 0.07%
of average net assets through $50 million and 0.05% over $50 million plus out-
of-pocket expenses. Chase Manhattan Bank is Custodian of the assets of the
Portfolio. The Custodian is responsible for the safekeeping of the Portfolio's
assets and the appointment of sub-custodian banks and clearing agencies. For
such services, Chase is entitled to receive from each Portfolio fees at the
annual rate of 0.018% of average net assets plus out-of-pocket expenses. The
Custodian takes no part in determining the investment policies of the Portfolio
or in deciding which securities are purchased or sold by the Portfolio. The
Portfolio, however, may invest in obligations of the Custodian and may purchase
securities from or sell securities to the Custodian.
DISTRIBUTION PLAN. The Trustees of the Trust have adopted a Distribution Plan
on behalf of Class III of the Portfolio (the Class III Plan) pursuant to Rule
12b-1 (the Rule) under the 1940 Act. The Rule provides in substance that a
mutual fund may not engage directly or indirectly in financing any activity that
is intended primarily to result in the sale of shares of the fund except
pursuant to a plan adopted by the fund under the Rule. The Trustees have
adopted the Plan to allow Class III and ALPS to incur distribution expenses.
The Class III Plan provides for payment of a distribution fee (12b-1 fee) to
ALPS of up to 0.75% of the average net assets of Class III of the Portfolio.
(These fees are in addition to the fees paid to ALPS under the Administration
Agreement.) The Trustees have limited the 12b-1 fee to 0.50% of Class III's
average net assets. ALPS has agreed to voluntarily waive one half of the 0.50%
12b-
19
<PAGE>
1 fee applicable to Class III of the Portfolio or 0.25% of that Class' average
net assets. The Trust or ALPS, on behalf of Class III of the Portfolio, may
enter into servicing agreements (Service Agreements) with banks, broker-dealers
or other institutions (Agency Institutions). The Class III Plan provides that
ALPS may use its fees and other resources to make payments to Agency
Institutions for performance of distribution-related services, including those
enumerated above. The Service Agreements further provide for compensation to
broker-dealers for their efforts to sell Class III shares. The distribution-
related services include, but are not limited to, the following: formulation and
implementation of marketing and promotional activities, such as mail promotions
and television, radio, newspaper, magazine and other mass media advertising;
preparation, printing and distribution of sales literature; preparation,
printing and distribution of prospectuses of the Portfolio and reports to
recipients other than existing shareholders of the Portfolio; obtaining such
information, analyses and reports with respect to marketing and promotional
activities as ALPS may from time to time, deem advisable; making payments to
securities dealers and others engaged in the sales of Class III Shares; and
providing training, marketing and support to such dealers and others with
respect to the sale of Class III Shares. The Class III Plan recognizes ALPS may
use its fees and other resources to pay expenses associated with the promotion
and administration of activities primarily intended to result in the sale of
shares.
The Plan has been approved by the Trustees, including the majority of
disinterested Trustees. As required by the Rule, the Trustees carefully
considered all pertinent factors relating to the implementation of the Plans
prior to its approval, and have determined that there is a reasonable likelihood
that the Plan will benefit the Portfolio and its shareholders. To the extent
that the Class III Plans give ALPS greater flexibility in connection with the
distribution of shares of the class, additional sales of shares may result.
The Class III Plans could be construed as compensation plans because ALPS is
paid a fixed fee and is given discretion concerning what expenses are payable
under the Plans. ALPS may spend more for marketing and distribution than it
receives in fees and reimbursements from the Portfolio. However, to the extent
fees received exceed expenses, including indirect expenses such as overhead,
ALPS could be said to have received a profit. For example, if ALPS pays $1 for
Class III distribution-related expenses and receives $2 under a Class III Plan,
the $1 difference could be said to be a profit for ALPS. (Because ALPS is
reimbursed for its out-of-pocket direct promotional expenses, a Class III Plan
also could be construed as a reimbursement plan. Until the issue is resolved by
the SEC, unreimbursed expenses incurred in one year will not be carried over to
a subsequent year.) If after payments by ALPS for marketing and distribution
there are any remaining fees attributable to a Class III Plan, these may be used
as ALPS may elect. Since the amount payable under a Class III Plan will be
commingled with ALPS's general funds, including the revenues it receives in the
conduct of its business, it is possible that certain of ALPS's overhead expenses
will be paid out of Plan fees and that these expenses may include items such as
the costs of leases, depreciation, communications, salaries, training and
supplies. The Portfolio believes that such expenses, if paid, will be paid only
indirectly out of the fees being paid under the Plan. For the fiscal year ended
June 30, 1998, the Portfolio paid distribution fees in the amount of $ ,
a portion of which was reimbursed by ALPS pursuant to the voluntary waiver and
reimbursement of portfolio expenses discussed under "Administration Agreement
and Other Contracts - Administrator and Distributor." All of these fees were
paid as compensation to dealers.
SHAREHOLDER SERVICES PLANS. In addition to the Rule 12b-1 Distribution Plans
described above, Class II and Class III have adopted Shareholder Services Plans
to compensate Agency Institutions for individual shareholder services and
account maintenance. These functions include: maintaining account records for
each shareholder who beneficially owns Class III Shares; answering questions and
handling
20
<PAGE>
correspondence from shareholders about their accounts; handling the transmission
of funds representing the purchase price or redemption proceeds; issuing
confirmations for transactions in Class III Shares by shareholders; assisting
customers in completing application forms; communicating with the transfer
agent; and providing account maintenance and account level support for all
transactions. For these services the participating Agency Institutions are paid
a service fee at the annual rate of up to .25% of average net assets of Class II
and Class III. Shareholder Servicing Fees for Class II or Class III have not
currently been authorized by the Board of Trustees although such fees may become
effective at a future time. For the fiscal year ended June 30, 1998, the
Portfolio did not pay any shareholder servicing fees.
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 Portfolio might occur, including possible termination of any
automatic investment or redemption or other services then being provided by any
bank. It is not expected that shareholders would suffer any adverse financial
consequences as a result of any of these occurrences. The Portfolio may execute
portfolio transactions with and purchase securities issued by depository
institutions that receive payments under the Plans. No preference will be shown
in the selection of investments for the instruments of such depository
institutions. In addition, state securities laws on this issue may differ from
the interpretations of federal law expressed herein, and banks and other
financial institutions may be required to register as dealers pursuant to state
law.
DESCRIPTION OF THE TRUST
TRUST ORGANIZATION. Tennessee Tax Free Portfolio is a portfolio of First Funds
(formerly The Masters Group of Mutual Funds), an open-end management investment
company organized as a Massachusetts business trust by a Declaration of Trust
dated March 6, 1992, as amended and restated on September 4, 1992. The
Declaration of Trust permits the Trustees to create additional portfolios and
classes. There are nine portfolios of the Trust, each with three Classes.
The assets of the Trust received for the issue or sale of shares of the
Portfolio and all income, earnings, profits, and proceeds thereof, subject only
to the rights of creditors, are specially allocated to such Portfolio, and
constitute the underlying assets of such Portfolio. The underlying assets of
the Portfolio are segregated on the books of account, and are to be charged with
the liabilities with respect to such Portfolio and with a share of the general
expenses of the Trust. Expenses with respect to the Trust are to be allocated
in proportion to the asset value of the respective Portfolios except where
allocations of direct expense can otherwise be fairly made. The officers of the
Trust, subject to the general supervision of the
21
<PAGE>
Trustees, have the power to determine which expenses are allocable to a given
Portfolio, or which are general or allocable to all of the Portfolios. In the
event of the dissolution or liquidation of the Trust, shareholders of a
Portfolio are entitled to receive as a class the underlying assets of such
Portfolio available for distribution.
SHAREHOLDER AND TRUSTEE LIABILITY. The Trust is an entity of the type commonly
known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The Declaration of Trust
provides that the Trust shall not have any claim against shareholders except for
the payment of the purchase price of shares and requires that each agreement,
obligation, or instrument entered into or executed by the Trust or the Trustees
shall include a provision limiting the obligations created thereby to the Trust
and its assets. The Declaration of Trust provides for indemnification out of
the Portfolio's property of any shareholders held personally liable for the
obligations of the Portfolio. The Declaration of Trust also provides that the
Portfolio shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of a Portfolio and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Portfolio itself
would be unable to meet its obligations. The Trustees believe that, in view of
the above, the risk of personal liability to shareholders is remote.
The Declaration of Trust further provides that the Trustees, if they have
exercised reasonable care, will not be liable for any neglect or wrongdoing, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which 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 July 31, 1998, the following shareholders owned more than 5% of the
outstanding shares of the indicated Class of the Portfolio:
Name and Address Class % of Class Held
- ---------------------------- ----- ----------------
Tennessee Mex. Inc, Agency I 6%
Knoxville, TN
Emmett N. Kennon II 9%
Rose S. Kennon, JTWROS
1603 Tyne Blvd.
Nashville, TN 37215
Gerald E. Stuart III 11%
P.O. Box 10288
Knoxville, TN 37939
NFSC FBO III 7%
H. Barrett Heywood III
Joan Talley Heywood
1506 Lexington Rd.
Chattanooga, TN 37405
22
<PAGE>
S.T. Canale III 5%
1594 Peabody
Memphis, TN 38104
VOTING RIGHTS. The Portfolio's capital consists of shares of beneficial
interest. The shares have no preemptive or conversion rights; the voting and
dividend rights, the right of redemption, and the privilege of exchange are
described in the Prospectus. Shares are fully paid and nonassessable, except as
set forth under the heading "Shareholder and Trustee Liability" above.
Shareholders representing 10% or more of the Trust or a Portfolio may, as set
forth in the Declaration of Trust, call meetings of the Trust or a Portfolio for
any purpose related to the Trust or Portfolio, as the case may be, including, in
the case of a meeting of the entire Trust, the purpose of voting on removal of
one or more Trustees. The Trust or any Portfolio may be terminated upon the
sale of its assets to another open-end management investment company, or upon
liquidation and distribution of its assets, if approved by vote of the holders
of a majority of the outstanding shares of the Trust or that Portfolio. If not
so terminated, the Trust and the Portfolio will continue indefinitely.
CLASSES. Pursuant to the Declaration of Trust, the Trustees have authorized
additional classes of shares for the Portfolio of the Trust. Although the
investment objective for each separate class of a particular Portfolio is the
same, fee structures are different such that one class may have a higher yield
than another class of the same Portfolio at any particular time. Shareholders
of the Trust will vote together in the aggregate and not separately by
Portfolio, or by class thereof, except as otherwise required by law or when the
Trustees determine that the matter to be voted upon affects only the interests
of the shareholders of a particular Portfolio or a class thereof. 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 Portfolio's financial statements and financial highlights for the fiscal
year ended June 30, 1998 are included in the Portfolio's Annual Report which is
a separate report supplied independent of this Statement of Additional
Information. The Portfolio's financial statements and financial highlights are
incorporated herein by reference.
APPENDIX
DOLLAR-WEIGHTED AVERAGE MATURITY for the Portfolio is derived by multiplying the
value of each investment by the number of days remaining to its maturity, adding
these calculations, and then dividing the total by the value of the fund's
Portfolio. An obligation's maturity is typically determined on a stated final
maturity basis, although there are some exceptions to this rule.
23
<PAGE>
For example, if it is probable that the issuer of an instrument will take
advantage of a maturity-shortening device, such as a call, refunding, or
redemption provision, the date on which the instrument will probably be called,
refunded, or redeemed may be considered to be its maturity date. When a
municipal bond issuer has committed to call an issue of bonds and has
established an independent escrow account that is sufficient to, and is pledged
to, refund that issue, the number of days to maturity for the pre-refunded bond
is considered to be the number of days to the announced call date of the bonds.
The descriptions that follow are examples of eligible ratings for the Portfolio.
The Portfolio may, however, consider the ratings for other types of investments
and the ratings assigned by other rating organizations when determining the
eligibility of a particular investment.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S RATINGS OF STATE AND MUNICIPAL
- -------------------------------------------------------------------------------
NOTES:
- -----
Moody's ratings for state and municipal and other short-term obligations will be
designated Moody's Investment Grade (MIG or VMIG for variable rate obligations).
This distinction is in recognition of the difference between short-term credit
risk and long-term credit risk. Factors affecting the liquidity of the borrower
and short-term cyclical elements are critical in short-term ratings, while other
factors of major importance in bond risk, long-term secular trends for example,
may be less important over the short run. Symbols used will be as follows:
MIG-1/VMIG-1 - This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG-2/VMIG-2 - This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG-3/VMIG-3 - This designation denotes favorable quality, with all security
elements accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG-4/VMIG-4 - This designation denotes adequate quality protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS OF STATE AND MUNICIPAL
- -----------------------------------------------------------------------------
NOTES:
- -----
SP-1 - Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
SP-2 - Satisfactory capacity to pay principal and interest.
SP-3 - Speculative capacity to pay principal and interest.
24
<PAGE>
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S MUNICIPAL BOND RATINGS:
- -----------------------------------------------------------------------
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S MUNICIPAL BOND RATINGS:
- ---------------------------------------------------------------------
AAA - Debt rated AAA has the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated debt issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
The ratings may be modified by the addition of a plus or minus to show relative
standing within the major rating categories.
25
<PAGE>
PART C. OTHER INFORMATION
-------------------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements for the fiscal year ended June 30, 1998 for each
Portfolio are incorporated herein by reference to the Trust's Annual
Report on Form N-30D.
(b) Exhibits:
(1) (a) Declaration of Trust dated as of March 6, 1992. (1)
(b) Supplement to the Declaration of Trust effective April 24, 1992.
(1)
(c) Amended and Restated Declaration of Trust dated as of September 4,
1992. (1)
(d) Supplement to the Declaration of Trust effective August 5, 1993.
(1)
(2) (a) Bylaws of the Trust. (1)
(b) Amendment to the Bylaws dated November 17, 1992. (1)
(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. (1)
(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. (1)
(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. (1)
(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, and between Provident Institutional Management
Corporation and First Tennessee Bank National Association on behalf
of Cash Reserve Portfolio, dated May 4, 1993. (1)
<PAGE>
(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 by
reference to Exhibit 5(e) to Post-Effective Amendment No. 9 to the
Trust's Registration Statement.
(f) Investment Advisory and Management Agreement between First Funds on
behalf of Capital Appreciation Portfolio and First Tennessee Bank
National Association dated August 29, 1997. (1)
(g) Investment Advisory and Management Agreement between First Funds on
behalf of Capital Appreciation Portfolio and Investment Advisers,
Inc. dated August 29, 1997. (1)
(h) Investment Advisory and Management Agreement between First Funds on
behalf of Intermediate Bond Portfolio and First Tennessee Bank
National Association dated August 29, 1997. (1)
(i) Sub-Advisory Agreement between First Tennessee Bank National
Association and Martin & Company, Inc. with respect to the
Intermediate Bond Portfolio dated March 2, 1998. (1)
(j) Sub-Advisory Agreement between First Tennessee Bank National
Association and Martin & Company, Inc. with respect to the Tennessee
Tax-Free Portfolio dated March 2, 1998. (1)
(6) (a)(1) General Distribution Agreement between First Funds on behalf of all
Portfolios, and ALPS Mutual Funds Services, Inc., dated July 1,
1995. (1)
(6) (a)(2) Amended and Restated General Distribution Agreement between First
Funds on behalf of all Portfolios, and ALPS Mutual Funds Services,
Inc., dated August 19, 1998. (1)
(b)(1) Administration Agreement between First Funds on behalf of all
Portfolios, and ALPS Mutual Funds Services, Inc., dated July 1,
1995. (1)
(b)(2) Amended and Restated Administration Agreement between First Funds on
behalf of all Portfolios, and ALPS Mutual Funds Services, Inc.,
dated November 19, 1997. (1)
(b)(3) Amended and Restated Administration Agreement between First Funds on
behalf of all Portfolios, and ALPS Mutual Funds Services, Inc.,
dated August 19, 1998. (1)
(d) Form of Servicing Agreement between ALPS Mutual Funds Services, Inc.
and an
<PAGE>
Agency Institution. (1)
(7) Not Applicable.
(8) (a) Mutual Fund Custody Agreement between the First Funds and Chase
Manhattan Bank of New York dated October 12, 1992. (1)
(b) Mutual Fund Transfer Agency Agreement between the First Funds and
United States Trust Company of New York dated November 10, 1992. (1)
(c) Amendment to Exhibit 8(b) above dated July 28, 1995. (1)
(9) (a) Fund Accounting and Pricing Services Agreement between First Funds
and Chase Manhattan Bank of New York dated November 10, 1992. (1)
(b) Amendment to Exhibit 9(a) above dated July 28, 1995. (1)
(10) Not applicable.
(11)(a) Opinion and Consent of Price Warehouse LLP, independent accountants.
(1)
(b) Consent of Baker, Donelson, Bearman & Caldwell. (1)
(12) Not Applicable.
(13) Written assurances that purchase representing initial capital was
made for investment purposes without any present intention of
redeeming or reselling. (1)
(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. (1)
(b) Shareholder Servicing Plan on behalf of Class II and III of each
Portfolio, dated March 20, 1993. (1)
(16) Schedule for Computation of Performance Calculations. (1)
(17) Not Applicable.
(18) Plan Providing for Multiple Classes of Shares pursuant to Rule 18f-
3. (1)
__________________
(1) Filed herein.
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant.
-------------------------------------------------------------
Not Applicable.
Item 26. Number of Holders of Securities
-------------------------------
July 31, 1998
<TABLE>
<CAPTION>
Title of Class: Shares of Beneficial Interest Number of Recordholders
- --------------------------------------------- -----------------------
Class I
- -------
<S> <C>
U.S. Treasury Money Market Portfolio 4
U.S. Government Money Market Portfolio 5
Municipal Money Market Portfolio 4
Cash Reserve Portfolio 3
Growth & Income Portfolio 8
Bond Portfolio 5
Tennessee Tax-Free Portfolio 2
Class II
- --------
Growth and Income Portfolio 486
Bond Portfolio 16
Tennessee Tax-Free Portfolio 87
Class III
- ---------
Growth & Income Portfolio 2,212
Bond Portfolio 234
Tennessee Tax-Free Portfolio 60
Treasury Money Market Portfolio 23
Government Money Market Portfolio 15
Municipal Money Market Portfolio 22
Cash Reserve Portfolio 116
</TABLE>
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
<PAGE>
with any claim, action suit or proceeding in which he is involved by virtue of
his service as a trustee, officer, or both. Additionally, amounts paid or
incurred in settlement of such matters are covered by this indemnification.
Indemnification will not be provided in certain circumstances, however. These
include instances of willful misfeasance, bad faith, gross negligence, and
reckless disregard of the duties involved in the conduct of the particular
office involved.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy is expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 28. Business and Other Connections of Investment Manager
----------------------------------------------------
First Tennessee Bank National Association serves as Investment Adviser to the
Registrant on behalf of each Portfolio. The directors and officers of the
Adviser have held, during the past two fiscal years, the following positions of
a substantial nature:
First Tennessee Bank Association (FTB)-Investment Advisor
<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, Unicom Corporation(4) Utility
Director George E. Cates Chairman of the Board and Chief Real estate investment
Executive Officer, Mid-America trust
Apartment 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 Mortgage company
Corporation(8)
Director, FT Mortgage Service, Inc.(9) Mortgage company
Director, Highland Capital Management Investment Adviser
Corp.(10)
Chairman and Director, "A" PLUS Consumer access/discount
Strategic Alliances, Inc.(11) card program and finder
Director, Corona National Life Credit life insurance
Insurance(12)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- ------------------- -------------------- ---------------------------------- ---------------------
<S> <C> <C> <C>
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, Pilot Retail operator of
Corporation(16) convenience stores
and travel centers
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(17)
Director, Harrah's Entertainment, Casino, entertainment
Inc.(18)
Director, Mid-America Apartment
Communities, Real estate investment
Inc.(5) trust
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(19)
Director, First Tennessee Equipment Equipment financing
Finance Corporation(38)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- ------------------- ------------------- --------------------------------------- --------------------------
<S> <C> <C> <C>
Director, First Tennessee Bank National National bank
Association Mississippi (17)
Director R. Brad Martin Chairman of the Board, Chief Retail
Executive Officer, Proffits, Inc.(20)
Director, Harrah's Entertainment, Casino, entertainment
Inc.(18)
Director, Pilot Corporation(16) Retail operator of
convenience stores and
travel centers
Director Joseph Orgill, III Chairman of the Board, West Union Distributor and
Corporation(21) manufacturer for
construction industry
Director, Chairman of the Board Wholesale hardware
Orgill, Inc.(22) distributor
Mallory Group(23) Warehousing, distribution
and transportation
Director Vicki R. Palmer Corporate Vice President and Treasurer Bottler of soft drink
of Coca Cola Enterprises, Inc.(24) products
Director Michael D. Rose Director, Promus Hotel Hotel franchisor and
Corporation(25) operator
Director, General Mills, Inc.(26) Food processing
Director, Ashland Inc.(27) Oil company
Director, Darden Restaurants, Inc.(28) Restaurant
Director, Stein Mart, Inc.(29) Retail
Director, FelCor Lodging Trust, Inc.(30) Hotel
Director, ResortQuest, Inc.(31) Vacation property
management
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- ----------- --------------------- --------------------------------------- ------------------------------
<S> <C> <C> <C>
Director William B. Sansom Chairman of the Board and Chief Wholesale distributor
Executive Officer, The H.T.
Hackney Company(32)
Director, Martin Marietta Materials(33) Construction aggregate
materials producer
Director, Astec Industries, Inc.(34) Construction aggregate
materials producer
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 Adviser
Director, Hickory Venture Venture Capital
Capital Corporation(35)
Director, Hickory Capital Venture Capital
Corporation(36)
Director, Martin & Co., Inc. Investment Adviser
Executive Vice John P. O'Connor, Jr. Executive Vice President and Chief Bank holding company
President and Credit Officer of FTNC(6)
Chief Credit Officer
Executive Vice Sarah Meyerrose 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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- -------------------------------- --------------------- ------------------------------------- --------------------
<S> <C> <C> <C>
Executive Vice Charles Burkett Director, Highland Capital Management Investment Adviser
President, Affluent Corp.(10)
Market Manager
Executive Vice David L. Berry None
President
Executive Vice Carey H. Brown None
President
ExecutiveVice William E. Woodson Director, Martin & Co., Inc.(39) Investment Adviser
President
Senior Vice President Wayne C. Marsh None
Senior Vice President John Curtis 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 Steven J. McNally None
Senior Vice President Scott Bovee None
Senior Vice President Suzanne Donaldson None
Senior Vice President Maureen MacIver None
Senior Vice President Otis M. Clayton None
Vice President William J. Branta None
Vice President Edward C. Dellinger None
Vice President Claudette S. Sanders None
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- -------------------------------- --------------------- ------------------------------------- --------------------
<S> <C> <C> <C>
Vice President Rosemary Manning None
Vice President John Barringer None
Investment Analyst Karen Kruse None
Chairman and CEO Larry B. Martin Director, Martin & Co., Inc. (39) Investment Adviser
First Tennessee Bank-Knoxville
President, First Lew Weems Director, Martin & Co., Inc. (39) Investment Adviser
Tennessee Bank-Knoxville
</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) Unicom Corporation, 1 First National Plaza, Chicago, IL 60690
(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) First Tennessee Bank National Association Mississippi, 579 Goodman Road
East, Southaven, MS 38671
(18) Harrah's Entertainment, Inc., 1023 Cherry Road, Memphis, TN 38117
(19) First Tennessee Housing Corporation, 165 Madison Ave., Memphis, TN 38103
(20) Profitt's Inc., 5810 Shelby Oaks Drive, Memphis, TN 38134
(21) West Union Corporation, 35 Union Ave., Suite 300, Memphis, TN 38103
(22) Orgill, Inc., 2100 Latham Street, Memphis, TN 38109
(23) Mallory Group, 4294 Sweeney Road, Memphis, TN 38118
(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) FelCor Lodging Trust, Inc., 545 East John Carpenter Freeway, Suite
1300, Irving, TX 75062-3933
(31) ResortQuest, 530 Oak Court Drive, #360, Memphis, TN 38117
<PAGE>
(32) The H. T. Hackney Company, Fidelity Bldg., 502 S. Gay Street, Suite
300, Knoxville, TN 37902
(33) Martin Marietta Materials, P. O. Box 30013, Raleigh, NC 27622-0013
(34) Astec Industries, Inc., P O Box 72787, Chattanooga, TN 37407
(35) First Tennessee Brokerage, Inc., 5100 Poplar Avenue, Memphis, TN 38117
(36) Hickory Venture Capital Corporation, 200 West Court Square, Suite 100,
Huntsville, AL 35801
(37) Hickory Capital Corporation, 200 West Court Square, Suite 100, Huntsville,
AL 35801
(38) First Tennessee Equipment Finance Corporation, 165 Madison Ave., Memphis,
TN 38103
(39) Martin & Company, Inc., Two Centre Square, 625 S. Gay Street, Suite 200,
Knoxville, TN 37902-1669
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) None
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)(2) Director,
NexAir, LLC
Director J. Kenneth Glass see FTB listing
Director Charles Burkett see FTB listing
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position Other Business
with Highland Name Connections
------------------------------------- ----------------------------- ---------------
<S> <C> <C>
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 products
Martin & Company, Inc. (Martin)
Two Centre Square, 625 S. Gay Street, Suite 200
Knoxville, TN 37902
<TABLE>
<CAPTION>
Position Other Business
with Martin Name Connections
----------------------------------- -------------------------- ---------------
<S> <C> <C>
Director, President A. David Martin(1) None
Vice President, Portfolio Manager Ted Flickinger, Jr.(2) None
Vice President, Portfolio Manager Paul Spitznagel(2) None
Vice President, Portfolio Manager Charles Stewart(3) None
Vice President Gary Hoemann(4) None
Director Larry B. Martin See FTB listing
Director GeorgeP. Lewis See FTB listing
Director J. Kenneth Glass See FTB listing
Director William F. Woodson, Jr. See FTB listing
Director Lew Weems See FTB listing
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position Other Business
with Martin Name Connections
----------------------------------- ----------------------- ---------------
<S> <C> <C>
Portfolio Manager John C. Miller(5) None
Portfolio Manager David Zandstra(5) None
Portfolio Manager Ralph Herbert(5) None
</TABLE>
(1) Previously, President, Martin & Co., L.P., a registered investment
adviser, 625 S. Gay Street, Knoxville, TN 37902 ("Martin, L.P.)
(2) Previously, Vice President, Martin, L.P.
(3) Previously, Assistant Portfolio Manager, Martin, L.P.
(4) Previously, Senior Vice President, First Tennessee Bank, 800 S. Gay
Street, Knoxville, TN 37902 ("FTB")
(5) Previously, Vice President, FTB
Investment Advisors, Inc. (IAI)
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
<PAGE>
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
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
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:
<PAGE>
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
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, Financial Investors Trust, Stonebridge Growth Fund,
Inc., Stonebridge Aggressive Growth Fund, Inc., SPDR Trust, MidCap SPDR
Trust, and DIAMONDS Trust.
(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 Positions and Offices
Business Address* Registrant with Underwriter
- --------------------------------------------------------------------------------------
<S> <C> <C>
W. Robert Alexander None Chairman, Chief Executive
Officer and Secretary
Arthur J. L. Lucey None President and Director
Thomas A. Carter None Chief Financial Officer
Edmund J. Burke None Executive Vice President
and Director
William N. Paston None Vice President
Jeremy May Treasurer Vice President
Chad Christensen None Vice President
James V. Hyatt Secretary General Counsel
John W. Hannon, Jr. None Director
Rick A. Pederson None Director
</TABLE>
<PAGE>
Chris Woessner None Director
* All addresses are 370 Seventeenth Street, Suite 2700, Denver, Colorado 80202.
(c) Not applicable.
Item 30. Location of Accounts and Records
--------------------------------
First Tennessee Bank National Association, located at 4990 Poplar Avenue,
Memphis, Tennessee, Highland Capital Management Corp., located at 6011 Privacy
Parkway, Suite 228, Memphis, Tennessee, BlackRock Institutional Management
Corporation, 103 Bellevue Parkway, Wilmington, Delaware, Investment Advisors,
Inc., located at 3700 First Bank Place, Minneapolis, Minnesota, Martin &
Company, Inc., located at Two Centre Square, Knoxville, Tennessee, and ALPS
Mutual Funds Services, Inc., located at 370 17th Street, Denver, Colorado, will
maintain physical possession of each such account, book or other documents of
the Trust, except for those documents relating to the custodial functions
maintained by the Trust's Custodian, Chase Manhattan Bank of New York, 114 West
47th Street, New York, New York, and those transfer agent, pricing and
bookkeeping and general accounting records maintained by the Trust's Transfer
Agent and Pricing and Accounting Agent, Chase Global Funds Services Company, a
wholly owned subsidiary of Chase Manhattan Bank of New York, 73 Tremont Street,
Boston, Massachusetts.
Item 31. Management Services
-------------------
Not Applicable.
Item 32. Undertakings
------------
(a) 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(a)
under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment No. 15 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 27th day of August, 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 August 27, 1998
- ----------------------
Richard C. Rantzow
/c/Mark A. Pougnet Treasurer August 27, 1998
- ------------------
Mark A. Pougnet
/c/Thomas M. Batchelor* Trustee August 27, 1998
- -----------------------
Thomas M. Batchelor
/c/John A. DeCell* Trustee August 27, 1998
- ------------------
John A. DeCell
/c/Larry W. Papasan* Trustee August 27, 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
- ------ --------
(1) (a) Declaration of Trust dated as of March 6, 1992.
(b) Supplement to the Declaration of Trust effective April 24, 1992.
(c) Amended and Restated Declaration of Trust dated as of September
4, 1992.
(d) Supplement to the Declaration of Trust effective August 5, 1993.
(2) (a) Bylaws of the Trust.
(b) Amendment to the Bylaws dated November 17, 1992.
(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.
(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.
(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.
(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, and between Provident Institutional Management
Corporation and First Tennessee Bank National Association on
behalf of Cash Reserve Portfolio, dated May 4, 1993.
(f) Investment Advisory and Management Agreement between First Funds
on behalf of Capital Appreciation Portfolio and First Tennessee
Bank National Association dated August 29, 1997.
<PAGE>
(g) Investment Advisory and Management Agreement between First Funds
on behalf of Capital Appreciation Portfolio and Investment
Advisers, Inc. dated August 29, 1997.
(h) Investment Advisory and Management Agreement between First Funds
on behalf of Intermediate Bond Portfolio and First Tennessee Bank
National Association dated August 29, 1997.
(i) Sub-Advisory Agreement between First Tennessee Bank National
Association and Martin & Company, Inc. with respect to the
Intermediate Bond Portfolio dated March 2, 1998.
(j) Sub-Advisory Agreement between First Tennessee Bank National
Association and Martin & Company, Inc. with respect to the
Tennessee Tax-Free Portfolio dated March 2, 1998.
(6) (a)(1) General Distribution Agreement between First Funds on behalf of
all Portfolios, and ALPS Mutual Funds Services, Inc., dated July
1, 1995.
(6) (a)(2) Amended and Restated General Distribution Agreement between
First Funds on behalf of all Portfolios, and ALPS Mutual Funds
Services, Inc., dated August 19, 1998.
(b)(1) Administration Agreement between First Funds on behalf of all
Portfolios, and ALPS Mutual Funds Services, Inc., dated July 1,
1995.
(b)(2) Amended and Restated Administration Agreement between First
Funds on behalf of all Portfolios, and ALPS Mutual Funds
Services, Inc., dated November 19, 1997.
(b)(3) Amended and Restated Administration Agreement between First
Funds on behalf of all Portfolios, and ALPS Mutual Funds
Services, Inc., dated August 19, 1998.
(d) Form of Servicing Agreement between ALPS Mutual Funds Services,
Inc. and an Agency Institution.
(8) (a) Mutual Fund Custody Agreement between the First Funds and Chase
Manhattan Bank of New York dated October 12, 1992.
(b) Mutual Fund Transfer Agency Agreement between the First Funds
and United States Trust Company of New York dated November 10,
1992.
(c) Amendment to Exhibit 8(b) above dated July 28, 1995.
<PAGE>
(9) (a) Fund Accounting and Pricing Services Agreement between First
Funds and Chase Manhattan Bank of New York dated November 10,
1992.
(b) Amendment to Exhibit 9(a) above dated July 28, 1995.
(11)(a) Opinion and Consent of Price Warehouse LLP, independent
accountants.
(b) Consent of Baker, Donelson, Bearman & Caldwell.
(13) Written assurances that purchase representing initial capital
was made for investment purposes without any present intention of
redeeming or reselling.
(15)(a) Distribution and Service Plan Agreements on behalf of all
Portfolios.
(b) Shareholder Servicing Plan on behalf of Class II and III of each
Portfolio, dated March 20, 1993.
(16) Schedule for Computation of Performance Calculations.
(18) Plan Providing for Multiple Classes of Shares pursuant to Rule
18f-3.
<PAGE>
EXHIBIT 1(A)
DECLARATION OF TRUST
DATED MARCH 6, 1992
DECLARATION OF TRUST, made March 6, 1992 by Arthur S. Loring and Stuart E.
Fross (the "Trustees").
WHEREAS, the Trustees desire to establish a trust fund for the investment
and reinvestment of funds contributed thereto;
NOW, THEREFORE, the Trustees declare that all money and property
contributed to the trust fund hereunder shall be held and managed in Trust under
this Declaration of Trust as herein set forth below.
ARTICLE I
---------
NAME AND DEFINITIONS
--------------------
NAME
- ----
Section 1. This Trust shall be known as "The Masters Group".
DEFINITIONS
- -----------
Section 2. Wherever used herein, unless otherwise required by the context
or specifically provided:
(a) The Terms "Affiliated Person", "Assignment", "Commission", "Interested
Person", "Majority Shareholder Vote" (the 67% or 50% requirement of the third
sentence of Section 2(a)(42) of the 1940 Act, whichever may be applicable) and
"Principal Underwriter" shall have the meanings given them in the 1940 Act, as
amended from time to time;
(b) The "Trust" refers to The Masters Group and reference to the Trust,
when applicable to one or more Series of the Trust, shall refer to any such
Series;
(c) "Net Asset Value" means the net asset value of each Series of the
Trust determined in the manner provided in Article X, Section 3;
(d) "Shareholder" means a record owner of Shares of the Trust;
(e) The "Trustees" refer to the individual trustees in their capacity as
trustees hereunder of the Trust and their successor or successors for the time
being in office as such trustee or trustees;
(f) "Shares" means the equal proportionate transferable units of interest
into which the beneficial interest of the Trust or each Series shall be divided
from time to time, including such class or classes of Shares as the Trustees may
from time to time create and establish and including
<PAGE>
fractions of Shares as well as whole Shares consistent with the requirements of
Federal and/or state securities laws; and
(g) The "1940 Act" refers to the Investment Company Act of 1940, as
amended from time to time.
(h) "Series" refers to series of Shares of the Trust established in
accordance with the provisions of Article III or any classes thereunder.
ARTICLE II
----------
PURPOSE OF TRUST
----------------
The purpose of this Trust is to provide investors a continuous source of
managed investment in securities.
ARTICLE III
-----------
BENEFICIAL INTEREST
-------------------
SHARES OF BENEFICIAL INTEREST
- -----------------------------
Section 1. The beneficial interest in the Trust shall be divided into such
transferable Shares of one or more separate and distinct Series or classes as
the Trustees shall from time to time create and establish. The number of Shares
is unlimited and each Share shall be without par value and shall be fully paid
and nonassessable. The Trustees shall have full power and authority, in their
sole discretion and without obtaining any prior authorization or vote of the
Shareholders or any Series or class of Shareholders of the Trust, to create and
establish (and to change in any manner) Shares or any classes thereof with such
preferences, voting powers, rights and privileges as the Trustees may from time
to time determine, to divide or combine the Shares or any Series or classes
thereof into a greater or lesser number, to classify or reclassify any issued
Shares or any Series or classes thereof into one or more Series or classes of
Shares, to abolish any one or more Series or classes of Shares, and to take such
other action with respect to the Shares as the Trustees may deem desirable.
ESTABLISHMENT OF SERIES
- -----------------------
Section 2. The establishment of any Series or class shall be effective upon
the adoption of a resolution by a majority of the then Trustees setting forth
such establishment and designation and the relative rights and preferences of
the Shares of such Series. At any time that there are no Shares outstanding of
any particular Series previously established and designated, the Trustees may by
a majority vote abolish that Series and the establishment and designation
thereof.
OWNERSHIP OF SHARES
- -------------------
Section 3. The ownership of Shares shall be recorded in the books of the
Trust. The Trustees may make such rules as they consider appropriate for the
transfer of Shares and similar matters. The record books of the Trust shall be
conclusive as to who are the holders of Shares and as to the number of Shares
held from time to time by each Shareholder.
<PAGE>
INVESTMENT IN THE TRUST
- -----------------------
Section 4. The Trustees shall accept investments in the Trust from such
persons and on such terms as they may from time to time authorize. Such
investments may be in the form of cash or securities in which the appropriate
Series is authorized to invest, valued as provided in Article X, Section 3.
After the date of the initial contribution of capital, the number of Shares to
represent the initial contribution may in the Trustees' discretion be considered
as outstanding and the amount received by the Trustees on account of the
contribution shall be treated as an asset of the Trust. Subsequent investments
in the Trust shall be credited to each Shareholder's account in the form of full
Shares at the Net Asset Value per Share next determined after the investment is
received; provided, however, that the Trustees may, in their sole discretion,
(a) impose a sales charge upon investments in the Trust and (b) issue fractional
Shares.
ASSETS AND LIABILITIES OF SERIES
- --------------------------------
Section 5. All consideration received by the Trust for the issue or sale of
Shares of a particular Series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall be
referred to as "assets belonging to" that Series. In addition any assets,
income, earnings, profits, and proceeds thereof, funds, or payments which are
not readily identifiable as belonging to any particular Series shall be
allocated by the Trustees between and among one or more of the Series in such
manner as they, in their sole discretion, deem fair and equitable. Each such
allocation shall be conclusive and binding upon the Shareholders of all Series
for all purposes, and shall be referred to as assets belonging to that Series.
The assets belonging to a particular Series shall be so recorded upon the books
of the Trust, and shall be held by the Trustees in Trust for the benefit of the
holders of Shares of that Series. The assets belonging to each particular Series
shall be charged with the liabilities of that Series and all expenses, costs,
charges and reserves attributable to that Series. Any general liabilities,
expenses, costs, charges or reserves of the Trust which are not readily
identifiable as belonging to any particular Series shall be allocated and
charged by the Trustees between or among any one or more of the Series in such
manner as the Trustees in their sole discretion deem fair and equitable. Each
such allocation shall be conclusive and binding upon the Shareholders of all
Series for all purposes. Any creditor of any Series may look only to the assets
of that Series to satisfy such creditor's debt.
NO PREEMPTIVE RIGHTS
- --------------------
Section 6. Shareholders shall have no preemptive or other right to
subscribe to any additional Shares or other securities issued by the Trust or
the Trustees
LIMITATION OF PERSONAL LIABILITY
- --------------------------------
Section 7. The Trustees shall have no power to bind any Shareholder
personally or to call upon any Shareholder for the payment of any sum of money
or assessment whatsoever other than such as the Shareholder may at any time
personally agree to pay by way of subscription for any Shares or otherwise.
Every note, bond, contract or other undertaking issued by or on behalf of the
Trust or the Trustees relating to the Trust shall include a recitation limiting
the obligation represented thereby to the Trust, or Series, and its assets (but
the omission of such a recitation shall not operate to bind any Shareholder).
<PAGE>
ARTICLE IV
----------
THE TRUSTEES
------------
MANAGEMENT OF THE TRUST
- -----------------------
Section 1. The business and affairs of the Trust shall be managed by the
Trustees, and they shall have all powers necessary and desirable to carry out
that responsibility.
ELECTION: INITIAL TRUSTEES
- --------------------------
Section 2. On a date fixed by the Trustees, the Shareholders shall elect
not less than two Trustees. A Trustee shall not be required to be a Shareholder
of the Trust. The initial Trustees shall be Arthur S. Loring and Stuart E. Fross
and such other individuals as the Board of Trustees shall appoint pursuant to
Section 4 of the Article IV.
TERM OF OFFICE OF TRUSTEES
- --------------------------
Section 3. The Trustees shall hold office during the lifetime of this
Trust, and until its termination as hereinafter provided; except (a) that any
Trustee may resign his trust by written instrument signed by him and delivered
to the other Trustees, which shall take effect upon such delivery or upon such
later date as is specified therein; (b) that any Trustee may be removed at any
time by written instrument, signed by at least two-thirds of the number of
Trustees prior to such removal, specifying the date when such removal shall
become effective; (c) that any Trustee who requests in writing to be retired or
who has become incapacitated by illness or injury may be retired by written
instrument signed by a majority of the other Trustees, specifying the date of
his retirement; and (d) a Trustee may be removed at any Special Meeting of the
Trust by a vote of two-thirds of the outstanding Shares.
RESIGNATION AND APPOINTMENT OF TRUSTEES
- ---------------------------------------
Section 4. In case of the declination, death, resignation, retirement,
removal, incapacity, or inability of any of the Trustees, or in case a vacancy
shall, by reason of an increase in number, or for any other reason, exist, the
remaining Trustees shall fill such vacancy by appointing such other person as
they in their discretion shall see fit consistent with the limitations under the
1940 Act. Such appointment shall be evidenced by a written instrument signed by
a majority of the Trustees in office or by recording in the records of the
Trust, whereupon the appointment shall take effect. Within three months of such
appointment the Trustees shall cause notice of such appointment to be mailed to
each Shareholder at his address as recorded on the books of the Trust. An
appointment of a Trustee may be made by the Trustees then in office and notice
thereof mailed to Shareholders as aforesaid in anticipation of a vacancy to
occur by reason of retirement, resignation or increase in number of Trustees
effective at a later date, provided that said appointment shall become effective
only at or after the effective date of said retirement, resignation or increase
in number of Trustees. As soon as any Trustee so appointed shall have accepted
this trust, the trust estate shall vest in the new Trustee or Trustees, together
with the continuing Trustees, without any further act or conveyance, and he
shall be deemed a Trustee hereunder. The power of appointment is subject to the
provisions of Section 16(a) of the 1940 Act.
<PAGE>
TEMPORARY ABSENCE OF TRUSTEE
- ----------------------------
Section 5. Any Trustee may, by power of attorney, delegate his power for a
period not exceeding six months at any one time to any other Trustee or
Trustees, provided that in no case shall less than two Trustees personally
exercise the other powers hereunder except as herein otherwise expressly
provided.
NUMBER OF TRUSTEES
- ------------------
Section 6. The number of Trustees, not less than two (2) nor more than
twelve (12), serving hereunder at any time shall be determined by the Trustees
themselves.
Whenever a vacancy in the Board of Trustees shall occur, until such vacancy
is filled, or while any Trustee is physically or mentally incapacitated by
reason of disease or otherwise, the other Trustees shall have all the powers
hereunder and the certificate of the other Trustees of such vacancy or
incapacity, shall be conclusive, provided, however, that no vacancy shall remain
unfilled for a period longer than thirty-six calendar months.
EFFECT OF DEATH, RESIGNATION, ETC. OF A TRUSTEE
- -----------------------------------------------
Section 7. The death, declination, resignation, retirement removal,
incapacity, or inability of the Trustees, or any one of them, shall not operate
to annul the Trust or to revoke any existing agency created pursuant to the
terms of this Declaration of Trust.
OWNERSHIP OF ASSETS OF THE TRUST
- --------------------------------
Section 8. The assets of the Trust shall be held separate and apart from
any assets now or hereafter held in any capacity other than as Trustee hereunder
by the Trustees or any successor Trustees. All of the assets of the Trust shall
at all times be considered as vested in the Trustees. No Shareholder shall be
deemed to have a severable ownership in any individual asset of the Trust or any
right of partition or possession thereof, but each Shareholder shall have a
proportionate undivided beneficial interest in the Trust.
ARTICLE V
---------
POWERS OF THE TRUSTEES
----------------------
POWERS
- ------
Section 1. The Trustees in all instances shall act as principals, and are
and shall be free from the control of the Shareholders. The Trustees shall have
full power and authority to do any and all acts and to make and execute any and
all contracts and instruments that they may consider necessary or appropriate in
connection with the management of the Trust. The Trustees shall not in any way
be bound or limited by present or future laws or customs in regard to trust
investments, but shall have full authority and power to make any and all
investments which they, in their uncontrolled discretion, shall deem proper to
accomplish the purpose of this Trust. Subject to any applicable limitation in
the Declaration of Trust or the Bylaws of the Trust, the Trustees shall have
power and authority:
<PAGE>
(a) To invest and reinvest cash and other property, and to hold cash or
other property uninvested, without in any event being bound or limited by any
present or future law or custom in regard to investments by Trustees, and to
sell, exchange, lend, pledge, mortgage, hypothecate, write options on and lease
any or all of the assets of the Trust.
(b) To adopt Bylaws not inconsistent with this Declaration of Trust
providing for the conduct of the business of the Trust and to amend and repeal
them to the extent that they do not reserve that right to the Shareholders.
(c) To elect and remove such officers and appoint and terminate such
agents as they consider appropriate.
(d) To employ a bank or trust company as custodian of any assets of the
Trust subject to any conditions set forth in this Declaration of Trust or in the
Bylaws, if any.
(e) To retain a transfer agent and Shareholder servicing agent, or both.
(f) To provide for the distribution of interests of the Trust either
through a principal underwriter in the manner hereinafter provided for or by the
Trust itself, or both.
(g) To set record dates in the manner hereinafter provided for.
(h) To delegate such authority as they consider desirable to any officers
of the Trust and to any agent, custodian or underwriter.
(i) To sell or exchange any or all of the assets of the Trust, subject to
the provisions of Article XII, Section 4(b) hereof.
(j) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and deliver
powers of attorney to such person or persons as the Trustees shall deem proper,
granting to such person or persons such power and discretion with relation to
securities or property as the Trustees shall deem proper.
(k) To exercise powers and rights of subscription or otherwise which in
any manner arise out of ownership of securities.
(1) To hold any security or property in a form not indicating any trust,
whether in bearer, unregistered or other negotiable form; or either in its own
name or in the name of a custodian or a nominee or nominees, subject in either
case to proper safeguards according to the usual practice of Massachusetts trust
companies or investment companies.
(m) To establish separate and distinct Series with separately defined
investment objectives and policies and distinct investment purposes in
accordance with the provisions of Article III.
<PAGE>
(n) To allocate assets, liabilities and expenses of the Trust to a
particular Series or to apportion the same between or among two or more Series
or classes thereof, provided that any liabilities or expenses incurred by a
particular Series shall be payable solely out of the assets belonging to that
Series or a class thereof as provided for in Article III.
(o) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or concern, any security of which is
held in the Trust; to consent to any contract, lease, mortgage, purchase, or
sale of property by such corporation or concern, and to pay calls or
subscriptions with respect to any security held in the Trust.
(p) To compromise, arbitrate, or otherwise adjust claims in favor of or
against the Trust or any matter in controversy including, but not limited to,
claims for taxes.
(q) To make distributions of income and of capital gains to Shareholders
in the manner hereinafter provided for.
(r) To borrow money and to pledge mortgage and hypothecate the assets of
the Trust, subject to applicable requirements of the 1940 Act.
(s) To establish, from time to time, a minimum total investment for
Shareholders, and to require the redemption of the Shares of any Shareholders
whose investment is less than such minimum upon giving notice to such
Shareholder.
No one dealing with the Trustees shall be under any obligation to make any
inquiry concerning the authority of the Trustees, or to see to the application
of any payments made or property transferred to the Trustees or upon their
order.
TRUSTEES AND OFFICERS AS SHAREHOLDERS
- -------------------------------------
Section 2. Any Trustee, officer or other agent of the Trust may acquire,
own and dispose of Shares to the same extent as if he were not a Trustee,
officer or agent; and the Trustees may issue and sell or cause to be issued and
sold Shares to and buy such Shares from any such person of any firm or company
in which he is interested, subject only to the general limitations herein
contained as to the sale and purchase of such Shares; and all subject to any
restrictions which may be contained in the Bylaws.
ACTION BY THE TRUSTEES
- ----------------------
Section 3. The Trustees shall act by majority vote at a meeting duly called
or by unanimous written consent without a meeting or by telephone consent
provided a quorum of Trustees participate in any such telephonic meeting, unless
the 1940 Act requires that a particular action be taken only at a meeting of the
Trustees. At any meeting of the Trustees, a majority of the Trustees shall
constitute a quorum. Meetings of the Trustees may be called orally or in writing
by the Chairman of the Trustees or by any two other Trustees. Notice of the
time, date and place of all meetings of the Trustees shall be given by the party
calling the meeting to each Trustee by telephone or telegram sent to his home or
business address at least twenty-four hours in advance of the meeting or by
written notice mailed to his home or business address at least seventy-two hours
in advance of the meeting. Notice need not be given to any Trustee who attends
the meeting without objecting to the lack of notice or who executes a written
waiver of notice with respect to the meeting. Subject to the requirements of the
1940 Act, the Trustees by majority vote may delegate to
<PAGE>
any one of their number their authority to approve particular matters or take
particular actions on behalf of the Trust.
CHAIRMAN OF THE TRUSTEES
- ------------------------
Section 4. The Trustees may appoint one of their number to be Chairman of
the Board of Trustees. The Chairman shall preside at all meetings of the
Trustees, shall be responsible for the execution of policies established by the
Trustees and the administration of the Trust, and may be the chief executive,
financial and accounting officer of the Trust.
ARTICLE VI
----------
EXPENSES OF THE TRUST
---------------------
TRUSTEE REIMBURSEMENT
- ---------------------
Section 1. Subject to the provisions of Article III, Section 5, the
Trustees shall be reimbursed from the Trust estate or the assets belonging to
the appropriate Series for their expenses and disbursements, including, without
limitation, fees and expenses of Trustees who are not Interested Persons of the
Trust, interest expense, taxes, fees and commissions of every kind, expenses of
pricing Trust Series securities, expenses of issue, repurchase and redemption of
shares including expenses attributable to a program of periodic repurchases or
redemptions, expenses of registering and qualifying the Trust and its Shares
under Federal and State laws and regulations, charges of custodians, transfer
agents, and registrars, expenses of preparing and setting up in type
Prospectuses and Statements of Additional Information, expenses of printing and
distributing prospectuses sent to existing Shareholders, auditing and legal
expenses, reports to Shareholders, expenses of meetings of Shareholders and
proxy solicitations therefor, insurance expense, association membership dues and
for such non-recurring items as may arise, including litigation to which the
Trust is a party, and for all losses and liabilities by them incurred in
administering the Trust, and for the payment of such expenses, disbursements,
losses and liabilities the Trustees shall have a lien on the assets belonging to
the appropriate Series prior to any rights or interests of the Shareholders
thereto. This section shall not preclude the Trust from directly paying any of
the aforementioned fees and expenses.
ARTICLE VII
-----------
INVESTMENT ADVISER. PRINCIPAL UNDERWRITER AND TRANSFER AGENT
------------------------------------------------------------
INVESTMENT ADVISER
- ------------------
Section 1. Subject to a Majority Shareholder Vote, the Trustees may in
their discretion from time to time enter into an investment advisory or
management contract(s) with respect to the Trust or any Series thereof whereby
the other party(ies) to such contract(s) shall undertake to furnish the Trustees
such management, investment advisory, statistical and research facilities and
services and such other facilities and services, if any, and all upon such terms
and conditions, as the Trustees may in their discretion determine.
Notwithstanding any provisions of this Declaration of Trust, the Trustees may
authorize the investment adviser(s) (subject to such general or specific
instructions as the Trustees may from time to time adopt) to effect purchases,
sales or exchanges of Series securities and other investment instruments of the
Trust on behalf of the Trustees or may authorize any officer, agent, or Trustee
to effect such purchases, sales or exchanges pursuant to recommendations of the
investment adviser (and all without further action
<PAGE>
by the Trustees). Any such purchases, sales and exchanges shall be deemed to
have been authorized by all of the Trustees.
The Trustees may, subject to applicable requirements of the 1940 Act,
including those relating to Shareholder approval, authorize the investment
adviser to employ one or more sub-advisers from time to time to perform such of
the acts and services of the investment adviser, and upon such terms and
conditions, as may be agreed upon between the investment adviser and sub-
adviser.
PRINCIPAL UNDERWRITER
- ---------------------
Section 2. The Trustees may in their discretion from time to time enter
into (a) contract(s) providing for the sale of the Shares, whereby the Trust may
either agree to sell the Shares to the other party to the contract or appoint
such other party its sales agent for such Shares. In either case, the contract
shall be on such terms and conditions as may be prescribed in the Bylaws, if
any, and such further terms and conditions as the Trustees may in their
discretion determine not inconsistent with the provisions of this Article VII,
or of the Bylaws, if any; and such contract may also provide for the repurchase
or sale of Shares by such other party as principal or as agent of the Trust.
TRANSFER AGENT
- --------------
Section 3. The Trustees may in their discretion from time to time enter
into a transfer agency and Shareholder service contract whereby the other party
shall undertake to furnish the Trustees with transfer agency and Shareholder
services. The contract shall be on such terms and conditions as the Trustees may
in their discretion determine not inconsistent with the provisions of this
Declaration of Trust or of the Bylaws, if any. Such services may be provided by
one or more entities.
PARTIES TO CONTRACT
- -------------------
Section 4. Any contract of the character described in Sections 1, 2 and 3
of this Article VII or in Article IX hereof may be entered into with any
corporation, firm, partnership, trust or association, although one or more of
the Trustees or officers of the Trust may be an officer, director, trustee,
shareholder, or member of such other party to the contract, and no such contract
shall be invalidated or rendered voidable by reason of the existence of any
relationship, nor shall any person holding such relationship be liable merely by
reason of such relationship for any loss or expense to the Trust under or by
reason of said contract or accountable for any profit realized directly or
indirectly therefrom, provided that the contract when entered into was
reasonable and fair and not inconsistent with the provisions of this Article VII
or the Bylaws, if any. The same person (including a firm, corporation,
partnership, trust, or association) may be the other party to contracts entered
into pursuant to Sections 1, 2 and 3 above or Article IX, and any individual may
be financially interested or otherwise affiliated with persons who are parties
to any or all of the contracts mentioned in this Section 4.
PROVISIONS AND AMENDMENTS
- -------------------------
Section 5. Any contract entered into pursuant to Sections 1 and 2 of this
Article VII shall be consistent with and subject to the requirements of Section
15 of the 1940 Act (including any amendments thereof or other applicable Act of
Congress hereafter enacted) with respect to its continuance in effect, its
termination, and the method of authorization and approval of such contract or
renewal thereof, and no amendment to any contract, entered into pursuant to
Section 1 shall be effective unless assented to by a Majority Shareholder Vote.
<PAGE>
ARTICLE VIII
------------
SHAREHOLDERS' VOTING POWERS AND MEETINGS
----------------------------------------
VOTING POWERS
- -------------
Section 1. The Shareholders shall have power to vote (i) for the election
of Trustees as provided in Article IV, Section 2, (ii) for the removal of
Trustees as provided in Article IV, Section 3(d), (iii) with respect to any
investment advisory or management contract as provided in Article VII, Sections
1 and 5, (iv) with respect to the amendment of this Declaration of Trust as
provided in Article XII, Section 7, (v) to the same extent as the shareholders
of a Massachusetts business corporation, as to whether or not a court action,
proceeding or claim should be brought or maintained derivatively or as a class
action on behalf of the Trust or the Shareholders, provided, however, that a
Shareholder of a particular Series shall not be entitled to bring any derivative
or class action on behalf of any other Series of the Trust, and (vi) with
respect to such additional matters relating to the Trust as may be required or
authorized by law, by this Declaration of Trust, or the Bylaws of the Trust, if
any, or any registration of the Trust with the Securities and Exchange
Commission (the "Commission") or any State, as the Trustees may consider
desirable. On any matter submitted to a vote of the Shareholders, all shares
shall be voted by individual Series, except (i) when required by the 1940 Act,
Shares shall be voted in the aggregate and not by individual Series; and (ii)
when the Trustees have determined that the matter affects only the interests of
one or more Series, then only the Shareholders of such Series shall be entitled
to vote thereon. Each whole Share shall be entitled to one vote as to any matter
on which it is entitled to vote, and each fractional Share shall be entitled to
a proportionate fractional vote. There shall be no cumulative voting in the
election of Trustees. Shares may be voted in person or by proxy. Until Shares
are issued, the Trustees may exercise all rights of Shareholders and may take
any action required or permitted by law, this Declaration of Trust or any Bylaws
of the Trust to be taken by Shareholders.
MEETINGS
- --------
Section 2. The first Shareholders' meeting shall be held as specified in
Section 2 of Article IV at the principal office of the Trust or such other place
as the Trustees may designate. Special meetings of the Shareholders of any
Series may be called by the Trustees and shall be called by the Trustees upon
the written request of Shareholders owning at least one-tenth of the outstanding
Shares entitled to vote. Whenever ten or more Shareholders meeting the
qualifications set forth in Section 16(c) of the 1940 Act, as the same may be
amended from time to time, seek the opportunity of furnishing materials to the
other Shareholders with a view to obtaining signatures on such a request for a
meeting, the Trustees shall comply with the provisions of said Section 16(c)
with respect to providing such Shareholders access to the list of the
Shareholders of record of the Trust or the mailing of such materials to such
Shareholders of record. Shareholders shall be entitled to at least fifteen days'
notice of any meeting.
QUORUM AND REQUIRED VOTE
- ------------------------
Section 3. A majority of Shares entitled to vote in person or by proxy
shall be a quorum for the transaction of business at a Shareholders' meeting,
except that where any provision of law or of this Declaration of Trust permits
or requires that holders of any Series shall vote as a Series, then a majority
of the aggregate number of Shares of that Series entitled to vote shall be
necessary to constitute a quorum for the transaction of business by that Series.
Any lesser number shall be sufficient for adjournments. Any adjourned session or
sessions may be held, within a reasonable time after the date set for the
original meeting, without the necessity of further notice. Except when a larger
vote is required by any provision of
<PAGE>
this Declaration of Trust or the Bylaws, a majority of the Shares voted in
person or by proxy shall decide any questions and a plurality shall elect a
Trustee, provided that where any provision of law or of this Declaration of
Trust permits or requires that the holders of any Series shall vote as a Series,
then a majority of the Shares of that Series voted on the matter shall decide
that matter insofar as that Series is concerned.
ARTICLE IX
----------
CUSTODIAN
---------
APPOINTMENT AND DUTIES
- ----------------------
Section 1. The Trustees shall at all times employ a bank or trust company
having capital, surplus and undivided profits of at least one million dollars
($1,000,000) as custodian with authority as its agent, but subject to such
restrictions, limitations and other requirements, if any, as may be contained in
the Bylaws of the Trust:
(1) to hold the securities owned by the Trust and deliver the same upon
written order,
(2) to receive and receipt for any moneys due to the Trust and deposit
the same in its own banking department or elsewhere as the Trustees may direct;
and
(3) to disburse such funds upon orders or vouchers; and the Trust may also
employ such custodian as its agent:
(1) to keep the books and accounts of the Trust and furnish clerical
and accounting services; and
(2) to compute, if authorized to do so by the Trustees, the Net Asset
Value of any Series in accordance with the provisions hereof; all upon such
basis of compensation as may be agreed upon between the Trustees and the
custodian. If so directed by a Majority Shareholder Vote, the custodian shall
deliver and pay over all property of the Trust held by it as specified in such
vote.
The Trustees may also authorize the custodian to employ one or more sub-
custodians from time to time to perform such of the acts and services of the
custodian, and upon such terms and conditions, as may be agreed upon between the
custodian and such sub-custodian and approved by the Trustees, provided that in
every case such sub-custodian shall be a bank or trust company organized under
the laws of the United States or one of the states thereof and having capital,
surplus and undivided profits of at least one million dollars ($1,000,000) or
such other person as may be permitted by the Commission, or otherwise in
accordance with the 1940 Act as from time to time amended.
<PAGE>
CENTRAL CERTIFICATE SYSTEM
- --------------------------
Section 2. Subject to such rules, regulations and orders as the Commission
may adopt, the Trustees may direct the custodian to deposit all or any part of
the securities owned by the Trust in a system for the central handling of
securities established by a national securities exchange or a national
securities association registered with the Commission under the Securities
Exchange Act of 1934, or such other person as may be permitted by the
Commission, or otherwise in accordance with the 1940 Act as from time to time
amended, pursuant to which system all securities of any particular class or
series of any issuer deposited within the system are treated as fungible and may
be transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal only
upon the order of the Trust.
ARTICLE X
---------
DISTRIBUTIONS AND REDEMPTIONS
-----------------------------
DISTRIBUTIONS
- -------------
Section 1.
(a) The Trustees may from time to time declare and pay dividends. The
amount of such dividends and the payment of them shall be wholly in the
discretion of the Trustees.
(b) The Trustees shall have power, to the fullest extent permitted by the
laws of Massachusetts, at any time to declare and cause to be paid dividends on
Shares of a particular Series, from the assets belonging to that Series, which
dividends, at the election of the Trustees, may be paid daily or otherwise
pursuant to a standing resolution or resolutions adopted only once or with such
frequency as the Trustees may determine, and may be payable in Shares of that
Series at the election of each Shareholder of that Series.
(c) Anything in this instrument to the contrary notwithstanding, the
Trustees may at any time declare and distribute pro rata among the Shareholders
of a particular Series as of the record date of that Series fixed as provided in
Section 3 hereof a "stock dividend".
REDEMPTIONS
- -----------
Section 2. In case any holder of record of Shares of a particular Series
desires to dispose of his Shares, he may deposit at the office of the transfer
agent or other authorized agent of that Series a written request or such other
form of request as the Trustees may from time to time authorize, requesting that
the Series purchase the Shares in accordance with this Section 2; and the
Shareholder so requesting shall be entitled to require the Series to purchase,
and the Series or the principal underwriter of the Series shall purchase his
said Shares, but only at the Net Asset Value thereof (as described in Section 3
hereof). The Series shall make payment for any such Shares to be redeemed, as
aforesaid, in cash or property from the assets of that Series and payment for
such Shares shall be made by the Series or the principal underwriter of the
Series to the Shareholder of record within seven (7) days after the date upon
which the request is effective.
<PAGE>
DETERMINATION OF NET ASSET VALUE AND VALUATION OF PORTFOLIO ASSETS
- ------------------------------------------------------------------
Section 3. The term "Net Asset Value" of any Series shall mean that amount
by which the assets of that Series, exceed its liabilities, all as determined by
or under the direction of the Trustees. Such value per Share shall be determined
separately for each Series of Shares and shall be determined on such days and at
such times as the Trustees may determine. Such determination shall be made with
respect to securities for which market quotations are readily available, at the
market value of such securities; and with respect to other securities and
assets, at the fair value as determined in good faith by the Trustees, provided,
however, that the Trustees, without Shareholder approval, may alter the method
of appraising portfolio securities insofar as permitted under the 1940 Act and
the rules, regulations and interpretations thereof promulgated or issued by the
Commission or insofar as permitted by any Order of the Commission applicable to
the Series. The Trustees may delegate any of its powers and duties under this
Section 3 with respect to appraisal of assets and liabilities. At any time the
Trustees may cause the value per Share last determined to be determined again in
similar manner and may fix the time when such redetermined value shall become
effective.
SUSPENSION OF THE RIGHT OF REDEMPTION
- -------------------------------------
Section 4. The Trustees may declare a suspension of the right of redemption
or postpone the date of payment as permitted under the 1940 Act. Such suspension
shall take effect at such time as the Trustees shall specify but not later than
the close of business on the business day next following the declaration of
suspension, and thereafter there shall be no right of redemption or payment
until the Trustees shall declare the suspension at an end. In the case of a
suspension of the right of redemption, a Shareholder may either withdraw his
request for redemption or receive payment based on the Net Asset Value per Share
existing after the termination of the suspension.
ARTICLE XI
----------
LIMITATION OF LIABILITY AND INDEMNIFICATION
-------------------------------------------
LIMITATION OF LIABILITY
- -----------------------
Section 1. Provided they have exercised reasonable care and have acted
under the reasonable belief that their actions are in the best interest of the
Trust, the Trustees shall not be responsible for or liable in any event for
neglect or wrongdoing of them or any officer, agent, employee or investment
adviser of the Trust, but nothing contained herein shall protect any 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.
INDEMNIFICATION
- ---------------
Section 2.
(a) Subject to the exceptions and limitations contained in Section (b)
below:
(i) every person who is, or has been, a Trustee or officer of the
Trust (hereinafter referred to as "Covered Person") shall be indemnified by the
appropriate Series to the fullest extent permitted by law against liability and
against all expenses reasonably incurred or paid by him in connection with any
claim,
<PAGE>
action, suit or proceeding in which he becomes involved as a party or otherwise
by virtue of his being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal or other,
including appeals), actual or threatened while in office or thereafter, and the
words "liability" and "expenses" shall include, without limitation, attorneys'
fees, costs, judgments, amounts paid in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before which
the proceeding was brought (A) to be liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the dudes involved in the conduct of his office or, (B) to have acted in good
faith in the reasonable belief that his action was in the best interest of the
Trust; or
(ii) in the event of a settlement unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office,
(A) by the court or other body approving the settlement;
(B) by at least a majority of those Trustees who are neither
interested persons of the Trust nor are parties to the matter based upon a
review of readily available facts (as opposed to a full trial-type inquiry); or
(C) by written opinion of independent legal counsel based upon a
review of readily available facts (as opposed to a full trial-type inquiry);
provided, however, that any Shareholder may, by appropriate legal proceedings,
challenge any such determination by the Trustees, or by independent counsel.
(c) The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not be exclusive
of or affect any other rights to which any Covered Person may now or hereafter
be entitled, shall continue as to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character described in
paragraph (a) of this Section 2 may be paid by the applicable Series from time
to time prior to final disposition thereof upon receipt of an undertaking by or
on behalf of such Covered Person that such amount will be paid over by him to
the applicable Series if it is ultimately determined that he is not entitled to
indemnification under this Section 2; provided, however, that either (a) such
Covered Person shall have provided appropriate security for such undertaking,
(b) the Trust is insured against losses arising out of any such advance payments
or (c) either a majority of the Trustees who are neither interested persons of
the Trust nor parties to the matter, or independent legal counsel in a written
opinion, shall have
<PAGE>
determined, based upon a review of readily available facts (as opposed to a
trial-type inquiry or full investigation), that there is reason to believe that
such Covered Person will be found entitled to indemnification under this Section
2.
SHAREHOLDERS
- ------------
Section 3. In case any Shareholder or former Shareholder of any Series of
the Trust shall be held to be personally liable solely by reason of his being or
having been a Shareholder and not because of his acts or omissions or for some
other reason, the Shareholder or former Shareholder (or his heirs, executors,
administrators or other legal representatives or in the case of a corporation or
other entity, its corporate or other general successor) shall be entitled out of
the assets belonging to the applicable Series to be held harmless from and
indemnified against all loss and expense arising from such liability. The Series
shall, upon request by the Shareholder, assume the defense of any claim made
against the Shareholder for any act or obligation of the Series and satisfy any
judgment thereon.
ARTICLE XII
-----------
MISCELLANEOUS
-------------
TRUST NOT A PARTNERSHIP
- -----------------------
Section 1. It is hereby expressly declared that a trust and not a
partnership is created hereby. No Trustee hereunder shall have any power to bind
personally either the Trust's officers or any Shareholder. All persons extending
credit to, contracting with or having any claim against the Trust or the
Trustees shall look only to the assets of the appropriate Series for payment
under such credit, contract or claim; and neither the Shareholders nor the
Trustees, nor any of their agents, whether past, present or future, shall be
personally liable therefor. Nothing in this Declaration of Trust shall protect a
Trustee against any liability to which the Trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of the office of Trustee hereunder.
TRUSTEE'S GOOD FAITH ACTION, EXPERT ADVICE, NO BOND OR SURETY
- -------------------------------------------------------------
Section 2. The exercise by the Trustees of their powers and discretions
hereunder in good faith and with reasonable care under the circumstances then
prevailing, shall be binding upon everyone interested. Subject to the provisions
of Section 1 of this Article XII and to Article XI, the Trustees shall not be
liable for errors of judgment or mistakes of fact or law. The Trustees may take
advice of counsel or other experts with respect to the meaning and operation of
this Declaration of Trust, and subject to the provisions of Section 1 of this
Article XII and to Article XI, shall be under no liability for any act or
omission in accordance with such advice or for failing to follow such advice.
The Trustees shall not be required to give any bond as such, nor any surety if a
bond is obtained.
ESTABLISHMENT OF RECORD DATES
- -----------------------------
Section 3. The Trustees may close the stock transfer books of the Trust for
a period not exceeding sixty (60) days preceding the date of any meeting of
Shareholders, or the date for the payment of any dividends, or the date for the
allotment of rights, or the date when any change or conversion or exchange of
Shares shall go into effect; or in lieu of closing the stock transfer books as
aforesaid, the Trustees may
<PAGE>
fix in advance a date, not exceeding sixty (60) days preceding the date of any
meeting of Shareholders, or the date for payment of any dividend, or the date
for the allotment of rights, or the date when any change or conversion or
exchange of Shares shall go into effect, as a record date for the determination
of the Shareholders entitled to notice of, and to vote at, any such meeting, or
entitled to receive payment of any such dividend, or to any such allotment of
rights, or to exercise the rights in respect of any such change, conversion or
exchange of Shares, and in such case such Shareholders and only such
Shareholders as shall be Shareholders of record on the date so fixed shall be
entitled to such notice of, and to vote at, such meeting, or to receive payment
of such dividend, or to receive such allotment or rights, or to exercise such
rights, as the case may be, notwithstanding any transfer of any Shares on the
books of the Trust after any such record date fixed or aforesaid.
TERMINATION OF TRUST
- --------------------
Section 4.
(a) This Trust shall continue without limitation of time but subject to
the provisions of subsection (b) of this Section 4.
(b) Subject to a Majority Shareholder Vote of each Series affected by the
matter or, if applicable, to a Majority Shareholder Vote of the Trust, the
Trustees may
(i) sell and convey the assets of the Trust or any affected Series to
another trust, partnership, association or corporation organized under the laws
of any state which is a diversified open-end management investment company as
defined in the 1940 Act, for adequate consideration which may include the
assumption of all outstanding obligations, taxes and other liabilities, accrued
or contingent of the Trust or any affected Series, and which may include shares
of beneficial interest or stock of such trust, partnership, association or
corporation; or
(ii) at any time sell and convert into money all of the assets of the
Trust or any affected Series.
Upon making provision for the payment of all such liabilities in either (i)
or (ii), by such assumption or otherwise, the Trustees shall distribute the
remaining proceeds or assets (as the case may be) ratably among the holders of
the Shares of the Trust or any affected Series then outstanding.
(c) Upon completion of the distribution of the remaining proceeds or the
remaining assets as provided in sub-section (b), the Trust or any affected
Series shall terminate and the Trustees shall be discharged of any and all
further liabilities and dudes hereunder and the right, title and interest of all
parties shall be cancelled and discharged.
FILING OF COPIES, REFERENCES, HEADINGS
- --------------------------------------
Section 5. The original or a copy of this instrument and of each
declaration of trust supplemental hereto shall be kept at the office of the
Trust where it may be inspected by any Shareholder. A copy of this instrument
and of each supplemental declaration of trust shall be filed by the Trustees
with the Secretary of the Commonwealth of Massachusetts and the Boston City
Clerk, as well as any other governmental office where such filing may from time
to time be required. Anyone dealing with the Trust may rely on a certificate by
an officer or Trustee of the Trust as to whether or not any such supplemental
declarations of trust have been made and as to any matters in connection with
the Trust hereunder, and with the same
<PAGE>
effect as if it were the original, may rely on a copy certified by an officer or
Trustee of the Trust to be a copy of this instrument or of any such supplemental
declaration of trust. In this instrument or in any such supplemental declaration
of trust, references to this instrument, and all expressions like "herein,"
"hereof" and "hereunder," shall be deemed to refer to this instrument as amended
or affected by any such supplemental declaration of trust. Headings are placed
herein for convenience of reference only and in case of any conflict, the text
of this instrument, rather than the headings, shall control. This instrument may
be executed in any number of counterparts each of which shall be deemed an
original.
APPLICABLE LAW
- --------------
Section 6. The trust set forth in this instrument is made in the
Commonwealth of Massachusetts, and it is created under and is to be governed by
and construed and administered according to the laws of said Commonwealth. The
Trust shall be of the type commonly called a Massachusetts business trust, and
without limiting the provisions hereof, the Trust may exercise all powers which
are ordinarily exercised by such a trust.
AMENDMENTS
- ----------
Section 7. If authorized by votes of the Trustees and a Majority
Shareholder Vote, or by any larger vote which may be required by applicable law
or this Declaration of Trust in any particular case, the Trustees shall amend or
otherwise supplement this instrument, by making a declaration of trust
supplemental hereto, which thereafter shall form a part hereof, except that an
amendment which shall affect the Shareholders of one or more Series but not the
Shareholders of all outstanding Series shall be authorized by vote of the
Shareholders holding a majority of the Shares entitled to vote of each Series
affected and no vote of Shareholders of a Series not affected shall be required.
Amendments having the purpose of changing the name of the Trust or of supplying
any omission, curing any ambiguity or curing, correcting or supplementing any
defective or inconsistent provision contained herein shall not require
authorization by Shareholder vote. Copies of the supplemental declaration of
trust shall be filed as specified in Section 5 of this Article XII.
FISCAL YEAR
Section 8. The fiscal year of the Trust shall end on a specified date as
set forth in the Bylaws, provided, however, that the Trustees may, without
Shareholder approval, change the fiscal year of the Trust.
IN WITNESS WHEREOF, the undersigned, being all of the initial Trustees of the
Trust, have executed this instrument this 6th day of March, 1992.
/s/ Arthur S. Loring
-------------------------------
Arthur S. Loring
Trustee
/s/ Stuart E. Fross
-------------------------------
Stuart E. Fross
Trustee
<PAGE>
EXHIBIT 1(B)
THE COMMONWEALTH OF MASSACHUSETTS
MICHAEL JOSEPH CONNOLLY
SECRETARY OF THE COMMONWEALTH
STATE HOUSE - BOSTON, MA
SUPPLEMENT TO THE DECLARATION OF TRUST
- --------------------------------------
We, Arthur S. Loring, Trustee and Smart E. Fross, Trustee of
The Masters Group
82 Devonshire Street
Boston, Massachusetts 02109
do hereby certify that, in accordance with Article XII, Section 7 of the
Declaration of Trust of The Masters Group, the following Supplement to said
Declaration of Trust was duly adopted.
VOTED: That the Declaration of Trust made March 6, 1992 be and it hereby is,
amended as follows:
That Article I, Section 1 of the Declaration of Trust of this Trust shall
be amended to read as follows:
"This Trust shall be known as 'The Masters Group of Mutual Funds'."
That Article 1, Section 2(b) of the Declaration of Trust of this Trust
shall be amended to read as follows:
"The 'Trust' refers to 'The Masters Group of Mutual Funds'."
The foregoing supplement to the Declaration of Trust became effective April 24,
1992 so long as this Supplement is filed in accordance with Chapter 182, Section
2, of the General Laws.
IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereunto signed
our names this 18th day of May, 1992.
/s/__________________ /s/__________________
Arthur S. Loring Stuart E. Fross
Trustee Trustee
<PAGE>
FIDELITY INVESTMENTS
Fidelity Management & Research Co.
82 Devonshire Street
Boston MA 02109
617-570-7000
August 24, 1992
The Masters Group of Mutual Funds
82 Devonshire Street
Boston, MA 02109
Gentlemen:
Please be advised that the 100,000 shares of the beneficial interest of The
Masters Group of Mutual Funds which we have today purchased from you were
purchased by Fidelity Management & Research Company as an investment with no
present intention of redeeming or reselling such shares.
Very truly yours,
/s/_____________________
Arthur S. Loring
Vice President and
General Counsel
<PAGE>
EXHIBIT 1(C)
DECLARATION OF TRUST
DATED MARCH 6,1992
As Amended and Restated
THIS DECLARATION OF TRUST, as made on March 6, 1992 by Arthur S. Loring and
Stuart E. Fross (the "Initial Trustees").
WHEREAS, the Initial Trustees established a trust fund for the investment
and reinvestment of funds contributed thereto on March 6, 1992 known as The
Masters Group of Mutual Funds (the "Trust");
WHEREAS, the sole shareholder of the Trust, and the Trustees, acting
pursuant to Article XII, Section 7, amended and restated the Declaration of
Trust on September 4, 1992 in its entirety, effective upon the execution of the
Declaration of Trust, as amended and restated, by the Trustees duly elected by
the sole shareholder,
NOW, THEREFORE, the Trustees declare that all money and property contributed
to the trust fund hereunder shall be held and managed in trust under this
Declaration of Trust as herein set forth below.
ARTICLE I
---------
NAME AND DEFINITIONS
--------------------
NAME
- ----
Section 1. This Trust shall be known as "The Masters Group of Mutual Funds".
DEFINITIONS
- -----------
Section 2. Wherever used herein, unless otherwise required by the context or
specifically provided:
(a) The Terms "Affiliated Person", "Assignment", "Commission",
"Interested Person", "Majority Shareholder Vote" (the 67% or 50% requirement
of the third sentence of Section 2(a)(42) of the 1940 Act, whichever may be
applicable) and "Principal Underwriter" shall have the meanings given them
in the 1940 Act, as amended from time to time;
(b) The "Trust" refers to The Masters Group of Mutual Funds and
reference to the Trust, when applicable to one or more Series of the Trust,
shall refer to any such Series;
(c) "Net Asset Value" means the net asset value of each Series of the
Trust determined in the manner provided in Article X, Section 3;
(d) "Shareholder" means a record owner of Shares of the Trust;
(e) The "Trustees" refer to the individual trustees in their capacity
as trustees hereunder of the Trust and their successor or successors for the
time being in office as such trustee or trustees;
(f) "Shares" means the equal proportionate transferable units of
interest into which the beneficial interest of the Trust or each Series
shall be divided from time to time, including such class or classes of
<PAGE>
Shares as the Trustees may from time to time create and establish and
including fractions of Shares as well as whole Shares consistent with the
requirements of Federal and/or state securities laws; and
(g) The "1940 Act" refers to the Investment Company Act of 1940, as
amended from time to time.
(h) "Series" refers to series of Shares of the Trust established in
accordance with the provisions of Article M or any classes thereunder.
ARTICLE II
----------
PURPOSE OF TRUST
----------------
The purpose of this Trust is to provide investors a continuous source of managed
investment in securities.
ARTICLE III
-----------
BENEFICIAL INTEREST
-------------------
SHARES OF BENEFICIAL INTEREST
- -----------------------------
Section 1. The beneficial interest in the Trust shall be divided into such
transferable Shares of one or more separate and distinct Series or classes as
the Trustees shall from time to time create and establish. The number of Shares
is unlimited and each Share shall be without par value and shall be fully paid
and nonassessable. The Trustees shall have full power and authority, in their
sole discretion and without obtaining any prior authorization or vote of the
Shareholders or any Series or class of Shareholders of the Trust, to create and
establish (and to change in any manner) Shares or any classes thereof with such
preferences, voting powers, rights and privileges as the Trustees may from time
to time determine, to divide or combine the Shares or any Series or classes
thereof into a greater or lesser number, to classify or reclassify any issued
Shares or any Series or classes thereof into one or more Series or classes of
Shares, to abolish any one or more Series or classes of Shares, and to take such
other action with respect to the Shares as the Trustees may deem desirable.
ESTABLISHMENT OF SERIES
- -----------------------
Section 2. The establishment of any Series or class shall be effective upon
the adoption of a resolution by a majority of the then Trustees setting forth
such establishment and designation and the relative rights and preferences of
the Shares of such Series. At any time that there are no Shares outstanding of
any particular Series previously established and designated, the Trustees may by
a majority vote abolish that Series and the establishment and designation
thereof.
OWNERSHIP OF SHARES
- -------------------
Section 3. The ownership of Shares shall be recorded in the books of the
Trust. The Trustees may make such rules as they consider appropriate for the
transfer of Shares and similar matters. The record books of the Trust shall be
conclusive as to who are the holders of Shares and as to the number of Shares
held from time to time by each Shareholder.
<PAGE>
INVESTMENT IN THE TRUST
- -----------------------
Section 4. The Trustees shall accept investments in the Trust from such
persons and on such terms as they may from time to time authorize. Such
investments may be in the form of cash or securities in which the appropriate
Series is authorized to invest, valued as provided in Article X, Section 3.
After the date of the initial contribution of capital, the number of Shares to
represent the initial contribution may in the Trustees' discretion be considered
as outstanding and the amount received by the Trustees on account of the
contribution shall be treated as an asset of the Trust. Subsequent investments
in the Trust shall be credited to each Shareholder's account in the form of full
Shares at the Net Asset Value per Share next determined after the investment is
received; provided, however, that the Trustees may, in their sole discretion,
(a) impose a sales charge upon investments in the Trust and (b) issue fractional
Shares.
ASSETS AND LIABILITIES OF SERIES
- --------------------------------
Section 5. All consideration received by the Trust for the issue or sale of
Shares of a particular Series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall be
referred to as "assets belonging to" that Series. In addition any assets,
income, earnings, profits, and proceeds thereof, funds, or payments which are
not readily identifiable as belonging to any particular Series shall be
allocated by the Trustees between and among one or more of the Series in such
manner as they, in their sole discretion, deem fair and equitable. Each such
allocation shall be conclusive and binding upon the Shareholders of all Series
for all purposes, and shall be referred to as assets belonging to that Series.
The assets belonging to a particular Series shall be so recorded upon the books
of the Trust, and shall be held by the Trustees in Trust for the benefit of the
holders of Shares of that Series. The assets belonging to each particular Series
shall be charged with the liabilities of that Series and all expenses, costs,
charges and reserves attributable to that Series. Any general liabilities,
expenses, costs, charges or reserves of the Trust which are not readily
identifiable as belonging to any particular Series shall be allocated and
charged by the Trustees between or among any one or more of the Series in such
manner as the Trustees in their sole discretion deem fair and equitable. Each
such allocation shall be conclusive and binding upon the Shareholders of all
Series for all purposes. Any creditor of any Series may look only to the assets
of that Series to satisfy such creditor's debt.
NO PREEMPTIVE RIGHT'S
- ---------------------
Section 6. Shareholders shall have no preemptive or other right to subscribe
to any additional Shares or other securities issued by the Trust or the
Trustees.
LIMITATION OF PERSONAL LIABILITY
- --------------------------------
Section 7. The Trustees shall have no power to bind any Shareholder
personally or to call upon any Shareholder for the payment of any sum of money
or assessment whatsoever other than such as the Shareholder may at any time
personally agree to pay by way of subscription for any Shares or otherwise.
Every note, bond, contract or other undertaking issued by or on behalf of the
Trust or the Trustees relating to the Trust shall include a recitation limiting
the obligation represented thereby to the Trust, or Series, and its assets (but
the omission of such a recitation shall not operate to bind any Shareholder).
<PAGE>
ARTICLE IV
----------
THE TRUSTEES
------------
MANAGEMENT OF THE TRUST
- -----------------------
Section 1. The business and affairs of the Trust shall be managed by the
Trustees, and they shall have all powers necessary and desirable to carry out
that responsibility.
ELECTION TRUSTEES
- -----------------
Section 2. On a date fixed by the Trustees, the Shareholders shall elect not
less than two Trustees. A Trustee shall not be required to be a Shareholder of
the Trust. The initial Trustees shall be Arthur S. Loring and Stuart E. Fross
and such other individuals as shall be appointed pursuant to Section 4 of the
Article IV.
TERM OF OFFICE OF TRUSTEES
- --------------------------
Section 3. The Trustees shall hold office during the lifetime of this Trust,
and until its termination as hereinafter provided; except (a) that any Trustee
may resign his trust by written instrument signed by him and delivered to the
other Trustees, which shall take effect upon such delivery or upon such later
date as is specified therein; (b) that any Trustee may be removed at any time by
written instrument, signed by at least two-thirds of the number of Trustees
prior to such removal, specifying the date when such removal shall become
effective; (c) that any Trustee who requests in writing to be retired or who has
become incapacitated by illness or injury may be retired by written instrument
signed by a majority of the other Trustees, specifying the date of his
retirement; and (d) a Trustee may be removed at any Special Meeting of the Trust
by a vote of two-thirds of the outstanding Shares.
RESIGNATION AND APPOINTMENT OF TRUSTEES
- ---------------------------------------
Section 4. In case of the declination, death, resignation, retirement,
removal, incapacity, or inability of any of the Trustees, or in case a vacancy
shall, by reason of an increase in number, or for any other reason, exist, the
remaining Trustees shall fill such vacancy by appointing such other person as
they in their discretion shall see fit consistent with the limitations under the
1940 Act. Such appointment shall be evidenced by a written instrument signed by
a majority of the Trustees in office or by recording in the records of the
Trust, whereupon the appointment shall take effect. Within three months of such
appointment the Trustees shall cause notice of such appointment to be mailed to
each Shareholder at his address as recorded on the books of the Trust. An
appointment of a Trustee may be made by the Trustees then in office and notice
thereof mailed to Shareholders as aforesaid in anticipation of a vacancy to
occur by reason of retirement, resignation or increase in number of Trustees
effective at a later date, provided that said appointment shall become effective
only at or after the effective date of said retirement, resignation or increase
in number of Trustees. As soon as any Trustee so appointed shall have accepted
this trust, the trust estate shall vest in the new Trustee or Trustees, together
with the continuing Trustees, without any further act or conveyance, and he
shall be deemed a Trustee hereunder. The power of appointment is subject to the
provisions of Section 16(a) of the 1940 Act.
<PAGE>
TEMPORARY ABSENCE OF TRUSTEE
- ----------------------------
Section 5. Any Trustee may, by power of attorney, delegate his power for a
period not exceeding six months at any one time to any other Trustee or
Trustees, provided that in no case shall less than two Trustees personally
exercise the other powers hereunder except as herein otherwise expressly
provided.
NUMBER OF TRUSTEES
- ------------------
Section 6. The number of Trustees, not less than two (2) nor more than
twelve (12), serving hereunder at any time shall be determined by the Trustees
themselves.
Whenever a vacancy in the Board of Trustees shall occur, until such vacancy
is filled, or while any Trustee is physically or mentally incapacitated by
reason of disease or otherwise, the other Trustees shall have all the powers
hereunder and the certificate of the other Trustees of such vacancy or
incapacity, shall be conclusive, provided, however, that no vacancy shall remain
unfilled for a period longer than thirty-six calendar months.
EFFECT OF DEATH, RESIGNATION, ETC. OF A TRUSTEE
- -----------------------------------------------
Section 7. The death, declination, resignation, retirement, removal,
incapacity, or inability of the Trustees, or any one of them, shall not operate
to annul the Trust or to revoke any existing agency created pursuant to the
terms of this Declaration of Trust.
OWNERSHIP OF ASSETS OF THE TRUST
- --------------------------------
Section 8. The assets of the Trust shall be held separate and apart from any
assets now or hereafter held in any capacity other than as Trustee hereunder by
the Trustees or any successor Trustees. All of the assets of the Trust shall at
all times be considered as vested in the Trustees. No Shareholder shall be
deemed to have a severable ownership in any individual asset of the Trust or any
right of partition or possession thereof, but each Shareholder shall have a
proportionate undivided beneficial interest in the Trust.
ARTICLE V
---------
POWERS OF THE TRUSTEES
----------------------
POWERS
- ------
Section 1. The Trustees in all instances shall act as principals, and are
and shall be free from the control of the Shareholders. The Trustees shall have
full power and authority to do any and all acts and to make and execute any and
all contracts and instruments that they may consider necessary or appropriate in
connection with the management of the Trust. The Trustees shall not in any way
be bound or limited by present or future laws or customs in regard to trust
investments, but shall have full authority and power to make any and all
investments which they, in their uncontrolled discretion, shall deem proper to
accomplish the purpose of this Trust. Subject to any applicable limitation in
the Declaration of Trust or the Bylaws of the Trust, the Trustees shall have
power and authority:
(a) To invest and reinvest cash and other property, and to hold cash or
other property uninvested, without in any event being bound or limited by any
present or future law or custom in regard to investments by
<PAGE>
Trustees, and to sell, exchange, lend, pledge, mortgage, hypothecate, write
options on and lease any or all of the assets of the Trust.
(b) To adopt Bylaws not inconsistent with this Declaration of Trust
providing for the conduct of the business of the Trust and to amend and repeal
them to the extent that they do not reserve that right to the Shareholders.
(c) To elect and remove such officers and appoint and terminate such
agents as they consider appropriate.
(d) To employ a bank or trust company as custodian of any assets of the
Trust subject to any conditions set forth in this Declaration of Trust or in the
Bylaws, if any.
(e) To retain a transfer agent or Shareholder servicing agent, or both.
(f) To provide for the distribution of interests of the Trust either
through a principal underwriter in the manner hereinafter provided for or by the
Trust itself, or both.
(g) To set record dates in the manner hereinafter provided for.
(h) To delegate such authority as they consider desirable to any officers
of the Trust and to any agent, custodian or underwriter.
(i) To sell or exchange any or all of the assets of the Trust, subject to
the provisions of Article XII Section 4(b) hereof.
(j) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and deliver
powers of attorney to such person or persons as the Trustees shall deem proper,
granting to such person or persons such power and discretion with relation to
securities or property as the Trustees shall deem proper.
(k) To exercise powers and rights of subscription or otherwise which in
any manner arise out of ownership of securities.
(1) To hold any security or property in a form not indicating any trust,
whether in bearer, unregistered or other negotiable form; or either in its own
name or in the name of a custodian or a nominee or nominees, subject in either
case to proper safeguards according to the usual practice of Massachusetts trust
companies or investment companies.
(m) To establish separate and distinct Series with separately defined
investment objectives and policies and distinct investment purposes in
accordance with the provisions of Article III.
(n) To allocate assets, liabilities and expenses of the Trust to a
particular Series or to apportion the same between or among two or more Series
or classes thereof, provided that any liabilities or expenses incurred by a
particular Series shall be payable solely out of the assets belonging to that
Series or a class thereof as provided for in Article III.
(o) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or concern, any security of which is
held in the Trust; to consent to any contract, lease, mortgage,
<PAGE>
purchase, or sale of property by such corporation or concern, and to pay calls
or subscriptions with respect to any security held in the Trust.
(p) To compromise, arbitrate, or otherwise adjust claims in favor of or
against the Trust or any matter in controversy including, but not limited to,
claims for taxes.
(q) To make distributions of income and of capital gains to Shareholders in
the manner hereinafter provided for.
(r) To borrow money and to pledge mortgage and hypothecate the assets of the
Trust, subject to applicable requirements of the 1940 Act.
(s) To establish, from time to time, a minimum total investment for
Shareholders, and to require the redemption of the Shares of any Shareholders
whose investment is less than such minimum upon giving notice to such
Shareholder.
No one dealing with the Trustees shall be under any obligation to make any
inquiry concerning the authority of the Trustees, or to see to the application
of any payments made or property transferred to the Trustees or upon their
order.
TRUSTEES AND OFFICERS AS SHAREHOLDERS
- -------------------------------------
Section 2. Any Trustee, officer or other agent of the Trust may acquire, own
and dispose of Shares to the same extent as if he were not a Trustee, officer or
agent; and the Trustees may issue and sell or cause to be issued and sold Shares
to and buy such Shares from any such person of any firm or company in which he
is interested, subject only to the general limitations herein contained as to
the sale and purchase of such Shares; and all subject to any restrictions which
may be contained in the Bylaws.
ACTION BY THE TRUSTEES
- ----------------------
Section 3. The Trustees shall act by majority vote at a meeting duly called
or by unanimous written consent without a meeting or by telephone consent
provided a quorum of Trustees participate in any such telephonic meeting, unless
the 1940 Act requires that a particular action be taken only at a meeting of the
Trustees. At any meeting of the Trustees, a majority of the Trustees shall
constitute a quorum. Meetings of the Trustees may be called orally or in writing
by the Chairman of the Trustees or by any two other Trustees. Notice of the
time, date and place of all meetings of the Trustees shall be given by the party
calling the meeting to each Trustee by telephone or telegram sent to his home or
business address at least twenty-four hours in advance of the meeting or by
written notice mailed to his home or business address at least seventy-two hours
in advance of the meeting. Notice need not be given to any Trustee who attends
the meeting without objecting to the lack of notice or who executes a written
waiver of notice with respect to the meeting. Subject to the requirements of the
1940 Act, the Trustees by majority vote may delegate to any one of their number
their authority to approve particular matters or take particular actions on
behalf of the Trust.
CHAIRMAN OF THE TRUSTEES
- ------------------------
Section 4. The Trustees may appoint one of their number to be Chairman of
the Board of Trustees. The Chairman shall preside at all meetings of the
Trustees, shall be responsible for the execution of policies
<PAGE>
established by the Trustees and the administration of the Trust, and may be the
chief executive, financial and accounting officer of the Trust.
ARTICLE VI
----------
EXPENSES OF THE TRUST
---------------------
TRUSTEE REIMBURSEMENT
- ---------------------
Section 1. Subject to the provisions of Article III, Section 5, the Trustees
shall be reimbursed from the Trust estate or the assets belonging to the
appropriate Series for their expenses and disbursements, including, without
limitation, fees and expenses of Trustees of the Trust, interest expense, taxes,
fees and commssion of every kind, expenses of pricing Trust Series securities,
expenses of issue, repurchase and redemption of shares including expenses
attributable to a program of periodic repurchases or redemptions, expenses of
registering and qualifying the Trust and its Shares under Fedeml and State laws
and regulations, charges of custodians, transfer agents, and registrars,
expenses of preparing and setting up in type Prospectuses and Statements of
Additional Information, expenses of printing and distributing prospectuses sent
to existing Shareholders, auditing and legal expenses, reports to Shareholders,
expenses of meetings of Shareholders and proxy solicitations therefor, insurance
expense, association membership dues and for such non-recurring items as may
arise, including litigation to which the Trust is a party, and for all losses
and liabilities by them incurred in administering the Trust, and for the payment
of such expenses, disbursements, losses and liabilities the Trustees shall have
a lien on the assets belonging to the appropriate Series prior to any rights or
interests of the Shareholders thereto. This section shall not preclude the Trust
from directly paying any of the aforementioned fees and expenses.
ARTICLE VII
-----------
INVESTMENT ADVISER, PRINCIPAL UNDERWRITER AND TRANSFER AGENT
------------------------------------------------------------
INVESTMENT ADVISER
- ------------------
Section 1. Subject to a Majority Shareholder Vote, the Trustees may in their
discretion from time to time enter into an investment advisory or management
contract(s) with respect to the Trust or any Series thereof whereby the other
party(ies) to such contract(s) shall undertake to furnish the Trustees such
management, investment advisory, statistical and research facilities and
services and such other facilities and services, if any, and all upon such terms
and conditions, as the Trustees may in their discretion determine.
Notwithstanding any provisions of this Declaration of Trust, the Trustees may
authorize the investment adviser(s) (subject to such general or specific
instructions as the Trustees may from time to time adopt) to effect purchases,
sales or exchanges of Series securities and other investment instruments of the
Trust on behalf of the Trustees or may authorize any officer, agent, or Trustee
to effect such purchases, sales or exchanges pursuant to recommendations of the
investment adviser (and all without further action by the Trustees). Any such
purchases, sales and exchanges shall be deemed to have been authorized by all of
the Trustees.
The Trustees may, subject to applicable requirements of the 1940 Act,
including those relating to Shareholder approval, authorize the investment
adviser to employ one or more sub-advisers from time to time to perform such of
the acts and services of the investment adviser, and upon such terms and
conditions, as may be agreed upon between the investment adviser and sub-
adviser.
<PAGE>
PRINCIPAL UNDERWRITER
- ---------------------
Section 2. The Trustees may in their discretion from time to time enter into
(a) contract(s) providing for the sale of the Shares, whereby the Trust may
either agree to sell the Shares to the other party to the contract or appoint
such other party its sales agent for such Shares. In either case, the contract
shall be on such terms and conditions as may be prescribed in the Bylaws, if
any, and such further terms and conditions as the Trustees may in their
discretion determine not inconsistent with the provisions of this Article VII,
or of the Bylaws, if any; and such contract may also provide for the repurchase
or sale of Shares by such other party as principal or as agent of the Trust.
TRANSFER AGENT
- --------------
Section 3. The Trustees may in their discretion from time to time enter into
a transfer agency and Shareholder service contract whereby the other party shall
undertake to furnish the Trustees with transfer agency and Shareholder services.
The contract shall be on such terms and conditions as the Trustees may in their
discretion determine not inconsistent with the provisions of this Declaration of
Trust or of the Bylaws, if any. Such services may be provided by one or more
entities.
PARTIES TO CONTRACT
- -------------------
Section 4. Any contract of the character described in Sections 1, 2 and 3 of
this Article VII or in Article IX hereof may be entered into with any
corporation, firm, partnership, trust or association, although one or more of
the Trustees or officers of the Trust may be an officer, director, trustee,
shareholder, or member of such other party to the contract, and no such contract
shall be invalidated or rendered voidable by reason of the existence of any
relationship, nor shall any person holding such relationship be liable merely by
reason of such relationship for any loss or expense to the Trust under or by
reason of said contract or accountable for any profit realized directly or
indirectly therefrom, provided that the contract when entered into was
reasonable and fair and not inconsistent with the provisions of this Article VII
or the Bylaws, if any. The same person (including a firm, corporation,
partnership, trust, or association) may be the other party to contracts entered
into pursuant to Sections 1, 2 and 3 above or Article IX, and any individual may
be financially interested or otherwise affiliated with persons who are parties
to any or all of the contracts mentioned in this Section 4.
PROVISIONS AND AMENDMENTS
- -------------------------
Section 5. Any contract entered into pursuant to Sections I and 2 of this
Article VII shall be consistent with and subject to the requirements of Section
15 of the 1940 Act (including any amendments thereof or other applicable Act of
Congress hereafter enacted) with respect to its continuance in effect, its
termination, and the method of authorization and approval of such contract or
renewal thereof, and no amendment to any contract, entered into pursuant to
Section I shall be effective unless assented to by a Majority Shareholder Vote.
ARTICLE VIII
------------
SHAREHOLDERS' VOTING POWERS AND MEETINGS
----------------------------------------
VOTING POWERS
- -------------
Section 1. The Shareholders shall have power to vote (i) for the election of
Trustees as provided in Article IV, Section 2, (ii) for the removal of Trustees
as provided in Article IV, Section 3(d), (iii) with respect to any investment
advisory or management contract as provided in Article VII, Sections I and 5,
(iv) with respect to
<PAGE>
the amendment of this Declaration of Trust as provided in Article XII, Section
7, (v) to the same extent as the shareholders of a Massachusetts business
corporation, as to whether or not a court action, proceeding or claim should be
brought or maintained derivatively or as a class action on behalf of the Trust
or the Shareholders, provided, however, that a Shareholder of a particular
Series shall not be entitled to bring any derivative or class action on behalf
of any other Series of the Trust, and (vi) with respect to such additional
matters relating to the Trust as may be required or authorized by law, by this
Declaration of Trust, or the Bylaws of the Trust, if any, or any registration of
the Trust with the Securities and Exchange Commission (the "Commission") or any
State,* as the Trustees may consider desirable. On any matter submitted to a
vote of the Shareholders, all shares shall be voted by individual Series, except
(i) when required by the 1940 Act, Shares shall be voted in the aggregate and
not by individual Series; and (ii) when the Trustees have determined that the
matter affects only the interests of one or more Series, then only the
Shareholders of such Series shall be entitled to vote thereon. Each .whole Share
shall be entitled to one vote as to any matter on which it is entitled to vote,
and each fractional Share shall be entitled to a proportionate fractional vote.
There shall be no cumulative voting in the election of Trustees. Shares may be
voted in person or by proxy. Until Shares are issued, the Trustees may exercise
all rights of Shareholders and may take any action required or permitted by law,
this Declaration of Trust or any Bylaws of the Trust to be taken by
Shareholders.
MEETINGS
- --------
Section 2. The first Shareholders' meeting shall be held as specified in
Section 2 of Article IV at the principal office of the Trust or such other place
as the Trustees may designate. Special meetings of the Shareholders of any
Series may be called by the Trustees and shall be called by the Trustees upon
the written request of Shareholders owning at least one-tenth of the outstanding
Shares entitled to vote. Whenever ten or more Shareholders meeting the
qualifications set forth in Section 16(c) of the 1940 Act, as the same may be
amended from time to time, seek the opportunity of furnishing materials to the
other Shareholders with a view to obtaining signatures on such a request for a
meeting, the Trustees shall comply with the provisions of said Section 16(c)
with respect to providing such Shareholders access to the list of the
Shareholders of record of the Trust or the mailing of such materials to such
Shareholders of record. Shareholders shall be entitled to at least fifteen days'
notice of any meeting.
QUORUM AND REQUIRED VOTE
- ------------------------
Section 3. A majority of Shares entitled to vote in person or by proxy shall
be a quorum for the transaction of business at a Shareholders' meeting, except
that where any provision of law or of this Declaration of Trust permits or
requires that holders of any Series shall vote as a Series, then a majority of
the aggregate number of Shares of that Series entitled to vote shall be
necessary to constitute a quorum for the transaction of business by that Series.
Any lesser number shall be sufficient for adjournments. Any adjourned session or
sessions may be held, within a reasonable time after the date set for the
original meeting, without the necessity of further notice. Except when a larger
vote is required by any provision of this Declaration of Trust or the Bylaws, a
majority of the Shares voted in person or by proxy shall decide any questions
and a plurality shall elect a Trustee, provided that where any provision of law
or of this Declaration of Trust permits or requires that the holders of any
Series shall vote as a Series, then a majority of the Shares of that Series
voted on the matter shall decide that matter insofar as that Series is
concerned.
<PAGE>
ARTICLE IX
----------
CUSTODIAN
---------
APPOINTMENT AND DUTIES
- ----------------------
Section 1. The Trustees shall at all times employ a bank or trust company
having capital, surplus and undivided profits of at least one million dollars
($1,000,000) as custodian with authority as its agent, but subject to such
restrictions, limitations and other requirements, if any, as may be contained in
the Bylaws of the Trust:
(1) to hold the securities owned by the Trust and deliver the same upon
written order,
(2) to receive and receipt for any moneys due to the Trust and deposit the
same in its own banking department or elsewhere as the Trustees may direct;
and
(3) to disburse such funds upon orders or vouchers;
and the Trust may also employ such custodian as its agent:
(1) to keep the books and accounts of the Trust and furnish clerical and
accounting services; and
(2) to compute, if authorized to do so by the Trustees, the Net Asset Value
of any Series in accordance with the provisions hereof;
all upon such basis of compensation as may be agreed upon between the Trustees
and the custodian. If so directed by a Majority Shareholder Vote, the custodian
shall deliver and pay over all property of the Trust held by it as specified in
such vote.
The Trustees may also authorize the custodian to employ one or more sub-
custodians from time to time to perform such of, the acts and services of the
custodian, and upon such terms and conditions, as may be agreed upon between the
custodian and such sub-custodian and approved by the Trustees, provided that in
every case such sub-custodian shall be a bank or trust company organized under
the laws of the United States or one of the states thereof and having capital,
surplus and undivided profits of at least one million dollars ($1,000,000) or
such other person as may be permitted by the Commission, or otherwise in
accordance with the 1940 Act as from time to time amended.
CENTRAL CERTIFICATE SYSTEM
- --------------------------
Section 2. Subject to such rules, regulations and orders as the Commission
may adopt, the Trustees may direct the custodian to deposit all or any part of
the securities owned by the Trust in a system for the central handling of
securities established by a national securities exchange or a national
securities association registered with the Commission under the Securities
Exchange Act of 1934, or such other person as may be permitted by the
Commission, or otherwise in accordance with the 1940 Act as from time to time
amended, pursuant to which system all securities of any particular class or
series of any issuer deposited within the system are treated as fungible and may
be transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal only
upon the order of the Trust.
<PAGE>
ARTICLE X
---------
DISTRIBUTIONS AND REDEMPTIONS
-----------------------------
DISTRIBUTIONS
- -------------
Section 1.
(a) The Trustees may from time to time declare and pay dividends. The
amount of such dividends and the payment of them shall be wholly in the
discretion of the Trustees.
(b) The Trustees shall have power, to the fullest extent permitted by
the laws of Massachusetts, at any time to declare and cause to be paid
dividends on Shares of a particular Series, from the assets belonging to that
Series, which dividends, at the election of the Trustees, may be paid daily
or otherwise pursuant to a standing resolution or resolutions adopted only
once or with such frequency as the Trustees may determine, and may be payable
in Shares of that Series at the election of each Shareholder of that Series.
(c) Anything in this instrument to the contrary notwithstanding, the
Trustees may at any time declare and distribute pro rata among the
Shareholders of a particular Series as of the record date of that Series
fixed as provided in Section 3 hereof a "stock dividend".
REDEMPTIONS
- ------------
Section 2. In case any holder of record of Shares of a particular Series
desires to dispose of his Shares, he may deposit at the office of the transfer
agent or other authorized agent of that Series a written request or such other
form of request as the Trustees may from time to time authorize, requesting that
the Series purchase the Shares in accordance with this Section 2; and the
Shareholder so requesting shall be entitled to require the Series to purchase,
and the Series or the principal underwriter of the Series shall purchase his
said Shares, but only at the Net Asset Value thereof (as described in Section 3
hereof). The Series shall make payment for any such Shares to be redeemed, as
aforesaid, in cash or property from the assets of that Series and payment for
such Shares shall be made by the Series or the principal underwriter of the
Series to the Shareholder of record within seven (7) days after the date upon
which the request is effective.
DETERMINATION OF NET ASSET VALUE AND VALUATION OF PORTFOLIO ASSETS
- ------------------------------------------------------------------
Section 3. The term "Net Asset Value" of any Series shall mean that amount
by which the assets of that Series, exceed its liabilities, all as determined by
or under the direction of the Trustees. Such value per Share shall be determined
separately for each Series of Shares and shall be determined on such days and at
such times as the Trustees may determine. Such determination shall be made with
respect to securities for which market quotations are readily available, at the
market value of such securities; and with respect to other securities and
assets, at the fair value as determined in good faith by the Trustees, provided,
however, that the Trustees, without Shareholder approval, may alter the method
of appraising portfolio securities insofar as permitted under the 1940 Act and
the rules, regulations and interpretations thereof promulgated or issued by the
Commission or insofar as permitted by any Order of the Commission applicable to
the Series. The Trustees may delegate any of its powers and duties under this
Section 3 with respect to appraisal of assets and liabilities. At any time the
Trustees may cause the value per Share last determined to be determined again in
similar manner and may fix the time when such predetermined value shall become
effective.
<PAGE>
SUSPENSION OF THE RIGHT OF REDEMPTION
- -------------------------------------
Section 4. The Trustees may declare a suspension of the right of redemption
or postpone the date of payment as permitted under the 1940 ACL Such suspension
shall take effect at such time as the Trustees shall specify but not later than
the close of business on the business day next following the declaration of
suspension, and thereafter there shall be no right of redemption or payment
until the Trustees shall declare the suspension at an end. In the case of a
suspension of the right of redemption, a Shareholder may either withdraw his
request for redemption or receive payment based on the Net Asset Value per Share
existing after the termination of the suspension.
ARTICLE XI
----------
LIMITATION OF LIABILITY AND INDEMNIFICATION
-------------------------------------------
LIMITATION OF LIABILITY
- -----------------------
Section 1. Provided they have exercised reasonable care and have acted under
the reasonable belief that their actions are in the best interest of the Trust,
the Trustees shall not be responsible for or liable in any event for neglect or
wrongdoing of them or any officer, agent, employee or investment adviser of the
Trust, but nothing contained herein shall protect any Trustee against any
liability to which he would otherwise be subject by reason of wilfull
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
INDEMNIFICATION
- ---------------
Section 2.
(a) Subject to the exceptions and limitations contained in Section (b)
below:
(i) every person who is, or has been, a Trustee or officer of the
Trust (hereinafter referred to as "Covered Person") shall be indemnified by
the appropriate Series to the fullest extent permitted by law against
liability and against all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his being or having been a
Trustee or officer and against amounts paid or incurred by him in the
settlement thereof,
(ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal or
other, including appeals), actual or threatened while in office or
thereafter, and the words "liability" and "expenses" shall include, without
limitation, attorneys' fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his office or
(B) not to have acted in good faith in the reasonable belief that his action
was in the best interest of the Trust; or
<PAGE>
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office,
(A) by the court or other body approving the settlement;
(B) by at least a majority of those Trustees who are neither
interested persons of the Trust nor are parties to the matter based upon a
review of readily available facts (as opposed to a full trial-type inquiry); or
(C) by written opinion of independent legal counsel based upon a
review of readily available facts (as opposed to a full trial-type inquiry);
provided, however, that any Shareholder may, by appropriate legal
proceedings, challenge any such determination by the Trustees, or by independent
counsel.
(c) The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not be exclusive of
or affect any other rights to which any Covered Person may now or hereafter be
entitled, shall continue as to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing, contained herein shall affect any
rights to indemnification to which Trust personnel, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character described in
paragraph (a) of this Section 2 shall be paid by the applicable Series from time
to time prior to final disposition thereof upon receipt of an undertaking by or
on behalf of such Covered Person that such amount will be paid over by him to
the applicable Series if it is ultimately determined that he is not entitled to
indemnification under this Section 2; provided, however, that either (a) such
Covered Person shall have provided appropriate security for such undertaking,
(b) the Trust is insured against losses arising out of any such advance payments
or (c) either a majority of the Trustees who are neither Interested Persons of
the Trust nor parties to the matter, or independent legal counsel in a written
opinion, shall have determined, based upon a review of readily available facts
(as opposed to a trial-type inquiry or full investigation), that there is reason
to believe that such Covered Person will be found entitled to indemnification
under this Section 2.
SHAREHOLDERS
- ------------
Section 3. In case any Shareholder or former Shareholder of any Series of
the Trust shall be held to be personally liable solely by reason of his being or
having been a Shareholder and not because of his acts or omissions or for some
other reason, the Shareholder or former Shareholder (or his heirs, executors,
administrators or other legal representatives or in the case of a corporation or
other entity, its corporate or other general successor) shall be entitled out of
the assets belonging to the applicable Series to be held harmless from and
indemnified against all loss and expense arising from such liability. The Series
shall, upon request by the Shareholder, assume the defense of any claim made
against the Shareholder for any act or obligation of the Series and satisfy any
judgment thereon.
<PAGE>
ARTICLE XII
-----------
MISCELLANEOUS
-------------
TRUST NOT A PARTNERSHIP
- -----------------------
Section 1. It is hereby expressly declared that a trust and not a
partnership is created hereby. No Trustee hereunder shall have any power to bind
personally either the Trust's officers or any Shareholder. All persons extending
credit to, contracting with or having any claim against the Trust or the
Trustees shall look only to the assets of the appropriate Series for payment
under such credit, contract or claim; and neither the Shareholders nor the
Trustees, nor any of their agents, whether past, present or future, shall be
personally liable therefor. Nothing in this Declaration of Trust shall protect a
Trustee against any liability to which the Trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of the office of Trustee hereunder.
TRUSTEE'S GOOD FAITH ACTION, EXPERT ADVICE, NO BOND OR SURETY
- -------------------------------------------------------------
Section 2. The exercise by the Trustees of their powers and discretions
hereunder in good faith and with reasonable care under the circumstances then
prevailing, shall be binding upon everyone interested. Subject to the provisions
of Section 1 of this Article XII and to Article XI, the Trustees shall not be
liable for errors of judgment or mistakes of fact or law. The Trustees may take
advice of counsel or other experts with respect to the meaning and operation of
this Declaration of Trust, and subject to the provisions of Section 1 of this
Article XII and to Article XI, shall be under no liability for any act or
omission in accordance with such advice or for failing to follow such advice.
The Trustees shall not be required to give any bond as such, nor any surety if a
bond is obtained.
ESTABLISHMENT QF RECORD DATES
- -----------------------------
Section 3. The Trustees may close the stock transfer books of the Trust for
a period not exceeding sixty (60) days preceding the date of any meeting of
Shareholders, or the date for the payment of any dividends, or the date for the
allotment of rights, or the date when any change or conversion or exchange of
Shares shall go into effect; or in lieu of closing the stock transfer books as
aforesaid, the Trustees may fix in advance a date, not exceeding sixty (60) days
preceding the date of any meeting of Shareholders, or the date for payment of
any dividend, or the date for the allotment of rights, or the date when any
change or conversion or exchange of Shares shall go into effect, as a record
date for the determination of the Shareholders entitled to notice of, and to
vote at, any such meeting, or entitled to receive payment of any such dividend,
or to any such allotment of rights, or to exercise the rights in respect of any
such change, conversion or exchange of Shares, and in such case such
Shareholders and only such Shareholders as shall be Shareholders of record on
the date so fixed shall be entitled to such notice of, and to vote at, such
meeting, or to receive payment of such dividend, or to receive such allotment or
rights, or to exercise such rights, as the case may be, notwithstanding any
transfer of any Shares on the books of the Trust after any such record date
fixed or aforesaid.
TERMINATION OF TRUST
- --------------------
Section 4.
(a) This Trust shall continue without limitation of time but subject to the
provisions of subsection (b) of this Section 4.
<PAGE>
(b) Subject to a Majority Shareholder Vote of each Series affected by the
matter or, if applicable, to a Majority Shareholder Vote of the Trust, the
Trustees may
(i) sell and convey the assets of the Trust or any affected Series to
another trust, partnership, association or corporation organized under the
laws of any state which is a diversified open-end management investment
company as defined in the 1940 Act, for adequate consideration which may
include the assumption of all outstanding obligations, taxes and other
liabilities, accrued or contingent, of the Trust or any affected Series, and
which may include shares of beneficial interest or stock of such trust,
partnership, association or corporation; or
(ii) at any time sell and convert into money all of the assets of the
Trust or any affected Series.
Upon making provision for the payment of all such liabilities in either (i)
or (ii), by such assumption or otherwise, the Trustees shall distribute the
remaining proceeds or assets (as the case may be) ratably among the holders of
the Shares of the Trust or any affected Series then outstanding.
(c) Upon completion of the distribution of the remaining proceeds or the
remaining assets as provided in sub-section (b), the Trust or any affected
Series shall terminate and the Trustees shall be discharged of any and all
further liabilities and duties hereunder and the right, title and interest of
all parties shall be canceled and discharged.
FILING OF COPIES, REFERENCES, HEADINGS
- --------------------------------------
Section 5. The original or a copy of this instrument and of each declaration
of trust supplemental hereto shall be kept at the office of the Trust where it
may be inspected by any Shareholder. A copy of this instrument and of each
supplemental declaration of trust shall be filed by the Trustees with the
Secretary of the Commonwealth of Massachusetts and the Boston City Clerk, as
well as any other governmental office where such filing may from time to time be
required. Anyone dealing with the Trust may rely on a certificate by an officer
or Trustee of the Trust as to whether or not any such supplemental declarations
of trust have been made and as to any matters in connection with the Trust
hereunder, and with the same effect as if it were the original, may rely on a
copy certified by an officer or Trustee of the Trust to be a copy of this
instrument or of any such supplemental declaration of trust. In this instrument
or in any such supplemental declaration of trust, references to this instrument,
and all expressions like "herein," "hereof" and "hereunder," shall be deemed to
refer to this instrument as amended or affected by any such supplemental
declaration of trust. Headings are placed herein for convenience of reference
only and in case of any conflict, the text of this instrument, rather than the
headings, shall control: This instrument may be executed in any number of
counterparts each of which shall be deemed an original.
APPLICABLE LAW
- --------------
Section 6. The Trust set forth in this instrument is made in the
Commonwealth of Massachusetts, and it is created under and is to be governed by
and construed and administered according to the laws of said Commonwealth. The
Trust shall be of the type commonly called a Massachusetts business trust, and
without limiting the provisions hereof, the Trust may exercise all powers which
are ordinarily exercised by such a trust.
<PAGE>
AMENDMENTS
- ----------
Section 7. If authorized by votes of the Trustees and a Majority Shareholder
Vote, or by any larger vote which may be required by applicable law or this
Declaration of Trust in any particular case, the Trustees shall amend or
otherwise supplement this instrument, by making a declaration of trust
supplemental hereto, which thereafter shall form a part hereof, except that an
amendment which shall affect the Shareholders of one or more Series but not the
Shareholders of all outstanding Series shall be authorized by vote of the
Shareholders holding a majority of the Shares entitled to vote of each Series
affected and no vote of Shareholders of a Series not affected shall be required.
Amendments having the purpose of changing the name of the Trust or of supplying
any omission, curing any ambiguity or curing, correcting or supplementing any
defective or inconsistent provision contained herein shall not require
authorization by Shareholder vote. Copies of the supplemental declaration of
trust shall be filed as specified in Section 5 of this Article XII.
FISCAL YEAR
- -----------
Section 8. The fiscal year of the Trust shall end on a specified date as set
forth in the Bylaws, provided, however, that the Trustees may, without
Shareholder approval, change the -fiscal year of the Trust.
IN WITNESS WHEREOF, the undersigned, being all of the Trustees of the Trust,
have executed this instrument this 4TH day of September, 1992.
/s/ Thomas M. Batchelor
-------------------
Thomas M Batchelor
Trustee
/s/ John A. DeCell
--------------
John A. DeCell
Trustee
/s/ L.R. Jalenak
------------
L.R. Jalenak
Trustee
/s/ Larry W. Papasan
----------------
Larry W. Papasan
Trustee
/s/ Richard C. Rantzow
------------------
Richard C. Rantzow
Trustee
<PAGE>
EXHIBIT 1(D)
SUPPLEMENT TO THE DECLARATION OF TRUST
- --------------------------------------
We, Thomas M. Batchelor, John A. DeCell, L.R. Jalenak, Jr., Larry W. Papasan,
and Richard C. Rantzow, Trustees of
The Masters Group of Mutual Funds
82 Devonshire Street
Boston, Massachusetts 02109
do hereby certify that, in accordance with Article XII, Section 7 of the
Declaration of Trust of The Masters Group of Mutual Funds, the following
Supplement to said Declaration of Trust was duly adopted:
VOTED: That the Declaration of Trust made March 6, 1992, as amended May 18,
1992, and amended and restated September 4, 1992, be and it hereby is,
amended as follows:
That Article I, Section I of the Declaration of Trust of this Trust
shall be amended to read as follows:
"This Trust shall be known as 'First Funds'."
That Article 1, Section 2(b) of the Declaration of Trust of this Trust
shall be amended to read as follows:
"The 'Trust' refers to 'First Funds'."
IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereunto signed
our names this 5th day of August, 1993.
/s/_____________________________ /s/_________________________
Thomas M Batchelor John A. DeCell
Trustee Trustee
/s/_____________________________ /s/__________________________
L.R. Jalenak, Jr. Larry W. Papasan
Trustee Trustee
/s/_____________________________
Richard C. Rantzow
Trustee
<PAGE>
EXHIBIT 2(A)
BYLAWS
OF
THE MASTERS GROUP OF MUTUAL FUNDS
These Bylaws of The Masters Group of Mutual Funds (the Trust), a
Massachusetts business trust, are subject to the Declaration of Trust of the
Trust dated March 6, 1992, as from time to time amended, supplemented or
restated (die Declaration of Trust). Capitalized terms used herein which are
defined in the Declaration of Trust are used as therein defined.
ARTICLE I
---------
PRINCIPAL OFFICE
----------------
The principal office of the Trust shall be located in Boston,
Massachusetts, or such other location as the Trustees may, from time to time,
determine. The Trust may establish and maintain such other offices and places of
business as the Trustees may, from time to time, determine.
ARTICLE II
----------
OFFICERS AND THEIR ELECTION
---------------------------
Officers
- --------
Section 1. The officers of the Trust shall be a President, a Treasurer, a
---------
Secretary, and such other officers as the Trustees may from time to time elect.
The Trustees may delegate to any officer or committee the power to appoint any
subordinate officers or agents. It shall not be necessary for any Trustee or
other officer to be a holder of Shares in the Trust.
Election of Officers
- --------------------
Section 2. The Treasurer and Secretary shall be chosen by the Trustees. The
---------
President shall be chosen by and from the Trustees. Two or more offices may be
held by a single person except the offices of President and Secretary. Subject
to the provisions of Article III, Section 12 hereof, the President, the
Treasurer and the Secretary shall each hold office until their successors are
chosen and qualified and all other officers shall hold office at the pleasure of
the Trustees.
Resignations
- ------------
Section 3. Any officer of the Trust may resign, notwithstanding Section 2
---------
hereof, by filing a written resignation with the President, the Trustees or the
Secretary, which resignation shall take effect on being so filed or at such time
as may be therein specified.
ARTICLE III
-----------
POWERS AND DUTIES OF OFFICERS AND TRUSTEES
------------------------------------------
Management Of The Trust - General
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Section 1. The business and affairs of the Trust shall be managed by, or
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under the direction of, the Trustees, and they shall have all powers necessary
and desirable to carry out their responsibilities, so far as such
<PAGE>
powers are not inconsistent with the laws of the Commonwealth of Massachusetts,
the Declaration of Trust or with these Bylaws.
Executive And Other Committees
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Section 2. The Trustees may elect from their own number an executive
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committee, which shall have any or all the powers of the Trustees while the
Trustees are not in session. The Trustees may also elect from their own number
other committees from time to time. The number composing such committees and the
powers conferred upon the same are to be determined by vote of a majority of the
Trustees. All members of such committees shall hold such offices at the pleasure
of the Trustees. The Trustees may abolish any such committee at any time. Any
committee to which the Trustees delegate any of their powers or duties shall
keep records of its meetings and shall report its actions to the Trustees. The
Trustees shall have power to rescind any action of any committee, but no such
rescission shall have retroactive effect.
Compensation
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Section 3. Each Trustee and each committee member may receive such
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compensation for his services and reimbursement for his expenses as may be fixed
from time to time by resolution of the Trustees.
Chairman Of The Trustees
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Section 4. The Trustees may appoint from among their number a Chairman who
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shall serve as such at the pleasure of the Trustees. When present, he shall
preside at all meetings of the Shareholders and the Trustees, and he may,
subject to the approval of the Trustees, appoint a Trustee to preside at such
meetings in his absence. He shall perform such other duties as the Trustees may
from time to time designate.
President
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Section 5. The President shall be the chief executive officer of the Trust
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and, subject to the direction of the Trustees, shall have general administration
of the business and policies of the Trust. Except as the Trustees may otherwise
order, the President shall have the power to grant, issue, execute or sign such
powers of attorney, proxies, agreements or other documents as may be deemed
advisable or necessary in the furtherance of the interests of the Trust or any
Series thereof. He shall also have the power to employ attorneys, accountants
and other advisers and agents and counsel for the Trust. The President shall
perform such duties additional to all of the foregoing as the Trustees may from
time to time designate.
Treasure
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Section 6. The Treasurer shall be the principal financial and accounting
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officer of the Trust. He shall deliver all funds and securities of the Trust
which may come into his hands to such company as the Trustees shall employ as
Custodian in accordance with the Declaration of Trust and applicable provisions
of law. He shall make annual reports regarding the business and condition of the
Trust, which reports shall be preserved in Trust records, and he shall furnish
such other reports regarding the business and condition of the Trust as the
Trustees may from time to time require. The Treasurer shall perform such
additional duties as the Trustees may from time to time designate.
Section 7. The Secretary shall record in books kept for the purpose all
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votes and proceedings of the Trustees and the Shareholders at their respective
meetings. He shall have the custody of the seal of the Trust. The Secretary
shall perform such additional duties as the Trustees may from time to time
designate.
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Vice President
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Section 8. Any Vice President of the Trust shall perform such duties as
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the Trustees or the President may from time to time designate. At the request or
in the absence or disability of the President, the Vice President (or, if there
are two or more Vice Presidents, then the senior of the Vice Presidents present
and able to act) may perform all the duties of the President and, when so
acting, shall have all the powers of and be subject to all the restrictions upon
the President.
Assistant Treasurer
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Section 8. Any Assistant Treasurer of the Trust shall perform such duties
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as the Trustees or the Treasurer may from time to time designate, and, in the
absence of the Treasurer, the senior Assistant Treasurer, present and able to
act, may perform all the duties of the Treasurer.
Assistant Secretary
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Section 9. Any Assistant Secretary of the Trust shall perform such duties
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as the Trustees or the Secretary may from time to time designate, and, in the
absence of the Secretary, the senior Assistant Secretary, present and able to
act, may perform all the duties of the Secretary.
Subordinate 0fficers
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Section 10. The Trustees from time to time may appoint such other officers
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or agents as they may deem advisable, each of whom shall have such title, hold
office for such period, have such authority and perform such duties as the
Trustees may determine. The Trustees from time to time may delegate to one or
more officers or committees of Trustees the power to appoint any such
subordinate officers or agents and to prescribe their respective terms of
office, authorities and duties.
Surety Bonds
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Section 11. The Trustees may require any officer or agent of the Trust to
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execute a bond (including, without limitation, any bond required by the
Investment Company Act of 1940, as amended (the 1940 Act) and the rules and
regulations of the Securities and Exchange Commission (SEC) to the Trust in such
sum and with such surety or sureties as the Trustees may determine, conditioned
upon the faithful performance of his duties to the Trust including
responsibility for negligence and for the accounting of any of the Trust's
property, funds or securities that may come into his hands.
Removal
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Section 12. Any officer may be removed from office whenever in the judgment
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of the Trustees the best interest of the Trust will be served thereby, by the
vote of a majority of the Trustees given at any regular meeting or any special
meeting of the Trustees. In addition, any officer or agent appointed in
accordance with the provisions of Section 10 hereof may be removed, either with
or without cause, by any officer upon whom such power of removal shall have been
conferred by the Trustees.
Remuneration
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Section 13. The salaries or other compensation, if any, of the officers of
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the Trust shall be fixed from time to time by resolution of the Trustees.
ARTICLE IV
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SHAREHOLDERS' MEETING
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Meetings
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Section 1. A meeting of the shareholders shall be called by the Secretary
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whenever (i) ordered by the Trustees or (ii) requested in writing by the holder
or holders of at least 10% of the Outstanding Shares entitled to vote. If the
Secretary, when so ordered or requested, refuses or neglects for more than 30
days to call such special meeting, the Trustees or the Shareholders so
requesting, may, in the name of the Secretary, call the meeting by giving notice
thereof in the manner required when notice is given by the Secretary. If the
meeting is a meeting of the Shareholders of one or more Series or classes of
Shares, but not a meeting of all Shareholders of the Trust, then only special
meetings of the Shareholders of such one or more Series or Classes shall be
called and only the shareholders of such one or more Series or Classes shall be
entitled to notice of and to vote at such meeting.
Notices
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Section 2. Except as above provided, notices of any meeting of the
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Shareholders shall be given by the Secretary by delivering or mailing, postage
prepaid, to each Shareholder entitled to vote at said meeting, written or
printed notification of such meeting at least fifteen days before the meeting,
to such address as may be registered with the Trust by the Shareholder. Notice
of any Shareholder meeting need not be given to any Shareholder if a written
waiver of notice, executed before or after such meeting, is filed with the
record of such meeting, or to any Shareholder who shall attend such meeting in
person or by proxy. Notice of adjournment of a Shareholders' meeting to another
time or place need not be given, if such time and place are announced at the
meeting or reasonable notice is given to persons present at the meeting and the
adjourned meeting is held within a reasonable time after the date set for the
original meeting.
Voting - Proxies
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Section 3. Subject to the provisions of the Declaration of Trust,
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shareholders entitled to vote may vote either in person or by proxy, provided
that either (i) an instrument authorizing such proxy to act is executed by the
Shareholder in writing and dated not more than eleven months before the meeting,
unless the instrument specifically provides for a longer period or (ii) the
Trustees adopt by resolution an electronic, telephonic, computerized or other
alternative to execution of a written instrument authorizing the proxy to act
which authorization is received not more than eleven months before the meeting.
Proxies shall be delivered to the Secretary of the Trust or other person
responsible for recording the proceedings before being voted. A proxy with
respect to Shares held in the name of two or more persons shall be valid if
executed by one of them unless at or prior to exercise of such proxy the Trust
receives a specific written notice to the contrary from any one of them. Unless
otherwise specifically limited by their terms, proxies shall entitle the holder
thereof to vote at any adjournment of a meeting. A proxy purporting to be
exercised by or on behalf of a Shareholder shall be deemed valid unless
challenged at or prior to its exercise and the burden or proving invalidity
shall rest on the challenger. At all meetings of the Shareholders, unless the
voting is conducted by inspectors, all questions relating to the qualifications
of voters, the validity of proxies, and the acceptance or rejection of votes
shall be decided by the Chairman of the meeting. Except as otherwise provided
herein or in the Declaration of Trust, as these Bylaws or such Declaration of
Trust may be amended or supplemented from time to time, all matters relating to
the giving, voting or validity of proxies shall be governed by the General
Corporation Law of the
<PAGE>
Commonwealth of Massachusetts relating to proxies, and judicial interpretations
thereunder, as if the Trust were a Massachusetts corporation and the
Shareholders were shareholders of a Massachusetts corporation.
Place Of Meeting
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Section 4. All special meetings of the Shareholders shall be held at the
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principal place of business of the Trust or at such other place in the United
States as the Trustees may designate.
Action Without a Meeting
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Section 5. Any action to be taken by Shareholders may be taken without a
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meeting if all Shareholders entitled to vote on the matter consent to the action
in writing and the written consents are filed with the records of meetings of
Shareholders of the Trust. Such consent shall be treated for all purposes as a
vote at a meeting of the Trustees held at the principal place of business of the
Trust.
ARTICLE V
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TRUSTEES' MEETING
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Special Meetings
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Section 1. Special meetings of the Trustees may be called orally or in
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writing by the Chairman of the Trustees or any two other Trustees.
Regular Meetings
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Section 2. Regular meetings of the Trustees may be held at such places and
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at such times as the Trustees may from time to time determine; each Trustee
present at such determination shall be deemed a party calling the meeting and no
call or notice will be required to such Trustee provided that any Trustee who is
absent when such determination is made shall be given notice of the
determination by the Chairman or any two other Trustees, as provided for in
Article V, Section 3 of the Declaration of Trust.
Quorum
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Section 3. A majority of the Trustees shall constitute a quorum for the
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transaction of business and an action of a majority of the quorum shall
constitute action of the Trustees.
Notice
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Section 4. Except as otherwise provided, notice of any special meeting of
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the Trustees shall be given by the party calling the meeting to each Trustee, as
provided for in Article V, Section 3 of the Declaration of Trust. A written
notice may be mailed, postage prepaid, addressed to him at his address as
registered on the books of the Trust or, if not so registered, at his last known
address.
Place Of Meeting
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Section 5. All special meetings of the Trustees shall be held at the
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principal place of business of the Trust or such other place as the Trustees may
designate. Any meeting may adjourn to any place.
Special Action
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Section 6. When all the Trustees shall be present at any meeting, however
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called or wherever held, or shall assent to the holding of the meeting without
notice, or shall sign a written assent thereto filed with the record of such
meeting, the acts of such meeting shall be valid as if such meeting had been
regularly held.
Action By Consent
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Section 7. Any action by the Trustees may be taken without a meeting if a
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written consent thereto is signed by all the Trustees and filed with the records
of the Trustees' meeting. Such consent shall be treated, for all purposes, as a
vote at a meeting of the Trustees held at the principal place of business of the
Trustees.
Participation in Meetings By Conference Telephone
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Section 8. Trustees may participate in a meeting of Trustees by conference
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telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation shall
constitute presence in person at such meeting. Any meeting conducted by
telephone shall be deemed to take place at and from the principal office of the
Trust.
ARTICLE VI
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SHARES OF BENEFICIAL INTEREST
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Beneficial Interest
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Section 1. The beneficial interest in the Trust shall at all times be
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divided into such transferable Shares of one or more separate and distinct
Series, or classes thereof, as the Trustees shall from time to time create and
establish. The number of Shares is unlimited, and each Share of each Series or
class thereof shall be without par value and shall represent an equal
proportionate interest with each other Share in the Series, none having priority
or preference over another, except to the extent that such priorities or
preferences are established with respect to one or more classes of shares
consistent with applicable law and any rule or order of the Commission.
Transfer of Shares
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Section 2. The Shares of the Trust shall be transferable, so as to affect
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the rights of the Trust, only by transfer recorded on the books of the Trust, in
person or by attorney.
Equitable Interest Not Recognized
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Section 3. Ile Trust shall be entitled to treat the holder of record of any
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Share or Shares of beneficial interest as the holder in fact thereof, and shall
not be bound to recognize any equitable or other claim or interest in such Share
or Shares on the part of any other person except as may be otherwise expressly
provided by law.
Share Certificate
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Section 4. No certificates certifying the ownership of Shares shall be
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issued except as the Trustees may otherwise authorize. The Trustees may issue
certificates to a Shareholder of any Series or class thereof for any purpose and
the issuance of a certificate to one or more Shareholders shall not require the
issuance of certificates generally. In the event that the Trustees authorize the
issuance of Share certificates, such certificate shall be in the form proscribed
from time to time by the Trustees and shall be signed by the President or a Vice
President and by the Treasurer, Assistant Treasurer, Secretary or Assistant
Secretary. Such signatures may be
<PAGE>
facsimiles if the certificate is signed by a transfer or shareholder services
agent or by a registrar, other than a Trustee, officer or employee of the Trust.
In case any officer who has signed or whose facsimile signature has been placed
on such certificate shall have ceased to be such officer before such certificate
is issued, it may be issued by the Trust with the same effect as if he or she
were such officer at the time of its issue.
In lieu of issuing certificates for Shares, the Trustees or the transfer or
shareholder services agent may either issue receipts therefor or may keep
accounts upon the books of the Trust for the record holders of such Shares, who
shall in either case be deemed, for all purposes hereunder, to be the holders of
certificates for such Shares as if they had accepted such certificates and shall
be held to have expressly assented and agreed to the terms hereof.
Loss of Certificate
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Section 5. In the case of the alleged loss or destruction or the mutilation
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of a Share certificate, a duplicate certificate may be issued in place thereof,
upon such terms as the Trustees may prescribe.
Discontinuance of Issuance Of Certificates
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Section 6. The Trustees may at any time discontinue the issuance of Share
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certificates and may, by written notice to each Shareholder, require the
surrender of Share certificates to the Trust for cancellation. Such surrender
and cancellation shall not affect the ownership of Shares in the Trust.
ARTICLE VII
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OWNERSHIP OF ASSETS OF THE TRUST
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The Trustees, acting for and on behalf of the Trust, shall be deemed to
hold legal and beneficial ownership of any income earned on securities held by
the Trust issued by any business entity formed, organized or existing under the
laws of any jurisdiction other than a state, commonwealth, possession or colony
of the United States or the laws of the United States.
ARTICLE VIII
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INSPECTION OF BOOKS
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The Trustees shall from time to time determine whether and to what extent,
and at what times and places, and under what conditions and regulations the
accounts and books of the Trust or any of them shall be open to the inspection
of the Shareholders; and no Shareholder shall have any right to inspect any
account or book or document of the Trust except as conferred by law or otherwise
by the Trustees or by resolution of the Shareholders.
ARTICLE IX
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INSURANCE OF OFFICERS, TRUSTEES, AND EMPLOYEES
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The Trust may purchase and maintain insurance on behalf of any Covered
Person (as defined in the Declaration of Trust) or employee of the Trust,
including any Covered Person or employee of the Trust who is or was serving at
the request of the Trust as a Trustee, officer or employee of a corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity or arising out of
his status as such, whether or not the Trustees would have the power to
indemnify him against such liability.
<PAGE>
The Trust may not acquire or obtain a contract for insurance that protects
or purports to protect any Trustee or officer of the Trust against any liability
to the Trust or its Shareholders to which he would otherwise be subject by
reason or willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
ARTICLE X
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SEAL
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The seal of the Trust shall be circular in form bearing the inscription:
THE MASTERS GROUP OF MUTUAL FUNDS
1992
MASSACHUSETTS
The form of the seal shall be subject to alteration by the Trustees and the
seal may be used by causing it or a facsimile to be impressed or affixed or
printed or otherwise reproduced.
Any officer or Trustee of the Trust shall have authority to affix the seal
of the Trust to any document, instrument or other paper executed and delivered
by or on behalf of the Trust; however, unless otherwise required by the
Trustees, the seal shall not be necessary to be placed on and its absence shall
not impair the validity of any document, instrument, or other paper executed by
or on behalf of the Trust.
ARTICLE XI
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FISCAL YEAR
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The fiscal year of the Trust shall end on such date as the Trustees shall
from time to time determine.
ARTICLE XII
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AMENDMENTS
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These Bylaws may be amended at any meeting of the Trustees of the Trust by
a majority vote.
ARTICLE XIII
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REPORTS TO SHAREHOLDERS
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The Trustees shall at least semi-annually submit to the Shareholders a
written financial report of the Trust including financial statements which shall
be certified at least annually by independent public accountants.
ARTICLE XIV
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HEADINGS
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Headings are placed in these By-Laws for convenience of reference only and
in case of any conflict, the text of these By-Laws rather than the headings
shall control.
<PAGE>
EXHIBIT 2(B)
AMENDMENT TO THE BYLAWS
OF
THE MASTERS GROUP OF MUTUAL FUNDS
This amendment dated November 17, 1992 to the Bylaws of The Masters Group of
Mutual Funds (the Trust), a Massachusetts business trust, is subject to the
Declaration of Trust of the Trust dated March 6, 1992, as from time to time
amended, supplemented or restated (the Declaration of Trust). Capitalized terms
used herein which are defined in the Declaration of Trust are used as therein
defined.
ARTICLE VI
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SHARES OF BENEFICIAL INTEREST
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Section 7. Each Series of the Trust may be divided into separate and distinct
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classes. Eligibility to purchase and hold such classes of shares may be fixed by
the Trustees, from time to time. Description of eligibility in the prospectus of
any class shall be conclusive. In the event that any holder of a class of Shares
is not eligible to hold Shares of such class, and is eligible to hold Shares of
another class of the same Series, then the Shares shall be reclassified as
Shares of the other class upon reasonable notice. Any notice period disclosed in
the prospectus of the original class shall be deemed to be reasonable notice.
<PAGE>
EXHIBIT 5(A)
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
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THIS INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT is made this 4th day of
September, 1992, between THE MASTERS GROUP OF MUTUAL FUNDS, a business trust
organized under the laws of the Commonwealth of Massachusetts (the "Trust"), on
behalf of its U.S. GOVERNMENT MONEY MARKET PORTFOLIO (the "Portfolio") and FIRST
TENNESSEE BANK NATIONAL ASSOCIATION, a national banking association (the
"Investment Adviser").
WHEREAS, the Trust has been organized to operate as an investment company
registered under the Investment Company Act of 1940 (the "1940 Act") with
multiple series of shares (hereinafter referred to as Classes) having varying
preferences, limitations and relative rights, and to invest and reinvest the
assets of the Portfolio in securities pursuant to investment objectives and
policies for the Portfolio;
WHEREAS, the Portfolio desires to avail itself of the services,
information, advice, assistance and facilities of an investment adviser and to
have an investment adviser provide or perform for it various investment
advisory, statistical, research, portfolio investment adviser selection and
other services as set forth more fully herein;
NOW, THEREFORE, Trust, on behalf of the Portfolio, and Investment Adviser
agree as follows:
1. Employment of the Investment Adviser. The Trust hereby employs the
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Investment Adviser to provide investment advice and to manage the investment and
reinvestment of the Portfolio's assets in the manner set forth in Section 2A of
this Agreement, subject to the direction of the Trustees, for the period, in the
manner, and on the terms hereinafter set forth. The Investment Adviser hereby
accepts such employment and agrees during such period to render the services and
to assume the obligations herein set forth. The investment Adviser shall for all
purposes herein be deemed to be an independent contractor and shall, except as
expressly provided or authorized (whether herein or otherwise), have no
authority to act or represent the Trust in any way or otherwise be deemed an
agent of the Trust.
2. Obligation of and Services to be Provided by the Investment Adviser.
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The Investment Adviser undertakes to provide the services hereinafter set forth
and to assume the following obligations:
A. Investment Advisory Services.
(a) The Investment Adviser shall have overall responsibility for the
day-to-day management and investment of the Portfolio's assets
and securities portfolio subject to and in accordance with the
investment objectives and policies of the Portfolio, and any
directions which the Trustees and officers of the Trust may issue
to the Investment Adviser from time to time, and shall perform
the following services: provide or cause to be provided
investment research and credit analysis concerning the
Portfolio's investments, (ii) conduct or cause to be conducted a
continual program of investment of the Portfolio's assets, (iii)
place or cause to be placed orders for all purchases and sales of
the investments made for the Portfolio, and (iv) maintain or
cause to be maintained the books and records required in
connection with its duties hereunder.
<PAGE>
(b) The Investment Adviser shall advise the Trustees of the Trust
regarding overall investment programs and strategies for the
Portfolio, revision of such programs as necessary, and shall
monitor and report periodically to the Trustees concerning the
implementation of such programs and strategies.
(c) The Investment Adviser, with the prior approval of the Trustees
(and the shareholders to the extent required by applicable law)
as to particular appointments, shall be permitted to (i) engage
one or more persons or companies ("Sub-Advisers"), which may have
full investment discretion to make all determinations with
respect to the investment and reinvestment of all or any portion
of the Portfolio's assets and the purchase and sale of all or any
portion of the Portfolio securities, subject to the terms and
conditions of this Agreement and the written agreement with any
Sub-Adviser; and (ii) take such steps as may be necessary to
implement such appointment.
(d) The Investment Adviser shall be solely responsible for paying the
fees and expenses of any Sub-Adviser for its services to the
Investment Adviser and the Portfolio. Except for instructions or
advice given to the Sub-Adviser by the Investment Adviser, the
Investment Adviser shall not be responsible or liable for the
investment merits of any decision by the Sub-Adviser to purchase,
hold or sell a security for the Portfolio.
(e) In the event one or more Sub-Advisers is appointed pursuant to
subparagraph (c) hereof, the Investment Adviser shall (i) monitor
and evaluate the investment performance of each Sub-Adviser
employed by the Investment Adviser for the Portfolio; (ii)
allocate the portion of the Portfolio's assets to be managed by
each Sub-Adviser; (iii) recommend changes in or additional Sub-
Advisers when appropriate; and (iv) compensate each Sub-Adviser.
(f) The Investment Adviser shall render such reports to the Trustees,
at regular meetings thereof, as the Trustees may reasonably
request regarding, among other things, the investment performance
of the Portfolio, including, if any Sub-Adviser has been
appointed, the investment performance of each Sub-Adviser.
(g) The Investment Adviser will monitor and coordinate, to the extent
necessary, the activities of the custodian, transfer agent,
distributor, administrator and pricing agent insofar as their
respective activities relate to the duties and obligations of the
Investment Adviser hereunder.
B. Provision of Information Necessary for Preparation of Securities
Registration Statements, Amendments and Other Materials.
The Investment Adviser will make available and provide such financial,
accounting and statistical information related to its duties and
responsibilities hereunder as required by the Trustees and necessary
for the preparation of registration statement, reports and other
documents required by federal and state securities laws and such other
information as the Trustees may reasonably request for use by the
Trust and its distributor for the underwriting and distribution of the
Portfolio's shares.
C. Other Obligations and Services.
<PAGE>
The Investment Adviser agrees to make available its officers and
employees to the Trustees and officers of the Trust for consultation
and discussions regarding the investment advisory activities of the
Portfolio.
3. Covenants by Investment Adviser. The Investment Adviser agrees with
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respect to the services provided to the Portfolio that it:
(a) will conform with all applicable rules and regulations of the
Securities and Exchange Commission ("SEC") and will in addition
conduct its activities under this Agreement in accordance with
applicable regulations of the Office of the Comptroller of the
Currency pertaining to the investment advisory activities of
national banks which are applicable to the Investment Adviser;
(b) will not make loans to any person for the purpose of purchasing
or carrying Portfolio shares, or make loans to the Trust;
(c) will not purchase shares of the Portfolio for its own investment
account;
(d) will maintain all books and records with respect to the
securities transactions of the Portfolio and furnish the Trustees
such periodic and special reports as the Trustees may request
with respect to the Portfolio;
(e) will treat confidentially and as proprietary information of the
Trust all records and other information relative to the Trust and
the Portfolio and prior, present or potential shareholders (other
than any information which Investment Adviser may have obtained
about shareholders from other business relationships with such
shareholders), and will not use such records and information for
any purpose other than performance of its responsibilities and
duties hereunder (except after prior notification to and approval
in writing by the Trust, which approval shall not be unreasonably
withheld and may not be withheld and will be deemed granted where
the Investment Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to
divulge such information by duly constituted authorities, when so
requested by the Trust or when otherwise required or permitted by
law); and
(f) will immediately notify the Trust of the occurrence of any event
which would disqualify Investment Adviser or any Sub-Adviser from
serving as investment adviser of an investment company.
4. Transaction Procedures. All investment transactions on behalf of the
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Portfolio will be compensated by payment to or delivery by the custodian for the
Portfolio duly appointed by the Trustees of the Trust (the "Custodian"), or such
approved depositories or agents duly appointed by the Trustees and as may be
designated by the Custodian in writing, as custodian for the Portfolio, of all
cash and/or securities due to or from the Portfolio, and neither Investment
Adviser nor any Sub-Adviser shall have possession or custody thereof or any
responsibility or liability with respect thereto. The Investment Adviser or any
Sub-Adviser effecting transactions on behalf of the Portfolio shall advise the
Custodian of all investment orders for the Portfolio placed by it with brokers,
dealers, banks and other parties ("Brokers"). The Trustees shall issue, or cause
to be issued, to the Custodian such instructions as may be appropriate in
connection with the settlement of any transaction initiated by the Investment
Adviser or any Sub-Adviser. The Portfolio shall be responsible for all custodial
arrangements and the payment of all custodial charges and fees, and,
<PAGE>
upon the giving of proper instructions to the Custodian, Investment Adviser
shall have no responsibility or liability with respect to custodian arrangements
or the acts, omissions or other conduct of the Custodian, except that it shall
be the responsibility of the Investment Adviser or any Sub-Adviser to take
appropriate action if the Custodian fails properly to confirm execution of the
instructions to the Investment Adviser or any Sub-Adviser in a written form duly
agreed upon by the Custodian and the Investment Adviser or any Sub-Adviser.
5. Execution and Allocation of Portfolio Brokerage. The Investment
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Adviser shall place, or shall cause each Sub-Adviser to place, subject to the
limitations contained in this paragraph 5, on behalf of the Portfolio, orders
for the execution of the Portfolio's securities transactions. Neither the
Investment Adviser nor any Sub-Adviser is authorized by the Trust to take any
action, including the purchase or sale of securities for the account of the
Portfolio, (a) in contravention of (i) any investment restrictions set forth in
the 1940 Act and the rules thereunder; (ii) specific instructions adopted by the
Trustees and communicated to the Investment Adviser; (iii) the investment
objectives, policies and restrictions of the Portfolio as set forth in the
Trust's current registration statement, as amended from time to time; or (iv)
instructions from the Trustees to the Investment Adviser or from the Investment
Adviser to any Sub-Adviser, or (b) which would have the effect of causing the
Trust to fail to qualify or to cease to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended, or any succeeding
statute.
The Investment Adviser or, if any Sub-Adviser shall be appointed, then the
Sub-Adviser, may place orders pursuant to its investment determinations for the
Portfolio either directly with the issuer or with any Brokers. In placing orders
with any Broker, the Investment Adviser or any Sub-Adviser will consider the
experience and skill of a Broker's securities traders as well as the Broker's
financial responsibility and administrative efficiency. The Investment Adviser
or any Sub-Adviser will attempt to obtain the best price and the most favorable
execution of its orders with any Brokers; however, in so doing, the Investment
Adviser or any Sub-Adviser may consider, subject to the approval of the
Trustees, the research, statistical, and related brokerage services provided or
to be provided by such Broker to the Portfolio. A commission paid to such
Brokers may be higher than that which another Broker would have charged for
effecting the same transaction, provided that the Investment Adviser or any Sub-
Adviser determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such Broker when
viewed in terms of either the particular transaction or the overall
responsibilities of the Investment Adviser or any Sub-Adviser with respect to
the accounts as to which it exercises investment discretion. It is understood
that neither the Investment Adviser nor any Sub-Adviser has adopted a formula
for selection of Brokers for the execution of the Portfolio's investment
transactions.
On occasions when either the Investment Adviser or any Sub-Adviser deems
the purchase or sale of a security to be in the best interest of the Portfolio
as well as other clients, the Investment Adviser or Sub-Adviser, to the extent
permitted by applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities to be sold or purchased in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as expenses incurred in the transaction, will be made by the Investment
Adviser or Sub-Adviser in the manner it considers to be the most equitable and
consistent with its fiduciary obligations to the Portfolio and to such other
clients.
The Investment Adviser will not, and will cause each Sub-Adviser not to,
execute any Portfolio transactions for the account of the Portfolio with a
Broker which is an "affiliated person" (as defined in the 1940 Act) of the
Trust, the Trust's distributor, the Investment Adviser or any Sub-Adviser except
in accordance with applicable laws, rules, regulations or effective exemption
orders issued by the SEC
<PAGE>
pursuant to the 1940 Act without the prior written approval of the Trustees. The
Trust agrees to provide the Investment Adviser, and the Investment Adviser
agrees to furnish to each Sub-Adviser, a list of brokers and dealers which are
"affiliated persons" of the Trust. The Investment Adviser likewise agrees to
furnish, and to cause each Sub-Adviser to furnish, to the Trust, with respect to
such Sub-Adviser, a list of Brokers which are "affiliated persons" of the
Investment Adviser and each Sub-Adviser. In no instance will Portfolio
securities be purchased from or sold to the Trust's principal distributor,
Investment Adviser, any Sub-Adviser or any affiliate thereof, except to the
extent permitted by an exemption order issued by the SEC or by applicable law.
The Investment Adviser shall render regular reports to the Trustees of the
total brokerage business placed by it and any Sub-Adviser(s) and the manner in
which the allocation of such brokerage has been accomplished.
6. Expenses of the Portfolio. The Portfolio or Trust will pay, or will
-------------------------
enter into arrangements that require third parties to pay, all expenses other
than those expressly assumed by the Investment Adviser herein, which expenses
payable by the Portfolio or Trust shall include:
(a) Expenses of all audits by independent public accountants;
(b) Expenses of transfer agent, registrar, dividend disbursing agent
and shareholder recordkeeping services;
(c) Expenses of custodial services including recordkeeping services
provided by the custodian;
(d) Expenses of obtaining quotations for calculating the value of the
Portfolio's net assets;
(e) Salaries and other compensation of any of its executive officers
or employees, if any, who are not officers, directors,
stockholders or employees of the Investment Adviser, the
Administrator or the Distributor;
(f) Taxes levied against the Portfolio;
(g) Brokerage fees and commissions in connection with the purchase
and sale of portfolio securities for the Portfolio;
(h) Costs, including the interest expense, of borrowing money;
(i) Costs and/or fees incident to Trustees and shareholder meetings
of the Trust and the Portfolio, the preparation and mailings of
prospectuses and reports of the Portfolio to its existing
shareholders, the filing of reports with regulatory bodies, the
maintenance of the Portfolio's legal existence, and the
registration of shares with federal and state securities
authorities;
(j) Legal fees, including the legal fees related to the registration
and continued qualification of the Portfolio's shares for sale;
(k) Costs of printing any share certificates representing shares of
the Portfolio;
<PAGE>
(l) Fees and expenses of Trustees who are not affiliated persons, as
defined in the 1940 Act, of the Investment Adviser, any Sub-
Adviser, the Distributor or any of their affiliates; and
(m) Its pro rata portion of the fidelity bond required by Section
17(g) of the 1940 Act, or of other insurance premiums.
7. Activities and Affiliates of the Investment Adviser. The Trustees
---------------------------------------------------
acknowledge that Investment Adviser or any Sub-Adviser, or one or more of its
affiliates, may have investment responsibilities or render investment advice to
or perform other investment advisory services for other individuals or entities
and that Investment Adviser or any Sub-Adviser, its affiliates or any of its or
their directors, officers, agents or employees may buy, sell or trade in any
securities for its or their respective accounts (such individuals, entities and
accounts hereinafter referred to as Affiliated Accounts). Subject to the
provisions of paragraph 2 hereof, the Trustees agree that Investment Adviser or
its affiliates and any Sub-Adviser(s) or its affiliates, may give advice or
exercise investment responsibility and take such other action with respect to
other Affiliated Accounts which may differ from the advice given or the timing
or nature of action taken with respect to the Portfolio, provided that
Investment Adviser or Sub-Adviser acts in good faith and in accordance with
applicable law or as permitted by an exemption order issued by the SEC, and
provided further, that it is Investment Adviser's and Sub-Adviser's policy to
allocate within its reasonable discretion, investment opportunities to the
Portfolio over a period of time on a fair and equitable basis relative to the
Affiliated Accounts, taking into account the investment objectives and policies
of the Portfolio and any specific investment restrictions applicable thereto.
The Trust acknowledges that one or more of the Affiliated Accounts may at any
time hold, acquire, increase, decrease, dispose of or otherwise deal with
positions in investments in which the Portfolio may have an interest from time
to time, whether in transactions which involve the Portfolio or otherwise.
Neither the Investment Adviser nor any Sub-Adviser shall have any obligation to
acquire for the Portfolio a position in any investment which any Affiliated
Account may acquire, and the Portfolio shall have no first refusal, coinvestment
or other rights in respect of any investment, either for the Portfolio or
otherwise.
8. Compensation of the Investment Adviser. For all services provided to
--------------------------------------
the Portfolio pursuant to this Agreement, the Trust shall pay the Investment
Adviser, and the Investment Adviser agrees to accept as full compensation
therefor, an investment advisory fee, payable as soon as practicable after the
last day of each month, calculated using a Blended Annual Rate as hereinafter
defined. The monthly investment advisory fee to be paid by the Trust to the
Investment Adviser shall be determined as of the close of business on the last
business day of each month by multiplying one-twelfth of the Blended Annual
Rate, calculated monthly as of such day, by the Average Portfolio Net Assets
(hereinafter defined), calculated monthly as of such day.
For purposes of this paragraph 8, the "Average Portfolio Net Assets" shall
be calculated monthly as of the last business day of each month and shall mean
the sum of the net assets of the Portfolio calculated each business day during
the month divided by the number of business days in the month (such net assets
to be determined as of the close of business each business day and computed in
the manner set forth in the Declaration of Trust of the Trust) . The "Blended
Annual Rate" shall mean the rate determined by dividing the Aggregate Annualized
Trust Fee (hereinafter defined) by the Average Trust Net Assets (hereinafter
defined). "Average Trust Net Assets" shall mean the sum of the Average Portfolio
Net Assets for each portfolio of the Trust which is a money market fund operated
in compliance with Rule 2a-7 of the 1940 Act and managed y the Investment
Adviser pursuant to a written agreement with the Trust.
<PAGE>
"Aggregate Annualized Trust Fee" shall be determined solely for the purpose
of determining the Blended Annual Rate and shall be the sum of the Annualized
Trust Fees determined in accordance with the following schedule:
Average Trust Net Assets x Annual Rate
--------------------------------------------
Up to $ 1 Billion x .25 percent
$ 1 Billion and over x .22 percent
The Investment Adviser agrees that its compensation for any fiscal year
shall be reduced by the amount, if any, by which the expenses of the Portfolio
for such fiscal year exceed the most restrictive state Blue Sky expense
limitation in effect from time to time, to the extent required by such
limitation. The Investment Adviser shall refund to the Portfolio the amount of
any reduction of the Investment Adviser's compensation pursuant to this
paragraph 8, reduced by the amount of any rebate paid directly to the Portfolio
by any Sub-Adviser engaged by Investment Adviser, as promptly as practicable
after the end of such fiscal year, provided that the Investment Adviser will not
be required to pay the Portfolio an amount greater than the fee paid to the
Investment Adviser in respect of such year pursuant to this Agreement. As used
in this paragraph 8, "expenses" shall mean those expenses included in the most
restrictive state Blue Sky limitation, having the broadest specification in such
state's Blue Sky statute, and "expense limitation" means a limit on the maximum
annual expenses which may be incurred by an investment company determined by
multiplying a fixed percentage by the average, or by multiplying more than one
such percentage by different specified amounts of the average, of the values of
an investment company's net assets for a fiscal year. The words "most
restrictive state Blue Sky expense limitation" shall be construed to result in
the largest reduction of the Investment Adviser's compensation for any fiscal
year of the Portfolio; provided, however, that nothing in this Agreement shall
require the Investment Adviser to reduce its fees if not required by an
applicable statue or regulation referred to above in this paragraph 8.
9. Proxies. The Trustees will vote all proxies solicited by or with
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respect to the issuers of securities, in which assets of the Portfolio may be
invested from time to time, unless the Trustees delegate such right to the
Investment Adviser.
10. Liabilities of the Investment Adviser.
-------------------------------------
(a) The Investment Adviser will not be liable for any error or
judgment or mistake of law or for any loss suffered by the
Portfolio or the Trust in connection with the matters to which
this Agreement relates, except that the Investment Adviser shall
be liable to the Portfolio and the Trust for a loss resulting
from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the
Investment Adviser in the performance of duties or reckless
disregard by it of its obligations or duties under this
Agreement.
(b) The Investment Adviser shall indemnify and hold harmless the
Portfolio from any loss, cost, expense or damage resulting from
the failure of any Sub-Adviser to comply with (i) any statement
included in the Trust's registration statement furnished by
Investment Adviser for inclusion therein, or (ii) instructions
given by the Investment Adviser to any Sub-Adviser for the
purpose of ensuring the Portfolio's compliance with the
applicable requirements of the 1940 Act or of the requirements of
the Internal Revenue Code of 1986 applicable to regulated
investment companies, or of successor statutes; provided,
however, that the indemnification provided by this subparagraph
10(b) shall
<PAGE>
apply only to the extent that the Sub-Adviser is liable to the
Trust and, after demand by the Trust, is unable or refuses to
discharge its obligation to the Portfolio.
(c) No provision of this Agreement shall be construed to protect any
Trustee or officer of the Trust, or the Investment Adviser, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
11. Renewal, Amendment and Termination.
----------------------------------
(a) This Agreement shall become effective on the date first written
above and shall remain in force for a period of two (2) years
from such date ' and from year to year thereafter but only so
long as such continuance is specifically approved at least
annually (i) by the vote of a majority of the Trustees who are
not interested persons of the Portfolio or the Investment
Adviser, cast in person at a meeting called for the purpose of
voting on such approval and by a vote of the Board of Trustees or
(ii) by the vote of a majority of the outstanding voting
securities of the Portfolio. The aforesaid provision that this
Agreement may be continued "annually" shall be construed in a
manner consistent with the 1940 Act and the rules and regulations
thereunder.
(b) This Agreement may be amended at any time, but only by written
agreement between the Trust and the Investment Adviser, which
amendment is subject to the approval of the Trustees and the
shareholders of the Trust in the manner required by the 1940 Act,
subject to any applicable exemption order of the SEC modifying
the provisions of the 1940 Act with respect to approval of
amendments to this Agreement.
(c) This Agreement:
(i) may at any time be terminated without the payment of any
penalty either by vote of the Trustees or by vote of a
majority of the outstanding voting securities of the
Portfolio, on sixty (60) days' written notice to the
Investment Adviser;
(ii) shall immediately terminate in the event of its
assignment; and
(iii) may be terminated by the Investment Adviser on sixty (60)
days' written notice to the Trust.
(d) As used in this Section 11, the terms "assignment", "interested
person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth in the 1940 Act and
the rules and regulations thereunder, subject to any applicable
orders of exemption issued by the SEC.
12. Books and Records. (a) The Trustees shall provide to the Investment
-----------------
Adviser copies of the Trust's most recent prospectus and statement of additional
information (as each may be amended or supplemented from time to time) which
relate to any class of shares representing interests in the Portfolio.
(b) In compliance with the requirements of Rule 3la-3 of the rules
promulgated under the 1940 Act ("Rules"), the Investment Adviser hereby agrees
that all records which it maintains for the Trust are the property of the Trust
and further agrees to surrender promptly to the Trust any such records upon the
Trust's request. The Investment Adviser further agrees to preserve for the
periods prescribed by Rule 3la-
<PAGE>
2, the records required to be maintained by the Investment Adviser hereunder
pursuant to Rule 3la-1 of the Rules.
13. Notices. All notices, requests, demands or other communications
-------
hereunder shall be in writing and shall be deemed given, if delivered
personally, on the day delivered or if mailed, by certified or registered mail,
postage prepaid, return receipt requested, three (3) days after placement in the
United States mail, to the addresses below:
If to Trust: The Masters Group of Mutual Funds
c/o Stuart E. Fross, Esq., Secretary
82 Devonshire Street, L12A
Boston, MA 02119
With a copy to: Daniel B. Hatzenbuehler, Esq.
Heiskell, Donelson, Bearman, Adams, Williams & Kirsch
165 Madison Avenue, 21st Floor
Memphis, TN 38103
If to Investment Adviser: Garland Capital Management
c/o C. Douglas Kelso, III
Senior Vice President
4990 Poplar Avenue
Memphis, TN 38117
With a copy to: Lee Welch, Esq.
Martin, Tate, Morrow & Marston, P.C.
22 N. Front Street, llth Floor
Memphis, TN 38103
14. Severability. If any provision of this Agreement shall be held or
------------
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
15. Limitation on Liability. Investment Adviser is hereby expressly put
-----------------------
on notice of the limitation of shareholder liability as set forth in the
Declaration of Trust and agrees that obligations assumed by the Portfolio
pursuant to this Agreement shall be limited in all cases to the Portfolio and
its assets. Investment Adviser agrees that it shall not seek satisfaction of any
such obligation from the shareholders or any individual shareholder of the
Portfolio, nor from the Trustees or any individual Trustee of the Portfolio.
16. Governing Law. To the extent that state law has not been preempted by
-------------
the provisions of any law of the United States heretofore or hereafter enacted,
as the same may be amended from time to time, this Agreement shall be
administered, construed and enforced according to the laws of the State of
Tennessee without giving effect to the choice of laws provisions thereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as of the day and year first written above.
THE MASTERS GROUP OF MUTUAL FUNDS
By: /s/ Richard C. Rantzow
-----------------------------
Richard C. Rantzow, President
FIRST TENNESSEE BANK NATIONAL ASSOCIATION, DOING
BUSINESS AS GARLAND CAPITAL MANAGEMENT
By: /s/ Douglas Kelso
-----------------------------
Title: Senior Vice President
------------------------
<PAGE>
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
--------------------------------------------
THIS INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT is made this 4th day of
September, 1992, between THE MASTERS GROUP OF MUTUAL FUNDS, a business trust
organized under the laws of the Commonwealth of Massachusetts (the "Trust"), on
behalf of its MUNICIPAL MONEY MARKET PORTFOLIO, (the "Portfolio") and FIRST
TENNESSEE BANK NATIONAL ASSOCIATION, a national banking association (the
"Investment Adviser").
WHEREAS, the Trust has been organized to operate as an investment company
registered under the Investment Company Act of 1940 (the "1940 Act") with
multiple series of shares (hereinafter referred to as Classes) having varying
preferences, limitations and relative rights, and to invest and reinvest the
assets of the Portfolio in securities pursuant to investment objectives and
policies for the Portfolio;
WHEREAS, the Portfolio desires to avail itself of the services,
information, advice, assistance and facilities of an investment adviser and to
have an investment adviser provide or perform for it various investment
advisory, statistical, research, portfolio investment adviser selection and
other services as set forth more fully herein;
NOW, THEREFORE, Trust, on behalf of the Portfolio, and Investment Adviser
agree as follows:
1. Employment of the Investment Adviser. The Trust hereby employs the
------------------------------------
Investment Adviser to provide investment advice and to manage the investment and
reinvestment of the Portfolio's assets in the manner set forth in Section 2A of
this Agreement, subject to the direction of the Trustees, for the period, in the
manner, and on the terms hereinafter set forth. The Investment Adviser hereby
accepts such employment and agrees during such period to render the services and
to assume the obligations herein set forth. The investment Adviser shall for
all purposes herein be deemed to be an independent contractor and shall, except
as expressly provided or authorized (whether herein or otherwise), have no
authority to act or represent the Trust in any way or otherwise be deemed an
agent of the Trust.
2. Obligation of and Services to be Provided by the Investment Adviser.
-------------------------------------------------------------------
The Investment Adviser undertakes to provide the services hereinafter set forth
and to assume the following obligations:
A. Investment Advisory Services.
(a) The Investment Adviser shall have overall responsibility for the
day-to-day management and investment of the Portfolio's assets
and securities portfolio subject to and in accordance with the
investment objectives and policies of the Portfolio, and any
directions which the Trustees and officers of the Trust may issue
to the Investment Adviser from time to time, and shall perform
the following services: provide or cause to be provided
investment research and credit analysis concerning the
Portfolio's investments, (ii) conduct or cause to be conducted a
continual program of investment of the Portfolio's assets, (iii)
place or cause to be placed orders for all purchases and sales of
the investments made for the Portfolio, and (iv) maintain or
cause to be maintained the books and records required in
connection with its duties hereunder.
<PAGE>
(b) The Investment Adviser shall advise the Trustees of the Trust
regarding overall investment programs and strategies for the
Portfolio, revision of such programs as necessary, and shall
monitor and report periodically to the Trustees concerning the
implementation of such programs and strategies.
(c) The Investment Adviser, with the prior approval of the Trustees
(and the shareholders to the extent required by applicable law)
as to particular appointments, shall be permitted to (i) engage
one or more persons or companies ("Sub-Advisers"), which may have
full investment discretion to make all determinations with
respect to the investment and reinvestment of all or any portion
of the Portfolio's assets and the purchase and sale of all or any
portion of the Portfolio securities, subject to the terms and
conditions of this Agreement and the written agreement with any
Sub-Adviser; and (ii) take such steps as may be necessary to
implement such appointment.
(d) The Investment Adviser shall be solely responsible for paying the
fees and expenses of any Sub-Adviser for its services to the
Investment Adviser and the Portfolio. Except for instructions or
advice given to the Sub-Adviser by the Investment Adviser, the
Investment Adviser shall not be responsible or liable for the
investment merits of any decision by the Sub-Adviser to purchase,
hold or sell a security for the Portfolio.
(e) In the event one or more Sub-Advisers is appointed pursuant to
subparagraph (c) hereof, the Investment Adviser shall (i) monitor
and evaluate the investment performance of each Sub-Adviser
employed by the Investment Adviser for the Portfolio; (ii)
allocate the portion of the Portfolio's assets to be managed by
each Sub-Adviser; (iii) recommend changes in or additional Sub-
Advisers when appropriate; and (iv) compensate each Sub-Adviser.
(f) The Investment Adviser shall render such reports to the Trustees,
at regular meetings thereof, as the Trustees may reasonably
request regarding, among other things, the investment performance
of the Portfolio, including, if any Sub-Adviser has been
appointed, the investment performance of each Sub-Adviser.
(g) The Investment Adviser will monitor and coordinate, to the extent
necessary, the activities of the custodian, transfer agent,
distributor, administrator and pricing agent insofar as their
respective activities relate to the duties and obligations of the
Investment Adviser hereunder.
B. Provision of Information Necessary for Preparation of Securities
Registration Statements, Amendments and Other Materials.
The Investment Adviser will make available and provide such financial,
accounting and statistical information related to its duties and
responsibilities hereunder as required by the Trustees and necessary
for the preparation of registration statement, reports and other
documents required by federal and state securities laws and such other
information as the Trustees may reasonably request for use by the
Trust and its distributor for the underwriting and distribution of the
Portfolio's shares.
C. Other Obligations and Services.
<PAGE>
The Investment Adviser agrees to make available its officers and
employees to the Trustees and officers of the Trust for consultation
and discussions regarding the investment advisory activities of the
Portfolio.
3 . Covenants by Investment Adviser. The Investment Adviser agrees with
-------------------------------
respect to the services provided to the Portfolio that it:
(a) will conform with all applicable rules and regulations of the
Securities and Exchange Commission ("SEC") and will in addition
conduct its activities under this Agreement in accordance with
applicable regulations of the Office of the Comptroller of the
Currency pertaining to the investment advisory activities of
national banks which are applicable to the Investment Adviser;
(b) will not make loans to any person for the purpose of purchasing
or carrying Portfolio shares, or make loans to the Trust;
(c) will not purchase shares of the Portfolio for its own investment
account;
(d) will maintain all books and records with respect to the
securities transactions of the Portfolio and furnish the Trustees
such periodic and special reports as the Trustees may request
with respect to the Portfolio;
(e) will treat confidentially and as proprietary information of the
Trust all records and other information relative to the Trust and
the Portfolio and prior, present or potential shareholders (other
than any information which Investment Adviser may have obtained
about shareholders from other business relationships with such
shareholders), and will not use such records and information for
any purpose other than performance of its responsibilities and
duties hereunder (except after prior notification to and approval
in writing by the Trust, which approval shall not be unreasonably
withheld and may not be withheld and will be deemed granted where
the Investment Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to
divulge such information by duly constituted authorities, when so
requested by the Trust or when otherwise required or permitted by
law); and
(f) will immediately notify the Trust of the occurrence of any event
which would disqualify Investment Adviser or any Sub-Adviser from
serving as investment adviser of an investment company.
4. Transaction Procedures. All investment transactions on behalf of the
----------------------
Portfolio will be compensated by payment to or delivery by the custodian for the
Portfolio duly appointed by the Trustees of the Trust (the "Custodian"), or such
approved depositories or agents duly appointed by the Trustees and as may be
designated by the Custodian in writing, as custodian for the Portfolio, of all
cash and/or securities due to or from the Portfolio, and neither Investment
Adviser nor any Sub-Adviser shall have possession or custody thereof or any
responsibility or liability with respect thereto. The Investment Adviser or any
Sub-Adviser effecting transactions on behalf of the Portfolio shall advise the
Custodian of all investment orders for the Portfolio placed by it with brokers,
dealers, banks and other parties ("Brokers"). The Trustees shall issue, or
cause to be issued, to the Custodian such instructions as may be appropriate in
connection with the settlement of any transaction initiated by the Investment
Adviser or any Sub-Adviser. The Portfolio shall be responsible for all
custodial arrangements and the payment of all custodial charges and fees, and,
<PAGE>
upon the giving of proper instructions to the Custodian, Investment Adviser
shall have no responsibility or liability with respect to custodian arrangements
or the acts, omissions or other conduct of the Custodian, except that it shall
be the responsibility of the Investment Adviser or any Sub-Adviser to take
appropriate action if the Custodian fails properly to confirm execution of the
instructions to the Investment Adviser or any Sub-Adviser in a written form duly
agreed upon by the Custodian and the Investment Adviser or any Sub-Adviser.
5. Execution and Allocation of Portfolio Brokerage. The Investment
-----------------------------------------------
Adviser shall place, or shall cause each Sub-Adviser to place, subject to the
limitations contained in this paragraph 5, on behalf of the Portfolio, orders
for the execution of the Portfolio's securities transactions. Neither the
Investment Adviser nor any Sub-Adviser is authorized by the Trust to take any
action, including the purchase or sale of securities for the account of the
Portfolio, (a) in contravention of (i) any investment restrictions set forth in
the 1940 Act and the rules thereunder; (ii) specific instructions adopted by the
Trustees and communicated to the Investment Adviser; (iii) the investment
objectives, policies and restrictions of the Portfolio as set forth in the
Trust's current registration statement, as amended from time to time; or (iv)
instructions from the Trustees to the Investment Adviser or from the Investment
Adviser to any Sub-Adviser, or (b) which would have the effect of causing the
Trust to fail to qualify or to cease to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended, or any succeeding
statute.
The Investment Adviser or, if any Sub-Adviser shall be appointed, then the
Sub-Adviser, may place orders pursuant to its investment determinations for the
Portfolio either directly with the issuer or with any Brokers. In placing
orders with any Broker, the Investment Adviser or any Sub-Adviser will consider
the experience and skill of a Broker's securities traders as well as the
Broker's financial responsibility and administrative efficiency. The Investment
Adviser or any Sub-Adviser will attempt to obtain the best price and the most
favorable execution of its orders with any Brokers; however, in so doing, the
Investment Adviser or any Sub-Adviser may consider, subject to the approval of
the Trustees, the research, statistical, and related brokerage services provided
or to be provided by such Broker to the Portfolio. A commission paid to such
Brokers may be higher than that which another Broker would have charged for
effecting the same transaction, provided that the Investment Adviser or any Sub-
Adviser determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such Broker when
viewed in terms of either the particular transaction or the overall
responsibilities of the Investment Adviser or any Sub-Adviser with respect to
the accounts as to which it exercises investment discretion. It is understood
that neither the Investment Adviser nor any Sub-Adviser has adopted a formula
for selection of Brokers for the execution of the Portfolio's investment
transactions.
On occasions when either the Investment Adviser or any Sub-Adviser deems
the purchase or sale of a security to be in the best interest of the Portfolio
as well as other clients, the Investment Adviser or Sub-Adviser, to the extent
permitted by applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities to be sold or purchased in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as expenses incurred in the transaction, will be made by the Investment
Adviser or Sub-Adviser in the manner it considers to be the most equitable and
consistent with its fiduciary obligations to the Portfolio and to such other
clients.
The Investment Adviser will not, and will cause each Sub-Adviser not to,
execute any Portfolio transactions for the account of the Portfolio with a
Broker which is an "affiliated person" (as defined in the 1940 Act) of the
Trust, the Trust's distributor, the Investment Adviser or any Sub-Adviser except
in accordance with applicable laws, rules, regulations or effective exemption
orders issued by the SEC
<PAGE>
pursuant to the 1940 Act without the prior written approval of the Trustees. The
Trust agrees to provide the Investment Adviser, and the Investment Adviser
agrees to furnish to each Sub-Adviser, a list of brokers and dealers which are
"affiliated persons" of the Trust. The Investment Adviser likewise agrees to
furnish, and to cause each Sub-Adviser to furnish, to the Trust, with respect to
such Sub-Adviser, a list of Brokers which are "affiliated persons" of the
Investment Adviser and each Sub-Adviser. In no instance will Portfolio
securities be purchased from or sold to the Trust's principal distributor,
Investment Adviser, any Sub-Adviser or any affiliate thereof, except to the
extent permitted by an exemption order issued by the SEC or by applicable law.
The Investment Adviser shall render regular reports to the Trustees of the
total brokerage business placed by it and any Sub-Adviser(s) and the manner in
which the allocation of such brokerage has been accomplished.
6. Expenses of the Portfolio. The Portfolio or Trust will pay, or will
-------------------------
enter into arrangements that require third parties to pay, all expenses other
than those expressly assumed by the Investment Adviser herein, which expenses
payable by the Portfolio or Trust shall include:
(a) Expenses of all audits by independent public accountants;
(b) Expenses of transfer agent, registrar, dividend disbursing
agent and shareholder recordkeeping services;
(c) Expenses of custodial services including recordkeeping
services provided by the custodian;
(d) Expenses of obtaining quotations for calculating the value
of the Portfolio's net assets;
(e) Salaries and other compensation of any of its executive
officers or employees, if any, who are not officers,
directors, stockholders or employees of the Investment
Adviser, the Administrator or the Distributor;
(f) Taxes levied against the Portfolio;
(g) Brokerage fees and commissions in connection with the
purchase and sale of portfolio securities for the Portfolio;
(h) Costs, including the interest expense, of borrowing money;
(i) Costs and/or fees incident to Trustees and shareholder
meetings of the Trust and the Portfolio, the preparation and
mailings of prospectuses and reports of the Portfolio to its
existing shareholders, the filing of reports with regulatory
bodies, the maintenance of the Portfolio's legal existence,
and the registration of shares with federal and state
securities authorities;
(j) Legal fees, including the legal fees related to the
registration and continued qualification of the Portfolio's
shares for sale;
(k) Costs of printing any share certificates representing shares
of the Portfolio;
<PAGE>
(l) Fees and expenses of Trustees who are not affiliated
persons, as defined in the 1940 Act, of the Investment
Adviser, any Sub-Adviser, the Distributor or any of their
affiliates; and
(m) Its pro rata portion of the fidelity bond required by
Section 17(g) of the 1940 Act, or of other insurance
premiums.
7. Activities and Affiliates of the Investment Adviser. The Trustees
---------------------------------------------------
acknowledge that Investment Adviser or any Sub-Adviser, or one or more of its
affiliates, may have investment responsibilities or render investment advice to
or perform other investment advisory services for other individuals or entities
and that Investment Adviser or any Sub-Adviser, its affiliates or any of its or
their directors, officers, agents or employees may buy, sell or trade in any
securities for its or their respective accounts (such individuals, entities and
accounts hereinafter referred to as Affiliated Accounts). Subject to the
provisions of paragraph 2 hereof, the Trustees agree that Investment Adviser or
its affiliates and any Sub-Adviser(s) or its affiliates, may give advice or
exercise investment responsibility and take such other action with respect to
other Affiliated Accounts which may differ from the advice given or the timing
or nature of action taken with respect to the Portfolio, provided that
Investment Adviser or Sub-Adviser acts in good faith and in accordance with
applicable law or as permitted by an exemption order issued by the SEC, and
provided further, that it is Investment Adviser's and Sub-Adviser's policy to
allocate within its reasonable discretion, investment opportunities to the
Portfolio over a period of time on a fair and equitable basis relative to the
Affiliated Accounts, taking into account the investment objectives and policies
of the Portfolio and any specific investment restrictions applicable thereto.
The Trust acknowledges that one or more of the Affiliated Accounts may at any
time hold, acquire, increase, decrease, dispose of or otherwise deal with
positions in investments in which the Portfolio may have an interest from time
to time, whether in transactions which involve the Portfolio or otherwise.
Neither the Investment Adviser nor any Sub-Adviser shall have any obligation to
acquire for the Portfolio a position in any investment which any Affiliated
Account may acquire, and the Portfolio shall have no first refusal, coinvestment
or other rights in respect of any investment, either for the Portfolio or
otherwise.
8. Compensation of the Investment Adviser. For all services provided to
--------------------------------------
the Portfolio pursuant to this Agreement, the Trust shall pay the Investment
Adviser, and the Investment Adviser agrees to accept as full compensation
therefor, an investment advisory fee, payable as soon as practicable after the
last day of each month, calculated using a Blended Annual Rate as hereinafter
defined. The monthly investment advisory fee to be paid by the Trust to the
Investment Adviser shall be determined as of the close of business on the last
business day of each month by multiplying one-twelfth of the Blended Annual
Rate, calculated monthly as of such day, by the Average Portfolio Net Assets
(hereinafter defined), calculated monthly as of such day.
For purposes of this paragraph 8, the "Average Portfolio Net Assets" shall
be calculated monthly as of the last business day of each month and shall mean
the sum of the net assets of the Portfolio calculated each business day during
the month divided by the number of business days in the month (such net assets
to be determined as of the close of business each business day and computed in
the manner set forth in the Declaration of Trust of the Trust) . The "Blended
Annual Rate" shall mean the rate determined by dividing the Aggregate Annualized
Trust Fee (hereinafter defined) by the Average Trust Net Assets (hereinafter
defined). "Average Trust Net Assets" shall mean the sum of the Average
Portfolio Net Assets for each portfolio of the Trust which is a money market
fund operated in compliance with Rule 2a-7 of the 1940 Act and managed y the
Investment Adviser pursuant to a written agreement with the Trust.
<PAGE>
"Aggregate Annualized Trust Fee" shall be determined solely for the purpose
of determining the Blended Annual Rate and shall be the sum of the Annualized
Trust Fees determined in accordance with the following schedule:
<TABLE>
<CAPTION>
Average Trust Net Assets x Annual Rate
----------------------------------------------
<S> <C> <C>
Up to $ 1 Billion x .25 percent
$ 1 Billion and over x .22 percent
</TABLE>
The Investment Adviser agrees that its compensation for any fiscal year
shall be reduced by the amount, if any, by which the expenses of the Portfolio
for such fiscal year exceed the most restrictive state Blue Sky expense
limitation in effect from time to time, to the extent required by such
limitation. The Investment Adviser shall refund to the Portfolio the amount of
any reduction of the Investment Adviser's compensation pursuant to this
paragraph 8, reduced by the amount of any rebate paid directly to the Portfolio
by any Sub-Adviser engaged by Investment Adviser, as promptly as practicable
after the end of such fiscal year, provided that the Investment Adviser will not
be required to pay the Portfolio an amount greater than the fee paid to the
Investment Adviser in respect of such year pursuant to this Agreement. As used
in this paragraph 8, "expenses" shall mean those expenses included in the most
restrictive state Blue Sky limitation, having the broadest specification in such
state's Blue Sky statute, and "expense limitation" means a limit on the maximum
annual expenses which may be incurred by an investment company determined by
multiplying a fixed percentage by the average, or by multiplying more than one
such percentage by different specified amounts of the average, of the values of
an investment company's net assets for a fiscal year. The words "most
restrictive state Blue Sky expense limitation" shall be construed to result in
the largest reduction of the Investment Adviser's compensation for any fiscal
year of the Portfolio; provided, however, that nothing in this Agreement shall
require the Investment Adviser to reduce its fees if not required by an
applicable statue or regulation referred to above in this paragraph 8.
9. Proxies. The Trustees will vote all proxies solicited by or with
-------
respect to the issuers of securities, in which assets of the Portfolio may be
invested from time to time, unless the Trustees delegate such right to the
Investment Adviser.
10. Liabilities of the Investment Adviser.
-------------------------------------
(a) The Investment Adviser will not be liable for any error or
judgment or mistake of law or for any loss suffered by the
Portfolio or the Trust in connection with the matters to which
this Agreement relates, except that the Investment Adviser shall
be liable to the Portfolio and the Trust for a loss resulting
from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the
Investment Adviser in the performance of duties or reckless
disregard by it of its obligations or duties under this
Agreement.
(b) The Investment Adviser shall indemnify and hold harmless the
Portfolio from any loss, cost, expense or damage resulting from
the failure of any Sub-Adviser to comply with (i) any statement
included in the Trust's registration statement furnished by
Investment Adviser for inclusion therein, or (ii) instructions
given by the Investment Adviser to any Sub-Adviser for the
purpose of ensuring the Portfolio's compliance with the
applicable requirements of the 1940 Act or of the requirements of
the Internal Revenue Code of 1986 applicable to regulated
investment companies, or of successor statutes; provided,
however, that the indemnification provided by this subparagraph
10(b) shall
<PAGE>
apply only to the extent that the Sub-Adviser is liable to the
Trust and, after demand by the Trust, is unable or refuses to
discharge its obligation to the Portfolio.
(c) No provision of this Agreement shall be construed to protect any
Trustee or officer of the Trust, or the Investment Adviser, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
11. Renewal, Amendment and Termination.
----------------------------------
(a) This Agreement shall become effective on the date first written
above and shall remain in force for a period of two (2) years
from such date ' and from year to year thereafter but only so
long as such continuance is specifically approved at least
annually (i) by the vote of a majority of the Trustees who are
not interested persons of the Portfolio or the Investment
Adviser, cast in person at a meeting called for the purpose of
voting on such approval and by a vote of the Board of Trustees or
(ii) by the vote of a majority of the outstanding voting
securities of the Portfolio. The aforesaid provision that this
Agreement may be continued "annually" shall be construed in a
manner consistent with the 1940 Act and the rules and regulations
thereunder.
(b) This Agreement may be amended at any time, but only by written
agreement between the Trust and the Investment Adviser, which
amendment is subject to the approval of the Trustees and the
shareholders of the Trust in the manner required by the 1940 Act,
subject to any applicable exemption order of the SEC modifying
the provisions of the 1940 Act with respect to approval of
amendments to this Agreement.
(c) This Agreement:
(i) may at any time be terminated without the payment of any
penalty either by vote of the Trustees or by vote of a
majority of the outstanding voting securities of the
Portfolio, on sixty (60) days' written notice to the
Investment Adviser;
(ii) shall immediately terminate in the event of its assignment;
and
(iii) may be terminated by the Investment Adviser on sixty (60)
days' written notice to the Trust.
(d) As used in this Section 11, the terms "assignment", "interested
person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth in the 1940 Act and
the rules and regulations thereunder, subject to any applicable
orders of exemption issued by the SEC.
12. Books and Records. (a) The Trustees shall provide to the Investment
-----------------
Adviser copies of the Trust's most recent prospectus and statement of additional
information (as each may be amended or supplemented from time to time) which
relate to any class of shares representing interests in the Portfolio.
(b) In compliance with the requirements of Rule 3la-3 of the rules
promulgated under the 1940 Act ("Rules"), the Investment Adviser hereby agrees
that all records which it maintains for the Trust are the property of the Trust
and further agrees to surrender promptly to the Trust any such records upon the
Trust's request. The Investment Adviser further agrees to preserve for the
periods prescribed by Rule 3la-
<PAGE>
2, the records required to be maintained by the Investment Adviser hereunder
pursuant to Rule 3la-1 of the Rules.
13. Notices. All notices, requests, demands or other communications
-------
hereunder shall be in writing and shall be deemed given, if delivered
personally, on the day delivered or if mailed, by certified or registered mail,
postage prepaid, return receipt requested, three (3) days after placement in the
United States mail, to the addresses below:
If to Trust: The Masters Group of Mutual Funds
c/o Stuart E. Fross, Esq., Secretary
82 Devonshire Street, F5H
Boston, MA 02119
With a copy to: Daniel B. Hatzenbuehler, Esq.
Baker, Donelson, Bearman, Caldwell, P.C.
165 Madison Avenue, 21st Floor
Memphis, TN 38103
If to Investment Adviser: Garland Capital Management
c/o: C. Douglas Kelso, III
Senior Vice President
First Tennessee Bank National Association
4385 Poplar Avenue
Memphis, TN 38117
With a copy to: Lee Welch, Esq.
Martin, Tate, Morrow & Marston, P.C.
22 N. Front Street, llth Floor
Memphis, TN 38103
14. Severability. If any provision of this Agreement shall be held or
------------
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
15. Limitation on Liability. Investment Adviser is hereby expressly put
-----------------------
on notice of the limitation of shareholder liability as set forth in the
Declaration of Trust and agrees that obligations assumed by the Portfolio
pursuant to this Agreement shall be limited in all cases to the Portfolio and
its assets. Investment Adviser agrees that it shall not seek satisfaction of
any such obligation from the shareholders or any individual shareholder of the
Portfolio, nor from the Trustees or any individual Trustee of the Portfolio.
16. Governing Law. To the extent that state law has not been preempted by
-------------
the provisions of any law of the United States heretofore or hereafter enacted,
as the same may be amended from time to time, this Agreement shall be
administered, construed and enforced according to the laws of the State of
Tennessee without giving effect to the choice of laws provisions thereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as of the day and year first written above.
THE MASTERS GROUP OF MUTUAL FUNDS
By: /s/ Richard C. Rantzow
----------------------
Richard C. Rantzow, President
FIRST TENNESSEE BANK NATIONAL ASSOCIATION,
DOING BUSINESS AS GARLAND CAPITAL MANAGEMENT
By: /s/ . Douglas Kelso
-------------------
Title: Senior Vice President
----------------------------
<PAGE>
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
--------------------------------------------
THIS INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT is made this 4/th/ day of
September, 1992, between THE MASTERS GROUP OF MUTUAL FUNDS, a business trust
organized under the laws of the Commonwealth of Massachusetts (the "Trust"), on
behalf of its U.S. TREASURY MONEY MARKET PORTFOLIO (the "Portfolio") and FIRST
TENNESSEE BANK NATIONAL ASSOCIATION, a national banking association (the
"Investment Adviser").
WHEREAS, the Trust has been organized to operate as an investment company
registered under the Investment Company Act of 1940 (the "1940 Act") with
multiple series of shares (hereinafter referred to as Classes) having varying
preferences, limitations and relative rights, and to invest and reinvest the
assets of the Portfolio in securities pursuant to investment objectives and
policies for the Portfolio;
WHEREAS, the Portfolio desires to avail itself of the services,
information, advice, assistance and facilities of an investment adviser and to
have an investment adviser provide or perform for it various investment
advisory, statistical, research, portfolio investment adviser selection and
other services as set forth more fully herein;
NOW, THEREFORE, Trust, on behalf of the Portfolio, and Investment Adviser
agree as follows:
1. Employment of the Investment Adviser. The Trust hereby employs the
------------------------------------
Investment Adviser to provide investment advice and to manage the investment and
reinvestment of the Portfolio's assets in the manner set forth in Section 2A of
this Agreement, subject to the direction of the Trustees, for the period, in the
manner, and on the terms hereinafter set forth. The Investment Adviser hereby
accepts such employment and agrees during such period to render the services and
to assume the obligations herein set forth. The investment Adviser shall for
all purposes herein be deemed to be an independent contractor and shall, except
as expressly provided or authorized (whether herein or otherwise), have no
authority to act or represent the Trust in any way or otherwise be deemed an
agent of the Trust.
2. Obligation of and Services to be Provided by the Investment Adviser.
-------------------------------------------------------------------
The Investment Adviser undertakes to provide the services hereinafter set forth
and to assume the following obligations:
A. Investment Advisory Services.
(a) The Investment Adviser shall have overall responsibility for the
day-to-day management and investment of the Portfolio's assets
and securities portfolio subject to and in accordance with the
investment objectives and policies of the Portfolio, and any
directions which the Trustees and officers of the Trust may issue
to the Investment Adviser from time to time, and shall perform
the following services: provide or cause to be provided
investment research and credit analysis concerning the
Portfolio's investments, (ii) conduct or cause to be conducted a
continual program of investment of the Portfolio's assets, (iii)
place or cause to be placed orders for all purchases and sales of
the investments made for the Portfolio, and (iv) maintain or
cause to be maintained the books and records required in
connection with its duties hereunder.
<PAGE>
(b) The Investment Adviser shall advise the Trustees of the Trust
regarding overall investment programs and strategies for the
Portfolio, revision of such programs as necessary, and shall
monitor and report periodically to the Trustees concerning the
implementation of such programs and strategies.
(c) The Investment Adviser, with the prior approval of the Trustees
(and the shareholders to the extent required by applicable law)
as to particular appointments, shall be permitted to (i) engage
one or more persons or companies ("Sub-Advisers"), which may have
full investment discretion to make all determinations with
respect to the investment and reinvestment of all or any portion
of the Portfolio's assets and the purchase and sale of all or any
portion of the Portfolio securities, subject to the terms and
conditions of this Agreement and the written agreement with any
Sub-Adviser; and (ii) take such steps as may be necessary to
implement such appointment.
(d) The Investment Adviser shall be solely responsible for paying the
fees and expenses of any Sub-Adviser for its services to the
Investment Adviser and the Portfolio. Except for instructions or
advice given to the Sub-Adviser by the Investment Adviser, the
Investment Adviser shall not be responsible or liable for the
investment merits of any decision by the Sub-Adviser to purchase,
hold or sell a security for the Portfolio.
(e) In the event one or more Sub-Advisers is appointed pursuant to
subparagraph (c) hereof, the Investment Adviser shall (i) monitor
and evaluate the investment performance of each Sub-Adviser
employed by the Investment Adviser for the Portfolio; (ii)
allocate the portion of the Portfolio's assets to be managed by
each Sub-Adviser; (iii) recommend changes in or additional Sub-
Advisers when appropriate; and (iv) compensate each Sub-Adviser.
(f) The Investment Adviser shall render such reports to the Trustees,
at regular meetings thereof, as the Trustees may reasonably
request regarding, among other things, the investment performance
of the Portfolio, including, if any Sub-Adviser has been
appointed, the investment performance of each Sub-Adviser.
(g) The Investment Adviser will monitor and coordinate, to the extent
necessary, the activities of the custodian, transfer agent,
distributor, administrator and pricing agent insofar as their
respective activities relate to the duties and obligations of the
Investment Adviser hereunder.
B. Provision of Information Necessary for Preparation of Securities
Registration Statements, Amendments and Other Materials.
The Investment Adviser will make available and provide such financial,
accounting and statistical information related to its duties and
responsibilities hereunder as required by the Trustees and necessary
for the preparation of registration statement, reports and other
documents required by federal and state securities laws and such other
information as the Trustees may reasonably request for use by the
Trust and its distributor for the underwriting and distribution of the
Portfolio's shares.
C. Other Obligations and Services.
<PAGE>
The Investment Adviser agrees to make available its officers and
employees to the Trustees and officers of the Trust for consultation
and discussions regarding the investment advisory activities of the
Portfolio.
3. Covenants by Investment Adviser. The Investment Adviser agrees with
-------------------------------
respect to the services provided to the Portfolio that it:
(a) will conform with all applicable rules and regulations of the
Securities and Exchange Commission ("SEC") and will in addition
conduct its activities under this Agreement in accordance with
applicable regulations of the Office of the Comptroller of the
Currency pertaining to the investment advisory activities of
national banks which are applicable to the Investment Adviser;
(b) will not make loans to any person for the purpose of purchasing
or carrying Portfolio shares, or make loans to the Trust;
(c) will not purchase shares of the Portfolio for its own investment
account;
(d) will maintain all books and records with respect to the
securities transactions of the Portfolio and furnish the Trustees
such periodic and special reports as the Trustees may request
with respect to the Portfolio;
(e) will treat confidentially and as proprietary information of the
Trust all records and other information relative to the Trust and
the Portfolio and prior, present or potential shareholders (other
than any information which Investment Adviser may have obtained
about shareholders from other business relationships with such
shareholders), and will not use such records and information for
any purpose other than performance of its responsibilities and
duties hereunder (except after prior notification to and approval
in writing by the Trust, which approval shall not be unreasonably
withheld and may not be withheld and will be deemed granted where
the Investment Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to
divulge such information by duly constituted authorities, when so
requested by the Trust or when otherwise required or permitted by
law); and
(f) will immediately notify the Trust of the occurrence of any event
which would disqualify Investment Adviser or any Sub-Adviser from
serving as investment adviser of an investment company.
4. Transaction Procedures. All investment transactions on behalf of the
----------------------
Portfolio will be compensated by payment to or delivery by the custodian for the
Portfolio duly appointed by the Trustees of the Trust (the "Custodian"), or such
approved depositories or agents duly appointed by the Trustees and as may be
designated by the Custodian in writing, as custodian for the Portfolio, of all
cash and/or securities due to or from the Portfolio, and neither Investment
Adviser nor any Sub-Adviser shall have possession or custody thereof or any
responsibility or liability with respect thereto. The Investment Adviser or any
Sub-Adviser effecting transactions on behalf of the Portfolio shall advise the
Custodian of all investment orders for the Portfolio placed by it with brokers,
dealers, banks and other parties ("Brokers"). The Trustees shall issue, or
cause to be issued, to the Custodian such instructions as may be appropriate in
connection with the settlement of any transaction initiated by the Investment
Adviser or any Sub-Adviser. The Portfolio shall be responsible for all
custodial arrangements and the payment of all custodial charges and fees, and,
<PAGE>
upon the giving of proper instructions to the Custodian, Investment Adviser
shall have no responsibility or liability with respect to custodian arrangements
or the acts, omissions or other conduct of the Custodian, except that it shall
be the responsibility of the Investment Adviser or any Sub-Adviser to take
appropriate action if the Custodian fails properly to confirm execution of the
instructions to the Investment Adviser or any Sub-Adviser in a written form duly
agreed upon by the Custodian and the Investment Adviser or any Sub-Adviser.
5. Execution and Allocation of Portfolio Brokerage. The Investment
-----------------------------------------------
Adviser shall place, or shall cause each Sub-Adviser to place, subject to the
limitations contained in this paragraph 5, on behalf of the Portfolio, orders
for the execution of the Portfolio's securities transactions. Neither the
Investment Adviser nor any Sub-Adviser is authorized by the Trust to take any
action, including the purchase or sale of securities for the account of the
Portfolio, (a) in contravention of (i) any investment restrictions set forth in
the 1940 Act and the rules thereunder; (ii) specific instructions adopted by the
Trustees and communicated to the Investment Adviser; (iii) the investment
objectives, policies and restrictions of the Portfolio as set forth in the
Trust's current registration statement, as amended from time to time; or (iv)
instructions from the Trustees to the Investment Adviser or from the Investment
Adviser to any Sub-Adviser, or (b) which would have the effect of causing the
Trust to fail to qualify or to cease to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended, or any succeeding
statute.
The Investment Adviser or, if any Sub-Adviser shall be appointed, then the
Sub-Adviser, may place orders pursuant to its investment determinations for the
Portfolio either directly with the issuer or with any Brokers. In placing
orders with any Broker, the Investment Adviser or any Sub-Adviser will consider
the experience and skill of a Broker's securities traders as well as the
Broker's financial responsibility and administrative efficiency. The Investment
Adviser or any Sub-Adviser will attempt to obtain the best price and the most
favorable execution of its orders with any Brokers; however, in so doing, the
Investment Adviser or any Sub-Adviser may consider, subject to the approval of
the Trustees, the research, statistical, and related brokerage services provided
or to be provided by such Broker to the Portfolio. A commission paid to such
Brokers may be higher than that which another Broker would have charged for
effecting the same transaction, provided that the Investment Adviser or any Sub-
Adviser determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such Broker when
viewed in terms of either the particular transaction or the overall
responsibilities of the Investment Adviser or any Sub-Adviser with respect to
the accounts as to which it exercises investment discretion. It is understood
that neither the Investment Adviser nor any Sub-Adviser has adopted a formula
for selection of Brokers for the execution of the Portfolio's investment
transactions.
On occasions when either the Investment Adviser or any Sub-Adviser deems
the purchase or sale of a security to be in the best interest of the Portfolio
as well as other clients, the Investment Adviser or Sub-Adviser, to the extent
permitted by applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities to be sold or purchased in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as expenses incurred in the transaction, will be made by the Investment
Adviser or Sub-Adviser in the manner it considers to be the most equitable and
consistent with its fiduciary obligations to the Portfolio and to such other
clients.
The Investment Adviser will not, and will cause each Sub-Adviser not to,
execute any Portfolio transactions for the account of the Portfolio with a
Broker which is an "affiliated person" (as defined in the 1940 Act) of the
Trust, the Trust's distributor, the Investment Adviser or any Sub-Adviser except
in accordance with applicable laws, rules, regulations or effective exemption
orders issued by the SEC
<PAGE>
pursuant to the 1940 Act without the prior written approval of the Trustees. The
Trust agrees to provide the Investment Adviser, and the Investment Adviser
agrees to furnish to each Sub-Adviser, a list of brokers and dealers which are
"affiliated persons" of the Trust. The Investment Adviser likewise agrees to
furnish, and to cause each Sub-Adviser to furnish, to the Trust, with respect to
such Sub-Adviser, a list of Brokers which are "affiliated persons" of the
Investment Adviser and each Sub-Adviser. In no instance will Portfolio
securities be purchased from or sold to the Trust's principal distributor,
Investment Adviser, any Sub-Adviser or any affiliate thereof, except to the
extent permitted by an exemption order issued by the SEC or by applicable law.
The Investment Adviser shall render regular reports to the Trustees of the
total brokerage business placed by it and any Sub-Adviser(s) and the manner in
which the allocation of such brokerage has been accomplished.
6. Expenses of the Portfolio. The Portfolio or Trust will pay, or will
-------------------------
enter into arrangements that require third parties to pay, all expenses other
than those expressly assumed by the Investment Adviser herein, which expenses
payable by the Portfolio or Trust shall include:
(a) Expenses of all audits by independent public accountants;
(b) Expenses of transfer agent, registrar, dividend disbursing
agent and shareholder recordkeeping services;
(c) Expenses of custodial services including recordkeeping
services provided by the custodian;
(d) Expenses of obtaining quotations for calculating the value
of the Portfolio's net assets;
(e) Salaries and other compensation of any of its executive
officers or employees, if any, who are not officers,
directors, stockholders or employees of the Investment
Adviser, the Administrator or the Distributor;
(f) Taxes levied against the Portfolio;
(g) Brokerage fees and commissions in connection with the
purchase and sale of portfolio securities for the Portfolio;
(h) Costs, including the interest expense, of borrowing money;
(i) Costs and/or fees incident to Trustees and shareholder
meetings of the Trust and the Portfolio, the preparation and
mailings of prospectuses and reports of the Portfolio to its
existing shareholders, the filing of reports with regulatory
bodies, the maintenance of the Portfolio's legal existence,
and the registration of shares with federal and state
securities authorities;
(j) Legal fees, including the legal fees related to the
registration and continued qualification of the Portfolio's
shares for sale;
(k) Costs of printing any share certificates representing shares
of the Portfolio;
<PAGE>
(l) Fees and expenses of Trustees who are not affiliated
persons, as defined in the 1940 Act, of the Investment
Adviser, any Sub-Adviser, the Distributor or any of their
affiliates; and
(m) Its pro rata portion of the fidelity bond required by
Section 17(g) of the 1940 Act, or of other insurance
premiums.
7. Activities and Affiliates of the Investment Adviser. The Trustees
---------------------------------------------------
acknowledge that Investment Adviser or any Sub-Adviser, or one or more of its
affiliates, may have investment responsibilities or render investment advice to
or perform other investment advisory services for other individuals or entities
and that Investment Adviser or any Sub-Adviser, its affiliates or any of its or
their directors, officers, agents or employees may buy, sell or trade in any
securities for its or their respective accounts (such individuals, entities and
accounts hereinafter referred to as Affiliated Accounts). Subject to the
provisions of paragraph 2 hereof, the Trustees agree that Investment Adviser or
its affiliates and any Sub-Adviser(s) or its affiliates, may give advice or
exercise investment responsibility and take such other action with respect to
other Affiliated Accounts which may differ from the advice given or the timing
or nature of action taken with respect to the Portfolio, provided that
Investment Adviser or Sub-Adviser acts in good faith and in accordance with
applicable law or as permitted by an exemption order issued by the SEC, and
provided further, that it is Investment Adviser's and Sub-Adviser's policy to
allocate within its reasonable discretion, investment opportunities to the
Portfolio over a period of time on a fair and equitable basis relative to the
Affiliated Accounts, taking into account the investment objectives and policies
of the Portfolio and any specific investment restrictions applicable thereto.
The Trust acknowledges that one or more of the Affiliated Accounts may at any
time hold, acquire, increase, decrease, dispose of or otherwise deal with
positions in investments in which the Portfolio may have an interest from time
to time, whether in transactions which involve the Portfolio or otherwise.
Neither the Investment Adviser nor any Sub-Adviser shall have any obligation to
acquire for the Portfolio a position in any investment which any Affiliated
Account may acquire, and the Portfolio shall have no first refusal, coinvestment
or other rights in respect of any investment, either for the Portfolio or
otherwise.
8. Compensation of the Investment Adviser. For all services provided to
--------------------------------------
the Portfolio pursuant to this Agreement, the Trust shall pay the Investment
Adviser, and the Investment Adviser agrees to accept as full compensation
therefor, an investment advisory fee, payable as soon as practicable after the
last day of each month, calculated using a Blended Annual Rate as hereinafter
defined. The monthly investment advisory fee to be paid by the Trust to the
Investment Adviser shall be determined as of the close of business on the last
business day of each month by multiplying one-twelfth of the Blended Annual
Rate, calculated monthly as of such day, by the Average Portfolio Net Assets
(hereinafter defined), calculated monthly as of such day.
For purposes of this paragraph 8, the "Average Portfolio Net Assets" shall
be calculated monthly as of the last business day of each month and shall mean
the sum of the net assets of the Portfolio calculated each business day during
the month divided by the number of business days in the month (such net assets
to be determined as of the close of business each business day and computed in
the manner set forth in the Declaration of Trust of the Trust) . The "Blended
Annual Rate" shall mean the rate determined by dividing the Aggregate Annualized
Trust Fee (hereinafter defined) by the Average Trust Net Assets (hereinafter
defined). "Average Trust Net Assets" shall mean the sum of the Average Portfolio
Net Assets for each portfolio of the Trust which is a money market fund operated
in compliance with Rule 2a-7 of the 1940 Act and managed by the Investment
Adviser pursuant to a written agreement with the Trust.
<PAGE>
"Aggregate Annualized Trust Fee" shall be determined solely for the purpose
of determining the Blended Annual Rate and shall be the sum of the Annualized
Trust Fees determined in accordance with the following schedule:
<TABLE>
<CAPTION>
Average Trust Net Assets x Annual Rate
-------------------------- - -----------
<S> <C> <C>
Up to $ 1 Billion x .25 percent
$ 1 Billion and over x .22 percent
</TABLE>
The Investment Adviser agrees that its compensation for any fiscal year
shall be reduced by the amount, if any, by which the expenses of the Portfolio
for such fiscal year exceed the most restrictive state Blue Sky expense
limitation in effect from time to time, to the extent required by such
limitation. The Investment Adviser shall refund to the Portfolio the amount of
any reduction of the Investment Adviser's compensation pursuant to this
paragraph 8, reduced by the amount of any rebate paid directly to the Portfolio
by any Sub-Adviser engaged by Investment Adviser, as promptly as practicable
after the end of such fiscal year, provided that the Investment Adviser will not
be required to pay the Portfolio an amount greater than the fee paid to the
Investment Adviser in respect of such year pursuant to this Agreement. As used
in this paragraph 8, "expenses" shall mean those expenses included in the most
restrictive state Blue Sky limitation, having the broadest specification in such
state's Blue Sky statute, and "expense limitation" means a limit on the maximum
annual expenses which may be incurred by an investment company determined by
multiplying a fixed percentage by the average, or by multiplying more than one
such percentage by different specified amounts of the average, of the values of
an investment company's net assets for a fiscal year. The words "most
restrictive state Blue Sky expense limitation" shall be construed to result in
the largest reduction of the Investment Adviser's compensation for any fiscal
year of the Portfolio; provided, however, that nothing in this Agreement shall
require the Investment Adviser to reduce its fees if not required by an
applicable statue or regulation referred to above in this paragraph 8.
9. Proxies. The Trustees will vote all proxies solicited by or with
-------
respect to the issuers of securities, in which assets of the Portfolio may be
invested from time to time, unless the Trustees delegate such right to the
Investment Adviser.
10. Liabilities of the Investment Adviser.
-------------------------------------
(a) The Investment Adviser will not be liable for any error or
judgment or mistake of law or for any loss suffered by the
Portfolio or the Trust in connection with the matters to which
this Agreement relates, except that the Investment Adviser shall
be liable to the Portfolio and the Trust for a loss resulting
from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the
Investment Adviser in the performance of duties or reckless
disregard by it of its obligations or duties under this
Agreement.
(b) The Investment Adviser shall indemnify and hold harmless the
Portfolio from any loss, cost, expense or damage resulting from
the failure of any Sub-Adviser to comply with (i) any statement
included in the Trust's registration statement furnished by
Investment Adviser for inclusion therein, or (ii) instructions
given by the Investment Adviser to any Sub-Adviser for the
purpose of ensuring the Portfolio's compliance with the
applicable requirements of the 1940 Act or of the requirements
of the Internal Revenue Code of 1986 applicable to regulated
investment companies, or of successor statutes; provided,
however, that the indemnification provided by this subparagraph
10(b) shall
<PAGE>
apply only to the extent that the Sub-Adviser is liable to the
Trust and, after demand by the Trust, is unable or refuses to
discharge its obligation to the Portfolio.
(c) No provision of this Agreement shall be construed to protect any
Trustee or officer of the Trust, or the Investment Adviser, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
11. Renewal, Amendment and Termination.
----------------------------------
(a) This Agreement shall become effective on the date first written
above and shall remain in force for a period of two (2) years
from such date ' and from year to year thereafter but only so
long as such continuance is specifically approved at least
annually (i) by the vote of a majority of the Trustees who are
not interested persons of the Portfolio or the Investment
Adviser, cast in person at a meeting called for the purpose of
voting on such approval and by a vote of the Board of Trustees or
(ii) by the vote of a majority of the outstanding voting
securities of the Portfolio. The aforesaid provision that this
Agreement may be continued "annually" shall be construed in a
manner consistent with the 1940 Act and the rules and regulations
thereunder.
(b) This Agreement may be amended at any time, but only by written
agreement between the Trust and the Investment Adviser, which
amendment is subject to the approval of the Trustees and the
shareholders of the Trust in the manner required by the 1940 Act,
subject to any applicable exemption order of the SEC modifying
the provisions of the 1940 Act with respect to approval of
amendments to this Agreement.
(c) This Agreement:
(i) may at any time be terminated without the payment of any
penalty either by vote of the Trustees or by vote of a
majority of the outstanding voting securities of the
Portfolio, on sixty (60) days' written notice to the
Investment Adviser;
(ii) shall immediately terminate in the event of its assignment;
and
(iii) may be terminated by the Investment Adviser on sixty (60)
days' written notice to the Trust.
(d) As used in this Section 11, the terms "assignment", "interested
person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth in the 1940 Act and
the rules and regulations thereunder, subject to any applicable
orders of exemption issued by the SEC.
12. Books and Records. (a) The Trustees shall provide to the Investment
-----------------
Adviser copies of the Trust's most recent prospectus and statement of additional
information (as each may be amended or supplemented from time to time) which
relate to any class of shares representing interests in the Portfolio.
(b) In compliance with the requirements of Rule 3la-3 of the rules
promulgated under the 1940 Act ("Rules"), the Investment Adviser hereby agrees
that all records which it maintains for the Trust are the property of the Trust
and further agrees to surrender promptly to the Trust any such records upon the
Trust's request. The Investment Adviser further agrees to preserve for the
periods prescribed by Rule 3la-
<PAGE>
2, the records required to be maintained by the Investment Adviser hereunder
pursuant to Rule 3la-1 of the Rules.
13. Notices. All notices, requests, demands or other communications
-------
hereunder shall be in writing and shall be deemed given, if delivered
personally, on the day delivered or if mailed, by certified or registered mail,
postage prepaid, return receipt requested, three (3) days after placement in the
United States mail, to the addresses below:
If to Trust: The Masters Group of Mutual Funds
c/o Stuart E. Fross, Esq., Secretary
82 Devonshire Street
F5H
Boston, MA 02119
With a copy to: Daniel B. Hatzenbuehler, Esq.
Baker, Donelson, Bearman, Adams, Williams & Kirsch
165 Madison Avenue, 21st Floor
Memphis, TN 38103
If to Investment Adviser: Garland Capital Management
c/o C. Douglas Kelso, III
Senior Vice President
First Tennessee Bank National Association
4385 Poplar Avenue
Memphis, TN 38117
With a copy to: Lee Welch, Esq.
Martin, Tate, Morrow & Marston, P.C.
22 N. Front Street, llth Floor
Memphis, TN 38103
14. Severability. If any provision of this Agreement shall be held or
------------
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
15. Limitation on Liability. Investment Adviser is hereby expressly put
-----------------------
on notice of the limitation of shareholder liability as set forth in the
Declaration of Trust and agrees that obligations assumed by the Portfolio
pursuant to this Agreement shall be limited in all cases to the Portfolio and
its assets. Investment Adviser agrees that it shall not seek satisfaction of
any such obligation from the shareholders or any individual shareholder of the
Portfolio, nor from the Trustees or any individual Trustee of the Portfolio.
16. Governing Law. To the extent that state law has not been preempted by
-------------
the provisions of any law of the United States heretofore or hereafter enacted,
as the same may be amended from time to time, this Agreement shall be
administered, construed and enforced according to the laws of the State of
Tennessee without giving effect to the choice of laws provisions thereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as of the day and year first written above.
THE MASTERS GROUP OF MUTUAL FUNDS
By: /s/ Richard C. Rantzow
------------------------------------------
Richard C. Rantzow, President
FIRST TENNESSEE BANK NATIONAL ASSOCIATION,
DOING BUSINESS AS GARLAND CAPITAL MANAGEMENT
By: /s/ C. Douglas Kelso, III
------------------------------------------
Title: Senior Vice President
---------------------------------------
<PAGE>
EXHIBIT 5(B)
SUB-ADVISORY AGREEMENT
----------------------
AGREEMENT made this 4/th/ day of September, 1992, between FIRST TENNESSEE
BANK NATIONAL ASSOCIATION, a national banking association doing business as
Garland Capital Management (herein called the "Investment Adviser") and
PROVIDENT INSTITUTIONAL MANAGEMENT CORPORATION, a Delaware corporation (herein
called the "Sub-Adviser").
WHEREAS, the Investment Adviser is the investment adviser to The Masters
Group of Mutual Funds (herein called the "Trust"), an open-end, diversified,
management investment company of the "series" type, registered under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Investment Adviser wishes to retain the Sub-Adviser to provide
investment advisory services in connection with the Trust's U.S. GOVERNMENT
MONEY MARKET PORTFOLIO (herein called the "Portfolio") a series of the Trust;
and
WHEREAS, the Sub-Adviser is willing to provide such services to the
Investment Adviser upon the conditions and for the compensation set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, it is agreed between
the parties hereto as follows:
1. Appointment. (a) The Investment Adviser hereby appoints the Sub-
-----------
Adviser its sub-adviser with respect to the Portfolio, as permitted in the
Investment Advisory and Management Agreement between the Investment Adviser and
the Trust dated September 4, 1992 (such Agreement or the most recent successor
advisor agreement between such parties is herein called the "Advisory
Agreement"). The Sub-Adviser accepts such appointment and agrees to use its best
professional judgement to make timely investment decisions for the Portfolio
with respect to the investments of the Portfolio in accordance with the
provisions of this Agreement for the compensation herein provided.
(b) The Sub-Adviser shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Trust or the Investment Adviser in any way or otherwise be deemed an agent of
the Trust or the Investment Adviser.
2. Delivery of Documents. (a) The Investment Adviser shall provide to the
---------------------
Sub-Adviser copies of the Trust's most recent prospectus and statement of
additional information (as each may be amended or supplemented from time to
time) which relate to any class of shares representing interests in the
Portfolio (each such prospectus and statement of additional information as
presently in effect, and as they shall from time to time be amended and
<PAGE>
supplemented, is herein respectively called a "Prospectus" and a "Statement of
Additional Information").
(b) The Sub-Adviser will make available and provide to the Investment
Adviser such financial, accounting, and statistical information related to its
duties and responsibilities hereunder as is necessary for the preparation of
registration statements, reports, and other documents required by federal and
state securities laws and such other information as the Trust's Board of
Trustees (herein called the "Trustees") or the Investment Adviser may reasonably
request for use by the Trust and its distributor for the underwriting and
distribution of the Portfolio shares.
3. Sub-Advisory Services to the Portfolio. Subject to the supervision of
--------------------------------------
the Investment Adviser, the Sub-Adviser will supervise the day-to-day operations
of the Portfolio and perform the following services: (i) provide investment
research and credit analysis concerning the Portfolio's investments, (ii)
conduct a continual program of investment of the Portfolio's assets, (iii) place
orders in accordance with paragraphs 4 to 7 hereof for all purchases and sales
of the investments made for the Portfolio, and (iv) maintain the books and
records required in connection with its duties hereunder. In addition, the Sub-
Adviser will keep the Investment Adviser informed of developments materially
affecting the Trust. The Sub-Adviser will communicate to the Investment Adviser
on each day that a purchase or sale of a security is effected for the Portfolio
(i) the name of the issuer, (ii) the amount of the purchase or sale, (iii) the
name of the broker, dealer, bank or other person (herein called "Brokers), if
any, through which the purchase or sale will be effected, (iv) the CUSIP number
of the security, if any, (v) the Portfolio to which such purchase or sale
pertains, and (vi) such other information as the Investment Adviser may
reasonably require for purposes of fulfilling its obligations to the Trust under
the Advisory Agreement. The Sub-Adviser will render to the Trustees such
periodic and special reports as the Investment Adviser or the Trustees may
reasonably request, including, if applicable, regular reports of the total
brokerage business placed by it and the manner in which the allocation of such
brokerage business has been accomplished. The Sub-Adviser will provide the
services rendered by it hereunder in accordance with the Portfolio's investment
objectives, policies, and restrictions as stated in its current Prospectus and
Statement of Additional Information. Except for instructions or advice given to
the Sub-Adviser by the Investment Adviser, the Investment Adviser shall not be
responsible or liable for the investment merits of any decision by the Sub-
Adviser to purchase, hold or sell a security for the Portfolio.
4. Brokerage. The Sub-Adviser may place orders pursuant to its
---------
investment determinations for the Portfolio either directly with the issuer or
with any Brokers. In placing orders, the Sub-Adviser will consider the
experience and skill of the firm's securities traders as well as the firm's
financial responsibility and administrative efficiency. The Sub-Adviser will
attempt to obtain the best price and the most favorable execution of its orders.
Consistent with these obligations, the Sub-Adviser may, subject to the approval
of the Trustees, select Brokers on the basis of the research, statistical, and
pricing services they provide to the Portfolio. A commission paid to such
Brokers may be higher than that which another qualified broker would have
charged for effecting the same transaction, provided that the Sub-Adviser
determines in good faith that such commission is reasonable in terms either of
the transaction or the overall
<PAGE>
responsibility of the Sub-Adviser to the Portfolio and its other clients and
that the total commissions paid by the Portfolio will be reasonable in relation
to the benefits to the Portfolio over the long term. In no instance will
Portfolio securities be purchased from or sold to the Trust's principal
underwriter, the investment Adviser, the Sub-Adviser, or any affiliate (as
defined in the 1940 Act) thereof, except to the extent permitted by SEC
exemptive order or by applicable law. The Investment Adviser agrees to provide
the Sub-Adviser a list of Brokers which are "affiliated persons" (as defined in
the 1940 Act) of the Trust and the Investment Adviser. The Sub-Adviser agrees to
furnish to the Investment Adviser and to the Trust a list of Brokers and
dealers, which are such "affiliated persons" of the Sub-Adviser. It is
understood that neither the Investment Adviser nor the Sub-Adviser has adopted a
formula for selection of Brokers for the execution of the Portfolio's investment
transactions.
5. Transaction Procedures. All investment transactions on behalf of the
----------------------
Portfolio will be consummated by payment to or delivery by the duly appointed
custodian for the Portfolio (the "Custodian"), or such depositories or agents
duly appointed by the Trustees and as may be designated by the Custodian in
writing, as custodian for the Portfolio, of all cash and/or securities due to or
from the Portfolio, and the Sub-Adviser shall not have possession or custody
thereof or any responsibility or liability with respect thereto. The Sub-
Adviser in effecting transactions on behalf of the Portfolio shall advise the
Custodian of all investment orders for the Portfolio placed by it with Brokers.
The Investment Adviser shall issue, or cause to be issued, to the custodian such
instructions as may be appropriate in connection with the settlement of any
transaction initiated by the Sub-Adviser. The Portfolio is responsible for all
custodial arrangements and the payment of all custodial charges and fees, and,
upon the giving of proper instructions to the Custodian, the Sub-Adviser shall
have no responsibility or liability with respect to custodial arrangements or
the acts, omissions or other conduct of the Custodian, except that it shall be
the responsibility of the Sub-Adviser to take appropriate action if the
Custodian fails properly to confirm, execution of the instructions to the Sub-
Adviser in a written form duly agreed upon by the Custodian and the Sub-Adviser.
6. Compliance with Laws; Confidentiality. (a) The Sub-Adviser agrees
---------------------------------------
that it will comply with all applicable rules and regulations of all federal and
state regulatory agencies having jurisdiction over the Sub-Adviser in
performance of its duties hereunder (herein called the "Rules"). The Sub-
Adviser will treat confidentially and as proprietary information of the Trust
all records and information relative to the Trust and prior, present or
potential shareholders, and will not use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Investment
Adviser and the Trust, which approval shall not be unreasonably withheld and may
not be withheld where the Sub-Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when required to divulge such
information by duly constituted authorities, or when so requested by the Trust.
(b) The Sub-Adviser is not authorized by the Trust or the Investment
Adviser to take any action, including the purchase or sale of securities for the
account of the Portfolio, (a) in contravention of (i) any investment
restrictions set forth-in the 1940 Act and the rules thereunder; (ii) specific
written instructions adopted by the Trustees or the Investment Adviser
<PAGE>
and communicated to the Sub-Adviser; or (iii) the investment objectives,
policies, and restrictions of the Portfolio as set forth in the Trust's
registration statement as amended from time to time, or (b) which would have the
effect of causing the Trust to fail to qualify or to cease to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as
amended, or any succeeding statute.
(c) The Sub-Adviser agrees with respect to the services provided to
the Portfolio that it:
(i) will conform with all applicable rules and regulations of
the Securities and Exchange Commission ("SEC");
[_]
(ii) will not purchase shares of the Portfolio for its own
investment account; and
[_]
(iii) will immediately notify the Trust and the Investment
Adviser of the occurrence of any event which would
disqualify the Sub-Adviser from serving as investment
adviser of an investment company.
[_]
7. Control by Trust's Board of Trustees. Any recommendations concerning
------------------------------------
the Portfolio's investment program proposed by the Sub-Adviser to the Portfolio
and to the Investment Adviser pursuant to this Agreement, as well as any other'
activities undertaken by the Sub-Adviser on behalf of the Portfolio pursuant
hereto, shall at all times be subject to any applicable directives of the Board
of Trustees of the Trust.
8. Services Not Exclusive. The Sub-Adviser's services hereunder are not
----------------------
deemed to be exclusive, and the Sub-Adviser shall be free to render similar
services to others so long as its services under this Agreement are not impaired
thereby.
9. Books and Records. In compliance with the requirements of Rule 3la-3
-----------------
of the Rules, the Sub-Adviser hereby agrees that all records which it maintains
for the Trust are the property of the Trust and further agrees to surrender
promptly to the Trust and the Investment Adviser any such records upon the
request of the Trust or the Investment Adviser. The Sub-Adviser further agrees
to preserve for the periods prescribed by Rule 3la-2, the records required to be
maintained by the Sub-Adviser hereunder pursuant to Rule 3la-1 of the Rules.
10. Expenses. During the term of this Agreement, the Sub-Adviser will
--------
bear all expenses in connection with the performance of its services under this
Agreement. The Sub-Adviser shall not bear certain other expenses related to the
operation of the Trust including, but not limited to: taxes levied against the
Trust, the Portfolio or the Investment Adviser; interest; brokerage fees and
commissions in connection with the purchase and sale of portfolio securities for
the Portfolio; and any extraordinary expense items.
<PAGE>
11. Compensation. (a) For the services provided and the expenses assumed
------------
pursuant to this Agreement, the Investment Adviser shall pay the Sub-Adviser,
and the Sub-Adviser agrees to accept as full compensation therefor, a sub-
advisory fee payable as soon as practicable after the last day of each month,
calculated using an annual rate of .33% (the "Annual Rate").
(b) The monthly sub-advisory fee to be paid by the Investment Adviser
to the Sub-Adviser shall be determined as of the close of business on the last
business day of each month by multiplying one-twelfth of the Annual Rate by the
Average Portfolio Net Assets (hereinafter defined) calculated monthly as of such
day.
(c) For the purposes of this paragraph, the "Average Portfolio Net
Assets" shall be calculated monthly as of the last business day of each month
and shall mean the sum of the net assets of the Portfolio calculated each
business day during the month divided by the number of business days in the
month (such net assets to be determined as of the close of business each
business day and computed in the manner set forth in the Declaration of Trust of
the Trust).
(d) The Sub-Adviser acknowledges that the Investment Adviser has
agreed with the Trust to reduce the Investment Adviser's compensation for any
fiscal year by the amount, if any, by which the expenses of the Portfolio for
such fiscal year exceed the most restrictive state Blue Sky expense limitation
in effect from time to time, to the extent required by such limitation. The
Sub-Adviser agrees that its compensation for any fiscal year shall be reduced
by the same proportion as the Investment Adviser's compensation is reduced as
described in the preceding sentence, for any fiscal year in which the expenses
of the Portfolio for such fiscal year exceed the most restrictive state Blue
Sky expense limitation in effect from time to time. The Sub-Adviser shall
refund to the Investment Adviser the amount of any reduction of the Sub-
Adviser's compensation pursuant to this paragraph 11(d) as promptly as
practicable after the end of such fiscal year, provided that the Sub-Adviser
will not be required to pay the Investment Adviser an amount greater than the
fee paid to the Sub-Adviser in respect of such year pursuant to this Agreement.
As used in this paragraph 11(d), "expenses" shall mean those expenses included
in the most restrictive state Blue Sky expense limitation, having the broadest
specification in such state's Blue Sky statute, and "expense limitation" means
a limit on the maximum annual expenses which may be incurred by an investment
company determined by multiplying a fixed percentage by the average, or by
multiplying more than one such percentage by different specified amounts of the
average, of the values of the investment company's net assets for a fiscal
year. The words "most restrictive state Blue Sky expense limitation" shall be
construed to result in the largest reduction of the Sub-Adviser's compensation
for any fiscal year of the Portfolio; provided, however, that nothing in this
Agreement shall require the Sub-Adviser to reduce its fees if the Investment
Adviser is not required by an applicable statute or regulation referred to
above in this paragraph 11(d) to reduce its fees.
12. Limitation on Liability. (a) The Sub-Adviser will not be liable for
-----------------------
any error or judgment or mistake of law or for any loss suffered by the
Investment Adviser, the Portfolio or the Trust in connection with the matters
to which this Agreement relates, except that the Sub-Adviser shall be liable to
the Investment Adviser, the Portfolio or the Trust for a loss resulting
<PAGE>
from a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the Sub-Adviser's part in the performance of its duties or
reckless disregard by it of its obligations or duties under this Agreement.
(b) The Sub-Adviser shall indemnify and hold harmless the Trust, the
Portfolio, and the Investment Adviser from any loss, cost, expense or damage
resulting from the failure of the descriptive information furnished by the Sub-
Adviser to be accurate in all material respects at the time provided or the
failure of the Sub-Advisor to comply in all material respects with the
investment objectives and policies and restrictions as set forth in the Trust's
registration statements as amended from time to time.
13. Duration, Amendment, and Termination. (a) This Agreement shall become
------------------------------------
effective on the date first written above and shall remain in force for a period
of two (2) years from such date, and from year to year thereafter but only so
long as such continuance is specifically approved at least annually by the
Investment Adviser, and (i) by the vote of a majority of the Trustees who are
not interested persons of the Investment Adviser or the Sub-Adviser, cast in
person at a meeting called for the purpose of voting on such approval and by a
vote of the Trustees or (ii) by the vote of a majority of the outstanding voting
securities of the Portfolio. The aforesaid provision that this Agreement may be
continued "annually" shall be construed in a manner consistent with the 1940 Act
and the rules and regulations thereunder.
(b) This Agreement may be amended at any time, but only by written
agreement between the Investment Adviser and the Sub-Adviser, which amendment is
subject to the approval of the Trustees and the shareholders of the Trust in the
manner required by the 1940 Act, subject to any applicable exemptive order of
the SEC modifying the provisions of the 1940 Act with respect to approval of
amendments of this Agreement.
(c) This Agreement: (i) may at any time be terminated without the
payment of any penalty either by vote of the Trustees or by vote of a majority
of the outstanding voting securities of the Portfolio, on sixty (60) days'
written notice to the Sub-Adviser, (ii) shall immediately terminate in the event
of its assignment; and (iii) may be terminated by the Sub-Adviser on sixty (60)
days' written notice to the Investment Adviser and by the Investment Adviser on
sixty (60) days' written notice to the Sub-Adviser.
(d) As used in this Section 12, the terms "assignment," "interested
person," and "vote of a majority of the outstanding voting securities" shall
have the meanings set forth in the 1940 Act and the rules and regulations
thereunder, subject to any applicable orders of exemption issued by the SEC.
(e) All notices, requests, demands or other communications hereunder
shall be in writing and shall be deemed given, if delivered personally, on the
day delivered or if mailed by certified or registered mail, postage prepaid,
return receipt requested, three (3) days after placement in the United States
mail, to the addresses below:
<PAGE>
If to Investment Adviser: Garland Capital Management
c/o C. Douglas Kelso, III
Senior Vice President
4385 Poplar Avenue, Suite E-1
Memphis, Tennessee 38117
[_]
[_]
With a copy to: Lee Welch, Esq.
Martin, Tate, Morrow & Marston, P.C.
22 North Front Street, ll th Floor
Memphis, Tennessee 38103
If to Sub-Adviser: Provident Institutional Management Corporation
c/o: Thomas H. Nevin
103 Bellevue Parkway
Wilmington, Delaware 19809
If to Trust: The Masters Group of Mutual Funds
c/o Stuart E. Fross, Esq. Secretary
82 Devonshire Street F5H
Boston, Massachusetts 02119
With a copy to: Daniel B. Hatzenbuehler, Esq.
Heiskell, Donelson, Bearman, Adams, Williams & Kirsch
165 Madison Avenue
Memphis, Tennessee 38103
14. Shareholder Liability. Sub-Adviser is hereby expressly put on notice
---------------------
of the limitation of shareholder liability as set forth in the Declaration of
Trust of the Trust and agrees that obligations assumed by the Portfolio or the
Trust, if any, shall be limited in all cases to the Portfolio and its assets.
Sub-Adviser agrees that it shall not seek satisfaction of any such obligation
from the shareholders or any individual shareholder of the Portfolio or the
Trust, nor from the Trustees or any individual Trustee of the Trust.
15. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any provisions
hereof or otherwise affect their construction or effect. If any provision of
this Agreement shall be held or made invalid by a court decision, statute, rule
or otherwise, the remainder of this agreement shall not be affected thereby.
This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors. To the extent that state law
has not been preempted by the provisions of any law of the United States
heretofore or hereafter enacted, as the same may be amended from time to time,
this Agreement shall be administered, construed, and enforced according to the
laws of the State of Tennessee without giving effect to the choice of laws
provisions thereof.
[_]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers designated below as of the day and
year first above-written.
FIRST TENNESSEE BANK NATIONAL
ASSOCIATION DOING BUSINESS AS
GARLAND CAPITAL MANAGEMENT
BY: /s/ C. Douglas Kelso
---------------------
Senior Vice President
PROVIDENT INSTITUTIONAL MANAGEMENT
CORPORATION
By: /s/ Thomas Nevin
----------------
President
<PAGE>
SUB-ADVISORY AGREEMENT
----------------------
AGREEMENT made this 4th day of September 1992, between FIRST TENNESSEE BANK
NATIONAL ASSOCIATION, a national banking association doing business as Garland
Capital Management (herein called the "Investment Adviser") and PROVIDENT
INSTITUTIONAL MANAGEMENT CORPORATION, a Delaware corporation (herein called the
"Sub-Adviser").
WHEREAS, the Investment Adviser is the investment adviser to The Masters
Group of Mutual Funds (herein called the "Trust"), an open-end, diversified,
management investment company of the "series" type, registered under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Investment Adviser wishes to retain the Sub-Adviser to provide
investment advisory services in connection with the Trust's MUNICIPAL MONEY
MARKET PORTFOLIO (herein called the "Portfolio") a series of the Trust; and
WHEREAS, the Sub-Adviser is willing to provide such services to the
Investment Adviser upon the conditions and for the compensation set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, it is agreed between
the parties hereto as follows:
1. Appointment. (a) The Investment Adviser hereby appoints the Sub-Adviser
-----------
its sub-adviser with respect to the Portfolio, as permitted in the Investment
Advisory and Management Agreement between the Investment Adviser and the Trust
dated September 4, 1992 (such Agreement or the most recent successor advisor
agreement between such parties is herein called the "Advisory Agreement"). The
Sub-Adviser accepts such appointment and agrees to use its best professional
judgement to make timely investment decisions for the Portfolio with respect to
the investments of the Portfolio in accordance with the provisions of this
Agreement for the compensation herein provided.
(b) The Sub-Adviser shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Trust or the Investment Adviser in any way or otherwise be deemed an agent of
the Trust or the Investment Adviser.
2. Delivery of Documents. (a) The Investment Adviser shall provide to the
---------------------
Sub-Adviser copies of the Trust's most recent prospectus and statement of
additional information (as each may be amended or supplemented from time to
time) which relate to any class of shares representing interests in the
Portfolio (each such prospectus and statement of additional information as
presently in effect, and as they shall from time to time be amended and
<PAGE>
supplemented, is herein respectively called a "Prospectus" and a "Statement of
Additional Information").
(b) The Sub-Adviser will make available and provide to the Investment
Adviser such financial, accounting, and statistical information related to its
duties and responsibilities hereunder as is necessary for the preparation of
registration statements, reports, and other documents required by federal and
state securities laws and such other information as the Trust's Board of
Trustees (herein called the "Trustees") or the Investment Adviser may reasonably
request for use by the Trust and its distributor for the underwriting and
distribution of the Portfolio shares.
3. Sub-Advisory Services to the Portfolio. Subject to the supervision of
--------------------------------------
the Investment Adviser, the Sub-Adviser will supervise the day-to-day operations
of the Portfolio and perform the following services: (i) provide investment
research and credit analysis concerning the Portfolio's investments, (ii)
conduct a continual program of investment of the Portfolio's assets, (iii) place
orders in accordance with paragraphs 4 to 7 hereof for all purchases and sales
of the investments made for the Portfolio, and (iv) maintain the books and
records required in connection with its duties hereunder. In addition, the Sub-
Adviser will keep the Investment Adviser informed of developments materially
affecting the Trust. The Sub-Adviser will communicate to the Investment Adviser
on each day that a purchase or sale of a security is effected for the Portfolio
(i) the name of the issuer, (ii) the amount of the purchase or sale, (iii) the
name of the broker, dealer, bank or other person (herein called "Brokers), if
any, through which the purchase or sale will be effected, (iv) the CUSIP number
of the security, if any, (v) the Portfolio to which such purchase or sale
pertains, and (vi) such other information as the Investment Adviser may
reasonably require for purposes of fulfilling its obligations to the Trust under
the Advisory Agreement. The Sub-Adviser will render to the Trustees such
periodic and special reports as the Investment Adviser or the Trustees may
reasonably request, including, if applicable, regular reports of the total
brokerage business placed by it and the manner in which the allocation of such
brokerage business has been accomplished. The Sub-Adviser will provide the
services rendered by it hereunder in accordance with the Portfolio's investment
objectives, policies, and restrictions as stated in its current Prospectus and
Statement of Additional Information. Except for instructions or advice given to
the Sub-Adviser by the Investment Adviser, the Investment Adviser shall not be
responsible or liable for the investment merits of any decision by the Sub-
Adviser to purchase, hold or sell a security for the Portfolio.
4. Brokerage. The Sub-Adviser may place orders pursuant to its
---------
investment determinations for the Portfolio either directly with the issuer or
with any Brokers. In placing orders, the Sub-Adviser will consider the
experience and skill of the firm's securities traders as well as the firm's
financial responsibility and administrative efficiency. The Sub-Adviser will
attempt to obtain the best price and the most favorable execution of its orders.
Consistent with these obligations, the Sub-Adviser may, subject to the approval
of the Trustees, select Brokers on the basis of the research, statistical, and
pricing services they provide to the Portfolio. A commission paid to such
Brokers may be higher than that which another qualified broker would have
charged for effecting the same transaction, provided that the Sub-Adviser
determines in good faith that such commission is reasonable in terms either of
the transaction or the overall
<PAGE>
responsibility of the Sub-Adviser to the Portfolio and its other clients and
that the total commissions paid by the Portfolio will be reasonable in relation
to the benefits to the Portfolio over the long term. In no instance will
Portfolio securities be purchased from or sold to the Trust's principal
underwriter, the investment Adviser, the Sub-Adviser, or any affiliate (as
defined in the 1940 Act) thereof, except to the extent permitted by SEC
exemptive order or by applicable law. The Investment Adviser agrees to provide
the Sub-Adviser a list of Brokers which are "affiliated persons" (as defined in
the 1940 Act) of the Trust and the Investment Adviser. The Sub-Adviser agrees to
furnish to the Investment Adviser and to the Trust a list of Brokers and
dealers, which are such "affiliated persons" of the Sub-Adviser. It is
understood that neither the Investment Adviser nor the Sub-Adviser has adopted a
formula for selection of Brokers for the execution of the Portfolio's investment
transactions.
5. Transaction Procedures. All investment transactions on behalf of the
----------------------
Portfolio will be consummated by payment to or delivery by the duly appointed
custodian for the Portfolio (the "Custodian"), or such depositories or agents
duly appointed by the Trustees and as may be designated by the Custodian in
writing, as custodian for the Portfolio, of all cash and/or securities due to or
from the Portfolio, and the Sub-Adviser shall not have possession or custody
thereof or any responsibility or liability with respect thereto. The Sub-
Adviser in effecting transactions on behalf of the Portfolio shall advise the
Custodian of all investment orders for the Portfolio placed by it with Brokers.
The Investment Adviser shall issue, or cause to be issued, to the custodian such
instructions as may be appropriate in connection with the settlement of any
transaction initiated by the Sub-Adviser. The Portfolio is responsible for all
custodial arrangements and the payment of all custodial charges and fees, and,
upon the giving of proper instructions to the Custodian, the Sub-Adviser shall
have no responsibility or liability with respect to custodial arrangements or
the acts, omissions or other conduct of the Custodian, except that it shall be
the responsibility of the Sub-Adviser to take appropriate action if the
Custodian fails properly to confirm, execution of the instructions to the Sub-
Adviser in a written form duly agreed upon by the Custodian and the Sub-Adviser.
6. Compliance with Laws; Confidentiality. (a) The Sub-Adviser agrees
---------------------------------------
that it will comply with all applicable rules and regulations of all federal and
state regulatory agencies having jurisdiction over the Sub-Adviser in
performance of its duties hereunder (herein called the "Rules"). The Sub-
Adviser will treat confidentially and as proprietary information of the Trust
all records and information relative to the Trust and prior, present or
potential shareholders, and will not use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Investment
Adviser and the Trust, which approval shall not be unreasonably withheld and may
not be withheld where the Sub-Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when required to divulge such
information by duly constituted authorities, or when so requested by the Trust.
(b) The Sub-Adviser is not authorized by the Trust or the Investment
Adviser to take any action, including the purchase or sale of securities for the
account of the Portfolio, (a) in contravention of (i) any investment
restrictions set forth-in the 1940 Act and the rules thereunder; (ii) specific
written instructions adopted by the Trustees or the Investment Adviser
<PAGE>
and communicated to the Sub-Adviser; or (iii) the investment objectives,
policies, and restrictions of the Portfolio as set forth in the Trust's
registration statement as amended from time to time, or (b) which would have the
effect of causing the Trust to fail to qualify or to cease to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as
amended, or any succeeding statute.
(c) The Sub-Adviser agrees with respect to the services provided to
the Portfolio that it:
(i) will conform with all applicable rules and regulations of
the Securities and Exchange Commission ("SEC");
[_]
[_]
(ii) will not purchase shares of the Portfolio for its own
investment account; and
[_]
[_]
(iii) will immediately notify the Trust and the Investment
Adviser of the occurrence of any event which would
disqualify the Sub-Adviser from serving as investment
adviser of an investment company.
[_]
7. Control by Trust's Board of Trustees. Any recommendations concerning
------------------------------------
the Portfolio's investment program proposed by the Sub-Adviser to the Portfolio
and to the Investment Adviser pursuant to this Agreement, as well as any other'
activities undertaken by the Sub-Adviser on behalf of the Portfolio pursuant
hereto, shall at all times be subject to any applicable directives of the Board
of Trustees of the Trust.
8. Services Not Exclusive. The Sub-Adviser's services hereunder are not
----------------------
deemed to be exclusive, and the Sub-Adviser shall be free to render similar
services to others so long as its services under this Agreement are not impaired
thereby.
9. Books and Records. In compliance with the requirements of Rule 3la-3
-----------------
of the Rules, the Sub-Adviser hereby agrees that all records which it maintains
for the Trust are the property of the Trust and further agrees to surrender
promptly to the Trust and the Investment Adviser any such records upon the
request of the Trust or the Investment Adviser. The Sub-Adviser further agrees
to preserve for the periods prescribed by Rule 3la-2, the records required to be
maintained by the Sub-Adviser hereunder pursuant to Rule 3la-1 of the Rules.
10. Expenses. During the term of this Agreement, the Sub-Adviser will
--------
bear all expenses in connection with the performance of its services under this
Agreement. The Sub-Adviser shall not bear certain other expenses related to the
operation of the Trust including, but not limited to: taxes levied against the
Trust, the Portfolio or the Investment Adviser; interest;
<PAGE>
brokerage fees and commissions in connection with the purchase and sale of
portfolio securities for the Portfolio; and any extraordinary expense items.
11. Compensation. (a) For the services provided and the expenses
------------
assumed pursuant to this Agreement, the Investment Adviser shall pay the Sub-
Adviser, and the Sub-Adviser agrees to accept as full compensation therefor, a
sub-advisory fee payable as soon as practicable after the last day of each
month, calculated using an annual rate of .33% (the "Annual Rate").
(b) The monthly sub-advisory fee to be paid by the Investment Adviser
to the Sub-Adviser shall be determined as of the close of business on the last
business day of each month by multiplying one-twelfth of the Annual Rate by the
Average Portfolio Net Assets (hereinafter defined) calculated monthly as of such
day.
(c) For the purposes of this paragraph, the "Average Portfolio Net
Assets" shall be calculated monthly as of the last business day of each month
and shall mean the sum of the net assets of the Portfolio calculated each
business day during the month divided by the number of business days in the
month (such net assets to be determined as of the close of business each
business day and computed in the manner set forth in the Declaration of Trust of
the Trust).
(d) The Sub-Adviser acknowledges that the Investment Adviser has
agreed with the Trust to reduce the Investment Adviser's compensation for any
fiscal year by the amount, if any, by which the expenses of the Portfolio for
such fiscal year exceed the most restrictive state Blue Sky expense limitation
in effect from time to time, to the extent required by such limitation. The
Sub-Adviser agrees that its compensation for any fiscal year shall be reduced
by the same proportion as the Investment Adviser's compensation is reduced as
described in the preceding sentence, for any fiscal year in which the expenses
of the Portfolio for such fiscal year exceed the most restrictive state Blue
Sky expense limitation in effect from time to time. The Sub-Adviser shall
refund to the Investment Adviser the amount of any reduction of the Sub-
Adviser's compensation pursuant to this paragraph 11(d) as promptly as
practicable after the end of such fiscal year, provided that the Sub-Adviser
will not be required to pay the Investment Adviser an amount greater than the
fee paid to the Sub-Adviser in respect of such year pursuant to this Agreement.
As used in this paragraph 11(d), "expenses" shall mean those expenses included
in the most restrictive state Blue Sky expense limitation, having the broadest
specification in such state's Blue Sky statute, and "expense limitation" means
a limit on the maximum annual expenses which may be incurred by an investment
company determined by multiplying a fixed percentage by the average, or by
multiplying more than one such percentage by different specified amounts of the
average, of the values of the investment company's net assets for a fiscal
year. The words "most restrictive state Blue Sky expense limitation" shall be
construed to result in the largest reduction of the Sub-Adviser's compensation
for any fiscal year of the Portfolio; provided, however, that nothing in this
Agreement shall require the Sub-Adviser to reduce its fees if the Investment
Adviser is not required by an applicable statute or regulation referred to
above in this paragraph 11(d) to reduce its fees.
12. Limitation on Liability. (a) The Sub-Adviser will not be liable for
-----------------------
any error or judgment or mistake of law or for any loss suffered by the
Investment Adviser, the Portfolio
<PAGE>
or the Trust in connection with the matters to which this Agreement relates,
except that the Sub-Adviser shall be liable to the Investment Adviser, the
Portfolio or the Trust for a loss resulting from a breach of fiduciary duty
with respect to the receipt of compensation for services or a loss resulting
from willful misfeasance, bad faith or gross negligence on the Sub-Adviser's
part in the performance of its duties or reckless disregard by it of its
obligations or duties under this Agreement.
(b) The Sub-Adviser shall indemnify and hold harmless the Trust, the
Portfolio, and the Investment Adviser from any loss, cost, expense or damage
resulting from the failure of the descriptive information furnished by the Sub-
Adviser to be accurate in all material respects at the time provided or the
failure of the Sub-Advisor to comply in all material respects with the
investment objectives and policies and restrictions as set forth in the Trust's
registration statements as amended from time to time.
13. Duration, Amendment, and Termination. (a) This Agreement shall become
------------------------------------
effective on the date first written above and shall remain in force for a period
of two (2) years from such date, and from year to year thereafter but only so
long as such continuance is specifically approved at least annually by the
Investment Adviser, and (i) by the vote of a majority of the Trustees who are
not interested persons of the Investment Adviser or the Sub-Adviser, cast in
person at a meeting called for the purpose of voting on such approval and by a
vote of the Trustees or (ii) by the vote of a majority of the outstanding voting
securities of the Portfolio. The aforesaid provision that this Agreement may be
continued "annually" shall be construed in a manner consistent with the 1940 Act
and the rules and regulations thereunder.
(b) This Agreement may be amended at any time, but only by written
agreement between the Investment Adviser and the Sub-Adviser, which amendment is
subject to the approval of the Trustees and the shareholders of the Trust in the
manner required by the 1940 Act, subject to any applicable exemptive order of
the SEC modifying the provisions of the 1940 Act with respect to approval of
amendments of this Agreement.
(c) This Agreement: (i) may at any time be terminated without the
payment of any penalty either by vote of the Trustees or by vote of a majority
of the outstanding voting securities of the Portfolio, on sixty (60) days'
written notice to the Sub-Adviser, (ii) shall immediately terminate in the event
of its assignment; and (iii) may be terminated by the Sub-Adviser on sixty (60)
days' written notice to the Investment Adviser and by the Investment Adviser on
sixty (60) days' written notice to the Sub-Adviser.
(d) As used in this Section 12, the terms "assignment," "interested
person," and "vote of a majority of the outstanding voting securities" shall
have the meanings set forth in the 1940 Act and the rules and regulations
thereunder, subject to any applicable orders of exemption issued by the SEC.
(e) All notices, requests, demands or other communications hereunder
shall be in writing and shall be deemed given, if delivered personally, on the
day delivered or if mailed by
<PAGE>
certified or registered mail, postage prepaid, return receipt requested, three
(3) days after placement in the United States mail, to the addresses below:
If to Investment Adviser: Garland Capital Management
c/o C. Douglas Kelso, III
Senior Vice President
4385 Poplar Avenue, Suite E-1
Memphis, Tennessee 38117
[_]
[_]
With a copy to: Lee Welch, Esq.
Martin, Tate, Morrow & Marston, P.C.
22 North Front Street, ll th Floor
Memphis, Tennessee 38103
If to Sub-Adviser: Provident Institutional Management
Corporation
c/o: Thomas H. Nevin
103 Bellevue Parkway
Wilmington, Delaware 19809
If to Trust: The Masters Group of Mutual Funds
c/o Stuart E. Fross, Esq. Secretary
82 Devonshire Street F5H
Boston, Massachusetts 02119
With a copy to: Daniel B. Hatzenbuehler, Esq.
Heiskell, Donelson, Bearman, Adams,
Williams & Kirsch
165 Madison Avenue
Memphis, Tennessee 38103
14. Shareholder Liability. Sub-Adviser is hereby expressly put on notice of
---------------------
the limitation of shareholder liability as set forth in the Declaration of Trust
of the Trust and agrees that obligations assumed by the Portfolio or the Trust,
if any, shall be limited in all cases to the Portfolio and its assets. Sub-
Adviser agrees that it shall not seek satisfaction of any such obligation from
the shareholders or any individual shareholder of the Portfolio or the Trust,
nor from the Trustees or any individual Trustee of the Trust.
15. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any provisions
hereof or otherwise affect their construction or effect. If any provision of
this Agreement shall be held or made invalid by a court decision, statute, rule
or otherwise, the remainder of this agreement shall not be affected thereby.
This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors. To the extent that state law
has not been preempted by the provisions of any law of the United States
heretofore or hereafter enacted, as the same may be amended from time to time,
this Agreement shall be administered, construed, and
<PAGE>
enforced according to the laws of the State of Tennessee without giving effect
to the choice of laws provisions thereof.
[_]
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers designated below as of the day and
year first above-written.
FIRST TENNESSEE BANK NATIONAL
ASSOCIATION DOING BUSINESS AS
GARLAND CAPITAL MANAGEMENT
BY: /s/ C. Douglas Kelso
--------------------
Senior Vice President
PROVIDENT INSTITUTIONAL MANAGEMENT
CORPORATION
By: /s/ Thomas Nevin
----------------
President
<PAGE>
SUB-ADVISORY AGREEMENT
----------------------
AGREEMENT made this 4/th/ day of September, 1992, between FIRST TENNESSEE
BANK NATIONAL ASSOCIATION, a national banking association doing business as
Garland Capital Management (herein called the "Investment Adviser") and
PROVIDENT INSTITUTIONAL MANAGEMENT CORPORATION, a Delaware corporation (herein
called the "Sub-Adviser").
WHEREAS, the Investment Adviser is the investment adviser to The Masters
Group of Mutual Funds (herein called the "Trust"), an open-end, diversified,
management investment company of the "series" type, registered under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Investment Adviser wishes to retain the Sub-Adviser to provide
investment advisory services in connection with the Trust's U.S. TREASURY
MONEY MARKET PORTFOLIO (herein called the "Portfolio") a series of the Trust;
and
WHEREAS, the Sub-Adviser is willing to provide such services to the
Investment Adviser upon the conditions and for the compensation set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, it is agreed between
the parties hereto as follows:
1. Appointment. (a) The Investment Adviser hereby appoints the Sub-Adviser
-----------
its sub-adviser with respect to the Portfolio, as permitted in the Investment
Advisory and Management Agreement between the Investment Adviser and the Trust
dated September 4, 1992 (such Agreement or the most recent successor advisor
agreement between such parties is herein called the "Advisory Agreement"). The
Sub-Adviser accepts such appointment and agrees to use its best professional
judgement to make timely investment decisions for the Portfolio with respect to
the investments of the Portfolio in accordance with the provisions of this
Agreement for the compensation herein provided.
(b) The Sub-Adviser shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Trust or the Investment Adviser in any way or otherwise be deemed an agent of
the Trust or the Investment Adviser.
2. Delivery of Documents. (a) The Investment Adviser shall provide to the
---------------------
Sub-Adviser copies of the Trust's most recent prospectus and statement of
additional information (as each may be amended or supplemented from time to
time) which relate to any class of shares representing interests in the
Portfolio (each such prospectus and statement of additional information as
presently in effect, and as they shall from time to time be amended and
<PAGE>
supplemented, is herein respectively called a "Prospectus" and a "Statement of
Additional Information").
(b) The Sub-Adviser will make available and provide to the Investment
Adviser such financial, accounting, and statistical information related to its
duties and responsibilities hereunder as is necessary for the preparation of
registration statements, reports, and other documents required by federal and
state securities laws and such other information as the Trust's Board of
Trustees (herein called the "Trustees") or the Investment Adviser may reasonably
request for use by the Trust and its distributor for the underwriting and
distribution of the Portfolio shares.
3. Sub-Advisory Services to the Portfolio. Subject to the supervision of
--------------------------------------
the Investment Adviser, the Sub-Adviser will supervise the day-to-day operations
of the Portfolio and perform the following services: (i) provide investment
research and credit analysis concerning the Portfolio's investments, (ii)
conduct a continual program of investment of the Portfolio's assets, (iii) place
orders in accordance with paragraphs 4 to 7 hereof for all purchases and sales
of the investments made for the Portfolio, and (iv) maintain the books and
records required in connection with its duties hereunder. In addition, the Sub-
Adviser will keep the Investment Adviser informed of developments materially
affecting the Trust. The Sub-Adviser will communicate to the Investment Adviser
on each day that a purchase or sale of a security is effected for the Portfolio
(i) the name of the issuer, (ii) the amount of the purchase or sale, (iii) the
name of the broker, dealer, bank or other person (herein called "Brokers), if
any, through which the purchase or sale will be effected, (iv) the CUSIP number
of the security, if any, (v) the Portfolio to which such purchase or sale
pertains, and (vi) such other information as the Investment Adviser may
reasonably require for purposes of fulfilling its obligations to the Trust under
the Advisory Agreement. The Sub-Adviser will render to the Trustees such
periodic and special reports as the Investment Adviser or the Trustees may
reasonably request, including, if applicable, regular reports of the total
brokerage business placed by it and the manner in which the allocation of such
brokerage business has been accomplished. The Sub-Adviser will provide the
services rendered by it hereunder in accordance with the Portfolio's investment
objectives, policies, and restrictions as stated in its current Prospectus and
Statement of Additional Information. Except for instructions or advice given to
the Sub-Adviser by the Investment Adviser, the Investment Adviser shall not be
responsible or liable for the investment merits of any decision by the Sub-
Adviser to purchase, hold or sell a security for the Portfolio.
4. Brokerage. The Sub-Adviser may place orders pursuant to its
---------
investment determinations for the Portfolio either directly with the issuer or
with any Brokers. In placing orders, the Sub-Adviser will consider the
experience and skill of the firm's securities traders as well as the firm's
financial responsibility and administrative efficiency. The Sub-Adviser will
attempt to obtain the best price and the most favorable execution of its orders.
Consistent with these obligations, the Sub-Adviser may, subject to the approval
of the Trustees, select Brokers on the basis of the research, statistical, and
pricing services they provide to the Portfolio. A commission paid to such
Brokers may be higher than that which another qualified broker would have
charged for effecting the same transaction, provided that the Sub-Adviser
determines in good faith that such commission is reasonable in terms either of
the transaction or the overall
<PAGE>
responsibility of the Sub-Adviser to the Portfolio and its other clients and
that the total commissions paid by the Portfolio will be reasonable in relation
to the benefits to the Portfolio over the long term. In no instance will
Portfolio securities be purchased from or sold to the Trust's principal
underwriter, the investment Adviser, the Sub-Adviser, or any affiliate (as
defined in the 1940 Act) thereof, except to the extent permitted by SEC
exemptive order or by applicable law. The Investment Adviser agrees to provide
the Sub-Adviser a list of Brokers which are "affiliated persons" (as defined in
the 1940 Act) of the Trust and the Investment Adviser. The Sub-Adviser agrees to
furnish to the Investment Adviser and to the Trust a list of Brokers and
dealers, which are such "affiliated persons" of the Sub-Adviser. It is
understood that neither the Investment Adviser nor the Sub-Adviser has adopted a
formula for selection of Brokers for the execution of the Portfolio's investment
transactions.
5. Transaction Procedures. All investment transactions on behalf of the
----------------------
Portfolio will be consummated by payment to or delivery by the duly appointed
custodian for the Portfolio (the "Custodian"), or such depositories or agents
duly appointed by the Trustees and as may be designated by the Custodian in
writing, as custodian for the Portfolio, of all cash and/or securities due to or
from the Portfolio, and the Sub-Adviser shall not have possession or custody
thereof or any responsibility or liability with respect thereto. The Sub-
Adviser in effecting transactions on behalf of the Portfolio shall advise the
Custodian of all investment orders for the Portfolio placed by it with Brokers.
The Investment Adviser shall issue, or cause to be issued, to the custodian such
instructions as may be appropriate in connection with the settlement of any
transaction initiated by the Sub-Adviser. The Portfolio is responsible for all
custodial arrangements and the payment of all custodial charges and fees, and,
upon the giving of proper instructions to the Custodian, the Sub-Adviser shall
have no responsibility or liability with respect to custodial arrangements or
the acts, omissions or other conduct of the Custodian, except that it shall be
the responsibility of the Sub-Adviser to take appropriate action if the
Custodian fails properly to confirm, execution of the instructions to the Sub-
Adviser in a written form duly agreed upon by the Custodian and the Sub-Adviser.
6. Compliance with Laws; Confidentiality. (a) The Sub-Adviser agrees
---------------------------------------
that it will comply with all applicable rules and regulations of all federal and
state regulatory agencies having jurisdiction over the Sub-Adviser in
performance of its duties hereunder (herein called the "Rules"). The Sub-
Adviser will treat confidentially and as proprietary information of the Trust
all records and information relative to the Trust and prior, present or
potential shareholders, and will not use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Investment
Adviser and the Trust, which approval shall not be unreasonably withheld and may
not be withheld where the Sub-Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when required to divulge such
information by duly constituted authorities, or when so requested by the Trust.
(b) The Sub-Adviser is not authorized by the Trust or the Investment
Adviser to take any action, including the purchase or sale of securities for the
account of the Portfolio, (a) in contravention of (i) any investment
restrictions set forth-in the 1940 Act and the rules thereunder; (ii) specific
written instructions adopted by the Trustees or the Investment Adviser
<PAGE>
and communicated to the Sub-Adviser; or (iii) the investment objectives,
policies, and restrictions of the Portfolio as set forth in the Trust's
registration statement as amended from time to time, or (b) which would have the
effect of causing the Trust to fail to qualify or to cease to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as
amended, or any succeeding statute.
(c) The Sub-Adviser agrees with respect to the services provided to
the Portfolio that it:
(i) will conform with all applicable rules and regulations of
the Securities and Exchange Commission ("SEC");
[_]
(ii) will not purchase shares of the Portfolio for its own
investment account; and
[_]
(iii) will immediately notify the Trust and the Investment
Adviser of the occurrence of any event which would
disqualify the Sub-Adviser from serving as investment
adviser of an investment company.
[_]
7. Control by Trust's Board of Trustees. Any recommendations concerning
------------------------------------
the Portfolio's investment program proposed by the Sub-Adviser to the Portfolio
and to the Investment Adviser pursuant to this Agreement, as well as any other'
activities undertaken by the Sub-Adviser on behalf of the Portfolio pursuant
hereto, shall at all times be subject to any applicable directives of the Board
of Trustees of the Trust.
8. Services Not Exclusive. The Sub-Adviser's services hereunder are not
----------------------
deemed to be exclusive, and the Sub-Adviser shall be free to render similar
services to others so long as its services under this Agreement are not impaired
thereby.
9. Books and Records. In compliance with the requirements of Rule 3la-3
-----------------
of the Rules, the Sub-Adviser hereby agrees that all records which it maintains
for the Trust are the property of the Trust and further agrees to surrender
promptly to the Trust and the Investment Adviser any such records upon the
request of the Trust or the Investment Adviser. The Sub-Adviser further agrees
to preserve for the periods prescribed by Rule 3la-2, the records required to be
maintained by the Sub-Adviser hereunder pursuant to Rule 3la-1 of the Rules.
10. Expenses. During the term of this Agreement, the Sub-Adviser will
--------
bear all expenses in connection with the performance of its services under this
Agreement. The Sub-Adviser shall not bear certain other expenses related to the
operation of the Trust including, but not limited to: taxes levied against the
Trust, the Portfolio or the Investment Adviser; interest; brokerage fees and
commissions in connection with the purchase and sale of portfolio securities for
the Portfolio; and any extraordinary expense items.
<PAGE>
11. Compensation. (a) For the services provided and the expenses
------------
assumed pursuant to this Agreement, the Investment Adviser shall pay the Sub-
Adviser, and the Sub-Adviser agrees to accept as full compensation therefor, a
sub-advisory fee payable as soon as practicable after the last day of each
month, calculated using an annual rate of .33% (the "Annual Rate").
(b) The monthly sub-advisory fee to be paid by the Investment Adviser
to the Sub-Adviser shall be determined as of the close of business on the last
business day of each month by multiplying one-twelfth of the Annual Rate by the
Average Portfolio Net Assets (hereinafter defined) calculated monthly as of such
day.
(c) For the purposes of this paragraph, the "Average Portfolio Net
Assets" shall be calculated monthly as of the last business day of each month
and shall mean the sum of the net assets of the Portfolio calculated each
business day during the month divided by the number of business days in the
month (such net assets to be determined as of the close of business each
business day and computed in the manner set forth in the Declaration of Trust of
the Trust).
(d) The Sub-Adviser acknowledges that the Investment Adviser has
agreed with the Trust to reduce the Investment Adviser's compensation for any
fiscal year by the amount, if any, by which the expenses of the Portfolio for
such fiscal year exceed the most restrictive state Blue Sky expense limitation
in effect from time to time, to the extent required by such limitation. The Sub-
Adviser agrees that its compensation for any fiscal year shall be reduced by the
same proportion as the Investment Adviser's compensation is reduced as described
in the preceding sentence, for any fiscal year in which the expenses of the
Portfolio for such fiscal year exceed the most restrictive state Blue Sky
expense limitation in effect from time to time. The Sub-Adviser shall refund to
the Investment Adviser the amount of any reduction of the Sub-Adviser's
compensation pursuant to this paragraph 11(d) as promptly as practicable after
the end of such fiscal year, provided that the Sub-Adviser will not be required
to pay the Investment Adviser an amount greater than the fee paid to the Sub-
Adviser in respect of such year pursuant to this Agreement. As used in this
paragraph 11(d), "expenses" shall mean those expenses included in the most
restrictive state Blue Sky expense limitation, having the broadest specification
in such state's Blue Sky statute, and "expense limitation" means a limit on the
maximum annual expenses which may be incurred by an investment company
determined by multiplying a fixed percentage by the average, or by multiplying
more than one such percentage by different specified amounts of the average, of
the values of the investment company's net assets for a fiscal year. The words
"most restrictive state Blue Sky expense limitation" shall be construed to
result in the largest reduction of the Sub-Adviser's compensation for any fiscal
year of the Portfolio; provided, however, that nothing in this Agreement shall
require the Sub-Adviser to reduce its fees if the Investment Adviser is not
required by an applicable statute or regulation referred to above in this
paragraph 11(d) to reduce its fees.
12. Limitation on Liability. (a) The Sub-Adviser will not be liable for
-----------------------
any error or judgment or mistake of law or for any loss suffered by the
Investment Adviser, the Portfolio or the Trust in connection with the matters to
which this Agreement relates, except that the Sub-Adviser shall be liable to the
Investment Adviser, the Portfolio or the Trust for a loss resulting
<PAGE>
from a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the Sub-Adviser's part in the performance of its duties or
reckless disregard by it of its obligations or duties under this Agreement.
(b) The Sub-Adviser shall indemnify and hold harmless the Trust, the
Portfolio, and the Investment Adviser from any loss, cost, expense or damage
resulting from the failure of the descriptive information furnished by the Sub-
Adviser to be accurate in all material respects at the time provided or the
failure of the Sub-Advisor to comply in all material respects with the
investment objectives and policies and restrictions as set forth in the Trust's
registration statements as amended from time to time.
13. Duration, Amendment, and Termination. (a) This Agreement shall become
------------------------------------
effective on the date first written above and shall remain in force for a period
of two (2) years from such date, and from year to year thereafter but only so
long as such continuance is specifically approved at least annually by the
Investment Adviser, and (i) by the vote of a majority of the Trustees who are
not interested persons of the Investment Adviser or the Sub-Adviser, cast in
person at a meeting called for the purpose of voting on such approval and by a
vote of the Trustees or (ii) by the vote of a majority of the outstanding voting
securities of the Portfolio. The aforesaid provision that this Agreement may be
continued "annually" shall be construed in a manner consistent with the 1940 Act
and the rules and regulations thereunder.
(b) This Agreement may be amended at any time, but only by written
agreement between the Investment Adviser and the Sub-Adviser, which amendment is
subject to the approval of the Trustees and the shareholders of the Trust in the
manner required by the 1940 Act, subject to any applicable exemptive order of
the SEC modifying the provisions of the 1940 Act with respect to approval of
amendments of this Agreement.
(c) This Agreement: (i) may at any time be terminated without the
payment of any penalty either by vote of the Trustees or by vote of a majority
of the outstanding voting securities of the Portfolio, on sixty (60) days'
written notice to the Sub-Adviser, (ii) shall immediately terminate in the event
of its assignment; and (iii) may be terminated by the Sub-Adviser on sixty (60)
days' written notice to the Investment Adviser and by the Investment Adviser on
sixty (60) days' written notice to the Sub-Adviser.
(d) As used in this Section 12, the terms "assignment," "interested
person," and "vote of a majority of the outstanding voting securities" shall
have the meanings set forth in the 1940 Act and the rules and regulations
thereunder, subject to any applicable orders of exemption issued by the SEC.
(e) All notices, requests, demands or other communications hereunder
shall be in writing and shall be deemed given, if delivered personally, on the
day delivered or if mailed by certified or registered mail, postage prepaid,
return receipt requested, three (3) days after placement in the United States
mail, to the addresses below:
<PAGE>
If to Investment Adviser: Garland Capital Management
c/o C. Douglas Kelso, III
Senior Vice President
4385 Poplar Avenue, Suite E-1
Memphis, Tennessee 38117
[_]
[_]
With a copy to: Lee Welch, Esq.
Martin, Tate, Morrow & Marston, P.C.
22 North Front Street, ll th Floor
Memphis, Tennessee 38103
If to Sub-Adviser: Provident Institutional Management Corporation
c/o: Thomas H. Nevin
103 Bellevue Parkway
Wilmington, Delaware 19809
If to Trust: The Masters Group of Mutual Funds
c/o Stuart E. Fross, Esq. Secretary
82 Devonshire Street F5H
Boston, Massachusetts 02119
With a copy to: Daniel B. Hatzenbuehler, Esq.
Heiskell, Donelson, Bearman, Adams, Williams & Kirsch
165 Madison Avenue
Memphis, Tennessee 38103
14. Shareholder Liability. Sub-Adviser is hereby expressly put on
----------------------
notice of the limitation of shareholder liability as set forth in the
Declaration of Trust of the Trust and agrees that obligations assumed by the
Portfolio or the Trust, if any, shall be limited in all cases to the Portfolio
and its assets. Sub-Adviser agrees that it shall not seek satisfaction of any
such obligation from the shareholders or any individual shareholder of the
Portfolio or the Trust, nor from the Trustees or any individual Trustee of the
Trust.
15. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any provisions
hereof or otherwise affect their construction or effect. If any provision of
this Agreement shall be held or made invalid by a court decision, statute, rule
or otherwise, the remainder of this agreement shall not be affected thereby.
This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors. To the extent that state law
has not been preempted by the provisions of any law of the United States
heretofore or hereafter enacted, as the same may be amended from time to time,
this Agreement shall be administered, construed, and enforced according to the
laws of the State of Tennessee without giving effect to the choice of laws
provisions thereof.
[_]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers designated below as of the day and
year first above-written.
FIRST TENNESSEE BANK NATIONAL
ASSOCIATION DOING BUSINESS AS
GARLAND CAPITAL MANAGEMENT
BY: /s/ C. Douglas Kelso
---------------------
Senior Vice President
PROVIDENT INSTITUTIONAL MANAGEMENT
CORPORATION
By: /s/ Thomas Nevin
----------------
President
<PAGE>
EXHIBIT 5(C)
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
--------------------------------------------
THIS INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT is made as of this 15/th/
day of February, 1993, between THE MASTERS GROUP OF MUTUAL FUNDS, a business
trust organized under the laws of the Commonwealth of Massachusetts (the
"Trust"), on behalf of its Cash Reserve Portfolio, (the "Portfolio") and FIRST
TENNESSEE BANK NATIONAL ASSOCIATION, a national banking association doing
business as Garland Capital Management (the "Investment Adviser").
WHEREAS, the Trust has been organized to operate as an investment company
registered under the Investment Company Act of 1940 (the 1940 Act") with
multiple series of shares (hereinafter referred to as Portfolios) having
varying preferences, limitations and relative rights, and to invest and reinvest
the assets of the Portfolio in securities pursuant to investment objectives and
policies for the Portfolio;
WHEREAS, the Portfolio desires to avail itself of the services,
information, advice, assistance and facilities of an investment adviser and to
have an investment adviser provide or perform for it various investment
advisory, statistical, research, portfolio investment adviser selection and
other services as set forth more fully herein;
NOW, THEREFORE, Trust, on behalf of the Portfolio, and Investment Adviser
agree as follows:
1. Employment of the Investment Adviser. The Trust hereby employs the
--------------------------------------
Investment Adviser to provide investment advice and to manage the investment and
reinvestment of the Portfolio's assets in the manner set forth in Section 2A of
---------
this Agreement, subject to the direction of the Trustees, for the period, in the
manner, and on the terms hereinafter set forth. The Investment Adviser hereby
accepts such employment and agrees during such period to render the services and
to assume the obligations herein set forth. The Investment Adviser shall for all
purposes herein be deemed to be an independent contractor and shall, except as
expressly provided or authorized (whether herein or otherwise), have no
authority to act for or represent the Trust in any way or otherwise be deemed an
agent of the Trust.
2. Obligation of and Services to be Provided by the Investment Adviser. The
---------------------------------------------------------------------
Investment Adviser undertakes to provide the services hereinafter set forth and
to assume the following obligations:
A. Investment Advisory services.
(a) The Investment Adviser shall have overall responsibility for the day-
to-day management and investment of the Portfolio's assets and
securities portfolio subject to and in accordance with the investment
objectives and policies of the Portfolio, and any directions which the
Trustees and officers of the Trust may issue to the Investment Adviser
from time to time, and shall perform the following services: (i)
provide or cause to be provided investment research and credit
analysis concerning the Portfolio's investments, (ii) conduct or cause
to be conducted a continual program of investment of the Portfolio's
assets, (iii) place or cause to be placed orders for all purchases and
sales of the investments made for the Portfolio, and (iv) maintain or
cause to be maintained the books and records required in connection
with its duties hereunder.
(b) The Investment Adviser shall advise the Trustees of the Trust
regarding overall investment programs and strategies for the
Portfolio, revision of such programs as necessary, and shall
<PAGE>
monitor and report periodically to the Trustees concerning the
implementation of such programs and strategies.
(c) The Investment Adviser, with the prior approval of the Trustees (and
the shareholders to the extent required by applicable law) as to
particular appointments, shall be permitted to (i) engage one or more
persons or companies ("Sub-Advisers"), which may have full investment
discretion to make all determinations with respect to the investment
and reinvestment of all or any portion of the Portfolio's assets and
the purchase and sale of all or any portion of the Portfolio
securities, subject to the terms and conditions of this Agreement and
the written agreement with any Sub-Adviser; and (ii) take such steps
as may be necessary to implement such appointment.
(d) The Investment Adviser shall be solely responsible for paying the fees
and expenses of any Sub-Adviser for its services to the Investment
Adviser and the Portfolio. Except for instructions or advice given to
the Sub-Adviser by the Investment Adviser, the Investment Adviser
shall not be responsible or liable for the investment merits of any
decision by the Sub-Adviser to purchase, hold or sell a security for
the Portfolio.
(e) In the event one or more Sub-Advisers is appointed pursuant to
subparagraph (c) hereof, the Investment Adviser shall (i) monitor and
evaluate the investment performance of each Sub-Adviser employed by
the Investment Adviser for the Portfolio; (ii) allocate the portion of
the Portfolio's assets to be managed by each Sub-Adviser; (iii)
recommend changes in or additional Sub-Advisers when appropriate; and
(iv) compensate each Sub-Adviser.
(f) The Investment Adviser shall render such reports to the Trustees, at
regular meetings thereof, as the Trustees may reasonably request
regarding, among other things, the investment performance of the
Portfolio, including, if any Sub-Adviser has been appointed, the
investment performance of each Sub-Adviser.
(g) The Investment Adviser will monitor and coordinate, to the extent
necessary, the activities of the custodian, transfer agent,
distributor, administrator and pricing agent insof ar as their
respective activities relate to the duties and obligations of the
Investment Adviser hereunder.
B. Provision of Information Necessary for Preparation of Securities
Registration Statements, Amendments and Other Materials.
The Investment Adviser will make available and provide such financial,
accounting and statistical information related to its duties and
responsibilities hereunder as required by the Trustees and necessary for
the preparation of registration statements, reports and other documents
required by federal and state securities laws and such other information as
the Trustees may reasonably request for use by the Trust and its
distributor for the underwriting and distribution of the Portfolio's
shares.
C. Other Obligations and Services.
The Investment Adviser agrees to make available its officers and employees
to the Trustees and officers of the Trust for consultation and discussions
regarding the investment advisory activities of the Portfolio.
3. Covenants by Investment Adviser. The Investment Adviser agrees with
---------------------------------
respect to the services provided to the Portfolio that it:
<PAGE>
(a) will conform with all applicable rules and regulations of the
securities and Exchange commission ("SEC") and will in addition
conduct its activities under this Agreement in accordance with
applicable regulations of the Office of the Comptroller of the
currency pertaining to the investment advisory activities of national
banks which are applicable to the Investment Adviser;
(b) will not make loans to any person for the purpose of purchasing or
carrying Portfolio shares, or make loans to the Trust;
(c) will not purchase shares of the Portfolio for its own investment
account;
(d) will maintain all books and records with respect to the securities
transactions of the Portfolio and furnish the Trustees such periodic
and special reports as the Trustees may request with respect to the
Portfolio;
(e) will treat confidentially and as proprietary information of the Trust
all records and other information relative to the Trust and the
Portfolio and prior, present or potential shareholders (other than any
information which Investment Adviser may have obtained about
shareholders from other business relationships with such
shareholders), and will not use such records and information for any
purpose other than performance of its responsibilities and duties
hereunder (except after prior notification to and approval in writing
by the Trust, which approval shall not be unreasonably withheld and
may not be withheld and will be deemed granted where the Investment
Adviser may be exposed to civil or criminal contempt proceedings for
failure to comply, when requested to divulge such information by duly
constituted authorities, when so requested by the Trust or when
otherwise required or permitted by law); and
(f) will immediately notify the Trust of the occurrence of any event which
would disqualify Investment Adviser or any Sub-Adviser from serving as
investment adviser of an investment company.
4. Transaction Procedures. All investment transactions on behalf of the
------------------------
Portfolio will be consummated by payment to or delivery by the custodian for the
Portfolio duly appointed by the Trustees of the Trust (the "Custodian") , or
such approved depositories or agents duly appointed by the Trustees and as may
be designated by the Custodian in writing, as custodian for the Portfolio, of
all cash and/or securities due to or from the Portfolio, and neither Investment
Adviser nor any Sub-Adviser shall have possession or custody thereof or any
responsibility or liability with respect thereto. The Investment Adviser or any
SubAdviser effecting transactions on behalf of the Portfolio shall advise the
Custodian of all investment orders for the Portfolio placed by it with brokers,
dealers, banks and other parties ("Brokers"). The Trustees shall issue, or cause
to be issued, to the Custodian such instructions as may be appropriate in
connection with the settlement of any transaction initiated by the Investment
Adviser or any Sub-Adviser. The Portfolio shall be responsible for all custodial
arrangements and the payment of all custodial charges and fees, and, upon the
giving of proper instructions to the Custodian, Investment Adviser shall have no
responsibility or liability with respect to custodian arrangements or the acts,
omissions or other conduct of the Custodian, except that it shall be the
responsibility of the Investment Adviser or any Sub-Adviser to take appropriate
action if the Custodian fails properly to confirm execution of the instructions
to the Investment Adviser or any Sub-Adviser in a written form duly agreed upon
by the Custodian and the Investment Adviser or any Sub-Adviser.
<PAGE>
5. Execution and Allocation, of Portfolio Brokerage. The Investment Adviser
--------------------------------------------------
shall place, or shall cause each Sub-Adviser to place, subject to the
limitations contained in this paragraph 5, on behalf of the Portfolio, orders
for the execution of the Portfolio's securities transactions. Neither the
Investment Adviser nor any Sub-Adviser is authorized by the Trust to take any
action, including the purchase or sale of securities for the account of the
Portfolio, (a) in contravention of (i) any investment restrictions set forth in
the 1940 Act and the rules thereunder; (ii) specific instructions adopted by the
Trustees and communicated to the Investment Adviser; (iii) the investment
objectives, policies and restrictions of the Portfolio as set forth in the
Trust's current registration statement, as amended from time to time; or (iv)
instructions from the Trustees to the Investment Adviser or from the Investment
Adviser to any Sub-Adviser, or (b) which would have the effect of causing the
Trust to fail to qualify or to cease to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended, or any succeeding
statute.
The Investment Adviser or, if any Sub-Adviser shall be appointed, then the
Sub-Adviser, may place orders pursuant to its investment determinations for the
Portfolio either directly with the issuer or with any Brokers. In placing orders
with any Broker, the Investment Adviser or any Sub-Adviser will consider the
experience and skill of a Broker's securities traders as well as the Broker's
financial responsibility and administrative efficiency. The Investment Adviser
or any Sub-Adviser will attempt to obtain the best price and the most favorable
execution of its orders with any Brokers; however, in so doing, the Investment
Adviser or any Sub-Adviser may consider, subject to the approval of the
Trustees, the research, statistical, and related brokerage services provided or
to be provided by such Broker to the Portfolio. A commission paid to such
Brokers may be higher than that which another Broker would have charged for
effecting the same transaction, provided that the Investment Adviser or any
SubAdviser determines in good faith that such commission is reasonable in
relation to the value of the brokerage and research services provided by such
Broker when viewed in terms of either the particular transaction or the overall
responsibilities of the Investment Adviser or any Sub-Adviser with respect to
the accounts as to which it exercises investment discretion. It is understood
that neither the Investment Adviser nor any Sub-Adviser has adopted a formula
for selection of Brokers for the execution of the Portfolio's investment
transactions.
On occasions when either the Investment Adviser or any Sub-Adviser deems
the purchase or sale of a security to be in the best interest of the Portfolio
as well as other clients, the Investment Adviser or Sub-Adviser, to the extent
permitted by applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities to be sold or purchased in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as expenses incurred in the transaction, will be made by the Investment
Adviser or Sub-Advisor in the manner it considers to be the most equitable and
consistent with its fiduciary obligations to the Portfolio and to such other
clients.
The Investment Adviser will not, and will cause each Sub-Adviser to,
execute any Portfolio transactions for the account of the Portfolio with a
Broker which is an "affiliated person" (as defined in the 1940 Act) of the
Trust, the Trust's distributor, the Investment Adviser or any Sub-Adviser
without the prior written approval of the Trustees. The Trust agrees to provide
the Investment Adviser, and the Investment Adviser agrees to furnish to each
Sub-Adviser, a list of brokers and dealers which are "affiliated persons" of the
Trust. The Investment Adviser likewise agrees to furnish, and to cause each Sub-
Adviser to furnish, to the Trust, with respect to such Sub-Adviser, a list of
Brokers which are "affiliated persons" of the Investment Adviser and each Sub-
Adviser. In no instance will Portfolio securities be purchased from or sold to
the Trust's principal distributor, Investment Adviser, any Sub-Adviser or any
affiliate thereof, except to the extent permitted by an exemption order issued
by the SEC or by applicable law.
<PAGE>
The Investment Adviser shall render regular reports to the Trustees of the
total brokerage business placed by it and any Sub-Adviser(s) and the manner in
which the allocation of such brokerage has been accomplished.
6. Expenses of the Portfolio. The Portfolio or Trust will pay, or will
---------------------------
enter into arrangements that require third parties to pay, all expenses other
than those expressly assumed by the Investment Adviser herein, which expenses
payable by the Portfolio or Trust shall include:
(a) Expenses of all audits by independent public accountants;
(b) Expenses of transfer agent, registrar, dividend disbursing agent
and shareholder recordkeeping services;
(c) Expenses of custodial services including recordkeeping services
provided by the custodian;
(d) Expenses of obtaining quotations for calculating the value of the
Portfolio's net assets;
(e) Salaries and other compensation of any of its executive officers
or employees, if any, who are not officers, directors,
stockholders or employees of the Investment Adviser, the
Administrator or the Distributor;
(f) Taxes levied against the Portfolio;
(g) Brokerage fees and commissions in connection with the purchase
and sale of portfolio securities for the Portfolio;
(h) Costs, including the interest expense, of borrowing money;
(i) Costs and/or fees incident to Trustees and shareholder meetings
of the Trust and the Portfolio, the preparation and mailings of
prospectuses and reports of the Portfolio to its existing
shareholders, the filing of reports with regulatory bodies, the
maintenance of the Portfolio's legal existence, and the
registration of shares with federal and state securities
authorities;
(j) Legal fees, including the legal fees related to the registration
and continued qualification of the Portfolio's shares for sale;
(k) Costs of printing any share certificates representing shares of
the Portfolio;
(1) Fees and expenses of Trustees who are not affiliated persons, as
defined in the 1940 Act, of the Investment Adviser, any Sub-
Adviser, the Distributor or any of their affiliates; and
(m) Its pro rata portion of the fidelity bond required by Section 17
(g) of the 1940 Act, or of other insurance premiums.
7. Activities and Affiliates of the Investment Adviser. The Trustees
-----------------------------------------------------
acknowledge that Investment Adviser or any Sub-Adviser, or one or more of its
affiliates, may have investment responsibilities or render investment advice to
or perform other investment advisory services for other individuals or entities
and that
<PAGE>
Investment Adviser or any Sub-Adviser, its affiliates or any of its or their
directors, officers, agents or employees may buy, sell or trade in any
securities for its or their respective accounts (such individuals, entities and
accounts hereinafter referred to as Affiliated Accounts). Subject to the
provisions of paragraph 2 hereof, the Trustees agree that Investment Adviser or
its affiliates and any Sub-Adviser(s) or its affiliates, may give advice or
exercise investment responsibility and take such other action with respect to
other Affiliated Accounts which may differ from the advice given or the timing
or nature of action taken with respect to the Portfolio, provided that
Investment Adviser or Sub-Adviser acts in good faith, and provided further, that
it is Investment Adviser's and Sub-Adviser's policy to allocate within its
reasonable discretion, investment opportunities to the Portfolio over a period
of time on a fair and equitable basis relative to the Affiliated Accounts,
taking into account the investment objectives and policies of the Portfolio and
any specific investment restrictions applicable thereto. The Trust acknowledges
that one or more of the Affiliated Accounts may at any time hold, acquire,
increase, decrease, dispose of or otherwise deal with positions in investments
in which the Portfolio may have an interest from time to time, whether in
transactions which involve the Portfolio or otherwise. Neither the Investment
Adviser nor any Sub-Adviser shall have any obligation to acquire for the
Portfolio a position in any investment which any Affiliated Account may acquire,
and the Portfolio shall have no first refusal, co-investment or other rights in
respect of any investment, either for the Portfolio or otherwise.
8. Compensation of the Investment Adviser. For all services provided to the
----------------------------------------
Portfolio pursuant to this Agreement, the Trust shall pay the Investment
Adviser, and the Investment Adviser agrees to accept as full compensation
therefor, an investment advisory fee, payable as soon as practicable after the
last day of each month, calculated using a Blended Annual Rate as hereinafter
defined. The monthly investment advisory fee to be paid by the Trust to the
Investment Adviser shall be determined as of the close of business on the last
business day of each month by multiplying one-twelfth of the Blended Annual
Rate, calculated monthly as of such day, by the Average Portfolio Net Assets
(hereinafter defined), also calculated monthly as of such day.
For purposes of this paragraph 8, the "Average Portfolio Net Assets" shall
be calculated monthly as of the last business day of each month and shall mean
the sum of the net assets of the Portfolio calculated each business day during
the month divided by the number of business days in the month (such net assets
to be determined as of the close of business each business day and computed in
the manner set forth in the Declaration of Trust of the Trust). The "Blended
Annual Rate" shall mean the rate determined by dividing the Aggregate Annualized
Trust Fee (hereinafter defined) by the Average Trust Net Assets (hereinafter
defined). "Average Trust Net Assets" shall mean the sum of the Average Portfolio
Net Assets for each portfolio of the Trust which is a money market fund operated
in compliance with Rule 2a-7 of the 1940 Act and managed by the Investment
Adviser pursuant to a written agreement with the Trust.
"Aggregate Annualized Trust Fee" shall be determined solely for the purpose
of determining the Blended Annual Rate and shall be the sum of the Annualized
Trust Fees determined in accordance with the following schedule:
Average Trust Net Assets x Annual Rate
- -------------------------- -----------
Up to $1 Billion x .25 percent
$1 Billion and over x .22 percent
The Investment Adviser agrees that its compensation for any fiscal year
shall be reduced by the amount, if any, by which the expenses of the Portfolio
for such fiscal year exceed the most restrictive state Blue Sky expense
limitation in effect from time to time, to the extent required by such
limitation. The Investment Adviser shall refund to the Portfolio the amount of
any reduction of the Investment Adviser's compensation pursuant to this
paragraph 8, reduced by the amount of any rebate paid directly to the Portfolio
by any Sub-Adviser engaged
<PAGE>
by Investment Adviser, as promptly as practicable after the end of such fiscal
year, provided that the Investment Adviser will not be required to pay the
Portfolio an amount greater than the fee paid to the Investment Adviser in
respect of such year pursuant to this Agreement. As used in this paragraph 8,
"expenses" shall mean those expenses included in the most restrictive state Blue
sky limitation, having the broadest specification in such state's Blue Sky
statute, and "expense limitation" means a limit on the maximum annual expenses
which may be incurred by an investment company determined by multiplying a fixed
percentage by the average, or by multiplying more than one such percentage by
different specified amounts of the average, of the values of an investment
company's net assets for a fiscal year. The words "most restrictive state Blue
Sky expense limitation" shall be construed to result in the largest reduction of
the Investment Adviser's compensation for any fiscal year of the Portfolio;
provided, however, that nothing in this Agreement shall require the Investment
Adviser to reduce its fees if not required by an applicable statue or regulation
referred to above in this paragraph 8.
9. Proxies. The Trustees will vote all proxies solicited by or with
-------
respect to the issuers of securities in which assets of the Portfolio may be
invested from time to time, unless the Trustees delegate such right to the
Investment Adviser.
10. Liabilities of the Investment Adviser.
--------------------------------------
(a) The Investment Adviser will not be liable for any error or
judgment or mistake of law or for any loss suffered by the
Portfolio or the Trust in connection with the matters to which
this Agreement relates, except that the Investment Adviser shall
be liable to the Portfolio and the Trust for a loss resulting
from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the
Investment Adviser in the performance of duties or reckless
disregard by it of its obligations or duties under this
Agreement.
(b) The Investment Adviser shall indemnify and hold harmless the
Portfolio from any loss, cost, expense or damage resulting from
the failure of any SubAdviser to comply with (i) any statement
included in the Trust's registration statement furnished by
Investment Adviser for inclusion therein, or (ii) instructions
given by the Investment Adviser to any Sub-Adviser for the
purpose of ensuring the Portfolio's compliance with the
applicable requirements of the 1940 Act or of the requirements of
the Internal Revenue Code of 1986 applicable to regulated
investment companies, or of successor statutes; provided,
however, that the indemnification provided by this subparagraph
10(b) shall apply only to the extent that the Sub-Adviser is
liable to the Trust and, after demand by the Trust, is unable or
refuses to discharge its obligation to the Portfolio.
(c) No provision of this Agreement shall be construed to protect any
Trustee or officer of the Trust, or the Investment Adviser, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
11. Renewal, Amendment and Termination.
-----------------------------------
(a) This Agreement shall become effective on the date first written above
and shall remain in force for a period of two (2) years from such
date, and from year to year thereafter but only so long as such
continuance is specifically approved at least annually (i) by the vote
of a majority of the Trustees who are not interested persons of the
Portfolio or the Investment Adviser, cast in person at a meeting
called for the purpose of voting on such approval and by a vote of the
Board of
<PAGE>
Trustees or (ii) by the vote of a majority of the outstanding voting
securities of the Portfolio. The aforesaid provision that this
Agreement may be continued "annually" shall be construed in a manner
consistent with the 1940 Act and the rules and regulations thereunder.
(b) This Agreement may be amended at any time, but only by written
agreement between the Trust and the Investment Adviser, which
amendment is subject to the approval of the Trustees and the
shareholders of the Trust in the manner required by the 1940 Act,
subject to any applicable exemption order of the SEC modifying the
provisions of the 1940 Act with respect to approval of amendments to
this Agreement.
(c) This Agreement:
(i) may at any time be terminated without the payment of any
penalty either by vote of the Trustees or by vote of a
majority of the outstanding voting securities of the
Portfolio, on sixty (60) days' written notice to the
Investment Adviser;
(ii) shall immediately terminate in the event of its
assignment; and
(iii) may be terminated by the Investment Adviser on sixty (60)
days' written notice to the Trust.
(d) As used in this Section 11, the terms "assignment," "interested
person" and "vote of a majority of the outstanding voting securities"
shall have the meanings set forth in the 1940 Act and the rules and
regulations thereunder, subject to any applicable orders of exemption
issued by the SEC.
12. Books and Records. (a) The Trustees shall provide to the Investment
-------------------
Adviser copies of the Trust's most recent prospectus and statement of additional
information (as each may be amended or supplemented from time to time) which
relate to any class of shares representing interests in the Portfolio.
(b) In compliance with the requirements of Rule 31a-3 of the rules
promulgated under the 1940 Act ("Rules"), the Investment Adviser hereby agrees
that all records which it maintains for the Trust are the property of the Trust
and further agrees to surrender promptly to the Trust any such records upon the
Trust's request. The Investment Adviser further agrees to preserve for the
periods prescribed by Rule 31a-2, the records required to be maintained by the
Investment Adviser hereunder pursuant to Rule 31a-1 of the Rules.
13. Notices. All notices, requests, demands or other, communications
---------
hereunder shall be in writing and shall be deemed given, if delivered
personally, on the day delivered or if mailed, by certified or registered mail,
postage prepaid, return receipt requested, three (3) days after placement in the
United States mail, to the addresses below:
If to Trust: The Masters Group of Mutual Funds
c/o Stuart E. Fross, Esq., Secretary
82 Devonshire Street, F5H
Boston, MA 02119
<PAGE>
With a copy to: Daniel B. Hatzenbuehler Esq.
Heiskell, Donelson, Bearman, Adams,
Williams & Kirsch
165 Madison Avenue, 21st Floor
Memphis, TN 38103
If to Investment Adviser: Garland capital Management
c/o C. Douglas Kelso, III
Senior Vice President
First Tennessee Bank National
Association
4385 Poplar Avenue
Memphis, TN 38117
with a copy to: Lee Welch, Esq.
Martin, Tate, Morrow & Marston, P.C.
22N. Front Street, 11th Floor
Memphis, TN 38103
14. Severability. If any provision of this Agreement shall be held or made
--------------
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
15. Limitation on Liability. Investment Adviser is hereby expressly put on
-------------------------
notice of the limitation of shareholder liability as set forth in the
Declaration of Trust and agrees that obligations assumed by the Portfolio
pursuant to this Agreement shall be limited in all cases to the Portfolio and
its assets. Investment Adviser agrees that it shall not seek satisfaction of any
such obligation from the shareholders or any individual shareholder of the
Portfolio, nor from the Trustees or any individual Trustee of the Portfolio.
16. Governing Law. To the extent that state law has not been preempted by
---------------
the provisions of any law of the United States heretofore or hereafter enacted,
as the same may be amended from time to time, this Agreement shall be
administered, construed and enforced according to the laws of the State of
Tennessee without giving effect to the choice of laws provisions thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as of the day and year first written above.
THE MASTERS GROUP OF MUTUAL FUNDS
/s/ By: Richard C. Rantzow, President
------------------------------
Richard C. Rantzow, President
FIRST TENNESSEE BANK NATIONAL ASSOC-
IATION, doing business as Garland Capital
Management.
/s/ By: C. Douglas Kelso, III
------------------------------
Title: Senior Vice President
----------------------------
<PAGE>
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
--------------------------------------------
THIS INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT is made as of this 15th
day of February, 1993, between THE MASTERS GROUP OF MUTUAL FUNDS, a business
trust organized under the laws of the Commonwealth of Massachusetts (the
"Trust"), on behalf of its TOTAL RETURN EQUITY PORTFOLIO (the "Portfolio") and
FIRST TENNESSEE BANK NATIONAL ASSOCIATION, a national banking association (the
"Investment Adviser").
WHEREAS, the Trust has been organized to operate as an investment company
registered under the Investment Company Act of 1940 (the "1940 Act") with
multiple series of shares (hereinafter referred to as Classes) having varying
preferences, limitations and relative rights, and to invest and reinvest the
assets of the Portfolio in securities pursuant to investment objectives and
policies for the Portfolio;
WHEREAS, the Portfolio desires to avail itself of the services,
information, advice, assistance and facilities of an investment adviser and to
have an investment adviser provide or perform for it various investment
advisory, statistical, research, portfolio investment adviser selection and
other services as set forth more fully herein;
NOW, THEREFORE, Trust, on behalf of the Portfolio, and Investment Adviser
agree as follows:
1. Employment of the Investment Adviser. The Trust hereby employs the
------------------------------------
Investment Adviser to provide investment advice and to manage the investment and
reinvestment of the Portfolio's assets in the manner set forth in Section 2A of
this Agreement, subject to the direction of the Trustees, for the period, in the
manner, and on the terms hereinafter set forth. The Investment Adviser hereby
accepts such employment and agrees during such period to render the services and
to assume the obligations herein set forth. The investment Adviser shall for
all purposes herein be deemed to be an independent contractor and shall, except
as expressly provided or authorized (whether herein or otherwise), have no
authority to act or represent the Trust in any way or otherwise be deemed an
agent of the Trust.
2. Obligation of and Services to be Provided by the Investment Adviser.
-------------------------------------------------------------------
The Investment Adviser undertakes to provide the services hereinafter set forth
and to assume the following obligations:
A. Investment Advisory Services.
(a) The Investment Adviser shall have overall responsibility for the
day-to-day management and investment of the Portfolio's assets
and securities portfolio subject to and in accordance with the
investment objectives and policies of the Portfolio, and any
directions which the Trustees and officers of the Trust may issue
to the Investment Adviser from time to time, and shall perform
the following services: provide or cause to be provided
investment research and credit analysis concerning the
Portfolio's investments, (ii) conduct or cause to be conducted a
continual program of investment of the Portfolio's assets, (iii)
place or cause to be placed orders for all purchases and sales of
the investments made for the Portfolio, and (iv) maintain or
cause to be maintained the books and records required in
connection with its duties hereunder.
<PAGE>
(b) The Investment Adviser shall advise the Trustees of the Trust
regarding overall investment programs and strategies for the
Portfolio, revision of such programs as necessary, and shall
monitor and report periodically to the Trustees concerning the
implementation of such programs and strategies.
(c) The Investment Adviser, with the prior approval of the Trustees
(and the shareholders to the extent required by applicable law)
as to particular appointments, shall be permitted to (i) engage
one or more persons or companies ("Sub-Advisers"), which may
have full investment discretion to make all determinations with
respect to the investment and reinvestment of all or any portion
of the Portfolio's assets and the purchase and sale of all or
any portion of the Portfolio securities, subject to the terms
and conditions of this Agreement and the written agreement with
any Sub-Adviser; and (ii) take such steps as may be necessary
to implement such appointment.
(d) The Investment Adviser shall be solely responsible f or paying
the fees and expenses of any Sub-Adviser for its services to the
Investment Adviser and the Portfolio. Except for instructions or
advice given to the Sub-Adviser by the Investment Adviser, the
Investment Adviser shall not be responsible or liable for the
investment merits of any decision by the Sub-Adviser to purchase,
hold or sell a security for the Portfolio.
(e) In the event one or more Sub-Advisers is appointed pursuant to
subparagraph (c) hereof, the Investment Adviser shall (i)
monitor and evaluate the investment performance of each Sub-
Adviser employed by the Investment Adviser for the Portfolio;
(ii) allocate the portion of the Portfolio's assets to be
managed by each Sub-Adviser; (iii) recommend changes in or
additional Sub-Advisers when appropriate; and (iv) compensate
each Sub-Adviser.
(f) The Investment Adviser shall render such reports to the Trustees,
at regular meetings thereof, as the Trustees may reasonably
request regarding, among other things, the investment performance
of the Portfolio, including, if any Sub-Adviser has been
appointed, the investment performance of each Sub-Adviser.
(g) The Investment Adviser will monitor and coordinate, to the
extent necessary, the activities of the custodian, transfer
agent, distributor, administrator and pricing agent insofar as
their respective activities relate to the duties and obligations
of the Investment Adviser hereunder.
B. Provision of Information Necessary for Preparation of Securities
Registration Statements, Amendments and Other Materials.
The Investment Adviser will make available and provide such financial,
accounting and statistical information related to its duties and
responsibilities hereunder as required by the Trustees and necessary
for the preparation of registration statement, reports and other
documents required by federal and state securities laws and such other
information as the Trustees may reasonably request for use by the
Trust and its distributor for the underwriting and distribution of the
Portfolio's shares.
C. Other Obligations and Services.
<PAGE>
The Investment Adviser agrees to make available its officers and
employees to the Trustees and officers of the Trust for consultation
and discussions regarding the investment advisory activities of the
Portfolio.
3 . Covenants by Investment Adviser. The Investment Adviser agrees with
-------------------------------
respect to the services provided to the Portfolio that it:
(a) will conform with all applicable rules and regulations of the
Securities and Exchange Commission ("SEC") and will in addition
conduct its activities under this Agreement in accordance with
applicable regulations of the Office of the Comptroller of the
Currency pertaining to the investment advisory activities of
national banks which are applicable to the Investment Adviser;
(b) will not make loans to any person for the purpose of purchasing
or carrying Portfolio shares, or make loans to the Trust;
(c) will not purchase shares of the Portfolio for its own investment
account;
(d) will maintain all books and records with respect to the
securities transactions of the Portfolio and furnish the Trustees
such periodic and special reports as the Trustees may request
with respect to the Portfolio;
(e) will treat confidentially and as proprietary information of the
Trust all records and other information relative to the Trust and
the Portfolio and prior, present or potential shareholders (other
than any information which Investment Adviser may have obtained
about shareholders from other business relationships with such
shareholders), and will not use such records and information for
any purpose other than performance of its responsibilities and
duties hereunder (except after prior notification to and approval
in writing by the Trust, which approval shall not be unreasonably
withheld and may not be withheld and will be deemed granted where
the Investment Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to
divulge such information by duly constituted authorities, when so
requested by the Trust or when otherwise required or permitted by
law); and
(f) will immediately notify the Trust of the occurrence of any event
which would disqualify Investment Adviser or any Sub-Adviser from
serving as investment adviser of an investment company.
4. Transaction Procedures. All investment transactions on behalf of the
----------------------
Portfolio will be compensated by payment to or delivery by the custodian for the
Portfolio duly appointed by the Trustees of the Trust (the "Custodian"), or such
approved depositories or agents duly appointed by the Trustees and as may be
designated by the Custodian in writing, as custodian for the Portfolio, of all
cash and/or securities due to or from the Portfolio, and neither Investment
Adviser nor any Sub-Adviser shall have possession or custody thereof or any
responsibility or liability with respect thereto. The Investment Adviser or any
Sub-Adviser effecting transactions on behalf of the Portfolio shall advise the
Custodian of all investment orders for the Portfolio placed by it with brokers,
dealers, banks and other parties ("Brokers"). The Trustees shall issue, or
cause to be issued, to the Custodian such instructions as may be appropriate in
connection with the settlement of any transaction initiated by the Investment
Adviser or any Sub-Adviser. The Portfolio shall be responsible for all
custodial arrangements and the payment of all custodial charges and fees, and,
<PAGE>
upon the giving of proper instructions to the Custodian, Investment Adviser
shall have no responsibility or liability with respect to custodian arrangements
or the acts, omissions or other conduct of the Custodian, except that it shall
be the responsibility of the Investment Adviser or any Sub-Adviser to take
appropriate action if the Custodian fails properly to confirm execution of the
instructions to the Investment Adviser or any Sub-Adviser in a written form duly
agreed upon by the Custodian and the Investment Adviser or any Sub-Adviser.
5 . Execution and Allocation of Portfolio Brokerage. The Investment
-----------------------------------------------
Adviser shall place, or shall cause each Sub-Adviser to place, subject to the
limitations contained in this paragraph 5, on behalf of the Portfolio, orders
for the execution of the Portfolio's securities transactions. Neither the
Investment Adviser nor any Sub-Adviser is authorized by the Trust to take any
action, including the purchase or sale of securities for the account of the
Portfolio, (a) in contravention of (i) any investment restrictions set forth in
the 1940 Act and the rules thereunder; (ii) specific instructions adopted by the
Trustees and communicated to the Investment Adviser; (iii) the investment
objectives, policies and restrictions of the Portfolio as set forth in the
Trust's current registration statement, as amended from time to time; or (iv)
instructions from the Trustees to the Investment Adviser or from the Investment
Adviser to any Sub-Adviser, or (b) which would have the effect of causing the
Trust to fail to qualify or to cease to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended, or any succeeding
statute.
The Investment Adviser or, if any Sub-Adviser shall be appointed, then the
Sub-Adviser, may place orders pursuant to its investment determinations for the
Portfolio either directly with the issuer or with any Brokers. In placing
orders with any Broker, the Investment Adviser or any Sub-Adviser will consider
the experience and skill of a Broker's securities traders as well as the
Broker's financial responsibility and administrative efficiency. The Investment
Adviser or any Sub-Adviser will attempt to obtain the best price and the most
favorable execution of its orders with any Brokers; however, in so doing, the
Investment Adviser or any Sub-Adviser may consider, subject to the approval of
the Trustees, the research, statistical, and related brokerage services provided
or to be provided by such Broker to the Portfolio. A commission paid to such
Brokers may be higher than that which another Broker would have charged for
effecting the same transaction, provided that the Investment Adviser or any Sub-
Adviser determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such Broker when
viewed in terms of either the particular transaction or the overall
responsibilities of the Investment Adviser or any Sub-Adviser with respect to
the accounts as to which it exercises investment discretion. It is understood
that neither the Investment Adviser nor any Sub-Adviser has adopted a formula
for selection of Brokers for the execution of the Portfolio's investment
transactions on occasions when either the Investment Adviser or any Sub-Adviser
deems the purchase or sale of a security to be in the best interest of the
Portfolio as well as other clients, the Investment Adviser or Sub-Adviser, to
the extent permitted by applicable laws and regulations, may, but shall be under
no obligation to, aggregate the securities to be sold or purchased in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as expenses incurred in the transaction, will be made by the Investment
Adviser or Sub-Adviser in the manner it considers to be the most equitable and
consistent with its fiduciary obligations to the Portfolio and to such other
clients.
The Investment Adviser will not, and will cause each Sub-Adviser not to,
execute any Portfolio transactions for the account of the Portfolio with a
Broker which is an "affiliated person" (as defined in the 1940 Act) of the
Trust, the Trust's distributor, the Investment Adviser or any Sub-Adviser except
in
<PAGE>
accordance with applicable laws, rules, regulations or effective exemption
orders issued by the SEC pursuant to the 1940 Act without the prior written
approval of the Trustees. The Trust agrees to provide the Investment Adviser,
and the Investment Adviser agrees to furnish to each Sub-Adviser, a list of
brokers and dealers which are "affiliated persons" of the Trust. The Investment
Adviser likewise agrees to furnish, and to cause each Sub-Adviser to furnish, to
the Trust, with respect to such Sub-Adviser, a list of Brokers which are
"affiliated persons" of the Investment Adviser and each Sub-Adviser. In no
instance will Portfolio securities be purchased from or sold to the Trust's
principal distributor, Investment Adviser, any Sub-Adviser or any affiliate
thereof, except to the extent permitted by an exemption order issued by the SEC
or by applicable law.
The Investment Adviser shall render regular reports to the Trustees of the
total brokerage business placed by it and any Sub-Adviser(s) and the manner in
which the allocation of such brokerage has been accomplished.
6. Expenses of the Portfolio. The Portfolio or Trust will pay, or will
-------------------------
enter into arrangements that require third parties to pay, all expenses other
than those expressly assumed by the Investment Adviser herein, which expenses
payable by the Portfolio or Trust shall include:
(a) Expenses of all audits by independent public accountants;
(b) Expenses of transfer agent, registrar, dividend disbursing agent
and shareholder recordkeeping services;
(c) Expenses of custodial services including recordkeeping services
provided by the custodian;
(d) Expenses of obtaining quotations for calculating the value of the
Portfolio's net assets;
(e) Salaries and other compensation of any of its executive officers
or employees, if any, who are not officers, directors,
stockholders or employees of the Investment Adviser, the
Administrator or the Distributor;
(f) Taxes levied against the Portfolio;
(g) Brokerage fees and commissions in connection with the purchase
and sale of portfolio securities for the Portfolio;
(h) Costs, including the interest expense, of borrowing money;
(i) Costs and/or fees incident to Trustees and shareholder meetings
of the Trust and the Portfolio, the preparation and mailings of
prospectuses and reports of the Portfolio to its existing
shareholders, the filing of reports with regulatory bodies, the
maintenance of the Portfolio's legal existence, and the
registration of shares with federal and state securities
authorities;
(j) Legal fees, including the legal fees related to the registration
and continued qualification of the Portfolio's shares for sale;
(k) Costs of printing any share certificates representing shares of
the Portfolio;
<PAGE>
(l) Fees and expenses of Trustees who are not affiliated persons, as
defined in the 1940 Act, of the Investment Adviser, any Sub-
Adviser, the Distributor or any of their affiliates; and
(m) Its pro rata portion of the fidelity bond required by Section
17(g) of the 1940 Act, or of other insurance premiums.
7. Activities and Affiliates of the Investment Adviser. The Trustees
---------------------------------------------------
acknowledge that Investment Adviser or any Sub-Adviser, or one or more of its
affiliates, may have investment responsibilities or render investment advice to
or perform other investment advisory services for other individuals or entities
and that Investment Adviser or any Sub-Adviser, its affiliates or any of its or
their directors, officers, agents or employees may buy, sell or trade in any
securities for its or their respective accounts (such individuals, entities and
accounts hereinafter referred to as Affiliated Accounts). Subject to the
provisions of paragraph 2 hereof, the Trustees agree that Investment Adviser or
its affiliates and any Sub-Adviser(s) or its affiliates, may give advice or
exercise investment responsibility and take such other action with respect to
other Affiliated Accounts which may differ from the advice given or the timing
or nature of action taken with respect to the Portfolio, provided that
Investment Adviser or Sub-Adviser acts in good faith and in accordance with
applicable law or as permitted by an exemption order issued by the SEC, and
provided further, that it is Investment Adviser's and Sub-Adviser's policy to
allocate within its reasonable discretion, investment opportunities to the
Portfolio over a period of time on a fair and equitable basis relative to the
Affiliated Accounts, taking into account the investment objectives and policies
of the Portfolio and any specific investment restrictions applicable thereto.
The Trust acknowledges that one or more of the Affiliated Accounts may at any
time hold, acquire, increase, decrease, dispose of or otherwise deal with
positions in investments in which the Portfolio may have an interest from time
to time, whether in transactions which involve the Portfolio or otherwise.
Neither the Investment Adviser nor any Sub-Adviser shall have any obligation to
acquire for the Portfolio a position in any investment which any Affiliated
Account may acquire, and the Portfolio shall have no first refusal, coinvestment
or other rights in respect of any investment, either for the Portfolio or
otherwise.
8. Compensation of the Investment Adviser. (a) For all services provided
--------------------------------------
to the Portfolio pursuant to this Agreement, the Trust shall pay the Investment
Adviser, and the Investment Adviser agrees to accept as full compensation
therefor, an investment advisory fee, payable as soon as practicable after the
last day of each month, calculated using an annual rate of .65% (the "Annual
Rate"). The monthly investment advisory fee to be paid by the Trust to the
Investment Adviser shall be determined as of the close of business on the last
business day of each month by multiplying one-twelfth of the Annual Rate by the
Average Portfolio Net Assets (hereinafter defined), calculated monthly as of
such day.
(b) For purposes of this paragraph 8, the "Average Portfolio Net Assets"
shall be calculated monthly as of the last business day of each month and shall
mean the sum of the net assets of the Portfolio calculated each business day
during the month divided by the number of business days in the month (such net
assets to be determined as of the close of business each business day and
computed in the manner set forth in the Declaration of Trust of the Trust) .
(c) The Investment Adviser agrees that its compensation for any fiscal year
shall be reduced by the amount, if any, by which the expenses of the Portfolio
for such fiscal year exceed the most restrictive state Blue Sky expense
limitation in effect from time to time, to the extent required by such
limitation. The Investment Adviser shall refund to the Portfolio the amount of
any reduction of the Investment Adviser's compensation pursuant to this
paragraph 8, reduced by the amount of any rebate paid
<PAGE>
directly to the Portfolio by any Sub-Adviser engaged by Investment Adviser, as
promptly as practicable after the end of such fiscal year, provided that the
Investment Adviser will not be required to pay the Portfolio an amount greater
than the fee paid to the Investment Adviser in respect of such year pursuant to
this Agreement. As used in this paragraph 8, "expenses" shall mean those
expenses included in the most restrictive state Blue Sky limitation, having the
broadest specification in such state's Blue Sky statute, and "expense
limitation" means a limit on the maximum annual expenses which may be incurred
by an investment company determined by multiplying a fixed percentage by the
average, or by multiplying more than one such percentage by different specified
amounts of the average, of the values of an investment company's net assets for
a fiscal year. The words "most restrictive state Blue Sky expense limitation"
shall be construed to result in the largest reduction of the Investment
Adviser's compensation for any fiscal year of the Portfolio; provided, however,
that nothing in this Agreement shall require the Investment Adviser to reduce
its fees if not required by an applicable statue or regulation referred to above
in this paragraph 8.
9. Proxies. The Trustees will vote all proxies solicited by or with
-------
respect to the issuers of securities in which assets of the Portfolio may be
invested from time to time, unless the Trustees delegate such right to the
Investment Adviser.
10. Liabilities of the Investment Adviser.
-------------------------------------
(a) The Investment Adviser will not be liable for any error or
judgment or mistake of law or for any loss suffered by the
Portfolio or the Trust in connection with the matters to which
this Agreement relates, except that the Investment Adviser shall
be liable to the Portfolio and the Trust for a loss resulting
from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the
Investment Adviser in the performance of duties or reckless
disregard by it of its obligations or duties under this
Agreement.
(b) The Investment Adviser shall indemnify and hold harmless the
Portfolio from any loss, cost, expense or damage resulting from
the failure of any Sub-Adviser to comply with (i) any statement
included in the Trust's registration statement furnished by
Investment Adviser for inclusion therein, or (ii) instructions
given by the Investment Adviser to any Sub-Adviser for the
purpose of ensuring the Portfolio's compliance with the
applicable requirements of the 1940 Act or of the requirements
of the Internal Revenue Code of 1986 applicable to regulated
investment companies, or of successor statutes; provided,
however, that the indemnification provided by this subparagraph
10(b) shall apply only to the extent that the Sub-Adviser is
liable to the Trust and, after demand by the Trust, is unable or
refuses to discharge its obligation to the Portfolio.
(c) No provision of this Agreement shall be construed to protect any
Trustee or officer of the Trust, or the Investment Adviser, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
11. Renewal, Amendment and Termination.
----------------------------------
(a) This Agreement shall become effective on the date first written
above and shall remain in force for a period of two (2) years
from such date ' and from year to year thereafter but only so
long as such continuance is specifically approved at least
annually (i) by the vote of a majority of the Trustees who are
not interested persons of the Portfolio or the Investment
Adviser, cast in person at a meeting called for the purpose of
voting on
<PAGE>
such approval and by a vote of the Board of Trustees or (ii) by
the vote of a majority of the outstanding voting securities of
the Portfolio. The aforesaid provision that this Agreement may be
continued "annually" shall be construed in a manner consistent
with the 1940 Act and the rules and regulations thereunder.
(b) This Agreement may be amended at any time, but only by written
agreement between the Trust and the Investment Adviser, which
amendment is subject to the approval of the Trustees and the
shareholders of the Trust in the manner required by the 1940 Act,
subject to any applicable exemption order of the SEC modifying
the provisions of the 1940 Act with respect to approval of
amendments to this Agreement.
(c) This Agreement:
(i) may at any time be terminated without the payment of any
penalty either by vote of the Trustees or by vote of a
majority of the outstanding voting securities of the
Portfolio, on sixty (60) days' written notice to the
Investment Adviser;
(ii) shall immediately terminate in the event of its
assignment; and
(iii) may be terminated by the Investment Adviser on sixty (60)
days' written notice to the Trust.
(d) As used in this Section 11, the terms "assignment", "interested
person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth in the 1940 Act and
the rules and regulations thereunder, subject to any applicable
orders of exemption issued by the SEC.
12. Books and Records. (a) The Trustees shall provide to the Investment
-----------------
Adviser copies of the Trust's most recent prospectus and statement of additional
information (as each may be amended or supplemented from time to time) which
relate to any class of shares representing interests in the Portfolio.
(b) In compliance with the requirements of Rule 3la-3 of the rules
promulgated under the 1940 Act ("Rules"), the Investment Adviser hereby agrees
that all records which it maintains for the Trust are the property of the Trust
and further agrees to surrender promptly to the Trust any such records upon the
Trust's request. The Investment Adviser further agrees to preserve for the
periods prescribed by Rule 3la-2, the records required to be maintained by the
Investment Adviser hereunder pursuant to Rule 3la-1 of the Rules.
13. Notices. All notices, requests, demands or other communications
-------
hereunder shall be in writing and shall be deemed given, if delivered
personally, on the day delivered or if mailed, by certified or registered mail,
postage prepaid, return receipt requested, three (3) days after placement in the
United States mail, to the addresses below:
If to Trust: First Funds
c/o James V. Hyatt
ALPS Mutual Fund Services, Inc.
Suite 2700
Denver, Colorado 80202
<PAGE>
With a copy to: Daniel B. Hatzenbuehler, Esq.
Baker, Donelson, Bearman, Caldwell, P.C.
165 Madison Avenue, 21st Floor
Memphis, TN 38103
If to Investment Adviser: First Tennessee Bank National Association
c/o C. Douglas Kelso, III
Senior Vice President and Manager
4990 Poplar Avenue, Third Floor
Memphis, TN 38117
With a copy to: Lee Welch, Esq.
Martin, Tate, Morrow & Marston, P.C.
22 N. Front Street, llth Floor
Memphis, TN 38103
14. Severability. If any provision of this Agreement shall be held or
------------
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
15. Limitation on Liability. Investment Adviser is hereby expressly put
-----------------------
on notice of the limitation of shareholder liability as set forth in the
Declaration of Trust and agrees that obligations assumed by the Portfolio
pursuant to this Agreement shall be limited in all cases to the Portfolio and
its assets. Investment Adviser agrees that it shall not seek satisfaction of
any such obligation from the shareholders or any individual shareholder of the
Portfolio, nor from the Trustees or any individual Trustee of the Portfolio.
16. Governing Law. To the extent that state law has not been preempted by
-------------
the provisions of any law of the United States heretofore or hereafter enacted,
as the same may be amended from time to time, this Agreement shall be
administered, construed and enforced according to the laws of the State of
Tennessee without giving effect to the choice of laws provisions thereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as of the day and year first written above.
FIRST FUNDS
By: /s/ Richard C. Rantzow
----------------------
Richard C. Rantzow, President
FIRST TENNESSEE BANK NATIONAL ASSOCIATION
By: /s/ C. Douglas Kelso
--------------------
C. Douglas Kelso, III, Senior Vice President and
Manager
<PAGE>
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
--------------------------------------------
THIS INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT is made as of this
15/th/ day of February, 1993, between THE MASTERS GROUP OF MUTUAL FUNDS, a
business trust organized under the laws of the Commonwealth of Massachusetts
(the "Trust"), on behalf of its TOTAL RETURN FIXED INCOME PORTFOLIO (the
"Portfolio") and FIRST TENNESSEE BANK NATIONAL ASSOCIATION, a national banking
association (the "Investment Adviser").
WHEREAS, the Trust has been organized to operate as an investment company
registered under the Investment Company Act of 1940 (the "1940 Act") with
multiple series of shares (hereinafter referred to as Classes) having varying
preferences, limitations and relative rights, and to invest and reinvest the
assets of the Portfolio in securities pursuant to investment objectives and
policies for the Portfolio;
WHEREAS, the Portfolio desires to avail itself of the services,
information, advice, assistance and facilities of an investment adviser and to
have an investment adviser provide or perform for it various investment
advisory, statistical, research, portfolio investment adviser selection and
other services as set forth more fully herein;
NOW, THEREFORE, Trust, on behalf of the Portfolio, and Investment Adviser
agree as follows:
1. Employment of the Investment Adviser. The Trust hereby employs the
------------------------------------
Investment Adviser to provide investment advice and to manage the investment and
reinvestment of the Portfolio's assets in the manner set forth in Section 2A of
this Agreement, subject to the direction of the Trustees, for the period, in the
manner, and on the terms hereinafter set forth. The Investment Adviser hereby
accepts such employment and agrees during such period to render the services and
to assume the obligations herein set forth. The investment Adviser shall for
all purposes herein be deemed to be an independent contractor and shall, except
as expressly provided or authorized (whether herein or otherwise), have no
authority to act or represent the Trust in any way or otherwise be deemed an
agent of the Trust.
2. Obligation of and Services to be Provided by the Investment Adviser.
-------------------------------------------------------------------
The Investment Adviser undertakes to provide the services hereinafter set forth
and to assume the following obligations:
A. Investment Advisory Services.
(a) The Investment Adviser shall have overall responsibility for the
day-to-day management and investment of the Portfolio's assets
and securities portfolio subject to and in accordance with the
investment objectives and policies of the Portfolio, and any
directions which the Trustees and officers of the Trust may issue
to the Investment Adviser from time to time, and shall perform
the following services: provide or cause to be provided
investment research and credit analysis concerning the
Portfolio's investments, (ii) conduct or cause to be conducted a
continual program of investment of the Portfolio's assets, (iii)
place or cause to be placed orders for all purchases and sales of
the investments made for the Portfolio, and (iv) maintain or
cause to be maintained the books and records required in
connection with its duties hereunder.
(b) The Investment Adviser shall advise the Trustees of the Trust
regarding overall investment programs and strategies for the
Portfolio, revision of such programs as
<PAGE>
necessary, and shall monitor and report periodically to the
Trustees concerning the implementation of such programs and
strategies.
(c) The Investment Adviser, with the prior approval of the Trustees
(and the shareholders to the extent required by applicable law)
as to particular appointments, shall be permitted to (i) engage
one or more persons or companies ("Sub-Advisers"), which may have
full investment discretion to make all determinations with
respect to the investment and reinvestment of all or any portion
of the Portfolio's assets and the purchase and sale of all or any
portion of the Portfolio securities, subject to the terms and
conditions of this Agreement and the written agreement with any
Sub-Adviser; and (ii) take such steps as may be necessary to
implement such appointment.
(d) The Investment Adviser shall be solely responsible for paying
the fees and expenses of any Sub-Adviser for its services to the
Investment Adviser and the Portfolio. Except for instructions or
advice given to the Sub-Adviser by the Investment Adviser, the
Investment Adviser shall not be responsible or liable for the
investment merits of any decision by the Sub-Adviser to purchase,
hold or sell a security for the Portfolio.
(e) In the event one or more Sub-Advisers is appointed pursuant to
subparagraph (c) hereof, the Investment Adviser shall (i) monitor
and evaluate the investment performance of each Sub-Adviser
employed by the Investment Adviser for the Portfolio; (ii)
allocate the portion of the Portfolio's assets to be managed by
each Sub-Adviser; (iii) recommend changes in or additional Sub-
Advisers when appropriate; and (iv) compensate each Sub-Adviser.
(f) The Investment Adviser shall render such reports to the Trustees,
at regular meetings thereof, as the Trustees may reasonably
request regarding, among other things, the investment performance
of the Portfolio, including, if any Sub-Adviser has been
appointed, the investment performance of each Sub-Adviser.
(g) The Investment Adviser will monitor and coordinate, to the extent
necessary, the activities of the custodian transfer agent,
distributor, administrator and pricing agent insofar as their
respective activities relate to the duties and obligations of the
Investment Adviser hereunder.
B. Provision of Information Necessary for Preparation of Securities
Registration Statements, Amendments and Other Materials.
The Investment Adviser will make available and provide such financial,
accounting and statistical information related to its duties and
responsibilities hereunder as required by the Trustees and necessary
for the preparation of registration statement, reports and other
documents required by federal and state securities laws and such other
information as the Trustees may reasonably request for use by the
Trust and its distributor for the underwriting and distribution of the
Portfolio's shares.
C. Other Obligations and Services.
<PAGE>
The Investment Adviser agrees to make available its officers and
employees to the Trustees and officers of the Trust for consultation
and discussions regarding the investment advisory activities of the
Portfolio.
3. Covenants by Investment Adviser. The Investment Adviser agrees with
-------------------------------
respect to the services provided to the Portfolio that it:
(a) will conform with all applicable rules and regulations of the
Securities and Exchange Commission ("SEC") and will in addition
conduct its activities under this Agreement in accordance with
applicable regulations of the Office of the Comptroller of the
Currency pertaining to the investment advisory activities of
national banks which are applicable to the Investment Adviser;
(b) will not make loans to any person for the purpose of purchasing
or carrying Portfolio shares, or make loans to the Trust;
(c) will not purchase shares of the Portfolio for its own investment
account;
(d) will maintain all books and records with respect to the
securities transactions of the Portfolio and furnish the Trustees
such periodic and special reports as the Trustees may request
with respect to the Portfolio;
(e) will treat confidentially and as proprietary information of the
Trust all records and other information relative to the Trust and
the Portfolio and prior, present or potential shareholders (other
than any information which Investment Adviser may have obtained
about shareholders from other business relationships with such
shareholders), and will not use such records and information for
any purpose other than performance of its responsibilities and
duties hereunder (except after prior notification to and approval
in writing by the Trust, which approval shall not be unreasonably
withheld and may not be withheld and will be deemed granted where
the Investment Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to
divulge such information by duly constituted authorities, when so
requested by the Trust or when otherwise required or permitted by
law); and
(f) will immediately notify the Trust of the occurrence of any event
which would disqualify Investment Adviser or any Sub-Adviser from
serving as investment adviser of an investment company.
4. Transaction Procedures. All investment transactions on behalf of the
----------------------
Portfolio will be compensated by payment to or delivery by the custodian for the
Portfolio duly appointed by the Trustees of the Trust (the "Custodian"), or such
approved depositories or agents duly appointed by the Trustees and as may be
designated by the Custodian in writing, as custodian for the Portfolio, of all
cash and/or securities due to or from the Portfolio, and neither Investment
Adviser nor any Sub-Adviser shall have possession or custody thereof or any
responsibility or liability with respect thereto. The Investment Adviser or any
Sub-Adviser effecting transactions on behalf of the Portfolio shall advise the
Custodian of all investment orders for the Portfolio placed by it with brokers,
dealers, banks and other parties ("Brokers"). The Trustees shall issue, or
cause to be issued, to the Custodian such instructions as may be appropriate in
connection with the settlement of any transaction initiated by the Investment
Adviser or any Sub-Adviser. The Portfolio shall be responsible for all
custodial arrangements and the payment of all custodial charges and fees, and,
<PAGE>
upon the giving of proper instructions to the Custodian, Investment Adviser
shall have no responsibility or liability with respect to custodian arrangements
or the acts, omissions or other conduct of the Custodian, except that it shall
be the responsibility of the Investment Adviser or any Sub-Adviser to take
appropriate action if the Custodian fails properly to confirm execution of the
instructions to the Investment Adviser or any Sub-Adviser in a written form duly
agreed upon by the Custodian and the Investment Adviser or any Sub-Adviser.
5. Execution and Allocation of Portfolio Brokerage. The Investment
-----------------------------------------------
Adviser shall place, or shall cause each Sub-Adviser to place, subject to the
limitations contained in this paragraph 5, on behalf of the Portfolio, orders
for the execution of the Portfolio's securities transactions. Neither the
Investment Adviser nor any Sub-Adviser is authorized by the Trust to take any
action, including the purchase or sale of securities for the account of the
Portfolio, (a) in contravention of (i) any investment restrictions set forth in
the 1940 Act and the rules thereunder; (ii) specific instructions adopted by the
Trustees and communicated to the Investment Adviser; (iii) the investment
objectives, policies and restrictions of the Portfolio as set forth in the
Trust's current registration statement, as amended from time to time; or (iv)
instructions from the Trustees to the Investment Adviser or from the Investment
Adviser to any Sub-Adviser, or (b) which would have the effect of causing the
Trust to fail to qualify or to cease to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended, or any succeeding
statute.
The Investment Adviser or, if any Sub-Adviser shall be appointed, then the
Sub-Adviser, may place orders pursuant to its investment determinations for the
Portfolio either directly with the issuer or with any Brokers. In placing
orders with any Broker, the Investment Adviser or any Sub-Adviser will consider
the experience and skill of a Broker's securities traders as well as the
Broker's financial responsibility and administrative efficiency. The Investment
Adviser or any Sub-Adviser will attempt to obtain the best price and the most
favorable execution of its orders with any Brokers; however, in so doing, the
Investment Adviser or any Sub-Adviser may consider, subject to the approval of
the Trustees, the research, statistical, and related brokerage services provided
or to be provided by such Broker to the Portfolio. A commission paid to such
Brokers may be higher than that which another Broker would have charged for
effecting the same transaction, provided that the Investment Adviser or any Sub-
Adviser determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such Broker when
viewed in terms of either the particular transaction or the overall
responsibilities of the Investment Adviser or any Sub-Adviser with respect to
the accounts as to which it exercises investment discretion. It is understood
that neither the Investment Adviser nor any Sub-Adviser has adopted a formula
for selection of Brokers for the execution of the Portfolio's investment
transactions on occasions when either the Investment Adviser or any Sub-Adviser
deems the purchase or sale of a security to be in the best interest of the
Portfolio as well as other clients, the Investment Adviser or Sub-Adviser, to
the extent permitted by applicable laws and regulations, may, but shall be under
no obligation to, aggregate the securities to be sold or purchased in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as expenses incurred in the transaction, will be made by the Investment
Adviser or Sub-Adviser in the manner it considers to be the most equitable and
consistent with its fiduciary obligations to the Portfolio and to such other
clients.
The Investment Adviser will not, and will cause each Sub-Adviser not to,
execute any Portfolio transactions for the account of the Portfolio with a
Broker which is an "affiliated person" (as defined in the 1940 Act) of the
Trust, the Trust's distributor, the Investment Adviser or any Sub-Adviser except
in accordance with applicable laws, rules, regulations or effective exemption
orders issued by the SEC pursuant to the 1940 Act without the prior written
approval of the Trustees. The Trust agrees to provide
<PAGE>
the Investment Adviser, and the Investment Adviser agrees to furnish to each
Sub-Adviser, a list of brokers and dealers, which are "affiliated persons" of
the Trust. The Investment Adviser likewise agrees to furnish, and to cause each
Sub-Adviser to furnish, to the Trust, with respect to such Sub-Adviser, a list
of Brokers, which are "affiliated persons" of the Investment Adviser and each
Sub-Adviser. In no instance will Portfolio securities be purchased from or sold
to the Trust's principal distributor, Investment Adviser, any Sub-Adviser or any
affiliate thereof, except to the extent permitted by an exemption order issued
by the SEC or by applicable law.
The Investment Adviser shall render regular reports to the Trustees of the
total brokerage business placed by it and any Sub-Adviser(s) and the manner in
which the allocation of such brokerage has been accomplished.
6. Expenses of the Portfolio. The Portfolio or Trust will pay, or will
-------------------------
enter into arrangements that require third parties to pay, all expenses other
than those expressly assumed by the Investment Adviser herein, which expenses
payable by the Portfolio or Trust shall include:
(a) Expenses of all audits by independent public accountants;
(b) Expenses of transfer agent, registrar, dividend disbursing agent
and shareholder recordkeeping services;
(c) Expenses of custodial services including recordkeeping services
provided by the custodian;
(d) Expenses of obtaining quotations for calculating the value of the
Portfolio's net assets;
(e) Salaries and other compensation of any of its executive officers
or employees, if any, who are not officers, directors,
stockholders or employees of the Investment Adviser, the
Administrator or the Distributor;
(f) Taxes levied against the Portfolio;
(g) Brokerage fees and commissions in connection with the purchase
and sale of portfolio securities for the Portfolio;
(h) Costs, including the interest expense, of borrowing money;
(i) Costs and/or fees incident to Trustees and shareholder meetings
of the Trust and the Portfolio, the preparation and mailings of
prospectuses and reports of the Portfolio to its existing
shareholders, the filing of reports with regulatory bodies, the
maintenance of the Portfolio's legal existence, and the
registration of shares with federal and state securities
authorities;
(j) Legal fees, including the legal fees related to the registration
and continued qualification of the Portfolio's shares for sale;
(k) Costs of printing any share certificates representing shares of
the Portfolio;
<PAGE>
(l) Fees and expenses of Trustees who are not affiliated persons, as
defined in the 1940 Act, of the Investment Adviser, any Sub-
Adviser, the Distributor or any of their affiliates; and
(m) Its pro rata portion of the fidelity bond required by Section
17(g) of the 1940 Act, or of other insurance premiums.
7. Activities and Affiliates of the Investment Adviser. The Trustees
---------------------------------------------------
acknowledge that Investment Adviser or any Sub-Adviser, or one or more of its
affiliates, may have investment responsibilities or render investment advice to
or perform other investment advisory services for other individuals or entities
and that Investment Adviser or any Sub-Adviser, its affiliates or any of its or
their directors, officers, agents or employees may buy, sell or trade in any
securities for its or their respective accounts (such individuals, entities and
accounts hereinafter referred to as Affiliated Accounts). Subject to the
provisions of paragraph 2 hereof, the Trustees agree that Investment Adviser or
its affiliates and any Sub-Adviser(s) or its affiliates, may give advice or
exercise investment responsibility and take such other action with respect to
other Affiliated Accounts which may differ from the advice given or the timing
or nature of action taken with respect to the Portfolio, provided that
Investment Adviser or Sub-Adviser acts in good faith and in accordance with
applicable law or as permitted by an exemption order issued by the SEC, and
provided further, that it is Investment Adviser's and Sub-Adviser's policy to
allocate within its reasonable discretion, investment opportunities to the
Portfolio over a period of time on a fair and equitable basis relative to the
Affiliated Accounts, taking into account the investment objectives and policies
of the Portfolio and any specific investment restrictions applicable thereto.
The Trust acknowledges that one or more of the Affiliated Accounts may at any
time hold, acquire, increase, decrease, dispose of or otherwise deal with
positions in investments in which the Portfolio may have an interest from time
to time, whether in transactions which involve the Portfolio or otherwise.
Neither the Investment Adviser nor any Sub-Adviser shall have any obligation to
acquire for the Portfolio a position in any investment which any Affiliated
Account may acquire, and the Portfolio shall have no first refusal, coinvestment
or other rights in respect of any investment, either for the Portfolio or
otherwise.
8. Compensation of the Investment Adviser. (a) For all services provided
--------------------------------------
to the Portfolio pursuant to this Agreement, the Trust shall pay the Investment
Adviser, and the Investment Adviser agrees to accept as full compensation
therefor, an investment advisory fee, payable as soon as practicable after the
last day of each month, calculated using an annual rate of .65% (the "Annual
Rate"). The monthly investment advisory fee to be paid by the Trust to the
Investment Adviser shall be determined as of the close of business on the last
business day of each month by multiplying one-twelfth of the Annual Rate by the
Average Portfolio Net Assets (hereinafter defined), calculated monthly as of
such day.
(b) For purposes of this paragraph 8, the "Average Portfolio Net Assets"
shall be calculated monthly as of the last business day of each month and shall
mean the sum of the net assets of the Portfolio calculated each business day
during the month divided by the number of business days in the month (such net
assets to be determined as of the close of business each business day and
computed in the manner set forth in the Declaration of Trust of the Trust).
(c) The Investment Adviser agrees that its compensation for any fiscal year
shall be reduced by the amount, if any, by which the expenses of the Portfolio
for such fiscal year exceed the most restrictive state Blue Sky expense
limitation in effect from time to time, to the extent required by such
limitation. The Investment Adviser shall refund to the Portfolio the amount of
any reduction of the Investment Adviser's compensation pursuant to this
paragraph 8, reduced by the amount of any rebate paid directly to the Portfolio
by any Sub-Adviser engaged by Investment Adviser, as promptly as practicable
<PAGE>
after the end of such fiscal year, provided that the Investment Adviser will not
be required to pay the Portfolio an amount greater than the fee paid to the
Investment Adviser in respect of such year pursuant to this Agreement. As used
in this paragraph 8, "expenses" shall mean those expenses included in the most
restrictive state Blue Sky limitation, having the broadest specification in such
state's Blue Sky statute, and "expense limitation" means a limit on the maximum
annual expenses which may be incurred by an investment company determined by
multiplying a fixed percentage by the average, or by multiplying more than one
such percentage by different specified amounts of the average, of the values of
an investment company's net assets for a fiscal year. The words "most
restrictive state Blue Sky expense limitation" shall be construed to result in
the largest reduction of the Investment Adviser's compensation for any fiscal
year of the Portfolio; provided, however, that nothing in this Agreement shall
require the Investment Adviser to reduce its fees if not required by an
applicable statue or regulation referred to above in this paragraph 8.
9. Proxies. The Trustees will vote all proxies solicited by or with
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respect to the issuers of securities, in which assets of the Portfolio may be
invested from time to time, unless the Trustees delegate such right to the
Investment Adviser.
10. Liabilities of the Investment Adviser.
-------------------------------------
(a) The Investment Adviser will not be liable for any error or
judgment or mistake of law or for any loss suffered by the
Portfolio or the Trust in connection with the matters to which
this Agreement relates, except that the Investment Adviser shall
be liable to the Portfolio and the Trust for a loss resulting
from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the
Investment Adviser in the performance of duties or reckless
disregard by it of its obligations or duties under this
Agreement.
(b) The Investment Adviser shall indemnify and hold harmless the
Portfolio from any loss, cost, expense or damage resulting from
the failure of any Sub-Adviser to comply with (i) any statement
included in the Trust's registration statement furnished by
Investment Adviser for inclusion therein, or (ii) instructions
given by the Investment Adviser to any Sub-Adviser for the
purpose of ensuring the Portfolio's compliance with the
applicable requirements of the 1940 Act or of the requirements of
the Internal Revenue Code of 1986 applicable to regulated
investment companies, or of successor statutes; provided,
however, that the indemnification provided by this subparagraph
10(b) shall apply only to the extent that the Sub-Adviser is
liable to the Trust and, after demand by the Trust, is unable or
refuses to discharge its obligation to the Portfolio.
(c) No provision of this Agreement shall be construed to protect any
Trustee or officer of the Trust, or the Investment Adviser, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
11. Renewal, Amendment and Termination.
----------------------------------
(a) This Agreement shall become effective on the date first written
above and shall remain in force for a period of two (2) years
from such date ' and from year to year thereafter but only so
long as such continuance is specifically approved at least
annually (i) by
<PAGE>
the vote of a majority of the Trustees who are not interested
persons of the Portfolio or the Investment Adviser, cast in
person at a meeting called for the purpose of voting on such
approval and by a vote of the Board of Trustees or (ii) by the
vote of a majority of the outstanding voting securities of the
Portfolio. The aforesaid provision that this Agreement may be
continued "annually" shall be construed in a manner consistent
with the 1940 Act and the rules and regulations thereunder.
(b) This Agreement may be amended at any time, but only by written
agreement between the Trust and the Investment Adviser, which
amendment is subject to the approval of the Trustees and the
shareholders of the Trust in the manner required by the 1940 Act,
subject to any applicable exemption order of the SEC modifying
the provisions of the 1940 Act with respect to approval of
amendments to this Agreement.
(c) This Agreement:
(i) may at any time be terminated without the payment of any
penalty either by vote of the Trustees or by vote of a
majority of the outstanding voting securities of the
Portfolio, on sixty (60) days' written notice to the
Investment Adviser;
(ii) shall immediately terminate in the event of its assignment;
and
(iii) may be terminated by the Investment Adviser on sixty (60)
days' written notice to the Trust.
(d) As used in this Section 11, the terms "assignment", "interested
person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth in the 1940 Act and
the rules and regulations thereunder, subject to any applicable
orders of exemption issued by the SEC.
12. Books and Records. (a) The Trustees shall provide to the Investment
-----------------
Adviser copies of the Trust's most recent prospectus and statement of additional
information (as each may be amended or supplemented from time to time) which
relate to any class of shares representing interests in the Portfolio.
(b) In compliance with the requirements of Rule 3la-3 of the rules
promulgated under the 1940 Act ("Rules"), the Investment Adviser hereby agrees
that all records which it maintains for the Trust are the property of the Trust
and further agrees to surrender promptly to the Trust any such records upon the
Trust's request. The Investment Adviser further agrees to preserve for the
periods prescribed by Rule 3la-2, the records required to be maintained by the
Investment Adviser hereunder pursuant to Rule 3la-1 of the Rules.
13. Notices. All notices, requests, demands or other communications
-------
hereunder shall be in writing and shall be deemed given, if delivered
personally, on the day delivered or if mailed, by certified or registered mail,
postage prepaid, return receipt requested, three (3) days after placement in the
United States mail, to the addresses below:
If to Trust: First Funds
c/o James V. Hyatt
ALPS Mutual Fund Services, Inc.
<PAGE>
Suite 2700
Denver, Colorado 80202
With a copy to: Daniel B. Hatzenbuehler, Esq.
Baker, Donelson, Bearman, Caldwell, P.C.
165 Madison Avenue, 21st Floor
Memphis, TN 38103
If to Investment Adviser: First Tennessee Bank National Association
c/o C. Douglas Kelso, III
Senior Vice President and Manager
4990 Poplar Avenue, Third Floor
Memphis, TN 38117
With a copy to: Lee Welch, Esq.
Martin, Tate, Morrow & Marston, P.C.
22 N. Front Street, llth Floor
Memphis, TN 38103
14. Severability. If any provision of this Agreement shall be held or
------------
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
15. Limitation on Liability. Investment Adviser is hereby expressly put
-----------------------
on notice of the limitation of shareholder liability as set forth in the
Declaration of Trust and agrees that obligations assumed by the Portfolio
pursuant to this Agreement shall be limited in all cases to the Portfolio and
its assets. Investment Adviser agrees that it shall not seek satisfaction of
any such obligation from the shareholders or any individual shareholder of the
Portfolio, nor from the Trustees or any individual Trustee of the Portfolio.
16. Governing Law. To the extent that state law has not been preempted by
-------------
the provisions of any law of the United States heretofore or hereafter enacted,
as the same may be amended from time to time, this Agreement shall be
administered, construed and enforced according to the laws of the State of
Tennessee without giving effect to the choice of laws provisions thereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as of the day and year first written above.
THE MASTERS GROUP OF MUTUAL FUNDS
By: /s/ Richard C. Rantzow
------------------------------------
Richard C. Rantzow, President
FIRST TENNESSEE BANK NATIONAL ASSOCIATION
By: /s/ C. Douglas Kelso
------------------------------------
C. Douglas Kelso, III, Senior Vice President and
Manager
<PAGE>
EXHIBIT 5(D)
SUB-ADVISORY AGREEMENT
----------------------
AGREEMENT made this 4th day of May 1993, between FIRST TENNESSEE BANK
NATIONAL ASSOCIATION, a national banking association doing business as Garland
Capital Management (herein called the "Investment Adviser") and PROVIDENT
INSTITUTIONAL MANAGEMENT CORPORATION, a Delaware corporation (herein called the
"Sub-Adviser").
WHEREAS, the Investment Adviser is the investment adviser to The Masters
Group of Mutual Funds (herein called the "Trust"), an open-end, diversified,
management investment company of the "series" type, registered under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Investment Adviser wishes to retain the Sub-Adviser to provide
investment advisory services in connection with the Trust's CASH RESERVE
PORTFOLIO (herein called the "Portfolio") a series of the Trust; and
WHEREAS, the Sub-Adviser is willing to provide such services to the
Investment Adviser upon the conditions and for the compensation set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, it is agreed between
the parties hereto as follows:
1. Appointment. (a) The Investment Adviser hereby appoints the Sub-Adviser
-----------
its sub-adviser with respect to the Portfolio, as permitted in the Investment
Advisory and Management Agreement between the Investment Adviser and the Trust
dated February 15, 1993 (such Agreement or the most recent successor advisor
agreement between such parties is herein called the "Advisory Agreement"). The
Sub-Adviser accepts such appointment and agrees to use its best professional
judgement to make timely investment decisions for the Portfolio with respect to
the investments of the Portfolio in accordance with the provisions of this
Agreement for the compensation herein provided.
(b) The Sub-Adviser shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Trust or the Investment Adviser in any way or otherwise be deemed an agent of
the Trust or the Investment Adviser.
2. Delivery of Documents. (a) The Investment Adviser shall provide to the
---------------------
Sub-Adviser copies of the Trust's most recent prospectus and statement of
additional information (as each may be amended or supplemented from time to
time) which relate to any class of shares representing interests in the
Portfolio (each such prospectus and statement of additional information as
presently in effect, and as they shall from time to time be amended and
<PAGE>
supplemented, is herein respectively called a "Prospectus" and a "Statement of
Additional Information").
(b) The Sub-Adviser will make available and provide to the Investment
Adviser such financial, accounting, and statistical information related to its
duties and responsibilities hereunder as is necessary for the preparation of
registration statements, reports, and other documents required by federal and
state securities laws and such other information as the Trust's Board of
Trustees (herein called the "Trustees") or the Investment Adviser may reasonably
request for use by the Trust and its distributor for the underwriting and
distribution of the Portfolio shares.
3. Sub-Advisory Services to the Portfolio. Subject to the supervision of
--------------------------------------
the Investment Adviser, the Sub-Adviser will supervise the day-to-day operations
of the Portfolio and perform the following services: (i) provide investment
research and credit analysis concerning the Portfolio's investments, (ii)
conduct a continual program of investment of the Portfolio's assets, (iii) place
orders in accordance with paragraphs 4 to 7 hereof for all purchases and sales
of the investments made for the Portfolio, and (iv) maintain the books and
records required in connection with its duties hereunder. In addition, the Sub-
Adviser will keep the Investment Adviser informed of developments materially
affecting the Trust. The Sub-Adviser will communicate to the Investment Adviser
on each day that a purchase or sale of a security is effected for the Portfolio
(i) the name of the issuer, (ii) the amount of the purchase or sale, (iii) the
name of the broker, dealer, bank or other person (herein called "Brokers), if
any, through which the purchase or sale will be effected, (iv) the CUSIP number
of the security, if any, (v) the Portfolio to which such purchase or sale
pertains, and (vi) such other information as the Investment Adviser may
reasonably require for purposes of fulfilling its obligations to the Trust under
the Advisory Agreement. The Sub-Adviser will render to the Trustees such
periodic and special reports as the Investment Adviser or the Trustees may
reasonably request, including, if applicable, regular reports of the total
brokerage business placed by it and the manner in which the allocation of such
brokerage business has been accomplished. The Sub-Adviser will provide the
services rendered by it hereunder in accordance with the Portfolio's investment
objectives, policies, and restrictions as stated in its current Prospectus and
Statement of Additional Information. Except for instructions or advice given to
the Sub-Adviser by the Investment Adviser, the Investment Adviser shall not be
responsible or liable for the investment merits of any decision by the Sub-
Adviser to purchase, hold or sell a security for the Portfolio.
4. Brokerage. The Sub-Adviser may place orders pursuant to its
---------
investment determinations for the Portfolio either directly with the issuer or
with any Brokers. In placing orders, the Sub-Adviser will consider the
experience and skill of the firm's securities traders as well as the firm's
financial responsibility and administrative efficiency. The Sub-Adviser will
attempt to obtain the best price and the most favorable execution of its orders.
Consistent with these obligations, the Sub-Adviser may, subject to the approval
of the Trustees, select Brokers on the basis of the research, statistical, and
pricing services they provide to the Portfolio. A commission paid to such
Brokers may be higher than that which another qualified broker would have
charged for effecting the same transaction, provided that the Sub-Adviser
determines in good faith that such commission is reasonable in terms either of
the transaction or the overall
<PAGE>
responsibility of the Sub-Adviser to the Portfolio and its other clients and
that the total commissions paid by the Portfolio will be reasonable in relation
to the benefits to the Portfolio over the long term. In no instance will
Portfolio securities be purchased from or sold to the Trust's principal
underwriter, the investment Adviser, the Sub-Adviser, or any affiliate (as
defined in the 1940 Act) thereof, except to the extent permitted by SEC
exemptive order or by applicable law. The Investment Adviser agrees to provide
the Sub-Adviser a list of Brokers which are "affiliated persons" (as defined in
the 1940 Act) of the Trust and the Investment Adviser. The Sub-Adviser agrees to
furnish to the Investment Adviser and to the Trust a list of Brokers and
dealers, which are such "affiliated persons" of the Sub-Adviser. It is
understood that neither the Investment Adviser nor the Sub-Adviser has adopted a
formula for selection of Brokers for the execution of the Portfolio's investment
transactions.
5. Transaction Procedures. All investment transactions on behalf of the
----------------------
Portfolio will be consummated by payment to or delivery by the duly appointed
custodian for the Portfolio (the "Custodian"), or such depositories or agents
duly appointed by the Trustees and as may be designated by the Custodian in
writing, as custodian for the Portfolio, of all cash and/or securities due to or
from the Portfolio, and the Sub-Adviser shall not have possession or custody
thereof or any responsibility or liability with respect thereto. The Sub-
Adviser in effecting transactions on behalf of the Portfolio shall advise the
Custodian of all investment orders for the Portfolio placed by it with Brokers.
The Investment Adviser shall issue, or cause to be issued, to the custodian such
instructions as may be appropriate in connection with the settlement of any
transaction initiated by the Sub-Adviser. The Portfolio is responsible for all
custodial arrangements and the payment of all custodial charges and fees, and,
upon the giving of proper instructions to the Custodian, the Sub-Adviser shall
have no responsibility or liability with respect to custodial arrangements or
the acts, omissions or other conduct of the Custodian, except that it shall be
the responsibility of the Sub-Adviser to take appropriate action if the
Custodian fails properly to confirm, execution of the instructions to the Sub-
Adviser in a written form duly agreed upon by the Custodian and the Sub-Adviser.
6. Compliance with Laws; Confidentiality. (a) The Sub-Adviser agrees
---------------------------------------
that it will comply with all applicable rules and regulations of all federal and
state regulatory agencies having jurisdiction over the Sub-Adviser in
performance of its duties hereunder (herein called the "Rules"). The Sub-
Adviser will treat confidentially and as proprietary information of the Trust
all records and information relative to the Trust and prior, present or
potential shareholders, and will not use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Investment
Adviser and the Trust, which approval shall not be unreasonably withheld and may
not be withheld where the Sub-Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when required to divulge such
information by duly constituted authorities, or when so requested by the Trust.
(b) The Sub-Adviser is not authorized by the Trust or the Investment
Adviser to take any action, including the purchase or sale of securities for the
account of the Portfolio, (a) in contravention of (i) any investment
restrictions set forth-in the 1940 Act and the rules thereunder; (ii) specific
written instructions adopted by the Trustees or the Investment Adviser
<PAGE>
and communicated to the Sub-Adviser; or (iii) the investment objectives,
policies, and restrictions of the Portfolio as set forth in the Trust's
registration statement as amended from time to time, or (b) which would have the
effect of causing the Trust to fail to qualify or to cease to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as
amended, or any succeeding statute.
(c) The Sub-Adviser agrees with respect to the services provided to
the Portfolio that it:
(i) will conform with all applicable rules and regulations
of the Securities and Exchange Commission ("SEC");
[_]
[_]
(ii) will not purchase shares of the Portfolio for its own
investment account; and
[_]
[_]
(iii) will immediately notify the Trust and the Investment
Adviser of the occurrence of any event which would
disqualify the Sub-Adviser from serving as investment
adviser of an investment company.
[_]
7. Control by Trust's Board of Trustees. Any recommendations concerning
------------------------------------
the Portfolio's investment program proposed by the Sub-Adviser to the Portfolio
and to the Investment Adviser pursuant to this Agreement, as well as any other'
activities undertaken by the Sub-Adviser on behalf of the Portfolio pursuant
hereto, shall at all times be subject to any applicable directives of the Board
of Trustees of the Trust.
8. Services Not Exclusive. The Sub-Adviser's services hereunder are not
----------------------
deemed to be exclusive, and the Sub-Adviser shall be free to render similar
services to others so long as its services under this Agreement are not impaired
thereby.
9. Books and Records. In compliance with the requirements of Rule 3la-3
-----------------
of the Rules, the Sub-Adviser hereby agrees that all records which it maintains
for the Trust are the property of the Trust and further agrees to surrender
promptly to the Trust and the Investment Adviser any such records upon the
request of the Trust or the Investment Adviser. The Sub-Adviser further agrees
to preserve for the periods prescribed by Rule 3la-2, the records required to be
maintained by the Sub-Adviser hereunder pursuant to Rule 3la-1 of the Rules.
10. Expenses. During the term of this Agreement, the Sub-Adviser will
--------
bear all expenses in connection with the performance of its services under this
Agreement. The Sub-Adviser shall not bear certain other expenses related to the
operation of the Trust including, but not limited to: taxes levied against the
Trust, the Portfolio or the Investment Adviser; interest;
<PAGE>
brokerage fees and commissions in connection with the purchase and sale of
portfolio securities for the Portfolio; and any extraordinary expense items.
11. Compensation. (a) For the services provided and the expenses
------------
assumed pursuant to this Agreement, the Investment Adviser shall pay the Sub-
Adviser, and the Sub-Adviser agrees to accept as full compensation therefor, a
sub-advisory fee payable as soon as practicable after the last day of each
month, calculated using an annual rate of .33% (the "Annual Rate").
(b) The monthly sub-advisory fee to be paid by the Investment Adviser
to the Sub-Adviser shall be determined as of the close of business on the last
business day of each month by multiplying one-twelfth of the Annual Rate by the
Average Portfolio Net Assets (hereinafter defined) calculated monthly as of such
day.
(c) For the purposes of this paragraph, the "Average Portfolio Net
Assets" shall be calculated monthly as of the last business day of each month
and shall mean the sum of the net assets of the Portfolio calculated each
business day during the month divided by the number of business days in the
month (such net assets to be determined as of the close of business each
business day and computed in the manner set forth in the Declaration of Trust of
the Trust).
(d) The Sub-Adviser acknowledges that the Investment Adviser has
agreed with the Trust to reduce the Investment Adviser's compensation for any
fiscal year by the amount, if any, by which the expenses of the Portfolio for
such fiscal year exceed the most restrictive state Blue Sky expense limitation
in effect from time to time, to the extent required by such limitation. The
Sub-Adviser agrees that its compensation for any fiscal year shall be reduced
by the same proportion as the Investment Adviser's compensation is reduced as
described in the preceding sentence, for any fiscal year in which the expenses
of the Portfolio for such fiscal year exceed the most restrictive state Blue
Sky expense limitation in effect from time to time. The Sub-Adviser shall
refund to the Investment Adviser the amount of any reduction of the Sub-
Adviser's compensation pursuant to this paragraph 11(d) as promptly as
practicable after the end of such fiscal year, provided that the Sub-Adviser
will not be required to pay the Investment Adviser an amount greater than the
fee paid to the Sub-Adviser in respect of such year pursuant to this Agreement.
As used in this paragraph 11(d), "expenses" shall mean those expenses included
in the most restrictive state Blue Sky expense limitation, having the broadest
specification in such state's Blue Sky statute, and "expense limitation" means
a limit on the maximum annual expenses which may be incurred by an investment
company determined by multiplying a fixed percentage by the average, or by
multiplying more than one such percentage by different specified amounts of the
average, of the values of the investment company's net assets for a fiscal
year. The words "most restrictive state Blue Sky expense limitation" shall be
construed to result in the largest reduction of the Sub-Adviser's compensation
for any fiscal year of the Portfolio; provided, however, that nothing in this
Agreement shall require the Sub-Adviser to reduce its fees if the Investment
Adviser is not required by an applicable statute or regulation referred to
above in this paragraph 11(d) to reduce its fees.
12. Limitation on Liability. (a) The Sub-Adviser will not be liable for
-----------------------
any error or judgment or mistake of law or for any loss suffered by the
Investment Adviser, the Portfolio
<PAGE>
or the Trust in connection with the matters to which this Agreement relates,
except that the Sub-Adviser shall be liable to the Investment Adviser, the
Portfolio or the Trust for a loss resulting from a breach of fiduciary duty
with respect to the receipt of compensation for services or a loss resulting
from willful misfeasance, bad faith or gross negligence on the Sub-Adviser's
part in the performance of its duties or reckless disregard by it of its
obligations or duties under this Agreement.
(b) The Sub-Adviser shall indemnify and hold harmless the Trust, the
Portfolio, and the Investment Adviser from any loss, cost, expense or damage
resulting from the failure of the descriptive information furnished by the Sub-
Adviser to be accurate in all material respects at the time provided or the
failure of the Sub-Advisor to comply in all material respects with the
investment objectives and policies and restrictions as set forth in the Trust's
registration statements as amended from time to time.
13. Duration, Amendment, and Termination. (a) This Agreement shall become
------------------------------------
effective on the date first written above and shall remain in force for a period
of two (2) years from such date, and from year to year thereafter but only so
long as such continuance is specifically approved at least annually by the
Investment Adviser, and (i) by the vote of a majority of the Trustees who are
not interested persons of the Investment Adviser or the Sub-Adviser, cast in
person at a meeting called for the purpose of voting on such approval and by a
vote of the Trustees or (ii) by the vote of a majority of the outstanding voting
securities of the Portfolio. The aforesaid provision that this Agreement may be
continued "annually" shall be construed in a manner consistent with the 1940 Act
and the rules and regulations thereunder.
(b) This Agreement may be amended at any time, but only by written
agreement between the Investment Adviser and the Sub-Adviser, which amendment is
subject to the approval of the Trustees and the shareholders of the Trust in the
manner required by the 1940 Act, subject to any applicable exemptive order of
the SEC modifying the provisions of the 1940 Act with respect to approval of
amendments of this Agreement.
(c) This Agreement: (i) may at any time be terminated without the
payment of any penalty either by vote of the Trustees or by vote of a majority
of the outstanding voting securities of the Portfolio, on sixty (60) days'
written notice to the Sub-Adviser, (ii) shall immediately terminate in the event
of its assignment; and (iii) may be terminated by the Sub-Adviser on sixty (60)
days' written notice to the Investment Adviser and by the Investment Adviser on
sixty (60) days' written notice to the Sub-Adviser.
(d) As used in this Section 12, the terms "assignment," "interested
person," and "vote of a majority of the outstanding voting securities" shall
have the meanings set forth in the 1940 Act and the rules and regulations
thereunder, subject to any applicable orders of exemption issued by the SEC.
(e) All notices, requests, demands or other communications hereunder
shall be in writing and shall be deemed given, if delivered personally, on the
day delivered or if mailed by
<PAGE>
certified or registered mail, postage prepaid, return receipt requested, three
(3) days after placement in the United States mail, to the addresses below:
If to Investment Adviser:Garland Capital Management
c/o C. Douglas Kelso, III
Senior Vice President
4385 Poplar Avenue, Suite E-1
Memphis, Tennessee 38117
[_]
[_]
With a copy to: Lee Welch, Esq.
Martin, Tate, Morrow & Marston, P.C.
22 North Front Street, 11th Floor
Memphis, Tennessee 38103
If to Sub-Adviser: PNC Institutional Management Corporation
c/o: Thomas H. Nevin
103 Bellevue Parkway
Wilmington, Delaware 19809
If to Trust: The Masters Group of Mutual Funds
c/o Stuart E. Fross, Esq. Secretary
82 Devonshire Street F5H
Boston, Massachusetts 02119
With a copy to: Daniel B. Hatzenbuehler, Esq.
Heiskell, Donelson, Bearman, Adams, Williams & Kirsch
165 Madison Avenue
Memphis, Tennessee 38103
14. Shareholder Liability. Sub-Adviser is hereby expressly put on notice
----------------------
of the limitation of shareholder liability as set forth in the Declaration of
Trust of the Trust and agrees that obligations assumed by the Portfolio or the
Trust, if any, shall be limited in all cases to the Portfolio and its assets.
Sub-Adviser agrees that it shall not seek satisfaction of any such obligation
from the shareholders or any individual shareholder of the Portfolio or the
Trust, nor from the Trustees or any individual Trustee of the Trust.
15. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any provisions
hereof or otherwise affect their construction or effect. If any provision of
this Agreement shall be held or made invalid by a court decision, statute, rule
or otherwise, the remainder of this agreement shall not be affected thereby.
This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors. To the extent that state law
has not been preempted by the provisions of any law of the United States
heretofore or hereafter enacted, as the same may be amended from time to time,
this Agreement shall be administered, construed, and
<PAGE>
enforced according to the laws of the State of Tennessee without giving effect
to the choice of laws provisions thereof.
[_]
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers designated below as of the day and
year first above-written.
FIRST TENNESSEE BANK NATIONAL
ASSOCIATION DOING BUSINESS AS
GARLAND CAPITAL MANAGEMENT
By: /s/ C. Douglas Kelso
--------------------
Senior Vice President
PNC INSTITUTIONAL MANAGEMENT
CORPORATION
By: /s/ Thomas Nevin
----------------
President
<PAGE>
SUB-ADVISORY AGREEMENT
----------------------
AGREEMENT made this 4/th/ day of May, 1993, between FIRST TENNESSEE BANK
NATIONAL ASSOCIATION, a national banking association (herein called the
"Investment Adviser") and FIRST TENNESSEE INVESTMENT MANAGEMENT, INC., a
Tennessee corporation (herein called the "Sub-Adviser").
WHEREAS, the Investment Adviser is the investment adviser to The Masters
Group of Mutual Funds (herein called the "Trust"), an open-end, diversified,
management investment company of the "series" type, registered under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Investment Adviser wishes to retain the Sub-Adviser to provide
investment advisory services in connection with the Trust's TOTAL RETURN EQUITY
PORTFOLIO (herein called the "Portfolio") a series of the Trust; and
WHEREAS, the Sub-Adviser is willing to provide such services to the
Investment Adviser upon the conditions and for the compensation set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, it is agreed between
the parties hereto as follows:
1. Appointment. (a) The Investment Adviser hereby appoints the Sub-Adviser
-----------
its sub-adviser with respect to the Portfolio, as permitted in the Investment
Advisory and Management Agreement between the Investment Adviser and the Trust
dated May 3, 1993 (such Agreement or the most recent successor advisor agreement
between such parties is herein called the "Advisory Agreement"). The Sub-
Adviser accepts such appointment and agrees to use its best professional
judgement to make timely investment decisions for the Portfolio with respect to
the investments of the Portfolio in accordance with the provisions of this
Agreement for the compensation herein provided.
(b) The Sub-Adviser shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Trust or the Investment Adviser in any way or otherwise be deemed an agent of
the Trust or the Investment Adviser.
2. Delivery of Documents. (a) The Investment Adviser shall provide to the
---------------------
Sub-Adviser copies of the Trust's most recent prospectus and statement of
additional information (as each may be amended or supplemented from time to
time) which relate to any class of shares representing interests in the
Portfolio (each such prospectus and statement of additional information as
presently in effect, and as they shall from time to time be amended and
<PAGE>
supplemented, is herein respectively called a "Prospectus" and a "Statement of
Additional Information").
(b) The Sub-Adviser will make available and provide to the Investment
Adviser such financial, accounting, and statistical information related to its
duties and responsibilities hereunder as is necessary for the preparation of
registration statements, reports, and other documents required by federal and
state securities laws and such other information as the Trust's Board of
Trustees (herein called the "Trustees") or the Investment Adviser may reasonably
request for use by the Trust and its distributor for the underwriting and
distribution of the Portfolio shares.
3. Sub-Advisory Services to the Portfolio. Subject to the supervision of
--------------------------------------
the Investment Adviser, the Sub-Adviser will supervise the day-to-day operations
of the Portfolio and perform the following services: (i) provide investment
research and credit analysis concerning the Portfolio's investments, (ii)
conduct a continual program of investment of the Portfolio's assets, (iii) place
orders in accordance with paragraphs 4 to 7 hereof for all purchases and sales
of the investments made for the Portfolio, and (iv) maintain the books and
records required in connection with its duties hereunder. In addition, the Sub-
Adviser will keep the Investment Adviser informed of developments materially
affecting the Trust. The Sub-Adviser will communicate to the Investment Adviser
on each day that a purchase or sale of a security is effected for the Portfolio
(i) the name of the issuer, (ii) the amount of the purchase or sale, (iii) the
name of the broker, dealer, bank or other person (herein called "Brokers), if
any, through which the purchase or sale will be effected, (iv) the CUSIP number
of the security, if any, (v) the Portfolio to which such purchase or sale
pertains, and (vi) such other information as the Investment Adviser may
reasonably require for purposes of fulfilling its obligations to the Trust under
the Advisory Agreement. The Sub-Adviser will render to the Trustees such
periodic and special reports as the Investment Adviser or the Trustees may
reasonably request, including, if applicable, regular reports of the total
brokerage business placed by it and the manner in which the allocation of such
brokerage business has been accomplished. The Sub-Adviser will provide the
services rendered by it hereunder in accordance with the Portfolio's investment
objectives, policies, and restrictions as stated in its current Prospectus and
Statement of Additional Information. Except for instructions or advice given to
the Sub-Adviser by the Investment Adviser, the Investment Adviser shall not be
responsible or liable for the investment merits of any decision by the Sub-
Adviser to purchase, hold or sell a security for the Portfolio.
4. Brokerage. The Sub-Adviser may place orders pursuant to its
---------
investment determinations for the Portfolio either directly with the issuer or
with any Brokers. In placing orders, the Sub-Adviser will consider the
experience and skill of the firm's securities traders as well as the firm's
financial responsibility and administrative efficiency. The Sub-Adviser will
attempt to obtain the best price and the most favorable execution of its orders.
Consistent with these obligations, the Sub-Adviser may, subject to the approval
of the Trustees, select Brokers on the basis of the research, statistical, and
pricing services they provide to the Portfolio. A commission paid to such
Brokers may be higher than that which another qualified broker would have
charged for effecting the same transaction, provided that the Sub-Adviser
determines in good faith that such commission is reasonable in terms either of
the transaction or the overall
<PAGE>
responsibility of the Sub-Adviser to the Portfolio and its other clients and
that the total commissions paid by the Portfolio will be reasonable in relation
to the benefits to the Portfolio over the long term. In no instance will
Portfolio securities be purchased from or sold to the Trust's principal
underwriter, the investment Adviser, the Sub-Adviser, or any affiliate (as
defined in the 1940 Act) thereof, except to the extent permitted by SEC
exemptive order or by applicable law. The Investment Adviser agrees to provide
the Sub-Adviser a list of Brokers which are "affiliated persons" (as defined in
the 1940 Act) of the Trust and the Investment Adviser. The Sub-Adviser agrees to
furnish to the Investment Adviser and to the Trust a list of Brokers and
dealers, which are such "affiliated persons" of the Sub-Adviser. It is
understood that neither the Investment Adviser nor the Sub-Adviser has adopted a
formula for selection of Brokers for the execution of the Portfolio's investment
transactions.
5. Transaction Procedures. All investment transactions on behalf of the
----------------------
Portfolio will be consummated by payment to or delivery by the duly appointed
custodian for the Portfolio (the "Custodian"), or such depositories or agents
duly appointed by the Trustees and as may be designated by the Custodian in
writing, as custodian for the Portfolio, of all cash and/or securities due to or
from the Portfolio, and the Sub-Adviser shall not have possession or custody
thereof or any responsibility or liability with respect thereto. The Sub-
Adviser in effecting transactions on behalf of the Portfolio shall advise the
Custodian of all investment orders for the Portfolio placed by it with Brokers.
The Investment Adviser shall issue, or cause to be issued, to the custodian such
instructions as may be appropriate in connection with the settlement of any
transaction initiated by the Sub-Adviser. The Portfolio is responsible for all
custodial arrangements and the payment of all custodial charges and fees, and,
upon the giving of proper instructions to the Custodian, the Sub-Adviser shall
have no responsibility or liability with respect to custodial arrangements or
the acts, omissions or other conduct of the Custodian, except that it shall be
the responsibility of the Sub-Adviser to take appropriate action if the
Custodian fails properly to confirm, execution of the instructions to the Sub-
Adviser in a written form duly agreed upon by the Custodian and the Sub-Adviser.
6. Compliance with Laws; Confidentiality. (a) The Sub-Adviser agrees
---------------------------------------
that it will comply with all applicable rules and regulations of all federal and
state regulatory agencies having jurisdiction over the Sub-Adviser in
performance of its duties hereunder (herein called the "Rules"). The Sub-
Adviser will treat confidentially and as proprietary information of the Trust
all records and information relative to the Trust and prior, present or
potential shareholders, and will not use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Investment
Adviser and the Trust, which approval shall not be unreasonably withheld and may
not be withheld where the Sub-Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when required to divulge such
information by duly constituted authorities, or when so requested by the Trust.
(b) The Sub-Adviser is not authorized by the Trust or the Investment
Adviser to take any action, including the purchase or sale of securities for the
account of the Portfolio, (a) in contravention of (i) any investment
restrictions set forth-in the 1940 Act and the rules thereunder; (ii) specific
written instructions adopted by the Trustees or the Investment Adviser
<PAGE>
and communicated to the Sub-Adviser; or (iii) the investment objectives,
policies, and restrictions of the Portfolio as set forth in the Trust's
registration statement as amended from time to time, or (b) which would have the
effect of causing the Trust to fail to qualify or to cease to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as
amended, or any succeeding statute.
(c) The Sub-Adviser agrees with respect to the services provided to
the Portfolio that it:
(i) will conform with all applicable rules and regulations of
the Securities and Exchange Commission ("SEC");
[_]
(ii) will not purchase shares of the Portfolio for its own
investment account; and
[_]
(iii) will immediately notify the Trust and the Investment
Adviser of the occurrence of any event which would
disqualify the Sub-Adviser from serving as investment
adviser of an investment company.
[_]
7. Control by Trust's Board of Trustees. Any recommendations concerning
------------------------------------
the Portfolio's investment program proposed by the Sub-Adviser to the Portfolio
and to the Investment Adviser pursuant to this Agreement, as well as any other'
activities undertaken by the Sub-Adviser on behalf of the Portfolio pursuant
hereto, shall at all times be subject to any applicable directives of the Board
of Trustees of the Trust.
8. Services Not Exclusive. The Sub-Adviser's services hereunder are not
----------------------
deemed to be exclusive, and the Sub-Adviser shall be free to render similar
services to others so long as its services under this Agreement are not impaired
thereby.
9. Books and Records. In compliance with the requirements of Rule 3la-3
-----------------
of the Rules, the Sub-Adviser hereby agrees that all records which it maintains
for the Trust are the property of the Trust and further agrees to surrender
promptly to the Trust and the Investment Adviser any such records upon the
request of the Trust or the Investment Adviser. The Sub-Adviser further agrees
to preserve for the periods prescribed by Rule 3la-2, the records required to be
maintained by the Sub-Adviser hereunder pursuant to Rule 3la-1 of the Rules.
10. Expenses. During the term of this Agreement, the Sub-Adviser will
--------
bear all expenses in connection with the performance of its services under this
Agreement. The Sub-Adviser shall not bear certain other expenses related to the
operation of the Trust including, but not limited to: taxes levied against the
Trust, the Portfolio or the Investment Adviser; interest; brokerage fees and
commissions in connection with the purchase and sale of portfolio securities for
the Portfolio; and any extraordinary expense items.
<PAGE>
11. Compensation. (a) For the services provided and the expenses
------------
assumed pursuant to this Agreement, the Investment Adviser shall pay the Sub-
Adviser, and the Sub-Adviser agrees to accept as full compensation therefor, a
sub-advisory fee payable as soon as practicable after the last day of each
month, calculated using an annual rate of .33% (the "Annual Rate").
(b) The monthly sub-advisory fee to be paid by the Investment Adviser
to the Sub-Adviser shall be determined as of the close of business on the last
business day of each month by multiplying one-twelfth of the Annual Rate by the
Average Portfolio Net Assets (hereinafter defined) calculated monthly as of such
day.
(c) For the purposes of this paragraph, the "Average Portfolio Net
Assets" shall be calculated monthly as of the last business day of each month
and shall mean the sum of the net assets of the Portfolio calculated each
business day during the month divided by the number of business days in the
month (such net assets to be determined as of the close of business each
business day and computed in the manner set forth in the Declaration of Trust of
the Trust).
(d) The Sub-Adviser acknowledges that the Investment Adviser has
agreed with the Trust to reduce the Investment Adviser's compensation for any
fiscal year by the amount, if any, by which the expenses of the Portfolio for
such fiscal year exceed the most restrictive state Blue Sky expense limitation
in effect from time to time, to the extent required by such limitation. The Sub-
Adviser agrees that its compensation for any fiscal year shall be reduced by the
same proportion as the Investment Adviser's compensation is reduced as described
in the preceding sentence, for any fiscal year in which the expenses of the
Portfolio for such fiscal year exceed the most restrictive state Blue Sky
expense limitation in effect from time to time. The Sub-Adviser shall refund to
the Investment Adviser the amount of any reduction of the Sub-Adviser's
compensation pursuant to this paragraph 11(d) as promptly as practicable after
the end of such fiscal year, provided that the Sub-Adviser will not be required
to pay the Investment Adviser an amount greater than the fee paid to the Sub-
Adviser in respect of such year pursuant to this Agreement. As used in this
paragraph 11(d), "expenses" shall mean those expenses included in the most
restrictive state Blue Sky expense limitation, having the broadest specification
in such state's Blue Sky statute, and "expense limitation" means a limit on the
maximum annual expenses which may be incurred by an investment company
determined by multiplying a fixed percentage by the average, or by multiplying
more than one such percentage by different specified amounts of the average, of
the values of the investment company's net assets for a fiscal year. The words
"most restrictive state Blue Sky expense limitation" shall be construed to
result in the largest reduction of the Sub-Adviser's compensation for any fiscal
year of the Portfolio; provided, however, that nothing in this Agreement shall
require the Sub-Adviser to reduce its fees if the Investment Adviser is not
required by an applicable statute or regulation referred to above in this
paragraph 11(d) to reduce its fees.
12. Limitation on Liability. (a) The Sub-Adviser will not be liable for
-----------------------
any error or judgment or mistake of law or for any loss suffered by the
Investment Adviser, the Portfolio or the Trust in connection with the matters to
which this Agreement relates, except that the Sub-Adviser shall be liable to the
Investment Adviser, the Portfolio or the Trust for a loss resulting
<PAGE>
from a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the Sub-Adviser's part in the performance of its duties or
reckless disregard by it of its obligations or duties under this Agreement.
(b) The Sub-Adviser shall indemnify and hold harmless the Trust, the
Portfolio, and the Investment Adviser from any loss, cost, expense or damage
resulting from the failure of the descriptive information furnished by the Sub-
Adviser to be accurate in all material respects at the time provided or the
failure of the Sub-Advisor to comply in all material respects with the
investment objectives and policies and restrictions as set forth in the Trust's
registration statements as amended from time to time.
13. Duration, Amendment, and Termination. (a) This Agreement shall become
------------------------------------
effective on the date first written above and shall remain in force for a period
of two (2) years from such date, and from year to year thereafter but only so
long as such continuance is specifically approved at least annually by the
Investment Adviser, and (i) by the vote of a majority of the Trustees who are
not interested persons of the Investment Adviser or the Sub-Adviser, cast in
person at a meeting called for the purpose of voting on such approval and by a
vote of the Trustees or (ii) by the vote of a majority of the outstanding voting
securities of the Portfolio. The aforesaid provision that this Agreement may be
continued "annually" shall be construed in a manner consistent with the 1940 Act
and the rules and regulations thereunder.
(b) This Agreement may be amended at any time, but only by written
agreement between the Investment Adviser and the Sub-Adviser, which amendment is
subject to the approval of the Trustees and the shareholders of the Trust in the
manner required by the 1940 Act, subject to any applicable exemptive order of
the SEC modifying the provisions of the 1940 Act with respect to approval of
amendments of this Agreement.
(c) This Agreement: (i) may at any time be terminated without the
payment of any penalty either by vote of the Trustees or by vote of a majority
of the outstanding voting securities of the Portfolio, on sixty (60) days'
written notice to the Sub-Adviser, (ii) shall immediately terminate in the event
of its assignment; and (iii) may be terminated by the Sub-Adviser on sixty (60)
days' written notice to the Investment Adviser and by the Investment Adviser on
sixty (60) days' written notice to the Sub-Adviser.
(d) As used in this Section 12, the terms "assignment," "interested
person," and "vote of a majority of the outstanding voting securities" shall
have the meanings set forth in the 1940 Act and the rules and regulations
thereunder, subject to any applicable orders of exemption issued by the SEC.
(e) All notices, requests, demands or other communications hereunder
shall be in writing and shall be deemed given, if delivered personally, on the
day delivered or if mailed by certified or registered mail, postage prepaid,
return receipt requested, three (3) days after placement in the United States
mail, to the addresses below:
<PAGE>
If to Investment Adviser: First Tennessee Bank National Association
c/o C. Douglas Kelso, III
Senior Vice President
4385 Poplar Avenue, Suite E-1
Memphis, Tennessee 38117
[_]
With a copy to: Lee Welch, Esq.
Martin, Tate, Morrow & Marston, P.C.
22 North Front Street, ll th Floor
Memphis, Tennessee 38103
If to Sub-Adviser: First Tennessee Investment Management, Inc.
c/o: William V. Pruett
Oak Court Center
4383 Poplar Avenue
Memphis, TN 38117
If to Trust: The Masters Group of Mutual Funds
c/o Stuart E. Fross, Esq. Secretary
82 Devonshire Street F5H
Boston, Massachusetts 02119
With a copy to: Daniel B. Hatzenbuehler, Esq.
Heiskell, Donelson, Bearman, Adams, Williams
& Kirsch
165 Madison Avenue
Memphis, Tennessee 38103
14. Shareholder Liability. Sub-Adviser is hereby expressly put on
----------------------
notice of the limitation of shareholder liability as set forth in the
Declaration of Trust of the Trust and agrees that obligations assumed by the
Portfolio or the Trust, if any, shall be limited in all cases to the Portfolio
and its assets. Sub-Adviser agrees that it shall not seek satisfaction of any
such obligation from the shareholders or any individual shareholder of the
Portfolio or the Trust, nor from the Trustees or any individual Trustee of the
Trust.
15. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any provisions
hereof or otherwise affect their construction or effect. If any provision of
this Agreement shall be held or made invalid by a court decision, statute, rule
or otherwise, the remainder of this agreement shall not be affected thereby.
This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors. To the extent that state law
has not been preempted by the provisions of any law of the United States
heretofore or hereafter enacted, as the same may be amended from time to time,
this Agreement shall be administered, construed, and enforced according to the
laws of the State of Tennessee without giving effect to the choice of laws
provisions thereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers designated below as of the day and
year first above-written.
FIRST TENNESSEE BANK NATIONAL
ASSOCIATION
BY: /s/ C. Douglas Kelso
---------------------------
Senior Vice President
FIRST TENNESSEE INVESTMENT MANAGEMENT, INC.
By: /s/ William V. Pruett
---------------------------
<PAGE>
SUB-ADVISORY AGREEMENT
----------------------
AGREEMENT made this 4/th/ day of May, 1993, between FIRST TENNESSEE
BANKNATIONAL ASSOCIATION, a national banking association (herein called the
"Investment Adviser") and FIRST TENNESSEE INVESTMENT MANAGEMENT, INC., a
Tennessee corporation (herein called the "Sub-Adviser").
WHEREAS, the Investment Adviser is the investment adviser to The Masters
Group of Mutual Funds (herein called the "Trust"), an open-end, diversified,
management investment company of the "series" type, registered under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Investment Adviser wishes to retain the Sub-Adviser to provide
investment advisory services in connection with the Trust's TOTAL RETURN FIXED
INCOME PORTFOLIO (herein called the "Portfolio") a series of the Trust; and
WHEREAS, the Sub-Adviser is willing to provide such services to the
Investment Adviser upon the conditions and for the compensation set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, it is agreed between
the parties hereto as follows:
1. Appointment. (a) The Investment Adviser hereby appoints the Sub-Adviser
-----------
its sub-adviser with respect to the Portfolio, as permitted in the Investment
Advisory and Management Agreement between the Investment Adviser and the Trust
dated May 3, 1993 (such Agreement or the most recent successor advisor agreement
between such parties is herein called the "Advisory Agreement"). The Sub-
Adviser accepts such appointment and agrees to use its best professional
judgement to make timely investment decisions for the Portfolio with respect to
the investments of the Portfolio in accordance with the provisions of this
Agreement for the compensation herein provided.
(b) The Sub-Adviser shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Trust or the Investment Adviser in any way or otherwise be deemed an agent of
the Trust or the Investment Adviser.
2. Delivery of Documents. (a) The Investment Adviser shall provide to the
---------------------
Sub-Adviser copies of the Trust's most recent prospectus and statement of
additional information (as each may be amended or supplemented from time to
time) which relate to any class of shares representing interests in the
Portfolio (each such prospectus and statement of additional information as
presently in effect, and as they shall from time to time be amended and
<PAGE>
supplemented, is herein respectively called a "Prospectus" and a "Statement of
Additional Information").
(b) The Sub-Adviser will make available and provide to the Investment
Adviser such financial, accounting, and statistical information related to its
duties and responsibilities hereunder as is necessary for the preparation of
registration statements, reports, and other documents required by federal and
state securities laws and such other information as the Trust's Board of
Trustees (herein called the "Trustees") or the Investment Adviser may reasonably
request for use by the Trust and its distributor for the underwriting and
distribution of the Portfolio shares.
3. Sub-Advisory Services to the Portfolio. Subject to the supervision of
--------------------------------------
the Investment Adviser, the Sub-Adviser will supervise the day-to-day operations
of the Portfolio and perform the following services: (i) provide investment
research and credit analysis concerning the Portfolio's investments, (ii)
conduct a continual program of investment of the Portfolio's assets, (iii) place
orders in accordance with paragraphs 4 to 7 hereof for all purchases and sales
of the investments made for the Portfolio, and (iv) maintain the books and
records required in connection with its duties hereunder. In addition, the Sub-
Adviser will keep the Investment Adviser informed of developments materially
affecting the Trust. The Sub-Adviser will communicate to the Investment Adviser
on each day that a purchase or sale of a security is effected for the Portfolio
(i) the name of the issuer, (ii) the amount of the purchase or sale, (iii) the
name of the broker, dealer, bank or other person (herein called "Brokers), if
any, through which the purchase or sale will be effected, (iv) the CUSIP number
of the security, if any, (v) the Portfolio to which such purchase or sale
pertains, and (vi) such other information as the Investment Adviser may
reasonably require for purposes of fulfilling its obligations to the Trust under
the Advisory Agreement. The Sub-Adviser will render to the Trustees such
periodic and special reports as the Investment Adviser or the Trustees may
reasonably request, including, if applicable, regular reports of the total
brokerage business placed by it and the manner in which the allocation of such
brokerage business has been accomplished. The Sub-Adviser will provide the
services rendered by it hereunder in accordance with the Portfolio's investment
objectives, policies, and restrictions as stated in its current Prospectus and
Statement of Additional Information. Except for instructions or advice given to
the Sub-Adviser by the Investment Adviser, the Investment Adviser shall not be
responsible or liable for the investment merits of any decision by the Sub-
Adviser to purchase, hold or sell a security for the Portfolio.
4. Brokerage. The Sub-Adviser may place orders pursuant to its
---------
investment determinations for the Portfolio either directly with the issuer or
with any Brokers. In placing orders, the Sub-Adviser will consider the
experience and skill of the firm's securities traders as well as the firm's
financial responsibility and administrative efficiency. The Sub-Adviser will
attempt to obtain the best price and the most favorable execution of its orders.
Consistent with these obligations, the Sub-Adviser may, subject to the approval
of the Trustees, select Brokers on the basis of the research, statistical, and
pricing services they provide to the Portfolio. A commission paid to such
Brokers may be higher than that which another qualified broker would have
charged for effecting the same transaction, provided that the Sub-Adviser
determines in good faith that such commission is reasonable in terms either of
the transaction or the overall
<PAGE>
responsibility of the Sub-Adviser to the Portfolio and its other clients and
that the total commissions paid by the Portfolio will be reasonable in relation
to the benefits to the Portfolio over the long term. In no instance will
Portfolio securities be purchased from or sold to the Trust's principal
underwriter, the investment Adviser, the Sub-Adviser, or any affiliate (as
defined in the 1940 Act) thereof, except to the extent permitted by SEC
exemptive order or by applicable law. The Investment Adviser agrees to provide
the Sub-Adviser a list of Brokers which are "affiliated persons" (as defined in
the 1940 Act) of the Trust and the Investment Adviser. The Sub-Adviser agrees to
furnish to the Investment Adviser and to the Trust a list of Brokers and
dealers, which are such "affiliated persons" of the Sub-Adviser. It is
understood that neither the Investment Adviser nor the Sub-Adviser has adopted a
formula for selection of Brokers for the execution of the Portfolio's investment
transactions.
5. Transaction Procedures. All investment transactions on behalf of the
----------------------
Portfolio will be consummated by payment to or delivery by the duly appointed
custodian for the Portfolio (the "Custodian"), or such depositories or agents
duly appointed by the Trustees and as may be designated by the Custodian in
writing, as custodian for the Portfolio, of all cash and/or securities due to or
from the Portfolio, and the Sub-Adviser shall not have possession or custody
thereof or any responsibility or liability with respect thereto. The Sub-
Adviser in effecting transactions on behalf of the Portfolio shall advise the
Custodian of all investment orders for the Portfolio placed by it with Brokers.
The Investment Adviser shall issue, or cause to be issued, to the custodian such
instructions as may be appropriate in connection with the settlement of any
transaction initiated by the Sub-Adviser. The Portfolio is responsible for all
custodial arrangements and the payment of all custodial charges and fees, and,
upon the giving of proper instructions to the Custodian, the Sub-Adviser shall
have no responsibility or liability with respect to custodial arrangements or
the acts, omissions or other conduct of the Custodian, except that it shall be
the responsibility of the Sub-Adviser to take appropriate action if the
Custodian fails properly to confirm, execution of the instructions to the Sub-
Adviser in a written form duly agreed upon by the Custodian and the Sub-Adviser.
6. Compliance with Laws; Confidentiality. (a) The Sub-Adviser agrees
---------------------------------------
that it will comply with all applicable rules and regulations of all federal and
state regulatory agencies having jurisdiction over the Sub-Adviser in
performance of its duties hereunder (herein called the "Rules"). The Sub-
Adviser will treat confidentially and as proprietary information of the Trust
all records and information relative to the Trust and prior, present or
potential shareholders, and will not use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Investment
Adviser and the Trust, which approval shall not be unreasonably withheld and may
not be withheld where the Sub-Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when required to divulge such
information by duly constituted authorities, or when so requested by the Trust.
(b) The Sub-Adviser is not authorized by the Trust or the Investment
Adviser to take any action, including the purchase or sale of securities for the
account of the Portfolio, (a) in contravention of (i) any investment
restrictions set forth-in the 1940 Act and the rules thereunder; (ii) specific
written instructions adopted by the Trustees or the Investment Adviser
<PAGE>
and communicated to the Sub-Adviser; or (iii) the investment objectives,
policies, and restrictions of the Portfolio as set forth in the Trust's
registration statement as amended from time to time, or (b) which would have the
effect of causing the Trust to fail to qualify or to cease to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as
amended, or any succeeding statute.
(c) The Sub-Adviser agrees with respect to the services provided to
the Portfolio that it:
(i) will conform with all applicable rules and regulations of
the Securities and Exchange Commission ("SEC");
[_]
[_] (ii) will not purchase shares of the Portfolio for its own
investment account; and
[_]
[_]
(iii) will immediately notify the Trust and the Investment
Adviser of the occurrence of any event which would
disqualify the Sub-Adviser from serving as investment
adviser of an investment company.
[_]
7. Control by Trust's Board of Trustees. Any recommendations concerning
------------------------------------
the Portfolio's investment program proposed by the Sub-Adviser to the Portfolio
and to the Investment Adviser pursuant to this Agreement, as well as any other'
activities undertaken by the Sub-Adviser on behalf of the Portfolio pursuant
hereto, shall at all times be subject to any applicable directives of the Board
of Trustees of the Trust.
8. Services Not Exclusive. The Sub-Adviser's services hereunder are not
----------------------
deemed to be exclusive, and the Sub-Adviser shall be free to render similar
services to others so long as its services under this Agreement are not impaired
thereby.
9. Books and Records. In compliance with the requirements of Rule 3la-3
-----------------
of the Rules, the Sub-Adviser hereby agrees that all records which it maintains
for the Trust are the property of the Trust and further agrees to surrender
promptly to the Trust and the Investment Adviser any such records upon the
request of the Trust or the Investment Adviser. The Sub-Adviser further agrees
to preserve for the periods prescribed by Rule 3la-2, the records required to be
maintained by the Sub-Adviser hereunder pursuant to Rule 3la-1 of the Rules.
10. Expenses. During the term of this Agreement, the Sub-Adviser will
--------
bear all expenses in connection with the performance of its services under this
Agreement. The Sub-Adviser shall not bear certain other expenses related to the
operation of the Trust including, but not limited to: taxes levied against the
Trust, the Portfolio or the Investment Adviser; interest;
<PAGE>
brokerage fees and commissions in connection with the purchase and sale of
portfolio securities for the Portfolio; and any extraordinary expense items.
11. Compensation. (a) For the services provided and the expenses
------------
assumed pursuant to this Agreement, the Investment Adviser shall pay the Sub-
Adviser, and the Sub-Adviser agrees to accept as full compensation therefor, a
sub-advisory fee payable as soon as practicable after the last day of each
month, calculated using an annual rate of .33% (the "Annual Rate").
(b) The monthly sub-advisory fee to be paid by the Investment Adviser
to the Sub-Adviser shall be determined as of the close of business on the last
business day of each month by multiplying one-twelfth of the Annual Rate by the
Average Portfolio Net Assets (hereinafter defined) calculated monthly as of such
day.
(c) For the purposes of this paragraph, the "Average Portfolio Net
Assets" shall be calculated monthly as of the last business day of each month
and shall mean the sum of the net assets of the Portfolio calculated each
business day during the month divided by the number of business days in the
month (such net assets to be determined as of the close of business each
business day and computed in the manner set forth in the Declaration of Trust of
the Trust).
(d) The Sub-Adviser acknowledges that the Investment Adviser has
agreed with the Trust to reduce the Investment Adviser's compensation for any
fiscal year by the amount, if any, by which the expenses of the Portfolio for
such fiscal year exceed the most restrictive state Blue Sky expense limitation
in effect from time to time, to the extent required by such limitation. The
Sub-Adviser agrees that its compensation for any fiscal year shall be reduced
by the same proportion as the Investment Adviser's compensation is reduced as
described in the preceding sentence, for any fiscal year in which the expenses
of the Portfolio for such fiscal year exceed the most restrictive state Blue
Sky expense limitation in effect from time to time. The Sub-Adviser shall
refund to the Investment Adviser the amount of any reduction of the Sub-
Adviser's compensation pursuant to this paragraph 11(d) as promptly as
practicable after the end of such fiscal year, provided that the Sub-Adviser
will not be required to pay the Investment Adviser an amount greater than the
fee paid to the Sub-Adviser in respect of such year pursuant to this Agreement.
As used in this paragraph 11(d), "expenses" shall mean those expenses included
in the most restrictive state Blue Sky expense limitation, having the broadest
specification in such state's Blue Sky statute, and "expense limitation" means
a limit on the maximum annual expenses which may be incurred by an investment
company determined by multiplying a fixed percentage by the average, or by
multiplying more than one such percentage by different specified amounts of the
average, of the values of the investment company's net assets for a fiscal
year. The words "most restrictive state Blue Sky expense limitation" shall be
construed to result in the largest reduction of the Sub-Adviser's compensation
for any fiscal year of the Portfolio; provided, however, that nothing in this
Agreement shall require the Sub-Adviser to reduce its fees if the Investment
Adviser is not required by an applicable statute or regulation referred to
above in this paragraph 11(d) to reduce its fees.
12. Limitation on Liability. (a) The Sub-Adviser will not be liable for
-----------------------
any error or judgment or mistake of law or for any loss suffered by the
Investment Adviser, the Portfolio
<PAGE>
or the Trust in connection with the matters to which this Agreement relates,
except that the Sub-Adviser shall be liable to the Investment Adviser, the
Portfolio or the Trust for a loss resulting from a breach of fiduciary duty
with respect to the receipt of compensation for services or a loss resulting
from willful misfeasance, bad faith or gross negligence on the Sub-Adviser's
part in the performance of its duties or reckless disregard by it of its
obligations or duties under this Agreement.
(b) The Sub-Adviser shall indemnify and hold harmless the Trust, the
Portfolio, and the Investment Adviser from any loss, cost, expense or damage
resulting from the failure of the descriptive information furnished by the Sub-
Adviser to be accurate in all material respects at the time provided or the
failure of the Sub-Advisor to comply in all material respects with the
investment objectives and policies and restrictions as set forth in the Trust's
registration statements as amended from time to time.
13. Duration, Amendment, and Termination. (a) This Agreement shall become
------------------------------------
effective on the date first written above and shall remain in force for a period
of two (2) years from such date, and from year to year thereafter but only so
long as such continuance is specifically approved at least annually by the
Investment Adviser, and (i) by the vote of a majority of the Trustees who are
not interested persons of the Investment Adviser or the Sub-Adviser, cast in
person at a meeting called for the purpose of voting on such approval and by a
vote of the Trustees or (ii) by the vote of a majority of the outstanding voting
securities of the Portfolio. The aforesaid provision that this Agreement may be
continued "annually" shall be construed in a manner consistent with the 1940 Act
and the rules and regulations thereunder.
(b) This Agreement may be amended at any time, but only by written
agreement between the Investment Adviser and the Sub-Adviser, which amendment is
subject to the approval of the Trustees and the shareholders of the Trust in the
manner required by the 1940 Act, subject to any applicable exemptive order of
the SEC modifying the provisions of the 1940 Act with respect to approval of
amendments of this Agreement.
(c) This Agreement: (i) may at any time be terminated without the
payment of any penalty either by vote of the Trustees or by vote of a majority
of the outstanding voting securities of the Portfolio, on sixty (60) days'
written notice to the Sub-Adviser, (ii) shall immediately terminate in the event
of its assignment; and (iii) may be terminated by the Sub-Adviser on sixty (60)
days' written notice to the Investment Adviser and by the Investment Adviser on
sixty (60) days' written notice to the Sub-Adviser.
(d) As used in this Section 12, the terms "assignment," "interested
person," and "vote of a majority of the outstanding voting securities" shall
have the meanings set forth in the 1940 Act and the rules and regulations
thereunder, subject to any applicable orders of exemption issued by the SEC.
(e) All notices, requests, demands or other communications hereunder
shall be in writing and shall be deemed given, if delivered personally, on the
day delivered or if mailed by
<PAGE>
certified or registered mail, postage prepaid, return receipt requested three
(3) days after placement in the United States mail, to the addresses below:
If to Investment Adviser: First Tennessee Bank National Association
c/o C. Douglas Kelso, III
Senior Vice President
4385 Poplar Avenue, Suite E-1
Memphis, Tennessee 38117
[_]
[_]
With a copy to: Lee Welch, Esq.
Martin, Tate, Morrow & Marston, P.C.
22 North Front Street, ll th Floor
Memphis, Tennessee 38103
If to Sub-Adviser: First Tennessee Investment
Management, Inc.
c/o: William V. Pruett
Oak Court Center
4383 Poplar Avenue
Memphis, TN 38117
If to Trust: The Masters Group of Mutual Funds
c/o Stuart E. Fross, Esq. Secretary
82 Devonshire Street F5H
Boston, Massachusetts 02119
With a copy to: Daniel B. Hatzenbuehler, Esq.
Heiskell, Donelson, Bearman, Adams, Williams &
Kirsch
165 Madison Avenue
Memphis, Tennessee 38103
14. Shareholder Liability. Sub-Adviser is hereby expressly put on notice
----------------------
of the limitation of shareholder liability as set forth in the Declaration of
Trust of the Trust and agrees that obligations assumed by the Portfolio or the
Trust, if any, shall be limited in all cases to the Portfolio and its assets.
Sub-Adviser agrees that it shall not seek satisfaction of any such obligation
from the shareholders or any individual shareholder of the Portfolio or the
Trust, nor from the Trustees or any individual Trustee of the Trust.
15. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any provisions
hereof or otherwise affect their construction or effect. If any provision of
this Agreement shall be held or made invalid by a court decision, statute, rule
or otherwise, the remainder of this agreement shall not be affected thereby.
This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors. To the extent that state law
has not been preempted by the provisions of any law of the United States
heretofore or hereafter enacted, as
<PAGE>
the same may be amended from time to time, this Agreement shall be administered,
construed, and enforced according to the laws of the State of Tennessee without
giving effect to the choice of laws provisions thereof.
[_]
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers designated below as of the day and
year first above-written.
FIRST TENNESSEE BANK NATIONAL
ASSOCIATION DOING BUSINESS AS
GARLAND CAPITAL MANAGEMENT
BY: /s/ C. Douglas Kelso
--------------------------
Senior Vice President
FIRST TENNESSEE INVESTMENT MANAGEMENT, INC.
By: /s/ William V. Pruett
--------------------------
<PAGE>
EXHIBIT 5(F)
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
--------------------------------------------
THIS INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT is made as of this 29th
day of August, 1997, between FIRST FUNDS, a business trust organized under the
laws of the Commonwealth of Massachusetts (the "Trust"), on behalf of its
CAPITAL APPRECIATION PORTFOLIO (the "Portfolio") and First Tennessee Bank
National Association ("Bank").
WHEREAS, the Trust has been organized to operate as an investment company
registered under the Investment Company Act of 1940, as amended, (the "1940
Act") with multiple series of shares (hereinafter referred to as Classes) having
varying preferences, limitations and relative rights, and to invest and reinvest
the assets of the Portfolio in securities pursuant to investment objectives and
policies for the Portfolio; and
WHEREAS, the Trust, under separate agreement (the "Investment Advisory and
Management Agreement"), has engaged the services of Investment Advisers, Inc. as
co-investment adviser to the Portfolio to provide day-to-day investment
management of the Portfolio's assets and securities, to conduct a continuous
program of investment of the Portfolio's assets, and to provide other advisory
services as outlined in the Investment Advisory and Management Agreement, a form
of which is attached hereto as Exhibit A, (IAI hereinafter being referred to as
"Investment Adviser" and Bank hereinafter being referred to as "Co-Adviser");
and
WHEREAS, the Trust desires to obtain the services, information, advice,
assistance and facilities of an investment adviser and to have an investment
adviser provide or perform for it various investment advisory, monitoring,
statistical, research, investment adviser selection and counseling and other
services with respect to the Portfolio as set forth more fully herein, but
exclusive of day-to-day investment management services;
NOW, THEREFORE, the Trust, on behalf of the Portfolio, and Co-Adviser
agree as follows:
1. Employment of the Co-Adviser. The Trust hereby employs the Co-Adviser
----------------------------
to provide investment advisory services in the manner set forth in Section 2A of
this Agreement, subject to the direction of the Trustees, for the period, in the
manner, and on the terms hereinafter set forth. The Co-Adviser hereby accepts
such employment and agrees during such period to render the services and to
assume the obligations herein set forth. The Co-Adviser shall for all purposes
herein be deemed to be an independent contractor and shall, except as expressly
provided or authorized (whether herein or otherwise), have no authority to act
or represent the Trust in any way or otherwise be deemed an agent of the Trust.
2. Obligations of, and Services to be Provided by, the Co-Adviser. The Co-
----------------------------------------------- --------------
Adviser undertakes to provide the services hereinafter set forth and to assume
the following obligations:
A. Investment Advisory Services.
(a) The Co-Adviser will provide the Trust with research, analyses and
recommendations with respect to the investment objective,
guidelines for and risk characteristics of the Portfolio.
1
<PAGE>
(b) The Co-Adviser will monitor the investment and management
activities of the Investment Adviser relative to the Portfolio,
including, but not limited to, purchase and sale transactions
following settlement thereof, and report to the Trustees on
compliance by the Investment Adviser with the investment
objective and policies of the Portfolio, any directions which the
Trustees and officers of the Trust may issue to the Investment
Adviser from time to time and the requirements of the 1940 Act
and all applicable rules and regulations of the Securities and
Exchange Commission ("SEC") with respect to the Portfolio. In
performing its monitoring services under this sub-section,the Co-
Adviser may rely, among other things, upon reports, data and
information furnished to it by the Investment Adviser, custodian
or other service providers to the Portfolio.
(c) The Co-Adviser will make recommendations with respect to the
engagement and termination of investment advisers and sub-
advisers for the Portfolio and provide research, analyses and
recommendations on qualified candidates to perform the investment
advisory and, if applicable, sub-advisory duties and
responsibilities for the day-to-day management of a continuous
investment program for the Portfolio and the related functions to
sustain that role.
(d) The Co-Adviser will perform or obtain research and analysis on
the investment performance of the Investment Adviser, or other
investment advisers or sub-advisers (collectively, the
"Advisers") with respect to the Portfolio and comparisons of its
absolute and relative performance to relevant indices and
investment universes.
(e) The Co-Adviser will determine and recommend allocation of assets
between multiple active Advisers at such time that the assets of
the Portfolio reach such size that multiple active Advisers are
warranted.
(f) The Co-Adviser may make presentations or reports on behalf of the
Investment Adviser, or other Advisers, at the request of the
Investment Adviser or such other Advisers in meetings and other
settings where the presence of a representative of any such
investment adviser is needed or requested but is unable to
attend. Such meetings and settings may include, but are not
limited to, (i) Board of Trustee meetings, (ii) meetings with
broker-dealers, and (iii) meetings with other channels of
distribution. Such meetings shall not include regulatory
meetings.
(g) The Co-Adviser will coordinate its activities with the Investment
Adviser and the activities of the Investment Adviser or other
Advisers, with the Portfolio's transfer agent, administrator,
custodian and independent accountants.
B. Provision of Information Necessary for Preparation of Securities
Registration Statements, Amendments and Other Materials.
The Co-Adviser will make available and provide such financial,
accounting, statistical and other information related to its duties
and responsibilities hereunder as required by the Trustees and
necessary for the preparation of registration statements, reports and
other documents required by federal and state securities laws and such
other information
2
<PAGE>
as the Trustees may reasonably request for use by the Trust and its
distributor for the underwriting and distribution of the Portfolio's
shares.
C. Other Obligations and Services.
The Co-Adviser agrees to make available its officers and employees to
the Trustees and officers of the Trust for consultation and
discussions regarding the activities of the Investment Adviser and the
Co-Adviser's duties hereunder and their activities with respect to the
Portfolio.
3. Covenants by Co-Adviser. The Co-Adviser covenants with the Trust
-----------------------
that, with respect to the services provided to the Portfolio, it:
(a) will comply with all applicable provisions of the 1940 Act and
applicable rules and regulations of the Securities and Exchange
Commission ("SEC") and will in addition conduct its activities
under this Agreement in accordance with the Portfolio's current
registration statement and applicable regulations of the Office of
the Comptroller of the Currency pertaining to the investment
advisory activities of national banks which are applicable to the
Co-Adviser;
(b) will not make loans to any person for the purpose of purchasing or
carrying Trust or Portfolio shares, or make loans to the Trust or
the Portfolio;
(c) will not purchase shares of the Trust or the Portfolio for its own
investment account;
(d) will maintain all books and records with respect to its duties set
forth herein, and furnish the Trustees such periodic and special
reports as the Trustees may request with respect to the Portfolio;
(e) will treat confidentially and as proprietary information of the
Trust all records and other information relative to the Trust and
the Portfolio and prior, present or potential shareholders (other
than any information which Co-Adviser may have obtained about
shareholders from other business relationships with such
shareholders), and will not use such records and information for
any purpose other than performance of its responsibilities and
duties hereunder (except after prior notification to and approval
in writing by the Trust, which approval shall not be unreasonably
withheld and may not be withheld and will be deemed granted where
the Co-Adviser may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such
information by duly constituted authorities, when so requested by
the Trust or when otherwise required or permitted by law);
(f) will, to the best of its knowledge and ability, immediately notify
the Trust of the occurrence of any event which would disqualify
Co-Adviser or the Investment Adviser from serving as investment
adviser of an investment company; and
(g) will determine that all information furnished to the Trust by the
Co-Adviser pursuant to this Agreement is accurate in all material
respects.
3
<PAGE>
4. Expenses of the Portfolio. The Portfolio or Trust will pay, or will
-------------------------
enter into arrangements that require third parties to pay, all expenses other
than those expressly assumed by the Co-Adviser herein, which expenses payable by
the Portfolio or Trust shall include:
(a) Expenses of all audits by independent public accountants;
(b) Expenses of Investment Adviser, transfer agent, registrar,
dividend disbursing agent and shareholder recordkeeping services;
(c) Expenses of custodial services including recordkeeping services
provided by the custodian;
(d) Expenses of obtaining quotations for calculating the value of the
Portfolio's net assets;
(e) Salaries and other compensation of any of its executive officers
or employees, if any, who are not officers, directors,
stockholders or employees of the Investment Adviser, the Co-
Adviser, the Administrator or the Distributor;
(f) Taxes levied against the Portfolio;
(g) Brokerage fees and commissions in connection with the purchase and
sale of portfolio securities for the Portfolio;
(h) Costs, including the interest expense, of borrowing money;
(i) Costs and/or fees incident to Trustees and shareholder meetings of
the Trust and the Portfolio, the preparation and mailings of
prospectuses and reports of the Portfolio to its existing
shareholders, the filing of reports with regulatory bodies, the
maintenance of the Portfolio's legal existence, and the
registration of shares with federal and state securities
authorities;
(j) Legal fees, including the legal fees related to the registration
and continued qualification of the Portfolio's shares for sale;
(k) Costs of printing any share certificates representing shares of
the Portfolio;
(l) Fees and expenses of Trustees who are not affiliated persons, as
defined in the 1940 Act, of the Co-Adviser, the Investment
Adviser, the Distributor or any of their affiliates; and
(m) Its pro rata portion of the fidelity bond required by section
17(g) of the 1940 Act, or of other insurance premiums.
5. Activities and Affiliates of the Co-Adviser. The Trustees acknowledge that
-------------------------------------------
the Co-Adviser , or one or more of its affiliates, may have investment
responsibilities or render investment advice to or perform other investment
advisory services for other individuals or entities and that the Co-Adviser ,
its affiliates or any of its or their directors, officers, agents or employees
may buy, sell or trade in any securities for its or their respective accounts
(such individuals, entities and accounts hereinafter referred to as "Affiliated
Accounts"). Subject to the provisions of paragraph 2 hereof, the Trustees agree
that the
4
<PAGE>
Co-Adviser or its affiliates may give advice or exercise investment
responsibility and take such other action with respect to other Affiliated
Accounts which may differ from the advice given or the timing or nature of
action taken with respect to the Portfolio, provided that the Co-Adviser acts in
good faith and in accordance with applicable law or as permitted by an exemption
order issued by the SEC, and provided further, that, as applicable to the
Portfolio, it is the Co-Adviser's policy to allocate within its reasonable
discretion, investment opportunities to the Portfolio over a period of time on a
fair and equitable basis relative to the Affiliated Accounts, taking into
account the investment objectives and policies of the Portfolio and any specific
investment restrictions applicable thereto. The Trust acknowledges that one or
more of the Affiliated Accounts may at any time hold, acquire, increase,
decrease, dispose of or otherwise deal with positions in investments in which
the Portfolio may have an interest from time to time, whether in transactions
which involve the Portfolio or otherwise. The Co-Adviser shall not have any
obligation to acquire for the Portfolio a position in any investment which any
Affiliated Account may acquire, and the Portfolio shall have no first refusal,
coinvestment or other rights in respect of any investment, either for the
Portfolio or otherwise.
6. Compensation of the Co-Adviser. (a) For all services provided to the
------------------------------
Portfolio pursuant to this Agreement, the Trust shall pay the Co-Adviser, and
the Co-Adviser agrees to accept as full compensation therefor, an investment
advisory fee, payable as soon as practicable after the last day of each month,
calculated using an annual rate of 0.15% of the average daily net assets of the
Portfolio (the "Annual Rate"). The monthly investment advisory fee to be paid
by the Trust to the Co-Adviser shall be determined as of the close of business
on the last business day of each month by multiplying one-twelfth of the Annual
Rate by the Average Portfolio Net Assets (hereinafter defined), calculated
monthly as of such day.
(b) For purposes of this paragraph 6, the "Average Portfolio Net Assets"
shall be calculated monthly as of the last business day of each month and shall
mean the sum of the net assets of the Portfolio calculated each business day
during the month divided by the number of business days in the month (such net
assets to be determined as of the close of business each business day and
computed in the manner set forth in the Declaration of Trust of the Trust) .
7. Proxies. The Trustees will vote all proxies solicited by or with
-------
respect to the issuers of securities in which assets of the Portfolio may be
invested from time to time, unless the Trustees delegate such right to the
Investment Adviser.
8. Liabilities of the Co-Adviser.
-----------------------------
(a) The Co-Adviser will not be liable for any loss suffered by the
Portfolio or the Trust as the result of any error of judgment or
mistake of law in connection with its performance of this
Agreement; provided, however, that the Co-Adviser shall be liable
-------- -------
to the Portfolio and the Trust for any loss resulting from (i) a
breach of fiduciary duty with respect to the receipt of
compensation for services; (ii) willful misfeasance, bad faith or
gross negligence in, or reckless disregard by the Co-Adviser of,
the performance of its duties and obligations under this
Agreement; or (iii) any material breach of any of its covenants
contained in this Agreement.
(b) No provision of this Agreement shall be construed to protect any
Trustee or officer of the Trust, or the Co-Adviser, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
5
<PAGE>
9. Renewal, Amendment and Termination.
----------------------------------
(a) This Agreement shall become effective on the date first
written above and shall remain in force for a period of two
(2) years from such date and from year to year thereafter but
only so long as such continuance is specifically approved at
least annually (i) by the vote of a majority of the Trustees
who are not interested persons of the Portfolio, the
Investment Adviser or the Co-Adviser, cast in person at a
meeting called for the purpose of voting on such approval and
by a vote of the Board of Trustees or (ii) by the vote of a
majority of the outstanding voting securities of the
Portfolio. The aforesaid provision that this Agreement may be
continued "annually" shall be construed in a manner
consistent with the 1940 Act and the rules and regulations
thereunder.
(b) This Agreement may be amended at any time, but only by
written agreement between the Trust and the Co-Adviser, which
amendment is subject to the approval of the Trustees and the
shareholders of the Trust in the manner required by the 1940
Act, subject to any applicable exemption order of the SEC
modifying the provisions of the 1940 Act with respect to
approval of amendments to this Agreement.
(c) This Agreement:
(i) may at any time be terminated without the payment of
any penalty either by vote of the Trustees or by vote
of a majority of the outstanding voting securities of
the Portfolio, on sixty (60) days' written notice to
the Co-Adviser;
(ii) shall immediately terminate in the event of its
assignment; and
(iii) may be terminated by the Co-Adviser on sixty (60)
days' written notice to the Trust.
(d) As used in this Section 9, the terms "assignment",
"interested person" and "vote of a majority of the
outstanding voting securities" shall have the meanings set
forth in the 1940 Act and the rules and regulations
thereunder, subject to any applicable orders of exemption
issued by the SEC.
10. Books and Records.
-----------------
(a) The Trustees shall provide to the Co-Adviser copies of the
Trust's most recent prospectus and statements of additional
information (as each may be amdended or supplemented from
time to time) which relate to any class of shares
representing inrterests in the Portfolio.
(b) In compliance with the requirements of Rule 3la-3 of the
rules promulgated under the 1940 Act ("Rules"), the Co-
Adviser hereby agrees that all records which it maintains for
the Trust are the property of the Trust and further agrees to
surrender promptly to the Trust any such records upon the
Trust's request. The Co-Adviser further agrees to preserve
for the periods prescribed by Rule 3la-2, the records
required to be maintained by the Co-Adviser hereunder
pursuant to Rule 3la-1 of the Rules.
6
<PAGE>
11. Notices. All notices, requests, demands or other communications hereunder
-------
shall be in writing and shall be deemed given, if delivered personally, on the
day delivered or if mailed, by certified or registered mail, postage prepaid,
return receipt requested, three (3) days after placement in the United States
mail, to the addresses below:
If to Trust: First Funds
c/o James V. Hyatt, Esq.
ALPS Mutual Fund Services, Inc.
370 17th Street, Suite 2700
Denver, Colorado 80202
With a copy to: Charles T. Tuggle, Jr., Esq.
Baker, Donelson, Bearman, Caldwell, P.C.
165 Madison Avenue, 21st Floor
Memphis, TN 38103
If to Co-Adviser: C. Douglas Kelso, III
c/o: First Tennessee Bank National Association
4990 Poplar Avenue, Third Floor
Memphis, TN 38117
With a copy to: Adella Heard, Esq.
First Tennessee Bank National Corporation
165 Madison Avenue, Third Floor
Memphis, TN 38103
12. Severability. If any provision of this Agreement shall be held or made
------------
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
13. Limitation on Liability. Co-Adviser is hereby expressly put on notice of
-----------------------
the limitation of shareholder liability as set forth in the Declaration of Trust
and agrees that obligations assumed by the Portfolio pursuant to this Agreement
shall be limited in all cases to the Portfolio and its assets. Co-Adviser
agrees that it shall not seek satisfaction of any such obligation from the
shareholders or any individual shareholder of the Portfolio, nor from the
Trustees or any individual Trustee of the Portfolio.
7
<PAGE>
14. Governing Law. To the extent that state law has not been preempted by the
-------------
provisions of any law of the United States heretofore or hereafter enacted, as
the same may be amended from time to time, this Agreement shall be administered,
construed and enforced according to the laws of the State of Tennessee without
giving effect to the choice of laws provisions thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as of the day and year first written above.
FIRST FUNDS
By: ______________________________
Name: James V. Hyatt
Title: Secretary
FIRST TENNESSEE BANK NATIONAL ASSOCIATION
By: ______________________________
Name: C. Douglas Kelso, III
Title: Senior Vice President
8
<PAGE>
EXHIBIT A
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
--------------------------------------------
THIS INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT is made as of this 28th
day of August, 1997, between FIRST FUNDS, a business trust organized under the
laws of the Commonwealth of Massachusetts (the "Trust"), on behalf of its
CAPITAL APPRECIATION PORTFOLIO (the "Portfolio") and Investment Advisers, Inc.,
a corporation organized under the laws of the State of Delaware ("IAI ").
WHEREAS, the Trust has been organized to operate as an investment company
registered under the Investment Company Act of 1940, as amended, (the "1940
Act") with multiple series of shares (hereinafter referred to as Classes) having
varying preferences, limitations and relative rights, and to invest and reinvest
the assets of the Portfolio in securities pursuant to investment objectives and
policies for the Portfolio;
WHEREAS, the Trust, under separate agreement has engaged the services of
First Tennessee Bank National Association ("Bank") as a co-investment adviser to
provide or perform various investment advisory, monitoring, statistical,
research, portfolio investment adviser selection, and other services with
respect to the Portfolio as set forth more fully in the Bank's Investment
Advisory and Management Agreement, a form of which is attached hereto as Exhibit
A, (Bank hereinafter being referred to as "Co-Adviser" and IAI hereinafter being
referred to as "Investment Adviser"); and
WHEREAS, the Trust desires to obtain the day-to-day portfolio investment
management services, information, advice, assistance and facilities of the
Investment Adviser with respect to the Portfolio as set forth more fully herein;
NOW, THEREFORE, Trust, on behalf of the Portfolio, and Investment Adviser
agree as follows:
1. Employment of the Investment Adviser. The Trust hereby employs the
------------------------------------
Investment Adviser to provide investment advice and to manage the investment and
reinvestment of the Portfolio's assets in the manner set forth in Section 2A. of
this Agreement, subject to the direction of the Trustees, for the period, in the
manner, and on the terms hereinafter set forth. The Investment Adviser hereby
accepts such employment and agrees during such period to render the services and
to assume the obligations herein set forth. The Investment Adviser shall for
all purposes herein be deemed to be an independent contractor and shall, except
as expressly provided or authorized (whether herein or otherwise), have no
authority to act or represent the Trust in any way or otherwise be deemed an
agent of the Trust.
2. Obligation of, and Services to be Provided by, the Investment Adviser.
---------------------------------------------------------------------
The Investment Adviser undertakes to provide the services hereinafter set forth
and to assume the following obligations:
A. Investment Advisory Services.
(a) The Investment Adviser shall have overall responsibility for the
day-to-day management and investment of the Portfolio's assets and
securities portfolio subject to and in accordance with the
investment objectives and policies of the Portfolio, and
9
<PAGE>
any directions which the Trustees and officers of the Trust may
issue to the Investment Adviser from time to time, and shall
perform the following services: (i) provide or cause to be
provided investment research and credit analysis concerning the
Portfolio's investments, (ii) conduct or cause to be conducted a
continual program of investment of the Portfolio's assets, (iii)
place or cause to be placed orders for all purchases and sales of
the investments made for the Portfolio, and (iv) maintain or cause
to be maintained the books and records required in connection with
its duties hereunder.
(b) The Investment Adviser shall advise the Trustees of the Trust
regarding overall investment programs and strategies for the
Portfolio, revision of such programs as necessary, and shall
monitor and report periodically to the Trustees concerning the
implementation of such programs and strategies.
(c) The Investment Adviser, with the prior approval of the Trustees
(and the shareholders to the extent required by applicable law) as
to particular appointments, shall be permitted to (i) engage one
or more persons or companies ("Sub-Advisers"), which may have full
investment discretion to make all determinations with respect to
the investment and reinvestment of all or any portion of the
Portfolio's assets and the purchase and sale of all or any portion
of the Portfolio securities, subject to the terms and conditions
of this Agreement and the written agreement to be executed with
any Sub-Adviser; and (ii) take such steps as may be necessary to
implement such appointment.
(d) The Investment Adviser will coordinate its activities with those
of the Co-Adviser and will provide to the Co-Adviser such
information regarding the Investment Adviser's investment
management activities to the Portfolio as the Co-Adviser may
reasonably request in order to enable the Co-Adviser to perform
its services on behalf of the Portfolio under the Co-Adviser
Agreement.
B. Provision of Information Necessary for Preparation of Securities
Registration Statements, Amendments and Other Materials.
The Investment Adviser will make available and provide such financial,
accounting, statistical and other information related to its duties
and responsibilities hereunder as required by the Trustees and
necessary for the preparation of registration statement, reports and
other documents required by federal and state securities laws and such
other information as the Trustees may reasonably request for use by
the Trust and its distributor for the underwriting and distribution of
the Portfolio's shares.
C. Other Obligations and Services.
The Investment Adviser agrees to make available its officers and
employees to the Trustees and officers of the Trust and to the Co-
Adviser for consultation and discussions regarding the investment
advisory activities of the Investment Adviser for the Portfolio. The
Investment Adviser will also coordinate its activities, to the extent
necessary, with the activities of the custodian, transfer agent,
distributor, administrator and pricing agent insofar as their
respective activities relate to the duties of the Investment Adviser
hereunder, and will provide to such service providers of the Portfolio
such information as they may reasonably request in order to perform
their services on behalf of the Portfolio.
10
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3 . Covenants by Investment Adviser. The Investment Adviser covenants
-------------------------------
with the Trust that with respect to the services provided to the Portfolio it:
(a) will comply with all applicable provisions of the 1940 Act and
applicable rules and regulations of the Securities and Exchange
Commission ("SEC") and will in addition conduct its activities
under this Agreement in accordance with the investment objective,
policies and limitations contained the current registration
statement of the Portfolio;
(b) will not make loans to any person for the purpose of purchasing or
carrying Portfolio shares, or make loans to the Portfolio or the
Trust;
(c) will not purchase shares of the Portfolio or the Trust for its own
investment account;
(d) will maintain all books and records with respect to the securities
transactions of the Portfolio and furnish the Trustees such
periodic and special reports as the Trustees may request with
respect to the Portfolio;
(e) will treat confidentially and as proprietary information of the
Trust all records and other information relative to the Trust and
the Portfolio and prior, present or potential shareholders (other
than any information which Investment Adviser may have obtained
about shareholders from other business relationships with such
shareholders), and will not use such records and information for
any purpose other than performance of its responsibilities and
duties hereunder (except after prior notification to and approval
in writing by the Trust, which approval shall not be unreasonably
withheld and may not be withheld and will be deemed granted where
the Investment Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to
divulge such information by duly constituted authorities, when so
requested by the Trust or when otherwise required or permitted by
law);
(f) will immediately notify the Trust and the Co-Adviser of the
occurrence of any event which would disqualify Investment Adviser
or any Sub-Adviser from serving as investment adviser of an
investment company; and
(g) will determine that all information furnished to the Trust or the
Co-Adviser by it pursuant to this Agreement is accurate in all
material respects.
4. Transaction Procedures. All investment transactions on behalf of the
----------------------
Portfolio will be compensated by payment to or delivery by the custodian for
the Portfolio duly appointed by the Trustees of the Trust (the "Custodian"), or
such approved depositories or agents duly appointed by the Trustees and as may
be designated by the Custodian in writing, as custodian for the Portfolio, of
all cash and/or securities due to or from the Portfolio, and the Investment
Adviser shall not have possession or custody thereof or any responsibility or
liability with respect thereto. The Investment Adviser effecting transactions
on behalf of the Portfolio shall advise the Custodian and the Co-Adviser of all
investment orders for the Portfolio placed by it with brokers, dealers, banks
and other parties ("Brokers"). The Trustees shall issue, or cause to be issued,
to the Custodian such instructions as may be appropriate in connection with the
settlement of any transaction initiated by the Investment Adviser. The Portfolio
shall be responsible for all custodial arrangements and the payment of all
custodial charges and fees, and, upon
11
<PAGE>
the giving of proper instructions to the Custodian, the Investment Adviser shall
have no responsibility or liability with respect to custodian arrangements or
the acts, omissions or other conduct of the Custodian, except that it shall be
the responsibility of the Investment Adviser to take appropriate action if the
Custodian fails properly to confirm execution of the instructions to the
Investment Adviser and the Co-Adviser in a written form duly agreed upon by the
Custodian, the Investment Adviser and the Co-Adviser.
5. Execution and Allocation of Portfolio Brokerage. The Investment
-----------------------------------------------
Adviser shall place, subject to the limitations contained in this paragraph 5,
on behalf of the Portfolio, orders for the execution of the Portfolio's
securities transactions. The Investment Adviser is authorized by the Trust to
take any action, including the purchase or sale of securities for the account
of the Portfolio, (a) that is not in contravention of (i) any investment
restrictions set forth in the 1940 Act and the rules thereunder; (ii) specific
instructions adopted by the Trustees and communicated to the Investment Adviser;
(iii) the investment objectives, policies and restrictions of the Portfolio as
set forth in the Trust's current registration statement, as amended from time to
time; or (iv) instructions from the Trustees to the Investment Adviser, and (b)
which would not have the effect of causing the Trust to fail to qualify or to
cease to qualify as a regulated investment company under the Internal Revenue
Code of 1986, as amended, or any succeeding statute.
The Investment Adviser may place orders pursuant to its investment
determinations for the Portfolio either directly with the issuer or with any
Brokers. In placing orders with any Broker, the Investment Adviser will
consider the experience and skill of a Broker's securities traders as well as
the Broker's financial responsibility and administrative efficiency. The
Investment Adviser will attempt to obtain the best price and the most favorable
execution of its orders with any Brokers; however, in so doing, the Investment
Adviser may consider, subject to applicable law, the research, statistical, and
related brokerage services provided or to be provided by such Broker to the
Portfolio or the other accounts for which the Investment Adviser exercises
investment discretion. A commission paid to such Brokers may be higher than
that which another Broker would have charged for effecting the same transaction,
provided that the Investment Adviser determines in good faith that such
commission is reasonable in relation to the value of the brokerage and research
services provided by such Broker when viewed in terms of either the particular
transaction or the overall responsibilities of the Investment Adviser with
respect to the accounts as to which it exercises investment discretion. It is
understood that the Investment Adviser has not adopted a formula for selection
of Brokers for the execution of the Portfolio's investment transactions. On
occasions when the Investment Adviser deems the purchase or sale of a security
to be in the best interest of the Portfolio as well as other clients, the
Investment Adviser, to the extent permitted by applicable laws and regulations,
may, but shall be under no obligation to, aggregate the securities to be sold or
purchased in order to obtain the most favorable price or lower brokerage
commissions and efficient execution. In such event, allocation of the
securities so purchased or sold, as well as expenses incurred in the
transaction, will be made by the Investment Adviser in the manner it considers
to be the most equitable and consistent with its fiduciary obligations to the
Portfolio and to such other clients.
The Investment Adviser will not execute any Portfolio transactions for the
account of the Portfolio with a Broker which is an "affiliated person" (as
defined in the 1940 Act) of the Trust, the Trust's distributor, the Investment
Adviser or the Co-Adviser except in accordance with applicable laws, rules,
regulations or effective exemption orders issued by the SEC pursuant to the 1940
Act without the prior written approval of the Trustees. The Trust agrees to
provide the Investment Adviser with a list of brokers and dealers that are
"affiliated persons" of the Trust. The Investment Adviser likewise agrees to
furnish to the Trust and the Co-Adviser a list of Brokers which are "affiliated
persons" of the Investment Adviser. In no instance will Portfolio securities be
purchased from or sold to the Trust's principal
12
<PAGE>
distributor, Investment Adviser, Co-Adviser or any affiliate thereof, except to
the extent permitted by an exemption order issued by the SEC or by applicable
law.
The Investment Adviser shall render regular reports to the Trustees and the
Co-Adviser of the total brokerage business placed by it and the manner in which
the allocation of such brokerage has been accomplished.
6. Expenses of the Portfolio. The Portfolio or Trust will pay, or will
-------------------------
enter into arrangements that require third parties to pay, all expenses other
than those expressly assumed by the Investment Adviser herein, which expenses
payable by the Portfolio or Trust shall include:
(a) Expenses of all audits by independent public accountants;
(b) Expenses of the Co-Adviser, transfer agent, registrar, dividend
disbursing agent and shareholder recordkeeping services;
(c) Expenses of custodial services including recordkeeping services
provided by the custodian;
(d) Expenses of obtaining quotations for calculating the value of the
Portfolio's net assets;
(e) Salaries and other compensation of any of its executive officers
or employees, if any, who are not officers, directors,
stockholders or employees of the Investment Adviser, the
administrator or the distributor;
(f) Taxes levied against the Portfolio;
(g) Brokerage fees and commissions in connection with the purchase and
sale of portfolio securities for the Portfolio;
(h) Costs, including the interest expense, of borrowing money;
(i) Costs and/or fees incident to Trustees and shareholder meetings of
the Trust and the Portfolio, the preparation and mailings of
prospectuses and reports of the Portfolio to its existing
shareholders, the filing of reports with regulatory bodies, the
maintenance of the Portfolio's legal existence, and the
registration of shares with federal and state securities
authorities;
(j) Legal fees in connection with the representation of the Trust
and/or Portfolio, including the legal fees related to the
registration and continued qualification of the Portfolio's shares
for sale;
(k) Costs of printing any share certificates representing shares of
the Portfolio;
(l) Fees and expenses of Trustees who are not affiliated persons, as
defined in the 1940 Act, of the Investment Adviser, the Co-
Adviser, the distributor or any of their affiliates; and
13
<PAGE>
(m) Its pro rata portion of the fidelity bond required by Section
17(g) of the 1940 Act, or of other insurance premiums.
7. Activities and Affiliates of the Investment Adviser. The Trustees
---------------------------------------------------
acknowledge that Investment Adviser, or one or more of its affiliates, may have
investment responsibilities or render investment advice to or perform other
investment advisory services for other individuals or entities and that
Investment Adviser, its affiliates or any of its or their directors, officers,
agents or employees may buy, sell or trade in any securities for its or their
respective accounts (such individuals, entities and accounts hereinafter
referred to as Affiliated Accounts). Subject to the provisions of paragraph 2
hereof, the Trustees agree that the Investment Adviser or its affiliates may
give advice or exercise investment responsibility and take such other action
with respect to other Affiliated Accounts which may differ from the advice given
or the timing or nature of action taken with respect to the Portfolio, provided
that Investment Adviser acts in good faith and in accordance with applicable law
or as permitted by an exemption order issued by the SEC, and provided further,
that it is Investment Adviser's policy to allocate within its reasonable
discretion, investment opportunities to the Portfolio over a period of time on a
fair and equitable basis relative to the Affiliated Accounts, taking into
account the investment objectives and policies of the Portfolio and any specific
investment restrictions applicable thereto. The Trust acknowledges that one or
more of the Affiliated Accounts may at any time hold, acquire, increase,
decrease, dispose of or otherwise deal with positions in investments in which
the Portfolio may have an interest from time to time, whether in transactions
which involve the Portfolio or otherwise. The Investment Adviser shall not
have any obligation to acquire for the Portfolio a position in any investment
which any Affiliated Account may acquire, and the Portfolio shall have no first
refusal, coinvestment or other rights in respect of any investment, either for
the Portfolio or otherwise.
8. Compensation of the Investment Adviser. (a) For all services provided
--------------------------------------
to the Portfolio pursuant to this Agreement, the Trust shall pay the Investment
Adviser, and the Investment Adviser agrees to accept as full compensation
therefor, an investment advisory fee, payable as soon as practicable after the
last day of each month, calculated using an annual rate of 0.70% of the average
daily net assets of the Portfolio for the first $50 million of such assets, and
0.65% on average daily net assets of the Portfolio in excess of $50 million (the
"Annual Rate"). The monthly investment advisory fee to be paid by the Trust to
the Investment Adviser shall be determined as of the close of business on the
last business day of each month by multiplying one-twelfth of the Annual Rate by
the Average Portfolio Net Assets (hereinafter defined), calculated monthly as of
such day.
(b) For purposes of this paragraph 8, the "Average Portfolio Net Assets"
shall be calculated monthly as of the last business day of each month and shall
mean the sum of the net assets of the Portfolio calculated each business day
during the month divided by the number of business days in the month (such net
assets to be determined as of the close of business each business day and
computed in the manner set forth in the Declaration of Trust of the Trust).
9. Proxies. The Trustees will vote all proxies solicited by or with
-------
respect to the issuers of securities in which assets of the Portfolio may be
invested from time to time, unless the Trustees delegate such right to the
Investment Adviser.
10. Liabilities of the Investment Adviser.
-------------------------------------
(a) The Investment Adviser will not be liable for any loss suffered by
the Portfolio or the Trust as the result of any error of judgment
or mistake of law in connection with its performance of this
Agreement; provided, however, that the Investment Adviser shall be
--------- -------
liable to the Portfolio and the Trust for any loss resulting from
(i) a breach of
14
<PAGE>
fiduciary duty with respect to the receipt of compensation for
services; (ii) willful misfeasance, bad faith or gross negligence
in, or reckless disregard by the Investment Adviser of, the
performance of its obligations or duties under this Agreement; or
(iii) any material breach of any of its covenants contained in
this Agreement.
` (b) No provision of this Agreement shall be construed to protect any
Trustee or officer of the Trust, or the Investment Adviser, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
11. Renewal, Amendment and Termination.
----------------------------------
(a) This Agreement shall become effective on the date first written
above and shall remain in force for a period of two (2) years from
such date and from year to year thereafter but only so long as
such continuance is specifically approved at least annually (i) by
the vote of a majority of the Trustees who are not interested
persons of the Portfolio, the Co-Adviser or the Investment
Adviser, cast in person at a meeting called for the purpose of
voting on such approval and by a vote of the Board of Trustees or
(ii) by the vote of a majority of the outstanding voting
securities of the Portfolio. The aforesaid provision that this
Agreement may be continued "annually" shall be construed in a
manner consistent with the 1940 Act and the rules and regulations
thereunder.
(b) This Agreement may be amended at any time, but only by written
agreement between the Trust and the Investment Adviser, which
amendment is subject to the approval of the Trustees and the
shareholders of the Trust in the manner required by the 1940 Act,
subject to any applicable exemption order of the SEC modifying the
provisions of the 1940 Act with respect to approval of amendments
to this Agreement.
(c) This Agreement:
(i) may at any time be terminated without the payment of any
penalty either by vote of the Trustees or by vote of a
majority of the outstanding voting securities of the
Portfolio, on sixty (60) days' written notice to the
Investment Adviser;
(ii) shall immediately terminate in the event of its assignment;
and
(iii) may be terminated by the Investment Adviser on sixty (60)
days' written notice to the Trust.
(d) As used in this Section 11, the terms "assignment", "interested
person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth in the 1940 Act and
the rules and regulations thereunder, subject to any applicable
orders of exemption issued by the SEC.
12. Books and Records. (a) The Trustees shall provide to the Investment
-----------------
Adviser copies of the Trust's most recent prospectus and statement of additional
information (as each may be amended or supplemented from time to time) which
relate to any class of shares representing interests in the Portfolio.
(b) In compliance with the requirements of Rule 31a-3 of the rules
promulgated under the 1940 Act ("Rules"), the Investment Adviser hereby agrees
that all records which it maintains for the Trust
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<PAGE>
are the property of the Trust and further agrees to surrender promptly to the
Trust any such records upon the Trust's request. The Investment Adviser further
agrees to preserve for the periods prescribed by Rule 31a-2, the records
required to be maintained by the Investment Adviser hereunder pursuant to Rule
31a-1 of the Rules.
13. Notices. All notices, requests, demands or other communications
-------
hereunder shall be in writing and shall be deemed given, if delivered
personally, on the day delivered or if mailed, by certified or registered mail,
postage prepaid, return receipt requested, three (3) days after placement in the
United States mail, to the addresses below:
If to Trust: First Funds
c/o James V. Hyatt, Esq.
ALPS Mutual Fund Services, Inc.
370 17th Street, Suite 2700
Denver, Colorado 80202
With a copy to: Daniel B. Hatzenbuehler, Esq.
Baker, Donelson, Bearman, Caldwell, P.C.
165 Madison Avenue, 21st Floor
Memphis, TN 38103
If to Investment Adviser: Investment Advisers, Inc.
c/o: Marty Hargrave
601 Second Ave. S., Suite 3700
Minneapolis, MN 55440-0357
14. Severability. If any provision of this Agreement shall be held or
------------
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
15. Limitation on Liability. Investment Adviser is hereby expressly put
-----------------------
on notice of the limitation of shareholder liability as set forth in the
Declaration of Trust and agrees that obligations assumed by the Portfolio
pursuant to this Agreement shall be limited in all cases to the Portfolio and
its assets. Investment Adviser agrees that it shall not seek satisfaction of
any such obligation from the shareholders or any individual shareholder of the
Portfolio, nor from the Trustees or any individual Trustee of the Portfolio.
16. Governing Law. To the extent that state law has not been preempted by
-------------
the provisions of any law of the United States heretofore or hereafter enacted,
as the same may be amended from time to time, this Agreement shall be
administered, construed and enforced according to the laws of the State of
Tennessee without giving effect to the choice of laws provisions thereof.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as of the day and year first written above.
FIRST FUNDS
By:____________________________________
Secretary
INVESTMENT ADVISERS, INC.
By:____________________________________
By:____________________________________
17
<PAGE>
EXHIBIT 5(G)
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
--------------------------------------------
THIS INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT is made as of this 29th
day of August, 1997, between FIRST FUNDS, a business trust organized under the
laws of the Commonwealth of Massachusetts (the "Trust"), on behalf of its
CAPITAL APPRECIATION PORTFOLIO (the "Portfolio") and Investment Advisers, Inc.,
a corporation organized under the laws of the State of Delaware ("IAI ").
WHEREAS, the Trust has been organized to operate as an investment company
registered under the Investment Company Act of 1940, as amended, (the "1940
Act") with multiple series of shares (hereinafter referred to as Classes) having
varying preferences, limitations and relative rights, and to invest and reinvest
the assets of the Portfolio in securities pursuant to investment objectives and
policies for the Portfolio;
WHEREAS, the Trust, under separate agreement has engaged the services of
First Tennessee Bank National Association ("Bank") as a co-investment adviser to
provide or perform various investment advisory, monitoring, statistical,
research, portfolio investment adviser selection, and other services with
respect to the Portfolio as set forth more fully in the Bank's Investment
Advisory and Management Agreement, a form of which is attached hereto as Exhibit
A, (Bank hereinafter being referred to as "Co-Adviser" and IAI hereinafter being
referred to as "Investment Adviser"); and
WHEREAS, the Trust desires to obtain the day-to-day portfolio investment
management services, information, advice, assistance and facilities of the
Investment Adviser with respect to the Portfolio as set forth more fully herein;
NOW, THEREFORE, Trust, on behalf of the Portfolio, and Investment Adviser
agree as follows:
1. Employment of the Investment Adviser. The Trust hereby employs the
------------------------------------
Investment Adviser to provide investment advice and to manage the investment and
reinvestment of the Portfolio's assets in the manner set forth in Section 2A. of
this Agreement, subject to the direction of the Trustees, for the period, in the
manner, and on the terms hereinafter set forth. The Investment Adviser hereby
accepts such employment and agrees during such period to render the services and
to assume the obligations herein set forth. The Investment Adviser shall for
all purposes herein be deemed to be an independent contractor and shall, except
as expressly provided or authorized (whether herein or otherwise), have no
authority to act or represent the Trust in any way or otherwise be deemed an
agent of the Trust.
2. Obligation of, and Services to be Provided by the Investment Adviser.
---------------------------------------------------------------------
The Investment Adviser undertakes to provide the services hereinafter set forth
and to assume the following obligations:
A. Investment Advisory Services.
(a) The Investment Adviser shall have overall responsibility for the
day-to-day management and investment of the Portfolio's assets and
securities portfolio subject to and in accordance with the
investment objectives and policies of the Portfolio, and any
directions which the Trustees and officers of the Trust may issue
to the Investment Adviser from time to time, and shall perform the
following services: (i) provide or cause to be provided investment
research and credit analysis concerning the Portfolio's
investments, (ii) conduct or cause to be conducted a continual
program
<PAGE>
of investment of the Portfolio's assets, (iii) place or cause to be
placed orders for all purchases and sales of the investments made
for the Portfolio, and (iv) maintain or cause to be maintained the
books and records required in connection with its duties hereunder.
(b) The Investment Adviser shall advise the Trustees of the Trust
regarding overall investment programs and strategies for the
Portfolio, revision of such programs as necessary, and shall
monitor and report periodically to the Trustees concerning the
implementation of such programs and strategies.
(c) The Investment Adviser, with the prior approval of the Trustees
(and the shareholders to the extent required by applicable law) as
to particular appointments, shall be permitted to (i) engage one or
more persons or companies ("Sub-Advisers"), which may have full
investment discretion to make all determinations with respect to
the investment and reinvestment of all or any portion of the
Portfolio's assets and the purchase and sale of all or any portion
of the Portfolio securities, subject to the terms and conditions of
this Agreement and the written agreement to be executed with any
Sub-Adviser; and (ii) take such steps as may be necessary to
implement such appointment.
(d) The Investment Adviser will coordinate its activities with those of
the Co-Adviser and will provide to the Co-Adviser such information
regarding the Investment Adviser's investment management activities
to the Portfolio as the Co-Adviser may reasonably request in order
to enable the Co-Adviser to perform its services on behalf of the
Portfolio under the Co-Adviser Agreement.
B. Provision of Information Necessary for Preparation of Securities
Registration Statements, Amendments and Other Materials.
The Investment Adviser will make available and provide such financial,
accounting, statistical and other information related to its duties and
responsibilities hereunder as required by the Trustees and necessary
for the preparation of registration statement, reports and other
documents required by federal and state securities laws and such other
information as the Trustees may reasonably request for use by the Trust
and its distributor for the underwriting and distribution of the
Portfolio's shares.
C. Other Obligations and Services.
The Investment Adviser agrees to make available its officers and
employees to the Trustees and officers of the Trust and to the Co-
Adviser for consultation and discussions regarding the investment
advisory activities of the Investment Adviser for the Portfolio. The
Investment Adviser will also coordinate its activities, to the extent
necessary, with the activities of the custodian, transfer agent,
distributor, administrator and pricing agent insofar as their
respective activities relate to the duties of the Investment Adviser
hereunder, and will provide to such service providers of the Portfolio
such information as they may reasonably request in order to perform
their services on behalf of the Portfolio.
3. Covenants by Investment Adviser. The Investment Adviser covenants
-------------------------------
with the Trust that with respect to the services provided to the Portfolio it:
2
<PAGE>
(a) will comply with all applicable provisions of the 1940 Act and
applicable rules and regulations of the Securities and Exchange
Commission ("SEC") and will in addition conduct its activities
under this Agreement in accordance with the investment objective,
policies and limitations contained the current registration
statement of the Portfolio;
(b) will not make loans to any person for the purpose of purchasing or
carrying Portfolio shares, or make loans to the Portfolio or the
Trust;
(c) will not purchase shares of the Portfolio or the Trust for its own
investment account;
(d) will maintain all books and records with respect to the securities
transactions of the Portfolio and furnish the Trustees such
periodic and special reports as the Trustees may request with
respect to the Portfolio;
(e) will treat confidentially and as proprietary information of the
Trust all records and other information relative to the Trust and
the Portfolio and prior, present or potential shareholders (other
than any information which Investment Adviser may have obtained
about shareholders from other business relationships with such
shareholders), and will not use such records and information for
any purpose other than performance of its responsibilities and
duties hereunder (except after prior notification to and approval
in writing by the Trust, which approval shall not be unreasonably
withheld and may not be withheld and will be deemed granted where
the Investment Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to
divulge such information by duly constituted authorities, when so
requested by the Trust or when otherwise required or permitted by
law);
(f) will immediately notify the Trust and the Co-Adviser of the
occurrence of any event which would disqualify Investment Adviser
or any Sub-Adviser from serving as investment adviser of an
investment company; and
(g) will determine that all information furnished to the Trust or the
Co-Adviser by it pursuant to this Agreement is accurate in all
material respects.
4. Transaction Procedures. All investment transactions on behalf of the
----------------------
Portfolio will be compensated by payment to or delivery by the custodian for
the Portfolio duly appointed by the Trustees of the Trust (the "Custodian"), or
such approved depositories or agents duly appointed by the Trustees and as may
be designated by the Custodian in writing, as custodian for the Portfolio, of
all cash and/or securities due to or from the Portfolio, and the Investment
Adviser shall not have possession or custody thereof or any responsibility or
liability with respect thereto. The Investment Adviser effecting transactions
on behalf of the Portfolio shall advise the Custodian and the Co-Adviser of all
investment orders for the Portfolio placed by it with brokers, dealers, banks
and other parties ("Brokers"). The Trustees shall issue, or cause to be issued,
to the Custodian such instructions as may be appropriate in connection with the
settlement of any transaction initiated by the Investment Adviser. The
Portfolio shall be responsible for all custodial arrangements and the payment
of all custodial charges and fees, and, upon the giving of proper instructions
to the Custodian, the Investment Adviser shall have no responsibility or
liability with respect to custodian arrangements or the acts, omissions or other
conduct of the Custodian, except that it shall be the responsibility of the
Investment Adviser to take appropriate action if the Custodian fails properly to
confirm execution of the instructions to the Investment Adviser and the Co-
3
<PAGE>
Adviser in a written form duly agreed upon by the Custodian, the Investment
Adviser and the Co-Adviser.
5. Execution and Allocation of Portfolio Brokerage. The Investment
-----------------------------------------------
Adviser shall place, subject to the limitations contained in this paragraph 5,
on behalf of the Portfolio, orders for the execution of the Portfolio's
securities transactions. The Investment Adviser is authorized by the Trust to
take any action, including the purchase or sale of securities for the account of
the Portfolio, (a) that is not in contravention of (i) any investment
restrictions set forth in the 1940 Act and the rules thereunder; (ii) specific
instructions adopted by the Trustees and communicated to the Investment Adviser;
(iii) the investment objectives, policies and restrictions of the Portfolio as
set forth in the Trust's current registration statement, as amended from time to
time; or (iv) instructions from the Trustees to the Investment Adviser, and (b)
which would not have the effect of causing the Trust to fail to qualify or to
cease to qualify as a regulated investment company under the Internal Revenue
Code of 1986, as amended, or any succeeding statute.
The Investment Adviser may place orders pursuant to its investment
determinations for the Portfolio either directly with the issuer or with any
Brokers. In placing orders with any Broker, the Investment Adviser will consider
the experience and skill of a Broker's securities traders as well as the
Broker's financial responsibility and administrative efficiency. The Investment
Adviser will attempt to obtain the best price and the most favorable execution
of its orders with any Brokers; however, in so doing, the Investment Adviser may
consider, subject to applicable law, the research, statistical, and related
brokerage services provided or to be provided by such Broker to the Portfolio or
the other accounts for which the Investment Adviser exercises investment
discretion. A commission paid to such Brokers may be higher than that which
another Broker would have charged for effecting the same transaction, provided
that the Investment Adviser determines in good faith that such commission is
reasonable in relation to the value of the brokerage and research services
provided by such Broker when viewed in terms of either the particular
transaction or the overall responsibilities of the Investment Adviser with
respect to the accounts as to which it exercises investment discretion. It is
understood that the Investment Adviser has not adopted a formula for selection
of Brokers for the execution of the Portfolio's investment transactions. On
occasions when the Investment Adviser deems the purchase or sale of a security
to be in the best interest of the Portfolio as well as other clients, the
Investment Adviser, to the extent permitted by applicable laws and regulations,
may, but shall be under no obligation to, aggregate the securities to be sold or
purchased in order to obtain the most favorable price or lower brokerage
commissions and efficient execution. In such event, allocation of the securities
so purchased or sold, as well as expenses incurred in the transaction, will be
made by the Investment Adviser in the manner it considers to be the most
equitable and consistent with its fiduciary obligations to the Portfolio and to
such other clients.
The Investment Adviser will not execute any Portfolio transactions for the
account of the Portfolio with a Broker which is an "affiliated person" (as
defined in the 1940 Act) of the Trust, the Trust's distributor, the Investment
Adviser or the Co-Adviser except in accordance with applicable laws, rules,
regulations or effective exemption orders issued by the SEC pursuant to the 1940
Act without the prior written approval of the Trustees. The Trust agrees to
provide the Investment Adviser with a list of brokers and dealers that are
"affiliated persons" of the Trust. The Investment Adviser likewise agrees to
furnish to the Trust and the Co-Adviser a list of Brokers which are "affiliated
persons" of the Investment Adviser. In no instance will Portfolio securities be
purchased from or sold to the Trust's principal distributor, Investment Adviser,
Co-Adviser or any affiliate thereof, except to the extent permitted by an
exemption order issued by the SEC or by applicable law.
4
<PAGE>
The Investment Adviser shall render regular reports to the Trustees and the
Co-Adviser of the total brokerage business placed by it and the manner in which
the allocation of such brokerage has been accomplished.
6. Expenses of the Portfolio. The Portfolio or Trust will pay, or will
-------------------------
enter into arrangements that require third parties to pay, all expenses other
than those expressly assumed by the Investment Adviser herein, which expenses
payable by the Portfolio or Trust shall include:
(a) Expenses of all audits by independent public accountants;
(b) Expenses of the Co-Adviser, transfer agent, registrar, dividend
disbursing agent and shareholder recordkeeping services;
(c) Expenses of custodial services including recordkeeping services
provided by the custodian;
(d) Expenses of obtaining quotations for calculating the value of the
Portfolio's net assets;
(e) Salaries and other compensation of any of its executive officers
or employees, if any, who are not officers, directors,
stockholders or employees of the Investment Adviser, the
administrator or the distributor;
(f) Taxes levied against the Portfolio;
(g) Brokerage fees and commissions in connection with the purchase and
sale of portfolio securities for the Portfolio;
(h) Costs, including the interest expense, of borrowing money;
(i) Costs and/or fees incident to Trustees and shareholder meetings of
the Trust and the Portfolio, the preparation and mailings of
prospectuses and reports of the Portfolio to its existing
shareholders, the filing of reports with regulatory bodies, the
maintenance of the Portfolio's legal existence, and the
registration of shares with federal and state securities
authorities;
(j) Legal fees in connection with the representation of the Trust
and/or Portfolio, including the legal fees related to the
registration and continued qualification of the Portfolio's shares
for sale;
(k) Costs of printing any share certificates representing shares of
the Portfolio;
(l) Fees and expenses of Trustees who are not affiliated persons, as
defined in the 1940 Act, of the Investment Adviser, the Co-
Adviser, the distributor or any of their affiliates; and
(m) Its pro rata portion of the fidelity bond required by Section
17(g) of the 1940 Act, or of other insurance premiums.
5
<PAGE>
7. Activities and Affiliates of the Investment Adviser. The Trustees
---------------------------------------------------
acknowledge that Investment Adviser, or one or more of its affiliates, may have
investment responsibilities or render investment advice to or perform other
investment advisory services for other individuals or entities and that
Investment Adviser, its affiliates or any of its or their directors, officers,
agents or employees may buy, sell or trade in any securities for its or their
respective accounts (such individuals, entities and accounts hereinafter
referred to as Affiliated Accounts). Subject to the provisions of paragraph 2
hereof, the Trustees agree that the Investment Adviser or its affiliates may
give advice or exercise investment responsibility and take such other action
with respect to other Affiliated Accounts which may differ from the advice given
or the timing or nature of action taken with respect to the Portfolio, provided
that Investment Adviser acts in good faith and in accordance with applicable law
or as permitted by an exemption order issued by the SEC, and provided further,
that it is Investment Adviser's policy to allocate within its reasonable
discretion, investment opportunities to the Portfolio over a period of time on a
fair and equitable basis relative to the Affiliated Accounts, taking into
account the investment objectives and policies of the Portfolio and any specific
investment restrictions applicable thereto. The Trust acknowledges that one or
more of the Affiliated Accounts may at any time hold, acquire, increase,
decrease, dispose of or otherwise deal with positions in investments in which
the Portfolio may have an interest from time to time, whether in transactions
which involve the Portfolio or otherwise. The Investment Adviser shall not have
any obligation to acquire for the Portfolio a position in any investment which
any Affiliated Account may acquire, and the Portfolio shall have no first
refusal, coinvestment or other rights in respect of any investment, either for
the Portfolio or otherwise.
8. Compensation of the Investment Adviser. (a) For all services provided
--------------------------------------
to the Portfolio pursuant to this Agreement, the Trust shall pay the Investment
Adviser, and the Investment Adviser agrees to accept as full compensation
therefor, an investment advisory fee, payable as soon as practicable after the
last day of each month, calculated using an annual rate of 0.70% of the average
daily net assets of the Portfolio for the first $50 million of such assets, and
0.65% on average daily net assets of the Portfolio in excess of $50 million (the
"Annual Rate"). The monthly investment advisory fee to be paid by the Trust to
the Investment Adviser shall be determined as of the close of business on the
last business day of each month by multiplying one-twelfth of the Annual Rate by
the Average Portfolio Net Assets (hereinafter defined), calculated monthly as of
such day.
(b) For purposes of this paragraph 8, the "Average Portfolio Net Assets"
shall be calculated monthly as of the last business day of each month and shall
mean the sum of the net assets of the Portfolio calculated each business day
during the month divided by the number of business days in the month (such net
assets to be determined as of the close of business each business day and
computed in the manner set forth in the Declaration of Trust of the Trust).
9. Proxies. The Trustees will vote all proxies solicited by or with
-------
respect to the issuers of securities in which assets of the Portfolio may be
invested from time to time, unless the Trustees delegate such right to the
Investment Adviser.
10. Liabilities of the Investment Adviser.
-------------------------------------
(a) The Investment Adviser will not be liable for any loss suffered
by the Portfolio or the Trust as the result of any error of
judgment or mistake of law in connection with its performance of
this Agreement; provided, however, that the Investment Adviser
-------- -------
shall be liable to the Portfolio and the Trust for any loss
resulting from (i) a breach of fiduciary duty with respect to the
receipt of compensation for services; (ii) willful misfeasance,
bad faith or gross negligence in, or reckless disregard by the
Investment
6
<PAGE>
Adviser of, the performance of its obligations or duties under
this Agreement; or (iii) any material breach of any of its
covenants contained in this Agreement.
(b) No provision of this Agreement shall be construed to protect any
Trustee or officer of the Trust, or the Investment Adviser, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
11. Renewal, Amendment and Termination.
----------------------------------
(a) This Agreement shall become effective on the date first written
above and shall remain in force for a period of two (2) years from
such date and from year to year thereafter but only so long as
such continuance is specifically approved at least annually (i) by
the vote of a majority of the Trustees who are not interested
persons of the Portfolio, the Co-Adviser or the Investment
Adviser, cast in person at a meeting called for the purpose of
voting on such approval and by a vote of the Board of Trustees or
(ii) by the vote of a majority of the outstanding voting
securities of the Portfolio. The aforesaid provision that this
Agreement may be continued "annually" shall be construed in a
manner consistent with the 1940 Act and the rules and regulations
thereunder.
(b) This Agreement may be amended at any time, but only by written
agreement between the Trust and the Investment Adviser, which
amendment is subject to the approval of the Trustees and the
shareholders of the Trust in the manner required by the 1940 Act,
subject to any applicable exemption order of the SEC modifying the
provisions of the 1940 Act with respect to approval of amendments
to this Agreement.
(c) This Agreement:
(i) may at any time be terminated without the payment of any
penalty either by vote of the Trustees or by vote of a
majority of the outstanding voting securities of the
Portfolio, on sixty (60) days' written notice to the
Investment Adviser;
(ii) shall immediately terminate in the event of its assignment;
and
(iii) may be terminated by the Investment Adviser on sixty (60)
days' written notice to the Trust.
(d) As used in this Section 11, the terms "assignment", "interested
person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth in the 1940 Act and
the rules and regulations thereunder, subject to any applicable
orders of exemption issued by the SEC.
12. Books and Records. (a) The Trustees shall provide to the Investment
-----------------
Adviser copies of the Trust's most recent prospectus and statement of additional
information (as each may be amended or supplemented from time to time) which
relate to any class of shares representing interests in the Portfolio.
(b) In compliance with the requirements of Rule 31a-3 of the rules
promulgated under the 1940 Act ("Rules"), the Investment Adviser hereby agrees
that all records which it maintains for the Trust are the property of the Trust
and further agrees to surrender promptly to the Trust any such records upon the
Trust's request. The Investment Adviser further agrees to preserve for the
periods prescribed by Rule
7
<PAGE>
31a-2, the records required to be maintained by the Investment Adviser hereunder
pursuant to Rule 31a-1 of the Rules.
13. Notices. All notices, requests, demands or other communications
-------
hereunder shall be in writing and shall be deemed given, if delivered
personally, on the day delivered or if mailed, by certified or registered mail,
postage prepaid, return receipt requested, three (3) days after placement in the
United States mail, to the addresses below:
If to Trust: First Funds
c/o James V. Hyatt, Esq.
ALPS Mutual Fund Services, Inc.
370 17/th/ Street, Suite 2700
Denver, Colorado 80202
With a copy to: Daniel B. Hatzenbuehler, Esq.
Baker, Donelson, Bearman, Caldwell, P.C.
165 Madison Avenue, 21/st/ Floor
Memphis, TN 38103
If to Investment Adviser: Investment Advisers, Inc.
c/o: Marty Hargrave
601 Second Ave. S., Suite 3700
Minneapolis, MN 55440-0357
14. Severability. If any provision of this Agreement shall be held or
------------
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
15. Limitation on Liability. Investment Adviser is hereby expressly put
-----------------------
on notice of the limitation of shareholder liability as set forth in the
Declaration of Trust and agrees that obligations assumed by the Portfolio
pursuant to this Agreement shall be limited in all cases to the Portfolio and
its assets. Investment Adviser agrees that it shall not seek satisfaction of
any such obligation from the shareholders or any individual shareholder of the
Portfolio, nor from the Trustees or any individual Trustee of the Portfolio.
16. Governing Law. To the extent that state law has not been preempted by
-------------
the provisions of any law of the United States heretofore or hereafter enacted,
as the same may be amended from time to time, this Agreement shall be
administered, construed and enforced according to the laws of the State of
Tennessee without giving effect to the choice of laws provisions thereof.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as of the day and year first written above.
FIRST FUNDS
By:___________________________________
Secretary
INVESTMENT ADVISERS, INC.
By:___________________________________
By:___________________________________
9
<PAGE>
EXHIBIT A
INVESTMENT ADVISORY AND MANAGMENT AGREEMENT
-------------------------------------------
THIS INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT is made as of this 28th
day of August, 1997, between FIRST FUNDS, a business trust organized under the
laws of the Commonwealth of Massachusetts (the "Trust"), on behalf of its
CAPITAL APPRECIATION PORTFOLIO (the "Portfolio") and First Tennessee Bank
National Association ("Bank").
WHEREAS, the Trust has been organized to operate as an investment company
registered under the Investment Company Act of 1940, as amended, (the "1940
Act") with multiple series of shares (hereinafter referred to as Classes) having
varying preferences, limitations and relative rights, and to invest and reinvest
the assets of the Portfolio in securities pursuant to investment objectives and
policies for the Portfolio; and
WHEREAS, the Trust, under separate agreement (the "Investment Advisory and
Management Agreement"), has engaged the services of Investment Advisers, Inc. as
co-investment adviser to the Portfolio to provide day-to-day investment
management of the Portfolio's assets and securities, to conduct a continuous
program of investment of the Portfolio's assets, and to provide other advisory
services as outlined in the Investment Advisory and Management Agreement (IAI
hereinafter being referred to as "Investment Adviser" and Bank hereinafter being
referred to as "Co-Adviser"); and
WHEREAS, the Trust desires to obtain the services, information, advice,
assistance and facilities of an investment adviser and to have an investment
adviser provide or perform for it various investment advisory, monitoring,
statistical, research, investment adviser selection and counseling and other
services with respect to the Portfolio as set forth more fully herein, but
exclusive of day-to-day investment management services;
NOW, THEREFORE, the Trust, on behalf of the Portfolio, and Co-Adviser agree
as follows:
1. Employment of the Co-Adviser. The Trust hereby employs the Co-Adviser
----------------------------
to provide investment advisory services in the manner set forth in Section 2A of
this Agreement, subject to the direction of the Trustees, for the period, in the
manner, and on the terms hereinafter set forth. The Co-Adviser hereby accepts
such employment and agrees during such period to render the services and to
assume the obligations herein set forth. The Co-Adviser shall for all purposes
herein be deemed to be an independent contractor and shall, except as expressly
provided or authorized (whether herein or otherwise), have no authority to act
or represent the Trust in any way or otherwise be deemed an agent of the Trust.
2. Obligations of, and Services to be Provided by the Co-Adviser. The Co-
--------------------------------------------------------------
Adviser undertakes to provide the services hereinafter set forth and to assume
the following obligations:
A. Investment Advisory Services.
(a) The Co-Adviser will provide the Trust with research, analyses and
recommendations with respect to the investment objective, guidelines
for and risk characteristics of the Portfolio.
10
<PAGE>
(b) The Co-Adviser will monitor the investment and management
activities of the Investment Adviser relative to the Portfolio,
including, but not limited to, purchase and sale transactions following
settlement thereof, and report to the Trustees on compliance by the
Investment Adviser with the investment objective and policies of the
Portfolio, any directions which the Trustees and officers of the Trust
may issue to the Investment Adviser from time to time and the
requirements of the 1940 Act and all applicable rules and regulations
of the Securities and Exchange Commission ("SEC") with respect to the
Portfolio. In performing its monitoring services under this sub-
section, the Co-Adviser may rely, among other things, upon reports,
data and information furnished to it by the Investment Adviser,
custodian or other service providers to the Portfolio.
(c) The Co-Adviser will make recommendations with respect to the
engagement and termination of investment advisers and sub-advisers for
the Portfolio and provide research, analyses and recommendations on
qualified candidates to perform the investment advisory and, if
applicable, sub-advisory duties and responsibilities for the day-to-day
management of a continuous investment program for the Portfolio and the
related functions to sustain that role.
(d) The Co-Adviser will perform or obtain research and analysis on the
investment performance of the Investment Adviser, or other investment
advisers or sub-advisers (collectively, the "Advisers") with respect to
the Portfolio and comparisons of its absolute and relative performance
to relevant indices and investment universes.
(e) The Co-Adviser will determine and recommend allocation of assets
between multiple active Advisers at such time that the assets of the
Portfolio reach such size that multiple active Advisers are warranted.
(f) The Co-Adviser may make presentations or reports on behalf of the
Investment Adviser, or other Advisers, at the request of the Investment
Adviser or such other Advisers in meetings and other settings where the
presence of a representative of any such investment adviser is needed
or requested but is unable to attend. Such meetings and settings may
include, but are not limited to, (i) Board of Trustee meetings, (ii)
meetings with broker-dealers, and (iii) meetings with other channels of
distribution. Such meetings shall not include regulatory meetings.
(g) The Co-Adviser will coordinate its activities with the Investment
Adviser and the activities of the Investment Adviser or other Advisers,
with the Portfolio's transfer agent, administrator, custodian and
independent accountants.
B. Provision of Information Necessary for Preparation of Securities
Registration Statements, Amendments and Other Materials.
The Co-Adviser will make available and provide such financial,
accounting, statistical and other information related to its duties and
responsibilities hereunder as required by the Trustees and necessary
for the preparation of registration statements, reports and other
documents required by federal and state securities laws and such other
information as the Trustees may reasonably request for use by the Trust
and its distributor for the underwriting and distribution of the
Portfolio's shares.
11
<PAGE>
C. Other Obligations and Services.
The Co-Adviser agrees to make available its officers and employees to
the Trustees and officers of the Trust for consultation and
discussions regarding the activities of the Investment Adviser and the
Co-Adviser's duties hereunder and their activities with respect to the
Portfolio.
3. Covenants by Co-Adviser. The Co-Adviser covenants with the Trust
-----------------------
that, with respect to the services provided to the Portfolio, it:
(a) will comply with all applicable provisions of the 1940 Act and
applicable rules and regulations of the Securities and Exchange
Commission ("SEC") and will in addition conduct its activities
under this Agreement in accordance with the Portfolio's current
registration statement and applicable regulations of the Office of
the Comptroller of the Currency pertaining to the investment
advisory activities of national banks which are applicable to the
Co-Adviser;
(b) will not make loans to any person for the purpose of purchasing or
carrying Trust or Portfolio shares, or make loans to the Trust or
the Portfolio;
(c) will not purchase shares of the Trust or the Portfolio for its own
investment account;
(d) will maintain all books and records with respect to its duties set
forth herein, and furnish the Trustees such periodic and special
reports as the Trustees may request with respect to the Portfolio;
(e) will treat confidentially and as proprietary information of the
Trust all records and other information relative to the Trust and
the Portfolio and prior, present or potential shareholders (other
than any information which Co-Adviser may have obtained about
shareholders from other business relationships with such
shareholders), and will not use such records and information for
any purpose other than performance of its responsibilities and
duties hereunder (except after prior notification to and approval
in writing by the Trust, which approval shall not be unreasonably
withheld and may not be withheld and will be deemed granted where
the Co-Adviser may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such
information by duly constituted authorities, when so requested by
the Trust or when otherwise required or permitted by law);
(f) will, to the best of its knowledge and ability, immediately notify
the Trust of the occurrence of any event which would disqualify
Co-Adviser or the Investment Adviser from serving as investment
adviser of an investment company; and
(g) will determine that all information furnished to the Trust by the
Co-Adviser pursuant to this Agreement is accurate in all material
respects.
4. Expenses of the Portfolio. The Portfolio or Trust will pay, or will
-------------------------
enter into arrangements that require third parties to pay, all expenses other
than those expressly assumed by the Co-Adviser herein, which expenses payable by
the Portfolio or Trust shall include:
(a) Expenses of all audits by independent public accountants;
12
<PAGE>
(b) Expenses of Investment Adviser, transfer agent, registrar,
dividend disbursing agent and shareholder recordkeeping services;
(c) Expenses of custodial services including recordkeeping services
provided by the custodian;
(d) Expenses of obtaining quotations for calculating the value of the
Portfolio's net assets;
(e) Salaries and other compensation of any of its executive officers
or employees, if any, who are not officers, directors,
stockholders or employees of the Investment Adviser, the Co-
Adviser, the Administrator or the Distributor;
(f) Taxes levied against the Portfolio;
(g) Brokerage fees and commissions in connection with the purchase and
sale of portfolio securities for the Portfolio;
(h) Costs, including the interest expense, of borrowing money;
(i) Costs and/or fees incident to Trustees and shareholder meetings of
the Trust and the Portfolio, the preparation and mailings of
prospectuses and reports of the Portfolio to its existing
shareholders, the filing of reports with regulatory bodies, the
maintenance of the Portfolio's legal existence, and the
registration of shares with federal and state securities
authorities;
(j) Legal fees, including the legal fees related to the registration
and continued qualification of the Portfolio's shares for sale;
(k) Costs of printing any share certificates representing shares of
the Portfolio;
(l) Fees and expenses of Trustees who are not affiliated persons, as
defined in the 1940 Act, of the Co-Adviser, the Investment
Adviser, the Distributor or any of their affiliates; and
(m) Its pro rata portion of the fidelity bond required by Section
17(g) of the 1940 Act, or of other insurance premiums.
5. Activities and Affiliates of the Co-Adviser. The Trustees acknowledge
-------------------------------------------
that the Co-Adviser, or one or more of its affiliates, may have investment
responsibilities or render investment advice to or perform other investment
advisory services for other individuals or entities and that the Co-Adviser,
its affiliates or any of its or their directors, officers, agents or employees
may buy, sell or trade in any securities for its or their respective accounts
(such individuals, entities and accounts hereinafter referred to as "Affiliated
Accounts"). Subject to the provisions of paragraph 2 hereof, the Trustees agree
that the Co-Adviser or its affiliates may give advice or exercise investment
responsibility and take such other action with respect to other Affiliated
Accounts which may differ from the advice given or the timing or nature of
action taken with respect to the Portfolio, provided that the Co-Adviser acts in
good faith and in accordance with applicable law or as permitted by an exemption
order issued by the SEC, and provided further, that, as applicable to the
Portfolio, it is the Co-Adviser's policy to allocate within its reasonable
13
<PAGE>
discretion, investment opportunities to the Portfolio over a period of time on a
fair and equitable basis relative to the Affiliated Accounts, taking into
account the investment objectives and policies of the Portfolio and any specific
investment restrictions applicable thereto. The Trust acknowledges that one or
more of the Affiliated Accounts may at any time hold, acquire, increase,
decrease, dispose of or otherwise deal with positions in investments in which
the Portfolio may have an interest from time to time, whether in transactions
which involve the Portfolio or otherwise. The Co-Adviser shall not have any
obligation to acquire for the Portfolio a position in any investment which any
Affiliated Account may acquire, and the Portfolio shall have no first refusal,
coinvestment or other rights in respect of any investment, either for the
Portfolio or otherwise.
6. Compensation of the Co-Adviser.
------------------------------
(a) For all services provided to the Portfolio pursuant to this
Agreement, the Trust shall pay the Co-Adviser, and the Co-Adviser
agrees to accept as full compensation therefor, an investment advisory
fee, payable as soon as practicable after the last day of each month,
calculated using an annual rate of 0.15% of the average daily net
assets of the Portfolio (the "Annual Rate"). The monthly investment
advisory fee to be paid by the Trust to the Co-Adviser shall be
determined as of the close of business on the last business day of
each month by multiplying one-twelfth of the Annual Rate by the
Average Portfolio Net Assets (hereinafter defined), calculated monthly
as of such day.
(b) For purposes of this paragraph 6, the "Average Portfolio Net
Assets" shall be calculated monthly as of the last business day of
each month and shall mean the sum of the net assets of the Portfolio
calculated each business day during the month divided by the number of
business days in the month (such net assets to be determined as of the
close of business each business day and computed in the manner set
forth in the Declaration of Trust of the Trust).
7. Proxies. The Trustees will vote all proxies solicited by or with
-------
respect to the issuers of securities in which assets of the Portfolio may be
invested from time to time, unless the Trustees delegate such right to the
Investment Adviser.
8. Liabilities of the Co-Adviser.
-----------------------------
(a) The Co-Adviser will not be liable for any loss suffered by the
Portfolio or the Trust as the result of any error of judgment or
mistake of law in connection with its performance of this
Agreement; provided, however, that the Co-Adviser shall be liable
-------- -------
to the Portfolio and the Trust for any loss resulting from (i) a
breach of fiduciary duty with respect to the receipt of
compensation for services; (ii) willful misfeasance, bad faith or
gross negligence in, or reckless disregard by the Co-Adviser of,
the performance of its duties and obligations under this
Agreement; or (iii) any material breach of any of its covenants
contained in this Agreement.
(b) No provision of this Agreement shall be construed to protect any
Trustee or officer of the Trust, or the Co-Adviser, from liability
in violation of Sections 17(h) and (i) of the 1940 Act.
14
<PAGE>
9. Renewal, Amendment and Termination.
----------------------------------
(a) This Agreement shall become effective on the date first written
above and shall remain in force for a period of two (2) years from
such date and from year to year thereafter but only so long as
such continuance is specifically approved at least annually (i) by
the vote of a majority of the Trustees who are not interested
persons of the Portfolio, the Investment Adviser or the Co-
Adviser, cast in person at a meeting called for the purpose of
voting on such approval and by a vote of the Board of Trustees or
(ii) by the vote of a majority of the outstanding voting
securities of the Portfolio. The aforesaid provision that this
Agreement may be continued "annually" shall be construed in a
manner consistent with the 1940 Act and the rules and regulations
thereunder.
(b) This Agreement may be amended at any time, but only by written
agreement between the Trust and the Co-Adviser, which amendment is
subject to the approval of the Trustees and the shareholders of
the Trust in the manner required by the 1940 Act, subject to any
applicable exemption order of the SEC modifying the provisions of
the 1940 Act with respect to approval of amendments to this
Agreement.
(c) This Agreement:
(i) may at any time be terminated without the payment of any
penalty either by vote of the Trustees or by vote of a
majority of the outstanding voting securities of the
Portfolio, on sixty (60) days' written notice to the Co-
Adviser;
(ii) shall immediately terminate in the event of its assignment;
and
(iii) may be terminated by the Co-Adviser on sixty (60) days'
written notice to the Trust.
(d) As used in this Section 9, the terms "assignment", "interested
person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth in the 1940 Act and
the rules and regulations thereunder, subject to any applicable
orders of exemption issued by the SEC.
10. Books and Records.
-----------------
(a) The Trustees shall provide to the Co-Adviser copies of the Trust's
most recent prospectus and statement of additional information (as
each may be amended or supplemented from time to time) which relate to
any class of shares representing interests in the Portfolio.
(b) In compliance with the requirements of Rule 3la-3 of the rules
promulgated under the 1940 Act ("Rules"), the Co-Adviser hereby agrees
that all records which it maintains for the Trust are the property of
the Trust and further agrees to surrender promptly to the Trust any
such records upon the Trust's request. The Co-Adviser further agrees
to preserve for the periods prescribed by Rule 3la-2, the records
required to be maintained by the Co-Adviser hereunder pursuant to Rule
3la-1 of the Rules.
15
<PAGE>
11. Notices. All notices, requests, demands or other communications
-------
hereunder shall be in writing and shall be deemed given, if delivered
personally, on the day delivered or if mailed, by certified or registered mail,
postage prepaid, return receipt requested, three (3) days after placement in the
United States mail, to the addresses below:
If to Trust: First Funds
c/o James V. Hyatt, Esq.
ALPS Mutual Fund Services, Inc.
370 17/th/ Street, Suite 2700
Denver, Colorado 80202
With a copy to: Daniel B. Hatzenbuehler, Esq.
Baker, Donelson, Bearman, Caldwell, P.C.
165 Madison Avenue, 21/st/ Floor
Memphis, TN 38103
If to Co-Adviser: C. Douglas Kelso, III
c/o: First Tennessee Bank National Association
4990 Poplar Avenue, Third Floor
Memphis, TN 38117
With a copy to: Adella Heard, Esq.
First Tennessee Bank National Corporation
165 Madison Avenue, Third Floor
Memphis, TN 38103
12. Severability. If any provision of this Agreement shall be held or
------------
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
13. Limitation on Liability. Co-Adviser is hereby expressly put on notice
-----------------------
of the limitation of shareholder liability as set forth in the Declaration of
Trust and agrees that obligations assumed by the Portfolio pursuant to this
Agreement shall be limited in all cases to the Portfolio and its assets. Co-
Adviser agrees that it shall not seek satisfaction of any such obligation from
the shareholders or any individual shareholder of the Portfolio, nor from the
Trustees or any individual Trustee of the Portfolio.
14. Governing Law. To the extent that state law has not been preempted by
-------------
the provisions of any law of the United States heretofore or hereafter enacted,
as the same may be amended from time to time, this Agreement shall be
administered, construed and enforced according to the laws of the State of
Tennessee without giving effect to the choice of laws provisions thereof.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as of the day and year first written above.
FIRST FUNDS
By:___________________________________
Secretary
FIRST TENNESSEE BANK NATIONAL ASSOCIATION
By:___________________________________
17
<PAGE>
EXHIBIT 5 (h)
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
--------------------------------------------
THIS INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT is made as of this 29th
day of August, 1997, between FIRST FUNDS, a business trust organized under the
laws of the Commonwealth of Massachusetts (the "Trust"), on behalf of its
INTERMEDIATE BOND PORTFOLIO (the "Portfolio") and FIRST TENNESSEE BANK NATIONAL
ASSOCIATION, a national banking association (the "Investment Adviser").
WHEREAS, the Trust has been organized to operate as an investment company
registered under the Investment Company Act of 1940 (the "1940 Act") with
multiple series of shares (hereinafter referred to as Classes) having varying
preferences, limitations and relative rights, and to invest and reinvest the
assets of the Portfolio in securities pursuant to investment objectives and
policies for the Portfolio;
WHEREAS, the Portfolio desires to avail itself of the services,
information, advice, assistance and facilities of an investment adviser and to
have an investment adviser provide or perform for it various investment
advisory, statistical, research, portfolio investment adviser selection and
other services as set forth more fully herein;
NOW, THEREFORE, Trust, on behalf of the Portfolio, and Investment Adviser
agree as follows:
1. Employment of the Investment Adviser. The Trust hereby employs the
------------------------------------
Investment Adviser to provide investment advice and to manage the investment and
reinvestment of the Portfolio's assets in the manner set forth in Section 2A of
this Agreement, subject to the direction of the Trustees, for the period, in the
manner, and on the terms hereinafter set forth. The Investment Adviser hereby
accepts such employment and agrees during such period to render the services and
to assume the obligations herein set forth. The Investment Adviser shall for
all purposes herein be deemed to be an independent contractor and shall, except
as expressly provided or authorized (whether herein or otherwise), have no
authority to act or represent the Trust in any way or otherwise be deemed an
agent of the Trust.
2. Obligation of and Services to be Provided by the Investment Adviser.
-------------------------------------------------------------------
The Investment Adviser undertakes to provide the services hereinafter set forth
and to assume the following obligations:
A. Investment Advisory Services.
(a) The Investment Adviser shall have overall responsibility for the
day-to-day management and investment of the Portfolio's assets
and securities portfolio subject to and in accordance with the
investment objectives and policies of the Portfolio, and any
directions which the Trustees and officers of the Trust may issue
to the Investment Adviser from time to time, and shall perform
the following services: provide or cause to be provided
investment research and credit analysis concerning the
Portfolio's investments, (ii) conduct or cause to be conducted a
continual program of investment of the Portfolio's assets, (iii)
place or cause to be placed orders for all purchases and sales of
the investments made for the Portfolio, and (iv) maintain or
cause to be maintained the books and records required in
connection with its duties hereunder.
<PAGE>
(b) The Investment Adviser shall advise the Trustees of the Trust
regarding overall investment programs and strategies for the
Portfolio, revision of such programs as necessary, and shall
monitor and report periodically to the Trustees concerning the
implementation of such programs and strategies.
(c) The Investment Adviser, with the prior approval of the Trustees
(and the shareholders to the extent required by applicable law)
as to particular appointments, shall be permitted to (i) engage
one or more persons or companies ("Sub-Advisers"), which may have
full investment discretion to make all determinations with
respect to the investment and reinvestment of all or any portion
of the Portfolio's assets and the purchase and sale of all or any
portion of the Portfolio securities, subject to the terms and
conditions of this Agreement and the written agreement with any
Sub-Adviser; and (ii) take such steps as may be necessary to
implement such appointment.
(d) The Investment Adviser shall be solely responsible f or paying
the fees and expenses of any Sub-Adviser for its services to the
Investment Adviser and the Portfolio. Except for instructions or
advice given to the Sub-Adviser by the Investment Adviser, the
Investment Adviser shall not be responsible or liable for the
investment merits of any decision by the Sub-Adviser to purchase,
hold or sell a security for the Portfolio.
(e) In the event one or more Sub-Advisers is appointed pursuant to
subparagraph (c) hereof, the Investment Adviser shall (i) monitor
and evaluate the investment performance of each Sub-Adviser
employed by the Investment Adviser for the Portfolio; (ii)
allocate the portion of the Portfolio's assets to be managed by
each Sub-Adviser; (iii) recommend changes in or additional Sub-
Advisers when appropriate; and (iv) compensate each Sub-Adviser.
(f) The Investment Adviser shall render such reports to the Trustees,
at regular meetings thereof, as the Trustees may reasonably
request regarding, among other things, the investment performance
of the Portfolio, including, if any Sub-Adviser has been
appointed, the investment performance of each Sub-Adviser.
(g) The Investment Adviser will monitor and coordinate, to the extent
necessary, the activities of the custodian, transfer agent,
distributor, administrator and pricing agent insofar as their
respective activities relate to the duties and obligations of the
Investment Adviser hereunder.
B. Provision of Information Necessary for Preparation of Securities
Registration Statements, Amendments and Other Materials.
The Investment Adviser will make available and provide such financial,
accounting and statistical information related to its duties and
responsibilities hereunder as required by the Trustees and necessary
for the preparation of registration statement, reports and other
documents required by federal and state securities laws and such other
information as the Trustees may reasonably request for use by the
Trust and its distributor for the underwriting and distribution of the
Portfolio's shares.
C. Other Obligations and Services.
<PAGE>
The Investment Adviser agrees to make available its officers and
employees to the Trustees and officers of the Trust for consultation
and discussions regarding the investment advisory activities of the
Portfolio.
3. Covenants by Investment Adviser. The Investment Adviser agrees with
-------------------------------
respect to the services provided to the Portfolio that it:
(a) will conform with all applicable rules and regulations of the
Securities and Exchange Commission ("SEC") and will in addition
conduct its activities under this Agreement in accordance with
applicable regulations of the Office of the Comptroller of the
Currency pertaining to the investment advisory activities of
national banks which are applicable to the Investment Adviser;
(b) will not make loans to any person for the purpose of purchasing
or carrying Portfolio shares, or make loans to the Trust;
(c) will not purchase shares of the Portfolio for its own investment
account;
(d) will maintain all books and records with respect to the
securities transactions of the Portfolio and furnish the Trustees
such periodic and special reports as the Trustees may request
with respect to the Portfolio;
(e) will treat confidentially and as proprietary information of the
Trust all records and other information relative to the Trust and
the Portfolio and prior, present or potential shareholders (other
than any information which Investment Adviser may have obtained
about shareholders from other business relationships with such
shareholders), and will not use such records and information for
any purpose other than performance of its responsibilities and
duties hereunder (except after prior notification to and approval
in writing by the Trust, which approval shall not be unreasonably
withheld and may not be withheld and will be deemed granted where
the Investment Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to
divulge such information by duly constituted authorities, when so
requested by the Trust or when otherwise required or permitted by
law); and
(f) will immediately notify the Trust of the occurrence of any event
which would disqualify Investment Adviser or any Sub-Adviser from
serving as investment adviser of an investment company.
4. Transaction Procedures. All investment transactions on behalf of the
----------------------
Portfolio will be compensated by payment to or delivery by the custodian for the
Portfolio duly appointed by the Trustees of the Trust (the "Custodian"), or such
approved depositories or agents duly appointed by the Trustees and as may be
designated by the Custodian in writing, as custodian for the Portfolio, of all
cash and/or securities due to or from the Portfolio, and neither Investment
Adviser nor any Sub-Adviser shall have possession or custody thereof or any
responsibility or liability with respect thereto. The Investment Adviser or any
Sub-Adviser effecting transactions on behalf of the Portfolio shall advise the
Custodian of all investment orders for the Portfolio placed by it with brokers,
dealers, banks and other parties ("Brokers"). The Trustees shall issue, or
cause to be issued, to the Custodian such instructions as may be appropriate in
connection with
<PAGE>
the settlement of any transaction initiated by the Investment Adviser or any
Sub-Adviser. The Portfolio shall be responsible for all custodial arrangements
and the payment of all custodial charges and fees, and, upon the giving of
proper instructions to the Custodian, Investment Adviser shall have no
responsibility or liability with respect to custodian arrangements or the acts,
omissions or other conduct of the Custodian, except that it shall be the
responsibility of the Investment Adviser or any Sub-Adviser to take appropriate
action if the Custodian fails properly to confirm execution of the instructions
to the Investment Adviser or any Sub-Adviser in a written form duly agreed upon
by the Custodian and the Investment Adviser or any Sub-Adviser.
5. Execution and Allocation of Portfolio Brokerage. The Investment
-----------------------------------------------
Adviser shall place, or shall cause each Sub-Adviser to place, subject to the
limitations contained in this paragraph 5, on behalf of the Portfolio, orders
for the execution of the Portfolio's securities transactions. Neither the
Investment Adviser nor any Sub-Adviser is authorized by the Trust to take any
action, including the purchase or sale of securities for the account of the
Portfolio, (a) in contravention of (i) any investment restrictions set forth in
the 1940 Act and the rules thereunder; (ii) specific instructions adopted by the
Trustees and communicated to the Investment Adviser; (iii) the investment
objectives, policies and restrictions of the Portfolio as set forth in the
Trust's current registration statement, as amended from time to time; or (iv)
instructions from the Trustees to the Investment Adviser or from the Investment
Adviser to any Sub-Adviser, or (b) which would have the effect of causing the
Trust to fail to qualify or to cease to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended, or any succeeding
statute.
The Investment Adviser or, if any Sub-Adviser shall be appointed, then the
Sub-Adviser, may place orders pursuant to its investment determinations for the
Portfolio either directly with the issuer or with any Brokers. In placing
orders with any Broker, the Investment Adviser or any Sub-Adviser will consider
the experience and skill of a Broker's securities traders as well as the
Broker's financial responsibility and administrative efficiency. The Investment
Adviser or any Sub-Adviser will attempt to obtain the best price and the most
favorable execution of its orders with any Brokers; however, in so doing, the
Investment Adviser or any Sub-Adviser may consider, subject to the approval of
the Trustees, the research, statistical, and related brokerage services provided
or to be provided by such Broker to the Portfolio. A commission paid to such
Brokers may be higher than that which another Broker would have charged for
effecting the same transaction, provided that the Investment Adviser or any Sub-
Adviser determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such Broker when
viewed in terms of either the particular transaction or the overall
responsibilities of the Investment Adviser or any Sub-Adviser with respect to
the accounts as to which it exercises investment discretion. It is understood
that neither the Investment Adviser nor any Sub-Adviser has adopted a formula
for selection of Brokers for the execution of the Portfolio's investment
transactions on occasions when either the Investment Adviser or any Sub-Adviser
deems the purchase or sale of a security to be in the best interest of the
Portfolio as well as other clients, the Investment Adviser or Sub-Adviser, to
the extent permitted by applicable laws and regulations, may, but shall be under
no obligation to, aggregate the securities to be sold or purchased in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as expenses incurred in the transaction, will be made by the Investment
Adviser or Sub-Adviser in the manner it considers to be the most equitable and
consistent with its fiduciary obligations to the Portfolio and to such other
clients.
The Investment Adviser will not, and will cause each Sub-Adviser not to,
execute any Portfolio transactions for the account of the Portfolio with a
Broker which is an "affiliated person" (as defined in the 1940 Act) of the
Trust, the Trust's distributor, the Investment Adviser or any Sub-Adviser except
in
<PAGE>
accordance with applicable laws, rules, regulations or effective exemption
orders issued by the SEC pursuant to the 1940 Act without the prior written
approval of the Trustees. The Trust agrees to provide the Investment Adviser,
and the Investment Adviser agrees to furnish to each Sub-Adviser, a list of
brokers and dealers which are "affiliated persons" of the Trust. The Investment
Adviser likewise agrees to furnish, and to cause each Sub-Adviser to furnish, to
the Trust, with respect to such Sub-Adviser, a list of Brokers which are
"affiliated persons" of the Investment Adviser and each Sub-Adviser. In no
instance will Portfolio securities be purchased from or sold to the Trust's
principal distributor, Investment Adviser, any Sub-Adviser or any affiliate
thereof, except to the extent permitted by an exemption order issued by the SEC
or by applicable law.
The Investment Adviser shall render regular reports to the Trustees of the
total brokerage business placed by it and any Sub-Adviser(s) and the manner in
which the allocation of such brokerage has been accomplished.
6. Expenses of the Portfolio. The Portfolio or Trust will pay, or will
-------------------------
enter into arrangements that require third parties to pay, all expenses other
than those expressly assumed by the Investment Adviser herein, which expenses
payable by the Portfolio or Trust shall include:
(a) Expenses of all audits by independent public accountants;
(b) Expenses of transfer agent, registrar, dividend disbursing agent
and shareholder recordkeeping services;
(c) Expenses of custodial services including recordkeeping services
provided by the custodian;
(d) Expenses of obtaining quotations for calculating the value of the
Portfolio's net assets;
(e) Salaries and other compensation of any of its executive officers
or employees, if any, who are not officers, directors,
stockholders or employees of the Investment Adviser, the
Administrator or the Distributor;
(f) Taxes levied against the Portfolio;
(g) Brokerage fees and commissions in connection with the purchase
and sale of portfolio securities for the Portfolio;
(h) Costs, including the interest expense, of borrowing money;
(i) Costs and/or fees incident to Trustees and shareholder meetings
of the Trust and the Portfolio, the preparation and mailings of
prospectuses and reports of the Portfolio to its existing
shareholders, the filing of reports with regulatory bodies, the
maintenance of the Portfolio's legal existence, and the
registration of shares with federal and state securities
authorities;
(j) Legal fees, including the legal fees related to the registration
and continued qualification of the Portfolio's shares for sale;
(k) Costs of printing any share certificates representing shares of
the Portfolio;
<PAGE>
(l) Fees and expenses of Trustees who are not affiliated persons, as
defined in the 1940 Act, of the Investment Adviser, any Sub-
Adviser, the Distributor or any of their affiliates; and
(m) Its pro rata portion of the fidelity bond required by Section
17(g) of the 1940 Act, or of other insurance premiums.
7. Activities and Affiliates of the Investment Adviser. The Trustees
---------------------------------------------------
acknowledge that Investment Adviser or any Sub-Adviser, or one or more of its
affiliates, may have investment responsibilities or render investment advice to
or perform other investment advisery services for other individuals or entities
and that Investment Adviser or any Sub-Adviser, its affiliates or any of its or
their directors, officers, agents or employees may buy, sell or trade in any
securities for its or their respective accounts (such individuals, entities and
accounts hereinafter referred to as Affiliated Accounts). Subject to the
provisions of paragraph 2 hereof, the Trustees agree that Investment Adviser or
its affiliates and any Sub-Adviser(s) or its affiliates, may give advice or
exercise investment responsibility and take such other action with respect to
other Affiliated Accounts which may differ from the advice given or the timing
or nature of action taken with respect to the Portfolio, provided that
Investment Adviser or Sub-Adviser acts in good faith and in accordance with
applicable law or as permitted by an exemption order issued by the SEC, and
provided further, that it is Investment Adviser's and Sub-Adviser's policy to
allocate within its reasonable discretion, investment opportunities to the
Portfolio over a period of time on a fair and equitable basis relative to the
Affiliated Accounts, taking into account the investment objectives and policies
of the Portfolio and any specific investment restrictions applicable thereto.
The Trust acknowledges that one or more of the Affiliated Accounts may at any
time hold, acquire, increase, decrease, dispose of or otherwise deal with
positions in investments in which the Portfolio may have an interest from time
to time, whether in transactions which involve the Portfolio or otherwise.
Neither the Investment Adviser nor any Sub-Adviser shall have any obligation to
acquire for the Portfolio a position in any investment which any Affiliated
Account may acquire, and the Portfolio shall have no first refusal, coinvestment
or other rights in respect of any investment, either for the Portfolio or
otherwise.
8. Compensation of the Investment Adviser. (a) For all services provided
--------------------------------------
to the Portfolio pursuant to this Agreement, the Trust shall pay the Investment
Adviser, and the Investment Adviser agrees to accept as full compensation
therefor, an investment advisory fee, payable as soon as practicable after the
last day of each month, calculated using an annual rate of 0.50% (the "Annual
Rate"). The monthly investment advisory fee to be paid by the Trust to the
Investment Adviser shall be determined as of the close of business on the last
business day of each month by multiplying one-twelfth of the Annual Rate by the
Average Portfolio Net Assets (hereinafter defined), calculated monthly as of
such day.
(b) For purposes of this paragraph 8, the "Average Portfolio Net Assets"
shall be calculated monthly as of the last business day of each month and shall
mean the sum of the net assets of the Portfolio calculated each business day
during the month divided by the number of business days in the month (such net
assets to be determined as of the close of business each business day and
computed in the manner set forth in the Declaration of Trust of the Trust).
(c) The Investment Adviser agrees that its compensation for any fiscal
year shall be reduced by the amount, if any, by which the expenses of the
Portfolio for such fiscal year exceed the most restrictive state Blue Sky
expense limitation in effect from time to time, to the extent required by such
limitation. The Investment Adviser shall refund to the Portfolio the amount of
any reduction of the Investment Adviser's compensation pursuant to this
paragraph 8, reduced by the amount of any rebate paid
<PAGE>
directly to the Portfolio by any Sub-Adviser engaged by Investment Adviser, as
promptly as practicable after the end of such fiscal year, provided that the
Investment Adviser will not be required to pay the Portfolio an amount greater
than the fee paid to the Investment Adviser in respect of such year pursuant to
this Agreement. As used in this paragraph 8, "expenses" shall mean those
expenses included in the most restrictive state Blue Sky limitation, having the
broadest specification in such state's Blue Sky statute, and "expense
limitation" means a limit on the maximum annual expenses which may be incurred
by an investment company determined by multiplying a fixed percentage by the
average, or by multiplying more than one such percentage by different specified
amounts of the average, of the values of an investment company's net assets for
a fiscal year. The words "most restrictive state Blue Sky expense limitation"
shall be construed to result in the largest reduction of the Investment
Adviser's compensation for any fiscal year of the Portfolio; provided, however,
that nothing in this Agreement shall require the Investment Adviser to reduce
its fees if not required by an applicable statue or regulation referred to above
in this paragraph 8.
9. Proxies. The Trustees will vote all proxies solicited by or with
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respect to the issuers of securities in which assets of the Portfolio may be
invested from time to time, unless the Trustees delegate such right to the
Investment Adviser.
10. Liabilities of the Investment Adviser.
-------------------------------------
(a) The Investment Adviser will not be liable for any error or
judgment or mistake of law or for any loss suffered by the
Portfolio or the Trust in connection with the matters to which
this Agreement relates, except that the Investment Adviser shall
be liable to the Portfolio and the Trust for a loss resulting
from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the
Investment Adviser in the performance of duties or reckless
disregard by it of its obligations or duties under this
Agreement.
(b) The Investment Adviser shall indemnify and hold harmless the
Portfolio from any loss, cost, expense or damage resulting from
the failure of any Sub-Adviser to comply with (i) any statement
included in the Trust's registration statement furnished by
Investment Adviser for inclusion therein, or (ii) instructions
given by the Investment Adviser to any Sub-Adviser for the
purpose of ensuring the Portfolio's compliance with the
applicable requirements of the 1940 Act or of the requirements of
the Internal Revenue Code of 1986 applicable to regulated
investment companies, or of successor statutes; provided,
however, that the indemnification provided by this subparagraph
10(b) shall apply only to the extent that the Sub-Adviser is
liable to the Trust and, after demand by the Trust, is unable or
refuses to discharge its obligation to the Portfolio.
(c) No provision of this Agreement shall be construed to protect any
Trustee or officer of the Trust, or the Investment Adviser, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
11. Renewal, Amendment and Termination.
----------------------------------
(a) This Agreement shall become effective on the date first written
above and shall remain in force for a period of two (2) years
from such date ' and from year to year thereafter but only so
long as such continuance is specifically approved at least
annually (i) by the vote of a majority of the Trustees who are
not interested persons of the Portfolio or the Investment
Adviser, cast in person at a meeting called for the purpose of
voting on
<PAGE>
such approval and by a vote of the Board of Trustees or (ii) by
the vote of a majority of the outstanding voting securities of
the Portfolio. The aforesaid provision that this Agreement may be
continued "annually" shall be construed in a manner consistent
with the 1940 Act and the rules and regulations thereunder.
(b) This Agreement may be amended at any time, but only by written
agreement between the Trust and the Investment Adviser, which
amendment is subject to the approval of the Trustees and the
shareholders of the Trust in the manner required by the 1940 Act,
subject to any applicable exemption order of the SEC modifying
the provisions of the 1940 Act with respect to approval of
amendments to this Agreement.
(c) This Agreement:
(i) may at any time be terminated without the payment of any
penalty either by vote of the Trustees or by vote of a
majority of the outstanding voting securities of the
Portfolio, on sixty (60) days' written notice to the
Investment Adviser;
(ii) shall immediately terminate in the event of its assignment;
and
(iii) may be terminated by the Investment Adviser on sixty (60)
days' written notice to the Trust.
(d) As used in this Section 11, the terms "assignment", "interested
person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth in the 1940 Act and
the rules and regulations thereunder, subject to any applicable
orders of exemption issued by the SEC.
12. Books and Records. (a) The Trustees shall provide to the Investment
-----------------
Adviser copies of the Trust's most recent prospectus and statement of additional
information (as each may be amended or supplemented from time to time) which
relate to any class of shares representing interests in the Portfolio.
(b) In compliance with the requirements of Rule 3la-3 of the rules
promulgated under the 1940 Act ("Rules"), the Investment Adviser hereby agrees
that all records which it maintains for the Trust are the property of the Trust
and further agrees to surrender promptly to the Trust any such records upon the
Trust's request. The Investment Adviser further agrees to preserve for the
periods prescribed by Rule 3la-2, the records required to be maintained by the
Investment Adviser hereunder pursuant to Rule 3la-1 of the Rules.
13. Notices. All notices, requests, demands or other communications
-------
hereunder shall be in writing and shall be deemed given, if delivered
personally, on the day delivered or if mailed, by certified or registered mail,
postage prepaid, return receipt requested, three (3) days after placement in the
United States mail, to the addresses below:
If to Trust: First Funds
c/o James V. Hyatt
ALPS Mutual Fund Services, Inc.
Suite 2700
Denver, Colorado 80202
<PAGE>
With a copy to: Charles T. Tuggle, Jr., Esq.
Baker, Donelson, Bearman, Caldwell, P.C.
165 Madison Avenue, 21st Floor
Memphis, TN 38103
If to Investment Adviser: First Tennessee Bank National Association
c/o C. Douglas Kelso, III
Senior Vice President and Manager
4990 Poplar Avenue, Third Floor
Memphis, TN 38117
With a copy to: Adella Heard, Esq.
First Tennessee Bank National Association
165 Madison Avenue, 3rd Floor
Memphis, TN 38103
14. Severability. If any provision of this Agreement shall be held or made
------------
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
15. Limitation on Liability. Investment Adviser is hereby expressly put on
-----------------------
notice of the limitation of shareholder liability as set forth in the
Declaration of Trust and agrees that obligations assumed by the Portfolio
pursuant to this Agreement shall be limited in all cases to the Portfolio and
its assets. Investment Adviser agrees that it shall not seek satisfaction of any
such obligation from the shareholders or any individual shareholder of the
Portfolio, nor from the Trustees or any individual Trustee of the Portfolio.
16. Governing Law. To the extent that state law has not been preempted by
-------------
the provisions of any law of the United States heretofore or hereafter enacted,
as the same may be amended from time to time, this Agreement shall be
administered, construed and enforced according to the laws of the State of
Tennessee without giving effect to the choice of laws provisions thereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as of the day and year first written above.
FIRST FUNDS
By: ________________________________
Name: James V. Hyatt
Title: Secretary
FIRST TENNESSEE BANK NATIONAL ASSOCIATION
By: ________________________________
Name: C. Douglas Kelso, III
Title: Senior Vice President
<PAGE>
EXHIBIT 5(i)
SUB-ADVISORY AGREEMENT
----------------------
AGREEMENT made this 2nd day of March 1998, between First Tennessee Bank National
Association (herein called the "Investment Adviser") and Martin & Company, Inc.,
a Tennessee corporation (herein called the "Sub-Adviser").
WHEREAS, the Investment Adviser is the investment adviser to First Funds, a
business trust organized under the laws of Massachusetts (herein called the
"Trust"), a registered open-end investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act") consisting of one or
more series of shares, each having its own investment policies; and
WHEREAS, the Sub-Adviser is an investment adviser under the Investment
Advisers Act of 1940; and
WHEREAS, the Investment Adviser wishes to retain the Sub-Adviser to provide
investment advisory services in connection with the Trust's Intermediate Bond
Portfolio (herein called the "Portfolio") a series of the Trust; and
WHEREAS , the Sub-Adviser is willing to provide such services to the
Investment Adviser upon the conditions and for the compensation set forth below;
NOW, THEREFORE, each party agrees as follows:
1. Appointment. (a) The Investment Adviser hereby appoints the Sub-
-----------
Adviser its sub-adviser with respect to the Portfolio, as permitted in the
Investment Advisory and Management Agreement between the Investment Adviser and
the Trust dated August 29, 1997 (such Agreement or the most recent successor
advisory agreement between such parties is herein called the "Advisory
Agreement"). The Sub-Adviser accepts such appointment and agrees to use its best
professional judgment to make timely investment decisions for the Portfolio with
respect to the investments of the Portfolio in accordance with the provisions of
this Agreement for the compensation herein provided.
(b) The Sub-Adviser shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Trust or the Investment Adviser in any way or otherwise be deemed an agent of
the Trust or the Investment Adviser.
2. Delivery of Documents. (a) The Investment Adviser shall provide to the
-----------------------
Sub-Adviser copies of the Trust's most recent prospectus and statement of
additional information (as each may be amended or supplemented from time to
time) which relate to any class of shares representing interests in the
Portfolio (each such prospectus and statement of additional
<PAGE>
information as presently in effect, and as they shall from time to time be
amended and supplemented, is herein respectively called a "Prospectus" and a
"Statement of Additional Information").
(b) The Sub-Adviser will make available and provide to the Investment
Adviser such financial accounting, and statistical information related to its
duties and responsibilities hereunder as is necessary for the preparation of
registration statements, reports, and other documents required by federal and
state securities laws and such other information as the Trust's Board of
Trustees (herein called the "Trustees") or the Investment Adviser may reasonably
request for use by the Trust and its distributor for the underwriting and
distribution of the Portfolio shares.
3. Sub-Advisory Services to the Portfolio. Subject to the supervision of
--------------------------------------
the Investment Adviser, the Sub-Adviser will supervise the day-to-day operations
of such portion of the Portfolio's assets as the Investment Adviser shall assign
to the Sub-Adviser and perform the following services with respect to such
portion of assets: (i) provide investment research and credit analysis
concerning the Portfolio's investments, (ii) conduct a continual program of
investment of the Portfolio's assets, (iii) place orders in accordance with
paragraphs 4 to 7 hereof for all purchases and sales of the investments made for
the Portfolio, and (iv) maintain the books and records required in connection
with its duties hereunder. In addition, the Sub-Adviser will keep the Investment
Adviser informed of developments materially affecting the Trust or the
Portfolio. The Sub-Adviser will communicate to the Investment Adviser on each
day that a purchase or sale of a security is effected for the Portfolio (i) the
name of the issuer, (ii) the amount of the purchase or sale, (iii) the name of
the broker, dealer, bank or other person (herein called "Brokers), if any,
through which the purchase or sale will be effected (iv) the CUSIP number of the
security, if any, (v) the Portfolio to which such purchase or sale pertains, and
(vi) such other information as the Investment Adviser may reasonably require for
purposes of fulfilling its obligations to the Trust under the Advisory
Agreement. The Sub-Adviser will render to the Trustees such periodic and special
reports as the Investment Adviser or the Trustees may reasonably request,
including, if applicable, regular reports of the total brokerage business placed
by it and the manner in which the allocation of such brokerage business has been
accomplished. The Sub-Adviser will provide the services rendered by it hereunder
in accordance with the Portfolio's investment objectives, policies, and
restrictions as stated in its current Prospectus and Statement of Additional
Information. Except for instructions or advice given to the Sub-Adviser by the
Investment Adviser, the Investment Adviser shall not be responsible or liable
for the investment merits of any decision by the Sub-Adviser to purchase, hold
or sell a security for the Portfolio.
4. Brokerage: The Sub-Adviser may place orders pursuant to its investment
----------
determinations for the Portfolio either directly with the issuer or with any
Brokers. In placing orders, the Sub-Adviser will consider the experience and
skill of the firm's securities traders as well as the firm's financial
responsibility and administrative efficiency. The Sub-Adviser will attempt to
obtain the best price and the most favorable execution of its orders. Consistent
with these obligations, the Sub-Adviser may, subject to the approval of the
Trustees, select Brokers on
<PAGE>
the basis of the research, statistical, and pricing services they provide to the
Portfolio. A commission paid to such Brokers may be higher than that which
another qualified broker would have charged for effecting the same transaction,
provided that the Sub-Adviser determines in good faith that such commission is
reasonable in terms either of the transaction or the overall responsibility of
the Sub-Adviser to the Portfolio and its other clients and that the total
commissions paid by the Portfolio will be reasonable in relation to the benefits
to the Portfolio over the long term. In no instance will Portfolio securities be
purchased from or sold to the Trust's principal underwriter, the Investment
Adviser, the Sub-Adviser, or any affiliate (as defined in the 1940 Act) thereof,
except to the extent permitted by SEC exemptive order or by applicable law. The
Investment Adviser agrees to provide the Sub-Adviser a list of Brokers which are
"affiliated persons" (as defined in the 1940 Act) of the Trust and the
Investment Adviser. The Sub-Adviser agrees to furnish to the Investment Adviser
and to the Trust a list of Brokers and dealers which are such "affiliated
persons" of the Sub-Adviser. It is understood that neither the Investment
Adviser nor the Sub-Adviser has adopted a formula for selection of Brokers for
the execution of the Portfolios investment transactions.
5. Transaction Procedures. All investment transactions on behalf of the
----------------------
Portfolio will be consummated by payment to or delivery by the duly appointed
custodian for the Portfolio (the "Custodian") , or such depositories or agents
duly appointed by the Trustees and as may be designated by the Custodian in
writing, as custodian for the Portfolio, of all cash and/or securities due to or
from the Portfolio, and the Sub-Adviser shall not have possession or custody
thereof or any responsibility or liability with respect thereto. The Sub-
Adviser in effecting transactions on behalf of the Portfolio shall advise the
Custodian of all investment orders for the Portfolio placed by it with Brokers.
The Investment Adviser shall issue, or cause to be issued, to the Custodian such
instructions as may be appropriate in connection with the settlement of any
transaction initiated by the Sub-Adviser. The Portfolio is responsible for all
custodial arrangements and the payment of all custodial charges and fees, and,
upon the giving of proper instructions to the Custodian, the Sub-Adviser shall
have no responsibility or liability with respect to custodial arrangements or
the acts, omissions or other conduct of the Custodian, except that it shall be
the responsibility of the Sub-Adviser to take appropriate action if the
Custodian fails properly to confirm execution of the instructions to the Sub-
Adviser in a written form duly agreed upon by the Custodian and the Sub-Adviser.
6. Compliance with Laws; Confidentiality. (a) The Sub-Adviser agrees that
-------------------------------------
it will comply with all applicable rules and regulations of all federal and
state regulatory agencies having jurisdiction over the Sub-Adviser in
performance of its duties hereunder (herein called the "Rules"). The Sub-Adviser
will treat confidentially and as proprietary information of the Trust all
records and information relative to the Trust and prior, present or potential
shareholders, and will not use such records and information for any purpose
other than performance of its responsibilities and duties hereunder, except
after prior notification to and approval in writing by the Investment Adviser
and the Trust, which approval shall not be unreasonably withheld and may not be
withheld where the Sub-Adviser may be exposed to civil or criminal contempt
proceedings
<PAGE>
for failure to comply, when required to divulge such information by duly
constituted authorities, or when so requested by the Trust.
(b) The Sub-Adviser is not authorized by the Trust or the Investment
Adviser to take any action, including the purchase or sale of securities for the
account of the Portfolio, (a) in contravention of (i) any investment
restrictions set forth in the 1940 Act and the rules thereunder; (ii) specific
written instructions adopted by the Trustees or the Investment Adviser and
communicated to the Sub-Adviser; or (iii) the investment objectives, policies,
and restrictions of the Portfolio as set forth in the Trust's registration
statement as amended from time to time, or (b) which would have the effect of
causing the Trust to fail to qualify or to cease to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended, or any
succeeding statute.
(c) The Sub-Adviser agrees with respect to the services provided to the
Portfolio that it:
i) will conform with all applicable rules and regulations of the
Securities and Exchange Commission ("SEC");
ii) will not purchase shares of the Portfolio for its own investment
account; and
iii) will immediately notify the Trust and the Investment Adviser of the
occurrence of any event which would disqualify the Sub-Adviser from serving
as investment adviser of an investment company.
7. Control by Trust's Board of Trustees. Any recommendations concerning
------------------------------------
the Portfolio's investment program proposed by the Sub-Adviser to the Portfolio
and to the Investment Adviser pursuant to this Agreement, as well as any other
activities undertaken by the Sub-Adviser on behalf of the Portfolio pursuant
hereto, shall at all times be subject to any applicable directives of the Board
of Trustees of the Trust.
8. Services Not Exclusive. The Sub-Adviser's services hereunder are not
----------------------
deemed to be exclusive, and the Sub-Adviser shall be free to render similar
services to others so long as its services under this Agreement are not impaired
thereby.
9. Books and Records. In compliance with the requirements of Rule 3la-3
-----------------
of the Rules, the Sub-Adviser hereby agrees that all records which it maintains
for the Trust are the property of the Trust and further agrees to surrender
promptly to the Trust and the Investment Adviser any such records upon the
request of the Trust or the Investment Adviser. The Sub-Adviser further agrees
to preserve for the periods prescribed by Rule 3la-2, the records required to be
maintained by the Sub-Adviser hereunder pursuant to Rule 3la-1 of the Rules.
<PAGE>
10. Expenses. During the term of this Agreement, the Sub-Adviser will
--------
bear all expenses in connection with the performance of its services under this
Agreement. The Sub- Adviser shall not bear certain other expenses related to
the operation of the Trust including, but not limited to: taxes levied against
the Trust, the Portfolio or the Investment Adviser; interest; brokerage fees and
commissions in connection with the purchase and sale of portfolio securities for
the Portfolio; and any extraordinary expense items.
11. Compensation. (a) For the services provided and the expenses assumed
------------
pursuant to this Agreement, the Investment Adviser shall pay the Sub-Adviser,
and the Sub-Adviser agrees to accept as full compensation therefor, a sub-
advisory fee payable as soon as practicable after the last day of each month,
calculated using an annual rate of 0.30% (the "Annual Rate").
(b) The monthly sub-advisory fee to be paid by the Investment Adviser
to the Sub-Adviser shall be determined as of the close of business on the last
business day of each month by multiplying one-twelfth of the Annual Rate by the
Average Portfolio Net Assets (hereinafter defined) calculated monthly as of such
day.
(c) For the purposes of this paragraph, the "Average Portfolio Net
Assets" shall be calculated monthly as of the last business day of each month
and shall mean the sum of the net assets of the Portfolio calculated each
business day during the month divided by the number of business days in the
month (such net assets to be determined as of the close of business each
business day and computed in the manner set forth in the Declaration of Trust of
the Trust).
12. Limitation on Liability. (a) The Sub-Adviser will not be liable for
-----------------------
any error or judgment or mistake of law or for any loss suffered by the
Investment Adviser, the Portfolio or the Trust in connection with the matters to
which this Agreement relates, except that the Sub-Adviser shall be liable to the
Investment Adviser, the Portfolio or the Trust for a loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the Sub-Adviser's part in the performance of its duties or
reckless disregard by it of its obligations or duties under this Agreement.
(b) The Sub-Adviser shall indemnify and hold harmless the Trust, the
Portfolio, and the Investment Adviser from any loss, cost, expense or damage
resulting from the failure of the descriptive information furnished by the Sub-
Adviser to be accurate in all material respects at the time provided or the
failure of the Sub-Adviser to comply in all material respects with the
investment objectives and policies and restrictions as set forth in the Trust's
registration statements as amended from time to time.
13. Duration, Renewal, Amendment, and Termination. (a) This Agreement
---------------------------------------------
shall become effective on the date first written above and shall remain in force
for a period of two (2) years from such date, and from year to year thereafter
but only so long as such continuance is specifically approved at least annually
by the Investment Adviser, and (i) by the vote of a majority of the Trustees who
are not interested persons of the Investment Adviser or the Sub-Adviser, cast
<PAGE>
in person at a meeting called for the purpose of voting on such approval and by
a vote of the Trustees or (ii) by the vote of a majority of the outstanding
voting securities of the Portfolio. The aforesaid provision that this Agreement
may be continued "annually" shall be construed in a manner consistent with the
1940 Act and the rules and regulations thereunder.
(b) This Agreement may be amended at any time, but only by written
agreement between the Investment Adviser and the Sub-Adviser, which amendment is
subject to the approval of the Trustees and the shareholders of the Trust in the
manner required by the 1940 Act, subject to any applicable exemptive order of
the SEC modifying the provisions of the 1940 Act with respect to approval of
amendments of this Agreement.
(c) This Agreement: (i) may at any time be terminated without the
payment of any penalty either by vote of the Trustees or by vote of a majority
of the outstanding voting securities of the Portfolio, on sixty (60) days'
written notice to the Sub-Adviser, (ii) shall immediately terminate in the event
of its assignment; and (iii) may be terminated by the Sub-Adviser on sixty (60)
days' written notice to the Investment Adviser and by the Investment Adviser on
sixty (60) days' written notice to the Sub-Adviser.
(d) As used in this Section 12, the terms "assignment," "interested
person," and "vote of a majority of the outstanding voting securities" shall
have the meanings set forth in the 1940 Act and the rules and regulations
thereunder, subject to any applicable orders of exemption issued by the SEC.
(e) All notices, requests, demands or other communications hereunder
shall be in writing and shall be deemed given, if delivered personally, on the
day delivered or if mailed by certified or registered mail, postage prepaid,
return receipt requested, three (3) days after placement in the United States
mail, to the addresses below:
If to Investment Adviser:
C. Douglas Kelso, III
c/o First Tennessee Bank National Association
4990 Poplar Avenue, Third Floor
Memphis, TN 38117
If to Sub-Adviser:
A. David Martin, President
Martin & Company, Inc.
Two Centre Square, Suite 200
625 South Gay St.
Knoxville, TN 37902
If to Trust:
c/o James V. Hyatt, Esq.
ALPS Mutual Funds Services, Inc.
370 17th St., Suite 3100
<PAGE>
Denver, CO 80302
14. Limitation on Liability. The Sub-Adviser is hereby expressly put on
-----------------------
notice of the limitation of shareholder liability as set forth in the
Declaration of Trust and agrees that obligations assumed by the Portfolio
pursuant to this Agreement shall be limited in all cases to the Portfolio and
its assets. Sub-Adviser agrees that it shall not seek satisfaction of any such
obligation from the shareholders or any individual shareholder of the Portfolio,
nor from the Trustees or any individual Trustee of the Portfolio.
15. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any provisions
hereof or otherwise affect their construction or effect. If any provision of
this Agreement shall be held or made invalid by a court decision, statute, rule
or otherwise, the remainder of this agreement shall not be affected thereby.
This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors. To the extent that state law
has not been preempted by the provisions of any law of the United States
heretofore or hereafter enacted, as the same may be amended from time to time,
this Agreement shall be administered, construed, and enforced according to the
laws of the State of Tennessee without giving effect to the choice of laws
provisions thereof.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers designated below as of the day and
year first above-written.
FIRST TENNESSEE BANK NATIONAL ASSOCIATION
By:____________________________________
Name: C. Douglas Kelso, III
Title: Senior Vice President
MARTIN & COMPANY, INC.
By:____________________________________
Name: A. David Martin
Title: President
<PAGE>
EXHIBIT 5(j)
SUB-ADVISORY AGREEMENT
----------------------
AGREEMENT made this 2nd day of March 1998, between First Tennessee Bank National
Association (herein called the "Investment Adviser") and Martin & Company, Inc.,
a Tennessee corporation (herein called the "Sub-Adviser").
WHEREAS, the Investment Adviser is the investment adviser to First Funds, a
business trust organized under the laws of Massachusetts (herein called the
"Trust"), a registered open-end investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act") consisting of one or
more series of shares, each having its own investment policies; and
WHEREAS, the Sub-Adviser is an investment adviser under the Investment
Advisers Act of 1940; and
WHEREAS, the Investment Adviser wishes to retain the Sub-Adviser to provide
investment advisory services in connection with the Trust's Tennessee Tax-Free
Portfolio (herein called the "Portfolio") a series of the Trust; and
WHEREAS , the Sub-Adviser is willing to provide such services to the
Investment Adviser upon the conditions and for the compensation set forth below;
NOW, THEREFORE, each party agrees as follows:
1. Appointment. (a) The Investment Adviser hereby appoints the Sub-
-----------
Adviser its sub-adviser with respect to the Portfolio, as permitted in the
Investment Advisory and Management Agreement between the Investment Adviser and
the Trust dated October 25, 1995 (such Agreement or the most recent successor
advisory agreement between such parties is herein called the "Advisory
Agreement"). The Sub-Adviser accepts such appointment and agrees to use its best
professional judgment to make timely investment decisions for the Portfolio with
respect to the investments of the Portfolio in accordance with the provisions of
this Agreement for the compensation herein provided.
(b) The Sub-Adviser shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Trust or the Investment Adviser in any way or otherwise be deemed an agent of
the Trust or the Investment Adviser.
2. Delivery of Documents. (a) The Investment Adviser shall provide to
-----------------------
the Sub-Adviser copies of the Trust's most recent prospectus and statement of
additional information (as each may be amended or supplemented from time to
time) which relate to any class of shares representing interests in the
Portfolio (each such prospectus and statement of additional information as
presently in effect, and as they shall from time to time be amended and
<PAGE>
supplemented, is herein respectively called a "Prospectus" and a "Statement of
Additional Information").
(b) The Sub-Adviser will make available and provide to the Investment
Adviser such financial accounting, and statistical information related to its
duties and responsibilities hereunder as is necessary for the preparation of
registration statements, reports, and other documents required by federal and
state securities laws and such other information as the Trust's Board of
Trustees (herein called the "Trustees") or the Investment Adviser may reasonably
request for use by the Trust and its distributor for the underwriting and
distribution of the Portfolio shares.
3. Sub-Advisory Services to the Portfolio. Subject to the supervision of
--------------------------------------
the Investment Adviser, the Sub-Adviser will supervise the day-to-day operations
of such portion of the Portfolio's assets as the Investment Adviser shall assign
to the Sub-Adviser and perform the following services with respect to such
portion of assets: (i) provide investment research and credit analysis
concerning the Portfolio's investments, (ii) conduct a continual program of
investment of the Portfolio's assets, (iii) place orders in accordance with
paragraphs 4 to 7 hereof for all purchases and sales of the investments made for
the Portfolio, and (iv) maintain the books and records required in connection
with its duties hereunder. In addition, the Sub-Adviser will keep the Investment
Adviser informed of developments materially affecting the Trust or the
Portfolio. The Sub-Adviser will communicate to the Investment Adviser on each
day that a purchase or sale of a security is effected for the Portfolio (i) the
name of the issuer, (ii) the amount of the purchase or sale, (iii) the name of
the broker, dealer, bank or other person (herein called "Brokers), if any,
through which the purchase or sale will be effected (iv) the CUSIP number of the
security, if any, (v) the Portfolio to which such purchase or sale pertains, and
(vi) such other information as the Investment Adviser may reasonably require for
purposes of fulfilling its obligations to the Trust under the Advisory
Agreement. The Sub-Adviser will render to the Trustees such periodic and special
reports as the Investment Adviser or the Trustees may reasonably request,
including, if applicable, regular reports of the total brokerage business placed
by it and the manner in which the allocation of such brokerage business has been
accomplished. The Sub-Adviser will provide the services rendered by it hereunder
in accordance with the Portfolio's investment objectives, policies, and
restrictions as stated in its current Prospectus and Statement of Additional
Information. Except for instructions or advice given to the Sub-Adviser by the
Investment Adviser, the Investment Adviser shall not be responsible or liable
for the investment merits of any decision by the Sub-Adviser to purchase, hold
or sell a security for the Portfolio.
4. Brokerage: The Sub-Adviser may place orders pursuant to its investment
----------
determinations for the Portfolio either directly with the issuer or with any
Brokers. In placing orders, the Sub-Adviser will consider the experience and
skill of the firm's securities traders as well as the firm's financial
responsibility and administrative efficiency. The Sub-Adviser will attempt to
obtain the best price and the most favorable execution of its orders. Consistent
with these obligations, the Sub-Adviser may, subject to the approval of the
Trustees, select Brokers on the basis of the research, statistical, and pricing
services they provide to the Portfolio. A commission paid to such Brokers may be
higher than that which another qualified broker would
<PAGE>
have charged for effecting the same transaction, provided that the Sub-Adviser
determines in good faith that such commission is reasonable in terms either of
the transaction or the overall responsibility of the Sub-Adviser to the
Portfolio and its other clients and that the total commissions paid by the
Portfolio will be reasonable in relation to the benefits to the Portfolio over
the long term. In no instance will Portfolio securities be purchased from or
sold to the Trust's principal underwriter, the Investment Adviser, the Sub-
Adviser, or any affiliate (as defined in the 1940 Act) thereof, except to the
extent permitted by SEC exemptive order or by applicable law. The Investment
Adviser agrees to provide the Sub-Adviser a list of Brokers which are
"affiliated persons" (as defined in the 1940 Act) of the Trust and the
Investment Adviser. The Sub-Adviser agrees to furnish to the Investment Adviser
and to the Trust a list of Brokers and dealers which are such "affiliated
persons" of the Sub-Adviser. It is understood that neither the Investment
Adviser nor the Sub-Adviser has adopted a formula for selection of Brokers for
the execution of the Portfolios investment transactions.
5. Transaction Procedures. All investment transactions on behalf of the
----------------------
Portfolio will be consummated by payment to or delivery by the duly appointed
custodian for the Portfolio (the "Custodian") , or such depositories or agents
duly appointed by the Trustees and as may be designated by the Custodian in
writing, as custodian for the Portfolio, of all cash and/or securities due to or
from the Portfolio, and the Sub-Adviser shall not have possession or custody
thereof or any responsibility or liability with respect thereto. The Sub-
Adviser in effecting transactions on behalf of the Portfolio shall advise the
Custodian of all investment orders for the Portfolio placed by it with Brokers.
The Investment Adviser shall issue, or cause to be issued, to the Custodian such
instructions as may be appropriate in connection with the settlement of any
transaction initiated by the Sub-Adviser. The Portfolio is responsible for all
custodial arrangements and the payment of all custodial charges and fees, and,
upon the giving of proper instructions to the Custodian, the Sub-Adviser shall
have no responsibility or liability with respect to custodial arrangements or
the acts, omissions or other conduct of the Custodian, except that it shall be
the responsibility of the Sub-Adviser to take appropriate action if the
Custodian fails properly to confirm execution of the instructions to the Sub-
Adviser in a written form duly agreed upon by the Custodian and the Sub-Adviser.
6. Compliance with Laws; Confidentiality. (a) The Sub-Adviser agrees that
-------------------------------------
it will comply with all applicable rules and regulations of all federal and
state regulatory agencies having jurisdiction over the Sub-Adviser in
performance of its duties hereunder (herein called the "Rules"). The Sub-Adviser
will treat confidentially and as proprietary information of the Trust all
records and information relative to the Trust and prior, present or potential
shareholders, and will not use such records and information for any purpose
other than performance of its responsibilities and duties hereunder, except
after prior notification to and approval in writing by the Investment Adviser
and the Trust, which approval shall not be unreasonably withheld and may not be
withheld where the Sub-Adviser may be exposed to civil or criminal contempt
proceedings for failure to comply, when required to divulge such information by
duly constituted authorities, or when so requested by the Trust.
<PAGE>
(b) The Sub-Adviser is not authorized by the Trust or the Investment
Adviser to take any action, including the purchase or sale of securities for the
account of the Portfolio, (a) in contravention of (i) any investment
restrictions set forth in the 1940 Act and the rules thereunder; (ii) specific
written instructions adopted by the Trustees or the Investment Adviser and
communicated to the Sub-Adviser; or (iii) the investment objectives, policies,
and restrictions of the Portfolio as set forth in the Trust's registration
statement as amended from time to time, or (b) which would have the effect of
causing the Trust to fail to qualify or to cease to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended, or any
succeeding statute.
(c) The Sub-Adviser agrees with respect to the services provided to the
Portfolio that it:
i) will conform with all applicable rules and regulations of the
Securities and Exchange Commission ("SEC");
ii) will not purchase shares of the Portfolio for its own investment
account; and
iii) will immediately notify the Trust and the Investment Adviser of the
occurrence of any event which would disqualify the Sub-Adviser from serving
as investment adviser of an investment company.
7. Control by Trust's Board of Trustees. Any recommendations concerning
------------------------------------
the Portfolio's investment program proposed by the Sub-Adviser to the Portfolio
and to the Investment Adviser pursuant to this Agreement, as well as any other
activities undertaken by the Sub-Adviser on behalf of the Portfolio pursuant
hereto, shall at all times be subject to any applicable directives of the Board
of Trustees of the Trust.
8. Services Not Exclusive. The Sub-Adviser's services hereunder are not
----------------------
deemed to be exclusive, and the Sub-Adviser shall be free to render similar
services to others so long as its services under this Agreement are not impaired
thereby.
9. Books and Records. In compliance with the requirements of Rule 3la-3
-----------------
of the Rules, the Sub-Adviser hereby agrees that all records which it maintains
for the Trust are the property of the Trust and further agrees to surrender
promptly to the Trust and the Investment Adviser any such records upon the
request of the Trust or the Investment Adviser. The Sub-Adviser further agrees
to preserve for the periods prescribed by Rule 3la-2, the records required to be
maintained by the Sub-Adviser hereunder pursuant to Rule 3la-1 of the Rules.
10. Expenses. During the term of this Agreement, the Sub-Adviser will
--------
bear all expenses in connection with the performance of its services under this
Agreement. The Sub- Adviser shall not bear certain other expenses related to
the operation of the Trust including, but not limited to: taxes levied against
the Trust, the Portfolio or the Investment Adviser; interest;
<PAGE>
brokerage fees and commissions in connection with the purchase and sale of
portfolio securities for the Portfolio; and any extraordinary expense items.
11. Compensation. (a) For the services provided and the expenses assumed
------------
pursuant to this Agreement, the Investment Adviser shall pay the Sub-Adviser,
and the Sub-Adviser agrees to accept as full compensation therefor, a sub-
advisory fee payable as soon as practicable after the last day of each month,
calculated using an annual rate of 0.30% (the "Annual Rate").
(b) The monthly sub-advisory fee to be paid by the Investment Adviser
to the Sub-Adviser shall be determined as of the close of business on the last
business day of each month by multiplying one-twelfth of the Annual Rate by the
Average Portfolio Net Assets (hereinafter defined) calculated monthly as of such
day.
(c) For the purposes of this paragraph, the "Average Portfolio Net
Assets" shall be calculated monthly as of the last business day of each month
and shall mean the sum of the net assets of the Portfolio calculated each
business day during the month divided by the number of business days in the
month (such net assets to be determined as of the close of business each
business day and computed in the manner set forth in the Declaration of Trust of
the Trust).
12. Limitation on Liability. (a) The Sub-Adviser will not be liable for
-----------------------
any error or judgment or mistake of law or for any loss suffered by the
Investment Adviser, the Portfolio or the Trust in connection with the matters to
which this Agreement relates, except that the Sub-Adviser shall be liable to the
Investment Adviser, the Portfolio or the Trust for a loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the Sub-Adviser's part in the performance of its duties or
reckless disregard by it of its obligations or duties under this Agreement.
(b) The Sub-Adviser shall indemnify and hold harmless the Trust, the
Portfolio, and the Investment Adviser from any loss, cost, expense or damage
resulting from the failure of the descriptive information furnished by the Sub-
Adviser to be accurate in all material respects at the time provided or the
failure of the Sub-Adviser to comply in all material respects with the
investment objectives and policies and restrictions as set forth in the Trust's
registration statements as amended from time to time.
13. Duration, Renewal, Amendment, and Termination. (a) This Agreement
---------------------------------------------
shall become effective on the date first written above and shall remain in force
for a period of two (2) years from such date, and from year to year thereafter
but only so long as such continuance is specifically approved at least annually
by the Investment Adviser, and (i) by the vote of a majority of the Trustees who
are not interested persons of the Investment Adviser or the Sub-Adviser, cast in
person at a meeting called for the purpose of voting on such approval and by a
vote of the Trustees or (ii) by the vote of a majority of the outstanding voting
securities of the Portfolio. The aforesaid provision that this Agreement may be
continued "annually" shall be construed in a manner consistent with the 1940 Act
and the rules and regulations
<PAGE>
thereunder.
(b) This Agreement may be amended at any time, but only by written
agreement between the Investment Adviser and the Sub-Adviser, which amendment is
subject to the approval of the Trustees and the shareholders of the Trust in the
manner required by the 1940 Act, subject to any applicable exemptive order of
the SEC modifying the provisions of the 1940 Act with respect to approval of
amendments of this Agreement.
(c) This Agreement: (i) may at any time be terminated without the
payment of any penalty either by vote of the Trustees or by vote of a majority
of the outstanding voting securities of the Portfolio, on sixty (60) days'
written notice to the Sub-Adviser, (ii) shall immediately terminate in the event
of its assignment; and (iii) may be terminated by the Sub-Adviser on sixty (60)
days' written notice to the Investment Adviser and by the Investment Adviser on
sixty (60) days' written notice to the Sub-Adviser.
(d) As used in this Section 12, the terms "assignment," "interested
person," and "vote of a majority of the outstanding voting securities" shall
have the meanings set forth in the 1940 Act and the rules and regulations
thereunder, subject to any applicable orders of exemption issued by the SEC.
(e) All notices, requests, demands or other communications hereunder
shall be in writing and shall be deemed given, if delivered personally, on the
day delivered or if mailed by certified or registered mail, postage prepaid,
return receipt requested, three (3) days after placement in the United States
mail, to the addresses below:
If to Investment Adviser:
C. Douglas Kelso, III
c/o First Tennessee Bank National Association
4990 Poplar Avenue, Third Floor
Memphis, TN 38117
If to Sub-Adviser:
A. David Martin, President
Martin & Company, Inc.
Two Centre Square, Suite 200
625 South Gay St.
Knoxville, TN 37902
If to Trust:
c/o James V. Hyatt, Esq.
ALPS Mutual Funds Services, Inc.
370 17th St., Suite 3100
Denver, CO 80202
14. Limitation on Liability. The Sub-Adviser is hereby expressly put on
-----------------------
notice of the limitation of shareholder liability as set forth in the
Declaration of Trust and agrees that obligations assumed by the Portfolio
pursuant to this Agreement shall be limited in all cases to
<PAGE>
the Portfolio and its assets. Sub-Adviser agrees that it shall not seek
satisfaction of any such obligation from the shareholders or any individual
shareholder of the Portfolio, nor from the Trustees or any individual Trustee of
the Portfolio.
15. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any provisions
hereof or otherwise affect their construction or effect. If any provision of
this Agreement shall be held or made invalid by a court decision, statute, rule
or otherwise, the remainder of this agreement shall not be affected thereby.
This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors. To the extent that state law
has not been preempted by the provisions of any law of the United States
heretofore or hereafter enacted, as the same may be amended from time to time,
this Agreement shall be administered, construed, and enforced according to the
laws of the State of Tennessee without giving effect to the choice of laws
provisions thereof.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers designated below as of the day and
year first above-written.
FIRST TENNESSEE BANK NATIONAL ASSOCIATION
By:___________________________________
Name: C. Douglas Kelso, III
Title: Senior Vice President
MARTIN & COMPANY, INC.
By:___________________________________
Name: A. David Martin
Title: President
<PAGE>
EXHIBIT 6(A)(1)
GENERAL DISTRIBUTION AGREEMENT
AGREEMENT dated as of July 1, 1995 between First Funds, a Massachusetts
business trust which may issue one or more series of beneficial interest (the
Trust), with respect to the separate series of the Trust as listed in Appendix A
(the Portfolios and each a Portfolio) and ALPS Mutual Funds Services, Inc., a
Colorado, corporation and a registered broker-dealer under the Securities
Exchange Act of 1934, having its principal place of business in Denver, Colorado
(the "Distributor").
WHEREAS, the Trust wishes to employ the services of the Distributor in
connection with the promotion and distribution of the Trust's shares of
beneficial interest representing the Portfolios (the Shares);
NOW, THEREFORE, in consideration of the mutual promises and undertakings
herein contained, the parties agree as follows:
1. Documents - The Trust has furnished the Distributor with copies of the
Trust's Declaration of Trust, Investment Advisory and Management Agreements,
Sub-Advisory Agreements, Custodian Agreement, Transfer Agency Agreement, Fund
Accounting and Pricing Services Agreement, Distribution and Service Plan,
Administration Agreement, current Prospectuses and Statements of Additional
Information, and all forms relating to any plan, program or service offered by
the Trust. The Trust shall furnish promptly to the Distributor a copy of any
amendment or supplement to any of the above-mentioned documents. The Trust
shall furnish promptly to the Distributor any additional documents necessary or
advisable to perform its functions hereunder.
2. Sale of Shares - The Trust grants to the Distributor the right to sell the
Shares as agent on behalf of the Trust, during the term of this Agreement,
subject to the registration requirements of the Securities Act of 1933, as
amended (1933 Act), and of the laws governing the sale of securities in the
various states (Blue Sky Laws), under the terms and conditions set forth in this
Agreement. The Distributor (i) shall have the right to sell, as agent on behalf
of the Trust, Shares authorized for issue and registered under the 1933 Act, and
(ii) may sell Shares under offers of exchange, if available, between and among
other Portfolios of the Trust advised by First Tennessee Bank National
Association (the "Investment Adviser").
3. Sale of Shares by the Trust - The rights granted to the Distributor shall be
nonexclusive in that the Trust reserves the right to sell Shares to investors on
applications received and accepted by the Trust. Further, the Trust reserves
the right to issue Shares in connection with the merger, consolidation or other
combination by the Trust through purchase or otherwise, with any other entity.
<PAGE>
4. Shares Covered by this Agreement - This Agreement shall apply to unissued
Shares of the Trust, Shares of the Trust held in its treasury in the event that
in the discretion of the Trust, treasury Shares shall be sold, and Shares of the
Trust repurchased for resale.
5. Public Offering Price - Except as otherwise noted in the Trust's current
Prospectuses and/or Statements of Additional Information, all Shares sold to
investors by the Distributor or the Trust will be sold at the public offering
price. The public offering price for all accepted subscriptions will be the net
asset value per Share, as determined in the manner described in the Trust's
current Prospectuses and/or Statements of Additional Information, plus a sales
charge (if any) described in the Trust's current Prospectuses and/or Statements
of Additional Information. The Trust shall in all cases receive the net asset
value per Share on all sales. If a sales charge is in effect, the Distributor
shall have the right, subject to such rules or regulations of the Securities and
Exchange Commission ("SEC") as may then be in effect pursuant to Section 22 of
the Investment Company Act of 1940, as amended, (the "1940 Act") to pay a
portion of the sales charge to dealers who have sold Shares of the Trust. If a
fee in connection with shareholder redemptions is in effect, the Trust shall
collect the fee on behalf of the Distributor and, unless otherwise agreed upon
by the Trust and the Distributor, the Distributor shall be entitled to receive
all of such fees.
6. Suspension of Sales - If and whenever the determination of net asset value
is suspended and until such suspension is terminated, no further orders for
Shares shall be processed by the Distributor except such unconditional orders as
may have been placed with the Distributor before it had knowledge of the
suspension. In addition, the Trust reserves the right to suspend sales and the
Distributor's authority to process orders for Shares on behalf of the Trust if,
in the judgment of the Trust, it is in the best interests of the Trust to do so.
Suspension will continue for such period as may be determined by the Trust.
7. Solicitation of Sales - In consideration of these rights granted to the
Distributor, the Distributor agrees to use all reasonable efforts, consistent
with its other business, to secure purchasers for Shares of the Trust. This
shall not prevent the Distributor from entering into like arrangements
(including arrangements involving the payment of underwriting commissions) with
other issuers. If a sales charge is in effect, the Distributor shall have the
right to enter into sales agreements with dealers of its choice for the sale of
Shares of the Trust to the public at the public offering price only and fix in
such agreements the portion of the sales charge which may be retained by
dealers, provided that the Trust shall approve the form of the dealer agreement
and the dealer discounts set forth therein and shall evidence such approval by
filing said form of dealer agreement and amendments thereto as an exhibit to its
currently effective Registration Statement.
8. Authorized Representations - The Distributor is not authorized by the Trust
to give any information or to make any representations other than those
contained in the appropriate Registration Statements or Prospectuses and
Statements of Additional Infor-
<PAGE>
mation filed with the SEC under the 1933 Act (as these Registration Statements,
Prospectuses and Statements of Additional Information may be amended from time
to time), or contained in shareholder reports or other material that may be
prepared by or on behalf of the Trust for the Distributor's use. Consistent with
the foregoing, the Distributor may prepare and distribute sales literature or
other material as it may deem appropriate in consultation with the Trust,
provided such sales literature complies with applicable law and regulation.
9. Registration of Shares - The Trust agrees that it will take all action
necessary to register the Shares under the 1933 Act (subject to the necessary
approval of its shareholders) so that there will be available for sale the
number of Shares the Distributor may reasonably be expected to sell. The Trust
shall make available to the Distributor, at the Distributor's expense such
number of copies of its currently effective Prospectuses and Statements of
Additional Information as the Distributor may reasonably request. The Trust, at
its expense, shall furnish to the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Shares of the Trust.
10. Distribution Expenses - Unless otherwise agreed to by the parties hereto in
writing or by the Trust and the Trust's other agents, the Distributor shall bear
the following expenses in connection with the performance of its services
hereunder, including, but not limited to, (a) the cost of printing and
distributing any Prospectuses and Statements of Additional Information or
reports in connection with the offering of Shares for sale to the public above
those required to be distributed to existing shareholders of the Trust. The
cost to Distributor shall be the incremental cost of preparing materials above
those required to satisfy existing shareholder requirements. (b) any other
literature used by the Distributor in connection with such offering, (c)
Distributor's advertising and promotional activities in connection with such
Offering, and (d) the marketing budget which includes the development and
production of marketing materials, promotional items and advertising, but
excludes any salary, overhead, or travel and entertainment expenses by the
Distributor's wholesalers or professional marketing staff. (e) Distributor will
hire, at its expense, a Tennessee wholesaler effective January 1, 1996, who
will have facilities or space made available, at no expense to Distributor, by
First Tennessee Bank or First Tennessee Brokerage, Inc. from time-to-time for
the wholesaler to hold meetings and otherwise perform their wholesaling
requirements. However, Distributor will be responsible for any administrative,
telephone, facsimile, or other out-of-pocket expenses of the wholesaler.
The Distributor shall bear all expenses in connection with the performance of
its services hereunder and shall have no obligation to pay or to reimburse the
Trust for any other expenses incurred by or on behalf of the Portfolios,
including any expenses which may be in excess of expense limitations imposed by
any state.
11. Trust Expenses - Unless otherwise agreed to by the parties hereto in writing
or by the Trust and the Trust's other agents, the Trust shall pay all fees and
expenses in
<PAGE>
connection with (a) filing of any registration statement, printing and the
distribution of any Prospectuses and Statements of Additional Information under
the 1933 Act and amendments prepared for use in connection with the offering of
Shares for sale to the public, preparing, setting in type, printing and mailing
Prospectuses, Statements of Additional Information and any supplements thereto
sent to existing shareholders, (b) preparing, setting in type, printing and
mailing any report (including Annual and Semi-Annual Reports) or other
communication to shareholders of the Trust, and (c) with the Blue Sky
registration and qualification of Shares for sale in the various states in which
the Board of Trustees of the Trust shall determine it advisable to qualify such
Shares for sale (including registering the Trust as a broker or dealer or any
officer of the Trust as agent or salesman in any state).
12. Use of the Distributor's Name - The Trust shall not use the name of the
Distributor, or any of its affiliates, in any Prospectus or Statement of
Additional Information, sales literature, and other material relating to the
Trust in any manner without the prior written consent of the Distributor (which
shall not be unreasonably withheld); provided, however, that the Distributor
hereby approves all lawful uses of the names of the Distributor and its
affiliates in the Prospectuses and Statements of Additional Information of the
Trust and in all other materials which merely refer in accurate terms to their
appointments hereunder or which are required by the SEC, NASD, OCC or any state
securities authority.
13. Use of the Trust's Name - Neither the Distributor nor any of its affiliates
shall use the name of the Trust in any Prospectuses or Statements of Additional
Information, sales literature, or other material relating to the Trust on any
forms for other than internal use in any manner without the prior consent of the
Trust (which shall not be unreasonably withheld); provided however, that the
Trust hereby approves all lawful uses of its name in the Prospectuses and
Statements of Additional Information of the Trust and in sales literature and
all other materials which are required by the Distributor in the discharge of
its duties hereunder which merely refer in accurate terms to the appointment of
the Distributor hereunder, or which are required by the SEC, NASD, OCC or any
state securities authority.
14. Insurance - The Distributor agrees to maintain fidelity bond and liability
insurance coverages which are, in scope and amount, consistent with coverages
customary for distribution activities. The Distributor shall notify the Trust
upon receipt of any notice of material, adverse change in the terms or
provisions of its insurance coverage. Such notification shall include the date
of change and the reason or reasons therefor. The Distributor shall notify the
Trust of any material claim against it, whether or not covered by insurance, and
shall notify the Trust from time to time as may be appropriate of the total
outstanding claims made by it under its insurance coverage.
15. Indemnification - The Trust agrees to indemnify and hold harmless the
Distributor and each of its directors, officers and employees, each person, if
any, who controls the Distributor within the meaning of Section 15 of the 1933
Act, against any loss, liability,
<PAGE>
claim, damages or expenses (including the reasonable cost of investigating or
defending any alleged loss, liability, claim, damages, or expense and reasonable
counsel fees incurred in connection therewith) arising by reason of any person
acquiring any Shares, based upon the ground that the Registration Statement,
Prospectus, Statement of Additional Information, shareholder reports or other
information filed or made public by the Trust (as from time to time amended)
included an untrue statement of a material fact or omitted to state a material
fact required to be stated or necessary in order to make the statements not
misleading under the 1933 Act, or any other statute or the common law. However,
the Trust does not agree to indemnify the Distributor or hold it harmless to the
extent that the statement or omission was made in reliance upon, and in
conformity with, information furnished to the Trust by or on behalf of the
Distributor. In no case (i) is the indemnity of the Trust in favor of the
Distributor or any person indemnified to be deemed to protect the Distributor or
any person against any liability to the Trust or its security holders to which
the Distributor or such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Trust to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made against the
Distributor or any person indemnified unless the Distributor or person, as the
case may be, shall have notified the Trust in writing of the claim within a
reasonable time after the summons or other first written notification giving
information of the nature of the claim shall have been served upon the
Distributor or any such person (or after the Distributor or such person shall
have received notice of service on any designated agent). However, failure to
notify the Trust of any claim shall not relieve the Trust from any liability
which it may have to the Distributor or any person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
paragraph. The Trust shall be entitled to participate at its own expense in the
defense, or, if it so elects, to assume the defense of any suit brought to
enforce any claims, but if the Trust elects to assume the defense, the defense
shall be conducted by counsel chosen by the Trust and satisfactory to the
Distributor or person or persons, defendant or defendants in the suit. In the
event the Trust elects to assume the defense of any suit and retain counsel, the
Distributor, officers or directors or controlling person or persons, defendant
or defendants in the suit, shall bear the fees and expenses of any additional
counsel retained by them. If the Trust does not elect to assume the defense of
any suit, it will reimburse the Distributor, officers or directors or
controlling person or persons, defendant or defendants in the suit for the
reasonable fees and expenses of any counsel retained by them. The Trust agrees
to notify the Distributor promptly of the commencement of any litigation or
proceedings against it or any of its officers or trustees in connection with the
issuance or sale of any of the Shares.
The Distributor also covenants and agrees that it will indemnify and hold
harmless the Trust and each of its Trustees and officers and each person, if
any, who controls the Trust within the meaning of Section 15 of the 1933 Act,
against any loss, liability, damages, claims or expense (including the
reasonable cost of investigating or defending any alleged loss, liability,
damages, claim or expense and reasonable counsel fees incurred in
<PAGE>
connection therewith) arising by reason of any person acquiring any Shares,
based upon the 1933 Act or any other statute or common law, alleging any
wrongful act of the Distributor or any of its employees or alleging that the
Registration Statement, Prospectus, Statement of Additional Information,
shareholder reports or other information filed or made public by the Trust (as
from time to time amended) included an untrue statement of a material fact or
omitted to state a material fact required to be stated or necessary in order to
make the statements not misleading, insofar as the statement or omission was
made in reliance upon, and in conformity with, information furnished to the
Trust by or on behalf of the Distributor. In no case (i) is the indemnity of the
Distributor in favor of the Trust or any person indemnified to be deemed to
protect the Trust or any person against any liability to which the Trust or such
person would otherwise be subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties under this Agreement, or (ii) is the
Distributor to be liable under its indemnity agreement contained in this
paragraph with respect to any claim made against the Trust or any person
indemnified unless the Trust or person, as the case may be, shall have notified
the Distributor in writing of the claim within a reasonable time after the
summons or other first written notification giving information of the nature of
the claim shall have been served upon the Trust or any such person (or after the
Trust or such person shall have received notice of service on any designated
agent). However, failure to notify the Distributor of any claim shall not
relieve the Distributor from any liability which it may have to the Trust or any
person against whom the action is brought otherwise than on account of its
indemnity agreement contained in this paragraph. In the case of any notice to
the Distributor, it shall be entitled to participate, at its own expense, in the
defense or, if it so elects, to assume the defense of any suit brought to
enforce the claim, but if the Distributor elects to assume the defense, the
defense shall be conducted by counsel chosen by it and satisfactory to the
Trust, to its officers and Trustees and to any controlling person or persons,
defendant or defendants in the suit. In the event that the Distributor elects to
assume the defense of any suit and retain counsel, the Trust or controlling
persons, defendant or defendants in the suit, shall bear the fees and expense of
any additional counsel retained by them. If the Distributor does not elect to
assume the defense of any suit, it will reimburse the Trust, officers and
Trustees or controlling person or persons, defendant or defendants in the suit,
for the reasonable fees and expenses of any counsel retained by them. The
Distributor agrees to notify the Trust promptly of the commencement of any
litigation or proceedings against it in connection with the Trust and sale of
any of the Shares.
16. Liability of the Distributor - The Distributor shall not be liable for any
damages or loss suffered by the Trust in connection with the matters to which
this Agreement relates, except for damage or loss resulting from willful
misfeasance, bad faith or gross negligence on the Distributor's part in the
performance, or reckless disregard, of its duties under this Agreement other
than damages and loss for which the Distributor has agreed to indemnify the
Trust under Section 15 of this Agreement. Any person, even though also an
officer, partner, employee or agent of the Distributor, or any of its
affiliates, who may be or become an officer of the Trust, shall be deemed, when
rendering services to or
<PAGE>
acting on any business of the Trust in any such capacity (other than services or
business in connection with the Distributor's duties under this Agreement), to
be rendering such services to or acting solely for the Trust and not as an
officer, partner, employee or agent or one under the control or direction of the
Distributor or any of its affiliates, even if paid by the Distributor or an
affiliate thereof.
17. Acts of God, Etc. - The Distributor shall not be liable for delays or
errors occurring by reason of circumstances not reasonably foreseeable and
beyond its control, including but not limited to acts of civil or military
authority, national emergencies, work stoppages, fire, flood, catastrophe, acts
of God, insurrection, war riot, or failure of communication or power supply. In
addition, in the event of equipment breakdowns which are (i) beyond the
reasonable control of the Distributor and (ii) not primarily attributable to the
failure of the Distributor to reasonably maintain or provide for the maintenance
of such equipment, the Distributor shall, at no additional expense to the Trust,
take reasonable steps in good faith to minimize service interruptions but shall
have no liability with respect thereto.
18. Supplemental Information - The Distributor and the Trust shall regularly
consult with each other regarding the Distributor's performance of its
obligations under this Agreement. In connection therewith, the Trust shall
submit to the Distributor at a reasonable time in advance of filing with the SEC
copies of any amended or supplemented Registration Statements (including
exhibits) under the 1933 Act and the 1940 Act, and, a reasonable time in advance
of their proposed use, copies of any amended or supplemented forms relating to
any plan, program or service offered by the Trust. Any change in such material
which would require any change in the Distributor's obligations under the
foregoing provisions shall be subject to the Distributor's approval, which shall
not be unreasonably withheld.
<PAGE>
19. Term - This Agreement became effective as of July 1, 1995 or such later date
as may be agreed upon by the parties hereto, and shall continue until June 30,
1996 ending June 30 of each year and thereafter shall continue automatically for
successive annual periods, provided such continuance is specifically approved at
least annually (i) by the Fund's Board of Trustees or (ii) by a vote of a
majority of the outstanding Shares of the Portfolio(s) (as defined in the 1940
Act), provided that in either event the continuance is also approved by the
majority of the Fund's Trustees who are not parties to the Agreement or
interested persons (as defined in the 1940 Act) of any party to this Agreement,
by vote cast in person at a meeting called for the purpose of voting on such
approval. This Agreement is terminable without penalty on not less than sixty
days' notice by the Fund's Trustees, by vote of a majority of the outstanding
Shares of the Portfolio(s) (as defined by the 1940 Act) or by the Distributor.
Any termination shall not affect the rights and obligations of the parties under
Sections 9, 14, 15, and 16, hereof. This Agreement shall automatically
terminate in the event of its assignment.
Upon the termination of this Agreement, the Distributor, at the Trust's expense
and direction, shall transfer to such successor as the Trust shall specify all
relevant books, records and other data established or maintained by the
Distributor under this Agreement.
20. Notice - Any notice required or permitted to be given by either party to the
other shall be deemed sufficient if sent by (i) telex, (ii) telecopier, or (iii)
registered or certified mail, postage prepaid, addressed by the party giving
notice to the other party of the last address furnished by the other party to
the party giving notice: if to the Trust at Baker, Donelson, Bearman & Caldwell,
Twentieth Floor, First Tennessee Building, 165 Madison Avenue, Memphis,
Tennessee, 38103, Attention: Daniel B. Hatzenbuehler, and if to the Distributor,
at 370 17th Street, Suite 2700, Denver, Colorado, 80202, Attn: Mark A. Pougnet,
or such other telex number or address as may be furnished by one party to the
other.
21. Confidential Information - The Distributor, its officers, directors,
employees and agents will treat confidentially and as proprietary information of
the Trust all records and other information relative to the Trust and to prior
or present shareholders or to those persons or entities who respond to the
Distributor's inquiries concerning investment in the Trust, and will not use
such records and information for any purposes other than performance of its
responsibilities and duties hereunder. If Distributor is requested or required
by, but not limited to, oral questions, interrogatories, request for information
or documents, subpoena, civil investigation, demand or other action, proceeding
or process or as otherwise required by law, statute, regulation, writ, decree or
the like to disclose such information, Distributor will provide Trust with
prompt written notice of any such request or requirement so that Trust may seek
an appropriate protective order or other appropriate remedy and/or waive
compliance with this provision. If such order or other remedy is not sought, or
obtained, or waiver not received, Distributor may without liability hereunder,
disclose to the person entity or agency requesting or requiring the information,
that portion of the information that is legally required in the opinion of
Distributor's counsel.
<PAGE>
22. Limitation of Liability - The Distributor is expressly put on notice of the
limitation of shareholder and Trustee liability as set forth in the Declaration
of Trust of the Trust and agrees that the obligations assumed by the Trust under
this contract shall be limited in all cases to the Trust and its assets. The
Distributor agrees that it shall not seek satisfaction of any such obligation
from the shareholders or any individual shareholder of the Trust. Nor shall the
Distributor seek satisfaction of any such obligation from the Trustees or any
individual Trustee of the Trust. The Distributor understands that the rights
and obligations of each series of Shares of the Trust under the Trust's
Declaration of Trust are separate and distinct from those of any and all other
series.
Any obligations of the Trust entered into in the name or on behalf thereof by
any of the Trustees, representatives or agents are made not individually, but in
such capacities, and are not binding upon any of the Trustees, shareholders, or
representatives of the Trust personally, but bind only the Trust property, and
all persons dealing with any class of Shares of the Trust must look solely to
the Trust property belonging to such class for the enforcement of any claims
against the Trust.
23. Miscellaneous - Each party agrees to perform such further acts and execute
such further documents as are necessary to effectuate the purposes hereof. This
Agreement shall be construed and enforced in accordance with and governed by the
laws of the State of Colorado to the extent federal law does not govern. The
captions in this Agreement are included for convenience of reference only and in
no way define or delimit any of the provisions hereof or otherwise affect their
construction or effect. Except as otherwise provided herein or under the 1940
Act, this Agreement may not be changed, waived, discharged or amended except by
written instrument which shall make specific reference to this Agreement and
which shall be signed by the party against which enforcement of such change,
waiver, discharge or amendment is sought. This Agreement may be executed
simultaneously in two or more counterparts, each of which taken together shall
constitute one and the same instrument.
All activities by Distributor and its agents and employees as distributor of the
Shares shall comply with all applicable laws, rules and regulations, including,
without limitation, all rules and regulations made or adopted pursuant to the
1940 Act by the SEC or any securities association registered under the
Securities Exchange Act of 1934.
Distributor will provide one or more persons, during normal business hours (7:00
a.m. to 6:00 p.m. mountain time), to respond to telephone questions with respect
to the Portfolio(s).
Distributor will promptly transmit any orders received by it for purchase,
redemption or exchange of the Shares to the Trust's transfer agent.
IN WITNESS WHEREOF, the Trust has executed this instrument in its name and
behalf, and its seal affixed, by one of its officers duly authorized, and the
Distributor has
<PAGE>
executed this instrument in its name and behalf, and its corporate seal affixed,
by one of its officers duly authorized, as of the day and year first above
written.
FIRST FUNDS ALPS MUTUAL FUNDS
SERVICES, INC.
By: ___________________ By: _____________________
Title: ________________ Title:___________________
<PAGE>
GENERAL DISTRIBUTION AGREEMENT
APPENDIX A
Effective August 18, 1997
FIRST FUNDS
Cash Reserve Portfolio
Municipal Money Market Portfolio
Tennessee Tax-Free Portfolio
Growth & Income Portfolio
Bond Portfolio
U.S. Government Money Market Portfolio
U.S. Treasury Money Market Portfolio
Capital Appreciation Portfolio
Intermediate Bond Portfolio
<PAGE>
EXHIBIT 6(a)(2)
AMENDED AND RESTATED
GENERAL DISTRIBUTION AGREEMENT
AGREEMENT dated as of August 19, 1998 between First Funds, a Massachusetts
business trust which may issue one or more series of beneficial interest (the
"Trust"), with respect to the separate series of the Trust as listed in Appendix
A (the "Portfolios" and each a "Portfolio") and ALPS Mutual Funds Services,
Inc., a Colorado, corporation and a registered broker-dealer under the
Securities Exchange Act of 1934, having its principal place of business in
Denver, Colorado (the "Distributor").
WHEREAS, the Trust wishes to employ the services of the Distributor in
connection with the promotion and distribution of the Trust's shares of
beneficial interest representing the Portfolios (the Shares); and
WHEREAS, the Trust and Distributor desire to amend and restate the General
Distribution Agreement dated as of July 1, 1995 to include additional provisions
for termination;
NOW, THEREFORE, in consideration of the mutual promises and undertakings
herein contained, the parties agree as follows:
1. Documents - The Trust has furnished the Distributor with copies of the
Trust's Declaration of Trust, Investment Advisory and Management Agreements,
Sub-Advisory Agreements, Custodian Agreement, Transfer Agency Agreement, Fund
Accounting and Pricing Services Agreement, Distribution and Service Plan,
Administration Agreement, current Prospectuses and Statements of Additional
Information, and all forms relating to any plan, program or service offered by
the Trust. The Trust shall furnish promptly to the Distributor a copy of any
amendment or supplement to any of the above-mentioned documents. The Trust
shall furnish promptly to the Distributor any additional documents necessary or
advisable to perform its functions hereunder.
2. Sale of Shares - The Trust grants to the Distributor the right to sell the
Shares as agent on behalf of the Trust, during the term of this Agreement,
subject to the registration requirements of the Securities Act of 1933, as
amended (1933 Act), and of the laws governing the sale of securities in the
various states (Blue Sky Laws), under the terms and conditions set forth in this
Agreement. The Distributor (i) shall have the right to sell, as agent on behalf
of the Trust, Shares authorized for issue and registered under the 1933 Act, and
(ii) may sell Shares under offers of exchange, if available, between and among
other Portfolios of the Trust ad vised by First Tennessee Bank National
Association (the "Investment Adviser").
<PAGE>
3. Sale of Shares by the Trust - The rights granted to the Distributor shall be
nonexclusive in that the Trust reserves the right to sell Shares to investors on
applications received and accepted by the Trust. Further, the Trust reserves
the right to issue Shares in connection with the merger, consolidation or other
combination by the Trust through purchase or otherwise, with any other entity.
4. Shares Covered by this Agreement - This Agreement shall apply to unissued
Shares of the Trust, Shares of the Trust held in its treasury in the event that
in the discretion of the Trust, treasury Shares shall be sold, and Shares of the
Trust repurchased for resale.
5. Public Offering Price - Except as otherwise noted in the Trust's current
Prospectuses and/or Statements of Additional Information, all Shares sold to
investors by the Distributor or the Trust will be sold at the public offering
price. The public offering price for all accepted subscriptions will be the net
asset value per Share, as determined in the manner described in the Trust's
current Prospectuses and/or Statements of Additional Information, plus a sales
charge (if any) described in the Trust's current Prospectuses and/or Statements
of Additional Information. The Trust shall in all cases receive the net asset
value per Share on all sales. If a sales charge is in effect, the Distributor
shall have the right, subject to such rules or regulations of the Securities
and Exchange Commission ("SEC") as may then be in effect pursuant to Section 22
of the Investment Company Act of 1940, as amended, (the "1940 Act") to pay a
portion of the sales charge to dealers who have sold Shares of the Trust. If a
fee in connection with shareholder redemptions is in effect, the Trust shall
collect the fee on behalf of the Distributor and, unless otherwise agreed upon
by the Trust and the Distributor, the Distributor shall be entitled to receive
all of such fees.
6. Suspension of Sales - If and whenever the determination of net asset value
is suspended and until such suspension is terminated, no further orders for
Shares shall be processed by the Distributor except such unconditional orders as
may have been placed with the Distributor before it had knowledge of the
suspension. In addition, the Trust reserves the right to suspend sales and the
Distributor's authority to process orders for Shares on behalf of the Trust if,
in the judgment of the Trust, it is in the best interests of the Trust to do so.
Suspension will continue for such period as may be determined by the Trust.
7. Solicitation of Sales - In consideration of these rights granted to the
Distributor, the Distributor agrees to use all reasonable efforts, consistent
with its other business, to secure purchasers for Shares of the Trust. This
shall not prevent the Distributor from entering into like arrangements
(including arrangements involving the payment of underwriting commissions) with
other issuers. If a sales charge is in effect, the Distributor shall have the
right to enter into sales agreements with dealers of its choice for the sale of
Shares of the Trust to the public at the public offering price only and fix in
such agreements the portion of the sales charge which may be retained by
dealers, provided that the Trust shall approve the form of the dealer agreement
and the dealer discounts set forth therein and shall evidence such approval by
filing said form of dealer agreement and amendments thereto as an exhibit to its
currently effective Registration Statement.
<PAGE>
8. Authorized Representations - The Distributor is not authorized by the Trust
to give any information or to make any representations other than those
contained in the appropriate Registration Statements or Prospectuses and
Statements of Additional Information filed with the SEC under the 1933 Act (as
these Registration Statements, Prospectuses and Statements of Additional
Information may be amended from time to time), or contained in shareholder
reports or other material that may be prepared by or on behalf of the Trust for
the Distributor's use. Consistent with the foregoing, the Distributor may
prepare and distribute sales literature or other material as it may deem
appropriate in consultation with the Trust, provided such sales literature
complies with applicable law and regulation.
9. Registration of Shares - The Trust agrees that it will take all action
necessary to register the Shares under the 1933 Act (subject to the necessary
approval of its shareholders) so that there will be available for sale the
number of Shares the Distributor may reasonably be expected to sell. The Trust
shall make available to the Distributor, at the Distributor's expense such
number of copies of its currently effective Prospectuses and Statements of
Additional Information as the Distributor may reasonably request. The Trust, at
its expense, shall furnish to the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Shares of the Trust.
10. Distribution Expenses - Unless otherwise agreed to by the parties hereto in
writing or by the Trust and the Trust's other agents, the Distributor shall bear
the following expenses in connection with the performance of its services
hereunder, including, but not limited to, (a) the cost of printing and
distributing any Prospectuses and Statements of Additional Information or
reports in connection with the offering of Shares for sale to the public above
those required to be distributed to existing shareholders of the Trust. The
cost to Distributor shall be the incremental cost of preparing materials above
those required to satisfy existing shareholder requirements. (b) any other
literature used by the Distributor in connection with such offering, (c)
Distributor's advertising and promotional activities in connection with such
Offering, and (d) the marketing budget which includes the development and
production of marketing materials, promotional items and advertising, but
excludes any salary, overhead, or travel and entertainment expenses by the
Distributor's wholesalers or professional marketing staff. (e) Distributor will
hire, at its expense, a Tennessee wholesaler effective January 1, 1996, who
will have facilities or space made available, at no expense to Distributor, by
First Tennessee Bank or First Tennessee Brokerage, Inc. from time-to-time for
the wholesaler to hold meetings and otherwise perform their wholesaling
requirements. However, Distributor will be responsible for any administrative,
telephone, facsimile, or other out-of-pocket expenses of the wholesaler.
The Distributor shall bear all expenses in connection with the performance of
its services hereunder and shall have no obligation to pay or to reimburse the
Trust for any other expenses incurred by or on behalf of the Portfolios,
including any expenses which may be in excess of expense limitations imposed by
any state.
<PAGE>
11. Trust Expenses - Unless otherwise agreed to by the parties hereto in writing
or by the Trust and the Trust's other agents, the Trust shall pay all fees and
expenses in connection with (a) filing of any registration statement, printing
and the distribution of any Prospectuses and Statements of Additional
Information under the 1933 Act and amendments prepared for use in connection
with the offering of Shares for sale to the public, preparing, setting in type,
printing and mailing Prospectuses, Statements of Additional Information and any
supplements thereto sent to existing shareholders, (b) preparing, setting in
type, printing and mailing any report (including Annual and Semi-Annual Reports)
or other communication to shareholders of the Trust, and (c) with the Blue Sky
registration and qualification of Shares for sale in the various states in which
the Board of Trustees of the Trust shall determine it advisable to qualify such
Shares for sale (including registering the Trust as a broker or dealer or any
officer of the Trust as agent or salesman in any state).
12. Use of the Distributor's Name - The Trust shall not use the name of the
Distributor, or any of its affiliates, in any Prospectus or Statement of
Additional Information, sales literature, and other material relating to the
Trust in any manner without the prior written consent of the Distributor (which
shall not be unreasonably withheld); provided, however, that the Distributor
hereby approves all lawful uses of the names of the Distributor and its
affiliates in the Prospectuses and Statements of Additional Information of the
Trust and in all other materials which merely refer in accurate terms to their
appointments hereunder or which are required by the SEC, NASD, OCC or any state
securities authority.
13. Use of the Trust's Name - Neither the Distributor nor any of its affiliates
shall use the name of the Trust in any Prospectuses or Statements of Additional
Information, sales literature, or other material relating to the Trust on any
forms for other than internal use in any manner without the prior consent of the
Trust (which shall not be unreasonably withheld); provided however, that the
Trust hereby approves all lawful uses of its name in the Prospectuses and
Statements of Additional Information of the Trust and in sales literature and
all other materials which are required by the Distributor in the discharge of
its duties hereunder which merely refer in accurate terms to the appointment of
the Distributor hereunder, or which are required by the SEC, NASD, OCC or any
state securities authority.
14. Insurance - The Distributor agrees to maintain fidelity bond and liability
insurance coverages which are, in scope and amount, consistent with coverages
customary for distribution activities. The Distributor shall notify the Trust
upon receipt of any notice of material, adverse change in the terms or
provisions of its insurance coverage. Such notification shall include the date
of change and the reason or reasons therefor. The Distributor shall notify the
Trust of any material claim against it, whether or not covered by insurance, and
shall notify the Trust from time to time as may be appropriate of the total
outstanding claims made by it under its insurance coverage.
15. Indemnification - The Trust agrees to indemnify and hold harmless the
Distributor and each of its directors, officers and employees, each person, if
any, who controls the Distributor
<PAGE>
within the meaning of Section 15 of the 1933 Act, against any loss, liability,
claim, damages or expenses (including the reasonable cost of investigating or
defending any alleged loss, liability, claim, damages, or expense and reasonable
counsel fees incurred in connection therewith) arising by reason of any person
acquiring any Shares, based upon the ground that the Registration Statement,
Prospectus, Statement of Additional Information, shareholder reports or other
information filed or made public by the Trust (as from time to time amended)
included an untrue statement of a material fact or omitted to state a material
fact required to be stated or necessary in order to make the statements not
misleading under the 1933 Act, or any other statute or the common law. However,
the Trust does not agree to indemnify the Distributor or hold it harmless to the
extent that the statement or omission was made in reliance upon, and in
conformity with, information furnished to the Trust by or on behalf of the
Distributor. In no case (i) is the indemnity of the Trust in favor of the
Distributor or any person indemnified to be deemed to protect the Distributor or
any person against any liability to the Trust or its security holders to which
the Distributor or such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Trust to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made against the
Distributor or any person indemnified unless the Distributor or person, as the
case may be, shall have notified the Trust in writing of the claim within a
reasonable time after the summons or other first written notification giving
information of the nature of the claim shall have been served upon the
Distributor or any such person (or after the Distributor or such person shall
have received notice of service on any designated agent). However, failure to
notify the Trust of any claim shall not relieve the Trust from any liability
which it may have to the Distributor or any person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
paragraph. The Trust shall be entitled to participate at its own expense in the
defense, or, if it so elects, to assume the defense of any suit brought to
enforce any claims, but if the Trust elects to assume the defense, the defense
shall be conducted by counsel chosen by the Trust and satisfactory to the
Distributor or person or persons, defendant or defendants in the suit. In the
event the Trust elects to assume the defense of any suit and retain counsel, the
Distributor, officers or directors or controlling person or persons, defendant
or defendants in the suit, shall bear the fees and expenses of any additional
counsel retained by them. If the Trust does not elect to assume the defense of
any suit, it will reimburse the Distributor, officers or directors or
controlling person or persons, defendant or defendants in the suit for the
reasonable fees and expenses of any counsel retained by them. The Trust agrees
to notify the Distributor promptly of the commencement of any litigation or
proceedings against it or any of its officers or trustees in connection with the
issuance or sale of any of the Shares.
The Distributor also covenants and agrees that it will indemnify and hold
harmless the Trust and each of its Trustees and officers and each person, if
any, who controls the Trust within the meaning of Section 15 of the 1933 Act,
against any loss, liability, damages, claims or expense (including the
reasonable cost of investigating or defending any alleged loss, liability,
damages, claim or expense and reasonable counsel fees incurred in connection
<PAGE>
therewith) arising by reason of any person acquiring any Shares, based upon the
1933 Act or any other statute or common law, alleging any wrongful act of the
Distributor or any of its employees or alleging that the Registration Statement,
Prospectus, Statement of Additional Information, shareholder reports or other
information filed or made public by the Trust (as from time to time amended)
included an untrue statement of a material fact or omitted to state a material
fact required to be stated or necessary in order to make the statements not
misleading, insofar as the statement or omission was made in reliance upon, and
in conformity with, information furnished to the Trust by or on behalf of the
Distributor. In no case (i) is the indemnity of the Distributor in favor of the
Trust or any person indemnified to be deemed to protect the Trust or any person
against any liability to which the Trust or such person would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of its reckless disregard of its
obligations and duties under this Agreement, or (ii) is the Distributor to be
liable under its indemnity agreement contained in this paragraph with respect to
any claim made against the Trust or any person indemnified unless the Trust or
person, as the case may be, shall have notified the Distributor in writing of
the claim within a reasonable time after the summons or other first written
notification giving information of the nature of the claim shall have been
served upon the Trust or any such person (or after the Trust or such person
shall have received notice of service on any designated agent). However,
failure to notify the Distributor of any claim shall not relieve the Distributor
from any liability which it may have to the Trust or any person against whom the
action is brought otherwise than on account of its indemnity agreement con
tained in this paragraph. In the case of any notice to the Distributor, it
shall be entitled to participate, at its own expense, in the defense or, if it
so elects, to assume the defense of any suit brought to enforce the claim, but
if the Distributor elects to assume the defense, the defense shall be conducted
by counsel chosen by it and satisfactory to the Trust, to its officers and
Trustees and to any controlling person or persons, defendant or defendants in
the suit. In the event that the Distributor elects to assume the defense of any
suit and retain counsel, the Trust or controlling persons, defendant or
defendants in the suit, shall bear the fees and expense of any additional
counsel retained by them. If the Distributor does not elect to assume the
defense of any suit, it will reimburse the Trust, officers and Trustees or
controlling person or persons, defendant or defendants in the suit, for the
reasonable fees and expenses of any counsel retained by them. The Distributor
agrees to notify the Trust promptly of the commencement of any litigation or
proceedings against it in connection with the Trust and sale of any of the
Shares.
16. Liability of the Distributor - The Distributor shall not be liable for any
damages or loss suffered by the Trust in connection with the matters to which
this Agreement relates, except for damage or loss resulting from willful
misfeasance, bad faith or gross negligence on the Distributor's part in the
performance, or reckless disregard, of its duties under this Agreement other
than damages and loss for which the Distributor has agreed to indemnify the
Trust under Section 15 of this Agreement. Any person, even though also an
officer, partner, employee or agent of the Distributor, or any of its
affiliates, who may be or become an officer of the Trust, shall be deemed, when
rendering services to or acting on any business of the Trust in any such
capacity (other than services or business in connection with the Distributor's
<PAGE>
duties under this Agreement), to be rendering such services to or acting solely
for the Trust and not as an officer, partner, employee or agent or one under the
control or direction of the Distributor or any of its affiliates, even if paid
by the Distributor or an affiliate thereof.
17. Acts of God, Etc. - The Distributor shall not be liable for delays or
errors occurring by reason of circumstances not reasonably foreseeable and
beyond its control, including but not limited to acts of civil or military
authority, national emergencies, work stoppages, fire, flood, catastrophe, acts
of God, insurrection, war riot, or failure of communication or power supply. In
addition, in the event of equipment breakdowns which are (i) beyond the
reasonable control of the Distributor and (ii) not primarily attributable to the
failure of the Distributor to reasonably maintain or provide for the maintenance
of such equipment, the Distributor shall, at no additional expense to the Trust,
take reasonable steps in good faith to minimize service interruptions but shall
have no liability with respect thereto.
18. Supplemental Information - The Distributor and the Trust shall regularly
consult with each other regarding the Distributor's performance of its
obligations under this Agreement. In connection therewith, the Trust shall
submit to the Distributor at a reasonable time in advance of filing with the SEC
copies of any amended or supplemented Registration Statements (including
exhibits) under the 1933 Act and the 1940 Act, and, a reasonable time in advance
of their proposed use, copies of any amended or supplemented forms relating to
any plan, program or service offered by the Trust. Any change in such material
which would require any change in the Distributor's obligations under the
foregoing provisions shall be subject to the Distributor's approval, which shall
not be unreasonably withheld.
19. Term - This Agreement became effective as of July 1, 1995 or such later date
as may be agreed upon by the parties hereto, and shall continue until June 30,
1996 and thereafter shall continue automatically for successive annual periods,
provided such continuance is specifically approved at least annually (i) by the
Fund's Board of Trustees or (ii) by a vote of a majority of the outstanding
Shares of the Portfolio(s) (as defined in the 1940 Act), provided that in either
event the continuance is also approved by the majority of the Fund's Trustees
who are not parties to the Agreement or interested persons (as defined in the
1940 Act) of any party to this Agreement, by vote cast in person at a meeting
called for the purpose of voting on such approval. This Agreement is terminable
without penalty on not less than sixty days' notice by the Fund's Trustees, by
vote of a majority of the outstanding Shares of the Portfolio(s) (as defined by
the 1940 Act) or by the Distributor. Any termination shall not affect the
rights and obligations of the parties under Sections 9, 14, 15, and 16, hereof.
This Agreement shall automatically terminate in the event of its assignment.
Unless otherwise agreed to by the parties hereto, this Agreement shall be
coterminous with the Amended and Restated Administration Agreement
("Administration Agreement") between the parties hereto; in the event of the
termination of the Administration Agreement, whether for "cause" (as defined in
the Administration Agreement) or otherwise, this Agreement shall also terminate
on the same date.
<PAGE>
Upon the termination of this Agreement, the Distributor, at the Trust's expense
and direction, shall transfer to such successor as the Trust shall specify all
relevant books, records and other data established or maintained by the
Distributor under this Agreement.
20. Notice - Any notice required or permitted to be given by either party to the
other shall be deemed sufficient if sent by (i) telex, (ii) telecopier, or (iii)
registered or certified mail, postage prepaid, addressed by the party giving
notice to the other party of the last address furnished by the other party to
the party giving notice: if to the Trust at Baker, Donelson, Bearman & Caldwell,
Twentieth Floor, First Tennessee Building, 165 Madison Avenue, Memphis,
Tennessee, 38103, Attention: Charles T. Tuggle, Jr.Daniel B. Hatzenbuehler, and
if to the Distributor, at 370 17th Street, Suite 273100, Denver, Colorado,
80202, Attn: Mark A. PougnetJames V. Hyatt, or such other telex number or
address as may be furnished by one party to the other.
21. Confidential Information - The Distributor, its officers, directors,
employees and agents will treat confidentially and as proprietary information of
the Trust all records and other information relative to the Trust and to prior
or present shareholders or to those persons or entities who respond to the
Distributor's inquiries concerning investment in the Trust, and will not use
such records and information for any purposes other than performance of its
responsibilities and duties hereunder. If Distributor is requested or required
by, but not limited to, oral questions, interrogatories, request for information
or documents, subpoena, civil investigation, demand or other action, proceeding
or process or as otherwise required by law, statute, regulation, writ, decree or
the like to disclose such information, Distributor will provide Trust with
prompt written notice of any such request or requirement so that Trust may seek
an appropriate protective order or other appropriate remedy and/or waive
compliance with this provision. If such order or other remedy is not sought, or
obtained, or waiver not received, Distributor may without liability hereunder,
disclose to the person entity or agency requesting or requiring the information,
that portion of the information that is legally required in the opinion of
Distributor's counsel.
22. Limitation of Liability - The Distributor is expressly put on notice of the
limitation of shareholder and Trustee liability as set forth in the Declaration
of Trust of the Trust and agrees that the obligations assumed by the Trust under
this contract shall be limited in all cases to the Trust and its assets. The
Distributor agrees that it shall not seek satisfaction of any such obligation
from the shareholders or any individual shareholder of the Trust. Nor shall the
Distributor seek satisfaction of any such obligation from the Trustees or any
individ ual Trustee of the Trust. The Distributor understands that the rights
and obligations of each series of Shares of the Trust under the Trust's
Declaration of Trust are separate and distinct from those of any and all other
series.
Any obligations of the Trust entered into in the name or on behalf thereof by
any of the Trustees, representatives or agents are made not individually, but in
such capacities, and are not binding upon any of the Trustees, shareholders, or
representatives of the Trust personally, but bind only the Trust property, and
all persons dealing with any class of Shares of the Trust
<PAGE>
must look solely to the Trust property belonging to such class for the
enforcement of any claims against the Trust.
23. Miscellaneous - Each party agrees to perform such further acts and execute
such further documents as are necessary to effectuate the purposes hereof. This
Agreement shall be construed and enforced in accordance with and governed by the
laws of the State of Colorado to the extent federal law does not govern. The
captions in this Agreement are included for convenience of reference only and in
no way define or delimit any of the provisions hereof or otherwise affect their
construction or effect. Except as otherwise provided herein or under the 1940
Act, this Agreement may not be changed, waived, discharged or amended except by
written instrument which shall make specific reference to this Agreement and
which shall be signed by the party against which enforcement of such change,
waiver, discharge or amendment is sought. This Agreement may be executed
simultaneously in two or more counterparts, each of which taken together shall
constitute one and the same instrument.
All activities by Distributor and its agents and employees as distributor of the
Shares shall comply with all applicable laws, rules and regulations, including,
without limitation, all rules and regulations made or adopted pursuant to the
1940 Act by the SEC or any securities association registered under the
Securities Exchange Act of 1934.
Distributor will provide one or more persons, during normal business hours (7:00
a.m. to 6:00 p.m. mountain time), to respond to telephone questions with respect
to the Portfolio(s).
Distributor will promptly transmit any orders received by it for purchase,
redemption or ex change of the Shares to the Trust's transfer agent.
IN WITNESS WHEREOF, the Trust has executed this instrument in its name and
behalf, and its seal affixed, by one of its officers duly authorized, and the
Distributor has executed this instrument in its name and behalf, and its
corporate seal affixed, by one of its officers duly authorized, as of the day
and year first above written.
FIRST FUNDS ALPS MUTUAL FUNDS
SERVICES, INC.
By: ____________________________ By: ______________________________
Richard Rantzow W. Robert Alexander
Title: President Title: Chairman
------------------------- ---------------------------
<PAGE>
GENERAL DISTRIBUTION AGREEMENT
APPENDIX A
Effective August 18, 1997
FIRST FUNDS
Cash Reserve Portfolio
Municipal Money Market Portfolio
Tennessee Tax-Free Portfolio
Growth & Income Portfolio
Bond Portfolio
U.S. Government Money Market Portfolio
U.S. Treasury Money Market Portfolio
Capital Appreciation Portfolio
Intermediate Bond Portfolio
<PAGE>
EXHIBIT 6 (B)(1)
ADMINISTRATION AGREEMENT
AGREEMENT dated July 1, 1995 between First Funds, a Massachusetts business
trust which may issue one or more series of shares of beneficial interest (the
Trust), with respect to the separate series of the Trust as listed in Appendix B
(the Portfolios), and ALPS Mutual Funds Services, Inc., a Colorado corporation
and a registered broker-dealer under the Securities Exchange Act of 1934 (the
Administrator)
WHEREAS, the Trust wishes to employ the services of the Administrator; and
WHEREAS, the Administrator wishes to provide such services under the
conditions set forth below.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained in this Agreement, the Trust and the Administrator agree as follows:
1. Appointment. The Trust hereby appoints and employs the Administrator and
-----------
the Administrator accepts the appointment as agent to perform the services
described herein.
2. Trust Administration. Subject to the direction and control of the Board
--------------------
of Trustees of the Trust ('Trustees"), the Administrator shall assist in
supervising aspects of the Trust's operation of the Portfolios not otherwise
supervised by the Trust's investment adviser, transfer agent, custodian,
auditors, counsel or other agents.
To the extent not otherwise the responsibility of, or provided by, the
Trust or other agents of the Trust, the Administrator shall provide: (i) office
space, equipment and facilities for maintaining the Trust's organization and for
performing administrative services hereunder; (ii) non-investment related
statistical and research data and such other reports, evaluations, and
information as the Trust may request from time to time; (iii) monthly compliance
testing and reporting based on the Investment Company Act of 1940 (the "1940
Act"), the Internal Revenue Code of 1986, as amended, and the investment
guidelines as outlined in each Portfolio's Prospectus and Statement of
Additional Information (such testing does not include testing for ERISA
compliance in respect of employee benefit plans invested in the Portfolios);
(iv) Code of Ethics reporting for the Trust's defined Access Persons, such
reporting to exclude all employees of the investment adviser or sub-adviser of
the Trust; (v) internal clerical, accounting and legal services; and (vi)
stationery and office supplies. The Administrator shall (a) prepare and file
with the Securities and Exchange Commission ("SEC") and applicable state
securities administrators the Portfolios' Registration Statement, Prospectuses
and Statements of Additional Information and Annual and Semi-Annual Reports to
Shareholders of the Portfolios, and cause such filings, together with any other
filings made with the SEC which may be relied upon by investors to make an
investment decision, to be reviewed and approved by Administrator's outside
counsel, at Administrator's expense, prior to such filing; and (b) coordinate
execution and filing by the Portfolios of all federal and state tax returns and
required tax filings other than those required to be made by the Trust's
transfer agent and custodian, and required filings with the SEC including timely
notices required pursuant to Rule 24f-2 under the 1940 Act, and Semi-Annual
Reports on Form N-SAR; and (c) prepare and file registrations, renewals and
other documents related to registration and qualification of the shares and the
Trust with state Blue Sky authorities with the advice and consultation of the
Trustees and the Trust's counsel. The Administrator shall also: (i) maintain the
Trust's existence, and during such times as the shares of the Portfolios are
publicly offered, maintain the registration and qualification of the Portfolios'
shares under federal and state law; (ii) to the extent not to be maintained by
the Trust's Portfolio accounting agent, keep and maintain the financial accounts
and records of the Trust; (iii) develop and implement procedures for monitoring
compliance with SEC, IRS and Prospectus and Statement of Additional Information
requirements; and (iv) generally assist as requested from
<PAGE>
time to time by the Trustees in other aspects of the Trust's operations, as
appropriate, including monitoring performance of the Trust's other agents.
In compliance with the requirements of Rule 31a-3 of the 1940 Act, the
Administrator hereby agrees that all records which it maintains with respect to
each Portfolio for the Trust are the property of the Trust, and further agrees
to surrender promptly to the Trust any of such records upon the Trust's request.
Administrator further agrees to preserve for the periods prescribed by Rule 31a-
2 under the 1940 Act the records subject to Rule 31a-1 under the 1940 Act that
are maintained by the Administrator.
In performing its services as Administrator, Administrator shall comply
with all applicable laws, rules and regulations including without limitation all
rules and regulations made or adopted pursuant to the Securities Act of 1933, as
amended ("1933 Act"), the 1940 Act, the SEC, the NASD, or state securities
commissions.
In connection with all documents and filings to be prepared by it under
this Section 2, Administrator represents that all such Registration Statements
and Prospectuses filed on behalf of the Trust with the SEC under the 1933 Act
and the 1940 Act, as applicable, with respect to the shares, will be prepared in
conformity with the requirements of said Acts and rules and regulations of the
SEC thereunder. As used in this Agreement, the terms "Registration Statement"
and "Prospectus" shall mean any registration statement and prospectus (together
with the related Statements of Additional Information) filed with the SEC with
respect to any of the shares and any amendments and supplements thereto which at
any time shall have been filed with the SEC. Administrator further represents
that any Registration Statement and Prospectus, when such Registration Statement
becomes effective, will contain all statements required to be stated therein in
conformity with the 1933 and 1940 Acts and the rules and regulations of the SEC;
that all statements of fact contained in any such Registration Statement and
Prospectus will be materially true and correct when such Registration Statement
becomes effective; and that neither any Registration Statement nor any
Prospectus when such Registration Statement becomes effective, will include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements contained therein not
misleading.
Administrator agrees to advise the Trustees promptly in writing:
(a) of any request by the SEC for amendments to the Registration Statement
or Prospectuses then in effect;
(b) in the event of the issuance by the SEC of any stop order suspending
the effectiveness of the Registration Statement or Prospectuses then in effect
or the initiation of any proceeding for that purpose;
(c) of the happening of any event which makes untrue any statement of a
material fact made in the Registration Statement or Prospectuses in order to
make the statements therein not misleading; and
(d) of all the actions of the SEC with respect to any Registration
Statement or Prospectus which may from time to time be filed with the SEC.
3. Fees. As compensation for the services, facilities and personnel which
----
the Administrator is to provide or cause to be provided pursuant to Paragraph 2,
each Portfolio of the Trust shall pay to the Administrator out of said
Portfolio's net assets, an annual fee, which shall be computed and accrued daily
and paid in arrears on the first business day of every month, at the annual rate
as referenced in Appendix A to this Agreement.
For the purpose of determining fees payable to the Administrator, the value
of the net assets of each Portfolio of the Trust shall be computed in the manner
described in the Portfolios' Prospectuses and Statements
<PAGE>
of Additional Information from time to time in effect. The fee for any partial
month under this Agreement shall be calculated on a proportional basis.
The Administrator may, from time to time, employ or associate with itself
such person or persons as it may believe to be particularly fitted to assist it
in the performance of this Agreement. Such person or persons may be officers and
employees who are employed by both the Administrator and the Trust. The
compensation of such person or persons shall be paid by the Administrator.
The services of the Administrator provided hereunder are not to be deemed
exclusive and the Administrator shall be free to render similar services to
others and engage in other activities. The Administrator shall be free to enter
other agreements with the Portfolios or the Trust for providing additional
services to the Portfolio or the Trust which are not covered by this Agreement,
and to receive additional compensation for such services. Such services may
include, but are not limited to, distribution of shares, pricing and bookkeeping
and transfer agent services. The Administrator will make available, at the
Administrator's expense, for consideration by the Trustees, officers or
employees of the Administrator to serve as Treasurer and Secretary of the Trust,
and such assistant officers as the Trustees may deem necessary or appropriate.
4. Seed Capital. Administrator will replace the seed capital (in the amount
--------------
of $100,000.00) of Fidelity Management & Research Corp. which had been initially
invested to activate the Portfolios of First Funds.
5. Expenses. The Administrator shall bear all expenses in connection with
----------
its performance of services hereunder, including but not limited to legal fees
and expenses in providing the services and preparing the documents described in
Section 2 of this Agreement. The Portfolios will pay, or contract with persons
not parties to this Agreement to pay for, all its expenses other than those
expressly stated to be payable by the Administrator hereunder, which expenses
payable by each Portfolio shall include, without limitation, (i) interest and
taxes; (ii) brokerage commissions and other costs in connection with the
purchase or sale of securities and other investment instruments; (iii) fees and
expenses of the Trustees; (iv) legal expenses (other than legal fees and
expenses, including legal fees related to Blue Sky filings for the Trust, which
the Administrator at its sole discretion, may incur from time to time in
utilizing outside law firms in fulfillment of its duties of Administration
hereunder) and audit expenses; (v) custodian, pricing and bookkeeping, registrar
and transfer agent fees and expenses; (vi) state and jurisdiction registration
fees, sales report fees, fees (if any) for filing of Prospectuses and/or
Statements of Additional Information related to the Blue Sky registration and
qualification of the Trust and the Portfolios' shares for distribution under
state and federal securities laws; (vii) expenses of printing and mailing proxy
material to shareholders of each Portfolio; (viii) all other expenses incidental
to holding meetings of the Portfolios' shareholders, including proxy
solicitations therefor; (ix) expenses of typesetting Prospectuses and Statements
of Additional Information and supplements thereto; (x) expenses of printing and
mailing Prospectuses and Statements of Additional Information and supplements
thereto sent to existing shareholders; (xi) insurance premiums for fidelity
bonds and other coverage to the extent approved by the Trustees; (xii)
association membership dues authorized by the Trustees; and (xiii) such
nonrecurring or extraordinary expenses as may arise, including those relating to
actions, suits, or proceedings to which the Trust is a party or to which the
Portfolios' assets are subject and the legal obligation which the Trust may have
to indemnify the Trustees and officers with respect thereto.
The Administrator has no obligation to reimburse the Trust or its
Portfolios for (or to have deducted from its fees) any Trust or Portfolio
expense in excess of expense limitations, if any, imposed by state securities
authorities having jurisdiction over the Trust.
6. Limitation of Liability. The Administrator shall not be liable for any
-------------------------
damages or loss suffered by the Trust in connection with the matters to which
this Agreement relates, except for a loss resulting from willful
<PAGE>
misfeasance, bad faith or gross negligence on its part in the performance, or
reckless disregard, of its duties under this Agreement. Any person, even though
also an officer, director, employee, or agent of the Administrator, who may be
or become an officer, Trustee, employee or agent of the Trust, shall be deemed,
when rendering services to or acting on any business of the Trust in any such
capacity (other than services or business in connection with the Administrator's
duties under this Agreement), to be rendering such service to or acting solely
for the Trust, and not as an officer, director, employee, or agent or one under
the control or direction of the Administrator even though paid by it.
7. Proprietary and Confidential Information. Administrator agrees on behalf
------------------------------------------
of itself and its officers, directors, agents and employees to treat
confidentially and as proprietary information of the Trust all records and other
information relative to the Trust and prior, present or potential shareholders,
and not to use such records and information for any purpose other than
performance of its responsibilities and duties hereunder. If the Administrator
is requested or required by, but not limited to, oral questions,
interrogatories, request for information or documents, subpoena, civil
investigation, demand or other action, proceeding or process or as otherwise
required by law, statute, regulation, writ, decree, or the like to disclose such
information, the Administrator will provide the Trust with prompt written notice
of any such request or requirement so that the Trust may seek an appropriate
protective order or other appropriate remedy and/or waive compliance with this
provision. If such order or other remedy is not sought, or obtained, or waiver
not received, the Administrator may without liability hereunder, disclose to the
person, entity or agency requesting or requiring the information, that portion
of the information that is legally required in the opinion of Administrator's
counsel.
8. Term. This Agreement became effective as of July 1, 1995, and shall
-----
continue until June 30, 1997 the ("Initial Term"). This Agreement shall continue
automatically for successive annual periods ending June 30 of each year,
provided such continuance is specifically approved at least annually (i) by the
Trustees, (ii) by a vote of a majority of the outstanding shares (as defined in
the 1940 Act), and provided further that in either event such continuance is
also approved by the majority of the Trustees who are not parties to the
Agreement or "interested persons" (as defined in the 1940 Act) of any party to
this Agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval. During the Initial Term, this Agreement may only be
terminated (i) for "cause" by the Trustees, or (ii) by vote of a majority (as
defined in the 1940 Act) of the outstanding shares of each Portfolio, or (iii)
by the Administrator on not less than sixty days' prior notice. After the
Initial Term of this Agreement, this Agreement may be terminable with respect to
a Portfolio, on not less than sixty days' notice by the Trustees, the
Administrator, or by vote of a majority of the outstanding shares of the
Portfolios (as defined by the 1940 Act).
Termination for "cause" shall mean:
(i) willful misfeasance, bad faith, gross negligence or reckless disregard
on the part of the Administrator with respect to its obligations and duties
hereunder or under the Distribution Agreement of even date herewith between
Administrator and the Trust (the Distribution Agreement);
(ii) regulatory, administrative, or judicial proceedings against
Administrator which result in a determination that it has violated any rule,
regulation, order, or law and which in the reasonable judgment of the Trustees,
including a majority of the Trustees who are not interested persons (as defined
in the 1940 Act) of any party to this Agreement, which substantially impairs the
performances of Administrator's obligations and duties hereunder or under the
Distribution Agreement;
(iii) financial difficulties on the part of Administrator which are
evidenced by the authorization or commencement of, or involvement by way of
pleading, answer, consent, or acquiescence in, a voluntary or involuntary case
under Title 11 of the United Stated Code, as from time to time in effect, or any
applicable law
<PAGE>
other than said Title 11, of any jurisdiction relating to the liquidation or
reorganization of debtors or to the modification or alteration of the rights of
creditors;
(iv) failure by the Administrator to maintain net capital of at least
$250,000 and to provide to the Trustee at least annually an audited financial
statement documenting the existence of such net capital;
(v) failure by the Administrator to keep in effect professional liability
insurance satisfactory to the Trustees naming the Administrator as insured and
providing coverage with respect to the Administrator's activities on behalf of
the Trust in the amount of at least $1,000,000, and to provide to the Trustees
at least annually a certificate of insurance evidencing that such insurance is
in full force and effect; or
(v) any other circumstance which in the reasonable judgment of the
Trustees, including a majority of the Trustees who are not interested persons
(as defined in the 1940 Act) of any party to this Agreement, substantially
impairs on an on-going basis the performance of Administrator's obligations and
duties hereunder or under the Distribution Agreement.
9. Governing Law, Shareholder and Trustee Limitation of Liabilities. This
----------------------------------------------------------------
Agreement shall be governed by the law of the State of Tennessee. The
Administrator is hereby expressly put on notice of the limitations of
shareholder and Trustee liability as set forth in the Declaration of Trust of
the Trust and agrees that obligations assumed by the Trust pursuant to this
Agreement shall be limited in all cases to the Trust and its assets. The
Administrator agrees that it shall not seek satisfaction of any such obligation
from the shareholders or any individual shareholder of the Trust, nor from the
Trustees or any individual Trustee of the Trust. The Administrator understands
that the rights and obligations of each series of the Trust under the Trust's
Declaration of Trust are separate and distinct from those of any and all other
series.
The captions in this Agreement are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which taken together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first above written.
ALPS MUTUAL FUNDS SERVICES, INC.
/s/ By: Robert Alexander
-------------------------------
Title: Chairman
----------------------------
FIRST FUNDS
/s/ By: Richard Rantzow
------------------------------------
Title: President
-----------------------------------
<PAGE>
EXHIBIT 6(B)(2)
AMENDED AND RESTATED
ADMINISTRATION AGREEMENT
AGREEMENT dated as of November 19, 1997 between First Funds, a
Massachusetts business trust which may issue one or more series of shares of
beneficial interest (the "Trust"), with respect to the separate series of the
Trust as listed in Appendix B (the "Portfolios"), and ALPS Mutual Funds
Services, Inc., a Colorado corporation and a registered broker-dealer under the
Securities Exchange Act of 1934 (the "Administrator").
WHEREAS, the Trust wishes to employ the services of the Administrator; and
WHEREAS, the Administrator wishes to provide such services under the
conditions set forth below; and
WHEREAS, the Trust and Administrator desire to amend and restate the
Administration Agreement dated as of July 1, 1995 to extend the term thereof;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained in this Agreement, the Trust and the Administrator agree as follows:
1. Appointment. The Trust hereby appoints and employs the Administrator
-----------
and the Administrator accepts the appointment as agent to perform the services
described herein.
2. Trust Administration. Subject to the direction and control of the
--------------------
Board of Trustees of the Trust ("Trustees"), the Administrator shall assist in
supervising aspects of the Trust's operation of the Portfolios not otherwise
supervised by the Trust's investment adviser, transfer agent, custodian,
auditors, counsel or other agents.
To the extent not otherwise the responsibility of, or provided by, the
Trust or other agents of the Trust, the Administrator shall provide: (i) office
space, equipment and facilities for maintaining the Trust's organization and for
performing administrative services hereunder; (ii) non-investment related
statistical and research data and such other reports, evaluations, and
information as the Trust may request from time to time; (iii) monthly compliance
testing and reporting based on the Investment Company Act of 1940 (the "1940
Act"), the Internal Revenue Code of 1986, as amended, and the investment
guidelines as outlined in each Portfolio's Prospectus and Statement of
Additional Information (such testing does not include testing for ERISA
compliance in respect of employee benefit plans invested in the Portfolios);
(iv) Code of Ethics reporting for the Trust's defined Access Persons, such
reporting to exclude all employees of the investment adviser(s) or sub-
adviser(s) of the Trust; (v) internal clerical, accounting and legal services;
and (vi) stationery and office supplies. The Administrator shall (a) prepare
and file with the Securities and Exchange Commission ("SEC") and applicable
state securities administrators the Portfolios' Registration Statement,
Prospectuses and Statements of
<PAGE>
Additional Information and Annual and Semi-Annual Reports to Shareholders of the
Portfolios, and cause such filings, together with any other filings made with
the SEC which may be relied upon by investors to make an investment decision, to
be reviewed and approved by Administrator's outside counsel, at Administrator's
expense, prior to such filing; and (b) coordinate execution and filing by the
Portfolios of all federal and state tax returns and required tax filings other
than those required to be made by the Trust's transfer agent and custodian, and
required filings with the SEC including timely notices required pursuant to Rule
24f-2 under the 1940 Act, and Semi-Annual Reports on Form N-SAR; and (c) prepare
and file registrations, renewals and other documents related to registration and
qualification of the shares and the Trust with state Blue Sky authorities with
the advice and consultation of the Trustees and the Trust's counsel. The
Administrator shall also: (i) maintain the Trust's existence, and during such
times as the shares of the Portfolios are publicly offered, maintain the
registration and qualification of the Portfolios' shares under federal and state
law; (ii) to the extent not to be maintained by the Trust's Portfolio accounting
agent, keep and maintain the financial accounts and records of the Trust; (iii)
develop and implement procedures for monitoring compliance with SEC, Internal
Revenue Service and Prospectus and Statement of Additional Information
requirements; and (iv) generally assist as requested from time to time by the
Trustees in other aspects of the Trust's operations, as appropriate, including
monitoring performance of the Trust's other agents.
In compliance with the requirements of Rule 31a-3 of the 1940 Act, the
Administrator hereby agrees that all records which it maintains with respect to
each Portfolio for the Trust are the property of the Trust, and further agrees
to surrender promptly to the Trust any of such records upon the Trust's request.
Administrator further agrees to preserve for the periods prescribed by Rule 31a-
2 under the 1940 Act the records subject to Rule 31a-1 under the 1940 Act that
are maintained by the Administrator.
In performing its services as Administrator, Administrator shall comply
with all applicable laws, rules and regulations including without limitation all
rules and regulations made or adopted pursuant to the Securities Act of 1933, as
amended ("1933 Act"), the 1940 Act, the SEC, the National Association of
Securities Dealers, Inc. (the "NASD") or state securities commissions.
In connection with all documents and filings to be prepared by it under
this Section 2, Administrator represents that all such Registration Statements
and Prospectuses filed on behalf of the Trust with the SEC under the 1933 Act
and the 1940 Act, as applicable, with respect to the shares, will be prepared in
conformity with the requirements of said Acts and rules and regulations of the
SEC thereunder. As used in this Agreement, the terms "Registration Statement"
and "Prospectus" shall mean any registration statement and prospectus (together
with the related Statements of Additional Information) filed with the SEC with
respect to any of the shares and any amendments and supplements thereto which at
any time shall have been filed with the SEC. Administrator further represents
that any Registration Statement and Prospectus, when such Registration Statement
becomes effective, will contain all statements required to be stated therein in
conformity with the 1933 and 1940 Acts and the rules and regulations of the
<PAGE>
SEC; that all statements of fact contained in any such Registration Statement
and Prospectus will be materially true and correct when such Registration
Statement becomes effective; and that neither any Registration Statement nor any
Prospectus when such Registration Statement becomes effective, will include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements contained therein not
misleading.
Administrator agrees to advise the Trustees promptly in writing:
(a) of any request by the SEC for amendments to the Registration
Statement or Prospectuses then in effect;
(b) in the event of the issuance by the SEC of any stop order
suspending the effectiveness of the Registration Statement or Prospectuses
then in effect or the initiation of any proceeding for that purpose;
(c) of the happening of any event which makes untrue any statement of
a material fact made in the Registration Statement or Prospectuses in order
to make the statements therein not misleading; and
(d) of all the actions of the SEC with respect to any Registration
Statement or Prospectus which may from time to time be filed with the SEC.
3. Fees. As compensation for the services, facilities and personnel which
----
the Administrator is to provide or cause to be provided pursuant to Paragraph 2,
each Portfolio of the Trust shall pay to the Administrator out of said
Portfolio's net assets, an annual fee, which shall be computed and accrued daily
and paid in arrears on the first business day of every month, at the annual rate
as referenced in Appendix A to this Agreement.
For the purpose of determining fees payable to the Administrator, the value
of the net assets of each Portfolio of the Trust shall be computed in the manner
described in the Portfolios' Prospectuses and Statements of Additional
Information from time to time in effect. The fee for any partial month under
this Agreement shall be calculated on a proportional basis.
The Administrator may, from time to time, employ or associate with itself
such person or persons as it may believe to be particularly fitted to assist it
in the performance of this Agreement. Such person or persons may be officers
and employees who are employed by both the Administrator and the Trust. The
compensation of such person or persons shall be paid by the Administrator.
The services of the Administrator provided hereunder are not to be deemed
exclusive and the Administrator shall be free to render similar services to
others and engage in other activities. The Administrator shall be free to enter
other agreements with the Portfolios or the Trust for providing additional
services to the Portfolio or the Trust which are not covered by this Agreement,
and to receive additional compensation for
<PAGE>
such services. Such services may include, but are not limited to, distribution
of shares, pricing and bookkeeping and transfer agent services. The
Administrator will make available, at the Administrator's expense, for
consideration by the Trustees, officers or employees of the Administrator to
serve as Treasurer and Secretary of the Trust, and such assistant officers as
the Trustees may deem necessary or appropriate.
4. Seed Capital. Administrator will replace the seed capital (in the
------------
amount of $100,000.00) of Fidelity Management & Research Corp. which had been
initially invested to activate the Portfolios of First Funds.
5. Expenses. The Administrator shall bear all expenses in connection with
--------
its performance of services hereunder, including but not limited to legal fees
and expenses in providing the services and preparing the documents described in
Section 2 of this Agreement. The Portfolios will pay, or contract with persons
not parties to this Agreement to pay for, all its expenses other than those
expressly stated to be payable by the Administrator hereunder, which expenses
payable by each Portfolio shall include, without limitation, (i) interest and
taxes; (ii) brokerage commissions and other costs in connection with the
purchase or sale of securities and other investment instruments; (iii) fees and
expenses of the Trustees; (iv) legal expenses (other than legal fees and
expenses, including legal fees related to Blue Sky filings for the Trust, which
the Administrator at its sole discretion, may incur from time to time in
utilizing outside law firms in fulfillment of its duties of Administration
hereunder) and audit expenses; (v) custodian, pricing and bookkeeping, registrar
and transfer agent fees and expenses; (vi) state and jurisdiction registration
fees, sales report fees, fees (if any) for filing of Prospectuses and/or
Statements of Additional Information related to the Blue Sky registration and
qualification of the Trust and the Portfolios' shares for distribution under
state and federal securities laws; (vii) expenses of printing and mailing proxy
material to shareholders of each Portfolio; (viii) all other expenses incidental
to holding meetings of the Portfolios' shareholders, including proxy
solicitations therefor; (ix) expenses of typesetting Prospectuses and Statements
of Additional Information and supplements thereto; (x) expenses of printing and
mailing Prospectuses and Statements of Additional Information and supplements
thereto sent to existing shareholders; (xi) insurance premiums for fidelity
bonds and other coverage to the extent approved by the Trustees; (xii)
association membership dues authorized by the Trustees; and (xiii) such
nonrecurring or extraordinary expenses as may arise, including those relating to
actions, suits, or proceedings to which the Trust is a party or to which the
Portfolios' assets are subject and the legal obligation which the Trust may have
to indemnify the Trustees and officers with respect thereto.
The Administrator has no obligation to reimburse the Trust or its
Portfolios for (or to have deducted from its fees) any Trust or Portfolio
expense in excess of expense limitations, if any, imposed by state securities
authorities having jurisdiction over the Trust.
6. Limitation of Liability. The Administrator shall not be liable for any
-----------------------
damages or loss suffered by the Trust in connection with the matters to which
this Agreement
<PAGE>
relates, except for a loss resulting from willful misfeasance, bad faith or
gross negligence on its part in the performance, or reckless disregard, of its
duties under this Agreement. Any person, even though also an officer, director,
employee, or agent of the Administrator, who may be or become an officer,
Trustee, employee or agent of the Trust, shall be deemed, when rendering
services to or acting on any business of the Trust in any such capacity (other
than services or business in connection with the Administrator's duties under
this Agreement), to be rendering such service to or acting solely for the Trust,
and not as an officer, director, employee, or agent or one under the control or
direction of the Administrator even though paid by it.
7. Proprietary and Confidential Information. Administrator agrees on
----------------------------------------
behalf of itself and its officers, directors, agents and employees to treat
confidentially and as proprietary information of the Trust all records and other
information relative to the Trust and prior, present or potential shareholders,
and not to use such records and information for any purpose other than
performance of its responsibilities and duties hereunder. If the Administrator
is requested or required by, but not limited to, oral questions,
interrogatories, request for information or documents, subpoena, civil
investigation, demand or other action, proceeding or process or as otherwise
required by law, statute, regulation, writ, decree, or the like to disclose such
information, the Administrator will provide the Trust with prompt written notice
of any such request or requirement so that the Trust may seek an appropriate
protective order or other appropriate remedy and/or waive compliance with this
provision. If such order or other remedy is not sought, or obtained, or waiver
not received, the Administrator may without liability hereunder, disclose to the
person, entity or agency requesting or requiring the information, that portion
of the information that is legally required in the opinion of Administrator's
counsel.
8. Term. This Agreement became effective as of July 1, 1995, and shall
----
continue until June 30, 2000 (the "Initial Term"). This Agreement shall
continue automatically for successive annual periods ending June 30 of each
year, provided such continuance is specifically approved at least annually (i)
by the Trustees, (ii) by a vote of a majority of the outstanding shares (as
defined in the 1940 Act), and provided further that in either event such
continuance is also approved by the majority of the Trustees who are not parties
to the Agreement or "interested persons" (as defined in the 1940 Act) of any
party to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. During the Initial Term, this Agreement may
only be terminated (i) for "cause" by the Trustees, or (ii) by vote of a
majority (as defined in the 1940 Act) of the outstanding shares of each
Portfolio, or (iii) by the Administrator on not less than sixty days' prior
notice. After the Initial Term of this Agreement, this Agreement may be
terminable with respect to a Portfolio, on not less than sixty days' notice by
the Trustees, the Administrator, or by vote of a majority of the outstanding
shares of the Portfolios (as defined by the 1940 Act).
Termination for "cause" shall mean:
<PAGE>
(i) willful misfeasance, bad faith, gross negligence or reckless
disregard on the part of the Administrator with respect to its obligations
and duties hereunder or under the Distribution Agreement of even date
herewith between Administrator and the Trust (the "Distribution
Agreement");
(ii) regulatory, administrative, or judicial proceedings against
Administrator which result in a determination that it has violated any
rule, regulation, order, or law and which in the reasonable judgment of the
Trustees, including a majority of the Trustees who are not interested
persons (as defined in the 1940 Act) of any party to this Agreement, which
substantially impairs the performances of Administrator's obligations and
duties hereunder or under the Distribution Agreement;
(iii) financial difficulties on the part of Administrator which are
evidenced by the authorization or commencement of, or involvement by way of
pleading, answer, consent, or acquiescence in, a voluntary or involuntary
case under Title 11 of the United Stated Code, as from time to time in
effect, or any applicable law other than said Title 11, of any jurisdiction
relating to the liquidation or reorganization of debtors or to the
modification or alteration of the rights of creditors;
(iv) failure by the Administrator to maintain net capital of at
least $250,000 and to provide to the Trustees at least annually an audited
financial statement documenting the existence of such net capital;
(v) failure by the Administrator to keep in effect professional
liability insurance satisfactory to the Trustees naming the Administrator
as insured and providing coverage with respect to the Administrator's
activities on behalf of the Trust in the amount of at least $1,000,000, and
to provide to the Trustees at least annually a certificate of insurance
evidencing that such insurance is in full force and effect; or
(vi) any other circumstance which in the reasonable judgment of the
Trustees, including a majority of the Trustees who are not interested
persons (as defined in the 1940 Act) of any party to this Agreement,
substantially impairs on an on-going basis the performance of
Administrator's obligations and duties hereunder or under the Distribution
Agreement.
9. Governing Law, Shareholder and Trustee Limitation of Liability. This
--------------------------------------------------------------
Agreement shall be governed by the law of the State of Tennessee. The
Administrator is hereby expressly put on notice of the limitations of
shareholder and Trustee liability as set forth in the Declaration of Trust of
the Trust and agrees that obligations assumed by the Trust pursuant to this
Agreement shall be limited in all cases to the Trust and its assets. The
Administrator agrees that it shall not seek satisfaction of any such obligation
from the shareholders or any individual shareholder of the Trust, nor from the
Trustees or any individual Trustee of the Trust. The Administrator understands
that the rights and obli-
<PAGE>
gations of each series of the Trust under the Trust's Declaration of Trust are
separate and distinct from those of any and all other series.
The captions in this Agreement are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which taken together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first above written.
ALPS MUTUAL FUNDS SERVICES, INC.
By: ________________________________
Title:
FIRST FUNDS
By: ________________________________
Title:
<PAGE>
APPENDIX A
----------
Effective July 1, 1995
ADMINISTRATION FEES
- -------------------
Money Market Portfolios: 7.5 Basis Points
Variable NAV Portfolios: 15 Basis Points
On new Portfolios of the Trust introduced after July 1, 1995, including the
Tennessee Tax-Free Portfolio, the Administrator will waive its fee for the
initial six months of operation, or until the Portfolio reaches $20 million in
average net assets, whichever occurs first. For the next six months of
operation of a new Portfolio, the Administrator will receive fees based on the
following structure:
1. 50% of the contractual fee up to $20 million in average net assets.
2. 75% of the contractual fee based on average net assets from $20
million to $25 million.
3. 100% of the contractual fee for average net assets above $25 million.
After one year of operation, the Administrator will collect its full contractual
fees.
Average net assets for each Portfolio shall be defined and computed in the
manner described in the Portfolio's Prospectuses and Statements of Additional
Information from time to time in effect.
<PAGE>
APPENDIX B
----------
Effective November 19, 1997
FIRST FUNDS
Cash Reserve Portfolio
Municipal Money Market Portfolio
Tennessee Tax-Free Portfolio
Growth and Income Portfolio
Bond Portfolio
U.S. Government Money Market Portfolio
U.S. Treasury Money Market Portfolio
Capital Appreciation Portfolio
Intermediate Bond Portfolio
<PAGE>
EXHIBIT 6(B)(3)
AMENDED AND RESTATED
ADMINISTRATION AGREEMENT
AGREEMENT dated as of August 19, 1998 between First Funds, a Massachusetts
business trust which may issue one or more series of shares of beneficial
interest (the "Trust"), with respect to the separate series of the Trust as
listed in Appendix B (the "Portfolios"), and ALPS Mutual Funds Services, Inc., a
Colorado corporation and a registered broker-dealer under the Securities
Exchange Act of 1934 (the "Administrator").
WHEREAS, the Trust wishes to employ the services of the Administrator; and
WHEREAS, the Administrator wishes to provide such services under the
conditions set forth below; and
WHEREAS, the Trust and Administrator, effective as of November 19, 1997,
amended and restated the Administration Agreement dated as of July 1, 1995 to
extend the term thereof to June 30, 2000; and
WHEREAS, the Trust and Administrator desire to amend the Amended and
Restated Administration Agreement dated as of November 19, 1997 to clarify the
term "net capital" in Section 8.(iv) hereof to mean "total stockholders equity";
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained in this Agreement, the Trust and the Administrator agree as follows:
1. Appointment. The Trust hereby appoints and employs the Administrator
and the Administrator accepts the appointment as agent to perform the services
described herein.
2. Trust Administration. Subject to the direction and control of the
Board of Trustees of the Trust ("Trustees"), the Administrator shall assist in
supervising aspects of the Trust's operation of the Portfolios not otherwise
supervised by the Trust's investment adviser, transfer agent, custodian,
auditors, counsel or other agents.
To the extent not otherwise the responsibility of, or provided by, the
Trust or other agents of the Trust, the Administrator shall provide: (i) office
space, equipment and facilities for maintaining the Trust's organization and for
performing administrative services hereunder; (ii) non-investment related
statistical and research data and such other reports, evaluations, and
information as the Trust may request from time to time; (iii) monthly compliance
testing and reporting based on the Investment Company Act of 1940 (the "1940
Act"), the Internal Revenue Code of 1986, as amended, and the investment
guidelines as outlined in each Portfolio's Prospectus and Statement of
Additional Information (such testing does not include testing for ERISA
compliance in respect of employee benefit plans invested in the Portfolios);
(iv) Code of Ethics reporting for the
<PAGE>
Trust's defined Access Persons, such reporting to exclude all employees of the
investment adviser(s) or sub-adviser(s) of the Trust; (v) internal clerical,
accounting and legal services; and (vi) stationery and office supplies. The
Administrator shall (a) prepare and file with the Securities and Exchange
Commission ("SEC") and applicable state securities administrators the
Portfolios' Registration Statement, Prospectuses and Statements of Additional
Information and Annual and Semi-Annual Reports to Shareholders of the
Portfolios, and cause such filings, together with any other filings made with
the SEC which may be relied upon by investors to make an investment decision, to
be reviewed and approved by Administrator's outside counsel, at Administrator's
expense, prior to such filing; and (b) coordinate execution and filing by the
Portfolios of all federal and state tax returns and required tax filings other
than those required to be made by the Trust's transfer agent and custodian, and
required filings with the SEC including timely notices required pursuant to Rule
24f-2 under the 1940 Act, and Semi-Annual Reports on Form N-SAR; and (c) prepare
and file registrations, renewals and other documents related to registration and
qualification of the shares and the Trust with state Blue Sky authorities with
the advice and consultation of the Trustees and the Trust's counsel. The
Administrator shall also: (i) maintain the Trust's existence, and during such
times as the shares of the Portfolios are publicly offered, maintain the
registration and qualification of the Portfolios' shares under federal and state
law; (ii) to the extent not to be maintained by the Trust's Portfolio accounting
agent, keep and maintain the financial accounts and records of the Trust; (iii)
develop and implement procedures for monitoring compliance with SEC, Internal
Revenue Service and Prospectus and Statement of Additional Information
requirements; and (iv) generally assist as requested from time to time by the
Trustees in other aspects of the Trust's operations, as appropriate, including
monitoring performance of the Trust's other agents.
In compliance with the requirements of Rule 31a-3 of the 1940 Act, the
Administrator hereby agrees that all records which it maintains with respect to
each Portfolio for the Trust are the property of the Trust, and further agrees
to surrender promptly to the Trust any of such records upon the Trust's request.
Administrator further agrees to preserve for the periods prescribed by Rule 31a-
2 under the 1940 Act the records subject to Rule 31a-1 under the 1940 Act that
are maintained by the Administrator.
In performing its services as Administrator, Administrator shall comply
with all applicable laws, rules and regulations including without limitation all
rules and regulations made or adopted pursuant to the Securities Act of 1933, as
amended ("1933 Act"), the 1940 Act, the SEC, the National Association of
Securities Dealers, Inc. (the "NASD") or state securities commissions.
In connection with all documents and filings to be prepared by it under
this Section 2, Administrator represents that all such Registration Statements
and Prospectuses filed on behalf of the Trust with the SEC under the 1933 Act
and the 1940 Act, as applicable, with respect to the shares, will be prepared in
conformity with the requirements of said Acts and rules and regulations of the
SEC thereunder. As used in this Agreement, the terms "Registration Statement"
and "Prospectus" shall mean any registration statement and prospectus (together
with the related Statements of Additional
<PAGE>
Information) filed with the SEC with respect to any of the shares and any
amendments and supplements thereto which at any time shall have been filed with
the SEC. Administrator further represents that any Registration Statement and
Prospectus, when such Registration Statement becomes effective, will contain all
statements required to be stated therein in conformity with the 1933 and 1940
Acts and the rules and regulations of the SEC; that all statements of fact
contained in any such Registration Statement and Prospectus will be materially
true and correct when such Registration Statement becomes effective; and that
neither any Registration Statement nor any Prospectus when such Registration
Statement becomes effective, will include an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements contained therein not misleading.
Administrator agrees to advise the Trustees promptly in writing:
(a) of any request by the SEC for amendments to the Registration
Statement or Prospectuses then in effect;
(b) in the event of the issuance by the SEC of any stop order
suspending the effectiveness of the Registration Statement or Prospectuses
then in effect or the initiation of any proceeding for that purpose;
(c) of the happening of any event which makes untrue any statement of
a material fact made in the Registration Statement or Prospectuses in order
to make the statements therein not misleading; and
(d) of all the actions of the SEC with respect to any Registration
Statement or Prospectus which may from time to time be filed with the SEC.
3. Fees. As compensation for the services, facilities and personnel which
the Administrator is to provide or cause to be provided pursuant to Paragraph 2,
each Portfolio of the Trust shall pay to the Administrator out of said
Portfolio's net assets, an annual fee, which shall be computed and accrued daily
and paid in arrears on the first business day of every month, at the annual rate
as referenced in Appendix A to this Agreement.
For the purpose of determining fees payable to the Administrator, the value
of the net assets of each Portfolio of the Trust shall be computed in the manner
described in the Portfolios' Prospectuses and Statements of Additional
Information from time to time in effect. The fee for any partial month under
this Agreement shall be calculated on a proportional basis.
The Administrator may, from time to time, employ or associate with itself
such person or persons as it may believe to be particularly fitted to assist it
in the performance of this Agreement. Such person or persons may be officers
and employees who are employed by both the Administrator and the Trust. The
compensation of such person or persons shall be paid by the Administrator.
<PAGE>
The services of the Administrator provided hereunder are not to be deemed
exclusive and the Administrator shall be free to render similar services to
others and engage in other activities. The Administrator shall be free to enter
other agreements with the Portfolios or the Trust for providing additional
services to the Portfolio or the Trust which are not covered by this Agreement,
and to receive additional compensation for such services. Such services may
include, but are not limited to, distribution of shares, pricing and bookkeeping
and transfer agent services. The Administrator will make available, at the
Administrator's expense, for consideration by the Trustees, officers or
employees of the Administrator to serve as Treasurer and Secretary of the Trust,
and such assistant officers as the Trustees may deem necessary or appropriate.
4. Seed Capital. Administrator will replace the seed capital (in the
amount of $100,000.00) of Fidelity Management & Research Corp. which had been
initially invested to activate the Portfolios of First Funds.
5. Expenses. The Administrator shall bear all expenses in connection with
its performance of services hereunder, including but not limited to legal fees
and expenses in providing the services and preparing the documents described in
Section 2 of this Agreement. The Portfolios will pay, or contract with persons
not parties to this Agreement to pay for, all its expenses other than those
expressly stated to be payable by the Administrator hereunder, which expenses
payable by each Portfolio shall include, without limitation, (i) interest and
taxes; (ii) brokerage commissions and other costs in connection with the
purchase or sale of securities and other investment instruments; (iii) fees and
expenses of the Trustees; (iv) legal expenses (other than legal fees and
expenses, including legal fees related to Blue Sky filings for the Trust, which
the Administrator at its sole discretion, may incur from time to time in
utilizing outside law firms in fulfillment of its duties of Administration
hereunder) and audit expenses; (v) custodian, pricing and bookkeeping, registrar
and transfer agent fees and expenses; (vi) state and jurisdiction registration
fees, sales report fees, fees (if any) for filing of Prospectuses and/or
Statements of Additional Information related to the Blue Sky registration and
qualification of the Trust and the Portfolios' shares for distribution under
state and federal securities laws; (vii) expenses of printing and mailing proxy
material to shareholders of each Portfolio; (viii) all other expenses incidental
to holding meetings of the Portfolios' shareholders, including proxy
solicitations therefor; (ix) expenses of typesetting Prospectuses and Statements
of Additional Information and supplements thereto; (x) expenses of printing and
mailing Prospectuses and Statements of Additional Information and supplements
thereto sent to existing shareholders; (xi) insurance premiums for fidelity
bonds and other coverage to the extent approved by the Trustees; (xii)
association membership dues authorized by the Trustees; and (xiii) such
nonrecurring or extraordinary expenses as may arise, including those relating to
actions, suits, or proceedings to which the Trust is a party or to which the
Portfolios' assets are subject and the legal obligation which the Trust may have
to indemnify the Trustees and officers with respect thereto.
The Administrator has no obligation to reimburse the Trust or its
Portfolios for (or to have deducted from its fees) any Trust or Portfolio
expense in excess of expense
<PAGE>
limitations, if any, imposed by state securities authorities having jurisdiction
over the Trust.
6. Limitation of Liability. The Administrator shall not be liable for any
damages or loss suffered by the Trust in connection with the matters to which
this Agreement relates, except for a loss resulting from willful misfeasance,
bad faith or gross negligence on its part in the performance, or reckless
disregard, of its duties under this Agreement. Any person, even though also an
officer, director, employee, or agent of the Administrator, who may be or become
an officer, Trustee, employee or agent of the Trust, shall be deemed, when
rendering services to or acting on any business of the Trust in any such
capacity (other than services or business in connection with the Administrator's
duties under this Agreement), to be rendering such service to or acting solely
for the Trust, and not as an officer, director, employee, or agent or one under
the control or direction of the Administrator even though paid by it.
7. Proprietary and Confidential Information. Administrator agrees on
behalf of itself and its officers, directors, agents and employees to treat
confidentially and as proprietary information of the Trust all records and other
information relative to the Trust and prior, present or potential shareholders,
and not to use such records and information for any purpose other than
performance of its responsibilities and duties hereunder. If the Administrator
is requested or required by, but not limited to, oral questions,
interrogatories, request for information or documents, subpoena, civil
investigation, demand or other action, proceeding or process or as otherwise
required by law, statute, regulation, writ, decree, or the like to disclose such
information, the Administrator will provide the Trust with prompt written notice
of any such request or requirement so that the Trust may seek an appropriate
protective order or other appropriate remedy and/or waive compliance with this
provision. If such order or other remedy is not sought, or obtained, or waiver
not received, the Administrator may without liability hereunder, disclose to the
person, entity or agency requesting or requiring the information, that portion
of the information that is legally required in the opinion of Administrator's
counsel.
8. Term. This Agreement became effective as of July 1, 1995, and shall
continue until June 30, 2000 (the "Initial Term"). Thereafter, this Agreement
shall continue automatically for successive annual periods ending June 30 of
each year, provided such continuance is specifically approved at least annually
(i) by the Trustees, (ii) by a vote of a majority of the outstanding shares (as
defined in the 1940 Act), and provided further that in either event such
continuance is also approved by the majority of the Trustees who are not parties
to the Agreement or "interested persons" (as defined in the 1940 Act) of any
party to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. During the Initial Term, this Agreement may
only be terminated (i) for "cause" by the Trustees, or (ii) by vote of a
majority (as defined in the 1940 Act) of the outstanding shares of each
Portfolio, or (iii) by the Administrator on not less than sixty days' prior
notice. After the Initial Term of this Agreement, this Agreement may be
terminable with respect to a Portfolio, on not less than sixty days' notice by
the Trustees,
<PAGE>
the Administrator, or by vote of a majority of the outstanding shares of the
Portfolios (as defined by the 1940 Act).
Termination for "cause" shall mean:
(i) willful misfeasance, bad faith, gross negligence or reckless
disregard on the part of the Administrator with respect to its obligations
and duties hereunder or under the Distribution Agreement of even date
herewith between Administrator and the Trust (the "Distribution
Agreement");
(ii) regulatory, administrative, or judicial proceedings against
Administrator which result in a determination that it has violated any
rule, regulation, order, or law and which in the reasonable judgment of the
Trustees, including a majority of the Trustees who are not interested
persons (as defined in the 1940 Act) of any party to this Agreement, which
substantially impairs the performances of Administrator's obligations and
duties hereunder or under the Distribution Agreement;
(iii) financial difficulties on the part of Administrator which are
evidenced by the authorization or commencement of, or involvement by way of
pleading, answer, consent, or acquiescence in, a voluntary or involuntary
case under Title 11 of the United Stated Code, as from time to time in
effect, or any applicable law other than said Title 11, of any jurisdiction
relating to the liquidation or reorganization of debtors or to the
modification or alteration of the rights of creditors;
(iv) failure by the Administrator to maintain total stockholders
equity of at least $250,000 and to provide to the Trustees at least
annually an audited financial statement documenting the existence of such
total stockholders equity;
(v) failure by the Administrator to keep in effect professional
liability insurance satisfactory to the Trustees naming the Administrator
as insured and providing coverage with respect to the Administrator's
activities on behalf of the Trust in the amount of at least $1,000,000, and
to provide to the Trustees at least annually a certificate of insurance
evidencing that such insurance is in full force and effect; or
(vi) any other circumstance which in the reasonable judgment of the
Trustees, including a majority of the Trustees who are not interested
persons (as defined in the 1940 Act) of any party to this Agreement,
substantially impairs on an on-going basis the performance of
Administrator's obligations and duties hereunder or under the Distribution
Agreement.
9. Governing Law, Shareholder and Trustee Limitation of Liability. This
Agreement shall be governed by the law of the State of Tennessee. The
Administrator is hereby expressly put on notice of the limitations of
shareholder and Trustee liability as set
<PAGE>
forth in the Declaration of Trust of the Trust and agrees that obligations
assumed by the Trust pursuant to this Agreement shall be limited in all cases to
the Trust and its assets. The Administrator agrees that it shall not seek
satisfaction of any such obligation from the shareholders or any individual
shareholder of the Trust, nor from the Trustees or any individual Trustee of the
Trust. The Administrator understands that the rights and obligations of each
series of the Trust under the Trust's Declaration of Trust are separate and
distinct from those of any and all other series.
The captions in this Agreement are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which taken together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first above written.
ALPS MUTUAL FUNDS SERVICES, INC.
By: ________________________________
W. Robert Alexander
Title: Chairman
FIRST FUNDS
By: ________________________________
Richard Rantzow
Title: President
<PAGE>
APPENDIX A
----------
Effective July 1, 1995
ADMINISTRATION FEES
- -------------------
Money Market Portfolios: 7.5 Basis Points
Variable NAV Portfolios: 15 Basis Points
On new Portfolios of the Trust introduced after July 1, 1995, including the
Tennessee Tax-Free Portfolio, the Administrator will waive its fee for the
initial six months of operation, or until the Portfolio reaches $20 million in
average net assets, whichever occurs first. For the next six months of
operation of a new Portfolio, the Administrator will receive fees based on the
following structure:
1. 50% of the contractual fee up to $20 million in average net assets.
2. 75% of the contractual fee based on average net assets from $20
million to $25 million.
3. 100% of the contractual fee for average net assets above $25 million.
After one year of operation, the Administrator will collect its full contractual
fees.
Average net assets for each Portfolio shall be defined and computed in the
manner described in the Portfolio's Prospectuses and Statements of Additional
Information from time to time in effect.
<PAGE>
APPENDIX B
----------
Effective November 19, 1997
FIRST FUNDS
Cash Reserve Portfolio
Municipal Money Market Portfolio
Tennessee Tax-Free Portfolio
Growth and Income Portfolio
Bond Portfolio
U.S. Government Money Market Portfolio
U.S. Treasury Money Market Portfolio
Capital Appreciation Portfolio
Intermediate Bond Portfolio
<PAGE>
EXHIBIT 6(D)
SERVICE CONTRACT
(Administrative and Agency Services Only)
WITH RESPECT TO FIRST FUNDS (THE TRUST):
CLASS III SHARES OF:
( ) Total Return Equity Portfolios
( ) Total Return Fixed Income Portfolio
(each Class III Portfolio)
To First Funds: We desire to enter into a Contract with you for activities in
connection with the servicing of beneficial owners of Class III shares of each
Portfolio of the Trust noted above.
THE TERMS AND CONDITIONS OF THIS CONTRACT ARE AS FOLLOWS:
1. We shall provide services for our clients who beneficially own Class III
Portfolio shares (Clients), which services may include, but are not limited
to: maintaining account records; answering questions and handling
correspondence; handling the transmission of funds representing the
purchase price or redemption proceeds; issuing confirmations for
transactions; assisting customers in completing application forms;
communicating with the transfer agent; providing account maintenance and
account level support; and providing such other information and services as
you or our Clients reasonably may request, as long as these requests are
not intended to result in the sale of shares.
2. We shall provide such office space and equipment, telephone facilities and
personnel (which may be all or any part of the space, equipment and
facilities currently used in our business, or all or any personnel employed
by us) as is necessary or beneficial for providing information and services
related to Class III Portfolio shares to Clients.
3. We agree to indemnify and hold you, the Trustees of the Trust, and the
Trust's adviser and transfer agent harmless from any and all direct or
indirect liabilities or losses resulting from requests, directions, actions
or inactions, of or by us or our officers, employees or agents regarding
the purchase, redemption, transfer or registration of Class III Portfolio
shares of the Trust. Such indemnification shall survive the termination of
this Contract.
Neither we nor any of our officers, employees or agents are authorized to
make any representation concerning Class III Portfolio shares except those
contained in the then current Prospectus, and which are consistent with our
capabilities under applicable law; and we shall have no authority to act as
agent for the Trust or for you in making such representation or otherwise.
4. In consideration of the services and facilities described herein, we shall
be entitled to receive, and you shall pay to us, with respect to the Class
III Portfolio shares of our Clients, fees at an annual rate as set forth in
the accompanying fee schedule. We understand that the payment of such fees
has been authorized pursuant to Shareholder Service Plans (each a Class III
Plan) approved by the Board of Trustees of the Trust, and those Trustees
who are not "interested persons" of the Trust (as defined in the Investment
Company Act of 1940) and who have no direct or indirect financial interest
in the operation of each Class III Plan or in any agreements related to
each Class III Plan (Independent Tru
5. We agree to conduct our activities in accordance with any applicable
federal or state laws, including securities laws and any obligation
thereunder to disclose to our Clients the receipt or fees in connection
with their beneficial ownership of shares of each Class III Portfolio. We
represent that any compensation payable to us in connection with the
investment of customers' assets in Class III of each Portfolio (a) will be
disclosed by us to our customers, (b) will be authorized by our customers,
and (c) will not result in an excessive fee payable to us.
6. You reserve the right, at your discretion and without notice, to suspend
the sale of shares or
<PAGE>
withdraw the sale of shares of each Class III Portfolio.
7. This Contract shall continue in force for one year from the effective date
(March 20, 1993) of the Class III Plan, and thereafter shall continue
automatically for successive annual periods, provided such continuance is
specifically subject to termination with respect to any Class III Portfolio
without penalty at any time if a majority of the Trust's Independent
Trustees vote to terminate or not to continue each Class III Plan. This
Contract may also be terminated by us, for any reason, upon 15 days'
written notice to you. Notwithstanding anything contained herein, in the
event that one or more of the Class III Plans shall terminate or we shall
fail to perform the recordkeeping and client servicing functions
contemplated by this Contract, such determination to be made in good faith
by the Trust or you, this Contract is terminable effective upon receipt of
notice thereof by us. This Contract will also terminate automatically in
the event of its assignment (as defined in the Investment Company Act of
1940).
8. All communications to you shall be sent to you in writing or by facsimile
at your offices, Attention: ALPS Mutual Funds Services, Inc., 370
Seventeenth Street, Suite 2700, Denver, CO 80202. Any notice to us shall be
duly given if mailed, telegraphed or facsimiled to us at the address shown
in this Contract.
9. The Contract shall be construed in Accordance with the laws of the State of
Colorado.
10. We acknowledge receipt of notice of the limitation of shareholder and
Trustee liability as set forth in the Declaration of Trust of the Trust and
agree that the obligations assumed by the Trust under this contract shall
be limited in all cases to the assets of Class III of the applicable
Portfolio.
<PAGE>
Very truly yours,
_________________________________________________________
Name of Shareholder Servicing Agent (Please print or Type)
_________________________________________________________
Street City State
By
_________________________________________________________
Authorized Signature
Its: _______________________
Date: ______________________
NOTE: Please return signed copies of this Service Contract to First Funds. Upon
acceptance, one countersigned copy will be returned to you.
FIRST FUNDS:
By
________________________________________________________
Authorized Signature
Its: ______________________
Date: _____________________
<PAGE>
EXHIBIT 8(A)
MUTUAL FUND CUSTODY AGREEMENT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
<S> <C>
1. Appointment 3
2. Delivery of Documents 3
3. Definitions 4
4. Delivery and Registration of Property 6
5. Voting Rights 7
6. Exercise of Rights; Tender Offers 8
7. Options 8
8. Futures Contracts 9
9. Receipt and Disbursement of Money 10
10. Receipt of Securities 10
11. Subcustodian Agreements 11
12. Use of Securities Depository or the Book Entry System 12
13. Instructions Consistent with the Declaration 13
14. Transactions not Requiring Instructions 14
25. Transactions Requiring Instructions 18
16. Purchase of Securities 19
17. Sales of Securities 19
18. Records 20
19. Cooperation with Accountants 20
20. Confidentiality 20
21. Equipment Failures 21
22. Right to Receive Advice 21
23. Compliance with Governmental Rules and Regulations 22
24. Compensation 22
25. Indemnification 22
26. Notice of Litigation; Right to Prosecute 24
27. Trust's Right to Proceed 27
28. Responsibility of U.S. Trust 25
29. Collection 26
30. Duration and Termination 26
31. Notices 27
32. Further Actions 28
33. Amendments 28
34. Miscellaneous 29
Attachment A - Fees
Attachment B - Authorized Persons
Attachment C - Portfolios of the Trust
</TABLE>
MUTUAL FUND CUSTODY AGREEMENT
-----------------------------
<PAGE>
THIS AGREEMENT is made as of October 12, 1992 by and between the Masters
Group of Mutual Funds, a Massachusetts Business Trust (the "Trust"), and UNITED
STATES TRUST COMPANY OF NEW YORK, a New York State chartered bank trust company
("U.S. Trust").
W I T N E S S E T H:
--------------------
WHEREAS, the Trust is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended ("the 1940 Act");
and
WHEREAS, the Trust desires to retain U.S. Trust to serve as the Trust's
custodian and U.S. Trust is willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Trust hereby appoints U.S. Trust to act as custodian
-------------
of its portfolio securities, cash and other property on the terms set forth in
this Agreement. U.S. Trust accepts such appointment and agrees to furnish the
services herein set forth in return for the compensation as provided in
Paragraph 24 of this Agreement. U.S. Trust agrees to comply with all relevant
provisions of the 1940 Act and applicable rules and regulations thereunder. The
Trust may from time to time issue separate series or classes or classify and
reclassify shares of such series.
2. Delivery of Documents. The Trust has furnished U.S. Trust with copies
-----------------------
properly certified or authenticated of each of the following:
(a) Resolutions of the Trust's Board of Trustees authorizing the
appointment of U.S. Trust as Custodian of the securities, cash and
other property of the Trust and approving this Agreement;
(b) Incumbency and signature certificates identifying and containing the
signatures of the Trust's officers and/or the persons authorized to
sign Proper Instructions, as hereinafter defined, on behalf of the
Trust;
(c) The Trust's Amended and Restated Declaration of Trust filed with the
Secretary of the Commonwealth of Massachusetts and all amendments
thereto (such Declaration of Trust, as currently in effect and as
they shall from time to time be amended, are herein called the
"Declaration");
(d) The Trust's By-Laws and all amendments thereto (such By-Laws, as
currently in effect and as they shall from time to time be amended,
are herein called the "By-Laws");
(e) Resolutions of the Trust's Board of Trustees and/or the Trust's
shareholders approving the Investment Advisory and Management
Agreement between the Trust and the advisor dated as of September 4,
1992 (the "Advisory Agreement");
(f) The Trust's current Registration Statement on Form N-1A under the
1940 Act and the Securities Act of 1933, as amended ("the 1933 Act")
as filed with the SEC; and
<PAGE>
(g) The Trust's most recent prospectus including all amendments and
supplements thereto (the "Prospectus").
The Trust will furnish U.S. Trust from time to time with copies of all
amendments of or supplements to the foregoing, if any.
3. Definitions.
------------
(a) "Authorized Person". As used in this Agreement, the term "Authorized
--------------------
Person" means the Trust's President, Vice-President, Treasurer and any other
person, whether or not any such person is an officer or employee of the
Trust, duly authorized by the Board of Trustees of the Trust to give Proper
Instructions on behalf of the Trust and whose signatures appear on
Attachment B hereto which may be amended from time to time.
(b) "Book-Entry System". As used in this Agreement, the term
--------------------
"Book-Entry System" means the Federal Reserve/Treasury book-entry
system for United States and federal agency securities, its
successor or successors and its nominee or nominees.
(c) "Property". The term "Property", as used in this Agreement, means:
------------
(i) any and all securities, cash, and other property of the Trust
which the Trust may from time to time deposit, or cause to be deposited,
with U.S. Trust or which U.S. Trust may from time to time hold for the
Trust;
(ii) all income, dividends, or distributions of any kind in respect
of any such securities or other property;
(iii) all proceeds of the sales, repurchase, redemptions (or
otherwise) of any of such securities or other property; and
(iv) all proceeds of the sale of securities issued by the Trust,
which are received by U.S. Trust from time to time from or on behalf of the
Trust.
(d) "Securities Depository". As used in this Agreement, the term
------------------------
"Securities Depository" shall mean The Depository Trust Company, a
clearing agency registered with the SEC or its successor or
successors and its nominee or nominees; and shall also mean any
other clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities Exchange Act of 1934,
its successor or successors specifically identified in a certified
copy of a resolution of the Trust's Board of Trustees delivered to
U.S. Trust and specifically approving deposits by U.S. Trust
therein.
(e) "Proper Instructions". Means instructions
-----------------------
(i) delivered by mail, telegram, cable, telex, facsimile sending
device, to the Mutual Funds Custody Division of U.S. Trust, signed by an
Authorized Person; or
(ii) transmitted electronically through the U.S. Trust Asset
Management System or any similar electronic instruction system acceptable
to U.S. Trust; or
<PAGE>
(iii) previously agreed to in writing by the Trust and U.S. Trust or
provided orally by the Trust in form satisfactory to U.S. Trust and promptly
followed by written instructions signed by an Authorized Person.
Regarding Proper Instructions, the Trust agrees to indemnify and
hold harmless U.S. Trust and its nominees from all loss, damage and expense
(including reasonable attorney's fees) suffered or incurred by U.S. Trust or its
nominee caused by or arising from actions taken by the Custodian in reliance
upon Proper Instructions; provided, however, that such indemnity shall not apply
to loss, damage or expense occasioned by or resulting from the gross negligence,
bad faith, reckless disregard of its duties or willful misfeasance of the
Custodian or its nominee or any material breach of this Agreement by U.S. Trust
or its nominee.
4. Delivery and Registration of the Property. (a) The Trust will deliver or
-------------------------------------------
cause to be delivered to U.S. Trust all Property owned by it, at any time during
the period of this Agreement, except for securities and monies to be delivered
to any Subcustodian appointed pursuant to Paragraph 11 hereof. U.S. Trust will
not be responsible for such securities and such monies until actually received
by it. All securities delivered to U.S. Trust or to any such Subcustodian (other
than in bearer form) shall be registered in the name of the Trust or in the name
of a nominee of the Trust or in the name of U.S. Trust or any nominee of U.S.
Trust (with or without indication of fiduciary status) or in the name of any
Subcustodian or any nominee of such Subcustodian appointed pursuant to Paragraph
11 hereof or shall be properly endorsed and in form for transfer satisfactory to
U.S. Trust.
(b) U.S. Trust and each Subcustodian shall at all times hold securities
of the Trust either: (i) by physical possession of the share certificates or
other instruments representing such securities in registered or bearer form; or
(ii) in the Book-Entry System, or (iii) in a Securities Depository.
(c) (i) U.S. Trust and each Subcustodian shall at all times hold, without
authority to withdraw, deliver, assign, hypothecate or otherwise dispose of
except in accordance with the express terms of this Agreement, securities of the
Trust in the name of U.S. Trust, the Trust or any nominee of either of them,
unless otherwise directed by Proper Instructions; provided that, in any event,
all securities and other assets of the Trust shall be held physically segregated
and separated from the assets of any other entity in an account of U.S. Trust or
a Subcustodian as the case may be, containing only the securities and assets of
the Trust, or (ii) in the event a Securities Depository or Book Entry System is
used by U.S. Trust or its Subcustodians only securities and assets held by U.S.
Trust or such Subcustodian as a fiduciary or custodian for their respective
customers, and provided further, that the records of U.S. Trust and such
Subcustodians shall indicate at all times the Trust or other customer for which
such securities and other assets are held in such account and the respective
interests therein.
5. Voting Rights. It is U.S. Trust's responsibility to deliver to the
---------------
Trust, via overnight mail if necessary, all forms of proxies, all notices of
meetings, and any other notices or announcements materially affecting or
relating to securities owned by the Trust that are received by U.S. Trust,
any Subcustodian (as hereinafter defined), or any nominee of either of them, and
upon receipt of Proper Instructions, U.S. Trust shall execute and deliver, or
use its best efforts to cause such Subcustodian or nominee to execute and
deliver such proxies or other authorizations as may be required. Where warrants,
options, tenders or other securities have fixed expiration dates, the Trust
understands that in order for U.S. Trust to act, U.S. Trust must receive the
Trust's instructions at its offices in New York, addressed as U.S. Trust may
from time to time request, by no later than noon (NY City time) at least one
business day prior to the last scheduled date to act with respect thereto (or
such earlier date or time as U.S. Trust may reasonably notify the Trust). U.S.
Trust shall provide the Trust with reasonable notice of the expiration dates of
such securities in order to permit the Trust to give U.S. Trust timely
instructions with respect to such notice. Provided U.S. Trust has notified the
<PAGE>
Trust as required by the preceding sentence, absent U.S. Trust's timely receipt
of such instructions, such instruments will expire without liability to U.S.
Trust.
6. Exercise of Rights; Tender Offers. Upon receipt of Proper
-----------------------------------
Instructions, U.S. Trust shall: (a) deliver warrants, puts, calls, rights or
similar securities to the issuer or trustee thereof, or to the agent of such
issuer or trustee, for the purpose of exercise or sale; and (b) deposit
securities upon invitations for tenders thereof, provided that the consideration
for such securities is to be paid or delivered to U.S. Trust, or the tendered
securities included in the Proper Instructions that are received in exchange for
the tendered securities are to be returned to U.S. Trust. Notwithstanding any
provision of this Agreement to the contrary, U.S. Trust shall take all action as
directed in Proper Instructions to comply with the terms of all mandatory or
compulsory exchanges, calls, tenders, redemptions, or similar rights of security
ownership, and shall promptly notify the Trust of such action in writing by
facsimile transmission or in such manner as the Trust may designate in writing.
7. Options. Upon receipt of Proper Instructions, U.S. Trust shall: (a)
---------
receive and retain confirmations or other documents, if any, evidencing the
purchase or writing of an option on a security or securities index by the Trust;
(b) deposit and maintain in a segregated account, securities (either physically
or by book entry in a Securities Depository), cash or other assets; and/or (c)
pay, release and/or transfer such securities, cash, or other assets in
accordance with notices or other communications evidencing the expiration,
termination or exercise of such options furnished by the Options Clearing
Corporation, the securities or options exchange on which such options are
traded, or such other organization as may be responsible for handling such
option transactions and promptly inform the Trust of such action. The Trust and
the broker-dealer shall be responsible for the sufficiency of assets held in any
segregated account established in compliance with applicable margin maintenance
requirements and the performance of other terms of any option contract, and
shall promptly upon notice from U.S. Trust bring such accounts into compliance
with such terms or requirements.
8. Futures Contracts. Upon receipt of Proper Instructions, U.S. Trust
-------------------
shall: (a) receive and retain
confirmations, if any, evidencing the purchase or sale of a futures contract or
an option on a futures contract by a Portfolio; (b) deposit and maintain in a
segregated account, cash, securities and other assets designated as initial,
maintenance or variation "margin" deposits intended to secure the Trust's
performance of its obligations under any futures contracts purchased or sold or
any options on futures contracts written by the Trust, regarding such margin
deposits; and (c) release assets from and/or transfer assets into such margin
accounts only in accordance with Proper Instructions or the terms of any
Safekeeping and Procedural
Agreement entered into among U.S. Trust, the Trust and a futures commission
merchant. The Trust shall be responsible for the sufficiency of assets held in
the segregated account in compliance with applicable margin maintenance
requirements and the performance of any futures contract or option on a futures
contract in accordance with its terms, and shall promptly upon notice act to
bring such accounts into compliance with such terms or requirements.
9. Receipt and Disbursement of Money.
----------------------------------
(a) U.S. Trust shall open and maintain a custody account (or
accounts) for the Trust, and shall hold in such account, subject to the
provisions hereof, all cash received by it from or for the Trust. U.S. Trust
shall make payments of cash to, or for the account of, the Trust from such cash
only (i) for the purchase of securities for the Trust as provided in paragraph
16 hereof; (ii) upon receipt of Proper Instructions, for the payment of
dividends or for the payment of interest, taxes, administration, distribution,
transfer agency or advisory fees or expenses which are to be borne by the Trust
under the terms of this Agreement, any Advisory Agreement, any Distribution
Agreement, any Transfer Agent Agreement, or any administration agreement; (iii)
<PAGE>
upon receipt of Proper Instructions for payments in connection with the
conversion, exchange or surrender of securities owned or subscribed to by the
Trust and held by or to be delivered to U. S. Trust; (iv) to a Subcustodian
pursuant to Paragraph 11 hereof; or (v) upon receipt of Proper Instructions for
other proper corporate purposes.
(b) U.S. Trust is hereby authorized to endorse and collect all checks,
drafts or other orders for the payment of money received as custodian for the
Trust.
10. Receipt of Securities.
----------------------
(a) Except as provided by Paragraph 11 hereof, U.S. Trust shall hold all
securities and non-cash Property received by it for the Trust. All such
securities and non-cash Property are to be held or disposed of by U.S. Trust for
the Trust pursuant to the terms of this Agreement. In the absence of Proper
Instructions, U.S. Trust shall have no power or authority to withdraw, deliver,
assign, hypothecate, pledge or otherwise dispose of any such securities and non-
cash Property, except in accordance with the express terms provided for in this
Agreement. In no case may any trustee, officer, employee or agent of the Trust,
acting as individuals, withdraw any securities or non-cash Property.
11. Subcustodian Agreements. In connection with its duties under this
-------------------------
Agreement, U.S. Trust may, at its own expense, enter into Subcustodian
agreements with other banks or trust companies for the receipt of certain
securities and cash to be held by U.S. Trust for the account of the Trust
pursuant to this Agreement; provided that each such bank or trust company has an
aggregate capital, surplus and undivided profits, as shown by its last published
report, of not less than twenty million dollars ($20,000,000) and that such bank
or trust company agrees with U.S. Trust to comply with all relevant provisions
of the 1940 Act and applicable rules and regulations thereunder. U.S. Trust will
be liable for acts or omissions of any such Subcustodian under the standards of
care provided for herein and shall hold the Trust harmless from any losses
occasioned therefrom.
(b) Promptly after the close of business on each day U.S. Trust shall
furnish the Trust with written confirmations and a summary of all transfers to
or from the account of the Trust during said day. Where securities are
transferred to the account of the Trust established at a Securities Depository
or the Book Entry System pursuant to Paragraph 12 hereof, U.S. Trust shall by
book entry or otherwise through the Securities Depository or Book Entry System
identify as belonging to such Trust the securities in a commingled group of
securities registered in the name of U.S. Trust (or its nominee) or shown in
U.S. Trust's account on the books of a Securities Depository or the Book-Entry
System. At least monthly and from time to time upon request of the Trust, U.S.
Trust shall furnish the Trust with a detailed statement of the Property held for
the Trust under this Agreement.
12. Use of Securities Depository or the Book-Entry System. The Trust
------------------------------------------------------
shall deliver to U.S. Trust a certified resolution of the Board of Trustees of
the Trust approving, authorizing and instructing U.S. Trust on a continuous and
ongoing basis until instructed to the contrary by Proper Instructions actually
received by U.S. Trust (i) to deposit in a Securities Depository named in such
resolutions or the Book-Entry System all securities of the Trust eligible for
deposit therein and (ii) to utilize a Securities Depository or the Book-Entry
System to the extent possible in connection with the performance of its duties
hereunder, including without limitation, settlements of purchases and sales of
securities by the Trust, and deliveries and returns of securities collateral in
connection with borrowings. Without limiting the generality of such use, it is
agreed that the following provisions shall apply thereto:
<PAGE>
(a) Securities and any cash of the Trust deposited in a Securities
Depository or the Book-Entry System will at all times be segregated from any
assets and cash controlled by U.S. Trust in other than a fiduciary or custodial
capacity but may be commingled with other assets held in such capacities. U.S.
Trust will effect payment for securities, in the place where the transaction is
settled, unless the Trust has given U.S. Trust Proper Instructions to the
contrary. U.S. Trust and its Subcustodians if any, will pay out money only upon
receipt of securities and will deliver securities versus payment.
(b) All books and records maintained by U.S. Trust which relate to the
Trust participation in a Securities Depository or the Book-Entry System will at
all times during U.S. Trust's regular business hours be open to the inspection
of the Trust's duly authorized employees or agents, and the Trust will be
furnished with all information in respect of the services rendered to it as it
may require.
(c) U.S. Trust will provide the Trust with copies of reports obtained by
U.S. Trust on the system of internal accounting control of the Book Entry System
or any Securities Depository System or of its own systems as the Trust may
reasonably request from time to time.
13. Instructions Consistent With The Declaration, etc. Unless otherwise
---------------------------------------------------
provided for in this Agreement, U.S. Trust shall act only upon Proper
Instructions. U.S. Trust may assume that any Proper Instructions received
hereunder are not in any way inconsistent with any provision of the Declaration
or By-Laws of the Trust or any vote or resolution of the Trust's Board of
Trustees, or any committee thereof. U.S. Trust shall be entitled to rely upon
any Proper Instructions actually received by U.S. Trust pursuant to this
Agreement. The Trust agrees that U.S. Trust shall incur no liability in acting
upon Proper Instructions given to U.S. Trust. In accordance with instructions
from the Trust, advances of cash or other Property made by U.S. Trust, arising
from the purchase, sale, redemption, transfer or other disposition of Property
of the Trust, or in connection with the disbursement of funds to any party, or
in payment of fees, expenses, claims or liabilities owed to U.S. Trust by the
Trust, or to any other party which has secured a judgment in a court of law
against the Trust which creates an overdraft in the accounts or over-delivery of
Property shall be deemed a loan by U.S. Trust to the Trust, payable on demand,
bearing interest at such rate customarily charged by U.S. Trust for similar
loans. The Trust agrees that test arrangements, authentication methods or other
security devices to be used with respect to instructions which the Trust may
give by telephone, telex, TWX, facsimile transmission, bank wire or through an
electronic instruction system, shall be processed in accordance with terms and
conditions for the use of such arrangements, methods or devices as U.S. Trust
may put into, effect and modify from time to time. The Trust shall safeguard any
test keys, identification codes or other security devices which U.S. Trust makes
available to the Trust and agrees that the Trust shall be responsible for any
loss, liability or damage incurred by U.S. Trust or by the Trust as a result of
U.S. Trust's acting in accordance with instructions from any unauthorized person
using the proper security device unless such loss, liability or damage was
incurred as a result of U.S. Trust's negligence or willful misconduct. U.S.
Trust may electronically record, but shall not be obligated to so record, any
instructions given by telephone and any other telephone discussions with respect
to the Trust. In the event that the Trust uses U.S. Trust's Asset Management
System, the Trust agrees that U.S. Trust is not responsible for the consequences
of the failure of that system to perform for any reason, beyond the reasonable
control of U.S. Trust, or the failure of any communications carrier, utility, or
communications network. In the event that system is inoperable, the Trust and
U.S. Trust agrees to accept the communication of transaction instructions by
telephone, facsimile transmission on equipment compatible to U.S. Trust's
facsimile receiving equipment or by letter, at no additional charge to the
Trust.
14. Transactions Not Requiring Instructions. U.S. Trust is authorized to
-----------------------------------------
take the following action without Proper Instructions:
<PAGE>
(a) Collection of Income and Other Payments. U.S. Trust shall:
-----------------------------------------
(i) promptly collect and receive for the account of the Trust, all income
and other payments and distributions, including (without limitation) stock
dividends, rights, warrants and similar items, included or to be included in the
Property of the Trust, and promptly advise the Trust of such receipt and shall
credit such income, as collected, to the Trust.. From time to time, U.S. Trust
may elect to credit, but shall not be so obligated, the account with interest,
dividends or principal payments on payable or contractual settlement date, in
anticipation of receiving same from a payor, central depository, broker or other
agent employed by the Trust or U.S. Trust. Any such crediting and posting shall
be at the Trust's sole risk, and U.S. Trust shall be authorized in accordance
with standard industry practice to reverse any such advance posting in the event
it does not receive good funds from any such payor, central depository, broker
or agent of the Trust.
(ii) with respect to securities of foreign issue, effect collection of
dividends, interest and other income, and to notify the Trust of any call for
redemption, offer of exchange, right of subscription, reorganization, or other
proceedings materially affecting such securities, or any default in payments due
thereon. It is understood, however, that U.S. Trust shall be under no
responsibility for any failure or delay in effecting such collections or giving
such notice with respect to securities of foreign issue, regardless of whether
or not the relevant information is published in any financial service available
to it unless such failure or delay is due to its negligence or willful
misconduct; however, this sub-paragraph (ii) shall not be construed as creating
any such responsibility with respect to securities of non-foreign issue.
Collections of income in foreign currency are, to the extent possible, to be
converted into United States dollars unless otherwise instructed by Proper
Instructions, and in effecting such conversion U.S. Trust shall use reasonable
methods or agencies. All risk and expenses incident to such collection and
conversion is for the account of the Trust and U.S. Trust shall have no
responsibility for fluctuations in exchange rates affecting any such conversion.
(iii) endorse and deposit for collection in the name of the Trust, checks,
drafts, or other orders for the payment of money on the same day as received;
(iv) receive and hold for the account of the Trust all securities received
by the Trust as a result of a stock dividend, share split-up or reorganization,
recapitalization, readjustment or other rearrangement or distribution of rights
or similar securities issued with respect to any portfolio securities of the
Trust held by U.S. Trust hereunder;
(v) present for payment and collect the amount payable upon all securities
which may mature or be called, redeemed or retired, or otherwise become payable
on the date such securities become payable;
(vi) take any action reasonably which necessary and proper in connection
with the collection and receipt of such income and other payments and the
endorsement for collection of checks, drafts and other negotiable instruments;
(viii)with respect to domestic securities, to exchange securities in
temporary form for securities in definitive form, to effect an exchange of the
shares where the par value of stock is changed, and to surrender securities at
maturity or when advised of earlier call for redemption, against payment
therefor in accordance with accepted industry practice. The Trust understands
that U.S. Trust subscribes to one or more nationally recognized services that
provide information with respect to calls for redemption of bonds or other
corporate actions. U.S. Trust shall not be liable for failure to redeem any
called bond or take other action if notice of such call or action was not
provided by any service to which it subscribes provided that U.S. Trust shall
have acted in good faith without negligence or willful misconduct. U.S. Trust
shall. have no duty to notify the Trust of any rights, duties, limitations,
conditions or other information set forth in any security (including mandatory
or
<PAGE>
optional put, call and similar provisions), but U.S. Trust shall forward to the
Trust any notices or other documents subsequently received in regard to any such
security. When fractional shares of stock of a declaring corporation are
received as a stock distribution, unless specifically instructed to the contrary
in writing, U.S. Trust is authorized to sell the fraction received and credit
the Trust's account. Unless specifically instructed to the contrary in writing,
U.S. Trust is authorized to exchange securities in bearer form for securities in
registered form. If any Property registered in the name of a nominee of U.S.
Trust is called for partial redemption by the issuer of such Property, U.S.
Trust is authorized to allot the called portion to the respective beneficial
holders of the Property in a fair and equitable manner.
(b) Miscellaneous Transactions. U.S. Trust is authorized to deliver or cause
----------------------------
to be delivered Property against payment or other consideration or written
receipt therefor in the following cases:
(i) for examination by a broker selling for the account of the
Trust;
(ii) for the exchange of interim receipts or temporary securities for
definitive securities;
(iii) for transfer of securities into the name of the Trust or U.S.
Trust or a nominee of either, or for exchange of securities for a different
number of bonds, certificates, or other evidence, representing the same
aggregate face amount or number of units bearing the same interest rate,
maturity date and call provisions, if any; provided that, in any such case,
the new securities are to be delivered to U.S. Trust.
15. Transactions Requiring Instructions. Upon receipt of Proper
-------------------------------------
Instructions and not otherwise, U.S. Trust, directly or through the use of a
Securities Depository or the Book-Entry System, shall:
(a) Execute and deliver to such persons as may be designated in such
Proper Instructions, proxies, consents, authorizations, and any other
instruments whereby the authority of the Trust as owner of any securities may be
exercised;
(b) Deliver any securities held for the Trust against receipt of other
securities or cash issued or paid in connection with the liquidation,
reorganization, refinancing, merger, consolidation or recapitalization of any
corporation, or the exercise of any conversion privilege;
(c) Deliver any securities held for the Trust to any protective committee,
reorganization committee or other person in connection with the reorganization,
refinancing, merger, consolidation, recapitalization or sale of assets of any
corporation, against receipt of such certificates or deposit, interim receipts
or other instruments or documents as may be issued to it to evidence such
delivery;
(d) Make such transfers or exchanges of the assets of the Trust and take
such other steps as shall be stated in said Instructions to be for the purpose
of effectuating any duly authorized plan of liquidation, reorganization, merger,
consolidation or recapitalization of the Trust;
(e) Release and deliver securities belonging to the Trust to any bank or
trust company for the purpose of pledge or hypothecation to secure any loan
incurred by the Trust; and pay such loan upon redelivery to it of the securities
pledged or hypothecated therefore and upon surrender of the note or notes
evidencing the loan;
(f) Release and deliver securities belonging to the Trust in connection
with any repurchase agreement entered into on behalf of the Trust, but only on
receipt of payment therefor, and pay out money's of the Trust's in connection
with such repurchase agreements, but only on delivery of the securities.
<PAGE>
(g) Deliver any securities held for the Trust upon the exercise of a
covered call option written by the Trust on such securities; and
(h) Deliver securities held for the Trust pursuant to separate security
lending agreements.
16. Purchase of Securities. Promptly after each purchase of
-----------------------
securities, the Trust shall deliver to U.S. Trust (as Custodian) Proper
Instructions specifying with respect to each such purchase: (a) the name of the
issuer and the title of the securities, (b) the number of shares or the
principal amount purchased and accrued interest, if any, (c) the dates of
purchase and settlement, (d) the purchase price per unit, (e) the total amount
payable upon such purchase, (f) the name of the person from whom or the broker
through whom the purchase was made and (g) the portfolio for which the purchase
was made if the Trust has more than one portfolio or series. U.S. Trust shall
upon receipt of securities purchased by or for the Trust pay out of the moneys
held for the account of such Trust the total amount payable to the person from
whom or the broker through whom the purchase was made, if and only if the same
conforms to the total amount payable as set forth in such Proper Instructions.
17. Sales of Securities. Promptly after each sale of securities, the
---------------------
Trust shall deliver to U.S. Trust Proper Instructions, specifying with respect
to each such sale: (a) the name of the issuer and the title of the security, (b)
the number of shares or principal amount sold, and accrued interest, if any, (c)
the date of sale, (d) the sale price per unit, (e) the total amount payable to
the Trust upon such sale, (f) the name of the broker through whom or the person
to whom the sale was made and (g) the portfolio for which the sale was made if
the Trust has more than one portfolio or series. U.S. Trust shall deliver the
securities upon receipt of the total amount payable to the Trust upon such sale,
if and only if the same conforms to the total amount payable as set forth in
such Proper Instructions.
18. Records. The books and records pertaining to the Trust which are in
---------
the possession of U.S. Trust shall be the property of the Trust. Such books and
records relating to the custody of the assets of the Trust shall be prepared and
maintained as required by the 1940 Act, as amended; other applicable federal and
state securities laws and rules and regulations; and, any state or federal
regulatory body having appropriate jurisdiction. The Trust, or the Trust's
authorized agents, employees and representatives, shall have access to such
books and records at all times during U.S. Trust's normal business hours, and
such books and records shall be surrendered to the Trust promptly upon request.
Upon reasonable request of the Trust, copies of any such books and records shall
be provided by U.S. Trust to the Trust or the Trust's authorized agents,
employees or representatives.
19. Cooperation with Accountants. U.S. Trust shall cooperate with the
------------------------------
Trust's independent certified public accountants and shall take all reasonable
action in the performance of its obligations under this Agreement to assure that
the necessary information is made available to such accountants for the
expression of their unqualified opinion, including but not limited to the
opinion included in the Trust's semi-annual report or on the Trust's Form N-SAR.
20. Confidentiality. U.S. Trust agrees on behalf of itself and its
-----------------
employees to treat confidentially and as the proprietary information of the
Trust all records and other information relative to the Trust and its prior,
present or potential shareholders and relative to the advisors and its prior,
present or potential customers, and not to use such records and information for
any purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Trust, which
approval shall not be unreasonably withheld and may not be withheld where U.S.
Trust may be exposed to civil or criminal contempt proceedings for failure to
comply, when requested to divulge such information by duly constituted
<PAGE>
authorities, or when so requested by the Trust. Nothing contained herein,
however, shall prohibit U.S. Trust from advertising or soliciting the public
generally with respect to other products or services, regardless of whether such
advertisement or solicitation may include prior, present or potential
Shareholders of the Trust.
21. Equipment Failures. In the event of the failure of certain equipment
--------------------
including but not limited to data processing equipment, telecommunications
equipment, or power generators located at U.S. Trust, at a designated
subcustodian, U.S. Trust shall, at no additional expense to the Trust, take
reasonable steps to minimize service interruptions but shall not have liability
with respect thereto. U.S. Trust shall enter into and shall maintain in effect
with appropriate parties reasonably acceptable to the Trust one or more
agreements making reasonable provision for backup emergency use of electronic
data processing equipment to the extent appropriate equipment is available.
22. Right to Receive Advice.
------------------------
(a) Advice of Trust. If U.S. Trust shall be in doubt as to any
-----------------
action to be taken or omitted by it, it may request, and shall receive,
clarification or advice from the Trust.
(b) Advice of Counsel. If U.S. Trust shall be in doubt as to any
-------------------
question of law involved in any action to be taken or omitted by U.S. Trust, it
may request advice at its own cost from counsel of its own choosing (who may be
counsel for the Trust or U.S. Trust, at the option of U.S. Trust).
(c) Conflicting Advice. In case of conflict between directions or
--------------------
advice received by U.S. Trust pursuant to subparagraph (a) of this paragraph and
advice received by U.S. Trust pursuant to subparagraph (b) of this paragraph,
U.S. Trust shall be entitled to rely on and follow the advice received pursuant
to the latter provision alone.
(d) Protection of U.S. Trust. U.S. Trust shall be protected in any
--------------------------
action or inaction which it takes or omits to take in reliance on any directions
or advice received pursuant to subparagraph (a) of this section. However,
nothing in this paragraph shall be construed as imposing upon U.S. Trust any
obligation to seek such directions or advice, or to act in accordance with such
directions or advice when received. Nothing in this subparagraph shall excuse
U.S. Trust when an action or omission on the part of U.S. Trust constitutes
willful misfeasance or gross negligence or reckless disregard by U.S. Trust of
its duties under this Agreement.
23. Compliance with Governmental Rules and Regulations. The Trust
----------------------------------------------------
assumes full responsibility for insuring that the contents of each Prospectus of
the Trust complies with all applicable requirements of the 1933 Act, the 1940
Act, and any laws, rules and regulations of governmental authorities having
jurisdiction. U.S. trust shall comply with all laws, rules and regulations of
governmental authorities having jurisdiction over it with respect to the
services to be performed by it under this Agreement.
24. Compensation. As compensation for the services described within this
--------------
Agreement and rendered by U.S. Trust during the term of this Agreement, the
Trust will pay to U.S. Trust monthly fees as detailed in Attachment A to this
Agreement that shall be agreed upon from time to time in writing by U.S. Trust
and the Trust. In addition, the Trust agrees to reimburse U.S. Trust for
reasonable out-of-pocket expenses described in Attachment A to this Agreement,
incurred in providing the services contained within this Agreement.
25. Indemnification. (a) The Trust, as sole owner of the Property,
-----------------
agrees to indemnify and hold harmless U.S. Trust and its nominees from all
taxes, charges, expenses, assessments, claims, and liabilities (including,
without limitation, liabilities arising under the 1933 Act, the Securities
Exchange Act of 1934, the
<PAGE>
1940 Act, and any state and foreign securities and blue sky laws, all as or to
be amended from time to time) and expenses, including (without limitation)
reasonable attorney's fees and disbursements, arising directly or indirectly (a)
from the fact that securities included in the Property are registered in the
name of any such nominee or (b) without limiting the generality of the foregoing
clause (a), from any action or thing which U.S. Trust takes or does or omits to
take or do (i) at the request or on the direction of or in reliance on the
advice of the Trust given in accordance with the terms of this Agreement, or
(ii) upon Proper Instructions, provided, that neither U.S. Trust nor any of its
nominees or Subcustodian shall be indemnified against any liability to the Trust
or to its Shareholders (or any expenses incident to such liability) arising out
of U.S. Trust's or such nominee's or Subcustodian's own willful misfeasance, bad
faith, gross negligence, or reckless disregard of its duties under this
Agreement or any agreement between U.S. Trust and any nominee or Subcustodian.
In the event of any advance of cash for any purpose made by U.S. Trust resulting
from Proper Instructions of the Trust, or in the event that U.S. Trust or its
nominee or Subcustodian shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in connection with the performance of this
Agreement, except such as may arise from its or its nominee's or subcustodian's
own gross negligence, bad faith, reckless disregard of its duties or willful
misfeasance, the Trust shall promptly reimburse U.S. Trust for such advance of
cash or such taxes, charges, expenses, a assessments claims or liabilities.
(b) U.S. Trust agrees to indemnify and hold harmless the Trust from
all loss, damage and expense suffered or incurred by the Trust caused by or
arising from (i) the bad faith, reckless disregard of duties, willful
misfeasance, or gross negligence of U.S. Trust, its agents and employees and
subcustodians engaged by U.S. Trust or (ii) any breach of this Agreement by U.S.
Trust.
(c) The Trust agrees to hold harmless U.S. Trust from all loss,
damage and expense suffered or incurred by U.S. Trust caused by or arising from
(i) the bad faith, reckless disregard of duties, willful misfeasance, or gross
negligence of the Trust, its agents and employees or (ii) any breach of this
Agreement by the Trust.
26. Notice of litigation, Right to Prosecute. U.S. Trust shall promptly
------------------------------------------
inform the Trust in writing of the commencement of any litigation or proceeding
in respect of which indemnity may be sought under the above paragraph 25. The
Trust shall be entitled to participate in any such litigation or proceeding and,
after written notice from the Trust to U.S. Trust, the Trust may assume the
defense of such litigation or proceeding with counsel of its choice at its own
expense. U.S. Trust shall not consent to the entry of any judgement or enter
into any settlement in any such litigation or proceeding without providing the
Trust with adequate prior written notice of any such settlement or judgement.
U.S. Trust shall submit written evidence to the Trust with respect to any cost
or expense for which they are seeking indemnification in such form and detail as
the Trust may reasonably request.
27. Trust's Right to Proceed. Notwithstanding anything to the contrary
--------------------------
contained herein, the Trust shall have, at its election upon reasonable notice
to U.S. Trust, the right to enforce, to the extent permitted by any applicable
agreement and applicable law, U.S. Trust's rights against any subcustodian or
Securities Depository for loss, damage or expense caused U.S. Trust or the Trust
by such subcustodian or Securities Depository and shall be entitled to enforce
the rights of U.S. Trust with respect to any claim against such Subcustodian or
Securities Depository which U.S. Trust may have as a consequence of such loss,
damage or expense, if and to the extent that the Trust has not been made whole
for any such loss or damage. U.S. Trust agrees to cooperate with the Trust and
take all actions reasonably requested by the Trust in connection with the
Trust's enforcement of any rights of U.S. Trust.
28. Responsibility of U.S. Trust. U.S. Trust shall not be required to
------------------------------
take any action except as specifically set forth herein. U.S. Trust shall be
responsible for its own willful, reckless and negligent failure or
<PAGE>
breach of this Agreement or that of any subcustodian it shall appoint to perform
its duties under this Agreement. Without limiting the generality of the
foregoing or of any other provision of this Agreement, U.S. Trust in connection
with its duties under this Agreement shall not be under any duty or obligation
to inquire into and shall not be liable for or in respect of (a) the validity or
invalidity or authority or lack thereof of any advice, direction, notice or
other instrument which conforms to the applicable requirements of this
Agreement, if any, and which U.S. Trust believes to be genuine, (b) the validity
of the issue of any securities purchased or sold by the Trust, the legality of
the purchase or sale thereof or the propriety of the amount paid or received
therefor, (c) the legality of the issue or sale of any shares, or the
sufficiency of the amount to be received therefor, (d) the legality of the
redemption of any shares, or the propriety of the amount to be paid therefore,
(e) the legality of the declaration or payment of any dividend or distribution
on Shares, or (f) delays or errors or loss of data occurring by reason of
circumstances beyond U.S. Trust's control, including acts of civil or military
authority, national emergencies, fire, mechanical breakdown (except as provided
in Paragraph 18), flood or catastrophe, acts of God, insurrection, war, riots,
or failure of the mail, transportation, communication or power supply.
29. Collection. All collections of monies or other property in respect,
------------
or which are to become. part, of the Property (but not the safekeeping thereof
upon receipt by U.S. Trust) shall be at the sole risk of the Trust. In any case
in which U.S. Trust does not receive any payment due the Trust within a
reasonable time after U.S. Trust has made proper demands for the same, it shall
so notify the Trust in writing, including copies of all demand letters, any
written responses thereto, and memoranda of all oral responses thereto, and to
telephonic demands, and await instructions from the Trust. U.S. Trust shall not
be obliged to take legal action for collection unless and until reasonably
indemnified to its satisfaction. U.S. Trust shall also notify the Trust promptly
whenever income due on securities is not collected in due course.
30. Duration and Termination. This Agreement shall be effective as of
--------------------------
the date hereof and shall continue until termination by the Trust or by U.S.
Trust on 60 day's prior written notice. Upon any termination of this Agreement,
pending appointment of a successor to U.S. Trust or a vote of the shareholders
of the Trust to dissolve or to function without a custodian of its cash,
securities or other property, U.S. Trust shall not deliver cash, securities or
other property of the Trust to the Trust, but may deliver them to a bank or
trust company designated by the Trust or, failing that, to a bank or trust
company of U.S. Trust's selection, having aggregate capital, surplus and
undivided profits, as shown by its last published report of not less than twenty
million dollars ($20,000,000) as a successor custodian for the Trust to be held
under terms similar to those of this Agreement, provided, however, that U.S.
Trust shall not be required to make any such delivery or payment until full
payment shall have been made by the Trust of all liabilities constituting a
charge on or against the properties then held by U.S. Trust or on or against
U.S. Trust and until full payment shall have been made. to U.S. Trust of all of
its fee, compensation, costs and expenses, subject to the provisions of
Paragraph 24 of this Agreement. The termination by the Trust of a particular
Series or Portfolio within the Trust that does not result in the closure of the
Trust does not constitute termination of this Agreement.
31. Notices. Notices shall be addressed,
--------
If to the Trust: The Masters Group of Mutual Funds
82 Devonshire Street
Boston, MA 02109
Attention: John Costello, Treasurer
With a copy to: Garland Capital Management
c/o First Tennessee National Bank, N.A.
Box 84
<PAGE>
Memphis, TN 38101
Attention: C. Douglas Kelso, S.V.P.
If to UST: United States Trust Co. of New York
114 West 47/th/ Street
New York, New York 10036
Attention: Division Head, Mutual Trusts
Division
or, if the address is to neither of the foregoing, at such other address
as shall have been notified to the sender of any such Notice or other
communication. Notice may be sent by first-class mail, in which case it shall be
deemed to have been received three days after it is sent, or if sent by
confirming telegram, cable, telex or facsimile sending device, it shall be
deemed to have been received immediately, or if sent by messenger, it shall be
deemed to have been received on the day it is delivered. All postage, cable,
telegram, telex and facsimile sending device charges arising from the sending of
a Notice hereunder shall be paid by the sender.
32. Further Actions. Each party agrees to perform such further acts and
-----------------
execute such further documents as are necessary to effectuate the purposes
hereof.
33. Amendments. This Agreement or any part hereof may be changed or
------------
waived only by an instrument in writing signed by the party against which
enforcement of such change or waiver is sought.
34. Miscellaneous. This Agreement embodies the entire Agreement and
---------------
understanding between the parties hereto, and supersedes all prior agreements
and understandings relating to the parties hereto. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. This Agreement shall be deemed to be a contract made in New York and
governed by New York law. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby. This Agreement shall be binding
upon and shall insure to the benefit of the parties hereto and their respective
successors. The parties agree that this Agreement constitutes separate
agreements between U.S. Trust and the Trust acting on behalf of each of its
Portfolios listed on Schedule C separately.
U.S. Trust acknowledges that the Trust is a Massachusetts business trust,
and that it is required by its Declaration of Trust to limit its liability in
all agreements to the assets of the Trust. Consequently, U.S. Trust agrees that
any claims by or through it against the Trust may be satisfied only from the
assets of the Trust, and no shareholders, trustees, or officers of the Trust may
be held personally liable or responsible for any obligations arising out of this
Agreement. Moreover, U.S. Trust agrees to treat each series of the Trust as
having separate obligations to U.S. Trust hereunder and will not attribute the
obligations of one series to any other series.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the day and year first above
written.
THE MASTERS GROUPOF MUTUAL FUNDS
<PAGE>
/S/ATTEST: Stuart E. Fross /S/BY: John Costello
-------------------- -------------------------
Stuart E. Fross, Secretary John Costello, Treasurer
UNITED STATES TRUST COMPANY OF NEW YORK
/S/ATTEST: __________________ /S/BY: ________________________
<PAGE>
ATTACHMENT A
For the services described in the Agreement, the Trust shall pay a
custody safekeeping fee and custody transaction fees as follows:
DOMESTIC CUSTODY SAFEKEEPING FEES
.018% (1.8 Basic Points) on the assets of each portfolio of the Trust.
There is no minimum fee for the Trust.
DOMESTIC CUSTODY TRANSACTION FEES
$15.00 per DTC, PTC or Fed Book Entry transaction
$25.00 per physical transaction
$40.00 per future or option wire
$ 8.00 per wire transfer
The Trust will be billed for all reasonable "out of pocket" expenses as
they relate to the execution of this Agreement.
<PAGE>
ATTACHMENT B
Authorized Persons
Richard Rantzow, President
John Costello, Treasurer
Stuart Fross, Secretary
Thomas Nevin
Michael Milligan
Michael Hutchinson
Rena Williams
Kathryn Allen
Robert Morgan
Ernest Cecilia
Richard Meyers
Patrick Ford
Jeffrey Carson
Deborah McCabe
Robert Strong
Mark Osterheld
Michael Williams
<PAGE>
EXHIBIT 8(B)
MUTUAL FUND TRANSFER AGENCY AGREEMENT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
------- ----
<S> <C>
1. Appointment 3
2. Representations and Warranties 3
3. Documents Furnished By the Trusted 5
4. Purchase of Shares 5
5. Unpaid Checks 6
6. Redemption of Shares 6
7. Transfer of Shares 7
8. Administration of Plans 7
9. Dividends and Distributions 7
10. Tax Returns and Reports 8
11. Share Certificates 9
12. Shareholder Mailings, Inquiries and Meetings 9
13. Other Reports and Information 10
14. Record Keeping 10
15. Confidentiality 11
16. Compensation 11
17. Indemnification 13
18. Commencement, Term and Termination 16
19. Audits, Inspections and visits 17
20. Cooperation with Accountants 17
21. Use of Trust's Name 17
22. Security 17
23. Insurance 18
24. Use of U.S. Trust's Name 19
25. Assignment 19
26. Amendment 19
27. Attachments 19
28. Miscellaneous 20
29. Compliance with Governmental Rules and Regulations 20
Attachment A - Fees
Attachment B - Services
</TABLE>
<PAGE>
MUTUAL FUND TRANSFER AGENCY AGREEMENT
-------------------------------------
This AGREEMENT made this 10th day of November, 1992 by and between The
Masters Group of Mutual Funds, a Massachusetts business trust, ("the Trust")
which may issue one or more series of shares of beneficial interest (each a
"Portfolio") and United States Trust Company of New York, a New York State
chartered bank and trust company having its principal office at 114 W. 47th
Street, New York, New York 10036 ("U.S. Trust")
W I T N E S S E T H:
--------------------
WHEREAS, the Trust desires to appoint U.S. Trust as the transfer agent,
registrar, dividend disbursing agent and agent in connection with certain other
activities of the Trust and U.S. Trust desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereto agree as follows:
1. Appointment. The Trust hereby appoints and employs U.S. Trust as
-------------
transfer agent and registrar for all of its authorized and issued shares of
beneficial interest (the "Shares") of each Portfolio of the Trust, dividend
disbursing agent and agent in connection with such plans for the purchase or
periodic redemption of Shares as are described in the prospectus and/or
statement of additional information of the Trust corresponding to the Portfolio
to which this Agreement relates; and U.S. Trust hereby accepts such appointment
and agrees to act in such capacities under the terms and conditions set forth
herein.
2. Representations and Warranties. (a) U.S. Trust represents and
--------------------------------
warrants to the Trust that:
(i) it is currently registered and at all times during the term
of this Agreement will be registered with the Securities and
Exchange Commission as a transfer agent and is in compliance,
and at all times during the term of this Agreement will be in
compliance, with all applicable rules and regulations for
registered transfer agents.
(ii) it is a trust duly organized and existing and in good
standing under the laws of the State of New York;
(iii) it is duly qualified to carry on its business in the State of
New York;
(iv) it is empowered under applicable laws and by its Declaration
of Trust to enter into and perform this Agreement;
(v) all requisite corporate proceedings have been taken to
authorize U.S. Trust to enter into and perform this Agreement;
(vi) it has and will continue to have access to the facilities,
personnel and equipment required to perform its duties and obligations
hereunder, and has made reasonable attempts to make alternative arrangements for
access to facilities, personnel and equipment in the event of any disruption;
<PAGE>
(vii) its entrance into this Agreement shall not cause a material
breach or be in material conflict with any other agreement or obligation of U.S.
Trust; and
(b) The Trust represents and warrants to U.S. Trust that:
(i) it is a Massachusetts business trust duly organized and
existing and in good standing under the laws of the Commonwealth of
Massachusetts;
(ii) it is empowered under applicable laws and by its Declaration
of Trust to enter into and perform this Agreement;
(iii) all requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement;
(iv) it is an investment company registered under the Investment
Company Act of 1940 (the 1940 Act"), as amended; and
(v) a registration statement on Form N-1A (including a
prospectus and statement of additional information) is currently effective and
will remain effective, and to the extent so required, appropriate filings under
the securities laws of the states have been made and will continue to be made,
with respect to all Shares being offered for sale.
3. Documents Furnished by the Trust.
---------------------------------
(a) The Trust shall promptly furnish to U.S. Trust the following
documents:
(i) a copy of the organizational documents of the Trust;
(ii) copies of all account application forms and other documents
related to shareholder accounts or any plans for the purchase or periodic
redemption of Shares; and
(iii) copies of the Trust's registration statement on Form N-1A as
amended and declared effective by the Securities and Exchange Commission.
(b) From time to time the Trust shall also furnish to U.S. Trust the
following documents:
(i) copies of all amendments to the organizational documents of
the Trust;
(ii) Copies of all post-effective amendments to the Trust's
registration statement on Form N-1A; and
(iii) such other certificates, documents and opinions as U.S. Trust
shall deem to be appropriate or necessary for the proper performance of its
duties hereunder.
4. Purchase of Shares. Upon receipt by U.S. Trust of any order for the
--------------------
purchase of Shares, U.S. Trust shall stamp such order with the date of receipt,
promptly deposit all trusts received to the account of each portfolio of the
Trust maintained with the entity then acting as custodian for the portfolio
securities and cash of the Portfolios (the "Custodian"), compute (to the nearest
three decimal places) the number of shares to be purchased according to the
public offering price in effect for purchases made on the date of such receipt
as set
<PAGE>
forth in the Trust's current prospectus, notify the Portfolio daily of the
deposit of such funds to a Portfolio's account with the Custodian and the number
of Shares subscribed for, and prepare and mail confirmations of such purchases
to the addresses specified by the persons making them and, if applicable, send
copies of such confirmations to the purchaser's Broker/Dealer or selling agent,
if any. All such actions are subject to any instructions which the Portfolios
may give to U.S. Trust with respect to acceptance of orders for shares so
received by it.
Unless otherwise requested by a purchaser, all Shares purchased shall
be credited to a book share account maintained for the purchase by U.S. Trust.
Subject to Paragraph 11 hereof, if a purchaser or existing shareholder
specifically requests in writing, and if the Trust has authorized the issuance
of certified shares, U.S. Trust as Transfer Agent, shall countersign, register,
issue and mail by first class mail to the purchaser or shareholder, a share
certificate for any whole and fractional number of Shares purchased or held in
his book share account, but no share certificate shall be mailed until the
purchase price of the Shares represented thereby shall have been received.
5. Unpaid Checks. In the event that any check or other order for
---------------
payment of money with respect to any purchase of Shares is returned unpaid for
any reason, U.S. Trust shall promptly notify the Trust and purchaser of such
nonpayment, and, in the absence of other instructions from the Trust or the
Distributor, take such steps as may be necessary to cancel promptly any Shares
purchased on the basis of such returned check and shall cancel accumulated
dividends for such account, and return such check or other order to the
purchaser.
6. Redemption of Shares. Upon receipt of any request for the
----------------------
redemption of Shares, U.S. Trust shall stamp such request with the date of
receipt, determine whether such request complies with all requirements for
redemption set forth in the Trust's current prospectus, and if so, compute the
redemption price in the manner set forth therein. If such request does not
comply with such requirements for redemption, U.S. Trust shall notify
the redeeming shareholder of the respects in which compliance is lacking and
effect redemption at such time-as all requirements for redemption are complied
with.
U.S. Trust shall notify the Portfolio daily of the amount of funds
required for payment upon redemption of Shares and the number of Shares
redeemed. Upon the receipt of such funds from the Custodian, U.S. Trust shall
pay over or cause to be paid over the redemption proceeds to redeeming
shareholders as instructed by them in the manner described in the Trust's
current prospectus, and prepare and mail confirmations of such redemptions and
if applicable send copies of such confirmations to the appropriate Broker/Dealer
or selling agent, if any. U.S. Trust shall cancel all share certificates
representing redeemed Shares, if any.
7. Transfer of Shares. Upon receipt by U.S. Trust of documentation in
--------------------
proper form to effect a transfer of Shares, including in the case of Shares for
which certificates may have been issued, the share certificates in proper form
for transfer, U.S. Trust shall register such transfer on the Portfolio's
shareholder records maintained by U.S. Trust pursuant to instructions received
from the transferor, cancel the certificates representing such Shares, if any,
and if so requested and subject to paragraph 11 hereof, countersign, register,
issue and mail by first class mail new certificates for the same or a smaller
whole or fractional number of Shares, and in the case of book share-transfers
prepare and mail confirmation of such transfer as instructed by the shareholder.
8. Administration of Plans. U.S. Trust shall administer such plans for
-----------------------
the purchase or periodic redemption of Shares as are described in the prospectus
and/or Statement of Additional Information of the Trust
<PAGE>
corresponding to the Shares in accordance with the terms of such plans, or as
U.S. Trust and the Trust may mutually agree from time to time.
9. Dividends and Distributions. Upon the declaration of any cash
-----------------------------
dividend or distribution upon the Shares, the Trust
shall furnish to U.S. Trust a certified copy of a resolution of the Trust's
Board setting forth the date of payment of such dividend or distribution, the
record date as of which shareholders entitled to payment thereof shall be
determined, and the amount payable per share to shareholders of record as of
such record date. In the case of dividends declared daily or at other regular
intervals, such certified resolution may be a standing resolution setting forth
the method of calculating such dividends and the Trust or its agent shall advise
U.S. Trust of the amount of such dividend at the appropriate intervals. U.S.
Trust shall notify the Trust and the Custodian of the amount of cash required to
pay the dividend or distribution so that the Trust may instruct its custodian to
make sufficient funds available on or before the payment date.
Upon receipt of such funds from the Custodian, U.S. Trust shall prepare
and mail to shareholders, at their addresses as they appear on the records
maintained by U.S. Trust or pursuant to any written order of a shareholder on
file with U.S. Trust, checks representing any dividends and distributions to
which they are entitled. If a shareholder is entitled to receive additional
Shares by reason of his decision to reinvest all or a portion of a dividend or
distribution, appropriate credits shall be made to the shareholder's book share
account and, if specifically so requested in writing and subject to paragraph 11
hereof, U.S. Trust shall countersign, register, and issue and mail by first
class mail to the shareholder or pursuant to his instructions, a share
certificate for any whole number of shares purchased. U.S. Trust shall prepare
and mail confirmations of such purchases and send copies of such confirmations
to the Trust.
10. Tax Returns and Reports. U.S. Trust shall prepare, file with the
-------------------------
Internal Revenue Service and with appropriate state or local agencies, and mail
to shareholders such returns for
reporting dividends, distributions and redemption's as are required to be so
prepared, filed and/or mailed, and withholdfrom the accounts of shareholders
such sums as are required to be withheld, under applicable federal, state and
local tax laws, rules and regulations in effect from time to time.
11. Share Certificates. If the Trust issues share certificates it
--------------------
shall comply with the provisions of this Paragraph 11. The Trust shall supply
U.S. Trust with sufficient supplies of blank share certificates. Such blank
share certificates shall be properly signed, manually or by facsimile signature,
by the duly authorized officers of the Trust, and shall bear the seal or a
facsimile thereof of the Trust.
Notwithstanding the death, resignation or removal of any officers of
the Trust authorized to sign such share certificates, U.S. Trust may continue to
countersign certificates which bear the manual or facsimile signature of such
officer until otherwise directed by the Trust.
U.S. Trust shall establish and maintain facilities and procedures
reasonably acceptable to the Trust for safekeeping of share certificates, check
forms and facsimile signature imprinting devices if any, and for the preparation
or use and for maintaining an accounting of such certificates, forms and
devices.
If the Trust issues share certificates, U.S. Trust shall issue a
replacement share certificate in lieu of a certificate which has been lost,
stolen or destroyed without any further action by the Trust's Board or any
officer of the Trust, upon receipt by U.S. Trust of a properly executed
affidavit with respect to such loss, theft or destruction and a lost certificate
bond, in a form satisfactory to U.S. Trust.
<PAGE>
12. Shareholder Mailings, Inquiries and Meetings. U.S. Trust shall
----------------------------------------------
address and mail all communications by the Trust to its shareholders promptly
following the delivery by the Trust of the material to be mailed.
U.S. Trust shall answer all correspondence it receives from
shareholders and former shareholders of the Trust relating to their ownership of
shares. In connection with meetings of shareholders, U.S. Trust shall prepare
shareholder lists, mail and certify as to the mailing of proxy materials,
receive and tabulate proxy cards, render periodic reports to the Trust on the
progress of such tabulation, and provide the Trust with inspectors of election
at any meeting of shareholders.
13. Other Reports and Information. U.S. Trust shall furnish to the
-------------------------------
Trust such information, including shareholder lists, sales information on a
state by state basis and other statistical information, in such form and at such
intervals as may be reasonably requested by the Trust.
14. Record Keeping. U.S. Trust shall keep records relating to the
----------------
services to be performed hereunder, in such form and manner as is required by
the Investment Company Act of 1940 and all other applicable laws, rules and
regulations, U.S. Trust agrees that all such books and records prepared or
maintained by U.S. Trust relating to the Trust are the property of the Trust and
will be preserved, for the periods prescribed under and made available in
accordance with the Investment Company Act of 1040 and maintained at the expense
of the Trust. U.S. Trust shall upon the Trust's demand surrender promptly to the
Trust and cease to retain in its files records and documents created and
maintained by U.S. Trust pursuant to this Agreement.
If not so turned over to the Trust, such records and documents will be
retained by U.S. Trust for six years from the year of creation, during the first
two of which such documents will be in readily accessible form. At the end of
the six-year period, such records and documents will either be turned over to
the Trust or destroyed in accordance with the Trust's authorization.
In the case of any requests or demands for the inspection of the
shareholder records of the Trust, U.S. Trust shall notify the Trust and secure
instructions from an officer of the Trust as to such inspection. U.S. Trust
reserves the right, however, to exhibit shareholder records to any person
whenever it is advised in writing by its counsel, with a copy to the Trust, that
it may be held liable for the failure to do so.
Such records shall include, but not be limited to, accounts for each
shareholder showing the following information:
(a) name, address and United States Tax Identification or Social
Security number;
(b) number and class of shares held and number of shares for which
certificates, if any, have been issued, including certificate numbers and
denominations;
(c) historical information regarding the account of each shareholder,
including dividends and distributions paid and the date and price for all
transactions on a shareholder's account;
(d) any stop or restraining order placed against a shareholder's
account;
(e) any correspondence relating to the current maintenance of a
shareholder's account;
(f) information with respect to withholdings; and
<PAGE>
(g) information required in order for U.S. Trust to perform any
calculations contemplated or required by this Agreement.
15. Confidentiality. All books, records, information, and data
-----------------
pertaining to the business of the Portfolio and U.S Trust parties which are
exchanged or received pursuant to the negotiation or the performance of this
Agreement shall remain confidential, shall not be used for any purpose other
than in connection with the performance of its obligations hereunder, and shall
not be voluntarily disclosed to any other person except as may be required by
law.
16. Compensation. For the services to be performed by U.S. Trust
--------------
pursuant to this Agreement as described in Attachment B, the Trust agrees to pay
U.S. Trust in accordance with the schedules and terms set forth in Attachment A
and as follows:
(a) Shareholder Service Fee. The Trust agrees to pay U.S. Trust an Annual
-------------------------
Service Fee per shareholder account. A "Shareholder account" is an account
holding a least a fraction of a Share and shall be deemed to exist after it is
in fact terminated until the month subsequent to the final federal tax filing
deadline(generally April 15th of the following year). The Annual Service Fee is
prorated and payable monthly based on the total number of accounts on the system
at the billing date each month. Service charges for a partial month's service
will be prorated on a thirty (30) day month basis.
(b) Out of Pocket Expenses. The Trust agrees to reimburse U.S. Trust
------------------------
for any equipment and supplies specially ordered by the Trust through U.S. Trust
and for any other expenses U.S. Trust may incur at the request of or consented
to by the Trust, including but not limited to expenses for stationery, postage,
telephone and telegraph line toll charges, data communications lines, shipping
charges, messenger services, forms, supplies and costs associated with the
termination of services pursuant to this Agreement:
Postage and the cost of materials for mailings to shareholder accounts
shall be advanced to U.S. Trust by the Trust at least five (5) business days
prior to the mailing date of such materials.
(c) Additional Services. The Trust may request additional services,
---------------------
additional processing, or special reports. Such requests may be provided by U.S.
Trust at additional charges. In this event, the Trust shall submit such requests
in writing together with such specifications as may be reasonably required by
U.S. Trust, and U.S. Trust shall respond to such requests in the form of a price
quotation. The Trust's written acceptance of the quotation must be received
prior to implementation of such request.
Additional services will be charged at U.S. Trust's standard rates.
(d) Terms of Payment. All fees, out-of-pocket expenses, or additional
------------------
charges of U.S. Trust shall be billed on a monthly basis and shall be due and
payable upon receipt of the invoice. U.S. Trust will render, after the close of
each month in which services have been furnished, a statement reflecting all of
the charges for such month.
(e) Taxes. In addition to any other charges specified hereunder, the
Trust shall pay any sales and/or use tax, transfer tax, excise tax, tariff,
duty, or any other tax or payment in lieu thereof imposed by any governmental
authority or agency as a direct result of the provision by U.S. Trust of goods
or services hereunder, except for taxes based on U.S. Trust's net income.
(f) Price Adjustment. After the initial term of this Agreement, U.S.
------------------
Trust may increase its rate for services for any renewal term, upon notice of
one hundred and twenty (120) days prior to the commencement of the renewed term.
<PAGE>
17. Indemnification.
----------------
(a) U.S. Trust shall not be responsible for, and the Trust shall
indemnify and hold U.S. Trust harmless from and against, any and all losses,
damages, costs, charges, reasonable attorney's fees, payments, expenses and
liability arising out of or attributable to:
(i) all actions of U.S. Trust or its agents or subcontractors
required to be taken pursuant to this Agreement, provided that such actions are
taken in good faith and without negligence or willful misconduct;
(ii) the Trust's refusal or failure to comply with the terms of this
Agreement, or the Trust's lack of good faith, negligence or willful misconduct,
or the breach of any material representation or warranty of the Trust hereunder;
(iii) the reliance on or use by U.S. Trust or its agents or
subcontractors on information, records or documents which are received by U.S.
Trust or its agents or subcontractors and furnished to it by or on behalf of the
Trust, and which have been prepared and/or maintained by the Trust or any other
person or firm(other than U.S. Trust or its agents or subcontractors) on behalf
of the Trust;
(iv) the reliance on, or the carrying out by U.S. Trust or its agents
or subcontractors, of any instructions or requests of the Trust; or
(v) the offer or sale of Shares by the Trust in violation of any
requirement under the federal securities laws or regulations or the securities
laws or regulations of any state that such Shares be registered in such state,
or- in violation of any stop order or other determination or ruling by any
federal agency or any state with respect to the offer or sale of such Shares in
such state.
(b) U.S. Trust shall indemnify and hold the Trust and its Trustees,
officers and employees harmless from and against any and all losses, damages,
costs, charges, reasonable attorney's fees, payments, expenses, and liability
arising out of or attributable to U.S. Trust's lack of good faith, negligence or
willful misconduct, or the breach of any duties of U.S. Trust hereunder.
(c) U.S. Trust may request the opinion of legal counsel at its own expense,
which counsel may be counsel to the Trust, with respect to any question of law
involved in any action required to be taken or omitted to be taken by U.S. Trust
under the terms of this Agreement and U.S. Trust and its agents and
subcontractors shall not be liable to the Trust for any action taken or omitted
by it in reliance upon the opinion of such counsel. U.S. Trust, its agents and
subcontractors shall be protected and indemnified in acting in a reasonable
manner upon any papers or documents furnished by or on behalf of the Trust, any
shareholder of the Trust or any representative of a shareholder, reasonably
believed to be genuine and to have been signed by the proper person or persons,
or upon any instructions, information, data, records or documents provided U.S.
Trust or its agents or subcontractors by telephone, in person, or by machine
readable input, telex, CRT data entry or similar means authorized by the Trust,
and U.S. Trust, its agents and subcontractors shall not be held to have notice
absent actual notice of any change or authority of any person until receipt of
written notice thereof. U.S. Trust, its agents and subcontractors shall also be
protected and indemnified in honoring share certificates which are reasonably
believed to bear the proper manual or facsimile signatures of the officers-of
the Trust.
(d) In the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of
<PAGE>
God, interruption of electrical power or other utilities, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable to the other for
any damages resulting from such failure to perform from such causes. U.S. Trust
shall use its best efforts to minimize the likelihood of all damage, loss of
data, delays and errors resulting from uncontrollable events, and should such
damage, loss of data, delays or errors occur, U.S. Trust shall use its best
efforts to mitigate the effects of such occurrence.
(e) Neither party to this Agreement shall be liable to the other party
for consequential, special or incidental damages under any provision of this
Agreement or for any act or failure to act hereunder.
(f) In order that the indemnification provisions contained in this
Section 17 shall apply, upon assertion of a claim for which either party may be
required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion and shall keep the other party
advised with respect to all developments concerning such claim.
The party who may be required to indemnify shall have the option to
participate with the party seeking indemnification in the defense of such claim.
The party seeking indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to indemnify it,
except with the other party's prior written consent.
18. Commencement, Term and Termination.
-----------------------------------
(a) The commencement date for the services provided hereunder shall be
November 10, 1992.
(b) This Agreement shall remain in effect indefinitely unless
terminated by either party, without penalty, upon ninety (90) days prior written
notice.
(c) Notwithstanding the foregoing, either party hereto may terminate
this Agreement upon written notice if the other party hereto is substantially
unable to perform its duties hereunder
because of a force majeure condition which lasts for more than seven (7) days.
(d) This Agreement may be terminated by either party hereto if the
other party is in material breach of this Agreement. In order to so terminate
this Agreement, written notice shall be given to an officer of the other party
of the non-breaching party's intention to terminate due to a failure to comply
with, or breach of, a material term or condition of this Agreement. Said written
notice shall specifically state the material term and conditions claimed to be
breached and shall provide at least fifteen (15) days in which to correct such
alleged breach. If such breach is not corrected in the time period allowed to
correct, then the notice giving party may terminate this Agreement immediately,
upon written notice.
(e) Should the Trust exercise its right to terminate this Agreement
for a reason other than U.S. Trust's breach or failure to perform, all out-of-
pocket expenses reasonably incurred by U.S. Trust in connection with the
movement of records and materials shall be borne by the Trust.
Nothing herein shall be construed to excuse the Trust from payment of
all charges due and payable to U.S. Trust for services and out-of-pocket
expenses and disbursements provided prior to termination. In the event of
termination as provided for in this Section 18, the provisions of section 15,
"Confidentiality" shall survive the termination of this Agreement.
<PAGE>
19. Audits, Inspections and Visits. U.S. Trust shall make available
---------------------------------
during regular business hours all records and other data created and maintained
pursuant to this Agreement for reasonable audit and inspection by the Trust, any
agent or person designated by the Trust, or any regulatory agency having
authority over the Trust. Upon reasonable notice by the Trust, U.S. Trust shall
make available during regular business hours its facilities and premises
employed in connection with its performance of this Agreement for reasonable
visits by the Trust, any agent or person designated by the Trust, or any
regulatory agency having authority over the Trust.
20. Cooperation with Accountants. U.S. Trust shall cooperate with the
-----------------------------
Trust's independent certified accountants, shall provide them with all
information they may reasonably request and shall take all reasonable action in
the performance of its obligations under this Agreement to assure that the
necessary information is made available to such accountants for the expression
of their unqualified opinion, including but not limited to the opinion included
in the Trust's semiannual reports on Form N-SAR.
21. Use of Trust's Name. U.S. Trust shall not use the name of the
--------------------
Trust or material relating to the Trust on any forms (including any checks, bank
drafts or bank statements) for other than internal use in a manner not consented
to prior to use, provided, however, that the Trust shall approve all uses of its
name which merely refer in accurate terms to the appointment of U.S. Trust
hereunder or which are required by the Securities and Exchange Commission or a
state securities commission; and further, provided that in no event shall such
approval be unreasonably withheld.
22. Security. U.S. Trust represents and warrants that, the various
---------
procedures and systems which U.S. Trust has implemented with regard to the
safeguarding from loss or damage attributable to fire, theft or any other cause
(including provision for twenty-four hours a day restricted access) of the
Trust's blank checks, certificates, records and other data and U.S. Trust's
records, data, equipment, facilities and other property used in the performance
of its obligations hereunder are adequate, and that it will make such changes
therein from time to time as in its judgment are required for the secure
performance of its obligations hereunder. U.S. Trust shall review such systems
and procedures on a periodic basis and the Trust shall have access to review
these systems and procedures.
23. Insurance. U.S. Trust shall maintain insurance of the types and
----------
in the amounts deemed by it to be appropriate and shall notify the Trust should
any of its insurance coverage by changed for any reason. Such notification shall
include the date of change and the reason or reasons therefor. U.S. Trust shall
notify the Trust of any material claims against U.S. Trust, whether or not they
may be covered by insurance, and shall notify the Trust from time to time as may
be appropriate of the total outstanding claims made by U.S. Trust under its
insurance coverage. To the extent that policies of insurance may provide for
coverage of claims for liability or indemnity by the parties set forth in this
Agreement, the contracts of insurance shall take precedence, and no provision of
this Agreement shall be construed to relieve an insurer of any obligation to pay
claims to the Trust, U.S. Trust or other insured party which would otherwise be
a covered claim in the absence of any provision of this Agreement.
24. Use of U.S. Trust's Name. The Trust shall not use U.S. Trust's
-------------------------
name in any prospectus or statement of additional information, shareholder
report, sales literature or other material relating to the Trust, otherwise than
for the purpose of merely identifying and describing the functions or U.S. Trust
hereunder, in a manner not approved by U.S. Trust in writing before such use;
provided, however, that U.S. Trust shall consent to all uses of its name
required by the Securities and Exchange Commission, any state securities
commission, or any federal or state regulatory authority and provided, further,
that in no case will such approval be unreasonably withheld.
<PAGE>
25. Assignment. Except as hereinafter provided, neither this Agreement
------------
nor any rights or obligations hereunder may be assigned by either party without
the written consent of the other party. This Agreement shall inure to the
benefit of and be binding upon the parties and their respective permitted
successors and assigns. U.S. Trust may, without further consent on the part of
the Trust, subcontract for the performance hereof with third parties, or
subsidiaries or other affiliates of U.S. Trust; provided, however, that U.S.
Trust 'shall be as fully responsible to the Trust for the acts and omissions of
any subcontractor as it is for its own acts and omissions and shall be
responsible for its choice of subcontractor.
26. Amendment. This Agreement may not be amended or modified in any
-----------
manner except by a written instrument executed by both parties.
27. Attachments. The Attachments listed below the signature lines
-------------
hereof and which are attached hereto are made a part of this agreement as if
fully included in the text hereof. In the event of any conflict or inconsistency
between provisions contained in such Attachments and provisions contained in the
main body of the Agreement, the provisions contained in the Agreement shall
prevail.
28. Miscellaneous. This Agreement shall be governed by and construed
---------------
in accordance with the laws of the State of New York. The captions in this
Agreement are included for convenience of reference only and in no way define or
limit any of the provisions hereof or otherwise affect their construction or
effect. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute the entire Agreement between the parties hereto and
supersede any prior oral or written Agreement with respect to the subject of
matter hereof.
The parties to this Agreement acknowledge and agree that all
liabilities arising, directly or indirectly, under this Agreement, of any and
every nature whatsoever, including without limitation, liabilities arising in
connection with any agreement of the Trust set forth herein to indemnify any
party to this Agreement or any other person, shall be satisfied out of the
assets of the Trust and that no Trustee, officer or shareholder of the Trust
shall be personally liable for any of the foregoing liabilities. The Trust's
Declaration of Trust, as amended from time to time, is on file in the office of
the Secretary of State of the Commonwealth of Massachusetts. Such Declaration of
Trust describes the limitations of liability of the Trustees, officers and
shareholders of the Trust. The parties agree that this Agreement constitutes
separate agreements between U.S. Trust and the Trust acting on behalf of each of
its Portfolios listed on Attachment C separately.
29. Compliance with Governmental Rules and Regulations. U.S. Trust
----------------------------------------------------
shall comply with all applicable requirements of the Investment Company Act of
1940, the Securities Act of 1933, the Securities Exchange Act of 1934 and any
other laws, rules and regulations of governmental authorities having
jurisdiction over the Trust with respect to the services to be performed by U.S.
Trust hereunder.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal by their officers thereunto duly authorized as of the date
first above written.
UNITED STATES TRUST COMPANY
OF NEW YORK
Attest: ______________________ /s/By: _____________________________
THE MASTERS GROUP OF MUTUAL FUNDS
Attest: ______________________ /s/By: _____________________________
<PAGE>
ATTACHMENT A
TRANSFER AGENCY AND SHAREHOLDER SERVICING FEES
The transfer agent fee for the "Trust Class" (Class I) of Shares for each
Portfolio is as follows:
$10,000 per year for Quarterly, Semi or Annual Dividend Funds
$11,000 per year for Monthly Dividend Funds
$13,000 per year for Daily Dividend Funds
The transfer agent fee for a "Retail Class" of Shares in each Portfolio will be
based on the following "per account" and annual minimums schedule:
$12 per Shareholder Account in Quarterly, Semi or Annual Dividend
Funds/$15,000 minimum per year
$12 per Shareholder Account in Monthly Dividend Funds/$16,000 minimum per
year
$18 per Shareholder Account in Daily Dividend Funds/$17,500 minimum per year
Out of Pocket Expenses for both Classes of Shares, as described in Paragraph
16(b) of this Agreement, will be billed to the Trust on a monthly basis.
<PAGE>
ATTACHMENT B
TRANSFER AGENCY STANDARD SYSTEM REPORTS
DAILY CLERICAL REPORTS
Activity Reports
Daily Price and Calendar Review
Transaction Activity Report
Exception Reports
Security Violation Transaction Report
Blue Sky Warning Report
File Maintenance Reports
Options and Control Maintenance Register
Shareholder Maintenance Register
Shareholder Freeze Register
Client Register Changes
Master Account Maintenance Report
Dealer Maintenance Register
Blue Sky Maintenance Register
Retirement Clerical File Maintenance
DAILY MONETARY REPORTS
Fund Accounting
Cash and Share Proof
Cash and Share Proof (Cash Credits)
Cash and Share Proof (Cash Debits)
Cash and Share Proof (Share Credits and Debits)
Cash Receipt Controls
Gain/Loss Journal
Position Control Report (Money Market Dividend)
Transaction Journals
Direct Purchase Journal
Pended Purchase Journal
Direct Redemption Journal
Exchange in Journal
CDSC Liability Exchange Report
Exchange Out Journal
Certificate Journal
Transfer Journal
Adjustment Journal
Direct Fee Journal
Wire Order PF/Wait - Settlement Journal
Wire Order Purchase Placement Journal
<PAGE>
Wire Order Full Settlement Journal
Wire Order Redemption Placement Journal
Wire Order Redemption Settlement Journal
Wire Order Cancel Journal
Spawned Transaction Journal
Net Accrual Change Journal
Distribution Journal
Transaction Reject Report
Transaction Warning Report
Outstanding Rejects Report
Transaction Registers
Certificate Register
Wire Register
Redemption/Refund Check Register
Distribution Check Register
Systematic Withdrawal Check Register
RPO Check Register
Commission Check Register
AM/PM Wire Register
Cumulative Reports
Wire Order Reconciliation Report
Wire Order Unpaid Purchases Report
Wire Order Paid and Waiting Report
Wire Order Unsettled Redemption Report
Wire Order Unpaid Purchases Aging Report
Sales Adjustment Detail Report
Fund Sales Summary Report
Daily Sales Report
Confirmation/Special Forms
Monetary Confirmation
Institutional Purchase Plan Activity Report
Wire Order Confirmation
Special Mailer
Shareholder Account Research Statement
Retirement Account Summary Statement
CDSC Liability Research Statement
Daily Confirmation Statement
WEEKLY EXCEPTION REPORTS
- - Periodic Company Update
- - Incomplete Registration Report
- - Certificate proof Report (Report Type 1)
- - Account Status Exception Report
- - Delinquent IPP Report
- - Master Account Exception Report
<PAGE>
- - LOI Expiration Report
MONTHLY REPORTS
- - LOI Customer Warning Report
- - LOI Dealer Warning Report
- - Accrued Fee Collection
- - Shareholder History Proof Report
- - CDSC Liability Rolling Report
- - LOI Completion Report
- - Money Transfer Projection Report
- - 12B-1 Dealer Report
- - Wire Order Monthly Broker/Dealer ledger
- - Sales Report by Fund, Account, Transaction Type
- - Year-to-Date Sales Report - Gross Amount by Fund
- - Year-to-Date Sales by Territory
- - Monthly Dealer Activity Report
- - Dealer Ranking Report
- - Monthly Blue Sky Summary
- - Month-to-Date Blue Sky Sales by State
- - 70 1/2 Notification Report
- - Delinquent Distributions Report
- - Retirement Periodic Warnings/Totals
- - Retirement Fee Totals by Plan Report
- - TTL Fees Due Less Than Accrued Amount Report
- - Ret Acct Closed/Zero Share Balance Report
- - Monthly Client Billing
OCCASIONAL FUND FUNCTIONS (O.F.F.) REPORTS
- - Commission Statement Company Commission Report
- - Position Control Report (Stock Dividend)
- - Position Control Report (Capital Gain)
- - Distribution Check Register
- - Commission Check Register
- - Trail Commission Statements
PURGE REPORTS
- - Shareholder Account Purge Register
- - Master Account Purge
- - Money Transfer Purge
- - Certificate File Delete
ANNUAL REPORTS
- - Annual Blue Sky Cumulative Sales by State
<PAGE>
- - 1099-Dividend Form
- - 1099-B Form
- - 1099-R Form
- - W2-P Form
- - 5498 Form
OPTIONAL REPORTS
- - Daily Purchase and Redemption Summary Report - 6119
- - Daily Transaction Activity Report - MAEZ0340
- - Fund Account and Share Total Report - MAEZ0140
- - Monthly Commission Activity Report - MAEZ0670
- - Master Account Report - CSR6436
- - Monthly New Account Report
- - Closed Account Report - CSR6294
- - Customer Account Ownership Report - CSR7019
- - Shareholder Account Value By Dealer
- - Promotional Analysis Report - MAEZM190
- - Share Balance By Account - MABRM901
- - Monthly Average Balance By Source of Business Report
- - Shareholders In Descending Order By Share Balance CSR8000
- - Account Profile and Options Report
- - Duplicate Social Security Number - CSR8000
- - Shares and Value By Blue Sky State Report - CSR8000
- - Shareholder By Dealer/Advisor Report - CSR0410
- - Month To Date Prices/Rates Report - MABX0908
- - Certificate File-Report
- - Summary Totals For Selection Transactions Report - CSR7631
- - Debit and Credit Transaction Report - CSR7631
- - Transactions By Fund and Date Report - CSR8020
- - RPO Account Report - MAEZ0370
- - Customer Type Detail Report MABRM951
- - Customer Type Summary Report MABX0801
- - Dealer Commissions Report - MAEZ0670
Fund
Dealer
Dealer/Branch
Dealer/Broker/Rep
- - Share Range Report - MABX0808
- - Fund Distribution Report - MABX0807
- - Fund Statistics By Account Type Report - MABX0806
- - Fund Option By Dealer Report - MABX805
- - Account Statistics By Dealer Report - MABX0803
- - Type of Account By State and Country Code - MABX0802
- - Dealer Branch Representative Report - MABX0804
- - Account Statistics By Dealer/Branch/Rep/Report - MABX0804
- - Sales Analysis Report
Dealer order
Fund, Tracking Code
<PAGE>
Tracking Code Only
Mailing Labels
Statement Run - M702
TRANSFER AGENCY FUNCTIONS
DAILY PROCESSING INCLUDES:
. Direct purchase by check, wire order, ACH, pre-authorized draft or
institutional purchase plan.
. Direct redemption by telephone, written correspondence or check and with
differing forms of payout, i.e., by check or bank wire.
. Wire order purchases and redemptions.
. Daily share/cash reconciliations.
. Systematic withdrawal plans.
. Retirement contributions/distributions/withhold
. Exchanges by telephone/mail.
. Transfers of shares.
. Issues/deposits of certificates.
. Daily dividend accruals.
. Letters of Intent.
. Rights of Accumulation.
. Head of family linkage.
. Master and Sub-accounting.
. Cash book reconciliation of all monetary transactions.
. Shareholder inquiry by telephone or letter.
. Transfer of assets.
. On-line real-time update of all non-monetary transactions.
. 100% Quality Control of all processed transactions.
Periodic Processing
- -------------------
<PAGE>
. Dividend and capital gain distribution payout and reinvestment.
. Proxy preparation, mailing, tabulation.
. Sales reporting - dealer, branch, rep levels.
. Blue Sky reporting - shares and dollars.
. Checking account reconciliation.
. Tax reporting (1099 processing for all accounts).
. Unclaimed property tracking and reporting.
. Backup withholding and compliance tracking.
. Mailing of Quarterly and Annual Reports.
<PAGE>
EXHIBIT 8(C)
AMENDMENT TO "FUND ACCOUNTING AND PRICING SERVICES AGREEMENT"
AND "MUTUAL FUND TRANSFER AGENCY AGREEMENT"
BETWEEN THE FIRST FUNDS (FORMERLY THE MASTERS GROUP OF MUTUAL FUNDS)
AND UNITED STATES TRUST COMPANY OF NEW YORK
(BOTH AGREEMENTS DATED NOVEMBER 10, 1992)
This Amendment is between United States Trust Company of New York and The
First Funds with respect to the Fund Accounting and Pricing Services Agreement
("Fund Accounting Agreement") and the Mutual Fund Transfer Agency Agreement
("Transfer Agency Agreement") (collectively, the "Agreements"), which are hereby
amended as follows:
Pursuant to Section 26 ("Amendments") of the Transfer Agency Agreement, Section
16(a) is deleted and the following Section is added:
(S)16(a) Shareholder Service Company: The parties agree that the annual
-----------------------------
fees for the services provided by United States Trust Company of New York,
through its affiliate, Mutual Funds Service Company, are hereby revised as
set forth in the attached Exhibit A. The Trust shall promptly reimburse
Mutual Funds Service Company for any out-of-pocket expenses and advances
payable by the Trust in accordance with Paragraph 6.
The Fund Accounting Agreement is hereby amended by deleting the existing Section
5 and replacing it with the following Section:
(S)5 Services: The parties agree that the annual fees for the services
provided pursuant to this Agreement by United States Trust Company of New
York, through its affiliate, Mutual Funds Service Company, are hereby
revised as set forth in the attached Exhibit A.
Attachment A and all references thereto in the Agreements are stricken and shall
be changed to Exhibit A, affixed hereto.
In all other respects, the Fund Accounting and Transfer Agency Agreements are
confirmed and shall continue to be effective.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their officer thereunto duly authorized as of this 28 day of July,
1995. This Amendment will be effective as of July 1, 1995.
UNITED STATES TRUST THE FIRST FUNDS
COMPANY OF NEW YORK
/s/By: _____________________________ /s/By: Richard Rantzow
------------------------
Title: ____________________________ Title: President
---------
<PAGE>
AMENDMENT TO "FUND ACCOUNTING AND PRICING SERVICES AGREEMENT"
AND "MUTUAL FUND TRANSFER AGENCY AGREEMENT"
BETWEEN THE FIRST FUNDS (FORMERLY THE MASTERS GROUP OF MUTUAL FUNDS)
AND UNITED STATES TRUST COMPANY OF NEW YORK
EXHIBIT A
---------
The combined annual fees (billable monthly) for services for both Agreements
will be as follows:
MONEY MARKET FUNDS
5 Basis Points on 1st $50 million of Average Total Net Assets
3 Basis Points on excess of $50 million of Average Total Net Assets
TOTAL RETURN FUNDS
7 Basis Points on 1st $50 million of Average Total Net Assets
5 Basis Points on excess of $50 million of Average Total Net Assets
Out of Pocket Expenses, as described in Section 16(b) of the Transfer Agency
Agreement and Section 5 of the Fund Accounting Agreement, will be billed to the
Trust on a monthly basis.
<PAGE>
EXHIBIT 9(A)
FUND ACCOUNTING AND PRICING SERVICES AGREEMENT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
1. Appointment 3
2. Calculation of Net Asset Value 3
3. Books and Records 3
4. Cooperation With Accountants 4
5. Services 4
6. Fees and Expenses 4
7. Compliance with Governmental Rules & Regulations 4
8. Confidentiality 4
9. References to U.S. Trust 4
10. Force Majeure; Equipment Failures 5
11. Indemnification of U.S. Trust 5
12. Shareholder Liability 5
13. Term; Termination 6
14. Assignment 6
15. Services for Others 6
16. Miscellaneous 6
17. Severability 6
18. Governing Laws 6
19. Notices 6
20. Counterparts 6
Attachment A - Fees 8
Attachment B - Services 9
</TABLE>
<PAGE>
FUND ACCOUNTING AND PRICING SERVICES AGREEMENT
----------------------------------------------
THIS AGREEMENT, made on this 10th day of November, 1992 by and between The
Masters Group of Mutual Funds, a Massachusetts business trust, (the "Trust"),
which may issue one or more series of shares of beneficial interest, (each a
"Portfolio") and United States Trust Company of New York, a New York State
chartered bank and trust company having its principal office at 114 West 47th
Street, New York, New York 10036 ("U.S. Trust").
W I T N E S S E T H:
--------------------
WHEREAS, the Trust is a registered investment company under the Investment
Company Act of 1940, as amended (The 1940 Act"); and
WHEREAS, the Trust desires to appoint hire U.S. Trust to provide the Trust
with certain accounting and pricing services, and U.S. Trust is willing to
provide such services upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. APPOINTMENT. The Trust hereby appoints U.S. Trust to provide the
------------
accounting and pricing services hereinafter set forth to the Trust, and U.S.
Trust accepts such appointment and agrees to provide such services, under the
terms and conditions set forth herein.
2. CALCULATION OF NET ASSET VALUE. U.S. Trust will calculate the Trust's
-------------------------------
net asset value and the per-share net asset value in accordance with the Trust's
effective Registration Statement on Form N-1A (the "Registration Statement")
under the Securities Act of 1933, as amended (the 111933 Act"), including its
current prospectus. U.S. Trust will prepare and maintain, in the manner set
forth in the Registration Statement and in accordance with instructions from a
designated officer of the Trust or 'the Trust's investment adviser, a daily
valuation of all portfolio securities and other assets of the Trust. In valuing
portfolio securities of the Trust, U.S. Trust may contract with, and rely upon
market quotations provided by outside services approved by the Trust. When
securities market quotations are not available through outside services approved
by the Trust, the securities will be valued based on the direction of the
Trustees of the Trust.
3. BOOKS AND RECORDS. U.S. Trust will (a) maintain such books and records
------------------
as are necessary to enable it to perform its duties under this Agreement; (b)
prepare and maintain complete, accurate and current all records with respect to
the Trust required to be maintained by the Trust under the Internal Revenue Code
of 1986, as amended (the "Code"), and under the 1940 Act and the applicable
rules and regulations thereunder; (c) at the Trust's expense, retain and
preserve said records in the manner and for the periods prescribed in the Code
and the 1940 Act and such rules and regulations; and (d) assist to the extent
requested by the Trust in the preparation of reports to the Trust's
shareholders, the Trust's Registration Statement and reports and filings
required pursuant to the Code, or state tax law, or the 1940 Act and the rules
and regulations thereunder.
U.S. Trust hereby acknowledges and agrees that all records prepared and
maintained by U.S. Trust pursuant to this Agreement ("Required Records") are the
property of the Trust. If this agreement is terminated, all Required Records
shall be delivered, at the Trust's expense, to the Trust or any such person
designated by the Trust, and U.S. Trust shall be relieved of responsibility for
the preparation and maintenance of any Required Records delivered to the Trust
or any such person.
<PAGE>
4. COOPERATION WITH ACCOUNTANTS. U.S. Trust shall cooperate with the
-----------------------------
Trust's independent public accountants and shall take all reasonable action in
the performance of its obligation under this Agreement to assure that the
necessary information is made available to such accountants for the expression
of their unqualified opinion where required for any document for the Trust.
5. SERVICES. In consideration of services rendered pursuant to this
---------
Agreement, the Trust shall pay to U.S. Trust a fee in accordance with the
schedule attached hereto (Attachment A) and shall promptly reimburse U.S. Trust
for any out-of-pocket expenses and advances payable by the Trust in accordance
with Paragraph 6. The services to be provided are detailed in Attachment B of
this Agreement.
6. FEES AND EXPENSES. Any fees and expenses connected with the performance
------------------
of this Agreement may be paid on behalf of the Trust by National Financial
Services Corporation or any affiliate thereof (NFSC), in which case the Trust
shall have no responsibility for the amounts paid by Fidelity therefor.
(a) U.S. Trust shall furnish, at its expense and without cost to the
Trust or Fidelity, (i) the services of its personnel to the extent required to
carry out its obligations under this Agreement, (ii) necessary office facilities
and related equipment, and (iii) use of data processing and computer software
equipment.
(b) All costs and expenses not expressly assumed by U.S. Trust under
Paragraph 6 (a) of this Agreement shall be paid by the Trust, including but not
limited to costs and expenses for pricing service fees; portfolio pricing vendor
fees and support service fees (Quotron, Telerate, NASDAQ, etc.); necessary
outside record storage; media for storage of records (e.g., microfilm,
microfiche, computer tapes); and any and all assessments, taxes or levies
assessed on U.S. Trust for services provided under this Agreement
7. COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS. Except as otherwise
---------------------------------------------------
provided in this Agreement and except for the accuracy of information furnished
to it by U.S. Trust, the Trust assumes full responsibility of the preparation,
contents and distribution of each prospectus of the Trust. U.S. Trust shall
comply with all applicable requirements of the 1940 Act, the 1933 Act and any
laws, rules and regulations of governmental authorities having jurisdiction over
the Trust with respect to the services performed by U.S. Trust hereunder.
8. CONFIDENTIALITY. U.S. Trust agrees to treat all records and other
----------------
information relative to the Trust as proprietary information of the Trust and,
on behalf of itself and its employees, to keep confidential all such
information, except after prior notification to and approval in writing by the
Trust, which approval shall not be unreasonably withheld and may not be withheld
where U.S. Trust may be exposed to civil or criminal contempt proceedings for
failure to comply, when requested to divulge such information by duly
constituted authorities or when so requested by the Trust.
9. REFERENCES TO U.S. Trust. The Trust shall not circulate any printed
-------------------------
matter which contains any reference to U.S. Trust without the prior
written approval of U.S. Trust, except solely such printed matter as
merely identifies U.S. Trust as Accounting and Pricing Services Agent or
as may be required by the 1940 Act, the securities Act of 1933 or other
applicable laws, rules and regulations to the Trust. The Trust will
submit printed matter requiring approval to U.S. Trust in draft form,
allowing reasonably sufficient time for review by U.S. Trust and its
counsel prior to any deadline for printing.
<PAGE>
10. FORCE MAJEURE; EQUIPMENT FAILURES.
----------------------------------
(a) If U.S. Trust shall be delayed in their performance of services or
prevented entirely or in part from performing services because of causes or
events beyond its control, including and without limitation acts of God
interruption of power or other utility, transportation or communication
services, acts of civil or military authority, national emergencies, explosion,
flood, accident, earthquake or other catastrophe, fire, future law, governmental
order, rule or regulation, then such delay or nonperformance shall be excused
and a reasonable time for performance in connection with this Agreement shall be
extended to include the period of such delay or nonperformance.
(b) In the event of equipment failures beyond U.S. Trust's control,
U.S. Trust shall take all steps necessary to minimize service interruptions but
shall have no liability with respect thereto. U.S. Trust shall enter into one or
more agreements making provision for emergency use of electronic data processing
equipment.
11. INDEMNIFICATION.
----------------
(a) U.S. Trust, its directors, officers, employees, shareholders, and
agents shall not be liable for any error of judgement or mistake of law or for
any loss suffered by the Trust in connection with the performance of this
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or negligence on the part of U.S. Trust, its employees,
agents and subcontractors in the performance, or reckless disregard, of its or
their obligations and duties under this Agreement.
(b) Notwithstanding any other provision of this Agreement, the Trust
shall indemnify and hold harmless U.S. Trust, its directors, officers,
employees, shareholders, and agents from and against any and all claims,
demands, expenses and liabilities (whether with or without basis in fact or law)
of any and every nature which U.S. Trust may sustain or incur or which be
asserted against U.S. Trust by any person by reason of, or as a result of any
action taken or omitted to be taken by U.S. Trust in connection with its
appointment in good faith in reasonable reliance upon any applicable law, act or
regulation even though the same may thereafter have been altered, changed,
amended or repealed. However, indemnification under this subparagraph shall not
apply to actions or omissions of U.S. Trust or its directors, officers,
employees, shareholders, agents, or subcontractors in cases of its or their own
willful misfeasance, bad faith or negligence.
(c) U.S. Trust agrees to hold harmless the Trust from all loss, damage
and expenses suffered or incurred by the Trust caused by or arising from (i) the
bad faith, reckless disregard of duties, willful misfeasance, or gross
negligence of U.S. Trust, its agents and employees or (ii) any breach of this
Agreement by U.S. Trust.
12. SHAREHOLDER LIABILITY. U.S. Trust is hereby expressly put on notice of
----------------------
the limitation of shareholder liability as set forth in the Declaration of Trust
of the Trust and agree that obligations assumed by the Trust pursuant to this
Agreement shall be limited in all cases to the Trust and its assets. U.S. Trust
agrees that it shall not seek satisfaction of any such obligation from the
shareholders or any individual shareholder of the Trust, nor from the Trustees
or any individual Trustee of the Trust. Moreover, U.S. Trust agrees to treat
each series of the Trust as having separate obligations to U.S. Trust hereunder
and will not attribute the obligations of one series to any other series.
<PAGE>
13. TERM; TERMINATION. (a) The provisions of this Agreement shall be
------------------
effective as of November 10, 1992 shall continue in effect for one year from
that date and shall continue in force from year to year thereafter, but only so
long as such continuance is approved by U.S. Trust and the Trust.
(b) Either party may terminate this Agreement on any date by giving the
other party at least sixty (60) days prior written notice of such termination
specifying the date fixed therefore.
(c) In the event that in connection with termination of this Agreement
a successor to any of U.S. Trust's duties or responsibilities under-this
Agreement is designated by the Trust by written notice to U.S. Trust, U.S. Trust
shall, promptly upon such termination and at the expense of the Trust, transfer
all Required Records and shall cooperate in the transfer of such duties and
responsibilities, including provision for assistance from the U.S. Trust's
cognizant personnel in the establishment of books, records, and other data by
such successor.
14. ASSIGNMENT. Except as hereinafter provided, neither this Agreement nor
-----------
any rights or obligations hereunder may be assigned by either party without the
written consent of the other party. This Agreement shall inure to the benefit of
and be binding upon the parties and their respective permitted successors and
assignees. U.S. Trust may, without further consent on the part of the Trust,
subcontract for the performance hereof with third parties who are subsidiaries
or affiliates of U.S. Trust; provided, however, that U.S. Trust shall be as
fully responsible to the Trust for the acts and omissions of any subcontractor
as it is for its own acts and omissions and shall be responsible for its choice
of subcontractors.
15. SERVICES FOR OTHERS. Nothing in this Agreement shall prevent U.S.
--------------------
Trust or any affiliated person (as defined in the Act) of U.S. Trust from
providing services for any other person, firm or corporation (including other
investment companies).
16. MISCELLANEOUS. The captions in this Agreement are included for
--------------
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. The parties
agree that this Agreement constitutes separate agreements between U.S. Trust and
the Trust acting on behalf of each of its Portfolios listed separately on
Attachment C.
17. SEVERABILITY. In the event any provision of this Agreement is
-------------
determined to be void or unenforceable, such determination shall not affect the
remainder of this Agreement, which shall continue to be in force.
18. GOVERNING LAWS. This Agreement shall be deemed to be a contract made
---------------
under, and shall be construed in accordance with, the laws (other than the laws
governing conflict-of-law matters) of the State of New York.
19. NOTICES. Any notice or demand given in connection with any agreement,
--------
document or instrument executed pursuant hereto shall be deemed to have been
sufficiently given or served for all purposes if sent by certified or registered
mail, postage and charges prepaid, to the following addresses: if to the Trust,
The Masters Group of Mutual Funds, 82 Devonshire Street, Boston, MA 02109 or at
any other address or addresses designated by the Trust to U.S. Trust in writing;
and if to U.S. Trust, to it at 114 West 47th Street, New York, NY 10036, or at
any other address or addresses designated by U.S. Trust to the Trust in writing.
20. COUNTERPARTS. This Agreement may be executed in one or more
-------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
UNITED STATES TRUST
COMPANY OF NEW YORK
Attest: _____________________ By: _______________________
THE MASTERS GROUP OF MUTUAL FUNDS
Attest: ______________________ By: _______________________
<PAGE>
ATTACHMENT A
For the services as described in this Agreement, the annual Fee per portfolio of
the Trust shall be $25,000, prorated and paid monthly.
Out of Pocket expenses, as described in Paragraph 6 (B) of this Agreement will
be billed to the Fund on a monthly basis.
<PAGE>
ATTACHMENT B
FUND ACCOUNTING SERVICES
Daily responsibilities include:
. Preparation of cash availability
. Review and accounting for all cash receipts and disbursements,
including:
- security settlements
- income collections
- shareholder settlements
- fund expenses
. Accrual of fund expenses based on fixed amounts or percentages of net assets
. Accrual of income specific to each securities method of accrual
. Recording of all security transactions
. Determination of fund dividend rates and yields
. Valuation of portfolios to determine fund prices
. Transmission of required reports to the Fund
DOMESTIC FUND ACCOUNTING DAILY REPORTS
A) General Ledger Reports
1. Trial Balance Report
2. General Ledger Activity Report
B) Portfolio Reports
1. Portfolio Report
2. Cost Lot Report
3. Purchase Journal
4. Sell/Maturity Journal
5. Amortization/Accretion Report
6. Maturity Projection Report
<PAGE>
C) Pricing Reports
1. Pricing Report
2. Pricing Report by Market Value
3. Pricing Variance by % Change
4. NAV Report
5. NAV Proof Report
6. Money Market Pricing Report
DOMESTIC FUND ACCOUNTING DAILY REPORTS, continued
D) Accounts Receivable/Payable Reports
1. Accounts Receivable for Investments Report
2. Accounts Payable for Investments Report
3. Interest Accrual Report
4. Dividend Accrual Report
E) Other
1. Dividend Computation Report
2. Cash Availability Report
3. Settlement Journal
INTERNATIONAL FUND ACCOUNTING DAILY REPORTS
A) General Ledger
1. Trial Balance Report
2. General Ledger Activity Report
B) Portfolio Reports
1. Portfolio Report by Sector
2. Cost Lot Report
3. Purchase Journal
4. Sell/Maturity Journal
C) Currency Reports
1. Currency Purchase/Sales Journal
2. Currency Valuation Report
D) Pricing Reports
1. Pricing Report by Country
2. Pricing Report by Market Value
3. Price Variance by % change
<PAGE>
4. NAV Report
5. NAV Proof Report
INTERNATIONAL FUND ACCOUNTING DAILY REPORTS, continued
E) Accounts Receivable/Payable Reports
1. Accounts Receivable for Investments Sold/Matured
2. Accounts Payable for Investments Purchased
3. Accounts Receivable for Forward Exchange Contracts
4. Accounts Payable for Forward Exchange Contracts
5. Interest Receivable Valuation
6. Interest Recoverable Withholding Tax
7. Dividends Receivable Valuation
S. Dividends Recoverable Withholding Tax
F) other
1. Exchange Rate Report
MONTHLY FUND ACCOUNTING REPORTS
A) Domestic Reports
1. Cost Proof Report
2. Transaction History Report
3. Realized Gain/Loss Report
4. Interest Record Report
5. Dividend Record Report
6. Broker Commission Totals
7. Broker Principal Trades
8. Shareholder Activity Report
9. Fund Performance Report
10. SEC Yield Calculation Work Sheet
B) International Reports
1. Forward Contract Transaction History Report
2. Currency Gain/Loss Report
<PAGE>
EXHIBIT 9(b)
AMENDMENT TO "FUND ACCOUNTING AND PRICING SERVICES AGREEMENT"
AND "MUTUAL FUND TRANSFER AGENCY AGREEMENT"
BETWEEN THE FIRST FUNDS (FORMERLY THE MASTERS GROUP OF MUTUAL FUNDS)
AND UNITED STATES TRUST COMPANY OF NEW YORK
(BOTH AGREEMENTS DATED NOVEMBER 10, 1992)
This Amendment is between United States Trust Company of New York and The
First Funds with respect to the Fund Accounting and Pricing Services Agreement
("Fund Accounting Agreement") and the Mutual Fund Transfer Agency Agreement
("Transfer Agency Agreement") (collectively, the "Agreements"), which are hereby
amended as follows:
Pursuant to Section 26 ("Amendments") of the Transfer Agency Agreement, Section
16(a) is deleted and the following Section is added:
(S)16(a) Shareholder Service Company: The parties agree that the annual
-----------------------------
fees for the services provided by United States Trust Company of New York,
through its affiliate, Mutual Funds Service Company, are hereby revised as
set forth in the attached Exhibit A. The Trust shall promptly reimburse
Mutual Funds Service Company for any out-of-pocket expenses and advances
payable by the Trust in accordance with Paragraph 6.
The Fund Accounting Agreement is hereby amended by deleting the existing Section
5 and replacing it with the following Section:
(S)5 Services: The parties agree that the annual fees for the services
provided pursuant to this Agreement by United States Trust Company of New
York, through its affiliate, Mutual Funds Service Company, are hereby
revised as set forth in the attached Exhibit A.
Attachment A and all references thereto in the Agreements are stricken and shall
be changed to Exhibit A, affixed hereto.
In all other respects, the Fund Accounting and Transfer Agency Agreements are
confirmed and shall continue to be effective.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their officer thereunto duly authorized as of this 28 day of July,
1995. This Amendment will be effective as of July 1, 1995.
UNITED STATES TRUST THE FIRST FUNDS
COMPANY OF NEW YORK
/s/ By: _____________________________ /s/ By: _________________________
Title: __________________________ Title: ______________________
<PAGE>
AMENDMENT TO "FUND ACCOUNTING AND PRICING SERVICES AGREEMENT"
AND "MUTUAL FUND TRANSFER AGENCY AGREEMENT"
BETWEEN THE FIRST FUNDS (FORMERLY THE MASTERS GROUP OF MUTUAL FUNDS)
AND UNITED STATES TRUST COMPANY OF NEW YORK
EXHIBIT A
---------
The combined annual fees (billable monthly) for services for both Agreements
will be as follows:
MONEY MARKET FUNDS
5 Basis Points on 1ST $50 million of Average Total Net Assets
3 Basis Points on excess of $50 million of Average Total Net Assets
TOTAL RETURN FUNDS
7 Basis Points on 1ST $50 million of Average Total Net Assets
5 Basis Points on excess of $50 million of Average Total Net Assets
Out of Pocket Expenses, as described in Section 16(B) of the Transfer Agency
Agreement and Section 5 of the Fund Accounting Agreement, will be billed to the
Trust on a monthly basis.
<PAGE>
EXHIBIT 11(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Prospectuses and
Statements of Additional Information constituting parts of this Post-Effective
Amendment No. 15 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated August 12, 1997, relating to the financial
statements and financial highlights appearing in the June 30, 1997 Annual Report
to Shareholders for the Growth and Income Portfolio, the Bond Portfolio and the
Tennessee Tax-Free Portfolio, which are also incorporated by reference to the
Registration Statement. We also consent to the references to us under the
heading "Financial Highlights" in the Prospectuses and under the heading
"Independent Accountants" in the Statements of Additional Information.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
August 27, 1998
<PAGE>
EXHIBIT 11(b)
Securities and Exchange Commission
October 23, 1997
Page 1
Baker Donelson Bearman & Caldwell
First Tennessee Building
Suite 2000
165 Madison Avenue
Memphis, Tennessee 38103
August 27, 1998
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Re: FIRST FUNDS (THE TRUST): GROWTH AND INCOME PORTFOLIO; BOND PORTFOLIO;
CAPITAL APPRECIATION PORTFOLIO; INTERMEDIATE BOND PORTFOLIO AND TENNESSEE
TAX-FREE PORTFOLIO (EACH, A PORTFOLIO)
File No. 33-46374
811-6589
Post-Effective Amendment No. 15
Dear Sirs:
We serve as counsel to the above-referenced Trust. Post-Effective Amendment
No. 15 ("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 pursuant to Paragraph (a) of Rule 485 under the
Securities Act of 1933 for the principal purpose disclosing information
pertaining to Martin & Company, Inc., a new sub-investment adviser for the
Tennessee Tax-Free and Intermediate Bond Portfolios.
Further, we consent to the use of our name in the Registration Statement or
elsewhere it may appear.
Very truly yours,
/s/ Baker Donelson Bearman & Caldwell
Baker Donelson Bearman & Caldwell
<PAGE>
EXHIBIT 13
FIDELITY INVESTMENTS
Fidelity Management & Research Co.
82 Devonshire Street
Boston MA 02109
617-570-7000
August 24, 1992
The Masters Group of Mutual Funds
82 Devonshire Street
Boston, MA 02109
Gentlemen:
Please be advised that the 100,000 shares of the beneficial interest of The
Masters Group of Mutual Funds which we have today purchased from you were
purchased by Fidelity Management & Research Company as an investment with no
present intention of redeeming or reselling such shares.
Very truly yours,
/s/_____________________
Arthur S. Loring
Vice President and
General Counsel
<PAGE>
EXHIBIT 15(A)
DISTRIBUTION AND SERVICE PLAN
1. This Distribution and Service Plan (the Plan), when effective in
accordance with its terms, shall be the written plan contemplated by Rule 12b-1
under the Investment Company Act of 1940 (the 1940 Act) of each series of First
Funds (the Trust), issuing separate series of shares designated as follows:
Total Return Equity Portfolio, Total Return Fixed Income Portfolio, U.S.
Treasury Money Market Portfolio, U.S. Government Money Market Portfolio,
Municipal Money Market Portfolio, and Cash Reserve Portfolio, duly established
series of shares (each a Portfolio) of the First Funds, a Massachusetts business
trust, registered as an open-end investment company under the 1940 Act (the
Trust).
2. The Trust has entered into separate Administration (Administration) and
General Distribution (Distribution) Agreements with respect to each Portfolio
with ALPS Mutual Funds Services, Inc. (the Administrator or the Distributor)
under which the Distributor uses all reasonable efforts, consistent with its
other business, to secure purchasers for each Portfolio's shares of beneficial
interest (shares). Under the Distribution Agreement, the Distributor pays the
expenses of printing and distributing any prospectuses, reports and other
literature used by the Distributor, advertising, and other promotional
activities in connection with the offering of shares of each Portfolio for sale
to the public. The Trust has entered into an Investment Advisory and Management
Agreement with Garland Capital Management, a division of First Tennessee Bank
National Association (the Investment Adviser). It is understood that the
Administrator may reimburse the Distributor for these expenses from any source
available to it, including the Administration fee paid to the Administrator by
each Portfolio.
3. The Investment Adviser may, subject to the approval of the Trustees,
make payments to third parties who render shareholder support services,
including but not limited to answering routine inquiries regarding each
Portfolio, processing shareholder transactions and providing such other
shareholder and administrative services as the Trust may reasonably request.
4. Each Portfolio will not make separate payments as a result of this Plan
to the Investment Adviser, Administrator, Distributor or any other party, it
being recognized that each Portfolio presently pays, and will continue to pay,
an investment advisory fee to the Investment Adviser and an administration fee
to the Administrator. To the extent that any payments made by each Portfolio to
the Investment Adviser or Administrator, including payment of fees under the
Investment Advisory and Management Agreement or the Administration Agreement,
respectively, should be deemed to be indirect financing of any activity
primarily intended to result in the sale of shares of each Portfolio within the
context of Rule 12b-1 under the 1940 Act, then such payments shall be deemed to
be authorized by this Plan.
5. This Plan shall become effective upon the first business day of the
month following approval by a vote of at least a "majority of the outstanding
voting securities of each Portfolio" (as defined in the 1940 Act), the Plan
having been approved by a vote of a majority of the Trustees of the Trust,
including a majority of Trustees who are not interested persons of the Trust (as
defined in the 1940 Act) and who have no direct or indirect financial interest
in the operation of this Plan or in any agreements related to this Plan (the
Independent Trustees), cast in person at a meeting called for the purpose of
voting on this Plan.
6. This Plan shall, unless terminated as hereinafter provided, remain in
effect from the date specified above until June 30, 1995, and from year to year
thereafter, provided, however, that such continuance is subject to approval
annually by a vote of a majority of the Trustees of the Trust, including a
majority of the Independent Trustees, cast in person at a meeting called for the
purpose of voting on this Plan. This Plan may be amended at any time by the
Board of Trustees, provided that (a) any amendment to authorize direct payments
by each Portfolio to finance any activity primarily intended to result in the
sale of shares of each Portfolio, to
<PAGE>
increase materially the amount spent by each Portfolio for distribution, or any
amendment of the Investment Advisory and Management Agreement or the
Administration Agreement to increase the amount to be paid by each Portfolio
thereunder shall be effective only upon approval by a vote of a majority of the
outstanding voting securities of each Portfolio, and (b) any material amendments
of this Plan shall be effective only upon approval in the manner provided in the
first sentence in this paragraph.
7. This Plan may be terminated at any time, without the payment of any
penalty, by vote of a majority of the Independent Trustees or by a vote of a
majority of the outstanding voting securities of each Portfolio.
8. During the existence of this Plan, the Trust shall require the
Investment Adviser and/or Distributor to provide the Trust, for review by the
Trust's Board of Trustees, and the Trustees shall review, at least quarterly, a
written report of the amounts expended in connection with financing any activity
primarily intended to result in the sale of shares of each Portfolio (making
estimates of such costs where necessary or desirable) and the purposes for which
such expenditures were made.
9. This Plan does not require the Investment Adviser or Distributor to
perform any specific type or level of distribution activities or to incur any
specific level of expenses for activities primarily intended to result in the
sale of shares of each Portfolio.
10. Consistent with the limitation of shareholder and Trustee liability as
set forth in the Trust's Declaration of Trust, any obligations assumed by each
Portfolio pursuant to this Plan and any agreements related to this Plan shall be
limited in all cases to each Portfolio and its assets, and shall not constitute
obligations of any shareholder or other series of shares of the Trust or of any
Trustee.
11. If any provision of this Plan shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of the Plan shall not be
affected thereby.
<PAGE>
EXHIBIT 15(B)
SHAREHOLDER SERVICES PLAN
First Funds: CLASS 11 and III
1. This Shareholder Services Plan (the Plan) is the Shareholder Services Plan
of the Class III of each series of First Funds (the Trust), a Massachusetts
business trust, registered as an open-end investment company under the
Investment Company Act of 1940 (the 1940 Act), as amended, issuing separate
series of shares designated as follows: U.S. Government Money Market Portfolio,
U.S. Treasury Money Market Portfolio, Municipal Money Market Portfolio, Cash
Reserve Portfolio, Total Return Fixed Income Portfolio, Total Return Equity
Portfolio, and Tennessee Tax-Free Portfolio, and any future series established
and designated by the Board of Trustees (each a Portfolio).
2. The Trust has entered into separate Administration (Administration) and
General Distribution (Distribution) Agreements with ALPS Mutual Funds Services,
Inc. (ALPS, the Administrator or the Distributor) under which the Distributor
uses all reasonable efforts, consistent with its other business, to secure
purchasers for each Portfolio's shares of beneficial interest. The Trust has
entered into an Investment Advisory and Management Contract with First Tennessee
Bank National Association (the Investment Adviser). The Trust has further
entered into custodial and transfer agency agreements with Chase Manhattan Bank
of New York and/or its subsidiary Chase Global Funds Services Company. Payments
under this Plan shall not be made for advisory, distribution, custodial or
transfer agency services.
3. Each Portfolio's shares of beneficial interest are divided into classes,
including a class of shares designated Class III (Class III Shares). Class III
Shares are subject to this Plan and the eligible investors in the Class III
Shares shall be as described in the current prospectus for the Class 111, as
amended or supplemented from time to time.
4. Each Portfolio may make periodic payments to parties (each a Shareholder
Servicing Agent) that have entered into a Shareholder Services Contract in the
form attached hereto with the Trust in respect of Class III shares at an
annualized rate of up to (and including) .25% of Class III's average net assets
attributable to the Shareholder Servicing Agent. The personal and account
maintenance services to be provided under this Plan by each Shareholder
Servicing Agent, may include, but are not limited to, maintaining account
records for each shareholder who beneficially owns Class III Shares, answering
questions and handling correspondence from shareholders about their accounts;
handling the trion of funds representing the purchase price or redemption
proceeds; issuing confirmations for actions in Class III Shares by shareholders;
assisting customers in completing application forms; communicating with the
transfer agent; and providing account maintenance and account level support for
all transactions. ALPS may act as the Trust's agent for transmitting or
arranging for commission of fees to Shareholder Servicing Agents under the
Shareholder Services Contract.
5. This Plan became effective June 14, 1995, having been approved by a vote of
a majority of the Trustees of the Trust, including a majority of Trustees who
are not interested persons of the Trust (as defined in the 1940 Act) and who
have no direct or indirect financial interest in the operation of this Plan or
in any agreements related to this Plan (the Independent Trustees), cast in
person at a meeting called for the purpose of voting on this Plan.
6. This Plan shall, unless terminated as hereinafter provided, remain in
effect from the date specified above until June 13, 1996, and from year to year
thereafter, provided, however, that such continuance is subject to approval
annually by a vote of a majority of the Trustees of the Trust, including a
majority of the Independent Trustees, cast in person at a meeting called for the
purpose of voting on this Plan.
<PAGE>
7. This Plan may be amended with respect to the Class III Shares of a
Portfolio, at any time by the Board of Trustees, provided that any material
amendment of this Plan shall be effective only upon approval in the manner
provided in paragraph 5 above.
8. This Plan may be terminated at any time, without the payment of any
penalty, by vote of a majority of the Independent Trustees.
9. Consistent with the initation of shareholder and Trustee liability as set
forth in the Trust's Declaration of Trust, any obligations assumed by the Trust,
a Portfolio or Class III thereof pursuant to this Plan and any agreements
related to this Plan shall be limited in all cases to the proportionate
ownership of the Class III Shares of the affected Portfolio and its assets, and
shall not constitute obligations of any shareholder of any other Class of the
affected Portfolio or Portfolios of the Trust or of any Trustee.
10. During the existence of this Plan, the Trust shall require ALPS as the
Administrator to provide the Trust, for review by the Trust's Trustees, and the
Trustees shall review, at least quarterly, a written report of the amounts
expended under the Plan and the purposes for which such expenditures were made.
11. If any provision of this Plan shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of the Plan shall not be
affected thereby.
<PAGE>
EXHIBIT 16
Exhibit 16
SCHEDULE FOR COMPUTATION OF PERFORMANCE CALCULATIONS
CUMULATIVE TOTAL RETURNS and their income and capital components are described
in the Trust's Statement of Additional Information, and are based on the net
asset values, dividends, capital gain distributions and reinvestment prices of
the historical period covered. Cumulative total returns may include or omit the
effect of sales charges and/or fees on redemption and the effect of reinvestment
of income or capital gain distributions and of subsequent investments or
redemptions.
AVERAGE ANNUAL RETURNS are calculated according to the following formula:
Average Annual Return = [(1 + Cumulative Return) /1/n/] - 1
[where n = the number of years in the base period]
The 7-DAY YIELD AND EFFECTIVE YIELD are calculated according to the methods
prescribed in Form N-1 A Item 22(a)(i) and (ii).
The 7-DAY YIELD is calculated according to the following formula:
7-Day Yield = (Base Period Return) X (365/7)
The EFFECTIVE YIELD is calculated according to the following formula:
Effective Yield = [(Base Period Return + 1) /365/7/] - 1
The TAX-EQUIVALENT YIELD is calculated according to the following formula:
Tax-Equivalent Yield = (yield)/(1 - [tax rate])
[where the tax rate is expressed in decimal notation (i.e. 28% = 0.28)]
For any municipal portfolio that invests a portion of its assets in obligations
subject to state taxes, the tax equivalent yield is adjusted to reflect these
investments.
The 30-DAY DISTRIBUTION RATE is calculated by dividing distributions per share
by net asset values per share:
Yield = 2[(a -b/cd + 1)/6/- 1]
Data and calculations for 30-DAY YIELDS using the method prescribe in Form N-1 A
Item 22(b) will be filed by amendment.
SCHEDULE FOR COMPUTATION OF PERFORMANCE CALCULATIONS
<PAGE>
Relative Volatility, Beta, Alpha, R/2/ and Return per Unit of Risk use Portfolio
whose income and capital components are described in the Portfolio's Statement
of Additional Information, and are based on the net asset values, dividends,
capital gain distributions and reinvestment prices of the historical period
covered.
1 . Relative Volatility
The formula for Relative Volatility is:
y/2/-n(y)/2/
y = --------------
n-1
____________________
x/2/-n(x)/2/
x = --------------
n-1
Where:
y = the standard deviation of the portfolio's returns
x = the standard deviation of the market's returns
x = the market's return for the |th period
y = the portfolio's return for the |th period
n = the number of periods
y = average one month return to the portfolio
x = average one month return to the market index
* period equals month
2. * Beta
The formula that calculates Beta is:
nxy -(xy)
* = ------------------
n(x)/2/-(x)/2/
Where:
x = the market's return for the |th period
y = the portfolio's return for the |th period
n = the number of periods
* period equals month
<PAGE>
3. Alpha
The formula for alpha is:
y-*x
= --------------
n
Where:
* = the portfolio's Beta
x = the market's return for the |th period
y = the portfolio's return for the |the period
n = the number of periods
* period equals month
4. R/2/
The formula for R/2/ is:
(+ *x-y)/2/
R/2 / = --------------
(y - y)/2/
Where:
x = the portfolio's Alpha
* = the portfolio's Beta
x = the market's return for the |th period
y = the portfolio's return for the |th period
y = the average one month return of the portfolio
* period equals month
5. Return per Unit of Risk
The formula for Return per Unit if Risk is:
ry
----------
P
<PAGE>
Where:
ry = the average annual no-load return to the portfolio over a historical time
period (usually the annual 36 month total return)
= the standard deviation of the portfolio's return over 36 months
P = the annualization factor for , where P is the number of periods in the year
6. Long-Term Moving Average MA\\n\\ = (ADJ|)/n
Where:
MA\\n\\= Moving Average for the nth week.
ADJ| = Closing Adjusted NAV for the |the week, and
n = #of weeks, 13 for 13 week Moving Average.
39 for 39 week Moving Average.
Short-Term Moving Average MAn\ = (ADJ|)/n
Where:
MA\\n\\ = Moving Average for the nth day
ADJ| = Closing Adjusted NAV for the |th day, and
n = # of Days, 65 for 13 week Moving Average.
195 for 39 week Moving Average.
Relative, Weekly WR| =ADJ|/ADJl|
Where:
WR| = the relative for the |th week.
ADJ| = the fund's closing adjusted NAV for the |th week, and
ADJl| = the index's closing adjusted NAV for the |th week.
For the daily relative, substitute the word day for week in the preceding
definitions.
5 Week Momentum Indicator M| = ( ( ADJ|/ADJl\\|-5\\) - 1)*100
Where:
M| = the 5 week momentum for the |th week
ADJ| = the fund's closing adjusted NAV for the |th week, and
ADJl\\|-5\\ = the fund's closing adjusted NAV for week, five weeks
previously.
8. Adjusted Indices
(1) DF\\1\\ = (V1 / So) - P\\1\\
<PAGE>
Where DF\\1\\, = The index's dividend factor for Month 1.
V\\1\\ = the value of an investment in the index at the end of month 1.
So = the number of shares held in the index at the end of month 0,
and
P\\1\\= the index's closing NAV for the last business day in month 1.
Please also take note of the following variables:
TR\\1\\ = The index's one month total return for Month 1.
Vo = the value of an investment in the index at the end of month 0,
and
Po = the index's closing NAV for the last business day in month 0.
Then,
(2) V\\1\\ = (1 + (TR\\1\\ / 100) )* Vo, and
(3) Vo = So * Po, therefore
(4) DF\\1\\= (((1+ (TR\\1\\/100))* (So*Po)) / So) -P\\1.\\
Formula 4 simplifies to
(5) DF\\1\\ =((1 + ( TR\\1\\/ 100))*Po) - P\\1\\
Formula 5 is the formula used to calculate the monthly dividend factors for the
S&P 500 for the months between February 1970 and the present. TR1 is the
cumulative one month return to the S&P 500 as published by Standard and Poor's.
Formula 5 is also used to calculate the dividend factors for the Toronto Stock
Exchange 300 and the Morgan Stanley EAFE, Europe, Pacific, & World Indices is
the same; however, their total returns must first be calculated. This is
straightforward because two versions of these indices exist, the usual daily
price index and a monthly total return index. The latter includes the
reinvestment of dividends net of any foreign withholding taxes. Both the daily
and the monthly are quoted in terms of U.S. dollars. The formula used for
calculating one of these indices total returns is:
(6) TR\\1\\ = ((M\\1\\/ Mo ) - 1)* 100
Where TR\\1\\ = The index's total return for Month 1.
M\\1\\ = The value of the total return index for Month 1.
<PAGE>
Mo = The value of the total return index for Month 0.
Two indices whose adjusted NAVs are used instead of monthly dividend factors
are the NASDAQ Composite Index and the Russell 2000 Index. For the former, no
adjustment is made. The raw NAV is used. For the latter, NAVs are adjusted for
dividends for all but the most recent month.
Like the international indices, the Russell 2000 also exists as a total
return index and a price index. The total return index, however, has a value for
every business day of the month and not just at the month's end. The total
return index is used as the adjusted NAVs for all but the most recent month.
(7) K\\l\\ = R\\l-1\\/ P\\l-1\\
Where:
K\\l\\ = The scaling constant for month 1, the last month.
R\\l-1\\ = The daily value of the total return index for the last day of
the second to last month.
P\\l-1\\ = The daily value of the price index for the same day, and
ADJ| = K*P|
Where:
ADJ| = The adjusted NAV for the |th day in the last month.
P| = The value of the price index on the |th day of the last month.
(9) Adjusted Net Asset Values
Following Day Dividend + Following Day Cap. Gains
Current Day Factor = _________________________________________________ + 1
Following Day Factor
Following Day NAV
Where:
Following Day Factor = 1.0 until the day preceding the first distribution.
Current Day NAV
Adjusted NAV = ____________________
Current Day Factor
<PAGE>
EXHIBIT 18
FIRST FUNDS
Rule 18f-3 Plan
Rule 18f-3
- ----------
Pursuant to Rule 18f-3 ("Rule 18f-3") of the Investment Company Act of 1940,
as amended (the "Act"), an open-end management investment company whose shares
are registered on Form N-1A may issue more than one class of voting stock
(hereinafter referred to as "shares"), provided that these multiple classes
differ either in the manner of distribution, or in services they provide to
shareholders, or both. First Funds (the "Trust"), a registered open-end
investment company whose shares are registered on Form N-1A, consisting of the
U.S. Treasury Money Market Portfolio, the U.S. Government Money Market
Portfolio, the Municipal Money Market Portfolio, the Cash Reserve Portfolio
(collectively, the "Money Market Portfolios"), the Total Return Fixed Income
Portfolio, the Tennessee Tax-Free Portfolio, and the Total Return Equity
Portfolio and any future fund or series created by the Trust (collectively, with
the Money Market Portfolios, the "Portfolios"), may offer to shareholders
multiple classes of shares in the Portfolios in accordance with Rule 18f-3 Plan
(or as amended) as described herein, upon approval of the Board of Trustees of
the Trust.
Authorized Classes
- ------------------
Each Portfolio, except for the Money Market Portfolios which does not offer
Class II shares, may issue three classes of shares--Class I, Class II and Class
III (collectively, "the "Classes" and individually, a "Class"). Class I shares
will be offered exclusively for investment of monies held in qualifying Trust,
fiduciary, advisory, agency, custodial or similar accounts ("Fiduciary
Accounts") by financial institutions or business organizations ("Agency
Institutions") that have entered into servicing agreements with the Distributor,
ALPS Mutual Funds Services, Inc. ("ALPS"), as well as corporations,
municipalities, non-profit institutions and other investors who can meet the
investment minimum. The minimum initial investment for each Agency Institution
is $100,000 per Portfolio or Money Market Portfolio which may be satisfied by
aggregating Fiduciary Accounts within each Portfolio or Money Market Portfolio.
Class I will not be offered with a sales load nor in connection with any
Distribution Plan pursuant to Rule 12b-1 of the Act (the "Rule 12b-1 Plan").
Investors who do not qualify for Class I may choose between Class II and
Class III, if they meet the initial investment minimum of $ 1,000. Class II
shares will not be offered in connection with any Rule 12b-1 Plan. Class II
shares may be subject to a shareholder servicing charge. Class II shares in all
Portfolios except the Money Market Portfolios are offered with a sales load.
Class III shares may be purchased for all the Portfolios by investors who
elect not to pay a sales load on their initial purchase, but will be subject to
Rule 12b-1 fees pursuant to the adopted Rule 12b-1 Plan. Class III shares may
also be subject to an asset-based shareholder servicing charge.
The Classes of shares issued by any Portfolio will be identical in all
respects except for Class designation, allocation of certain expenses directly
related to the distribution or service arrangement, or both, for a Class, and
voting rights--each Class votes separately with respect to issues affecting only
that Class. Shares of all Classes will represent interests in the same
investment portfolio therefore each Class is subject to the same investment
objectives, policies and limitations.
<PAGE>
Class Expenses
- --------------
Each Class of shares shall bear expenses, not including advisory or custodial
fees or other expenses related to the management of the Portfolio's assets, that
are directly attributable to the kind or degree of services rendered to that
Class ("Class Expenses"). Class Expenses, including the investment advisory fee
or the fee of other service providers, may be waived or reimbursed by the
Portfolios' investment adviser, underwriter or any other provider of services to
the Portfolios.
Exchanges and Conversion Privileges
- -----------------------------------
The Portfolios generally do not permit exchanges among Classes, except that
Class I shares may be exchanged or converted by the Portfolio for either Class
II or III shares, as elected by the investor, should an investor cease to be
eligible to invest in Class 1. Additionally, since there are no Class II Money
Market Portfolios, exchanges from Class II into Money Market Portfolios will go
into Class III.
