<PAGE>
As filed with the Securities and Exchange Commission on MAY 21, 1999
------------
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 X
Pre-Effective Amendment No. --
-- --
Post-Effective Amendment No. 17 X
--- --
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
--
Amendment No.
-- --
(Check appropriate box or boxes.)
FIRST FUNDS
-----------
(Exact name of Registrant as Specified in Charter)
370 17th Street, Suite 3100
DENVER, CO 80202
----------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 442-1941
--------------
Russell C. Burk, Secretary
First Funds
370 17th Street, Suite 3100
DENVER, CO 80202
----------------
(Name and Address of Agent of 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: As soon as practicable
after the effective date of
this Amendment
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b)
- --
on (date) pursuant to paragraph (b)
- --
X 60 days after filing pursuant to paragraph (a) (1)
- --
on , pursuant to paragraph (a) (1)
- -- ------------
75 days after filing pursuant to paragraph (a) (2)
- --
on (date) pursuant to paragraph (a) (2)
- --
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
Registrant registered an indefinite number of shares pursuant to regulation
24f-2 under the Investment Company Act of 1940 on September 25, 1998.
<PAGE>
PROSPECTUS
Dated , 1999
------------
FIRST FUNDS
GROWTH & INCOME PORTFOLIO
[FIRST FUNDS LOGO]
CLASS I
CLASS II
CLASS III
CLASS IV
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy of this prospectus. Any representation
to the contrary is a criminal offense.
<PAGE>
GROWTH & INCOME PORTFOLIO
-----------------------------------
FUND FACTS
Goal:
Maximum current total return
through --
- Capital Appreciation
and
- Dividend Income.
Principal Investments:
- Common Stocks
- ADRs
- Convertible Securities
Classes of Shares Offered in
this Prospectus:
- Class I
- Class II
- Class III
- Class IV
Investment Adviser:
- First Tennessee Bank National
Association ("First Tennessee"
or "Adviser")
Investment Sub-Adviser:
- Highland Capital Management
Corporation
("Highland" or "Sub-Adviser")
Portfolio Managers:
- Edward J. Goldstein
- David L. Thompson
Distributor:
- ALPS Mutual Funds Services,
Inc. ("ALPS")
-----------------------------------
INVESTMENT OBJECTIVE -- The objective of the Growth & Income Portfolio (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.
PRINCIPAL INVESTMENT STRATEGIES -- Under normal market conditions, the
Investment Adviser and Sub-Adviser currently intend to invest at least 80% of
the Portfolio's assets in common stock and American Depositary Receipts
(ADRs) of U.S. and international companies that are traded on major domestic
securities exchanges (NYSE, ASE, NASDAQ). The Portfolio may also invest in
convertible preferred stock, bonds, and debentures that are convertible into
common stock.
PRIMARY RISKS -- Your investment in the Portfolio is subject to many risks,
including:
- - Market Risk - Interest Rate Risk
- - Credit Risk - Foreign Investment Risk
- - Valuation Risk - Liquidity Risk
For more information about the risk factors identified above, please refer to
the section entitled "Principal Investments" later in this prospectus. The
Statement of Additional Information ("SAI") contains additional information
about the risks associated with investing in the Portfolio.
THE VALUE OF THE PORTFOLIO'S SHARES, LIKE STOCK PRICES GENERALLY, WILL
FLUCTUATE WITHIN A WIDE RANGE. AN INVESTOR IN THE PORTFOLIO COULD LOSE MONEY
OVER SHORT OR EVEN LONG PERIODS OF TIME.
PLEASE REMEMBER THAT THERE IS NO GUARANTEE THAT THE PORTFOLIO WILL ACHIEVE
ITS INVESTMENT OBJECTIVE, AND AN INVESTMENT IN THE PORTFOLIO IS NOT INSURED,
ENDORSED, OR GUARANTEED BY THE FDIC, A BANK OR ANY GOVERNMENT AGENCY.
SHOULD I INVEST IN THE GROWTH & INCOME PORTFOLIO?
The Portfolio may be appropriate for you if:
- - You can tolerate the price fluctuations and volatility that are inherent in
investing in a broad-based stock mutual fund.
- - You are seeking an investment that seeks to provide long-term growth as
well as some dividend income.
- - You wish to add a growth and income stock fund to your existing investment
portfolio. (REMEMBER, NO SINGLE INVESTMENT CAN PROVIDE AN EFFECTIVE,
BALANCED INVESTMENT PLAN.)
- - You are seeking growth of capital and income over a long-term investment
time horizon -- at least five years.
1
<PAGE>
-------------------------------------------------------
WHAT IS THE S&P 500 INDEX?
The S&P 500 Index is an unmanaged index tracking the
performance of 500 publicly traded U.S. Stocks and is
often used to indicate the performance of the overall
domestic stock market. The S&P 500 is not a mutual fund,
and you cannot invest in it directly. Also, the
performance of the S&P 500 does not reflect the costs
associated with operating a mutual fund, such as buying,
selling, and holding securities.
-------------------------------------------------------
PERFORMANCE
The following bar chart and table can help you evaluate the potential risks
of investing in the Portfolio. Both the bar chart and the table show the
variability the Portfolio has experienced in its performance in the past. THE
PAST PERFORMANCE OF THE PORTFOLIO DOES NOT INDICATE HOW IT WILL PERFORM IN
THE FUTURE AND IS INTENDED TO BE USED FOR PURPOSES OF COMPARISON ONLY.
In the bar chart below we compare the returns of the Class I shares to the
performance of the S&P 500 Index for the past five calendar years. The
performance of the Class I shares shown in the bar chart reflects the
expenses associated with those shares.
- -------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURN (CLASS I)
Chart
<TABLE>
<S> <C>
12/31/94 5.27%
12/31/95 29.52%
12/31/96 25.92%
12/31/97 36.16%
12/31/98 22.76%
</TABLE>
Best Quarter (quarter ended December 31, 1998) -- 20.60%
Worst Quarter (quarter ended September 30, 1998) -- (9.33)%
- -------------------------------------------------------------------------------
The following table lists the Portfolio's average year-by-year return by
class over the past one and five, year periods and since the inception of
each class of shares. The table also compares the average annual total
returns of each class of shares of the Portfolio for the periods shown to the
performance of the S&P 500 Index over the same periods of time.
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(for the period ended December 31, 1998)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCEPTION DATE 1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C> <C>
CLASS I 8/2/93 22.76% 23.55% 23.01%
CLASS II 12/20/95 15.32% 21.78% 21.48%
CLASS III 12/9/93 20.49% 22.04% 21.70%
CLASS IV*/ N/A N/A N/A
S&P 500 28.34% 24.02% 23.14%
</TABLE>
*/ Information for the Class IV shares is not included in the table because
the Class has not been in existence for one full calendar year. Once the Class
IV shares have been in existence for one full calendar year, the performance of
the Class IV shares will be included in the table along with the other classes
of shares.
2
<PAGE>
FEES AND EXPENSES OF THE GROWTH & INCOME PORTFOLIO
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS I CLASS II CLASS III CLASS IV
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on purchases None 5.75 None None
as a percentage of offering price
Maximum deferred sales charge (load) (as a
percentage of original purchase price or
redemption proceeds, as applicable) None None 1.00%*/ 5.00%
</TABLE>
*/ Applied to redemptions made during the first year after purchase. No
deferred sales charges are imposed on redemptions after one year from date of
purchase.
SHAREHOLDER FEES are deducted from your investments when you buy or sell
shares of the Portfolio. The Portfolio may waive or reduce sales charges;
please see the section entitled "Class II -- Public Offering Price" later in
this Prospectus and the SAI.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES
<S> <C> <C> <C> <C>
(FOR THE YEAR ENDED JUNE 30, 1998.) CLASS I CLASS II CLASS III CLASS IV
- -------------------------------------------------- --------- ---------- ---------- ---------
- -------------------------------------------------- --------- ---------- ---------- ---------
Management Fees**/ .65% .65% .65% .65%
- -------------------------------------------------- --------- ---------- ---------- ---------
- -------------------------------------------------- --------- ---------- ---------- ---------
12b-1 Fees .00% .00% .75% 1.00%
- -------------------------------------------------- --------- ---------- ---------- ---------
- -------------------------------------------------- --------- ---------- ---------- ---------
Other Expenses .28% .63% .62% .37% ***/
---- ---- ---- ---- ---
- -------------------------------------------------- --------- ---------- ---------- ---------
- -------------------------------------------------- --------- ---------- ---------- ---------
Total Portfolio Operating Expenses .93% 1.28% 2.02% 2.02%
--------- ---------- ---------- ---------
</TABLE>
**/ First Tennessee, as Investment Adviser, has voluntarily agreed to
waive the portion of the investment management fee that exceeds .50% of the
Portfolio's average net assets.
***/ Because the Class IV shares have not been in existence for a full
year, this amount is estimated.
ANNUAL PORTFOLIO OPERATING EXPENSES are deducted from the Portfolio's assets
before its pays dividends and before its net asset value and total return is
calculated. We do not charge you separately for these expenses.
EXAMPLES -- The following examples are intended to help you compare the cost of
investing in the Portfolio to the cost of investing in other mutual funds with
similar investment objectives. The two examples show the cumulative amount of
Portfolio expenses you would pay on a hypothetical investment of $10,000 in each
class of shares offered by the Portfolio. Both examples assume a 5% average
annual return and that you reinvest all of your dividends. Your actual costs may
be higher or lower.
<TABLE>
<CAPTION>
ASSUMING REDEMPTION ASSUMING NO
AT END OF PERIOD REDEMPTION
<S> <C> <C> <C> <C> <C> <C>
- ----------------------- ---------- ---------- ----------- ------------- ---------------- ---------------
- ----------------------- ---------- ---------- ----------- ------------- ---------------- ---------------
CLASS I CLASS II CLASS III CLASS IV*/ CLASS III CLASS IV*/
- ----------------------- ---------- ---------- ----------- ------------- ---------------- ---------------
- ----------------------- ---------- ---------- ----------- ------------- ---------------- ---------------
After 1 year 95 698 305 705 205 205
- ----------------------- ---------- ---------- ----------- ------------- ---------------- ---------------
- ----------------------- ---------- ---------- ----------- ------------- ---------------- ---------------
After 3 years 296 957 633 933 633 633
- ----------------------- ---------- ---------- ----------- ------------- ---------------- ---------------
- ----------------------- ---------- ---------- ----------- ------------- ---------------- ---------------
After 5 years 514 1,237 1,087 1,287 1,087 1,087
- ----------------------- ---------- ---------- ----------- ------------- ---------------- ---------------
- ----------------------- ---------- ---------- ----------- ------------- ---------------- ---------------
After 10 years 1,142 2,030 2,345 2,155 2,345 2,155
- ----------------------- ---------- ---------- ----------- ------------- ---------------- ---------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
*/ The Class IV example reflects the conversion of Class IV shares
to Class II shares after eight years from the date of purchase of the Class IV
shares.
3
<PAGE>
HOW WE MANAGE THE GROWTH & INCOME PORTFOLIO
OUR INVESTMENT STRATEGY -- In selecting investments for the Portfolio,
Highland analyzes the fundamentals of individual companies. Fundamental
analysis considers a company's essential soundness and future prospects, as
well as overall industry outlook. Highland believes that companies with
superior financial characteristics bought at attractive valuation levels,
have produced superior results over time. To find such characteristics,
Highland's analysts search for companies producing consistent earnings and
growth over a full market cycle. The portfolio managers, in turn, use this
research to select stocks for purchase or sale by the Portfolio.
PRINCIPAL INVESTMENTS -- The following table describes the securities in
which the Portfolio typically invests and the principal risks associated with
those securities.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
SECURITIES PRINCIPAL RISKS ASSOCIATED
WITH THE SECURITY
- ----------------------------------------------------------- -----------------------------------------------------
<S> <C>
COMMON STOCKS: Securities that represent shares of MARKET RISK -- The risk that the market value of a
ownership in a corporation. Stockholders participate security may increase or decrease, sometimes rapidly
in the corporation's profits and losses, proportionate to and unpredictably. This risk is common to all
the number of shares they own. stocks and bonds and the mutual funds that invest in
them.
VALUATION RISK -- The risk that the Portfolio has
valued certain securities at a higher price than it
than it can sell them for. This risk is common where
the security is from a relatively new issuer with
little or no previous market history and a mutual
fund's management is called upon to assign a value
to the security.
- ----------------------------------------------------------- -----------------------------------------------------
AMERICAN DEPOSITARY RECEIPTS: Certificates issued by a FOREIGN RISK -- The risk that foreign securities may
U.S. bank which represent a stated number of shares of a be adversely affected by political instability of the
foreign corporation that the bank holds in its vault. An issuer's country, changes in currency exchange rates,
ADR entitles the holder to all dividends and capital foreign economic conditions, or regulatory and
gains earned by the underlying foreign shares. While reporting standards that are less stringent than
ADRs represent a stated number of shares of a foreign those of the United States.
corporation, ADRs are traded on domestic securities
exchanges.
MARKET RISK VALUATION RISK
- ----------------------------------------------------------- -----------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
SECURITIES PRINCIPAL RISKS ASSOCIATED
WITH THE SECURITY
- ----------------------------------------------------------- -----------------------------------------------------
<S> <C>
CONVERTIBLE SECURITIES: Convertible securities are CREDIT RISK -- The risk that the issuer of a
preferred stock or debt obligations that are convertible security, or a party to a contract, will default or
into common stock. Convertible securities have both otherwise not honor a financial obligation.
equity and debt or fixed-income risk characteristics.
INTEREST RATE RISK -- The risk of a decline in market
value of an interest bearing instrument due to
changes in interest rates. For example, a rise in
interest rates typically will cause the value of a
fixed rate security to fall. On the other hand,
a decrease in interest rates will cause the value
MARKET RISK
- ----------------------------------------------------------- -----------------------------------------------------
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS: CREDIT RISK
An agreement between a buyer and seller of securities in
which the seller agrees to buy the securities back within
a specified period of time at the same price the buyer
paid for them, plus an amount equal to an agreed upon
interest rate.
- ----------------------------------------------------------- -----------------------------------------------------
</TABLE>
In addition to the securities identified above, the Portfolio may, from time
to time, engage in the following investment practices or techniques:
BORROWING FROM BANKS. The Portfolio may borrow money from banks (up to 33 1/3%
of the Portfolio's total assets) for temporary or emergency purposes.
--------------------------------
WHAT IS A DERIVATIVE INSTRUMENT?
A derivative is a financial
contract whose value is based
on (or "derived" from) a
traditional security (such as
a stock or bond), an asset
(such as a commodity like
gold), or a market index (such
as the S&P 500 Index). Futures
and options are derivatives
that have been traded on
regulated exchanges for more
than two decades.
DERIVATIVE INSTRUMENTS. The Portfolio may invest in instruments and
securities generally known as derivative investments for hedging purposes
only. These investments may include the use of forward currency contracts,
put and call option contracts, zero coupon bonds, and stripped fixed-income
obligations.
Highland may not buy any of these instruments or use any 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 a small amount of
cash relative to the magnitude of the risk assumed. This is called leverage.
They also may result in a loss of principal if Highland judges market
conditions incorrectly or employs a strategy that does not correlate well
with the investment strategy of the Portfolio. 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.
LENDING SECURITIES. The Portfolio may temporarily lend up to 33 1/3% of its
portfolio securities to broker-dealers and institutions, but only when the
loans are fully collateralized.
TEMPORARY DEFENSIVE POSITION. In response to adverse economic or market
conditions, the Portfolio may invest without limit in short-term money market
securities including, but not limited to, U.S. government obligations,
commercial paper, and certificates of deposit. This strategy is inconsistent
with the investment objective and
5
<PAGE>
principal investment strategies of the Portfolio, and if employed, could
result in the Portfolio achieving a lower return than it might have achieved
under normal market conditions.
For more information about the securities in which the Portfolio invests,
please refer to the Appendix to this Prospectus and the SAI.
EURO CONVERSION. On January 1, 1999, certain participating countries in the
European Economic Monetary Union adopted the "Euro" as their official
currency. Other EU member countries may convert to the Euro at a later date.
As of January 1, 1999, governments in participating countries issued new debt
and redenominated existing debt in Euros; corporations may choose to issue
stocks or bonds in Euros or national currency. The new European Central Bank
(the "ECB") has assumed responsibility for a uniform monetary policy in
participating countries. Euro conversion risks that could affect the
Portfolio's foreign investments include: (1) the readiness of Euro payment,
clearing, and other operational systems; (2) the legal treatment of debt
instruments and financial contracts in existing national currencies rather
than the Euro; (3) exchange-rate fluctuations between the Euro and non-Euro
currencies during the transition period of January 1, 1999 through December
31, 2001 and beyond; (4) potential U.S. tax issues with respect to Fund
securities; and (5) the ECB's abilities to manage monetary policies among the
participating countries.
PREPARING FOR THE YEAR 2000
This Year 2000 information constitutes a YEAR 2000 READINESS DISCLOSURE under
the Federal Year 2000 Information and Readiness Disclosure Act of 1998.
The Portfolio, as with other financial and business organizations in the
United States and around the world, could be adversely affected if computer
systems used by the Portfolio's service providers, including its investment
advisers, fail to correctly interpret and process date information concerning
dates occurring on and after January 1, 2000. In addition, corporate and
governmental data processing errors may result in production problems for
individual companies and overall economic uncertainties.
Earnings of individual issuers may be affected by remediation costs. Also, it
has been reported that foreign institutions have made less progress in
addressing the Year 2000 problem than major U.S. entities, which could make
certain investments of the Portfolio more sensitive to these risks. The
Portfolio's service providers, including First Tennessee and Highland, have
taken and continue to take steps to address this issue. If the Portfolio or
the Investment Advisers or any of the Portfolio's service providers are
unsuccessful in their attempts, shareholders could experience certain
disruptions in the services provided to them by the Portfolio. For example,
shareholders may be unable to redeem shares or the Portfolio may be unable to
compute its net asset value. The Portfolio, the Adviser, and Highland
anticipate that testing of their computer systems will be completed by Fall
1999. However, there can be no assurance that the Portfolio will be
successful and that shareholders will not experience any disruptions.
WHO MANAGES THE GROWTH & INCOME 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, 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 Portfolios assets in accordance with
the investment policies and objectives of the Portfolio.
First Tennessee 530 Oak Court Dr., Memphis, Tennessee, serves as the
investment adviser to the Portfolio. For managing its investment and business
affairs, the Portfolio is obligated to pay First Tennessee a monthly
management fee at the annual rate of .65% of its average net assets. First
Tennessee has voluntarily agreed to limit its advisory fees to .50% of the
Portfolio's average net assets.
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. In the event
one or more sub-advisers is appointed by First Tennessee, First Tennessee
shall
6
<PAGE>
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 serves as an investment adviser to individual, corporate and
institutional advisory clients, pension plans and collective investment
funds, with approximately $16 billion in assets under administration
(including nondiscretionary accounts) and $4 billion in assets under
management as of June 30, 1998, as well as experience in supervising
sub-advisers.
Highland, 6077 Primacy Parkway, Memphis, TN, 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
$4.3 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 fee for the Portfolio.
PORTFOLIO MANAGERS
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 Masters degree in 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 a
Chartered Financial Analyst. Mr. Thompson is a graduate of the University of
Mississippi and received a Masters degree in of Business Administration from
the University of North Carolina.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING PLANS
The Trustees have adopted a plan of distribution pursuant to Rule 12b-1 under
the 1940 Act for both the Class III and Class IV shares of the Portfolio
(each a "Distribution Plan" and together the "Distribution Plans"). Both
Distribution Plans permit the use of Portfolio assets to compensate ALPS for
its services and costs in distributing Class III and Class IV shares and
servicing shareholder accounts.
Under the Distribution Plans, ALPS receives an amount equal to .75% of the
average net assets of the Portfolio that are attributable to Class III shares
and an amount equal to 1.00% of the average net assets of the Portfolio that
are attributable to Class IV shares. All or a portion of the fees paid to
ALPS under the Distribution Plans will, in turn, be paid to certain
broker-dealers, investment advisers, and other third parties (each an
"Investment Professional" and collectively the "Investment Professionals") as
compensation for selling Class III and IV shares and for providing ongoing
sales support services.
The Trustees also have adopted Shareholder Servicing Plans on behalf of the
Class II, III, and IV shares of the Portfolio. Under the Shareholder
Servicing Plans, certain broker-dealers, banks, and other financial
institutions (collectively the "Service Organizations") an amount equal to
.25% of the average net assets of the Portfolio that are attributable to each
Class of shares as compensation for shareholder services and account
maintenance. These services include responding to shareholder inquiries,
directing shareholder communications, account balance maintenance, and
dividend posting.
Because the fees paid under the Distribution and the Shareholder Servicing
Plans are paid out of Portfolio assets on an on-going basis, over time these
fees will increase the cost of your investment and may cost you more than
other types of sales charges.
7
<PAGE>
HOW TO INVEST IN THE GROWTH & INCOME PORTFOLIO
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 Boston Financial Data
Services ( the "Transfer Agent"). If an order is received by the Transfer
Agent prior to 4:00 p.m. Eastern Time on any Business Day (as defined in the
section "How Are Portfolio Shares Valued?") and the funds are received by the
Transfer Agent 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 the
Transfer Agent. 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 the Transfer Agent 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 the Portfolio, without notice to shareholders.
- --------------------------------------------------------------------------------
WHAT CLASSES OF SHARES DOES THE GROWTH & INCOME PORTFOLIO OFFER?
- --------------------------------------------------------------------------------
The Portfolio offers investors four different classes of shares. The different
classes of shares represent investments in the same portfolio of securities;
however, each class is subject to different expenses and likely will have
different share prices. When you buy shares, be sure to tell us the class of
shares that you would like to invest in.
CLASS I SHARES. Class I shares are offered to institutional investors
exclusively. Class I shares are not subject to any sales loads and do not incur
distribution or shareholder servicing fees. The sales load may be waived under
certain circumstances.
CLASS II SHARES. Class II shares are offered to investors subject to an
up-front sales load. Under certain circumstances, the sales load may be
waived. The sales load is reflected in the offering price of the Class II
shares. Class II shares also incur shareholder servicing fees.
CLASS III SHARES. Class III shares are offered to investors without the
imposition of any up-front sales load; however, you will pay a contingent
deferred sales charge ("CDSC") of 1.00% if you redeem the shares within one
year from the date of purchase. The Class III shares also incur distribution
and shareholder servicing fees.
CLASS IV SHARES. Class IV shares are offered to investors without the
imposition of any up-front sales load; however, Class IV shares are subject
to a CDSC of up to 5.00%. The CDSC is phased out over a period of six years.
After six years from the date of purchase, Class IV shares automatically
convert to Class II shares. Class IV shares also incur distribution and
shareholder servicing fees.
- -------------------------------------------------------------------------------
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
8
<PAGE>
notified if the minimum balance is not being maintained and will be allowed
30 days to make additional investments before the 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 made 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
the Transfer Agent 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 the Transfer Agent. Please call
1-800-442-1941 (option 2), to advise the Transfer Agent 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 the Transfer Agent.
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 the Transfer Agent at 73 Tremont Street, Boston,
Massachusetts, 02108.
Pursuant to the Investment Company Act of 1940, as amended, 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 the Transfer Agent.
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 the Transfer Agent 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
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<PAGE>
Institutional Investor does not want to be able to initiate redemptions and
exchanges by telephone, please call the Transfer Agent for instructions.
CLASS II, III, AND IV
WHO MAY INVEST?
Class II, III, and IV 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 "Fees and Expenses."
INVESTMENT REQUIREMENTS
The minimum initial investment in Class II, III, and IV 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 re-establish 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 them 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 the Transfer Agent 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 the
Transfer Agent before 4:00 p.m. Eastern Time in order for you to receive that
day's share price. The Transfer Agent 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 the Transfer Agent 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 First Funds, c/o Boston Financial, P.O. Box 8050,
Boston, MA 02266-8050. Telephone representatives are available at
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<PAGE>
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 the
Transfer Agent 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 the Transfer Agent. 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:
State Street Bank and Trust Company
ABA #011000028
First Funds
Account #9905-440-5
(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 next calculated NAV
after the Transfer Agent 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.
11
<PAGE>
BY PHONE: Provided you have elected this option in advance, you may request a
redemption of Portfolio shares by calling the Transfer Agent at
1-800-442-1941 (option 2). Your redemption proceeds can be sent to you in the
mail or, as more fully described below, the proceeds can be sent directly to
a bank account you designate by bank transfer or wire. For your protection,
all telephone calls are recorded. Also, neither First Funds, First Tennessee,
IAI, nor the Transfer Agent or any of their agents will be responsible for
acting on telephone instructions they believe are genuine. For more
information about telephone redemptions, please call 1-800-442-1941 (option
2).
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 the Transfer Agent 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 the Transfer Agent. 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 First Funds.
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 the Transfer Agent by telephone (for example,
during times of unusual market activity), consider placing your order by mail
directly to the Transfer Agent. 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 next determined NAV 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 regular
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 the Transfer Agent at
1-800-442-1941 (option 2), or your Investment Professional at least three
Business Days prior to your next scheduled investment date.
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<PAGE>
SYSTEMATIC WITHDRAWAL PLAN
You can have monthly, quarterly or semi-annual checks sent from your account
to you, to a person named by you, or to your bank checking account. Your
Systematic Withdrawal Plan payments are drawn from share redemptions and must
be in the amount of $100 or more per Portfolio per month. If Systematic
Withdrawal Plan redemptions exceed income dividends earned on your shares,
your account eventually may be exhausted. Please contact 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. The Transfer Agent 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) Roth IRA's, Education IRAs, Rollover IRAs, Keogh Plans, and Simplified
Employee Pension Plans (SEP-IRAs).
CLASS II
SALES LOADS
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 a
broker-dealer which has entered into an agreement with ALPS, the Portfolio's
Distributor. You may calculate your sales load as follows:
TOTAL SALES LOAD FOR CLASS II SHARES
<TABLE>
<CAPTION>
AS A % OF OFFERING REALLOWANCE TO
AMOUNT OF TRANSACTION PRICE PER SHARE AS A % OF NAV BROKER-DEALER
<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 ALPS may be changed from time to time. ALPS, at its
expense, may provide additional non-cash promotional incentives to eligible
representatives of Broker-Dealers in the form of attendance at a sales
seminar at a resort. These incentives may be limited to certain eligible
representatives of Broker-Dealers 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(k) Plan, 403(b) 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
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<PAGE>
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 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 toward 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, 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 First Funds at 1-800-442-1941
(option 1).
RIGHT OF ACCUMULATION. The sales charge schedule under the heading "Sales
Loads" 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
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<PAGE>
Class II shares which you already own on which you have paid a sales load. If
you are a participant in a First Funds IRA or if you are a trustee or
custodian of another type of First Funds retirement plan, you may also credit
towards completion of your Letter of Intent any Class II shares held through
the IRA or in the plan, even if a load was not paid. Each investment you make
during the period may be made at the reduced sales charge that would apply to
the total amount you intend to invest. The reduced sales load applies only to
new purchases.
If you do not invest the total amount within the period, you may pay the
difference between the higher sales charge rate that would have been applied
to the purchases you made and the reduced sales charge rate you have paid.
Shares of the Portfolio equal to 5% of the amount you intend to invest will
be held in escrow and, if you do not pay the difference within 20 days
following the mailing of a request, the Transfer Agent will redeem a
sufficient amount of your escrowed shares to pay the additional sales charge.
After the terms of your Letter of Intent are fulfilled, the Transfer Agent
will release your escrowed shares.
If your purchases qualify for a further sales load reduction in addition to
that indicated in the Letter of Intent, the sales load will be adjusted to
reflect your total purchases. Signing a Letter of Intent does not bind you to
purchase the full amount indicated at the sales load in effect at the time of
signing, but you must complete the intended purchase to obtain the reduced
sales load. To apply, sign the Letter of Intent form at the time you purchase
Class II shares. You will be entitled to the applicable sales load that is in
effect at the date you submit the Letter of Intent until you complete your
intended purchase.
QUALIFICATION OF DISCOUNTS. As shown in the schedule of Class II sales
charges, larger purchases may result in lower sales charges to you. For
purposes of determining the amount of purchases using the Right of
Accumulation and Letter of Intent privileges, you may combine your purchase
with:
- purchases by your spouse or his, her or your joint account or for the
account of any minor children, and
- the aggregate investment of any trustee or other Institutional Investor
for you and/or your spouse or your minor children.
A trustee or custodian of any qualified pension or profit sharing plan may
combine its aggregate purchases.
OTHER. Class II shares also incur Shareholder Servicing Fees. See
discussion under "Distribution Plans and Shareholder Servicing Plans."
CLASS III
Class III shares are bought with no front-end load. Therefore, the offering
price for such shares will be at their NAV. Class III shares incur
Distribution Fees and Shareholder Servicing Fees. See discussion under
"Distribution Plans and Shareholder Servicing Plans."
DEFERRED SALES CHARGES. A contingent deferred sales charge (CDSC) of 1.00% is
imposed on redemptions of Class III shares within the first year after
purchase, based on the lower of the shares' cost and the current net asset
value. Any shares acquired by reinvestment of distributions will be redeemed
without a CDSC. In addition, any shares purchased not established prior to
November 2, 1998 are not subject to the CDSC.
CLASS IV
Class IV shares are bought with no front-end load. Therefore, the offering
price for such shares will be at the NAV. Class IV shares incur Distribution
Fees and Shareholder Servicing Fees. See discussion under "Distribution Plans
and Shareholder Servicing Plans."
DEFERRED SALES CHARGES. A CDSC of up to 5.00% is imposed on redemptions of
Class IV shares. As shown in the table below, the CDSC associated with the
Class IV shares is phased out over a period of six years. Any shares acquired
by reinvestment of dividends will be redeemed without the imposition of any
CDSC.
15
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------
Year
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
5% 4% 3% 3% 2% 1%
-----------------------------------------------------
</TABLE>
AUTOMATIC CONVERSION. After eight years from the date of purchase, Class IV
shares will automatically convert to Class II shares. For more information
about the Class II shares please refer to the information above.
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.
DISTRIBUTION OPTIONS: The Portfolio may earn dividends from its stocks and
interest from bond, money market, and other fixed-income investments. These
are passed along as dividend distributions. Income dividends for the
Portfolio are declared and paid monthly. 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.
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 within the Fund Family. Not all of the Portfolios
in the Fund Family may be available in your state. Please check with your
Investment Professional or call First Funds at 1-800-442-1941. 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 NAV next determined after the exchange request is received and
accepted by the Transfer Agent. You may execute exchange transactions by
calling the Transfer Agent 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
Highland 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
16
<PAGE>
purchases by exchange if, in Highland'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 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.
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 quarterly.
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. A portion of the Portfolio's
dividends may qualify for the dividends-received deduction for corporations.
When paid, dividends are taxable, 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 deemed 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 by 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.
17
<PAGE>
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.
FINANCIAL HIGHLIGHTS
The Financial Highlights Table is presented to help you understand the
Portfolio's financial performance for the past five years. All "per share"
information reflects financial results for a single Portfolio share. This
information has been audited by Pricewaterhouse Coopers LLP, whose report,
along with the Portfolio's financial statements, is included in the
Portfolio's annual report, which is available upon request by calling First
Funds at 1-800-442-1941 (option 1).
GROWTH & INCOME PORTFOLIO
<TABLE>
<CAPTION>
CLASS I
For the Six Months For the Year
Ended December 31, (Unaudited) Ended June 30,
1998 1998 1997 1996 1995 1994**
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $21.56 $17.03 $14.12 $12.22 $10.53 $10.00
------------------------------------------------------------------
Income from investment operations:
Net investment income 0.07 0.17 0.18 0.19 0.23 0.17
Net realized and unrealized gain on investments 1.94 5.25 3.75 2.58 2.21 0.57
------------------------------------------------------------------
Total from investment operations 2.01 5.42 3.93 2.77 2.44 0.74
------------------------------------------------------------------
Distributions:
Net investment income (0.07) (0.17) (0.18) (0.19) (0.23) (0.17)
Net realized gain (0.61) (0.72) (0.84) (0.68) (0.52) (0.04)
------------------------------------------------------------------
Total distributions (0.68) (0.89) (1.02) (0.87) (0.75) (0.21)
------------------------------------------------------------------
Net asset value, end of period $22.89 $21.56 $17.03 $14.12 $12.22 $10.53
------------------------------------------------------------------
------------------------------------------------------------------
TOTAL RETURN+ 9.34%# 32.55% 28.83% 23.54% 24.20% 7.39%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $689,148 $651,363 $221,136 $159,146 $114,000 $82,751
Ratio of expenses to average daily net assets(1) 0.80%* 0.82% 0.83% 0.76% 0.47% 0.34%*
Ratio of net investment income to average net assets 0.63%* 0.78% 1.19% 1.40% 2.12% 1.83%*
Portfolio turnover rate 22%* 7% 25% 41% 33% 83%*
(1) During the period, various fees were waived.
The ratio of expenses to average net assets
had such waivers not occurred is as follows. 0.95%* 0.97% 0.98% 1.00% 0.99% 1.05%*
</TABLE>
* Annualized.
** Classes I commenced operations on August 2, 1993.
+ Total return would have been lower had various fees not been waived
during the period.
# Total return for periods of less than one year are not annualized.
18
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
GROWTH & INCOME PORTFOLIO
<TABLE>
<CAPTION>
CLASS II
For the Six Months For the Year
Ended December 31, (Unaudited) Ended June 30,
1998 1998 1997 1996**
---- ---- ---- ----
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $21.58 $17.05 $14.12 $13.05
----------------------------------------------------
Income from investment operations:
Net investment income 0.03 0.10 0.13 0.09
Net realized and unrealized gain on investments 1.95 5.27 3.76 1.74
----------------------------------------------------
Total from investment operations 1.98 5.37 3.89 1.83
----------------------------------------------------
Distributions:
Net investment income (0.03) (0.12) (0.12) (0.08)
Net realized gain (0.61) (0.72) (0.84) (0.68)
----------------------------------------------------
Total distributions (0.64) (0.84) (0.96) (0.76)
----------------------------------------------------
Net asset value, end of period $22.92 $21.58 $17.05 $14.12
----------------------------------------------------
----------------------------------------------------
TOTAL RETURN+*** 9.18%# 32.17% 28.48% 14.71%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $61,858 $46,863 $16,514 $1,918
Ratio of expenses to average daily net assets(1) 1.10%* 1.13% 1.14% 1.06%*
Ratio of net investment income to average net assets 0.33%* 0.47% 0.88% 1.10%*
Portfolio turnover rate 22%* 7% 25% 41%
(1) During the period, various fees were waived.
The ratio of expenses to average net assets
had such waivers not occurred is as follows. 1.24%* 1.28% 1.29% 1.30%*
</TABLE>
<TABLE>
<CAPTION>
CLASS III
For the Six Months For the Year
Ended December 31, (Unaudited) Ended June 30,
1998 1998 1997 1996 1995 1994**
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $21.47 $16.99 $14.11 $12.23 $10.51 $10.60
------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.05) (0.04) 0.02 0.03 0.06 0.06
Net realized and unrealized gain (loss) on investments 1.93 5.24 3.74 2.60 2.24 (0.05)
------------------------------------------------------------------
Total from investment operations 1.88 5.20 3.76 2.63 2.30 0.01
------------------------------------------------------------------
------------------------------------------------------------------
Distributions:
Net investment income - - (0.04) (0.07) (0.06) (0.06)
Net realized gain (0.61) (0.72) (0.84) (0.68) (0.52) (0.04)
------------------------------------------------------------------
Total distributions (0.61) (0.72) (0.88) (0.75) (0.58) (0.10)
------------------------------------------------------------------
Net asset value, end of period $22.74 $21.47 $16.99 $14.11 $12.23 $10.51
------------------------------------------------------------------
------------------------------------------------------------------
TOTAL RETURN+ 8.76%# 31.16% 27.44% 22.19% 22.61% 0.08%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $84,282 $79,360 $50,178 $36,892 $19,363 $2,094
Ratio of expenses to average daily net assets(1) 1.86%* 1.87% 1.94% 1.87% 1.72% 1.83%*
Ratio of net investment income to average net assets (0.43)%* (0.28)% 0.08% 0.29% 0.87% 0.34%*
Portfolio turnover rate 22%* 7% 25% 41% 33% 83%*
(1) During the period, various fees were waived.
The ratio of expenses to average net assets
had such waivers not occurred is as follows. 2.00%* 2.02% 2.09% 2.11% 2.26% 6.03%*
</TABLE>
* Annualized.
** Class II and III commenced operations on and December 20, 1995 and December
9, 1993, respectively.
*** Class II total return does not include the one time front-end sales charge.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.
A-1
<PAGE>
APPENDIX
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO'S INVESTMENTS
The following information provides a brief description of the securities in
which the Portfolio may invest and the transactions it may take. 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.
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
arc 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 excepts 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 Trustees, Highland
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-
A-2
<PAGE>
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. 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.
U.S. GOVERNMENT OBLIGATIONS. 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. 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. 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
A-3
<PAGE>
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.
A-4
<PAGE>
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO
- --------------------------------------------------------------------------------
If you would like more information about the Portfolio, the following documents
are available free upon request.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains additional information about all aspects of the Portfolio. A
current SAI has been filed with the Securities and Exchange Commission (the
"SEC") and is incorporated herein by reference. For a copy of the SAI, write
or call the Portfolio at the address or phone number listed below.
Information about the Portfolio (including the SAI) also may be reviewed and
copied, upon payment of a duplicating fee, at the SEC's Public Reference Room
in Washington, D.C. You also can obtain this information, upon payment of a
duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009.
The SEC also maintains a Web site located at http://www.sec.gov that contains
the SAI, material incorporated herein by reference, and other information
regarding the Portfolio. For more information about the operation of the
Public Reference Room, please call the SEC at 1-800-SEC-0330.
ANNUAL AND SEMI-ANNUAL REPORTS
The Portfolio's annual and semi-annual reports provide additional information
about the Portfolio's investments. The annual report contains a discussion of
the market conditions and investment strategies that significantly affected
the Portfolio's performance during the last fiscal year.
---------------------------------------
---------------------------------------
TO OBTAIN THE SAI OR THE MOST RECENT
ANNUAL OR SEMI-ANNUAL REPORT FOR THE
PORTFOLIO YOU MAY WRITE TO FIRST FUNDS
AT 370 17TH STREET, SUITE 3100,
DENVER, COLORADO 80202 OR CALL FIRST
FUNDS AT 1-800-442-1941 (OPTION 1).
---------------------------------------
---------------------------------------
Investment Company Act File No. 811-
<PAGE>
PROSPECTUS
Dated , 1999
FIRST FUNDS
CAPITAL APPRECIATION PORTFOLIO
[FIRST FUNDS LOGO]
CLASS I
CLASS II
CLASS III
CLASS IV
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy of this prospectus. Any representation
to the contrary is a criminal offense.
<PAGE>
CAPITAL APPRECIATION PORTFOLIO
INVESTMENT OBJECTIVE -- The objective of the Capital Appreciation Portfolio
(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).
PRINCIPAL INVESTMENT STRATEGIES -- Under normal market conditions, IAI
currently intend 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. The Portfolio also may invest in preferred
stock, bonds and debentures convertible into common stock of U.S. based
companies of all sizes, industries, and geographical markets. The Portfolio
may also invest in securities of foreign issuers.
PRIMARY RISKS -- Your investment in the Portfolio is subject to many risks,
including:
- - Market Risk - Interest Rate Risk
- - Credit Risk - Small Company Stock Risk
- - Foreign Investment Risk
For more information about the risk factors identified above, please refer to
the section entitled "Principal Investments" later in this prospectus. The
Statement of Additional Information ("SAI") contains additional information
about the risks associated with investing in the Portfolio.
- ------------------------------------------------------------------------
FUND FACTS
- ------------------------------------------------------------------------
Goal: Seek long-term capital appreciation.
Principal Investments:
- - Common Stocks
- - Small Company Stocks
Classes of Shares Offered in this Prospectus:
- - Class I
- - Class II
- - Class III
- - Class IV
Co-Investment Adviser:
- - First Tennessee Bank National Association ("First Tennessee")
Co-Investment Adviser:
- - Investment Advisers, Inc. ("IAI")
Portfolio Manager:
- - Martin Calihan
Distributor:
- - ALPS Mutual Funds Services, Inc. ("ALPS")
- ------------------------------------------------------------------------
THE VALUE OF THE PORTFOLIO'S SHARES, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE
WITHIN A WIDE RANGE. AN INVESTOR IN THE PORTFOLIO COULD LOSE MONEY OVER SHORT OR
EVEN LONG PERIODS OF TIME.
PLEASE REMEMBER THAT THERE IS NO GUARANTEE THAT THE PORTFOLIO WILL ACHIEVE ITS
INVESTMENT OBJECTIVE. AN INVESTMENT IN THE PORTFOLIO IS NOT INSURED, ENDORSED,
OR GUARANTEED BY THE FDIC, A BANK OR ANY GOVERNMENT AGENCY.
SHOULD I INVEST IN THE CAPITAL APPRECIATION PORTFOLIO?
The Portfolio may be appropriate for you if:
- - You can tolerate the price fluctuations and volatility that are inherent in
investing in a stock mutual fund that invests in small and medium-
capitalization companies.
- - You are seeking long-term capital appreciation in your investment.
- - You wish to add an aggressive growth oriented stock fund to your existing
investment portfolio. (REMEMBER, NO SINGLE INVESTMENT CAN PROVIDE AN
EFFECTIVE, BALANCED INVESTMENT PLAN.)
- - You are not seeking current income or the preservation of capital.
1
<PAGE>
PERFORMANCE
The following bar chart and table can help you evaluate the potential risks of
investing in the Portfolio. Both the bar chart and the table show the
variability the Portfolio has experienced in its performance in the past. THE
PAST PERFORMANCE OF THE PORTFOLIO DOES NOT INDICATE HOW IT WILL PERFORM IN THE
FUTURE AND IS INTENDED TO BE USED FOR PURPOSES OF COMPARISON ONLY.
In the bar chart below we compare the returns of the Class I shares to the
performance of the Russell 2500 TM Growth Index for the past year (the first
full calendar year that the Class I shares have been in existence). The
performance of the Class I shares shown in the bar chart reflects the expenses
associated with those shares.
- -------------------------------------------------------------------------------
WHAT IS THE RUSSELL 2500-TM- GROWTH INDEX?
The Russell 2500TM Growth Index measures the performance of those Russell 2500
costs associated with operating a mutual fund, such as buying, selling, and
holding securities.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURN (CLASS I)
Chart
12/31/97 1.59%
Best Quarter (quarter ended December 31, 1998 -- 23.40%
Worst Quarter (quarter ended September 30, 1998 -- (24.12)%
- -------------------------------------------------------------------------------
The following table lists the Portfolio's average year-by-year return by class
over the past one year period and since the inception of each class of shares.
The table also compares the average annual total returns of each class of shares
of the Portfolio for the periods shown to the performance of the Russell 2500 TM
Growth Index over the same periods of time.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(for the period ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Inception Date 1 year 5 year 10 year Since Inception
<S> <C> <C> <C> <C> <C>
Class I 9/2/97 1.69% N/A N/A 0.68%
Class II 10/2/97 (4.41)% N/A N/A (8.22)%
Class III 10/2/97 (0.52)% N/A N/A (4.61)%
Class IV*/
Russell 2500-TM-
Growth 3.39% N/A N/A 1.37%
</TABLE>
*/ Information for the Class IV shares is not included in the table because
the Class has not been in existence for one full calendar year. Once the
Class IV shares have been in existence for one full calendar year, the
performance of the Class IV shares will be included in the table along with
the other classes of shares.
2
<PAGE>
FEES AND EXPENSES OF THE CAPITAL APPRECIATION PORTFOLIO
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS I CLASS II CLASS III CLASS IV
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases as a percentage of offering price None 5.75% None None
Maximum deferred sales charge (load)
(as a percentage of original purchase price
or redemption proceeds, as applicable) None None 1.00%*/ 5.00%
</TABLE>
*/ Applied to redemptions made during the first year after purchase. No
deferred sales charges are imposed on redemptions after one year from date of
purchase.
SHAREHOLDER FEES are deducted from your investments when you buy or sell shares
of the Portfolio. The Portfolio may waive or reduce sales charges; please see
the section entitled "Class II -- Public Offering Price" later in this
Prospectus and the SAI.
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(For the year ended June 30, 1998.) Class I Class II Class III Class IV
<S> <C> <C> <C> <C>
Management Fees**/ .85% .85% .85% .85%
12b-1 Fees .00% .00% .75% 1.00%
Other Expenses .46% .82% .83% .58%
***/Total Portfolio Operating Expenses 1.31% 1.67% 2.43% 2.43%
</TABLE>
**/ First Tennessee, as Co-Investment Adviser, has voluntarily agreed to
waive its entire investment management fee, which amounts to .15% of the
Portfolio's average net assets.
***/ Because the Class IV shares have not been in existence for a full year,
this amount is estimated.
ANNUAL PORTFOLIO OPERATING EXPENSES are deducted from the Portfolio's assets
before its pays dividends and before its net asset value and total return is
calculated. We do not charge you separately for these expenses.
EXAMPLES
The following examples are intended to help you compare the cost of investing in
the Portfolio to the cost of investing in other mutual funds with similar
investment objectives. The two examples show the cumulative amount of Portfolio
expenses you would pay on a hypothetical investment of $10,000 in each class of
shares offered by the Portfolio. Both examples assume a 5% average annual return
and that you reinvest all of your dividends and distributions. Your actual costs
may be higher or lower.
<TABLE>
<CAPTION>
ASSUMING REDEMPTION ASSUMING NO
AT END OF PERIOD REDEMPTION
CLASS I CLASS II CLASS III CLASS IV*/ CLASS III CLASS IV*/
<S> <C>
After 1 year 133 735 346 746 246 246
After 3 years 415 1,071 757 1,057 757 757
After 5 years 718 1,430 1,295 1,450 1,295 1,295
After 10 years 1,577 2,435 2,762 2,575 2,762 2,575
</TABLE>
*/ The Class IV example reflects the conversion of Class IV shares to Class II
shares after eight years from the date of purchase of the Class IV shares.
3
<PAGE>
HOW WE MANAGE THE CAPITAL APPRECIATION PORTFOLIO
OUR INVESTMENT STRATEGY -- In selecting investments for the Portfolio, IAI
analyze the fundamental values of individual companies as well as particular
industries. In particular, a company is evaluated by visiting management and
through assessing other levels of the company, its competitors, its customers,
and its vendors. Fundamental analysis considers a company's essential soundness
and future prospects, as well as overall industry outlook. The Portfolio also
may invest in foreign securities that IAI believes possess unusual values.
PRINCIPAL INVESTMENTS -- The following table describes the securities in which
the Portfolio typically invests and the principal risks associated with those
securities.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
SECURITIES PRINCIPAL RISKS ASSOCIATED
WITH THE SECURITY
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS: Securities that represent shares of ownership MARKET RISK -- The risk that the market value of a security may
in a corporation. Stockholders participate in the increase or decrease, sometimes rapidly and unpredictably.
corporation's profits and losses, proportionate to the This risk is common to all stocks and bonds and the mutual funds
number of shares they own. that invest in them.
SMALL COMPANY STOCKS: Common stocks issued by companies with LIQUIDITY RISK -- The risk that certain securities or other
smaller market capitalizations. investments may be difficult or impossible to sell at the time the
Portfolio would like to sell them. It may be difficult for the
Portfolio to sell the investment for the value the Portfolio has
placed on it.
MARKET RISK
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SMALL COMPANY STOCK RISK -- Small capitalization stocks involve
greater risk than those associated with larger, more established
companies. Small company stocks may be subject to abrupt or erratic
price movements.
VALUATION RISK -- The risk that the Portfolio has valued certain
securities at a higher price than it can sell them for. This risk
is common where the security is from a relatively new issuer with
little or no previous market history and a mutual fund's management
is called upon to assign a value to the security.
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</TABLE>
4
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<TABLE>
<CAPTION>
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SECURITIES PRINCIPAL RISKS ASSOCIATED
WITH THE SECURITY
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
CONVERTIBLE SECURITIES: Convertible securities are preferred CREDIT RISK -- The risk that the issuer of a security, or a party
stock or debt obligations that are convertible into common to a contract, will default or otherwise not honor a financial
stock. Convertible securities have both equity and debt or obligation.
fixed-income risk characteristics.
INTEREST RATE RISK -- The risk of a decline in market value of an
interest bearing instrument due to changes in interest rates. For
example, a rise in interest rates typically will cause the value of
a fixed rate security to fall. On the other hand, a decrease in
interest rates will cause the value of a fixed rate security
to increase.
MARKET RISK
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SECURITIES OF FOREIGN ISSUERS: Securities issued by: FOREIGN INVESTMENT RISK - The risk that foreign securities may be
(1) Companies organized outside the United States, adversely affected by political instability of the issue's country,
(2) companies whose securities are principally traded outside changes in currency exchange rates, foreign economic conditions, or
of the United States, and (3) foreign governments and agencies regulatory and reporting standards that are less stringent than
or instrumentalities of foreign governments. Securities of those of the United States. Foreign investment risks will normally
foreign issuers includes American Depositary Receipts (ADRs), be greatest when a Fund invests in issuers located in emerging
which are U.S. dollar-denominated securities. countries.
LIQUIDITY RISK
MARKET RISK
VALUATION RISK
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REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS: CREDIT RISK
An agreement between a buyer and seller of securities in
which the seller agrees to buy the securities back within
a specified period of time at the same price the buyer paid
for them, plus an amount equal to an agreed upon interest
rate.
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</TABLE>
In addition to the securities identified above, the Portfolio may, from time
to time, engage in the following investment practices or techniques:
BORROWING FROM BANKS. The Portfolio may borrow money from banks (up to 33 1/3%
of the Portfolio's total assets) for temporary or emergency purposes.
- -------------------------------------------------------------------------------
WHAT IS A DERIVATIVE INSTRUMENT?
A derivative is a financial contract whose value is based on (or "derived"
from) a traditional security (such as a stock or bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 index). Futures
and options are derivatives that have been traded on regulated exchanges for
more than two decades.
- --------------------------------------------------------------------------------
DERIVATIVE INSTRUMENTS. 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 any
of these instruments or use any of these techniques unless they believe 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 a small amount of cash relative
to the magnitude of the risk assumed. This is called leverage. They also may
result in a loss of principal if IAI judges market
5
<PAGE>
conditions incorrectly or employs a strategy that does not correlate well
with the investment strategy of the Portfolio. 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.
LENDING SECURITIES. The Portfolio may temporarily lend up to 33 1/3% of its
portfolio securities to broker-dealers and institutions, but only when the
loans are fully collateralized.
TEMPORARY DEFENSIVE POSITION. In response to adverse economic or market
conditions, the Portfolio may invest without limit in short-term money market
securities including, but not limited to, U.S. government obligations,
commercial paper, and certificates of deposit. This strategy is inconsistent
with the investment objective and principal investment strategies of the
Portfolio, and if employed, could result in the Portfolio achieving a lower
return than it might have achieved under normal market conditions.
For more information about the securities in which the Portfolio invests and
their risks, please refer to the Appendix to this Prospectus and the SAI.
EURO CONVERSION
On January 1, 1999, certain participating countries in the European Economic
Monetary Union adopted the "Euro" as their official currency. Other EU member
countries may convert to the Euro at a later date. As of January 1, 1999,
governments in participating countries issued new debt and redenominated
existing debt in Euros; corporations may choose to issue stocks or bonds in
Euros or national currency. The new European Central Bank (the "ECB") has
assumed responsibility for a uniform monetary policy in participating
countries. Euro conversion risks that could affect the Portfolio's foreign
investments include: (1) the readiness of Euro payment, clearing, and other
operational systems; (2) the legal treatment of debt instruments and
financial contracts in existing national currencies rather than the Euro;
(3) exchange-rate fluctuations between the Euro and non-Euro currencies during
the transition period of January 1, 1999 through December 31, 2001 and
beyond; (4) potential U.S. tax issues with respect to Fund securities; and
(5) the ECB's abilities to manage monetary policies among the participating
countries.
PREPARING FOR THE YEAR 2000
This Year 2000 information constitutes a Year 2000 Readiness Disclosure under
the Federal Year 2000 Information Readiness Disclosure Act of 1998.
The Portfolio, as with other financial and business organizations in the
United States and around the world, could be adversely affected if computer
systems used by the Portfolio's service providers, including its investment
advisers, fail to correctly interpret and process date information concerning
dates occurring on and after January 1, 2000. In addition, corporate and
governmental data processing errors may result in production problems for
individual companies and overall economic uncertainties.
Earnings of individual issuers may be affected by remediation costs. Also, it
has been reported that foreign institutions have made less progress in
addressing the Year 2000 problem than major U.S. entities, which could make
certain investments of the Portfolio more sensitive to these risks. The
Portfolio's service providers, including its investment advisers, have taken
and continue to take steps to address this issue. If the Portfolio or First
Tennessee or IAI or any of the Portfolio's service providers are unsuccessful
in their attempts, shareholders could experience certain disruptions in the
services provided to them by the Portfolio. For example, shareholders may be
unable to redeem shares or the Portfolio may be unable to compute its net
asset value. The Portfolio and First Tennessee and IAI anticipate that
testing of their computer systems will be completed by Fall 1999. However,
there can be no assurance that the Portfolio will be successful and
shareholders will not experience any disruptions.
WHO MANAGES THE CAPITAL APPRECIATION PORTFOLIO?
First Tennessee and IAI serve as Co-Investment Advisers to the Portfolio.
First Tennessee, among other things, provides investment management
evaluations to the Board of Trustees (the "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.
6
<PAGE>
First Tennessee, 530 Oak Court Drive, Memphis, Tennessee, serves as the
investment adviser to the Portfolio. The Portfolio is obligated to pay First
Tennessee a monthly management fee at the annual rate of 0.15% of its average
net assets for the investment advisory services First Tennessee provides.
First Tennessee has voluntarily agreed to waive its entire management fee for
the current fiscal year.
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 serves as an investment adviser to individual, corporate and
institutional advisory clients, pension plans and collective investment
funds, with approximately $16 billion in assets under administration
(including nondiscretionary accounts) and $4 billion in assets under
management as of June 30, 1998, as well as experience in supervising
sub-advisers.
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 of
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, foundations,
religious, educational and charitable institutions, trusts, municipalities
and individuals, having total assets in excess of $7 billion as 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 P.O. Box 357, Minneapolis, Minnesota 55440-0357.
PORTFOLIO MANAGER
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 Company from 1990 to 1991. Mr. Calihan is a Chartered Financial
Analyst and has managed the Portfolio since its inception.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING PLANS
The Trustees have adopted a plan of distribution pursuant to Rule 12b-1 under
the 1940 Act for both the Class III and Class IV shares of the Portfolio
(each a "Distribution Plan" and together the "Distribution Plans"). Both
Distribution Plans permit the use of Portfolio assets to compensate ALPS for
its services and costs in distributing Class III and Class IV shares and
servicing shareholder accounts.
Under the Distribution Plans, ALPS receives an amount equal to .75% of the
average net assets of the Portfolio that are attributable to Class III shares
and an amount equal to 1.00% of the average net assets of the Portfolio that
are attributable to Class IV shares. All or a portion of the fees paid to
ALPS under the Distribution Plans will, in turn, be paid to certain
investment advisers and other third parties (collectively "Investment
Professionals") as compensation for selling Class III and IV shares and for
providing ongoing sales support services.
The Trustees also have adopted Shareholder Servicing Plans on behalf of the
Class II, III, and IV shares of the Portfolio. Under the Shareholder
Servicing Plans, certain broker-dealers, banks, and other financial
institutions (collectively "Service Organizations") receive an amount equal
to .25% of the average net assets of the Portfolio that are attributable to
each Class of shares as compensation for shareholder services and account
maintenance, including responding to shareholder inquiries, directing
shareholder communications, account balance maintenance, and dividend posting.
Because the fees paid under the Distribution and the Shareholder Servicing
Plans are paid out of Portfolio assets on an on-going basis, over time these
fees will increase the cost of your investment and may cost you more than
other types of sales charges.
7
<PAGE>
HOW TO INVEST IN THE CAPITAL APPRECIATION PORTFOLIO
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 entities serving in a trust, advisory,
agency, custodial or similar capacity (the "Institutional Investors") 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.
- -------------------------------------------------------------------------------
WHAT CLASSES OF SHARES DOES THE CAPITAL APPRECIATION PORTFOLIO OFFER?
The Portfolio offers investors four different classes of shares. The
different classes of shares represent investments in the same portfolio of
securities; however, each class is subject to different expenses and likely
will have different share prices. When you buy shares, be sure to tell us the
class of shares that you would like to invest in.
CLASS I SHARES. Class I shares are offered to institutional investors
exclusively. Class I shares are not subject to any sales loads and do not
incur distribution or shareholder servicing fees.
CLASS II SHARES. Class II shares are offered to investors subject to an
up-front sales load. Under certain circumstances, the sales load may be
waived. The sales load is reflected in the offering price of the Class II
shares. Class II shares also incur shareholder servicing fees.
CLASS III SHARES. Class III shares are offered to investors without the
imposition of any up-front sales load; however, you will pay a contingent
deferred sales charge ("CDSC") of 1.00% if you redeem the shares within one
year from the date of purchase. The Class III shares also incur distribution
and shareholder servicing fees.
CLASS IV SHARES. Class IV shares are offered to investors without the
imposition of any up-front sales load; however, Class IV shares are subject
to a CDSC of up to 5.00%. The CDSC is phased out over a period of six years.
After six years from the date of purchase, Class IV shares automatically
convert to Class II shares. Class IV shares also incur distribution and
shareholder servicing fees.
- -------------------------------------------------------------------------------
HOW ARE INVESTMENTS MADE?
Each Institutional Investor will transmit orders to Boston Financial Data
Services (the "Transfer Agent"). If an order is received by the Transfer Agent
prior to 4:00 p.m. Eastern Time on any Business Day (as defined in the section
"How Are Portfolio Shares Valued?") and the funds are received by the Transfer
Agent 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")
next calculated after an order is received by the Transfer Agent. 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 the Transfer Agent 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 made 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.
8
<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 the
Transfer Agent 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 the Transfer Agent. Please call 1-800-442-1941,
(option 2) to advise the Transfer Agent 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 the Transfer Agent. 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 the Transfer Agent
at 73 Tremont Street, Boston, Massachusetts 02108.
Pursuant to the Investment Company Act of 1940, as amended, 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 the Transfer Agent. In
case of suspension of the right of redemption, the Institutional Investor may
either withdraw its request for redemption or it will receive payment based on
the NAV next determined after the termination of the suspension.
ADDITIONAL INFORMATION
The Portfolio also reserves the right to reject any specific purchase order,
including certain purchases by exchange. Purchase orders may be refused if, in
IAI's opinion, they are of a size that would disrupt management of the
Portfolio.
In order to allow IAI to manage the Portfolio most effectively, Institutional
Investors are strongly urged to initiate all trades (investments, exchanges and
redemptions of shares) as early in the day as possible and to notify the
Transfer Agent 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 the Transfer Agent for instructions.
CLASS II, III, AND IV
WHO MAY INVEST?
Class II, III and IV 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 "Fees and Expenses."
INVESTMENT REQUIREMENTS
The minimum initial investment in Class II, III, and IV 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
9
<PAGE>
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 them 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 the Transfer Agent 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 the Transfer Agent
before 4:00 p.m. Eastern time in order for you to receive that day's share
price. The Transfer Agent 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
the Transfer Agent 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 First Funds, c/o Boston Financial, P.O. Box 8050,
Boston, MA 02266-8050. Telephone representatives are available at
1-800-442-1991, (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
the Transfer Agent 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 the Transfer Agent. 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:
State Street Bank and Trust Company
ABA #011000028
First Funds
Account #9905-440-5
(Account Registration)
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<PAGE>
(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 the Transfer Agent 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 PHONE: Provided you have elected this option in advance, you may request a
redemption of Portfolio shares by calling the Transfer Agent at
1-800-442-1941 (option 2). Your redemption proceeds can be sent to you in the
mail or, as more fully described below, the proceeds can be sent directly to
a bank account you designate by bank transfer or wire. For your protection,
all telephone calls are recorded. Also, neither First Funds, First Tennessee,
IAI, nor the Transfer Agent or any of their agents will be responsible for
acting on telephone instructions they believe are genuine. For more
information about telephone redemptions, please call 1-800-442-1941 (option
2).
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 the Transfer Agent 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 the Transfer Agent. 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 First Funds.
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 the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. 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.
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HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?
If you are investing through an investment adviser, broker dealer, or other
third party (each, an "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 the Transfer Agent 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 First Funds 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. The Transfer Agent 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 traditional Individual Retirement Accounts (IRAs),
Roth IRAs, Education IRAs, Rollover IRAs, Keogh Plans, and Simplified Employee
Pension Plans (SEPIRAs).
CLASS II
SALES LOADS
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 FOR CLASS II SHARES
------------------------------------
AS A % OF OFFERING REALLOWANCE TO
AMOUNT OF TRANSACTION PRICE PER SHARE AS A % OF NAV BROKER-DEALER
<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 ALPS may be changed from time to time. ALPS, at its
expense, may provide additional non-cash promotional incentives to eligible
representatives of Broker-Dealers in the form of attendance at a sales
seminar at a resort.
12
<PAGE>
These incentives may be limited to certain eligible representatives of
Broker-Dealers 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 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, 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 First Funds at 1-800-442-1941
(option 1).
RIGHT OF ACCUMULATION. The sales charge schedule under the heading "Sales
Loads" 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
13
<PAGE>
the offering price. Similarly, each subsequent purchase of First Funds Class
II shares may be added to your aggregate investment at the time of purchase
to determine the applicable sales loads.
LETTER OF INTENT. A Letter of Intent allows you to purchase Class II shares
over a 13-month period at a reduced sales charge. The sales charge is based
on the total amount you intend to purchase plus the total net asset value of
Class II shares which you already own on which you have paid a sales load. If
you are a participant in a First Funds IRA or if you are a trustee or
custodian of another type of First Funds retirement plan, you may also credit
towards completion of your Letter of Intent any Class II shares held through
the IRA or in the plan, even if a load was not paid. Each investment you make
during the period may be made at the reduced sales charge that would apply to
the total amount you intend to invest. The reduced sales load applies only to
new purchases. If you do not invest the total amount within the period, you
may pay the difference between the higher sales charge rate that would have
been applied to the purchases you made and the reduced sales charge rate you
have paid. Shares of the Portfolio equal to 5% of the amount you intend to
invest will be held in escrow and, if you do not pay the difference within 20
days following the mailing of a request, the Transfer Agent will redeem a
sufficient amount of your escrowed shares to pay the additional sales charge.
After the terms of your Letter of Intent are fulfilled, the Transfer Agent
will release your escrowed shares.
If your purchases qualify for a further sales load reduction in addition to
that indicated in the Letter of Intent, the sales load will be adjusted to
reflect your total purchases. Signing a Letter of Intent does not bind you to
purchase the full amount indicated at the sales load in effect at the time of
signing, but you must complete the intended purchase to obtain the reduced
sales load. To apply, sign the Letter of Intent form at the time you purchase
Class II shares. You will be entitled to the applicable sales load that is in
effect at the date you submit the Letter of Intent until you complete your
intended purchase.
QUALIFICATION OF DISCOUNTS. As shown in the schedule of Class II sales
charges, larger purchases may result in lower sales charges to you. For
purposes of determining the amount of purchases using the Right of
Accumulation and Letter of Intent privileges, you may combine your Purchase
with:
- purchases by your spouse or his, her or your joint account or for the
account of any minor children, and
- the aggregate investment of any trustee or other Institutional Investor
for you and/or your spouse or your minor children.
A trustee or custodian of any qualified pension or profit sharing plan may
combine its aggregate purchases.
OTHER. Class II shares also incur Shareholder Servicing Fees. See discussion
under "Distribution Plan and Shareholder Servicing Plans."
CLASS III
Class III shares are bought with no front-end load. Therefore, the offering
price for such shares will be at their NAV. Class III shares incur Distribution
Fees and Shareholder Servicing Fees. See discussion under "Distribution Plans
and Shareholder Servicing Plans."
DEFERRED SALES CHARGES. A contingent deferred sales charge (CDSC) of 1.00% is
imposed on redemptions of Class III shares within the first year after
purchase, based on the lower of the shares' cost and the current net asset
value. Any shares acquired by reinvestment of distributions will be redeemed
without a CDSC. In addition, shares purchased prior to October 30, 1998 are
not subject to the CDSC.
CLASS IV Shares
Class IV shares are bought without a front-end load; that is, the offering price
for such shares will be their NAV. Class IV shares incur distribution fees and
shareholder servicing fees. See discussion under "Distribution Plans and
Shareholder Servicing Plans."
DEFERRED SALES CHARGES. A CDSC of up to 5.00% is imposed on redemptions of
Class IV shares. The CDSC associated with the Class IV shares is phased out
over a period of six years. Any shares acquired by reinvestment of dividends
will be redeemed without the imposition of any CDSC.
14
<PAGE>
-------------------------------------------------------
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
5% 4% 3% 3% 2% 1%
-------------------------------------------------------
AUTOMATIC CONVERSION. After eight years from the date of purchase, Class IV
shares will automatically convert to Class II shares. For more information
about the Class II shares please refer to the information above.
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. If they are not traded on a U.S. market,
then the quotation is based on the primary foreign market, and then translated
from foreign market quotations into U.S. dollars using current exchange rates.
DISTRIBUTION OPTIONS: The Portfolio may earn dividends from its stocks and
interest from bond, money market, and other fixed-income investments. These are
passed along as dividend distributions. Income dividends for the Portfolio are
declared and paid monthly. 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.
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 within the Fund Family. Not all of the Portfolios in
the Fund Family may be available in your state. Please check with your
Investment Professional or call First Funds at 1-800-442-1941. 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
NAV next determined after the exchange request is received and accepted by the
Transfer Agent. You may execute exchange transactions by calling the Transfer
Agent 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.
15
<PAGE>
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
adversely affected. Exchanges or purchase orders may be restricted or refused
if the Portfolio receives or anticipates individual or simultaneous orders
affecting a significant portion of the Portfolio's assets. Although the
Portfolio will attempt to give prior notice whenever it is reasonably able to
do so, it may impose these restrictions at any time. The Portfolio reserves
the right to modify or withdraw the exchange privilege upon 60 days notice
and to suspend the offering of shares in any Class without notice to
shareholders. You or your Institutional Investor, if you are invested in
Class I, will receive written confirmation of each exchange transaction.
Exchanges are generally not permitted from Class I to another Class. Should a
beneficial owner of Class I shares cease to be eligible to purchase shares of
Class I, Class I shares held in an Institutional Account may be converted to
shares of another Class.
STATEMENTS AND REPORTS
You, or if Class I, the Institutional Investor, will receive a monthly
statement and a confirmation after every transaction that affects the share
balance or the account registration. A statement with tax information will be
mailed by January 31 of each tax year and also will be filed with the IRS. At
least twice a year, you, or if Class I, the Institutional Investor, will
receive the Portfolio's financial statements. To reduce expenses, only one
copy of the Portfolio's reports (such as the Prospectus and Annual Report)
will be mailed to each investor or, if Class I, each Institutional Investor.
Please write to First Funds at 370 17th Street, Suite 3100, Denver, CO 80202,
to request additional copies.
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 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. 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.
16
<PAGE>
FINANCIAL HIGHLIGHTS
The Financial Highlights Table is presented to help you understand the
Portfolio's financial performance for the past five years. All "per share"
information reflects financial results for a single Portfolio share. This
information has been audited by PricewaterhouseCoopers LLP, whose report,
along with the "Portfolio's" financial statements, is included in the
Portfolio's annual report, which is available upon request by calling First
Funds at 1-800-442-1941 (option 1).
CAPITAL APPRECIATION PORTFOLIO
<TABLE>
<CAPTION>
CLASS I
-------
For the Six Months Ended For the Period
December 31, (Unaudited) Ended June 30,
1998 1998**
---- ----
<S> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $10.74 $10.00
-----------------------------------------------
Income from investment operations:
Net investment loss (0.04) (0.03)
Net realized and unrealized gain
(loss) on investments (0.64) 0.77
-----------------------------------------------
Total from investment operations (0.68) 0.74
-----------------------------------------------
Distributions:
Net realized gain (0.24) -
-----------------------------------------------
Net asset value, end of period $9.82 $10.74
-----------------------------------------------
-----------------------------------------------
TOTAL RETURN+ (6.26)%# 7.40%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $33,219 $37,014
Ratio of expenses to average daily
net assets(1) 1.23%* 1.16%*
Ratio of net investment loss to
average net assets (0.90)%* (0.54)%*
Portfolio turnover rate 54%* 44%*
(1) During the period, various fees
were waived. The ratio of expenses
to average net assets had such waivers
not occurred is as follows. 1.38%* 1.36%*
CLASS II
--------
For the Six Months Ended For the Period
December 31, (Unaudited) Ended June 30,
1998 1998**
---- ----
<S> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $10.71 $10.51
-----------------------------------------------
Income from investment operations:
Net investment loss (0.05) (0.05)
Net realized and unrealized gain
(loss) on investments (0.65) 0.25
-----------------------------------------------
Total from investment operations (0.70) 0.20
-----------------------------------------------
Distributions:
Net realized gain (0.24) -
-----------------------------------------------
Net asset value, end of period $9.77 $10.71
-----------------------------------------------
-----------------------------------------------
TOTAL RETURN+*** (6.47)%# 1.90%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $1,597 $1,400
Ratio of expenses to average daily
net assets(1) 1.62%* 1.52%*
Ratio of net investment loss to
average net assets (1.29)%* (0.90)%*
Portfolio turnover rate 54%* 44%*
(1) During the period, various fees
were waived. The ratio of expenses
to average net assets had such
waivers not occurred is as follows. 1.76%* 1.72%*
</TABLE>
* Annualized.
** Class I commenced operations on September 2, 1997 and Classes II
commenced operations on October 2, 1997.
*** Class II total return does not include the one time sales charge.
+ Total return would have been lower had various fees not been waived
during the period.
# Total return for periods of less than one year are not annualized.
17
<PAGE>
FINANCIAL HIGHLIGHTS
CAPITAL APPRECIATION PORTFOLIO (Continued)
<TABLE>
<CAPTION>
CLASS III
---------
For the Six Months Ended For the Period
December 31, (Unaudited) Ended June 30,
1998 1998**
---- ----
<S> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $10.64 $10.51
-----------------------------------------------
Income from investment operations:
Net investment loss (0.11) (0.10)
Net realized and unrealized gain
(loss) on investments (0.63) 0.23
-----------------------------------------------
Total from investment operations (0.74) 0.13
-----------------------------------------------
Distributions:
Net realized gain (0.24) -
-----------------------------------------------
Net asset value, end of period $9.66 $10.64
-----------------------------------------------
-----------------------------------------------
TOTAL RETURN+ (6.89)%# 1.24%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $448 $590
Ratio of expenses to average daily
net assets(1) 2.37%* 2.28%*
Ratio of net investment loss to
average net assets (2.04)%* (1.65)%*
Portfolio turnover rate 54%* 44%*
(1) During the period, various fees
were waived. The ratio of expenses
to average net assets had such
waivers not occurred is as follows. 2.52%* 2.47%*
</TABLE>
* Annualized.
** Class III commenced operations on October 2, 1997.
+ 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.
18
<PAGE>
APPENDIX
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO'S INVESTMENTS
The following information provides 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 AND WHEN-ISSUED TRANSACTIONS. The Portfolio may buy and sell
obligations on a when-issued or delayed-delivery basis, with payment and
delivery taking place at a future date. The market value of obligations
purchased in this way may change before the delivery date, which could
increase fluctuations in the Portfolio's share price, yield, and return.
Ordinarily, the Portfolio will not earn interest on obligations until they
are delivered.
FORWARDS. A forward represents a contract that obligates the counterparty to
buy, and the other to sell, a specific underlying asset at a specific price,
amount, and date in the future. Forwards are similar to futures except for
the fact that forwards are privately negotiated. The most common type of
forward contracts are foreign currency exchange contracts.
The Portfolio may enter into forward exchange currency contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its
foreign portfolio holdings and to hedge certain firm purchase and sale
commitments denominated in foreign currencies. A forward exchange currency
contract is a commitment to purchase or sell a foreign currency at a future
date at a negotiated forward rate. The gain or loss arising from the
difference between the original contract and the closing of such contract is
included in net realized gain or loss on foreign currency transactions.
Fluctuations in the value of forward exchange currency contracts are recorded
for financial reporting purposes as unrealized gains or losses by the
Portfolio.
RESTRICTED SECURITIES. The Portfolio may purchase securities which cannot be
sold to the public without registration under the Securities Act of 1933
("Restricted Securities"). Unless registered for sale, these securities can
only be sold in privately negotiated transactions or pursuant to an exemption
from registration. Provided that the security has a demand feature of seven
days or less, or a dealer or institutional trading market exists, these
Restricted Securities are not treated as illiquid securities for the purposes
of the Portfolio's investment limitations. Investing in restricted securities
could have the effect of increasing the level of Portfolio illiquidity if
qualified institutional buyers become, for a time, uninterested in purchasing
these securities.
ILLIQUID SECURITIES. Under guidelines established by the Board of Trustees,
IAI determines the liquidity of the Portfolio's investments. The absence of a
trading market can make it difficult to ascertain a market value for illiquid
investments. Disposing of illiquid investments or securities subject to legal
restrictions may involve time-consuming negotiation and legal expenses. It
may be difficult or impossible for the Portfolio to sell illiquid or
Restricted Securities promptly at an acceptable price. The Portfolio may
invest up to 15% of its net assets in illiquid investments.
MONEY MARKET INSTRUMENTS. 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 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
19
<PAGE>
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.
U.S. GOVERNMENT OBLIGATIONS. 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. 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. Zero Coupons 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.
20
<PAGE>
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO
- --------------------------------------------------------------------------------
If you would like more information about the Portfolio, the following documents
are available free upon request.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains additional information about all aspects of the Portfolio. A
current SAI has been filed with the Securities and Exchange Commission (the
"SEC") and is incorporated herein by reference. For a copy of the SAI, write
or call the Portfolio at the address or phone number listed below.
Information about the Portfolio (including the SAI) also may be reviewed and
copied, upon payment of a duplicating fee, at the SEC's Public Reference Room
in Washington, D.C. You also can obtain this information, upon payment of a
duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009.
The SEC also maintains a Web site located at http://www.sec.gov that contains
the SAI, material incorporated herein by reference, and other information
regarding the Portfolio. For more information about the operation of the
Public Reference Room, please call the SEC at 1-800-SEC-0330.
ANNUAL AND SEMI-ANNUAL REPORTS
The Portfolio's annual and semi-annual reports provide additional information
about the Portfolio's investments. The annual report contains a discussion of
the market conditions and investment strategies that significantly affected
the Portfolio's performance during the last fiscal year.
- -------------------------------------------------------------------------------
To obtain the SAI or the most recent annual or semi-annual report for the
Portfolio you may write to First Funds at 370 17th Street, Suite 3100, Denver,
Colorado 80202 or call First Funds at 1-800-442-1941.
- -------------------------------------------------------------------------------
Investment Company Act File No. 811-
<PAGE>
Prospectus
Dated , 1999
FIRST FUNDS
TENNESSEE TAX-FREE PORTFOLIO
[FIRST FUNDS LOGO]
CLASS I
CLASS II
CLASS III
CLASS IV
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
TENNESSEE TAX-FREE PORTFOLIO
INVESTMENT OBJECTIVE -- The objective of the Tennessee Tax-Free Portfolio (the
"Portfolio") 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.
PRINCIPAL INVESTMENT STRATEGIES -- Under normal market conditions, the Portfolio
invests in investment grade municipal obligations 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. The Portfolio seeks to invest its assets
so that, to the fullest extent possible, the income that is received by the
Portfolio will be exempt from both Tennessee and federal income taxes.
The Portfolio may invest in a wide range of municipal obligations, including
tax, revenue, or bond anticipation notes; tax-exempt commercial paper; general
obligations or revenue bonds (including municipal lease obligations and
resources recovery bonds); and industrial development bonds. However, the
Portfolio may invest in obligations of any duration.
While the dollar-weighted average maturity of the Portfolio may vary, Martin
currently anticipates that the dollar-weighted average portfolio maturity of the
Portfolio will be between 5 and 15 years. As a fixed-income securities adviser,
Martin historically has favored securities with a maturity range between 3 and
10 years.
PRIMARY RISKS -- Your investment in the Portfolio is subject to many risks,
including:
- - Interest Rate Risk - Non-Diversification Risk
- - Credit Risk - Geographic Concentration Risk
- - Liquidity Risk
For more information about the risk factors identified above, please refer to
the section entitled "Principal Investments" later in this prospectus. The
Statement of Additional Information ("SAI") contains additional information
about the risks associated with investing in the Portfolio.
- -------------------------------------------------------------------------------
FUND FACTS
Goal: To provide a high level of current income that is exempt from both
federal and Tennessee personal income tax.
Principal Investments:
- - Tennessee Municipal
Bonds
Average Portfolio Maturity --
[6.6 years]
Classes of Shares Offered in this Prospectus:
- - Class I
- - Class II
- - Class III
- - Class IV
Investment Adviser:
- - First Tennessee Bank National Association ("First Tennessee" or "Adviser")
Investment Sub-Adviser:
- - Martin & Company, Inc. ("Martin" or "Sub-Adviser")
Portfolio Managers:
- - Ralph W. Herbert
- - Ted L. Flickinger, Jr.
Distributor:
- - ALPS Mutual Funds Services, Inc. ("ALPS")
- -------------------------------------------------------------------------------
THE VALUE OF THE PORTFOLIO'S SHARES WILL FLUCTUATE WITHIN A WIDE RANGE, SO AN
INVESTOR IN THE PORTFOLIO COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS OF
TIME.
PLEASE REMEMBER THAT THERE IS NO GUARANTEE THAT THE PORTFOLIO WILL ACHIEVE ITS
INVESTMENT OBJECTIVE. AN INVESTMENT IN THE PORTFOLIO IS NOT INSURED, ENDORSED,
OR GUARANTEED BY THE FDIC, A BANK OR ANY GOVERNMENT AGENCY.
SHOULD I INVEST IN THE TENNESSEE TAX-FREE PORTFOLIO?
The Portfolio may be appropriate for you if:
- - You are seeking a high quality portfolio of municipal obligations.
(REMEMBER, NO SINGLE INVESTMENT CAN PROVIDE AN EFFECTIVE, BALANCED
INVESTMENT PLAN.)
- - You are seeking income that is exempt from both federal and Tennessee
income tax.
1
<PAGE>
PERFORMANCE
The following bar chart and table can help you evaluate the potential risks of
investing in the Portfolio. Both the bar chart and the table show the
variability the Portfolio has experienced in its performance in the past. THE
PAST PERFORMANCE OF THE PORTFOLIO DOES NOT INDICATE HOW IT WILL PERFORM IN THE
FUTURE AND IS INTENDED TO BE USED FOR PURPOSES OF COMPARISON ONLY.
In the bar chart below we compare the returns of the Class I shares to the
performance of the Lehman Brothers Municipal Bond Index for the past three
calendar years. The performance of the Class I shares shown in the bar chart
reflects the expenses associated with those shares.
- -------------------------------------------------------------------------------
WHAT IS THE LEHMAN BROTHERS 10-YEAR MUNICIPAL BOND INDEX?
The Lehman Brothers 10-Year Municipal Bond Index is a broad market performance
benchmark for the shorter-term tax-exempt municipal bond market. The Lehman
Brothers 10-Year Municipal Bond Index is not a mutual fund, and you cannot
invest in it directly. Also, the performance of the Lehman Brothers 10-Year
Municipal Bond Index does not reflect the costs associated with operating a
mutual fund, such as buying, selling, and holding securities. PERFORMANCE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURN (CLASS I)
<TABLE>
<CAPTION>
Chart
<S> <C>
12/31/96 3.64%
12/31/97 8.61%
12/31/98 6.11%
</TABLE>
Best Quarter (quarter ended June 30, 1997) -- 3.53%
Worst Quarter (quarter ended March 31, 1996) -- (1.12)%
- -------------------------------------------------------------------------------
The following table lists the Portfolio's average year-by-year return by class
over the past one year period and since the inception of each class of shares.
The table also compares the average annual total returns of each class of shares
for the periods shown to the performance of the Lehman Brothers 10-Year
Municipal Bond Index over the same periods of time.
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(for the period ended December 31, 1998)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Inception Date 1 year Since Inception
<S> <C> <C> <C>
Class I 12/15/95 6.11% 6.24%
Class II 12/29/95 3.35% 5.33%
Class III 12/15/95 4.80% 5.99%
Class IV*/
Lehman Brothers 6.76% 6.85%
10-Year Municipal
Bond Index
</TABLE>
*/ Information for the Class IV shares is not included in the table because
the Class has not been in existence for one full calendar year. Once the Class
IV shares have been in existence for one full calendar year, the performance of
the Class IV shares will be included in the table along with the other classes
of shares.
2
<PAGE>
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS I CLASS II CLASS III CLASS IV
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on purchases as None 2.50% None None
a percentage of offering price
Maximum deferred sales charge (load) (as a None None 1.00%*/ 3.00%
percentage of original purchase price or redemption
proceeds, as applicable)
</TABLE>
*/ Applied to redemptions made during the first year after purchase. No
deferred sales charges are imposed on redemption after one year from date of
purchase.
SHAREHOLDER FEES are deducted from your investments when you buy or sell shares
of the Portfolio. The Portfolio may waive or reduce sales charges; please see
the section entitled "Class II -- Public Offering Price" later in this
Prospectus and the SAI.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES
(FOR THE YEAR ENDED JUNE 30, 1998.) CLASS I CLASS II CLASS III CLASS IV
<S> <C> <C> <C> <C>
Management Fees**/ .50% .50% .50% .50%
12b-1 Fees .00% .00% .75%***/ .60%
Other Expenses .35% .66% .65% .50%****/
---- ----- ----- -----
Total Portfolio Operating Expenses .85% 1.16% 1.90% 1.60%
</TABLE>
**/ First Tennessee, as Investment Adviser, has voluntarily agreed
to waive the entire investment management fee that it is entitled to receive
under the Investment Advisory and Management Agreement.
***/ The Trustees have agreed to limit the 12b-1 fees applicable to
Class III shares to .50% and ALPS has voluntarily agreed to waive .10% of the
12b-1 fees applicable to Class III shares.
****/ Because the Class IV shares have not been in existence for a
full year, this amount is estimated.
ANNUAL PORTFOLIO OPERATING EXPENSES are deducted from the Portfolio's assets
before its pays dividends and before its net asset value and total return is
calculated. We do not charge you separately for these expenses.
Examples -- The following examples are intended to help you compare the cost
of investing in the Portfolio to the cost of investing in other mutual funds
with similar investment objectives. The two examples show the cumulative
amount of Portfolio expenses you would pay on a hypothetical investment of
$10,000 in each class of shares offered by the Portfolio. Both examples
assume a 5% average annual return and that you reinvest all of your
dividends. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
ASSUMING REDEMPTION ASSUMING NO
AT END OF PERIOD REDEMPTION
CLASS I CLASS II CLASS III CLASS IV*/ CLASS III CLASS IV*/
<S> <C> <C> <C> <C> <C> <C>
After 1 year 87 365 293 463 193 163
After 3 years 271 609 597 705 597 505
After 5 years 471 872 1,026 970 1,026 870
After 10 years 1,048 1,622 2,219 1,623 2,219 1,623
</TABLE>
*/ The Class IV example reflects the conversion of Class IV
shares to Class II shares after five years from the date of purchase of the
Class IV shares.
3
<PAGE>
HOW WE MANAGE THE TENNESSEE TAX-FREE PORTFOLIO
OUR INVESTMENT STRATEGY -- Under normal market conditions, the Portfolio will
pursue its investment objective by:
- - as a matter of fundamental policy, investing 80% of its assets in municipal
obligations that are exempt from federal income tax, other than the
alternative minimum tax; and
- - investing at least 65% of its assets in municipal obligations that are
exempt from Tennessee personal income tax. The Portfolio seeks to invest
substantially all of its assets in Tennessee tax-exempt obligations.
In selecting investments for the Portfolio, Martin evaluates a variety of
factors, including bond type, bond quality, and bond maturity allocation based
on economic trends and historic yield comparisons.
PRINCIPAL INVESTMENTS -- The following table describes the securities in which
the Portfolio typically invests and the principal risks associated with those
securities.
- -------------------------------------------------------------------------------
SECURITIES
MUNICIPAL OBLIGATIONS (IN GENERAL): Securities that are issued to raise money
for various public purposes. This includes 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.
- -------------------------------------------------------------------------------
PRINCIPAL RISKS ASSOCIATED WITH THE SECURITY
CREDIT RISK -- The risk that the issuer of a security, or a party to a
contract, will default or otherwise not honor a financial obligation.
INTEREST RATE RISK -- The risk of a decline in market value of an interest
bearing instrument due to changes in interest rates. For example, a rise in
interest rates typically will cause the value of a fixed rate security to
fall. On the other hand, a decrease in interest rates will cause the value of
a fixed rate security to increase. In general, shorter term securities offer
greater stability and are less sensitive to changes in interst rates. Longer
term securities of the type in which the Portfolio invests offer less
stability and tend to be more sensitive to changes in interest rate, but
generally offer higher yields.
LIQUIDITY RISK -- The risk that certain securities or other investments may
be difficult or impossible to sell at the time the Portfolio would like to
sell them. It may be difficult for the Portfolio to sell the investment for
the value the Portfolio has placed on it.
- -------------------------------------------------------------------------------
MUNICIPAL LEASE OBLIGATIONS: Securities issued by state and local
governments or authorities to acquire land and a wide variety of equipment
and facilities. These obligations typically are not backed by the credit of
the issuing municipality, and their interest may become taxable if the lease
is assigned. If funds are not appropriated for the lease payments for the
following year, 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.
- -------------------------------------------------------------------------------
CREDIT RISK
INTEREST RATE RISK
LIQUIDITY RISK
- -------------------------------------------------------------------------------
MUNICIPAL REFUNDING COLLATERALIZED MORTGAGE OBLIGATIONS (MR CMOS): MR CMOS
originated from revenue bonds issued to fund low interest rate mortgages for
first time home buyers with low to
- -------------------------------------------------------------------------------
CREDIT RISK
INTEREST RATE RISK
4
<PAGE>
moderate incomes and are now secured by an "escrow fund" generally consisting
entirely of direct U.S. Government obligations that are sufficient for paying
the security holders. 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 highly rated
instruments with above average yield.
- -------------------------------------------------------------------------------
LIQUIDITY RISK
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS: An agreement between
a buyer and seller of securities in which the seller agrees to buy the
securities back within a specified period of time at the same price the buyer
paid for them, plus an amount equal to an agreed upon interest rate.
- -------------------------------------------------------------------------------
CREDIT RISK
- -------------------------------------------------------------------------------
TAX-EXEMPT COMMERCIAL PAPER: Promissory notes issued by
municipalities to help finance short-term capital or
operating needs.
- -------------------------------------------------------------------------------
CREDIT RISK
INTEREST RATE RISK
LIQUIDITY RISK
- -------------------------------------------------------------------------------
In addition to the securities identified above, the Portfolio may, from time to
time, engage in the following investment practices or techniques:
BORROWING FROM BANKS. The Portfolio may borrow money from banks (up to
33 1/3% of the Portfolio's total assets) for temporary or emergency purposes.
LENDING SECURITIES. The Portfolio may temporarily lend up to 33 1/3% of its
portfolio securities to broker-dealers and institutions, but only when the
loans are fully collateralized.
TEMPORARY DEFENSIVE POSITION. While the Portfolio ordinarily will not invest
in securities that are subject to federal income tax, it may do so in
response to adverse economic or market conditions. During such periods, the
Portfolio may invest without limit in high quality taxable money market
instruments including, but not limited to, U.S. government obligations,
commercial paper, and repurchase and reverse repurchase agreements. This
strategy is inconsistent with the investment objective and principal
investment strategies of the Portfolio, and if employed, could result in the
Portfolio achieving a lower return than it might have achieved under normal
market conditions. Such a strategy also may result in investors becoming
subject to state or federal income taxes.
For more information about the securities, and their associated risks, in
which the Portfolio invests, please refer to the SAI.
NON-DIVERSIFICATION RISK. An investment in a non-diversified mutual fund (as
defined in the Investment Company Act of 1940) such as the Portfolio, entails
greater risks than an investment in a diversified mutual fund. Because the
Portfolio is non-diversified, it may invest a higher percentage of its assets
in the securities of a smaller number of issuers. As a result, the Portfolio
may be more susceptible to any single economic, political, or regulatory
occurrence than a more widely diversified mutual fund and may be subject to
greater risk of loss with respect to its portfolio securities.
GEOGRAPHIC CONCENTRATION RISK. The performance of the Portfolio is
susceptible to various statutory, political, and economic factors that are
unique to the State of Tennessee. Some of these factors include the Tennessee
budget process, the state economy, and the volatility of state tax
collections. For more information about the specific factors that could
impact the performance of the Portfolio, please refer to the SAI.
5
<PAGE>
LIQUIDITY RISK RELATED TO TENNESSEE MUNICIPAL OBLIGATIONS. In general, the
secondary market for municipal obligations issued by Tennessee is less liquid
than that for taxable debt obligations or for large issues of municipal
obligations that are traded across the country. As a result, the securities
available to the Portfolio for purchase may be limited and it may be more
difficult for the Portfolio to sell or otherwise dispose of certain portfolio
securities. At the present time an established resale market exists for the
Tennessee obligations in which the Portfolio invests. However, there is no
guarantee that this secondary market will be available to the Portfolio in
the future.
PREPARING FOR THE YEAR 2000
This Year 2000 information constitutes a YEAR 2000 READINESS DISCLOSURE under
the Federal Year 2000 Information and Readiness Disclosure Act of 1998.
The Portfolio, as with other financial and business organizations in the
United States and around the world, could be adversely affected if computer
systems used by the Portfolio's service providers, including First Tennessee
and Martin, fail to correctly interpret and process date information
concerning dates occurring on and after January 1, 2000. In addition,
corporate and governmental data processing errors may result in production
problems for individual companies and overall economic uncertainties.
Earnings of individual issuers may be affected by remediation costs. Also, it
has been reported that foreign institutions have made less progress in
addressing the Year 2000 problem than major U.S. entities, which could make
certain investments of the portfolios more sensitive to these risks. The
Portfolio's service providers, including its Adviser and Sub-Adviser, have
taken and continue to take steps to address this issue. If the Portfolio, the
Adviser, the Sub-Adviser or any of the Portfolio's service providers are
unsuccessful in their attempts, shareholders could experience certain
disruptions in the services provided to them by the Portfolio. For example,
shareholders may be unable to redeem shares or the Portfolio may be unable to
compute its net asset value. The Portfolio, the Adviser, and Martin
anticipate that testing of their computer systems will be completed by Fall
1999. However, there can be no assurance that the Portfolio will be
successful and shareholders will not experience any disruptions.
WHO MANAGES THE TENNESSEE TAX-FREE PORTFOLIO?
First Tennessee, 530 Oak Court Drive, Memphis, Tennessee, serves as the
investment adviser to the Portfolio. 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.
Under the Investment Advisory and Management Agreement (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.
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 serves as an investment adviser to individual, corporate and
institutional advisory clients, pension plans and collective investment
funds, with approximately $16 billion in assets under administration
(including nondiscretionary accounts) and $4 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 9 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. Martin has a total of $1.6 billion in assets under management as of
June 30, 1998. First Tennessee is obligated to pay Martin a monthly
sub-advisory fee at the annual rate of .30% of the Portfolio's average net
assets. Martin has voluntarily agreed to waive its sub-advisory fee, although
this waiver could be discontinued in whole or in part at any time.
6
<PAGE>
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.
PORTFOLIO MANAGERS
Ralph W. Herbert, Vice President and Fixed Income Portfolio Manager with
Martin, co-manages the Tennessee Tax-Free Portfolio with Mr. Flickinger. Mr.
Herbert has over 20 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., Senior 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.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING PLANS
The Board of Trustees (the "Trustees") has adopted a plan of distribution
pursuant to Rule 12b-1 under the 1940 Act for both the Class III and Class IV
shares of the Portfolio (each a "Distribution Plan" and together the
"Distribution Plans"). Both Distribution Plans permit the use of Portfolio
assets to compensate ALPS for its services and costs in distributing Class
III and Class IV shares and servicing Shareholder accounts. Under the
Distribution Plans, ALPS receives an amount equal to .75% of the average net
assets of the Portfolio that are attributable to Class III shares and an
amount equal to .70% of the average net assets of the Portfolio that are
attributable to Class IV shares. The Trustees have limited the amount that
may be paid under the Distribution Plan for the Class III shares to .50%.
ALPS also has agreed to waive .10% of the amount it is entitled to receive
under the Distribution Plan for the Class III shares. All or a portion of the
fees paid to ALPS under the Distribution Plans will, in turn, be paid to
certain investment advisers and other third parties (collectively "Investment
Professionals") as compensation for selling Class III and IV shares and for
providing ongoing sales support services.
The Trustees also have adopted Shareholder Servicing Plans on behalf of the
Class II, III, and IV shares of the Portfolio. Under the Shareholder
Servicing Plans, certain broker-dealers, banks, and other financial
institutions (collectively "Service Organizations") receive an amount equal
to .25% of the average net assets of the Portfolio that are attributable to
each Class of shares as compensation for shareholder services and account
maintenance. These services include responding to shareholder inquiries,
directing shareholder communications, account balance maintenance, and
dividend posting. Although the Shareholder Servicing Plans have been approved
by the Trustees, no fees have been paid under the plans with regard to the
Class III or Class IV shares. However, Class II shares incur shareholder
servicing fees in an amount equal to .10% of the average net assets of the
Class IV shares. With regard to the Class III and Class IV shares, the
Trustees reserve the right to authorize the payment of fees under the
Shareholder Servicing Plans in the future.
Because the fees paid under the Distribution and the Shareholder Servicing
Plans are paid out of Portfolio assets on an on-going basis, over time these
fees will increase the cost of your investment and may cost you more than
other types of sales charges.
7
<PAGE>
HOW TO INVEST IN THE TENNESSEE TAX-FREE PORTFOLIO
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 entities serving in a trust, advisory,
agency, custodial or similar capacity (together "Institutional Investors")
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.
- -------------------------------------------------------------------------------
WHAT CLASSES OF SHARES DOES THE TENNESSEE TAX-FREE PORTFOLIO OFFER?
The Portfolio offers investors four different classes of shares. The
different classes of shares represent investments in the same portfolio of
securities; however, each class is subject to different expenses and likely
will have different share prices. When you buy shares, be sure to tell us the
class of shares that you would like to invest in.
CLASS I SHARES. Class I shares are offered to institutional investors
exclusively. Class I shares are not subject to sales loads and do not incur
distribution or shareholder servicing fees.
CLASS II SHARES. Class II shares are offered to investors subject to an
up-front sales load. Under certain circumstances, the sales load may be
waived. The sales load is reflected in the offering price of the Class II
shares. Class II shares also incur shareholder servicing fees.
CLASS III SHARES. Class III shares are offered to investors without the
imposition of any up-front sales load; however, you will pay a contingent
deferred sales charge ("CDSC") of 1.00% if you redeem the shares within one
year from the date of purchase. The Class III shares also incur distribution
and shareholder servicing fees.
CLASS IV SHARES. Class IV shares are offered to investors without the
imposition of any up-front sales load; however, Class IV shares are subject
to a CDSC of up to 3.00%. The CDSC is phased out over a period of five years.
After five years from the date of purchase, Class IV shares automatically
convert to Class II shares. Class IV shares also incur distribution and
shareholder servicing fees.
- -------------------------------------------------------------------------------
HOW ARE INVESTMENTS MADE?
Each Institutional Investor will transmit orders to Boston Financial Data
Services (the "Transfer Agent"). If an order is received by the Transfer
Agent 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
the Transfer Agent 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 the Transfer Agent. 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 the Transfer Agent 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.
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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 made 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
the Transfer Agent 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 the Transfer Agent. Please call
1-800-442-1941 (option 2) to advise the Transfer Agent 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 the Transfer Agent.
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 the Transfer Agent, 73 Tremont Street, Boston,
Massachusetts 02108. Shares redeemed will earn dividends declared, if any,
through the date of redemption.
Pursuant to the Investment Company Act of 1940, ad amended, 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.
If transactions by telephone cannot be executed (for example, during times of
unusual market activity), orders may be placed by mail to the Transfer Agent.
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 the Transfer Agent 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 the Transfer
Agent for instructions.
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CLASS II, III AND IV
WHO MAY INVEST?
Class II, III and IV 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 "Fees and Expenses."
INVESTMENT REQUIREMENTS
The minimum initial investment in Class II, III and IV 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
re-establish 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 the Transfer Agent 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 the
Transfer Agent before 4:00 p.m. Eastern Time in order for you to receive that
day's share price. The Transfer Agent 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 First Funds, c/o Boston Financial, P.O. Box 8050,
Boston, MA 02266-8050. 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:
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<PAGE>
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 the Transfer Agent
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 the Transfer Agent. 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:
State Street Bank and Trust Company
ABA #011000028
First Funds
Account #9905-440-5
(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 the Transfer Agent 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 PHONE: Provided you have elected this option in advance, you may request a
redemption of Portfolio shares by calling the Transfer Agent at
1-800-442-1941 (option 2). Your redemption proceeds can be sent to you in the
mail or, as more fully described below, the proceeds can be sent directly to
a bank account you designate by bank transfer or wire. For your protection,
all telephone calls are recorded. Also, neither First Funds, First Tennessee,
Martin, nor the Transfer Agent or any of their agents will be responsible for
acting on telephone instructions they believe are genuine. For more
information about telephone redemptions, please call 1-800-442-1941
(option 2).
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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 the Transfer Agent 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 the Transfer Agent. 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 First Funds.
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 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 the Transfer Agent by telephone (for example,
during times of unusual market activity), consider placing your order by mail
directly to the Transfer Agent. 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 the Transfer Agent 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 First Funds 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 First Funds at 1-800-442-1941 (option 1)
or your Investment Professional for more information on the plans and their
benefits, provisions and fees. The Transfer Agent 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
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your investment income. Minimums may differ from those listed previously
under "Investment Requirements". Plans include traditional Individual
Retirement Accounts (IRAs), Roth IRAs, Education IRAs, Rollover IRAs, Keogh
Plans, and Simplified Employee Pension Plans (SEPIRAs).
CLASS II
SALES LOADS
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 a
broker/dealer that has entered into an agreement with ALPS, the Portfolio's
Distributor. You may calculate your sales load as follows:
<TABLE>
<CAPTION>
TOTAL SALES LOAD FOR CLASS II SHARES REALLOWANCE TO
BROKER/DEALERS
--------------------------------------------
AMOUNT OF TRANSACTION AS A % OF OFFERING AS A % OF OFFERING PRICE
PRICE PER SHARE AS A % OF NAV PER SHARE
<S> <C> <C> <C>
Less than $100,000 2.50 2.56 2.25
$100,000 to $249,999 2.00 2.04 1.75
$250,000 to $499,999 1.75 1.78 1.50
$500,000 to $999,999 1.25 1.27 1.00
$1,000,000 and over 0.50 0.50 0.40
</TABLE>
The reallowance to ALPS may be changed from time to time. ALPS, at its
expense, may provide additional non-cash promotional incentives to eligible
representatives of Broker-Dealers in the form of attendance at a sales
seminar at a resort. These incentives may be limited to certain eligible
representatives of Broker-Dealers 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(k) Plan, 403(b) Plan or directed agency account if
the trustee, custodian, or agent 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 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.
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<PAGE>
In addition, if you purchase Class II shares within 60 days after redeeming
shares of the Portfolio, you will receive credit towards the sales load
payable on the purchase to the extent of the sales load you paid on the
shares you redeemed. This reinstatement privilege may be exercised only with
respect to redemptions and purchases in the same First Funds Portfolio. The
reinstatement privilege can be exercised only one time with respect to any
particular redemption.
QUANTITY DISCOUNTS
You may be entitled to reduced sales charges through the Right of
Accumulation or a Letter of Intent, even if you do not make an investment of
a size that would normally qualify for a quantity discount.
To qualify for a reduction of or exception to the sales load, you or your
Investment Professional must notify the Transfer Agent, 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 First Funds at 1-800-442-1941
(option 1).
RIGHT OF ACCUMULATION. The sales charge schedule under the heading "Sales
Loads" 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 2.00% 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
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<PAGE>
- 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 "Distribution Plans and Shareholder Servicing Plans."
CLASS III
Class III shares are bought with no front-end load. Therefore, the offering
price for such shares will be at their NAV. Class III shares incur
Distribution Fees and Shareholder Servicing Fees. See discussion under
"Distribution Plans and Shareholder Servicing Plans."
DEFERRED SALES CHARGES. A contingent deferred sales charge (CDSC) of 1.00% is
imposed on redemptions of Class III shares within the first year after
purchase, based on the lower of the shares' cost and the current net asset
value. Any shares acquired by reinvestment of distributions will be redeemed
without a CDSC. In addition, shares purchased prior to October 30, 1998 are
not subject to the CDSC.
CLASS IV
Class IV shares are bought with no front-end load. Therefore, the offering
price for such shares will be at the NAV. Class IV shares incur distribution
fees and shareholder servicing fees. See discussion under "Distribution Plans
and Shareholder Servicing Plans."
DEFERRED SALES CHARGES. A CDSC of up to 3.00% is imposed on redemptions of
Class IV shares. As shown in the table below, the CDSC associated with the
Class IV shares is phased out over a period of five years. Any shares
acquired by reinvestment of dividends will be redeemed without the imposition
of any CDSC.
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5
<S> <C> <C> <C> <C>
3% 2.5% 2% 1.5% 1%
</TABLE>
AUTOMATIC CONVERSION. After five years from the date of purchase, Class IV
shares will automatically convert to Class II shares. For more information
about the Class II shares please refer to the information above.
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 may earn interest from its bond, money
market, and other fixed-income investments. These are passed along as
dividend distributions. Income dividends for the Portfolio are declared daily
and paid monthly. 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.
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<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 within the Fund Family. Not all of the Portfolios
in the Fund Family may be available in your state. Please check with your
Investment Professional or call First Funds at 1-800-442-1941. 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 NAV next determined after the exchange request is received and
accepted by the Transfer Agent. You may execute exchange transactions by
calling the Transfer Agent 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 adversely affected.
Exchanges or purchase orders may be restricted or refused if the Portfolio
receives or anticipates individual or simultaneous orders affecting
significant portion 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.
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 First Funds at 370 17th Street, Suite 3100, Denver, Colorado
80202 to request additional copies.
16
<PAGE>
WHAT IS THE EFFECT OF FEDERAL INCOME TAX ON THIS INVESTMENT?
The Portfolio intends to distribute substantially all of its net investment
income, and capital gains, if any, to shareholders within each calendar year
as well as on a fiscal year basis. Any net capital gains realized are
normally distributed in December. Income dividends for the Portfolio 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.
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. 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.
17
<PAGE>
FINANCIAL HIGHLIGHTS
The Financial Highlights Table is presented to help you understand the
Portfolio's financial performance for the past three years. All "per share"
information reflects financial results for a single Portfolio share. This
information has been audited by PricewaterhouseCoopers LLP, whose report,
along with the Portfolio's financial statements, is included in the
Portfolio's annual report, which is available upon request by calling First
Funds at 1-800-442-1941 (option 1).
<TABLE>
<CAPTION>
TENNESSEE TAX-FREE PORTFOLIO CLASS I
-------
For the Six Months For the Year
Ended December 31, (Unaudited) Ended June 30,
------------------------------ --------------
1998 1998 1997 1996**
---- ---- ---- ----
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $10.31 $9.99 $9.71 $10.00
Income from investment operations: --------------------------------------------------------------
Net investment income 0.23 0.48 0.50 0.23
Net realized and unrealized gain (loss) on investments 0.11 0.32 0.28 (0.29)
--------------------------------------------------------------
Total from investment operations 0.34 0.80 0.78 (0.06)
--------------------------------------------------------------
Distributions:
Net investment income (0.23) (0.48) (0.50) (0.23)
Net realized gain (0.03) - - -
--------------------------------------------------------------
Total distributions (0.26) (0.48) (0.50) (0.23)
--------------------------------------------------------------
Net asset value, end of period $10.39 $10.31 $9.99 $9.71
--------------------------------------------------------------
--------------------------------------------------------------
TOTAL RETURN+ 3.37%# 8.16% 8.26% (0.65)%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $181,468 $176,884 $8,935 $5,925
Ratio of expenses to average daily net assets (1) 0.36%* 0.31% 0.07% 0.50%*
Ratio of net investment income to average net assets 4.50%* 4.71% 5.09% 4.31%*
Portfolio turnover rate 38%* 15% 122% 8%*
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.86% 0.85% 1.14% 1.42%*
</TABLE>
<TABLE>
<CAPTION>
CLASS II
--------
For the Six Months For the Year
Ended December 31, (Unaudited) Ended June 30,
------------------------------ --------------
1998 1998 1997 1996**
---- ---- ---- ----
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $10.34 $10.01 $9.73 $10.06
--------------------------------------------------------------
Income from investment operations:
Net investment income 0.23 0.48 0.51 0.21
Net realized and unrealized gain (loss) on investments 0.10 0.33 0.28 (0.33)
--------------------------------------------------------------
Total from investment operations 0.33 0.81 0.79 (0.12)
--------------------------------------------------------------
Distributions:
Net investment income (0.23) (0.48) (0.51) (0.21)
Net realized gain (0.03) - - -
--------------------------------------------------------------
Total distributions (0.26) (0.48) (0.51) (0.21)
--------------------------------------------------------------
Net asset value, end of period $10.41 $10.34 $10.01 $9.73
--------------------------------------------------------------
--------------------------------------------------------------
TOTAL RETURN+*** 3.24%# 8.22% 8.37% (1.25)%#
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $11,324 $8,973 $5,941 $1,875
Ratio of expenses to average daily net assets (1) 0.41%* 0.37% 0.12% 0.49%*
Ratio of net investment income to average net assets 4.45%* 4.65% 5.03% 4.32%*
Portfolio turnover rate 38%* 15% 122% 8%*
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.91%* 0.91% 1.14% 1.42%*
</TABLE>
18
<PAGE>
* Annualized.
** Class I commenced operations on December 15, 1995. Class II commenced
operations on December 29, 1995.
*** Class II total return does not include the one time sales charge.
+ Total return would have been lower had various fees not been waived
during the period.
# Total return for periods of less than one year are not annualized.
FINANCIAL HIGHLIGHTS
TENNESSEE TAX-FREE PORTFOLIO (CONTINUED)
<TABLE>
<CAPTION>
CLASS III
---------
For the Six Months For the Year
Ended December 31, (Unaudited) Ended June 30,
------------------------------ --------------
1998 1998 1997 1996**
---- ---- ---- ----
<S> <C> <C> <C> <C>
Selected Per-Share Data
Net asset value, beginning of period $10.32 $10.00 $9.72 $10.00
--------------------------------------------------------------
Income from investment operations:
Net investment income 0.22 0.45 0.50 0.19
Net realized and unrealized gain (loss) on investments 0.11 0.32 0.28 (0.28)
--------------------------------------------------------------
Total from investment operations 0.33 0.77 0.78 (0.09)
--------------------------------------------------------------
Distributions:
Net investment income (0.22) (0.45) (0.50) (0.19)
Net realized gain (0.03) - - -
--------------------------------------------------------------
Total distributions (0.25) (0.45) (0.50) (0.19)
--------------------------------------------------------------
Net asset value, end of period $10.40 $10.32 $10.00 $9.72
--------------------------------------------------------------
--------------------------------------------------------------
Total Return+ 3.20%# 7.86% 8.20% (0.87)%#
Ratios and Supplemental Data
Net assets, end of period (thousands) $15,667 $9,270 $5,750 $896
Ratio of expenses to average daily net assets (1) 0.69%* 0.61% 0.23% 0.98%*
Ratio of net investment income to average net assets 4.17%* 4.41% 4.93% 3.83%*
Portfolio turnover rate 38%* 15% 122% 8%*
(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 1.66%* 1.65% 1.91% 1.91%*
</TABLE>
* Annualized.
** Class III commenced operations on December 15, 1995.
+ Total return would have been lower had various fees not been waived during
the period. # Total return for periods of less than one year are not
annualized.
19
<PAGE>
APPENDIX
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO'S INVESTMENTS
- --------------------------------------------------------
The following information provides 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 AND WHEN-ISSUED TRANSACTIONS. The Portfolio may buy and sell
obligations on an 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 stand-by
commitment is a put that entitles the security holder to same-day settlement
at amortized cost plus accrued interest.
ILLIQUID SECURITIES. 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 placement.
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 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.
RESOURCE RECOVERY BONDS. 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.
U.S. GOVERNMENT OBLIGATIONS. 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
A - 1
<PAGE>
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. U.S. Treasury obligations are obligations issued
by the United States and backed by its full faith and credit.
VARIABLE AND FLOATING RATE INSTRUMENTS. 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.
A - 2
<PAGE>
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO
- ------------------------------------------
If you would like more information about the Portfolio, the following
documents are available free upon request.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains additional information about all aspects of the Portfolio. A
current SAI has been filed with the Securities and Exchange Commission (the
"SEC") and is incorporated herein by reference. For a copy of the SAI, write
or call the Portfolio at the address or phone number listed below.
Information about the Portfolio (including the SAI) also may be reviewed and
copied, upon payment of a duplicating fee, at the SEC's Public Reference Room
in Washington, D.C. You also can obtain this information, upon payment of a
duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009.
The SEC also maintains a Web site located at http://www.sec.gov that contains
the SAI, material incorporated herein by reference, and other information
regarding the Portfolio. For more information about the operation of the
Public Reference Room, please call the SEC at 1-800-SEC-0330.
ANNUAL AND SEMI-ANNUAL REPORTS
The Portfolio's annual and semi-annual reports provide additional information
about the Portfolio's investments. The annual report contains a discussion of
the market conditions and investment strategies that significantly affected
the Portfolio's performance during the last fiscal year.
- -------------------------------------------------------------------------------
TO OBTAIN THE SAI OR THE MOST RECENT ANNUAL OR SEMI-ANNUAL REPORT FOR THE
PORTFOLIO YOU MAY WRITE TO FIRST FUNDS AT 370 17TH STREET, SUITE 3100,
DENVER, COLORADO 80202 OR CALL FIRST FUNDS AT 1-800-442-1941 (OPTION 1).
- -------------------------------------------------------------------------------
Investment Company Act File No. 811-
<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
OF THE BOND AND INTERMEDIATE BOND PORTFOLIOS AND
CLASS I, CLASS II, CLASS III, AND CLASS IV OF THE
GROWTH & INCOME AND CAPITAL APPRECIATION PORTFOLIOS, DATED______________, 1999
This Statement is not a prospectus but should be read in conjunction with the
current Prospectus for each Class of First Funds: Growth & Income and Capital
Appreciation Portfolios dated ________, 1999; and Bond and Intermediate Bond
Portfolios (Portfolios) dated , 1999, 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 Portfolios, included in the Annual
Report for the fiscal year ended June 30, 1998 and the Semi-Annual Report for
the six-month period ended December 31, 1998, are incorporated herein by
reference. To obtain additional free copies of this Statement, the Annual
Report, the Semi-Annual Report, or the Prospectuses for each Portfolio, please
call the Distributor at 1-800-442-1941, option 1 or write to the Distributor at
370 17th Street, Suite 3100, Denver CO 80202.
TABLE OF CONTENTS PAGE
INVESTMENT RESTRICTIONS AND LIMITATIONS
INVESTMENT INSTRUMENTS
PORTFOLIO TRANSACTIONS
VALUATION OF PORTFOLIO SECURITIES
PERFORMANCE
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
DISTRIBUTIONS AND TAXES
TRUSTEES AND OFFICERS
INVESTMENT ADVISORY AGREEMENTS
ADMINISTRATION AGREEMENT AND OTHER CONTRACTS
DESCRIPTION OF THE TRUST
FINANCIAL STATEMENTS
APPENDIX
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)
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
State Street Bank & Trust Company (State Street or the Transfer Agent)
CUSTODIAN
State Street Bank & Trust Company (State Street or the Custodian)
<PAGE>
INVESTMENT RESTRICTIONS AND LIMITATIONS
The following policies and limitations supplement those set forth in the
Portfolios' Prospectuses. Unless otherwise noted, whenever an investment policy
or limitation states a maximum percentage of a Portfolio's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of a Portfolio's acquisition of such security
or other asset. Accordingly, except as to borrowings and illiquid securities,
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 borrowings or illiquid
securities, any borrowing or investment in such securities that exceeds the
applicable limitations listed below will be reduced promptly to meet such
limitation.
Fundamental policies and investment limitations cannot be changed without
approval by a "majority of the outstanding voting securities" (as defined in the
Investment Company Act of 1940) of that Portfolio. However, except for the
fundamental investment limitations set forth below, the investment policies and
limitations described in this Statement of Additional Information are not
fundamental and may be changed without shareholder approval.
INVESTMENT LIMITATIONS OF THE GROWTH & INCOME, CAPITAL APPRECIATION, BOND
AND INTERMEDIATE BOND PORTFOLIOS
THE FOLLOWING ARE THE FUNDAMENTAL LIMITATIONS FOR EACH PORTFOLIO, SET FORTH IN
THEIR ENTIRETY. EACH PORTFOLIO MAY NOT:
(1) with respect to 75% of a Portfolio's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by
the U.S. government or any of its agencies or instrumentalities) if, as
a result, (a) more than 5% of a Portfolio's total assets would be
invested in the securities of that issuer; or (b) such a Portfolio
would hold more than 10% of the outstanding voting securities of that
issuer;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(3) borrow money, except that each Portfolio may borrow money for temporary
or emergency purposes (not for leveraging or investment) in an amount
not exceeding 331/3% 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 331/3% 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
331/3% of its total assets would be lent to other parties, but this
limit does not apply to purchases of debt securities or to repurchase
agreements;
(9) Each Portfolio may, notwithstanding any other fundamental investment
policy or limitation, invest all of its assets in the securities of a
single open-end or closed-end management investment company with
substantially the same fundamental investment objectives, policies, and
limitations as the Portfolio.
THE FOLLOWING LIMITATIONS OF EACH PORTFOLIO ARE NOT FUNDAMENTAL AND MAY BE
CHANGED WITHOUT SHAREHOLDER APPROVAL.
(i) Each Portfolio does not currently intend during the coming year to
purchase securities on margin, except that each Portfolio may obtain
such short-term credits as are necessary for the clearance of
transactions, and provided that margin payments in connection with
futures contracts and options on futures contracts shall not constitute
purchasing securities on margin.
-2-
<PAGE>
(ii) Each Portfolio may borrow money only (a) from a bank or (b) by engaging
in reverse repurchase agreements with any party (reverse repurchase
agreements are treated as borrowings for purposes of fundamental
investment limitation 3). The Portfolio will not purchase any security
while borrowings representing more than 5% of its total assets are
outstanding.
(iii) Each Portfolio does not currently intend during the coming year to
purchase any security, if, as a result, more than 15% of its net assets
would be invested in securities that are deemed to be illiquid because
they are subject to legal or contractual restrictions on resale or
because they cannot be sold or disposed of in the ordinary course of
business at approximately the prices at which they are valued.
(iv) Each Portfolio does not currently intend during the coming year to
purchase or sell futures contracts. This limitation does not apply to
securities that incorporate features similar to futures contracts.
(v) Each Portfolio does not currently intend during the coming year to make
loans, but this limitation does not apply to purchases of debt
securities.
(vi) Each Portfolio does not currently intend during the coming year to
invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental
investment objectives, policies, and limitations as the Portfolio.
INVESTMENT INSTRUMENTS
First Tennessee Bank National Association (First Tennessee), serves as
Investment Adviser to the Growth & Income, Bond and Intermediate Bond Portfolios
and, with the prior approval of the Board of Trustees (the Trustees), has
engaged Highland Capital Management Corp. (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 AND WHEN-ISSUED TRANSACTIONS. Each Portfolio may buy and sell
securities on a delayed-delivery or when-issued basis. These transactions
involve a commitment by each Portfolio to purchase or sell specific securities
at a predetermined price and/or yield, with payment and delivery taking place
after the customary settlement period for that type of security (and more than
seven days in the future). Typically, no interest accrues to the purchaser until
the security is delivered. Each Portfolio may receive fees for entering into
delayed delivery transactions.
When purchasing securities on a delayed-delivery basis, each Portfolio assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. Because a Portfolio is not required to pay for securities until
the delivery date, these risks are in addition to the risks associated with such
Portfolio's other investments. If a Portfolio remains substantially fully
invested at a time when delayed-delivery purchases are outstanding, the
delayed-delivery purchases may result in a form of leverage. When
delayed-delivery purchases are outstanding, a Portfolio will set aside
appropriate liquid assets in a segregated custodial account to cover its
purchase obligations. When a Portfolio has sold a security on a delayed-delivery
basis, a Portfolio does not participate in further gains or losses with respect
to the security. If the other party to a delayed-delivery transaction fails to
deliver or pay for the securities, such Portfolio could miss a favorable price
or yield opportunity, or could suffer a loss.
Each Portfolio may renegotiate delayed-delivery transactions after they are
entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.
FOREIGN INVESTMENTS. Foreign investments purchased by each Portfolio can involve
significant risks in addition to the risks inherent in U.S. investments. The
value of securities denominated in or indexed to foreign currencies, and of
dividends and interest from such securities, can change significantly when
foreign currencies strengthen or weaken to the U.S. dollar. Foreign securities
markets generally have less trading volume and less liquidity than U.S. markets,
and prices on some foreign markets can be highly volatile. Many foreign
countries lack uniform accounting and disclosure standards comparable to those
applicable to U.S. companies, and it may be more difficult to obtain reliable
information regarding an issuer's financial condition and operations. In
addition, the costs of foreign investing, including withholding taxes, brokerage
commissions, and custodial costs, are generally higher than for U.S.
investments.
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
-3-
<PAGE>
unrest, or adverse diplomatic developments. There is no assurance that a
Portfolio's investment adviser will be able to anticipate or counter these
Potential events.
The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.
Each Portfolio may invest in foreign securities that impose restrictions on
transfer within the U.S. or to U.S. persons. Although securities subject to
transfer restrictions may be marketable abroad, they may be less liquid than
foreign securities of the same class that are not subject to such restrictions.
American Depository Receipts and European Depository Receipts (ADRs and EDRs)
are certificates evidencing ownership of shares of a foreign-based corporation
held in trust by a bank or similar financial institution. Designed for use in
U.S. and European securities markets, respectively, ADRs and EDRs are
alternatives to the purchase of the underlying securities in their national
markets and currencies.
FOREIGN CURRENCY TRANSACTIONS. The Portfolios may conduct foreign currency
transactions on a spot (i.e., cash) basis or by entering into forward contracts
to purchase or sell foreign currencies at a future date and price. The
Portfolios will convert currency on a spot basis from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers generally do not charge a fee for conversion, they do realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the fund at one rate, while offering a lesser rate of exchange should the
portfolio desire to resell that currency to the dealer. Forward contracts are
generally traded in an interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. The parties to a
forward contract may agree to offset or terminate the contract before its
maturity, or may hold the contract to maturity and complete the contemplated
currency exchange.
Each Portfolio may use currency forward contracts for any purpose consistent
with its investment objective. The following discussion summarizes the principal
currency management strategies involving forward contracts that could be used by
the Portfolio. The Portfolios may also use swap agreements, indexed securities,
and options and futures contracts relating to foreign currencies for the same
purposes.
When a Portfolio agrees to buy or sell a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for the purchase or sale, for a fixed amount of
U.S. dollars, of the amount of foreign currency involved in the underlying
security transaction, the Portfolio will be able to protect itself against an
adverse change in foreign currency values between the date the security is
purchased or sold and the date on which payment is made or received. This
technique is sometimes referred to as a "settlement hedge" or "transaction
hedge." The Portfolio may also enter into forward contracts to purchase or sell
a foreign currency in anticipation of future purchases or sales of securities
denominated in foreign currency, even if the specific investments have not yet
been selected by the Portfolio's investment adviser.
A Portfolio may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example, if a
Portfolio owned securities denominated in pounds sterling, it could enter into a
forward contract to sell pounds sterling in return for U.S. dollars to hedge
against possible declines in the pound's value. Such a hedge, sometimes referred
to as a "position hedge," would tend to offset both positive and negative
currency fluctuations, but would not offset changes in security values caused by
other factors. A Portfolio could also hedge the position by selling another
currency expected to perform similarly to the pound sterling - for example, by
entering into a forward contract to sell Deutsche marks or European Currency
Units in return for U.S. dollars. This type of hedge, sometimes referred to as a
"proxy hedge," could offer advantages in terms of cost, yield, or efficiency,
but generally would not hedge currency exposure as effectively as a simple hedge
into U.S. dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedged securities
are denominated.
A Portfolio may enter into forward contracts to shift its investment exposure
from one currency into another. This may include shifting exposure from U.S.
dollars to a foreign currency, or from one foreign currency to another foreign
currency. For example, if a Portfolio held investments denominated in Deutsche
marks, such Portfolio could enter into forward contracts to sell Deutsche marks
and purchase Swiss Francs. This type of strategy, sometimes known as a "cross
hedge," will tend to reduce or eliminate exposure to the currency that is sold,
and increase exposure to the currency that is purchased, much as if the
Portfolio had sold a security denominated in one currency and purchased an
equivalent security denominated in another. Cross-hedges protect against losses
resulting from a decline in the hedged currency, but will cause the Portfolio to
assume the risk of fluctuations in the value of the currency it purchases.
Under certain conditions, Securities and Exchange Commission (SEC) guidelines
require mutual funds to set aside cash or other appropriate liquid assets in a
segregated custodial account to cover currency forward contracts. As required by
SEC guidelines, the Portfolios will segregate assets to cover currency forward
contracts, if any, whose purpose is essentially speculative. The Portfolios
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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 the appropriate
Sub-Adviser's or IAI's skill in analyzing and predicting currency values.
Forward contracts may substantially change a Portfolio's investment exposure to
changes in currency exchange rates, and could result in losses to a Portfolio if
currencies do not perform as the investment adviser anticipates. For example, if
a currency's value rose at a time when 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 appropriate
Sub-Adviser or IAI 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
appropriate Sub-Adviser or IAI increases a Portfolio's exposure to a foreign
currency, and that currency's value declines, the Portfolio will realize a loss.
There is no assurance that the appropriate Sub-Adviser's or IAI's use of forward
currency contracts will be advantageous to a Portfolio or that it will hedge at
an appropriate time. The policies described in this section are non-fundamental
policies of each Portfolio.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are
valued. Under guidelines established by the Trustees, the 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, 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. 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
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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.
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
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).
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The features of call options are essentially the same as those of put options,
except that the purchaser of a call option obtains the right to purchase, rather
than sell, the underlying instrument at the option's strike price. A call buyer
typically attempts to participate in potential price increases of the underlying
instrument with risk limited to the cost of the option if security prices fall
At the same time, the buyer can expect to suffer a loss if security prices do
not rise sufficiently to offset the cost of the option.
WRITING PUT AND CALL OPTIONS. When a Portfolio writes a put option, it takes the
opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the Portfolio assumes the obligation to pay the strike
price for the option's underlying instrument if the other party to the option
chooses to exercise it. The Portfolios may seek to terminate their positions in
put options they write before exercise by closing out the options in the
secondary market at their current price. If the secondary market is not liquid
for a put option a Portfolio has written, however, the Portfolio must continue
to be prepared to pay the strike price while the option is outstanding,
regardless of price changes, and must continue to set aside assets to cover its
position.
If security prices rise, a put writer would generally expect to profit, although
its gain would be limited to the amount of the premium it received. If security
prices remain the same over time, it is likely that the writer will also profit,
because it should be able to close out the option at a lower price. If security
prices fall, the put writer would expect to suffer a loss. This loss should be
less than the loss from purchasing the underlying instrument directly, however,
because the premium received for writing the option should mitigate the effects
of the decline.
Writing a call option obligates each Portfolio to sell or deliver the option's
underlying instrument, in return for the strike price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS. Each Portfolio may purchase and write options in combination
with each other, or in combination with forward contracts, to adjust the risk
and return characteristics of the overall position. For example, the Portfolios
may purchase a put option and write a call option on the same underlying
instrument, in order to construct a combined position whose risk and return
characteristics are similar to selling a futures contract. Another possible
combined position would involve writing a call option at one strike price and
buying a call option at a lower price, in order to reduce the risk of the
written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
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.
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ASSET COVERAGE FOR OPTIONS POSITIONS. The Portfolios will comply with guidelines
established by the SEC with respect to coverage of options strategies by mutual
funds and, if the guidelines so require, will set aside appropriate liquid
assets in a segregated custodial account in the amount prescribed. Securities
held in a segregated account cannot be sold while the option strategy is
outstanding, unless they are replaced with other suitable assets. As a result,
there is a possibility that segregation of a large percentage of the Portfolios'
assets could impede portfolio management or the Portfolios' ability to meet
redemption requests or other current obligations.
[Soft dollar data to be added by amendment]
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of securities are placed on behalf of the
respective Portfolios by Highland, Martin and IAI (collectively, the Advisers)
pursuant to authority contained in each Portfolio's 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.
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.
The Growth & Income Portfolio paid brokerage commissions in the amounts of
$167,413, $147,563 and $276,190 during the fiscal years ended June 30, 1998,
1997 and 1996, respectively. The Capital Appreciation Portfolio paid brokerage
commissions in the amount of $57,106 for the fiscal period ended June 30, 1998.
During the fiscal years ended June 30, 1998, 1997 and 1996, no brokerage
commissions were paid by the Growth & Income and Capital Appreciation Portfolios
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 e 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 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
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for each Portfolio. It is the current opinion of the Trustees that the
desirability of retaining the Portfolios' Advisers outweighs any disadvantages
to the Portfolios that may be said to exist from exposure to simultaneous
transactions.
VALUATION OF PORTFOLIO SECURITIES
In valuing securities owned by each Portfolio, the Advisers use various methods
depending on the market or exchange on which the securities is traded.
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. The Advisers believe that this two-fold
approach more accurately reflects 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.
The Trustees have approved the use of pricing services. 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.
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
5.63%, 5.15% and 4.32%, respectively; and 5.59%, 5.12% and 4.57% for the
Intermediate Bond Portfolio, respectively. Shares of Class IV were not issued as
of that date.
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
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<PAGE>
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 Class I, Class II, and Class III 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* 32.55% 23.38% 24.57% 21.74% 31.16% 22.07%
Capital Appreciation* N/A N/A N/A N/A N/A N/A
Bond Portfolio 9.28% 6.42% 5.01% 5.29% 8.02% 5.17%
Intermediate Bond N/A N/A N/A N/A N/A N/A
</TABLE>
* Information regarding the Class IV Shares is not presented here
because the Class IV Shares were not offered as of the date of this statement.
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 may invest to other mutual funds,
especially to those with similar investment objectives. These comparisons may be
based on data published by IBC USA (Publications), Inc. of Ashland, MA or by
Lipper Analytical Services, Inc. (Lipper, sometimes referred to as Lipper
Analytical Services), an independent service located in Summit, New Jersey that
monitors the performance of mutual funds. Lipper generally ranks funds on the
basis of total return, assuming reinvestment of distributions, but does not take
sales charges or redemption fees into consideration, and is prepared without
regard to tax consequences. Lipper may also rank funds based on yield. In
addition to the mutual fund rankings, the Portfolio's performance may be
compared to mutual fund performance indices prepared by Lipper. The BOND FUND
REPORT AVERAGES' which is reported in the BOND FUND REPORT; covers taxable bond
funds. When evaluating comparisons to money market funds, investors should
consider the relevant differences in investment objectives and policies.
Specifically, money market funds invest in short-term, high-quality instruments
and seek to maintain a stable $1.00 share price. The Bond Portfolios, however,
invest in longer-term instruments and their share price changes daily in
response to a variety of factors. Investors should give consideration to the
quality and maturity of the portfolio securities of the respective investment
companies when comparing investment alternatives.
MOVING AVERAGES. The Portfolios may illustrate performance using moving
averages. A long-term moving average is the average of each week's adjusted
closing NAV for a specified period. A short-term moving average is the average
of each day's adjusted closing NAV for a specified period. Moving Average
Activity Indicators combine adjusted closing NAVs from the last business day of
each week with moving averages for a specified period to produce indicators
showing when an NAV has crossed, stayed above, or stayed below its moving
average.
NET ASSET VALUE. Charts and graphs using the Portfolios' net asset values,
adjusted net asset values, and benchmark indices may be used to exhibit
performance. An adjusted NAV includes any distributions paid by the Portfolio
and reflects all elements of its return. Unless otherwise indicated, the
Portfolio's adjusted NAVs are not adjusted for sales charges, if any.
From time to time, each Portfolio's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals. For
example, the Portfolios may quote Morningstar, Inc. in its advertising
materials. Morningstar, Inc. is a mutual fund rating service that rates mutual
funds on the basis of risk-adjusted performance.
Each Portfolio may be compared in advertising to certificates of deposits (CD's)
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 CD's, 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
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<PAGE>
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 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 State Street expects the same holiday schedule to be observed in the
future, the New York Stock Exchange and the Federal Reserve Bank of New York
(New York Federal Reserve) may modify their holiday schedules at any time.
If the Trustees determine that existing conditions make cash payment
undesirable, redemption payments may be made in whole or in part in securities
or other property, valued for this purpose as they are valued in computing each
Portfolio's NAV. Shareholders receiving securities or other property on
redemption may realize a gain or loss for tax purposes and will incur any costs
of sale, as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, each Portfolio is required to give
shareholders at least 60 days' notice prior to terminating or modifying each
Portfolio's exchange privilege. Under Rule 11a-3, the 60-day notification
requirement may be waived if (i) the only effect of a modification would be to
reduce or eliminate an administrative fee, redemption fee or deferred sales
charge ordinarily payable at the time of exchange, or (ii) under extraordinary
circumstances, a Portfolio temporarily suspends the offering of shares as
permitted under the 1940 Act or by the SEC or because it is unable to invest
amounts effectively in accordance with its investment objective and policies.
This exchange limit may be modified for accounts in certain institutional
retirement plans to conform to plan exchange limits and Department of Labor
Regulations.
ADDITIONAL CLASS II, CLASS III, AND CLASS IV 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.
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.
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<PAGE>
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 long-term capital gains rate, 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.
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 in prior fiscal years and
intends to continue 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 federal tax rules applicable to regulated investment companies. The
Portfolio's principal place of business is located in Denver, Colorado. The
Portfolio intends to comply with Colorado tax rules applicable to registered
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.
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<PAGE>
TRUSTEES AND OFFICERS
Information regarding the Trustees and executive officers of the Trust is set
forth in the table 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 (*).
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS
- -----------------------------------------------------------------------------------------------------------------------------------
Name, Address, and Age Position(s) Held Principal Occupation
with Trust During Past 5 Years
- ------------------------------------------- ------------------- -------------------------------------------------------------------
<S> <C> <C>
THOMAS M. BATCHELOR, age 76, Trustee Mr. Batchelor presently operates a management consultant business
4325 Woodcrest Drive, Memphis, TN 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, age 62, Trustee Mr. DeCell is the proprietor of DeCell & Company (real estate and
5178 Wheelis Dr., Suite 2, Memphis, TN business consulting), and
President of Capital Advisers, Inc. (real estate consulting and
asset management).
- ------------------------------------------- ------------------- -------------------------------------------------------------------
*L. R. JALENAK, JR., age 68, Trustee Mr. Jalenak was Chairman of the Board (1990 -1993 (retired)),
6094 Apple Tree Drive, Suite 11, Cleo Inc. (manufacturer of gift-related products), a Gibson
Memphis, TN 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 Mr. Papasan is President of Smith & Nephew, Inc. (orthopedic
5114 Winton Place, Memphis, TN division). 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 Mr. Rantzow was Vice President/Director, Ron Miller Associates,
5790 Shelby Avenue, Memphis, TN Trustee Inc. (manufacturer). Mr. Rantzow was Managing Partner (until
1990) of the Memphis office of Ernst & Young.
- ------------------------------------------- ------------------- -------------------------------------------------------------------
*JEREMY O. MAY, age 29, Treasurer Mr. May is a Vice President and Director of Mutual Fund
370 17th Street, Denver, CO Operations 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.
- ------------------------------------------- ------------------- -------------------------------------------------------------------
*RUSSELL C. BURK, age 40, Secretary Mr. Burk is General Counsel of ALPS. Prior to joining ALPS, Mr.
370 17th Street, Denver CO Burk served as Securities Counsel for Security Life of Denver, a
wholly-owned subsidiary of ING.
- ------------------------------------------- ------------------- -------------------------------------------------------------------
</TABLE>
Effective after the May 1998 meeting of the Board, the Trustees of the Trust
each receive from the Trust an annual fee of $6,000 and a fee in the amount of
$2,000 for attending each regularly scheduled quarterly meeting of the Trustees
and $500 for each unscheduled meeting. Previously, the Trustees of the Trust
each received 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:
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<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Pension or Aggregate
Aggregate Retirement Estimated Compensation
Compensation Benefits Annual From the Trust
Name from the Accrued As Benefits and Fund
Trust Part of Fund Upon Complex Paid
Expenses Retirement to Trustees
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Batchelor
Trustee $9,500 $0 $0 $9,500
John A. DeCell
Trustee $9,500 $0 $0 $9,500
L.R. Jalenak, Jr.
Trustee $9,500 $0 $0 $9,500
Larry W. Papasan
Trustee $7,000 $0 $0 $7,000
Richard C. Rantzow
Trustee $9,500 $0 $0 $9,500
- ---------------------------------------------------------------------------------------------
</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., Knoxville,
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 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. First Tennessee has
voluntarily agreed to waive its fee to .50.%, .00%, .15% and .00% of the average
net assets of the Growth & Income, Capital Appreciation, Bond and Intermediate
Bond Portfolios, respectively. The fee waivers may be discontinued at any time.
For the fiscal years ended June 30, 1998, 1997 and 1996, First Tennessee earned
$3,169,117, $1,520,039 and $1,076,198 from the Growth & Income Portfolio,
respectively, before waiving $731,335, $350,778 and $358,250 of its fees,
respectively. For the fiscal years ended June 30, 1998, 1997 and 1996, First
Tennessee earned $887,260, $658,049 and $563,748 from the Bond Portfolio,
respectively, before waiving $645,280, $478,581 and $482,559 of its fees,
respectively. For the fiscal period ended June 30, 1998, First Tennessee earned
$32,970 and $320,973, respectively, from the Capital Appreciation and
Intermediate Bond Portfolios before waiving these amounts. For the fiscal period
ended June 30, 1998, IAI earned $153,858 from the Capital Appreciation
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
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<PAGE>
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. 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 $731,335, $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 $241,980, $179,468 and
$153,749 from the Bond Portfolio, respectively. For the fiscal period ended June
30, 1998, ALPS earned administration fees in the amount of $32,970 from the
Capital Appreciation Portfolio before waiving $10,780 of its fees. For the
fiscal year ended June 30, 1998, ALPS earned administration fees in the amount
of $96,292 from the Intermediate Bond Portfolio before waiving $5,595 of its
fees.
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
$243,778, $116,926 and $82,965 from the Growth & Income Portfolio, respectively
before waiving $0, $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 $80,660, $59,823 and $51,198 from the
Bond Portfolio, respectively, before waiving $0, $0 and $23,882, respectively.
For the fiscal period ended June 30, 1998, First Tennessee earned
co-administration fees in the amount of $10,990 and $32,087, from the Capital
Appreciation and Intermediate Bond Portfolios, respectively.
As the Distributor, ALPS sells shares of Class I as agent on behalf of the Trust
at no additional cost to the Trust. Class III and Class IV are obligated to pay
ALPS monthly a 12b-1 fee at the annual rate of .75% and 1.00% of average net
assets, respectively, all or a portion of which may be paid out to
broker-dealers or others involved in the distribution of Class III and Class IV
shares. This fee may be limited from time to time by the Board of Trustees. See
"Administration Agreements and Other 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. State Street Bank & Trust
Company, through its affiliate Boston Financial Data Services, provides transfer
agent and shareholder services for each Portfolio. For such services, State
Street is entitled to receive a fee from each Portfolio based on their net asset
value, plus out-of-pocket expenses.
State Street is also Custodian of the assets of the Portfolios and calculates
the NAV and dividends of each Class of each Portfolio and maintains the
portfolio and general accounting records. The Custodian is responsible for the
safekeeping of each Portfolio's assets and the appointment of sub-custodian
banks and clearing agencies. For such services, State Street is entitled to
receive a fee from each Portfolio based on their net asset value, plus certain
minimum monthly accounting fees and 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 a "Class III Plan") and Class IV of
the Growth & Income and Capital Appreciation Portfolios (each a "Class IV 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 to compensate ALPS for incurring
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 and up
to
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<PAGE>
1.00% of the average net assets of Class IV shares of the Growth & Income and
Capital Appreciation Portfolios, 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 and Class IV of the Growth &
Income and Capital Appreciation Portfolios, may enter into servicing agreements
(Service Agreements) with banks, broker-dealers or other institutions (Agency
Institutions).
Each Class III and Class IV 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 and Class IV 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 and Class IV shares; and
providing training, marketing and support to such dealers and others with
respect to the sale of Class III and Class IV shares. Each Class III and Class
IV 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 and Class IV Plans give ALPS greater flexibility in
connection with the distribution of shares of the class, additional sales of
shares may result.
The Class III and Class IV 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, each 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 or Class IV Plan, these may be used as ALPS may elect. Since the
amount payable under each 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' 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,
Capital Appreciation, Bond and Intermediate Bond Portfolios paid distribution
fees in the amounts of $481,934, $2,508,17,602 and $10, respectively. All of
these fees were paid as compensation to dealers. As of that date no Class IV
Shares were offered.
SHAREHOLDER SERVICE PLAN. In addition to the Rule 12b-1 Distribution Plans
described above, Class II, Class III and Class IV 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, Class III
and Class IV 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, Class III and Class IV 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, Class III and Class IV.
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>
<CAPTION>
Growth & Income Capital Appreciation Bond Intermediate Bond
Portfolio* Portfolio* Portfolio Portfolio
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Class II $ 76,175 $1.631 $3,587 $639
Class III $160,645 $836 $5,867 $3
</TABLE>
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
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<PAGE>
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 First Tennessee'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, Intermediate Bond
Portfolio and Capital Appreciation Portfolio are Portfolios 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 Declaration of Trust permits the Trustees to create
additional Portfolios and Classes. There are nine Portfolios of the Trust, six
with three Classes and three with four Classes.
The assets of the Trust received for the issue or sale of shares of each
Portfolio and all income, earnings, profits, and proceeds thereof, subject only
to the rights of creditors, are specially allocated to such Portfolio, and
constitute the underlying assets of such Portfolio. The underlying assets of
each Portfolio are segregated on the books of account, and are to be charged
with the liabilities with respect to such Portfolio and with a share of the
general expenses of the Trust. Expenses with respect to the Trust are to be
allocated in proportion to the asset value of the respective Portfolios except
where allocations of direct expense can otherwise be fairly made. The officers
of the Trust, subject to the general supervision of the Trustees, have the power
to determine which expenses are allocable to a given Portfolio, or which are
general or allocable to all of the Portfolios. In the event of the dissolution
or liquidation of the Trust, shareholders of a Portfolio are entitled to receive
as a class the underlying assets of such Portfolio available for distribution.
SHAREHOLDER AND TRUSTEE LIABILITY. The Trust is an entity of the type commonly
known as a "Massachusetts business trust." Under Massachusetts law, shareholders
of such a trust may, under certain circumstances, be held personally liable for
the obligations of the trust. The Declaration of Trust provides that the Trust
shall not have any claim against shareholders except for the payment of the
purchase price of shares and requires that each agreement, obligation, or
instrument entered into or executed by the Trust or the Trustees shall include a
provision limiting the obligations created thereby to the Trust and its assets.
The Declaration of Trust provides for indemnification out of each Portfolio's
property of any shareholders held personally liable for the obligations of each
Portfolio. The Declaration of Trust also provides that each Portfolio shall,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of a Portfolio and satisfy any judgment thereon. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Portfolio itself would be
unable to meet its obligations. The Trustees believe that, in view of the above,
the risk of personal liability to shareholders is remote.
The Declaration of Trust further provides that the Trustees, if they have
exercised reasonable care, will not be liable for any neglect or wrongdoing, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
As of ________________, 1999, the following shareholders owned more than 5% of
the outstanding shares of the indicated Class of the Portfolios
[To be updated by amendment]:
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.
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<PAGE>
CLASSES. Pursuant to the Declaration of Trust, the Trustees have authorized
additional Classes of shares for each Portfolio of the Trust. Although the
investment objective for each separate Class of a particular Portfolio is the
same, fee structures are different such that one Class may have a higher yield
than another Class of the same Portfolio at any particular time. Shareholders of
the Trust will vote together in the aggregate and not separately by Portfolio,
or by Class thereof, except as otherwise required by law or when the Trustees
determine that the matter to be voted upon affects only the interests of the
shareholders of a particular Portfolio or a Class thereof. Pursuant to a vote by
the Board of Trustees, the Trust has adopted Rule 18f-3 under the Act and has
issued multiple Classes of shares with respect to each of its Portfolios.
Accordingly, the rights, privileges and obligations of each such Class will be
determined in accordance with such rule.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers 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.
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<PAGE>
FINANCIAL STATEMENTS
The Growth & Income, Capital Appreciation, Bond and Intermediate Bond
Portfolios' financial statements and financial highlights for the fiscal year
ended June 30, 1998 and the six-month period ended December 31, 1998 are
included in the Trust's Annual and Semi-Annual Reports, respectively, which are
each a separate report supplied independently of this Statement of Additional
Information. The Growth & Income, Capital Appreciation, Bond and Intermediate
Bond Portfolios' financial statements and financial highlights are incorporated
herein by reference.
The Portfolio's financial statements for the year ended June 30, 1998 were
audited by PricewaterhouseCoopers LLP, whose report thereon is included in the
Portfolio's annual report. On April 29, 1999, PricewaterhouseCoopers LLP
resigned as the Portfolio's auditors; such resignation was accepted by the Board
of Trustees. The Trustees have approved the appointment of Deloitte & Touche LLP
as independent auditors of the Portfolio, effective upon the resignation of
PricewaterhouseCoopers LLP.
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<PAGE>
APPENDIX
DOLLAR-WEIGHTED AVERAGE MATURITY for Bond Portfolio is derived by multiplying
the value of each investment by the number of days remaining to its maturity,
adding these calculations, and then dividing the total by the value of the
Portfolio. An obligation's maturity is typically determined on a stated final
maturity basis, although there are some exceptions to this rule.
For example, if it is probable that the issuer of an instrument will take
advantage of a maturity-shortening device, such as a call, refunding, or
redemption provision, the date on which the instrument will probably be called,
refunded, or redeemed may be considered to be its maturity date. Also, the
maturities of mortgage-backed securities and some asset-backed securities, such
as collateralized mortgage obligations, are determined on a weighted average
life basis, which is the average time for principal to be repaid. For a mortgage
security, this average time is calculated by assuming a constant prepayment rate
for the life of the mortgage. The weighted average life of these securities is
likely to be substantially shorter than their stated final maturity.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS:
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protections may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered as medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through Baa in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S CORPORATE BOND RATINGS:
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated debt issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in highest-rated categories.
The ratings from AA to BBB may be modified by the addition of a plus or minus to
show relative standing within the major rating categories.
<PAGE>
FIRST FUNDS
TENNESSEE TAX-FREE PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION FOR CLASS I,
CLASS II, CLASS III, AND CLASS IV , 1999
This Statement is not a prospectus but should be read in conjunction with the
current Prospectus for each Class of the Tennessee Tax-Free Portfolio dated ,
1999. 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 and the Semi-Annual Report for the six month
period ended December 31, 1998, are incorporated herein by reference. To obtain
additional free copies of this Statement, the Annual Report, the Semi-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 OF CONTENTS PAGE
INVESTMENT RESTRICTIONS AND LIMITATIONS
INVESTMENT INSTRUMENTS
SPECIAL CONSIDERATIONS AFFECTING TENNESSEE
PORTFOLIO TRANSACTIONS
VALUATION OF PORTFOLIO SECURITIES
PERFORMANCE
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
DISTRIBUTIONS AND TAXES
TRUSTEES AND OFFICERS
INVESTMENT ADVISORY AGREEMENT
ADMINISTRATION AGREEMENT AND OTHER CONTRACTS
DESCRIPTION OF THE TRUST
FINANCIAL STATEMENTS
APPENDIX
INVESTMENT ADVISER
First Tennessee Bank National Association (First Tennessee or the Investment
Adviser)
SUB ADVISER
Martin & Company, Inc. (Martin or 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
State Street Bank & Trust Company (State Street or the Transfer Agent)
CUSTODIAN
State Street Bank & Trust Company (State Street or the Custodian)
<PAGE>
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, except as to borrowings and illiquid securities, 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 331/3% 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 331/3% 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
(7) lend any security or make any other loan if, as a result, more than
331/3% 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.
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<PAGE>
(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.
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. The 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 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
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<PAGE>
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. The 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 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,
the 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. The 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
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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, the Tennessee Tax-Free
Portfolio effectively holds a demand obligation that bears interest at the
prevailing short-term tax-exempt rate. In selecting tender option 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 (VRDO/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 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. 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 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 Fund balance of
$345 million by fiscal year end 1997. In fiscal 1996 the General Fund was $128.6
million.
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<PAGE>
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 (BEP). This increase has
since been made permanent and the BEP has been fully funded as of July 1997.
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 health care
plan have stabilized.
The Tennessee economy is largely based on manufacturing and services, which
accounted 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% which
was higher than the national average of 4.95% in 1997. In 1996, however, the
State unemployment rate of 5.2% was lower than the 1996 national average of
5.4%. 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, 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 15%, 122% and 8%, respectively. The increase in portfolio
turnover rate between 1996 and 1997 is largely attributable 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.
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<PAGE>
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.
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 yields were 4.16%, 3.94% and 3.83% for Class I,
II and III, respectively. Class IV shares were not offered as of June 30, 1998.
The 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:
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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%
single return joint return Then taxable equivalent yield is:
<S> <C> <C> <C> <C> <C>
$0- $25,350 $0 - $42,350 15% 2.35% 3.53% 4.71%
$25,351 - $61,400 $42,351 - $102,300 28% 2.78% 4.17% 5.56%
$61,401 - $128,100 $102,301- $155,950 31% 2.90% 4.35% 5.80%
$128,101- $278,450 $155,951- $278,450 36% 3.13% 4.69% 6.25%
$278,451- above $278,451- above 39.6% 3.31% 4.97% 6.62%
</TABLE>
* Taxable income (gross income after all exemptions, adjustments, and
deductions) based on 1997 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.
<TABLE>
<CAPTION>
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:
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
*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>
The Tennessee Tax-Free Portfolio* 8.16% 6.13% 4.16% 4.58% 7.86% 5.90%
</TABLE>
* Information regarding the Class IV Shares is not presented here
because the Class IV shares were not offered until as of the date of this
statement.
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<PAGE>
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 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 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 (CD's)
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 CD's, 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. It may also compare its performance to the Lehman Brothers 5-Year
and 10-Year Municipal Bond Indices. 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, Class III, and Class IV 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 State Street 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 properly valued for this purpose as they are valued in computing the
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, 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
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<PAGE>
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, CLASS III, AND CLASS IV 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.
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 in January describing the tax status of dividends and capital gain
distributions, if any, for the prior year. Dividends derived from the 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 made any taxable distributions for the period.
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 the 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 or long-term capital gains rate, as
designated by the Portfolio, regardless of how long the shareholders have owned
their Portfolio shares.
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 redemption 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.
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TAX STATUS OF THE TRUST. The Portfolio has qualified in prior years and intends
to continue 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 federal tax
rules applicable to regulated investment companies. The Portfolio's principal
place of business is located in Denver, Colorado. The Portfolio intends to
comply with Colorado tax rules applicable to registered investment companies.
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.
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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 (*).
<TABLE>
<CAPTION>
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TRUSTEES AND OFFICERS
- -----------------------------------------------------------------------------------------------------------------------------------
Name, Address, and Age Position(s) Held Principal Occupation
with Trust During Past 5 Years
- ------------------------------------------- ------------------- -------------------------------------------------------------------
<S> <C> <C>
THOMAS M. BATCHELOR, age 76, Trustee Mr. Batchelor presently operates a management consultant business
4325 Woodcrest Drive, Memphis, TN 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, age 62, Trustee Mr. DeCell is the proprietor of DeCell & Company (real estate and
5178 Wheelis Dr., Suite 2, Memphis, TN business consulting), and
President of Capital Advisers, Inc. (real estate consulting and
asset management).
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*L. R. JALENAK, JR., age 68, Trustee Mr. Jalenak was Chairman of the Board (1990 -1993 (retired)),
6094 Apple Tree Drive, Suite 11, Cleo Inc. (manufacturer of gift-related products), a Gibson
Memphis, TN 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.
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LARRY W. PAPASAN, age 57, Trustee Mr. Papasan is President of Smith & Nephew, Inc. (orthopedic
5114 Winton Place, Memphis, TN division). 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.
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*RICHARD C. RANTZOW, age 60, President and Mr. Rantzow was Vice President/Director, Ron Miller Associates,
5790 Shelby Avenue, Memphis, TN Trustee Inc. (manufacturer). Mr. Rantzow was Managing Partner (until
1990) of the Memphis office of Ernst & Young.
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*JEREMY O. MAY, age 29, Treasurer Mr. May is a Vice President and Director of Mutual Fund
370 17th Street, Denver, CO Operations 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.
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*RUSSELL C. BURK, age 40, Secretary Mr. Burk is General Counsel of ALPS. Prior to joining ALPS, Mr.
370 17th Street, Denver CO Burk served as Securities Counsel for Security Life of Denver, a
wholly-owned subsidiary of ING.
- ------------------------------------------- ------------------- -------------------------------------------------------------------
</TABLE>
Effective after the May 1998 meeting of the Board, the Trustees of the Trust
each receive from the Trust an annual fee of $6,000 and a fee in the amount of
$2,000 for attending each regularly scheduled quarterly meeting of the Trustees
and $500 for each unscheduled meeting. Previously, the Trustees of the Trust
each received 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:
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<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Pension or Aggregate
Aggregate Retirement Estimated Compensation
Compensation Benefits Annual From the Trust
Name from the Accrued As Benefits and Fund
Trust Part of Fund Upon Complex Paid
Expenses Retirement to Trustees
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Batchelor
Trustee $9,500 $0 $0 $9,500
John A. DeCell
Trustee $9,500 $0 $0 $9,500
L.R. Jalenak, Jr.
Trustee $9,500 $0 $0 $9,500
Larry W. Papasan
Trustee $7,000 $0 $0 $7,000
Richard C. Rantzow
Trustee $9,500 $0 $0 $9,500
- ---------------------------------------------------------------------------------------------
</TABLE>
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 Bank, N.A., 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 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, the 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 years ended June 30, 1998, 1997 and 1996, First Tennessee
earned $398,898, $65,349 and $12,692, respectively, before waiving its entire
fee. [Pursuant to the fee waivers discussed above, the Portfolio has not paid
any investment advisory fees in the past three fiscal years.]
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. ALPS has
voluntarily agreed to reimburse 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. Effective
December 31, 1998, ALPS reduced its voluntary waiver of 12b-1 fees applicable to
Class III from .25% to .10%. ALPS reserves the right to modify or terminate this
waiver of 12b-1 expense at any time.
For the fiscal years ended June 30, 1998, 1997 and 1996, ALPS earned
administration fees in the amount of $119,670, 19,605 and $3,755 from the
Portfolio, respectively, before waiving $32,146, $19,605 and $3,755 of its fees,
respectively.
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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. For the fiscal years ended June 30,
1998, 1997 and 1996, First Tennessee earned co-administration fees in the amount
of $39,890, $6,535, and $1,252 from the Portfolio, respectively before waiving
$0, $4,227, and $1,252 of its fees, respectively.
As the Distributor, ALPS sells shares of Class I as agent on behalf of the Trust
at no additional cost to the Trust. Class III and Class IV are obligated to pay
ALPS monthly a 12b-1 fee at the annual rate of up to .75% and .70% of the
average net assets of Class III and Class IV, respectively, all or a portion of
which may be paid out to broker-dealers or others involved in the distribution
of Class III and Class IV shares. See "Administration Agreements and Other
Contracts - Distribution Plan." Class II and III each 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. State Street Bank & Trust
Company, through its affiliate Boston Financial Data Services, provides transfer
agent and shareholder services for the Portfolio. For such services, State
Street is entitled to receive a fee from the Portfolio based on its net asset
value, plus out-of-pocket expenses.
State Street is also Custodian of the assets of the Portfolio and calculates the
NAV and dividends of each Class of the Portfolio and maintains the portfolio and
general accounting records. 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, State Street is entitled to receive a fee from the
Portfolio based on its net asset value, plus certain minimum monthly accounting
fees and 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") and Class IV of the
Portfolio (the "Class IV 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 Class III and Class IV
Plans to allow each Class to compensate ALPS for incurring distribution
expenses. The Class III 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 0.10% of the .50% 12b-1
fee applicable to Class III of the Portfolio. The Class IV Plan provides for
payment of a 12b-1 fee of up to .70% of the average net assets of Class IV of
the Portfolio. The Trust or ALPS, on behalf of Class III and Class IV of the
Portfolio, may enter into servicing agreements (Service Agreements) with banks,
broker-dealers or other institutions (Agency Institutions). The Class III and
Class IV Plans each 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
and Class IV 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 and Class IV Shares; and providing training, marketing
and support to such dealers and others with respect to the sale of Class III and
Class IV Shares. The Class III and Class IV Plans each recognize 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 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 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 the Class III Plan, the $1
difference could be said to be a profit for ALPS. (Because ALPS is reimbursed
for its out-
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of-pocket direct promotional expenses, the 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 the Class III or Class IV Plan, these may
be used as ALPS may elect. Since the amount payable under each 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 each Plan. For the fiscal year ended
June 30, 1998, the Portfolio paid distribution fees in the amount of $45,138
under the Class III Plan, 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. As of that date, no
Class IV Shares were issued.
SHAREHOLDER SERVICES PLANS. In addition to the Rule 12b-1 Distribution Plans
described above, Class II, Class III and Class IV 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, Class
III and Class IV 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, Class III and Class IV 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, Class III and Class IV. Shareholder Servicing
Fees for Class II, Class III and Class IV 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. Effective December 31, 1998, the Class II shares
began to incur Shareholder servicing fees in an amount equal to .10% of the
average net assets of the Class II shares.
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. The 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, six with three Classes and
three with four 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 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
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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 __________________, 1999, the following shareholders owned more than 5% of
the outstanding shares of the indicated Class of the Portfolio:
[To be updated by amendment]
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. PricewaterhouseCoopers 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.
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FINANCIAL STATEMENTS
The Portfolio's financial statements and financial highlights for the fiscal
year ended June 30, 1998 and the six-month period ended December 31, 1998 are
included in the Portfolio's Annual Report and Semi-Annual Report, respectively,
which are separate reports are supplied independent of this Statement of
Additional Information. The Portfolio's financial statements and financial
highlights are incorporated herein by reference.
The Portfolio's financial statements for the year ended June 30, 1998 were
audited by PricewaterhouseCoopers LLP, whose report thereon is included in the
Portfolio's annual report. On April 29, 1999, PricewaterhouseCoopers LLP
resigned as the Portfolio's auditors; such resignation was accepted by the Board
of Trustees. The Trustees have approved the appointment of Deloitte & Touche LLP
as independent auditors of the Portfolio, effective upon the resignation of
PricewaterhouseCoopers LLP.
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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.
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-LIVMIG-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 refinancings.
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 - 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.
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:
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<PAGE>
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.
<PAGE>
PART C. OTHER INFORMATION
Item 23. EXHIBITS
Exhibit
Number Description
- ------ -----------
(a) (1) Declaration of Trust dated as of March 6, 1992. (1)
(2) Supplement to the Declaration of Trust effective April 24,
1992. (1)
(3) Amended and Restated Declaration of Trust dated as of September 4,
1992. (1)
(4) Supplement to the Declaration of Trust effective August 1,
1993. (1)
(b) (1) Bylaws of the Trust. (1)
(2) Amendment to the Bylaws dated November 17, 1992. (1)
(c) Not Applicable.
(d) (1) 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)
(2) 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)
(3) 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)
(4) Sub-Advisory Agreements between First Tennessee Investment
Management, Inc. and First Tennessee Bank National Association on
behalf of Cash Reserve Portfolio, Total Return Equity Portfolio
and Total Return Fixed Income Portfolio, dated May 4, 1993. (1)
(5) Investment Advisory and Management Agreement between First Funds
on behalf
<PAGE>
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.
(6) 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)
(7) Investment Advisory and Management Agreement between First Funds
on behalf of Capital Appreciation Portfolio and Investment
Advisers, Inc. dated August 29, 1997. (1)
(8) 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)
(9) 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)
(10) 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)
(e) (1) General Distribution Agreement between First Funds on behalf of
all Portfolios, and ALPS Mutual Funds Services, Inc., dated July
1, 1995. (1)
(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)
(3) Administration Agreement between First Funds on behalf of all
Portfolios, and ALPS Mutual Funds Services, Inc., dated July 1,
1995. (1)
(4) Amended and Restated Administration Agreement between First Funds
on behalf of all Portfolios, and ALPS Mutual Funds Services, Inc.,
dated November 19, 1997. (1)
(5) Amended and Restated Administration Agreement between First Funds
on behalf of all Portfolios, and ALPS Mutual Funds Services, Inc.,
dated August 19, 1998. (1)
(6) Form of Servicing Agreement between ALPS Mutual Funds Services,
Inc. and an
<PAGE>
Agency Institution is file herewith electronically.
(7) Form of Selling Dealer Agreement between ALPS Mutual Funds
Services, Inc. and selected dealers is filed herewith
electronically.
(8) Form of Bank Agency Agreement between ALPS Mutual Funds Services,
Inc., and banks is filed herewith electronically.
(9) Power of Attorney dated September 25, 1998 (2)
(f) Not Applicable.
(g) Custody Agreement between the First Funds and State Street
Bank & Trust Company dated May 7, 1999 is filed herewith
electronically.
(h) Transfer Agency Agreement between First Funds and State Street
Bank & Trust Company dated May 7, 1999 is filed herewith
electronically.
(i) Opinion and Consent of Baker, Donelson, Bearman & Caldwell is
filed herewith electronically.
(j) Opinion and Consent of PricewaterhouseCoopers LLP, independent
accountants.
[To be provided by amendment]
(k) Not Applicable.
(l) Written assurances that purchase representing initial capital
was made for investment purposes without any present intention
of redeeming or reselling. (1)
(m) (1) Form of Shareholder Servicing Plan for First Funds Class II and
III is filed electronically herewith.
(2) Form of Distribution Plan for First Funds Class III shares is
filed electronically herewith.
(3) Form of Distribution Plan for First Funds Class IV shares is filed
electronically herewith.
(4) Form of Shareholder Services Plan for First Funds Class IV shares
is filed electronically herewith.
(n) Financial Data Schedules are filed herewith electronically.
<PAGE>
(o) Form of Plan Providing for Multiple Classes of Shares pursuant to
Rule 18f-3 is filed herewith electronically.
- ------------------
(1) Incorporated by reference to Post-Effective Amendment No. 15 to the Trust's
Registration Statement.
(2) Incorporated by reference to Post-Effective Amendment No. 16 to the Trust's
Registration Statement.
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not Applicable.
Item 25. INDEMNIFICATION
Article XI, Section 2 of the Declaration of Trust sets forth the
reasonable and fair means for determining whether indemnification
shall be provided to any past or present Trustee or officer. It
states that the Registrant shall indemnify any present or past
Trustee, or officer to the fullest extent permitted by law against
liability and all expenses reasonably incurred by him in
connection with any claim, action suit or proceeding in which he
is involved by virtue of his service as a trustee, officer, or
both. Additionally, amounts paid or incurred in settlement of such
matters are covered by this indemnification. Indemnification will
not be provided in certain circumstances, however. These include
instances of willful misfeasance, bad faith, gross negligence, and
reckless disregard of the duties involved in the conduct of the
particular office involved.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy is expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE>
Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT MANAGER
FIRST TENNESSEE BANK NATIONAL ASSOCIATION (FTB) - INVESTMENT ADVISER
<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- -------- ---- ------------ --------
<S> <C> <C> <C>
Director Robert C. Blattberg Polk Brothers Distinguished Education
Professor of Retailing
J.L. Kellogg Graduate School
of Management
Northwestern University (1)
Director, Factory Card Outlet Corp. (2) Retail
Director, Golub Corporation (3) Grocery
Director Carlos H. Cantu President, Chief Executive Officer, Consumer services
Director, The ServiceMaster Company(4) and Supportive
Management services
Director, Unicom Corporation (5) Utility
Director George E. Cates Chairman of the Board and Chief Real estate investment
Executive Officer, Mid-America trust
Apartment Communities, Inc. (6)
Director, J. Kenneth Glass Executive Vice President, Director, Bank holding company
President, FTNC (7)
Retail Financial
Services Chairman and Director, Norlen Life Credit life insurance
Insurance Company (7)
Director, FT Mortgage Companies (8) Mortgage company
Director, FT Mortgage Holding Mortgage company
Corporation (9)
Director, First Tennessee Mortgage Mortgage company
Services, Inc. (10)
Director, Highland Capital Management Investment Advisor
Corp. (11)
Chairman and Director, First Horizon Consumer access/discount
Strategic Alliances, Inc. (12) card program and finder
Director, First Tennessee Merchant Merchant processing
Services, Inc. (13)
Director, Federal Flood Certification Flood insurance
Corp. (14)
Director, FT Reinsurance Company (15) Insurance
Director, Martin & Company (16) Investment adviser
Director, First Horizon Asset Securities, Securitization conduit
Inc. (17)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- -------- ---- ------------ --------
<S> <C> <C> <C>
Director James A. Haslam, III Chief Executive Officer, Pilot Retail operator of
Corporation (18) convenience stores and
travel centers
Director, Ruby Tuesday, Inc. (19) Restaurant
President, Ralph Horn President, Chairman of the Board, Chief Bank holding company
Chairman of the Executive Officer and Director, FTNC(7)
Board, Chief
Executive Officer Director, Harrah's Entertainment, Inc.(20) Casino, entertainment
and Director
Director, Mid-America Apartment Real estate investment
Communities, Inc. (6) trust
Director, John C. Kelley, Jr. Executive Vice President, Director, Bank holding company
President, Business FTNC (7)
Financial Services/
Memphis Financial Director, Check Consultants, Inc. (7) Check processing and
Services related services
Director, Check Consultants Company Check processing and
of Tennessee (7) related services
Director, First Tennessee Housing Public welfare investments
Corporation (21)
Director, First Tennessee Equipment Equipment financing
Finance Corporation (22)
Director R. Brad Martin Chairman of the Board, Chief Executive Retail
Officer, Saks, Incorporated (23)
Director, Harrah's Entertainment, Inc. (20) Casino, entertainment
Director, Pilot Corporation (18) Retail operator of
convenience stores and
travel centers
Director Joseph Orgill, III Chairman of the Board, West Union Distributor and manufacturer
Corporation (24) for construction industry
Director, Chairman of the Board Wholesale hardware
Orgill, Inc. (25) distributor
Mallory Group (26) Warehousing, distribution
and transportation
Director Vicki R. Palmer Corporate Vice President and Treasurer of Bottler of soft drink products
Coca Cola Enterprises, Inc. (27)
Director Michael D. Rose Director, Nextera Enterprises, Inc. (28) Business consulting
Director, General Mills, Inc. (29) Food processing
Director, Ashland Inc. (30) Oil company
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- -------- ---- ------------ --------
<S> <C> <C> <C>
Michael D. Rose Director, Darden Restaurants, Inc.(31) Restaurant
(continued)
Director, Stein Mart, Inc.(32) Retail
Director, FelCor Lodging Trust, Inc.(33) Hotel
Director, ResortQuest International, Vacation property
Inc. (34) management
Director William B. Sansom Chairman of the Board and Chief Wholesale distributor
Executive Officer, The H.T.
Hackney Company (35)
Director, Martin Marietta Materials, Construction aggregate
Inc. (36) materials producer
Director, Astec Industries, Inc. (37) Construction aggregate
Materials producer
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- -------- ---- ------------ --------
<S> <C> <C> <C>
Executive Vice Susan Schmidt Bies Executive Vice President, Auditor, Bank holding company
President, FTNC (7)
Auditor
Executive Vice Harry A. Johnson, III Executive Vice President and Bank holding company
President and General Counsel of FTNC(7)
General Counsel
Executive Vice George Perry Lewis Director, First Tennessee Broker Dealer
President-Group Brokerage, Inc. (38)
Manager, Money
Management Director, Highland Capital Investment Adviser
Management Corp. (11)
Director, Hickory Venture Venture Capital
Capital Corporation (39)
Director, Hickory Capital Venture Capital
Corporation (40)
Director, Martin & Co., Inc.(16) Investment Adviser
Director, FT Insurance Corporation(41) Insurance
Executive Vice John P. O'Connor, Jr. Executive Vice President and Chief Bank holding company
President and Credit Officer of FTNC(7)
Chief Credit
Officer
Executive Vice Sarah Meyerrose Executive Vice President Employee Bank holding company
President- Services of FTNC(7)
Employee Services
Executive Vice Elbert L. Thomas, Jr. Executive Vice President and Chief Bank holding company
President, Chief Financial Officer of FTNC(7)
Financial Officer
Director, First Tennessee ABS, Inc.(42) REIT/REMIC
Director, FT Real Estate Securities REIT/REMIC
Company, Inc.(43)
Director, FT Realty Securities QRS, REIT/REMIC
Inc.(44)
Director, FT Real Estate Securities REIT/REMIC
Holding Company, Inc.(45)
Executive Vice Charles Burkett Director, Highland Capital Management Investment Adviser
President, Corp.(11)
Affluent
Market Manager
Executive Vice David L. Berry None
President
Executive Vice William E. Woodson Director, Martin & Co., inc.(16) Investment Adviser
President
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- -------- ---- ------------ --------
<S> <C> <C> <C>
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 Maureen MacIver None
Senior Vice President Otis M. Clyaton None
Vice President Suzanne Donaldson None
Vice President Craig Harris None
Vice President Edward C. Dellinger None
Vice President Claudette S. Sanders None
Vice President John Barringer None
Trust Officer Robert Johnston None
Chairman and CEO Larry B. Martin Director, Martin & Co., Inc.(16) Investment Adviser
First Tennessee Bank-
Knoxville
President, First Lew Weems Director, Martin & Co., Inc.(16) Investment Adviser
Tennessee Bank-
Knoxville
</TABLE>
<PAGE>
NOTES:
* All directors of FTB are also directors of its parent, First Tennessee
National Corporation, which controls FTB. Messrs, Glass, Horn, Johnson,
Keen, Kelley, Lewis, O'Connor and Thomas and Ms. Bies and Ms. Meyerrose are
considered executive officers of FTNC.
(1) J.L. Kellog Graduate School of Management, 875 N. Michigan Ave., Suite
2945, Chicago, IL 60611
(2) Factory Card Outlet Corp., 745 Birbinal Drive, Bensenville, IL 60106-1212
(3) Golub Corporation, P.O. Box 1074, Schenectady, NY 12301
(4) ServiceMaster Company, One ServiceMaster Way, Downers Grove, IL 30515
(5) Unicom Corporation, 1 First National Plaza, Chicago, IL 60690
(6) Mid-America Apartment Communities, Inc., 6584 Poplar Ave., Ste. 340,
Memphis, TN 38138
(7) First Tennessee Bank National Association and First Tennessee National
Corporation, 165 Madison Avenue, Memphis, TN 38103
(8) FT Mortgage Companies, 2974 LBJ Freeway, Dallas, TX 75234
(9) FT Mortgage Holding Corporation, 165 Madison Ave., Memphis, TN 38103
(10) FT Mortgage Services, Inc., 165 Madison Ave., Memphis, TN 38103
(11) Highland Capital Management Corp., 6077 Primacy Parkway, Suite 228,
Memphis, TN 38117
(12) First Horizon Strategic Alliances, Inc., 1700 Rambling Road, Richmond, VA
23235
(13) First Tennessee Merchant Services, Inc., 300 Court Ave., Memphis, TN 38103
(14) Federal Flood Certification Corporation, 6220 Gaston Ave., Dallas, TX 75214
(15) FT Reinsurance Company, 7 Burlington Square, 6th Floor, Burlington, VT
05401
(16) Martin & Company, Two Centre Square, 625 S. Gay Street, Suite 200,
Knoxville, TN 37902-1669
(17) First Horizon Asset Securities, 2974 LBJ Freeway, Dallas, TX 75234
(18) Pilot Corporation, 5508 Lonas Road, Knoxville, TN 37909
(19) Ruby Tuesday, Inc., 150 West Church Ave., Maryville, TN 37801
(20) Harrah's Entertainment, Inc., 1023 Cherry Road, Memphis, TN 38117
(21) First Tennessee Housing Corporation, 165 Madison Ave., Memphis, TN 38103
(22) First Tennessee Equipment Finance Corporation, 165 Madison Ave., Memphis,
TN 38103
(23) Saks, Incorporated, 5810 Shelby Oaks Drive, Memphis, TN 38134
(24) West Union Corporation, 35 Union Ave., Suite 300, Memphis, TN 38103
(25) Orgill, Inc., 2100 Latham Street, Memphis, TN 38109
<PAGE>
(26) Mallory Group, 4294 Sweeney Road, Memphis,TN 38118
(27) Coca Cola Enterprises, Inc., 2500 Windy ridge Pkwy, Marietta, GA 30067
(28) Nextera Enterprises, Inc., One Cranberry Hill, Lexington, MA 02421
(29) General Mills, Inc., 9200 Wayzata Blvd., Minneapolis, MN 55426
(30) Ashland Co., 2351 Channel Ave., Memphis, TN
(31) Darden Restaurants, Inc., 5900 Lake Ellenor Drive, Orlando, FL 32809
(32) Stein Mart, Inc., 1200 Riverplace Blvd., Jacksonville, FL 32207
(33) FelCor Lodging Trust, Inc., 545 East John Carpenter Freeway, Suite 1300,
Irving, TX 75062-3933
(34) ResortQuest International, Inc., 530 Oak Court Drive, #360, Memphis, TN
38117
(35) The H.T Hackney Company, Fidelity Bldg., 502 S. Gay Street, Suite 300,
Knoxville, TN 37902
(36) Martin Marietta Materials, Inc., P.O. Box 30013, Raleigh, NC 27622-0013
(37) Astec Industries, Inc., P.O. Box 72787, Chattanooga, TN 37407
(38) First Tennessee Brokerage, Inc., 5100 Poplar Avenue, Memphis, TN 38117
(39) Hickory Venture Capital Corporation, 200 West Court Square, Suite 100,
Huntsville, AL 35801
(40) Hickory Capital Corporation, 200 West Court Square, Suite 100, Huntsville,
AL 35801
(41) FT Insurance Corporation, 530 Oak Court Drive, Memphis, TN 38117
(42) First Tennessee ABS, Ins., P.O. Box 249, Springdale, AR 72765
(43) FT Real Estate Securities, Company, Inc., P.O. Box 249, Springdale, AR
72765
(44) FT Realty Securities QRS, Inc., P.O. Box 249, Springdale, AR 72765
(45) FT Real Estate Securities Holding Company, Inc., P.O. Box 249, Springdale,
AR 72765
<PAGE>
HIGHLAND CAPITAL MANAGEMENT CORP. (HIGHLAND)
6077 PRIMACY PARKWAY, MEMPHIS, TN
<TABLE>
<CAPTION>
Position Other Business
with Highland Name Connections
- ------------- ---- -----------
<S> <C> <C>
Director, Executive Vice President, Edward J. Goldstein None
Treasurer, Secretary
Director, President Steven Wishnia None
Director, Executive Vice President James M. Weir None
Director, Chairman of the Board Paul H. Berz None
Director Charles Thomas Whitman (1)(2) Director, NexAir, LLC
Director J. Kenneth Glass see FTB listing
Director Charles Burkett see FTB listing
Director George Perry Lewis see FTB listing
Senior Vice President Steven T. Ashby None
Senior Vice President David L. Thompson None
Senior Vice President James R. Turner None
</TABLE>
(1) Previously, Executive Vice President 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
<PAGE>
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
Director Larry B. Martin See FTB listing
Director George P. 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
Senior 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, Senior Securities Analyst Stanley Erwin, Jr. None
Vice President, Portfolio Manager Gary Hoemann (4) None
Vice President, Portfolio Manager John C. Miller (5) None
Vice President, Portfolio Manager David Zandstra (5) None
Vice President, 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
Item 27. PRINCIPAL UNDERWRITERS
(1) 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 with
Business Address* Registrant 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
Russell C. Burk Secretary General Counsel
John W. Hannon, Jr. None Director
Rick A. Pederson None Director
Chris Woessner None Director
</TABLE>
<PAGE>
* All addresses are 370 Seventeenth Street, Suite 3100, Denver, Colorado 80202.
Item 28. LOCATION OF ACCOUNTS AND RECORDS
First Tennessee Bank National Association, located at 530 Oak
Court Dr., Suite 200, 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, State
Street Bank and Trust Company, Two Heritage Drive, 9th Floor,
North Quincy, MA and those transfer agent, pricing and bookkeeping
and general accounting records maintained by the Trust's Transfer
Agent and Pricing and Accounting Agent, State Street Bank and
Trust Company at the same address listed above.
Item 29. MANAGEMENT SERVICES
Not Applicable.
Item 30. UNDERTAKINGS
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 Rule 485(a)
thereunder and the Investment Company Act of 1940, the Registrant certifies that
it has duly caused this Post-Effective Amendment No. 17 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 21th day of
May, 1999.
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 May 21, 1999
- ----------------------
Richard C. Rantzow
/c/Jeremy O. May Treasurer May 21, 1999
- ----------------
Jeremy O. May
/c/Thomas M. Batchelor* Trustee May 21, 1999
- -----------------------
Thomas M. Batchelor
/c/John A. DeCell* Trustee May 21, 1999
- ------------------
John A. DeCell
/c/Larry W. Papasan* Trustee May 21, 1999
- --------------------
Larry W. Papasan
* Signature affixed by Desiree M. Franklin pursuant to a power of attorney dated
September 25, 1998.
<PAGE>
INDEX TO EXHIBITS
FIRST FUNDS
EXHIBIT NUMBER
- --------------
(e) (6) Form of Servicing Agreement between ALPS Mutual Funds, Inc. and
an Agency Institution.
(e) (7) Form of Selling Dealer Agreement between ALPS Mutual Services,
Inc and selected dealers.
(e) (8) Form of Bank Agency Agreement between ALPS Mutual Funds
Services, Inc. and banks.
(g) Custody Agreement between First Funds and State Street Bank and
Trust Company dated May 7, 1999.
(h) Transfer Agency Agreement between First Funds and State Street
Bank and Trust Company dated May 7, 1999.
(i) Opinion and Consent of Baker, Donelson, Bearman & Caldwell.
(m) (1) Form of Shareholder Servicing Plan for First Funds Class II and
III shares.
(m) (2) Form of Distribution Plan for First Funds Class III shares.
(m) (3) Form of Distribution Plan for First Funds Class IV shares.
(m) (4) Form of Shareholder Services Plan for First Funds Class IV
shares.
(n) Financial Data Schedules.
(o) Form of Plan Providing for Multiple Classes of Shares Pursuant
to Rule 18f-3.
<PAGE>
SERVICE CONTRACT
(Administrative and Agency Services Only)
- -------------------------------------------------------------------------------
WITH RESPECT TO FIRST FUNDS (THE TRUST):CLASS II SHARES OF:
( ) Growth & Income Portfolio
( ) Bond Portfolio
( ) U.S. Treasury Money Market Portfolio
( ) U.S. Government Money Market Portfolio
( ) Municipal Money Market Portfolio
( ) Cash Reserve Portfolio
( ) Tennessee Tax-Free Portfolio
( ) Intermediate Bond Portfolio
( ) Capital Appreciation Portfolio
CLASS III SHARES OF:
( ) Growth & Income Portfolio
( ) Bond Portfolio
( ) Tennessee Tax-Free Portfolio
( ) Intermediate Bond Portfolio
( ) Capital Appreciation Portfolio
Class IV shares of:
() Growth & Income Portfolio
() Tennessee Tax-Free Portfolio
() Capital Appreciation Porfolio(each Class II,III or IV Portfolios)
To First Funds: We desire to enter into a Contract with you for activities in
connection with the servicing of beneficial owners of Class II and 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 II, III
or IV 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 II,III or IV 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 II,III or IV
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 II, III or IV 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
representations 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 II,
III or IV 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 Services Plans (each a
Class II, III or IVPlan) 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 II, III or IV Plan or in
any agreements related to each Class II,III or IV Plan (Independent
Trustees), that such fees will be paid from each Class II, III or IV
Portfolio, or any other source available to you; and that such fees are
subject to change during the term of this Contract and shall be paid only so
long as this Contract is in effect.
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 of fees in connection with their
beneficial ownership of shares of each Class II, III or IV Portfolio. We
represent that any compensation payable to us in connection with the
investment of customers' assets in Class II,III or IV 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 withdraw the sale of shares of each Class II,III or IV
Portfolio.
7. This Contract shall continue in force for one year from the effective date
of the Class II,III or IV Plan, and thereafter shall continue automatically
for successive annual periods, provided such continuance is specifically
subject to termination with respect to any Class II,III or IV Portfolio
without penalty at any time if a majority of the Trust's Independent
Trustees vote to terminate or not to continue each Class II,III or IV 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 II,III or IV 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 3100, 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
<PAGE>
and agree that the obligations assumed by the Trust under this contract
shall be limited in all cases to the assets of Class II,III or IV of the
applicable Portfolio.
Very truly yours,
- -------------------------------------------------------------------------------
Name of Shareholder Servicing Agent (Please Print or Type )
- -------------------------------------------------------------------------------
Street City State Zip Code
By
- -------------------------------------------------------------------------------
Authorized Signature Title
Its:
-------------------------------------
Date:
------------------------------------
NOTE: Please return two 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>
FEE SCHEDULE FOR AGENCY INSTITUTIONS OR
QUALIFIED RECIPIENTS OF
First Funds: Class II,III and IV Shares
- ------------------------------------------------------------------------------
Those who have signed the Service Contract and who render administrative support
and recordkeeping services as described therein, will hereafter be referred to
as "Agency Institutions or Qualified Recipients."
Qualified Recipients who perform administrative support and recordkeeping
services on behalf of holders of Class II,III or IV shares in accordance with
the terms of the Service Contract, will earn a monthly fee at the annualized
rate set forth below of the average aggregate net assets of their clients
invested in the Portfolio(s) according to the following schedule:
<TABLE>
<CAPTION>
Class II Portfolio Compensation
- ------------------ ------------
<S> <C>
Growth & Income .25%
Bond .25%
U.S. Treasury Money Market .25%
U.S. Government Money Market .25%
Municipal Money Market .25%
Cash Reserve .25%
Tennessee Tax-Free .10%
Intermediate Bond .25%
Capital Appreciation .25%
Class III Portfolio Compensation
- ------------------- ------------
Growth & Income .25%
Bond .25%
Tennessee Tax-Free 0
Intermediate Bond .25%
Capital Appreciation .25%
Class IV Portfolio Compensation
- ------------------ ------------
Growth & Income .25%
Tennessee Tax-Free .10%
Capital Appreciation .25%
</TABLE>
The fees paid to each Qualified Recipient will be calculated and paid monthly.
<PAGE>
SELLING DEALER AGREEMENT
As the principal underwriter of the shares of First Funds, we, ALPS Mutual
Funds Services, Inc. agree to sell to you, [_______________________], shares of
each Class of First Funds purchased by us as principal from the Portfolios for
resale by you as principal upon the following terms and conditions:
1. As used herein the following terms shall have the meaning hereinafter set
forth (unless a different meaning is plainly required by the context):
(a) "Funds" shall mean the open-end investment companies, series, or (in
the case of companies or series offering multiple classes of shares) classes of
one or more of the foregoing, the shares of which from time to time shall be
offered by us as principal underwriter to you hereunder and which are designated
by us as such by telephonic or written notice to you. This Agreement shall apply
only to such companies, series or classes so designated and offered by us to you
from time to time and only such companies, series or classes shall be considered
to be Funds hereunder. Until further notice in writing from us to you, such
Funds are the following series of First Funds: U.S. Treasury Money Market
Portfolio, U.S. Government Money Market Portfolio, Municipal Money Market
Portfolio, Cash Reserve Portfolio, Growth & Income Portfolio, Bond Portfolio,
and Tennessee Tax-Free Portfolio.
(b) "Portfolio" shall mean any one of the Funds.
(c) "Prospectus" shall mean a Portfolio's prospectus, statement of
additional information, any supplements thereto current at the time of any
action described herein.
2. (a) In all resales to the public of shares of the Portfolios sold to you
by us, (i) you shall sell at the applicable public offering price giving effect
to cumulative or quantity discounts or other purchase programs, plans or
services described in the Prospectus of the Portfolio or class thereof whose
shares are being resold and you shall transmit payment for such shares in
accordance with paragraph 3(a) below; (ii) you shall act as dealer; and (iii)
your discount, if any, with respect to the resale shall be as set forth in the
applicable schedule of discounts issued by us and in effect at the time of the
sale by us to you of such shares or as set forth in the Prospectus. Such
discount schedules are subject to change or discontinuance by us or the
Portfolios from time to time as set forth in paragraph 7 below.
(b) In the case of a Portfolio or class thereof which has adopted a
Distribution and Service Plan pursuant to Rule 12b-1 under the Investment
Company Act of 1940 (a "Plan"), we may elect from time to time to make payments
to you as provided under such Plan. In the case of a Portfolio or class thereof
that has no currently effective Plan, we may, to the extent permitted by
applicable law, elect to make payments to you from our own funds. Any such
payments shall be made in the amount and manner set forth in the applicable
schedule of distribution and service payments issued by us and then in effect or
as set forth in the Prospectus. Such schedule of distribution and service
<PAGE>
payments may be discontinued or changed by us from time to time and shall be in
effect with respect to a Portfolio which has a Plan only so long as such
Portfolio's Plan remains in effect.
(c) In the event that Article III, Section 26 of the NASD Rules of Fair
Practice preclude any Portfolio or class thereof from imposing, or us from
receiving, a sales charge (as defined in that Section) or any portion thereof,
then you shall not be entitled to any payments from us hereunder from the date
that the Portfolio or class thereof discontinues or is required to discontinue
imposition of some or all of its sales charges. If the Portfolio or class
thereof resumes imposition of some or all of its sales charge, you will be
entitled to payments hereunder on the same terms as the Portfolio extends to us.
3. (a) The placing of orders with us shall be governed by instructions which
we shall issue from time to time. Payment for shares ordered from us shall be
made in accordance with such instructions in New York Clearing House funds
received by us within three business days (as defined in each Portfolio's
Prospectus) after our acceptance of the order. If such payment is not received
by us, we reserve the right, without notice forthwith, to cancel the sale, or,
at our option, to sell the shares ordered back to the issuing Portfolio, in
which latter case we may hold you responsible for any loss, including loss of
profit, suffered by us as a result of your failure to make payment as aforesaid.
(b) A purchase, transfer, redemption, repurchase or sale (each hereinafter
a "Transaction") of Portfolio shares shall be evidenced by a confirmation
statement transmitted to you. Any Transaction in Portfolio shares, shall be
effected and evidenced by book-entry on the records maintained by the transfer
agent of the Funds.
(c) You appoint the transfer agent for each Portfolio as your agent to
execute customers' Transactions in Portfolio shares sold to you by us in
accordance with the terms and provisions of any account, program, plan or
service established or used by your customers and to confirm each such
Transaction to your customers on your behalf, and at the time of the Transaction
you guarantee the legal capacity of your customers so transacting in such shares
and any co-owners of such shares.
(d) You may instruct the Portfolios' transfer agent to register shares
purchased in your name and account as nominee for your customers, in which event
all Prospectuses, proxy statements, periodic reports and other printed material
will be sent to you and all confirmations and other communications to
shareholders will be transmitted to you. You shall be responsible for forwarding
such printed material, confirmations and communications, or the information
contained therein, to all customers for whom you hold such shares as nominee.
However, we, the Portfolios' transfer agent, or the Portfolios shall be
responsible for the reasonable costs associated with your forwarding such
printed material, confirmations and communications and shall reimburse you in
full for such costs. You shall also be responsible for complying with all
reporting and tax withholding requirements with respect to the customers for
whose account you are holding such shares. With respect to customers other than
such customers, you shall provide us with all information (including, without
limitation, certification of taxpayer identification numbers and back-up
withholding instructions) necessary or appropriate for us to comply with legal
and regulatory reporting requirements.
4. Upon request, we will furnish you a reasonable number of copies of the
Prospectus of each of the Portfolios and the printed information referred to in
paragraph 6 below issued as supplements
<PAGE>
thereto.
5. (a) You represent that you are and will remain a member in good standing
of the National Association of Securities Dealers, Inc. ("NASD"), and agree to
abide by all of its rules and regulations including its Rules of Fair Practice.
You further agree to comply with all applicable state and federal laws and rules
and regulations of regulatory agencies having jurisdiction. Reference is hereby
specifically made to Section 26, Article III, of the Rules of Fair Practice of
the NASD, which is incorporated herein as if set forth in full. The termination
of your membership in the NASD or any breach of said Section 26 will immediately
and automatically terminate this Agreement.
(b) We shall not purchase Portfolio shares from a Portfolio except for
the purpose of covering purchase orders already received by us, and you shall
not purchase Portfolio shares from us other than for investment except for the
purpose of covering purchase orders already received by you.
(c) You shall not withhold placing customers' orders for Portfolio
shares so as to profit yourself as a result of such withholding, e.g., by virtue
of a change in a Portfolio's net asset value per share from that used in
determining the offering price to your customers.
(d) We shall not accept a conditional order for Portfolio shares on any
basis other than at a definite specified price.
(e) If, within seven business days after confirmation by us of your
original purchase order for shares of a Portfolio, such shares are repurchased
by the issuing Portfolio or by us for the account of such Portfolio or are
tendered for redemption by the customer, (i) you shall forthwith refund to us
the full discount retained by you on the original sale pursuant to paragraph
2(a) and any distribution and service payments made to you pursuant to paragraph
2(b) above, and (ii) we shall forthwith pay to such Portfolio our share of the
sales charge on the original sale by us and shall also pay such Portfolio the
refund received under clause (i) when we receive it. You shall refund to the
Portfolio immediately upon receipt the amount of any dividends or distributions
paid to you as nominee for your customers with respect to redeemed or
repurchased Portfolio shares to the extent that the proceeds of such redemption
or repurchase may include the dividends or distributions payable on such shares.
You shall be notified by us of such repurchase or redemption within ten days of
such repurchase or redemption. Delivery to the Portfolio's transfer agent is
delivery to the Portfolio.
(f) In the event any adjustment in the discount retained by you on any
sale under paragraph 2(a), or in the distribution and service payments made to
you under paragraph 2(b) shall result in an overpayment by us of such discount
or payment, you shall forthwith remit such overpayment. The term "adjustment" as
used in the preceding sentence shall not include any changes in amounts paid to,
retained by, or due you caused by a change in or discontinuance of such
discounts or distribution and service payments (as provided under paragraphs
2(a), 2(b) and 7) prior to the effective date of such change or discontinuance
of the discount or distribution and service payment. You acknowledge that the
foregoing shall in no way limit our right to change or discontinue such
discounts or distribution and service payment as provided in paragraphs 2 and 7
hereof, and that, after the effective date of a change in or discontinuance by
us of the discount
<PAGE>
schedules or of the distribution and service payments or termination of any
Plan, discounts retained by you under paragraph 2(a) or amounts paid under 2(b)
shall be in amounts and made in accordance with such change, discontinuation or
termination.
(g) Neither we nor you shall, as principal, purchase Portfolio shares
from a record holder at a price lower than the bid price next quoted by or for
the issuing Portfolio.
(h) Nothing in this Agreement shall prevent you from selling Portfolio
shares for the account of a beneficial owner to us or the issuing Portfolio and
charging the beneficial owner a reasonable charge for handling the transaction,
provided that you disclose to such record owner that direct redemption of the
shares can be accomplished by the record owner without incurring such charge.
6. (a) In all sales of Portfolio shares to the public you shall act as a
dealer for your own account and in no transaction shall you have any authority
to act or hold yourself out as agent for us, or any Portfolio, and nothing in
this Agreement including the use of the words "discount" or "payment," shall
cause you to be our partner, employee, or agent or give you any authority to act
for us or for any Portfolio. Neither we nor any Portfolio shall be liable for
any of your acts or obligations as a dealer under this Agreement.
(b) No person is authorized to make any representations concerning
Portfolio shares except those contained in such Portfolio's Prospectus, and in
buying shares from us or selling shares to us hereunder, you shall rely solely
on the representations contained in the Prospectus. We or the Portfolio shall
bear the expense of qualifying Portfolio shares under the securities laws of the
various states. Any printed information which we shall furnish you (other than
the Portfolios' Prospectuses, periodic reports and supplemental information) is
our sole responsibility and not the responsibility of the respective Portfolios.
You agree that the Portfolios shall have no liability or responsibility to you
with respect to any such printed information. No sales literature or advertising
material (including material disseminated through radio, television or other
electronic media) concerning Portfolio shares, other than such printed
information, shall be used by you in connection with the offer or sale of
Portfolio shares without obtaining our prior written approval. You shall not
distribute or make available to investors any printed information furnished by
us which is marked "FOR BROKER/DEALER USE ONLY" or which otherwise indicates
that it is confidential or not intended to be distributed to investors.
(c) You will comply with all applicable state and federal laws and with
the rules and regulations of authorized regulatory agencies thereunder. You will
not offer shares of any Portfolio for sale unless such shares are duly
registered under the applicable state and federal statutes and the rules and
regulations thereunder.
7. All orders are subject to acceptance or rejection by us. We reserve the right
in our discretion, without notice, to suspend sales or to withdraw the offering
of Portfolio shares, in whole or in part, or to make a limited offering of
Portfolio shares. Either of us may cancel this Agreement upon telephonic or
written notice to the other. Upon telephonic or written notice to you, we may
also change, or amend any provision of this Agreement. Upon telephonic or
written notice to you, we or any Portfolio may change, amend or discontinue any
schedule or schedules of discounts or
<PAGE>
distribution and service payments issued by us from time to time and may issue a
new or replacement schedule or schedules of discounts or distribution and
service payments from time to time. You hereby agree that you shall have no
vested interest in any type, amount or rate of discount or distribution and
service payment and that you shall have no claim against us or any Portfolio by
virtue of any change or diminution in the rate or amount of, or discontinuance
of, any discount or distribution and service payment in connection with the
shares of any Portfolio.
8. You agree, in connection with Portfolios that offer multiple classes of
Shares, to disclose to investors that are eligible to purchase the other
class(es) of such Portfolio (as set forth in the applicable Prospectus) the
availability of such other class(es). You and we each further agree to waive or
accept reduced payments pursuant to any Plan from each Portfolio that is a money
market fund within the meaning of Rule 2a-7 under the Investment Company Act of
1940 (or from any class thereof) to the extent necessary to assure that such
Portfolio and each class thereof maintains a constant $1.00 net asset value per
share.
9. Failure of either party to terminate this Agreement upon the occurrence of
any event set forth in this Agreement as a cause for termination shall not
constitute a waiver of the right to terminate this Agreement at a later time on
account of such occurrence.
10. In the event of a dispute, such dispute shall be settled by arbitration
before arbitrators sitting in Denver, Colorado in accordance with the commercial
rules then in effect at the NASD. The arbitrators shall act by majority
decision, and their award may allocate attorneys' fees and arbitration costs
between the parties; such award shall be final and binding between the parties
and judgment thereon may be entered in any court of competent jurisdiction.
11. All communications to us should be sent to our address. Any notice to you
shall be duly given if mailed or telegraphed to you at the address specified by
you below. This Agreement shall become binding upon receipt by us in Denver,
Colorado of a counterpart hereof duly accepted and signed by you. THIS AGREEMENT
SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO.
12. The Agent will provide the Trust or its designees such information as the
Trust or its designees may reasonably request (including, without limitation,
periodic certifications confirming the provision to Customers of the services
described herein), and will otherwise cooperate with the Trust and its designees
(including, without limitation, any auditors designated by the Trust), in
connection with the preparation of reports to its Board of Trustees concerning
this Agreement and the monies paid or payable under this Agreement, as well as
any other reports or filings that may be required by law.
<PAGE>
13. This Agreement supersedes and cancels all previous agreements between us,
whether oral or written.
Very truly yours,
Dated as of: ___________________ ALPS MUTUAL FUNDS SERVICES,
INC.
By:__________________
_____________________
Signature
Its:_________________
ACCEPTED AND AGREED:
________________________________
Firm
By: ____________________________
Authorized Representative
________________________________
Signature
Address: _______________________
________________________________
________________________________
NSCC Dealer #____________________________ Fax Number:________________________
NSCC Dealer Alpha Code___________________ Date:______________________________
NSCC Clearing #__________________________ Mutual Fund Coordinator/
Primary Contact:
Phone Number:____________________________ ___________________________________
<PAGE>
SCHEDULE OF DISTRIBUTION AND SERVICE PAYMENTS
FOR SALES OF CLASS III SHARES
PURSUANT TO PARAGRAPH 2(b) OF THE SELLING DEALER AGREEMENT
In consideration of sales of Class III and IV shares of the Portfolios of First
Funds (the Trust), under the terms and conditions of Paragraph 2(b) of the
Selling Dealer Agreement, the following schedule for the payment of fees shall
apply:
<TABLE>
<CAPTION>
DEALER COMPENSATION
NAME OF PORTFOLIO CONTRACTUAL RATE CURRENT CHARGE
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS III
U.S. TREASURY MONEY MARKET PORTFOLIO .45% .25%
U.S. GOVERNMENT MONEY MARKET PORTFOLIO .45% .25%
MUNICIPAL MONEY MARKET PORTFOLIO .45% .25%
CASH RESERVE PORTFOLIO .45% .25%
BOND PORTFOLIO .75% .50%
GROWTH & INCOME PORTFOLIO .75% .75%
TENNESSEE TAX-FREE PORTFOLIO .75% .50%
INTERMEDIATE BOND PORTFOLIO .75% .50%
CAPITAL APPRECIATION PORTFOLIO .75% .75%
CLASS IV
GROWTH & INCOME PORTFOLIO .75% .75%
TENNESSEE TAX-FREE PORTFOLIO .60% .60%
CAPITAL APPRECIATION PORTFOLIO .75% .75%
</TABLE>
ALPS Mutual Funds Services, Inc. shall pay you a fee based on the monthly
average daily net assets of Class III or IV shares of each Portfolio that has
commenced operations. Such fee shall be computed daily and paid monthly. The
determination of daily net assets shall be made at the close of each business
day throughout the month and computed in the manner specified in the Portfolio's
then-current Prospectus for the determination of the net asset value of shares
of each Class, but shall exclude assets attributable to any other Class of the
Portfolio.
<PAGE>
BANK AGENCY AGREEMENT
We, ALPS Mutual Funds Services, Inc., are distributors of First Funds. You
____________________ are a wholly-owned subsidiary or division of
_________________ ("Bank") and desire to make Portfolio shares available to your
bank customers upon the following terms and conditions:
1. As used herein the following terms shall have the meaning hereinafter set
forth (unless a different meaning is plainly required by the context):
(a) "Funds" shall mean the open-end investment companies, series, or
(in the case of companies or series offering multiple classes of shares) classes
of one or more of the foregoing, the shares of which from time to time shall be
offered by us as principal underwriter to you hereunder and which are designated
by us as such by telephonic or written notice to you. This Agreement shall apply
only to such companies, series, or classes so designated and only such
companies, series or classes shall be considered to be Funds hereunder. Until
further notice in writing from us to you, such Funds are the following series of
First Funds: U.S. Treasury Money Market Portfolio, U.S. Government Money Market
Portfolio, Municipal Money Market Portfolio, Cash Reserve Portfolio, Growth &
Income Portfolio, Bond Portfolio, Intermediate Bond Portfolio, Capital
Appreciation Portfolio and Tennessee Tax-Free Portfolio.
(b) "Portfolio" shall mean any one of the Funds.
(c) "Prospectus" shall mean a Portfolio's prospectus, statement of
additional information, any supplements thereto current at the time of any
action described herein.
2. (a) In respect of all sales of Portfolio shares to your customers for
which you act as agent, (i) such shares shall be sold at the applicable public
offering price, giving effect to cumulative or quantity discounts or other
purchase programs, plans or services as described in the Prospectus of the
Portfolio or class thereof whose shares are being sold and you shall transmit
payment for such shares in accordance with paragraph 3(a) below; (ii) your
customers' transactions will be executed only upon your authorization, and on
all such transactions you shall be acting solely as agent, upon the order and at
the request of your customers, without recourse to you, and such transactions
shall be for the account of your customers and not for your account; (iii) your
compensation for acting as agent with respect to sales shall be as set forth in
the applicable schedule issued and in effect at the time of the sale or as set
forth in the Prospectus. Such compensation schedules are subject to change or
discontinuance by us from time to time as set forth in paragraph 7 below.
<PAGE>
(b) In the case of a Portfolio or class thereof which has adopted a
Distribution and Service Plan pursuant to Rule 12b-1 under the Investment
Company Act of 1940 (a "Plan"), and subject to applicable law, we may elect from
time to time to make service payments to you under such Plan. In the case of a
Portfolio that has no currently effective Plan, we, to the extent permitted by
applicable law, may elect to make service payments to you from our own funds for
services which may include, without limitation, changing client dividend
options, account designations and addresses; processing purchases and
redemptions on behalf of clients, including automatic dividend reinvestment
requests and automatic investment and redemption of client account cash
balances; arranging for bank wires; providing periodic statements of account or
subaccounting services to clients; and such other services or information as we
or your clients may reasonably request. Any such service payments shall be made
for shareholder servicing and shall be in the amount and manner set forth in the
applicable schedule of service payments issued by us and then in effect or as
set forth in the Prospectus. Such schedule of service payments may be changed or
discontinued by us from time to time and shall be in effect with respect to a
Portfolio which has a Plan only so long as such Portfolio's Plan remains in
effect.
(c) In the event that Article III, Section 26 of the NASD Rules of Fair
Practice preclude any Portfolio or class thereof from imposing a sales charge
(as defined in that Section) or any portion thereof, then you shall not be
entitled to any payments from us hereunder from the date that the Portfolio or
class thereof discontinues or is required to discontinue imposition of some or
all of its sales charges. If the Portfolio or class thereof resumes imposition
of some or all of its sales charge, you will be entitled to payments hereunder
on the same terms as the Portfolio extends to us.
3. (a) The placing of orders with us shall be governed by instructions
which we shall issue from time to time. Payment for shares shall be made in
accordance with such instructions in New York Clearing House funds received by
us within five business days (as defined in each Portfolio's Prospectus) after
our acceptance of the order. If such payment is not received by us, we reserve
the right, without notice, forthwith to cancel the sale, or, at our option to
sell the shares ordered back to the issuing Portfolio, in which latter case, we
may hold you responsible for any loss, including loss of profit, suffered by us
as a result of your failure to make payment as aforesaid. You may deduct the
agency compensation due you under paragraph 2(a) above prior to payment for
shares purchased through you.
(b) You appoint the transfer agent for each Portfolio as your agent to
execute customers' purchase, sale, transfer, or redemption (each hereinafter a
"Transaction") of Portfolio shares in accordance with the terms and provisions
of any account, program, plan or service established or used by your customers
and to confirm each such Transaction to your customers on your behalf on a fully
disclosed basis, and at the time of the Transaction, you guarantee the legal
capacity of your customers and any co-owners of such shares so transacting in
such shares.
<PAGE>
(c) You may instruct a Portfolio's transfer agent to register shares
purchased in your name and account as nominee for your customers, in which event
all Prospectuses, proxy statements, periodic reports and other printed material
will be sent to you and all confirmations and other communications to
shareholders will be transmitted to you. You shall be responsible for forwarding
such printed material, confirmations and communications, or the information
contained therein, to all customers for whom you hold such shares as nominee.
However, we, the Portfolios' transfer agent, or the Portfolios shall be
responsible for the reasonable costs associated with your forwarding such
printed material, confirmations and communications and shall reimburse you in
full for such costs. You shall also be responsible for complying with all
reporting and tax withholding requirements with respect to the customers for
whose accounts you are holding such shares. With respect to customers other than
such customers, you shall provide us with all information (including, without
limitation, certification of taxpayer identification numbers and back-up
withholding instructions) necessary or appropriate for us to comply with legal
and regulatory reporting requirements.
4. Upon request, we will furnish you a reasonable number of copies of the
Prospectus of each of the Portfolios and the printed information referred to in
paragraph 6 below issued as supplements thereto.
5. (a) You represent that you either (i) are registered as a securities
broker/dealer with the Securities and Exchange Commission ("SEC") and are and
will remain a member in good standing of the National Association of Securities
Dealers, Inc. ("NASD"), and agree to abide by all of its rules and regulations
including its Rules of Fair Practice (reference is hereby specifically made to
Section 26, Article III, of the Rules of Fair Practice of the NASD, which is
incorporated herein as if set forth in full), and you further agree to comply
with all applicable state and federal laws and rules and regulations of
regulatory agencies having jurisdiction; or (ii) you are a bank as defined in
Section 3(a)(6) of the Securities Exchange Act of 1934, as amended, and are duly
authorized to engage in the Transactions to be performed hereunder.
If your membership in the NASD terminates, or you breach any provision of
said Section 26, or if you cease to be a bank as defined above, this Agreement
will be immediately and automatically terminated.
(b) We shall not purchase Portfolio shares from a Portfolio except for
the purpose of covering purchase orders already received by us, and you shall
not purchase Portfolio shares from us, other than for investment, except for the
purpose of covering purchase orders already received by you.
(c) You shall not withhold placing customers' orders for Portfolio
shares so as to profit yourself as a result of such withholding, e.g., by virtue
of a change in a Portfolio's net asset value per share from that used in
determining the offering price to your customers.
<PAGE>
(d) We shall not accept a conditional order for Portfolio shares on any
basis other than at a definite specified price.
(e) If, within seven business days after confirmation by us of the
original purchase order for shares of a Portfolio, such shares are repurchased
by the issuing Portfolio or by us for the account of such Portfolio, or are
tendered for redemption by the customer, you shall forthwith refund, or forfeit
the right to receive, the full amount of any agency compensation on the original
sale pursuant to paragraph 2(a) and any service payments made to you pursuant to
paragraph 2(b) above. You shall refund to the Portfolio immediately upon receipt
the amount of any dividends or distributions paid to you as nominee for your
customers with respect to redeemed or repurchased Portfolio shares to the extent
that the proceeds of such redemption or repurchase may include the dividends or
distributions payable on such shares. You shall be notified by us of such
repurchase or redemption within ten days of the date of such transaction.
(f) In the event any adjustment in the amount of agency compensation
made to you on any sale under paragraph 2(a), or in service payments made to you
under paragraph 2(b) shall result in an overpayment by us of such compensation
or service payment, you shall forthwith remit to us such overpayment. The term
"adjustment" as used in the preceding sentence shall not include any changes in
amounts paid to or due you caused by a change in or discontinuance of such
compensation or service payments (as provided under paragraphs 2(a), 2(b), and
7) prior to the effective date of such change or discontinuance of such
compensation or service payment. You acknowledge that the foregoing shall in no
way limit our right to change or discontinue such compensation or payments as
provided in paragraphs 2 and 7 hereof, and that, after the effective date of a
change in, or discontinuance by us of the agency compensation schedules or of
the service payments or termination of any Plan, any such agency compensation
under paragraph 2(a) or service payment under 2(b) shall be in amounts and made
in accordance with such change, discontinuation or termination.
(g) Nothing in this Agreement shall prevent you from acting as your
customers' agent in selling Portfolio shares for the account of a record owner
to us or the issuing Portfolio and charging your customers a reasonable charge
for handling the transaction, provided you disclose to such record owner that
direct redemption of the shares can be accomplished by the record owner without
incurring such charge.
6. (a) In all sales of Portfolio shares to the public you shall act as
agent for your own customers and in no transaction shall you have any authority
to act or hold yourself out as agent for us or any Portfolio, and nothing in
this Agreement, including the use of the word "compensation" or "payment," shall
cause you to be our partner, employee, or agent or give you any authority to act
for us or for any Portfolio. Neither we nor any Portfolio shall be liable for
any of your acts or obligations under this Agreement.
<PAGE>
(b) No person is authorized to make any representations concerning
Portfolio shares except those contained in such Portfolio's Prospectus and you
shall rely solely on the representations contained in such Prospectus. We or the
Portfolio shall bear the expense of qualifying Portfolio shares under the
securities laws of the various states. Any printed information which we shall
furnish you (other than the Portfolios' Prospectuses, periodic reports and
supplemental information) is our sole responsibility and not the responsibility
of the respective Portfolios. You agree that the Portfolios shall have no
liability or responsibility to you with respect to any such printed information.
No sales literature or advertising material (including material disseminated
through radio, television or other electronic media) concerning Portfolio
shares, other than such printed information, shall be used by you in connection
with making Portfolio shares available without obtaining our prior written
approval. You shall not distribute or make available to investors any printed
information furnished by us which is marked "FOR BROKER/DEALER USE ONLY" or
which otherwise indicates that it is confidential or not intended to be
distributed to investors.
(c) You will comply with all applicable state and federal laws and with
the rules and regulations of authorized regulatory agencies thereunder. You will
not make available shares of any Portfolio unless such shares are duly
registered under the applicable state and federal statutes and the rules and
regulations thereunder. You may rely on written or oral communications from us
as to due registration.
7. All orders are subject to acceptance or rejection by us. We reserve the
right in our discretion, without notice, to suspend sales or to withdraw the
offering of Portfolio shares, in whole or in part, or to make a limited offering
of Portfolio shares. Either of us may cancel this Agreement upon telephonic or
written notice to the other. Upon telephonic or written notice to you, we may
also change, or amend any provision of this Agreement. Upon telephonic or
written notice to you, we or any Portfolio may change, amend or discontinue any
schedule or schedules of compensation or service payments issued by us from time
to time and may issue a new or replacement schedule or schedules of compensation
or service payments from time to time. You hereby agree that you shall have no
vested interest in any type, amount or rate of compensation or service payment
and that you shall have no claim against us or any Portfolio by virtue of any
change or diminution in the rate or amount of, or discontinuance of, any
compensation or service payment in connection with the shares of any Portfolio.
8. You agree, in connection with Portfolios that offer multiple classes of
shares, to disclose to investors that are eligible to purchase the other
class(es) of such Portfolio(s) (as set forth in the applicable Prospectus) the
availability of such other class(es). You and we each agree to waive or accept
reduced payments pursuant to any Plan from a Portfolio that is a money market
fund within the meaning of Rule 2a-7 under the Investment Company Act of 1940
(or from any class thereof) to the extent necessary to assure that such
Portfolio and each class thereof maintains a constant $1.00 net asset value per
share.
<PAGE>
9. Failure of either party to terminate this Agreement upon the occurrence of
any event set forth in this Agreement as a cause for termination shall not
constitute a waiver of the right to terminate this Agreement at a later time on
account of such occurrence.
10. In the event of a dispute, such dispute shall be settled by arbitration
before arbitrators sitting in Denver, Colorado in accordance with the commercial
rules then in effect at the NASD. The arbitrators shall act by majority
decision, and their award may allocate attorneys' fees and arbitration costs
between the parties; such award shall be final and binding between the parties
and judgment thereon may be entered in any court of competent jurisdiction.
11. All communications to us should be sent to our address. Any notice to you
shall be duly given if mailed or telegraphed to you at the address specified by
you below. This Agreement shall become binding upon receipt by us in Denver,
Colorado of a counterpart hereof duly accepted and signed by you. THIS AGREEMENT
SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO.
12. The Agent will provide the Trust or its designees such information as the
Trust or its designees may reasonably request (including, without limitation,
periodic certifications confirming the provision to Customers of the services
described herein), and will otherwise cooperate with the Trust and its designees
(including, without limitation, any auditors designated by the Trust), in
connection with the preparation of reports to its Board of Trustees concerning
this Agreement and the monies paid or payable under this Agreement, as well as
any other reports or filings that may be required by law.
<PAGE>
13. This Agreement supersedes and cancels all previous agreements between us,
whether oral or written.
Very truly yours,
Dated as of: ___________________ ALPS MUTUAL FUNDS
SERVICES, INC.
By:
________________________________
______________________________
Signature
Its:
_______________________________
ACCEPTED AND AGREED:
________________________________
Firm:
By: ____________________________
Authorized Representative
________________________________
Signature
Address: _______________________
________________________________
________________________________
<PAGE>
BANK AGENCY AGREEMENT FEE SCHEDULE
In consideration of sales of shares of the Portfolios of First Funds (the Trust)
under the terms and conditions of the Bank Agency Agreement, the following
schedule for the payment of fees shall apply:
<TABLE>
<CAPTION>
RULE 12b-1 ANNUAL RATE
Name of Portfolio CONTRACTUAL RATE CURRENT CHARGE
- ----------------- ---------------- --------------
<S> <C> <C>
CLASS III
U.S. TREASURY MONEY MARKET PORTFOLIO .45% .25%
U.S. GOVERNMENT MONEY MARKET PORTFOLIO .45% .25%
MUNICIPAL MONEY MARKET PORTFOLIO .45% .25%
CASH RESERVE PORTFOLIO .45% .25%
BOND PORTFOLIO .75% .75%
GROWTH & INCOME PORTFOLIO .75% .75%
TENNESSEE TAX-FREE PORTFOLIO .75% .50%
INTERMEDIATE BOND PORTFOLIO .75% .75%
CAPITAL APPRECIATION PORTFOLIO .75% .75%
CLASS IV
GROWTH & INCOME PORTFOLIO .75% .75%
TENNESSEE TAX-FREE PORTFOLIO .60% .60%
CAPITAL APPRECIATION PORTFOLIO .75% .75%
</TABLE>
Class III and IV of each Portfolio shall pay to ALPS Mutual Funds Services, Inc.
(ALPS) a fee based on the average daily net assets of a class throughout the
month, or such lesser amount as may be established from time to time by the
Trustees of the Trust, as specified in the Distribution and Service Plan;
provided that, for any period during which the total of such fee and all other
expenses of Class III or IV, would exceed the gross income of such Class, such
fee shall be reduced by such excess. Such fee shall be computed daily and paid
monthly. The determination of daily net assets shall be made at the close of
each business day throughout the month and computed in the manner specified in
the Portfolio's then current Prospectus for the determination of the net asset
<PAGE>
value of shares of each Class, but shall exclude assets attributable to any
other Class of the Portfolio.
<PAGE>
CUSTODIAN AGREEMENT
This Agreement between FIRST FUNDS a business trust organized and existing
under the laws of Massachusetts with its principal place of business at 370 17th
Street, Suite 3100, Denver, Colorado 80202 (the "FUND"), and STATE STREET BANK
and TRUST COMPANY, a Massachusetts trust company with its principal place of
business at 225 Franklin Street, Boston, Massachusetts 02110 (the "CUSTODIAN"),
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and
WHEREAS, the Fund intends that this Agreement be applicable to 9 series,
CAPITAL APPRECIATION PORTFOLIO, GROWTH & INCOME PORTFOLIO, TENNESSEE TAX-FREE
PORTFOLIO, BOND PORTFOLIO, INTERMEDIATE BOND PORTFOLIO, U.S. TREASURY MONEY
MARKET PORTFOLIO, U.S. GOVERNMENT MONEY MARKET PORTFOLIO, MUNICIPAL MONEY MARKET
PORTFOLIO, AND CASH RESERVE PORTFOLIO (such series together with all other
series subsequently established by the Fund and made subject to this Agreement
in accordance with Section 18, be referred to herein as the "PORTFOLIO(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
SECTION 1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT
The Fund hereby employs the Custodian as the custodian of the assets of the
Portfolios of the Fund, including securities which the Fund on behalf of the
applicable Portfolio desires to be held in places within the United States
("DOMESTIC SECURITIES") and securities it desires to be held outside the United
States ("FOREIGN SECURITIES"). The Fund on behalf of the Portfolio(s) agrees to
deliver to the Custodian all securities and cash of the Portfolios, and all
payments of income, payments of principal or capital distributions received by
it with respect to all securities owned by the Portfolio(s) from time to time,
and the cash consideration received by it for such new or treasury shares of
beneficial interest of the Fund representing interests in the Portfolios
("SHARES") as may be issued or sold from time to time. The Custodian shall not
be responsible for any property of a Portfolio held or received by the Portfolio
and not received by the Custodian or a sub-custodian appointed hereunder.
Upon receipt of "PROPER INSTRUCTIONS" (as such term is defined in Section 6
hereof), the Custodian shall on behalf of the applicable Portfolio(s) from time
to time employ one or more sub-custodians located in the United States, but only
in accordance with an applicable vote by the
<PAGE>
Board of Trustees of the Fund (the "BOARD") on behalf of the applicable
Portfolio(s), and provided that the Custodian shall have no more or less
responsibility or liability to the Fund on account of any actions or omissions
of any sub-custodian so employed than any such sub-custodian has to the
Custodian. The Custodian may employ as sub-custodian for the Fund's foreign
securities on behalf of the applicable Portfolio(s) the foreign banking
institutions and foreign securities depositories designated in Schedules A and B
hereto but only in accordance with the applicable provisions of Sections
3 and 4.
SECTION 2. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD
BY THE CUSTODIAN IN THE UNITED STATES
SECTION 2.1 HOLDING SECURITIES. The Custodian shall hold and physically
segregate for the account of each Portfolio all non-cash property to be held by
it in the United States including all domestic securities owned by such
Portfolio, other than (a) securities which are maintained pursuant to Section
2.8 in a clearing agency which acts as a securities depository or in a
book-entry system authorized by the U.S. Department of the Treasury (each, a
"U.S. SECURITIES SYSTEM") and (b) commercial paper of an issuer for which State
Street Bank and Trust Company acts as issuing and paying agent ("DIRECT PAPER")
which is deposited and/or maintained in the Direct Paper System of the Custodian
(the "DIRECT PAPER SYSTEM") pursuant to Section 2.9.
SECTION 2.2 DELIVERY OF SECURITIES. The Custodian shall release and
deliver domestic securities owned by a Portfolio held by the Custodian or in a
U.S. Securities System account of the Custodian or in the Custodian's Direct
Paper book entry system account ("DIRECT PAPER SYSTEM ACCOUNT") only upon
receipt of Proper Instructions on behalf of the applicable Portfolio, which may
be continuing instructions when deemed appropriate by the parties, and only in
the following cases:
1) Upon sale of such securities for the account of the Portfolio and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Portfolio;
3) In the case of a sale effected through a U.S. Securities System, in
accordance with the provisions of Section 2.8 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Portfolio;
2
<PAGE>
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of the
Portfolio or into the name of any nominee or nominees of the Custodian
or into the name or nominee name of any agent appointed pursuant to
Section 2.7 or into the name or nominee name of any sub-custodian
appointed pursuant to Section 1; or for exchange for a different
number of bonds, certificates or other evidence representing the same
aggregate face amount or number of units; PROVIDED that, in any such
case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Portfolio, to
the broker or its clearing agent, against a receipt, for examination
in accordance with "street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to receiving
payment for such securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim receipts or temporary securities for
definitive securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Portfolio, BUT ONLY against receipt of adequate collateral as agreed
upon from time to time by the Custodian and the Fund on behalf of the
Portfolio, which may be in the form of cash or obligations issued by
the United States government, its agencies or instrumentalities,
except that in connection with any loans for which collateral is to be
credited to the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury, the Custodian will
not be held liable or responsible for the delivery of securities owned
by the Portfolio prior to the receipt of such collateral;
3
<PAGE>
11) For delivery as security in connection with any borrowing by the Fund
on behalf of the Portfolio requiring a pledge of assets by the Fund on
behalf of the Portfolio, BUT ONLY against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the "EXCHANGE
ACT") and a member of The National Association of Securities Dealers,
Inc. ("NASD"), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Portfolio of the Fund;
13) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange Act,
relating to compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar organization or
organizations, regarding account deposits in connection with
transactions by the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent for the Fund (the
"TRANSFER AGENT") for delivery to such Transfer Agent or to the
holders of Shares in connection with distributions in kind, as may be
described from time to time in the currently effective prospectus and
statement of additional information of the Fund related to the
Portfolio (the "PROSPECTUS"), in satisfaction of requests by holders
of Shares for repurchase or redemption; and
15) For any other proper purpose, BUT ONLY upon receipt of, in addition to
Proper Instructions from the Fund on behalf of the applicable
Portfolio, a copy of a resolution of the Board or of the Executive
Committee thereof signed by an officer of the Fund and certified by
the Secretary or an Assistant Secretary thereof (a "CERTIFIED
RESOLUTION"), specifying the securities of the Portfolio to be
delivered, setting forth the purpose for which such delivery is to be
made, declaring such purpose to be a proper trust purpose, and naming
the person or persons to whom delivery of such securities shall be
made.
SECTION 2.3 REGISTRATION OF SECURITIES. Domestic securities held by the
Custodian (other than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the Portfolio
or of any nominee of the Custodian which nominee shall be assigned exclusively
to the Portfolio, UNLESS the Fund has authorized in writing the appointment of a
nominee to be used in common with other registered investment companies having
the same investment adviser as the Portfolio, or in the name or nominee name of
any agent appointed pursuant to Section 2.7 or in the name or nominee name of
any sub-custodian
4
<PAGE>
appointed pursuant to Section 1. All securities accepted by the Custodian on
behalf of the Portfolio under the terms of this Agreement shall be in "street
name" or other good delivery form. If, however, the Fund directs the Custodian
to maintain securities in "street name", the Custodian shall utilize its best
efforts only to timely collect income due the Fund on such securities and to
notify the Fund on a best efforts basis only of relevant corporate actions
including, without limitation, pendency of calls, maturities, tender or exchange
offers.
SECTION 2.4 BANK ACCOUNTS. The Custodian shall open and maintain a
separate bank account or accounts in the United States in the name of each
Portfolio of the Fund, subject only to draft or order by the Custodian acting
pursuant to the terms of this Agreement, and shall hold in such account or
accounts, subject to the provisions hereof, all cash received by it from or for
the account of the Portfolio, other than cash maintained by the Portfolio in a
bank account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940, as amended (the "1940 ACT"). Funds held by the
Custodian for a Portfolio may be deposited by it to its credit as Custodian in
the Banking Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable; PROVIDED,
however, that every such bank or trust company shall be qualified to act as a
custodian under the 1940 Act and that each such bank or trust company and the
funds to be deposited with each such bank or trust company shall on behalf of
each applicable Portfolio be approved by vote of a majority of the Board. Such
funds shall be deposited by the Custodian in its capacity as Custodian and shall
be withdrawable by the Custodian only in that capacity.
SECTION 2.5 COLLECTION OF INCOME. Subject to the provisions of Section
2.3, the Custodian shall collect on a timely basis all income and other payments
with respect to registered domestic securities held hereunder to which each
Portfolio shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and other
payments with respect to bearer domestic securities if, on the date of payment
by the issuer, such securities are held by the Custodian or its agent thereof
and shall credit such income, as collected, to such Portfolio's custodian
account. Without limiting the generality of the foregoing, the Custodian shall
detach and present for payment all coupons and other income items requiring
presentation as and when they become due and shall collect interest when due on
securities held hereunder. Income due each Portfolio on securities loaned
pursuant to the provisions of Section 2.2 (10) shall be the responsibility of
the Fund. The Custodian will have no duty or responsibility in connection
therewith, other than to provide the Fund with such information or data as may
be necessary to assist the Fund in arranging for the timely delivery to the
Custodian of the income to which the Portfolio is properly entitled.
SECTION 2.6 PAYMENT OF FUND MONIES. Upon receipt of Proper Instructions
on behalf of the applicable Portfolio, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out monies of a
Portfolio in the following cases only:
5
<PAGE>
1) Upon the purchase of domestic securities, options, futures contracts
or options on futures contracts for the account of the Portfolio but
only (a) against the delivery of such securities or evidence of title
to such options, futures contracts or options on futures contracts to
the Custodian (or any bank, banking firm or trust company doing
business in the United States or abroad which is qualified under the
1940 Act to act as a custodian and has been designated by the
Custodian as its agent for this purpose) registered in the name of the
Portfolio or in the name of a nominee of the Custodian referred to in
Section 2.3 hereof or in proper form for transfer; (b) in the case of
a purchase effected through a U.S. Securities System, in accordance
with the conditions set forth in Section 2.8 hereof; (c) in the case
of a purchase involving the Direct Paper System, in accordance with
the conditions set forth in Section 2.9; (d) in the case of repurchase
agreements entered into between the Fund on behalf of the Portfolio
and the Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against delivery of the securities either in
certificate form or through an entry crediting the Custodian's account
at the Federal Reserve Bank with such securities or (ii) against
delivery of the receipt evidencing purchase by the Portfolio of
securities owned by the Custodian along with written evidence of the
agreement by the Custodian to repurchase such securities from the
Portfolio or (e) for transfer to a time deposit account of the Fund in
any bank, whether domestic or foreign; such transfer may be effected
prior to receipt of a confirmation from a broker and/or the applicable
bank pursuant to Proper Instructions from the Fund as defined herein;
2) In connection with conversion, exchange or surrender of securities
owned by the Portfolio as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued as set forth in
Section 5 hereof;
4) For the payment of any expense or liability incurred by the Portfolio,
including but not limited to the following payments for the account of
the Portfolio: interest, taxes, management, accounting, transfer
agent and legal fees, and operating expenses of the Fund whether or
not such expenses are to be in whole or part capitalized or treated as
deferred expenses;
5) For the payment of any dividends on Shares declared pursuant to the
governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, BUT ONLY upon receipt of, in addition to
Proper Instructions from the Fund on behalf of the Portfolio, a copy
of a Certified Resolution specifying the amount of such payment,
setting forth the purpose for
6
<PAGE>
which such payment is to be made, declaring such purpose to be a
proper trust purpose, and naming the person or persons to whom such
payment is to be made.
SECTION 2.7 APPOINTMENT OF AGENTS. The Custodian may at any time or
times in its discretion appoint (and may at any time remove) any other bank or
trust company which is itself qualified under the 1940 Act to act as a
custodian, as its agent to carry out such of the provisions of this Section 2 as
the Custodian may from time to time direct; PROVIDED, however, that the
appointment of any agent shall not relieve the Custodian of its responsibilities
or liabilities hereunder.
SECTION 2.8 DEPOSIT OF FUND ASSETS IN U.S. SECURITIES SYSTEMS. The
Custodian may deposit and/or maintain securities owned by a Portfolio in a
clearing agency registered with the United States Securities and Exchange
Commission (the "SEC") under Section 17A of the Exchange Act , which acts as a
securities depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies, collectively referred
to herein as "U.S. SECURITIES SYSTEM" in accordance with applicable Federal
Reserve Board and SEC rules and regulations, if any, and subject to the
following provisions:
1) The Custodian may keep securities of the Portfolio in a U.S.
Securities System provided that such securities are represented in an
account of the Custodian in the U.S. Securities System (the "U.S.
SECURITIES SYSTEM ACCOUNT") which account shall not include any assets
of the Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a U.S. Securities System shall
identify by book-entry those securities belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the account of
the Portfolio upon (i) receipt of advice from the U.S. Securities
System that such securities have been transferred to the U.S.
Securities System Account, and (ii) the making of an entry on the
records of the Custodian to reflect such payment and transfer for the
account of the Portfolio. The Custodian shall transfer securities
sold for the account of the Portfolio upon (i) receipt of advice from
the U.S. Securities System that payment for such securities has been
transferred to the U.S. Securities System Account, and (ii) the making
of an entry on the records of the Custodian to reflect such transfer
and payment for the account of the Portfolio. Copies of all advices
from the U.S. Securities System of transfers of securities for the
account of the Portfolio shall identify the Portfolio, be maintained
for the Portfolio by the Custodian and be provided to the Fund at its
request. Upon request, the Custodian shall furnish the Fund on behalf
of the Portfolio confirmation of each transfer to or from the account
of the Portfolio in the form of a written advice or notice and
7
<PAGE>
shall furnish to the Fund on behalf of the Portfolio copies of daily
transaction sheets reflecting each day's transactions in the U.S.
Securities System for the account of the Portfolio;
4) The Custodian shall provide the Fund with any report obtained by the
Custodian on the U.S. Securities System's accounting system, internal
accounting control and procedures for safeguarding securities
deposited in the U.S. Securities System;
5) The Custodian shall have received from the Fund on behalf of the
Portfolio the initial or annual certificate, as the case may be,
required by Section 15 hereof;
6) Anything to the contrary in this Agreement notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the Portfolio
for any loss or damage to the Portfolio resulting from use of the U.S.
Securities System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any of its or
their employees or from failure of the Custodian or any such agent to
enforce effectively such rights as it may have against the U.S.
Securities System; at the election of the Fund, it shall be entitled
to be subrogated to the rights of the Custodian with respect to any
claim against the U.S. Securities System or any other person which the
Custodian may have as a consequence of any such loss or damage if and
to the extent that the Portfolio has not been made whole for any such
loss or damage.
SECTION 2.9 FUND ASSETS HELD IN THE CUSTODIAN'S DIRECT PAPER SYSTEM.
The Custodian may deposit and/or maintain securities owned by a Portfolio in the
Direct Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System will
be effected in the absence of Proper Instructions from the Fund on
behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the Direct
Paper System only if such securities are represented in the Direct
Paper System Account, which account shall not include any assets of
the Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Portfolio;
4) The Custodian shall pay for securities purchased for the account of
the Portfolio upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to the
account of the Portfolio. The Custodian
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shall transfer securities sold for the account of the Portfolio upon
the making of an entry on the records of the Custodian to reflect such
transfer and receipt of payment for the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the Portfolio,
in the form of a written advice or notice, of Direct Paper on the next
business day following such transfer and shall furnish to the Fund on
behalf of the Portfolio copies of daily transaction sheets reflecting
each day's transaction in the Direct Paper System for the account of
the Portfolio;
6) The Custodian shall provide the Fund on behalf of the Portfolio with
any report on its system of internal accounting control as the Fund
may reasonably request from time to time.
SECTION 2.10 SEGREGATED ACCOUNT. The Custodian shall upon receipt of
Proper Instructions on behalf of each applicable Portfolio establish and
maintain a segregated account or accounts for and on behalf of each such
Portfolio, into which account or accounts may be transferred cash and/or
securities, including securities maintained in an account by the Custodian
pursuant to Section 2.8 hereof, (i) in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the Custodian and a
broker-dealer registered under the Exchange Act and a member of the NASD (or any
futures commission merchant registered under the Commodity Exchange Act),
relating to compliance with the rules of The Options Clearing Corporation and of
any registered national securities exchange (or the Commodity Futures Trading
Commission or any registered contract market), or of any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions by the Portfolio, (ii) for purposes of segregating cash or
government securities in connection with options purchased, sold or written by
the Portfolio or commodity futures contracts or options thereon purchased or
sold by the Portfolio, (iii) for the purposes of compliance by the Portfolio
with the procedures required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the SEC relating to the maintenance of
segregated accounts by registered investment companies and (iv) for other proper
trust purposes, BUT ONLY, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the applicable
Portfolio, a copy of a Certified Resolution setting forth the purpose or
purposes of such segregated account and declaring such purpose(s) to be a proper
trust purpose.
SECTION 2.11 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian
shall execute ownership and other certificates and affidavits for all federal
and state tax purposes in connection with receipt of income or other payments
with respect to domestic securities of each Portfolio held by it and in
connection with transfers of securities.
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SECTION 2.12 PROXIES. The Custodian shall, with respect to the domestic
securities held hereunder, cause to be promptly executed by the registered
holder of such securities, if the securities are registered otherwise than in
the name of the Portfolio or a nominee of the Portfolio, all proxies, without
indication of the manner in which such proxies are to be voted, and shall
promptly deliver to the Portfolio such proxies, all proxy soliciting materials
and all notices relating to such securities.
SECTION 2.13 COMMUNICATIONS RELATING TO PORTFOLIO SECURITIES. Subject to
the provisions of Section 2.3, the Custodian shall transmit promptly to the Fund
for each Portfolio all written information (including, without limitation,
pendency of calls and maturities of domestic securities and expirations of
rights in connection therewith and notices of exercise of call and put options
written by the Fund on behalf of the Portfolio and the maturity of futures
contracts purchased or sold by the Portfolio) received by the Custodian from
issuers of the securities being held for the Portfolio. With respect to tender
or exchange offers, the Custodian shall transmit promptly to the Portfolio all
written information received by the Custodian from issuers of the securities
whose tender or exchange is sought and from the party (or his agents) making the
tender or exchange offer. If the Portfolio desires to take action with respect
to any tender offer, exchange offer or any other similar transaction, the
Portfolio shall notify the Custodian at least three business days prior to the
date on which the Custodian is to take such action.
SECTION 3. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER OF THE PORTFOLIOS
SECTION 3.1 DEFINITIONS. The following capitalized terms shall have the
indicated meanings:
"COUNTRY RISK" means all factors reasonably related to the systemic risk of
holding Foreign Assets in a particular country including, but not limited to,
such country's political environment; economic and financial infrastructure
(including any Mandatory Securities Depositories operating in the country);
prevailing or developing custody and settlement practices; and laws and
regulations applicable to the safekeeping and recovery of Foreign Assets held in
custody in that country.
"ELIGIBLE FOREIGN CUSTODIAN" has the meaning set forth in section (a)(1) of Rule
17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as
defined in Rule 17f-5), a bank holding company meeting the requirements of an
Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate
action of the U.S. Securities and Exchange Commission (the "SEC")), or a foreign
branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the
requirements of a custodian under Section 17(f) of the 1940 Act, except that the
term does not include Mandatory Securities Depositories.
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"FOREIGN ASSETS" means any of the Portfolios' investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Portfolios'
transactions in such investments.
"FOREIGN CUSTODY MANAGER" has the meaning set forth in section (a)(2)
of Rule 17f-5.
"MANDATORY SECURITIES DEPOSITORY" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if the
Fund, on the Portfolios' behalf, determines to place Foreign Assets in a country
outside the United States (i) because required by law or regulation; (ii)
because securities cannot be withdrawn from such foreign securities depository
or clearing agency; or (iii) because maintaining or effecting trades in
securities outside the foreign securities depository or clearing agency is not
consistent with prevailing or developing custodial or market practices.
SECTION 3.2 DELEGATION TO THE CUSTODIAN AS FOREIGN CUSTODY MANAGER. The
Fund, by resolution adopted by the Board, hereby delegates to the Custodian with
respect to the Portfolios, subject to Section (b) of Rule 17f-5, the
responsibilities set forth in this Section 3 with respect to Foreign Assets of
the Portfolios held outside the United States, and the Custodian hereby accepts
such delegation, as Foreign Custody Manager with respect to the Portfolios.
SECTION 3.3 COUNTRIES COVERED. The Foreign Custody Manager shall be
responsible for performing the delegated responsibilities defined below only
with respect to the countries and custody arrangements for each such country
listed on Schedule A to this Agreement, which list of countries may be amended
from time to time by the Fund with the Agreement of the Foreign Custody Manager.
The Foreign Custody Manager shall list on Schedule A the Eligible Foreign
Custodians selected by the Foreign Custody Manager to maintain the assets of the
Portfolios, which list of Eligible Foreign Custodians may be amended from time
to time in the sole discretion of the Foreign Custody Manager. Mandatory
Securities Depositories are listed on Schedule B to this Contract, which
Schedule B may be amended from time to time by the Foreign Custody Manager. The
Foreign Custody Manager will provide amended versions of Schedules A and B in
accordance with Section 3.7 hereof.
Upon the receipt by the Foreign Custody Manager of Proper Instructions to
open an account or to place or maintain Foreign Assets in a country listed on
Schedule A, and the fulfillment by the Fund on behalf of the Portfolios of the
applicable account opening requirements for such country, the Foreign Custody
Manager shall be deemed to have been delegated by the Board on behalf of the
Portfolios responsibility as Foreign Custody Manager with respect to that
country and to have accepted such delegation. Following the receipt of Proper
Instructions directing the Foreign Custody Manager to close the account of a
Portfolio with the Eligible Foreign Custodian selected by the Foreign Custody
Manager in a designated country, the delegation by the Board on behalf of the
Portfolios to the Custodian as Foreign Custody Manager for that country shall be
deemed to have been withdrawn and the Custodian
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shall immediately cease to be the Foreign Custody Manager of the Portfolios with
respect to that country.
The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to the
Fund. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect to
the country as to which the Custodian's acceptance of delegation is withdrawn.
SECTION 3.4 SCOPE OF DELEGATED RESPONSIBILITIES.
3.4.1. SELECTION OF ELIGIBLE FOREIGN CUSTODIANS. Subject to the
provisions of this Section 3, the Portfolios' Foreign Custody Manager may place
and maintain the Foreign Assets in the care of the Eligible Foreign Custodian
selected by the Foreign Custody Manager in each country listed on Schedule A, as
amended from time to time. In performing its delegated responsibilities as
Foreign Custody Manager to place or maintain Foreign Assets with an Eligible
Foreign Custodian, the Foreign Custody Manager shall determine that the Foreign
Assets will be subject to reasonable care, based on the standards applicable to
custodians in the country in which the Foreign Assets will be held by that
Eligible Foreign Custodian, after considering all factors relevant to the
safekeeping of such assets, including, without limitation the factors specified
in Rule 17f-5(c)(1).
3.4.2. CONTRACTS WITH ELIGIBLE FOREIGN CUSTODIANS. The Foreign Custody
Manager shall determine that the contract (or the rules or established practices
or procedures in the case of an Eligible Foreign Custodian that is a foreign
securities depository or clearing agency) governing the foreign custody
arrangements with each Eligible Foreign Custodian selected by the Foreign
Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).
3.4.3. MONITORING. In each case in which the Foreign Custody Manager
maintains Foreign Assets with an Eligible Foreign Custodian selected by the
Foreign Custody Manager, the Foreign Custody Manager shall establish a system to
monitor (i) the appropriateness of maintaining the Foreign Assets with such
Eligible Foreign Custodian and (ii) the contract governing the custody
arrangements established by the Foreign Custody Manager with the Eligible
Foreign Custodian (or the rules or established practices and procedures in the
case of an Eligible Foreign Custodian selected by the Foreign Custody Manager
which is a foreign securities depository or clearing agency that is not a
Mandatory Securities Depository). In the event the Foreign Custody Manager
determines that the custody arrangements with an Eligible Foreign Custodian it
has selected are no longer appropriate, the Foreign Custody Manager shall notify
the Board in accordance with Section 3.7 hereunder.
SECTION 3.5 GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY. For
purposes of this Section 3, the Board shall be deemed to have considered and
determined to accept such Country Risk as is incurred by placing and maintaining
the Foreign Assets in each country for
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which the Custodian is serving as Foreign Custody Manager of the Portfolios.
The Fund, on behalf of the Portfolios, and the Board shall be deemed to be
monitoring on a continuing basis such Country Risk to the extent that the Board
considers necessary or appropriate. The Fund and the Custodian each expressly
acknowledge that the Foreign Custody Manager shall not be delegated any
responsibilities under this Section 3 with respect to Mandatory Securities
Depositories.
SECTION 3.6 STANDARD OF CARE AS FOREIGN CUSTODY MANAGER OF THE
PORTFOLIOS. In performing the responsibilities delegated to it, the Foreign
Custody Manager agrees to exercise reasonable care, prudence and diligence such
as a person having responsibility for the safekeeping of assets of management
investment companies registered under the 1940 Act would exercise.
SECTION 3.7 REPORTING REQUIREMENTS. The Foreign Custody Manager shall
report the withdrawal of the Foreign Assets from an Eligible Foreign Custodian
and the placement of such Foreign Assets with another Eligible Foreign Custodian
by providing to the Board amended Schedules A or B at the end of the calendar
quarter in which an amendment to either Schedule has occurred. The Foreign
Custody Manager shall make written reports notifying the Board of any other
material change in the foreign custody arrangements of the Portfolios described
in this Section 3 after the occurrence of the material change.
SECTION 3.8 REPRESENTATIONS WITH RESPECT TO RULE 17f-5. The Foreign
Custody Manager represents to the Fund that it is a U.S. Bank as defined in
section (a)(7) of Rule 17f-5. The Fund represents to the Custodian that the
Board has determined that it is reasonable for the Board to rely on the
Custodian to perform the responsibilities delegated pursuant to this Agreement
to the Custodian as the Foreign Custody Manager of the Portfolios.
SECTION 3.9 EFFECTIVE DATE AND TERMINATION OF THE CUSTODIAN AS FOREIGN
CUSTODY MANAGER. The Board's delegation to the Custodian as Foreign Custody
Manager of the Portfolios shall be effective as of the date of execution of this
Agreement and shall remain in effect until terminated at any time, without
penalty, by written notice from the terminating party to the non-terminating
party. Termination will become effective thirty (30) days after receipt by the
non-terminating party of such notice. The provisions of Section 3.3 hereof
shall govern the delegation to and termination of the Custodian as Foreign
Custody Manager of the Portfolios with respect to designated countries.
SECTION 4. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE
PORTFOLIOS HELD OUTSIDE OF THE UNITED STATES
SECTION 4.1 DEFINITIONS. Capitalized terms in this Section 4 shall have
the following meanings:
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"FOREIGN SECURITIES SYSTEM" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.
"FOREIGN SUB-CUSTODIAN" means a foreign banking institution serving as an
Eligible Foreign Custodian.
SECTION 4.2 HOLDING SECURITIES. The Custodian shall identify on its
books as belonging to the Portfolios the foreign securities held by each Foreign
Sub-Custodian or Foreign Securities System. The Custodian may hold foreign
securities for all of its customers, including the Portfolios, with any Foreign
Sub-Custodian in an account that is identified as belonging to the Custodian for
the benefit of its customers, PROVIDED HOWEVER, that (i) the records of the
Custodian with respect to foreign securities of the Portfolios which are
maintained in such account shall identify those securities as belonging to the
Portfolios and (ii), to the extent permitted and customary in the market in
which the account is maintained, the Custodian shall require that securities so
held by the Foreign Sub-Custodian be held separately from any assets of such
Foreign Sub-Custodian or of other customers of such Foreign Sub-Custodian.
SECTION 4.3 FOREIGN SECURITIES SYSTEMS. Foreign securities shall be
maintained in a Foreign Securities System in a designated country only through
arrangements implemented by the Foreign Sub-Custodian in such country pursuant
to the terms of this Agreement.
SECTION 4.4 TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT.
4.4.1. DELIVERY OF FOREIGN SECURITIES. The Custodian or a Foreign
Sub-Custodian shall release and deliver foreign securities of the Portfolios
held by such Foreign Sub-Custodian, or in a Foreign Securities System account,
only upon receipt of Proper Instructions, which may be continuing instructions
when deemed appropriate by the parties, and only in the following cases:
(i) upon the sale of such foreign securities for the Portfolios in
accordance with commercially reasonable market practice in the
country where such foreign securities are held or traded,
including, without limitation: (A) delivery against expectation
of receiving later payment; or (B) in the case of a sale effected
through a Foreign Securities System in accordance with the rules
governing the operation of the Foreign Securities System;
(ii) in connection with any repurchase agreement related to foreign
securities;
(iii) to the depository agent in connection with tender or other
similar offers for foreign securities of the Portfolios;
(iv) to the issuer thereof or its agent when such foreign securities
are called, redeemed, retired or otherwise become payable;
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(v) to the issuer thereof, or its agent, for transfer into the name
of the Custodian (or the name of the respective Foreign
Sub-Custodian or of any nominee of the Custodian or such Foreign
Sub-Custodian) or for exchange for a different number of bonds,
certificates or other evidence representing the same aggregate
face amount or number of units;
(vi) to brokers, clearing banks or other clearing agents for
examination or trade execution in accordance with market custom;
PROVIDED that in any such case the Foreign Sub-Custodian shall
have no responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for such
securities except as may arise from the Foreign Sub-Custodian's
own negligence or willful misconduct;
(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment
of the securities of the issuer of such securities, or pursuant
to provisions for conversion contained in such securities, or
pursuant to any deposit agreement;
(viii) in the case of warrants, rights or similar foreign securities,
the surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities;
(ix) for delivery as security in connection with any borrowing by the
Portfolios requiring a pledge of assets by the Portfolios;
(x) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other proper purpose, BUT ONLY upon receipt of, in
addition to Proper Instructions, a copy of a Certified Resolution
specifying the foreign securities to be delivered, setting forth
the purpose for which such delivery is to be made, declaring such
purpose to be a proper trust purpose, and naming the person or
persons to whom delivery of such securities shall be made.
4.4.2. PAYMENT OF PORTFOLIO MONIES. Upon receipt of Proper
Instructions, which may be continuing instructions when deemed appropriate by
the parties, the Custodian shall pay out, or direct the respective Foreign
Sub-Custodian or the respective Foreign Securities System to pay out, monies of
a Portfolio in the following cases only:
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(i) upon the purchase of foreign securities for the Portfolio, unless
otherwise directed by Proper Instructions, by (A) delivering
money to the seller thereof or to a dealer therefor (or an agent
for such seller or dealer) against expectation of receiving later
delivery of such foreign securities; or (B) in the case of a
purchase effected through a Foreign Securities System, in
accordance with the rules governing the operation of such Foreign
Securities System;
(ii) in connection with the conversion, exchange or surrender of
foreign securities of the Portfolio;
(iii) for the payment of any expense or liability of the Portfolio,
including but not limited to the following payments: interest,
taxes, investment advisory fees, transfer agency fees, fees under
this Agreement, legal fees, accounting fees, and other operating
expenses;
(iv) for the purchase or sale of foreign exchange or foreign exchange
contracts for the Portfolio, including transactions executed with
or through the Custodian or its Foreign Sub-Custodians;
(v) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(vii) in connection with the borrowing or lending of foreign
securities; and
(viii) for any other proper purpose, BUT ONLY upon receipt of, in
addition to Proper Instructions, a copy of a Certified Resolution
specifying the amount of such payment, setting forth the purpose
for which such payment is to be made, declaring such purpose to
be a proper trust purpose, and naming the person or persons to
whom such payment is to be made.
4.4.3. MARKET CONDITIONS. Notwithstanding any provision of this
Agreement to the contrary, settlement and payment for Foreign Assets received
for the account of the Portfolios and delivery of Foreign Assets maintained for
the account of the Portfolios may be effected in accordance with the customary
established securities trading or processing practices and procedures in the
country or market in which the transaction occurs, including, without
limitation, delivering Foreign Assets to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) with the expectation of
receiving later payment for such Foreign Assets from such purchaser or dealer.
The Custodian shall provide to the Board the information with respect to
custody and settlement practices in countries in which the Custodian employs a
Foreign Sub-Custodian, including without limitation information relating to
Foreign Securities Systems, described on Schedule C hereto at the time or times
set forth on such Schedule. The Custodian may revise
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Schedule C from time to time, provided that no such revision shall result in the
Board being provided with substantively less information than had been
previously provided hereunder.
SECTION 4.5 REGISTRATION OF FOREIGN SECURITIES. The foreign securities
maintained in the custody of a Foreign Sub-Custodian (other than bearer
securities) shall be registered in the name of the applicable Portfolio or in
the name of the Custodian or in the name of any Foreign Sub-Custodian or in the
name of any nominee of the foregoing, and the Fund on behalf of such Portfolio
agrees to hold any such nominee harmless from any liability as a holder of
record of such foreign securities. The Custodian or a Foreign Sub-Custodian
shall not be obligated to accept securities on behalf of a Portfolio under the
terms of this Agreement unless the form of such securities and the manner in
which they are delivered are in accordance with reasonable market practice.
SECTION 4.6 BANK ACCOUNTS. The Custodian shall identify on its books as
belonging to the Fund cash (including cash denominated in foreign currencies)
deposited with the Custodian. Where the Custodian is unable to maintain, or
market practice does not facilitate the maintenance of, cash on the books of the
Custodian, a bank account or bank accounts opened and maintained outside the
United States on behalf of a Portfolio with a Foreign Sub-Custodian shall be
subject only to draft or order by the Custodian or such Foreign Sub-Custodian,
acting pursuant to the terms of this Agreement to hold cash received by or from
or for the account of the Portfolio.
SECTION 4.7 COLLECTION OF INCOME. The Custodian shall use reasonable
commercial efforts to collect all income and other payments with respect to the
Foreign Assets held hereunder to which the Portfolios shall be entitled and
shall credit such income, as collected, to the applicable Portfolio. In the
event that extraordinary measures are required to collect such income, the Fund
and the Custodian shall consult as to such measures and as to the compensation
and expenses of the Custodian relating to such measures.
SECTION 4.8 SHAREHOLDER RIGHTS. With respect to the foreign securities
held pursuant to this Agreement, the Custodian will use reasonable commercial
efforts to facilitate the exercise of voting and other shareholder rights,
subject always to the laws, regulations and practical constraints that may exist
in the country where such securities are issued. The Fund acknowledges that
local conditions, including lack of regulation, onerous procedural obligations,
lack of notice and other factors may have the effect of severely limiting the
ability of the Fund to exercise shareholder rights.
SECTION 4.9 COMMUNICATIONS RELATING TO FOREIGN SECURITIES. The
Custodian shall transmit promptly to the Fund written information (including,
without limitation, pendency of calls and maturities of foreign securities and
expirations of rights in connection therewith) received by the Custodian via the
Foreign Sub-Custodians from issuers of the foreign securities being held for the
account of the Portfolios. With respect to tender or exchange offers, the
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Custodian shall transmit promptly to the Fund written information so received by
the Custodian from issuers of the foreign securities whose tender or exchange is
sought or from the party (or its agents) making the tender or exchange offer.
The Custodian shall not be liable for any untimely exercise of any tender,
exchange or other right or power in connection with foreign securities or other
property of the Portfolios at any time held by it unless (i) the Custodian or
the respective Foreign Sub-Custodian is in actual possession of such foreign
securities or property and (ii) the Custodian receives Proper Instructions with
regard to the exercise of any such right or power, and both (i) and (ii) occur
at least three business days prior to the date on which the Custodian is to take
action to exercise such right or power
SECTION 4.10 LIABILITY OF FOREIGN SUB-CUSTODIANS AND FOREIGN SECURITIES
SYSTEMS. Each agreement pursuant to which the Custodian employs as a Foreign
Sub-Custodian shall, to the extent possible, require the Foreign Sub-Custodian
to exercise reasonable care in the performance of its duties and, to the extent
possible, to indemnify, and hold harmless, the Custodian from and against any
loss, damage, cost, expense, liability or claim arising out of or in connection
with the Foreign Sub-Custodian's performance of such obligations. At the Fund's
election, the Portfolios shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a Foreign Sub-Custodian as a
consequence of any such loss, damage, cost, expense, liability or claim if and
to the extent that the Portfolios have not been made whole for any such loss,
damage, cost, expense, liability or claim.
SECTION 4.11 TAX LAW. The Custodian shall have no responsibility or
liability for any obligations now or hereafter imposed on the Fund, the
Portfolios or the Custodian as custodian of the Portfolios by the tax law of the
United States or of any state or political subdivision thereof. It shall be the
responsibility of the Fund to notify the Custodian of the obligations imposed on
the Fund with respect to the Portfolios or the Custodian as custodian of the
Portfolios by the tax law of countries other than those mentioned in the above
sentence, including responsibility for withholding and other taxes, assessments
or other governmental charges, certifications and governmental reporting. The
sole responsibility of the Custodian with regard to such tax law shall be to use
reasonable efforts to assist the Fund with respect to any claim for exemption or
refund under the tax law of countries for which the Fund has provided such
information.
SECTION 4.12 CONFLICT. If the Custodian is delegated the responsibilities
of Foreign Custody Manager pursuant to the terms of Section 3 hereof, in the
event of any conflict between the provisions of Sections 3 and 4 hereof, the
provisions of Section 3 shall prevail.
SECTION 5. PAYMENTS FOR SALES OR REPURCHASES OR REDEMPTIONS OF SHARES
The Custodian shall receive from the distributor for the Shares or from the
Transfer Agent and deposit into the account of the appropriate Portfolio such
payments as are received for Shares thereof issued or sold from time to time by
the Fund. The Custodian will provide timely
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notification to the Fund on behalf of each such Portfolio and the Transfer Agent
of any receipt by it of payments for Shares of such Portfolio.
From such funds as may be available for the purpose, the Custodian shall,
upon receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the
redemption or repurchase of Shares, the Custodian shall honor checks drawn on
the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the Custodian in accordance
with such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
SECTION 6. PROPER INSTRUCTIONS
Proper Instructions as used throughout this Agreement means a writing
signed or initialed by one or more person or persons as the Board shall have
from time to time authorized. Each such writing shall set forth the specific
transaction or type of transaction involved, including a specific statement of
the purpose for which such action is requested. Oral instructions will be
considered Proper Instructions if the Custodian reasonably believes them to have
been given by a person authorized to give such instructions with respect to the
transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Upon receipt of a certificate of the Secretary or an
Assistant Secretary as to the authorization by the Board accompanied by a
detailed description of procedures approved by the Board, Proper Instructions
may include communications effected directly between electro-mechanical or
electronic devices provided that the Board and the Custodian are satisfied that
such procedures afford adequate safeguards for the Portfolios' assets. For
purposes of this Section, Proper Instructions shall include instructions
received by the Custodian pursuant to any three - party agreement which requires
a segregated asset account in accordance with Section 2.10.
SECTION 7. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Agreement, PROVIDED that all such payments shall be accounted for to
the Fund on behalf of the Portfolio;
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2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Portfolio, checks, drafts
and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Portfolio except as
otherwise directed by the Board.
SECTION 8. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper reasonably believed
by it to be genuine and to have been properly executed by or on behalf of the
Fund. The Custodian may receive and accept a copy of a Certified Resolution as
conclusive evidence (a) of the authority of any person to act in accordance with
such resolution or (b) of any determination or of any action by the Board as
described in such resolution, and such resolution may be considered as in full
force and effect until receipt by the Custodian of written notice to the
contrary.
SECTION 9. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND
CALCULATION OF NET ASSET VALUE AND NET INCOME
The Custodian shall keep the books of account of each Portfolio and compute
daily the net asset value per Share of the outstanding Shares. The Custodian
shall also calculate daily the net income of the Portfolio as described in the
Prospectus and shall advise the Fund and the Transfer Agent daily of the total
amounts of such net income and, if instructed in writing by an officer of the
Fund to do so, shall advise the Transfer Agent periodically of the division of
such net income among its various components. The daily calculations of the net
asset value per Share and the income of each Portfolio shall be made at the time
or times described from time to time in the Prospectus.
SECTION 10. RECORDS
The Custodian shall with respect to each Portfolio create and maintain all
records relating to its activities and obligations under this Agreement in such
manner as will meet the obligations of the Fund under the 1940 Act, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents of
the SEC. The Custodian shall, at the Fund's request, supply the Fund with a
tabulation of securities owned by each
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Portfolio and held by the Custodian and shall, when requested to do so by the
Fund and for such compensation as shall be agreed upon between the Fund and the
Custodian, include certificate numbers in such tabulations.
SECTION 11. OPINION OF FUND'S INDEPENDENT ACCOUNTANT
The Custodian shall take all reasonable action, as the Fund on behalf of
each applicable Portfolio may from time to time request, to obtain from year to
year favorable opinions from the Fund's independent accountants with respect to
its activities hereunder in connection with the preparation of the Fund's Form
N-1A, and Form N-SAR or other annual reports to the SEC and with respect to any
other requirements thereof.
SECTION 12. REPORTS TO FUND BY INDEPENDENT PUBLIC ACCOUNTANTS
The Custodian shall provide the Fund, on behalf of each of the Portfolios
at such times as the Fund may reasonably require, with reports by independent
public accountants on the accounting system, internal accounting control and
procedures for safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a U.S. Securities
System or a Foreign Securities System, relating to the services provided by the
Custodian under this Agreement; such reports shall be of sufficient scope and in
sufficient detail as may reasonably be required by the Fund to provide
reasonable assurance that any material inadequacies would be disclosed by such
examination, and, if there are no such inadequacies, the reports shall so state.
SECTION 13. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian as set forth on Schedule D hereto, as such Schedule
may be revised from time to time upon agreement between the Fund, on behalf of
each applicable Portfolio, and the Custodian.
SECTION 14. RESPONSIBILITY OF CUSTODIAN
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Agreement and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission
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merchant acting pursuant to the terms of a three-party futures or options
agreement. The Custodian shall be held to the exercise of reasonable care in
carrying out the provisions of this Agreement, but shall be kept indemnified by
and shall be without liability to the Fund for any action taken or omitted by it
in good faith without negligence. It shall be entitled to rely on and may act
upon advice of counsel (who may be counsel for the Fund) on all matters, and
shall be without liability for any action reasonably taken or omitted pursuant
to such advice. The Custodian shall be without liability to the Fund and the
Portfolios for any loss, liability, claim or expense resulting from or caused by
anything which is (A) part of Country Risk (as defined in Section 3 hereof),
including without limitation nationalization, expropriation, currency
restrictions, or acts of war, revolution, riots or terrorism, or (B) part of the
"prevailing country risk" of the Portfolios, as such term is used in SEC Release
Nos. IC-22658; IS-1080 (May 12, 1997) or as such term or other similar terms are
now or in the future interpreted by the SEC or by the staff of the Division of
Investment Management thereof.
Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Fund for any loss, liability,
claim or expense resulting from or caused by; (i) events or circumstances beyond
the reasonable control of the Custodian or any sub-custodian or Securities
System or any agent or nominee of any of the foregoing, including, without
limitation, the interruption, suspension or restriction of trading on or the
closure of any securities market, power or other mechanical or technological
failures or interruptions, computer viruses or communications disruptions, work
stoppages, natural disasters, or other similar events or acts; (ii) errors by
the Fund or the Investment Advisor in their instructions to the Custodian
provided such instructions have been in accordance with this Agreement; (iii)
the insolvency of or acts or omissions by a Securities System; (iv) any delay or
failure of any broker, agent or intermediary, central bank or other commercially
prevalent payment or clearing system to deliver to the Custodian's sub-custodian
or agent securities purchased or in the remittance or payment made in connection
with securities sold; (v) any delay or failure of any company, corporation, or
other body in charge of registering or transferring securities in the name of
the Custodian, the Fund, the Custodian's sub-custodians, nominees or agents or
any consequential losses arising out of such delay or failure to transfer such
securities including non-receipt of bonus, dividends and rights and other
accretions or benefits; (vi) delays or inability to perform its duties due to
any disorder in market infrastructure with respect to any particular security or
Securities System; and (vii) any provision of any present or future law or
regulation or order of the United States of America, or any state thereof, or
any other country, or political subdivision thereof or of any court of competent
jurisdiction.
The Custodian shall be liable for the acts or omissions of a Foreign
Sub-Custodian (as defined in Section 4 hereof) to the same extent as set forth
with respect to sub-custodians generally in this Agreement.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of
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the Custodian, result in the Custodian or its nominee assigned to the Fund or
the Portfolio being liable for the payment of money or incurring liability of
some other form, the Fund on behalf of the Portfolio, as a prerequisite to
requiring the Custodian to take such action, shall provide indemnity to the
Custodian in an amount and form satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or agents,
to advance cash or securities for any purpose (including but not limited to
securities settlements, foreign exchange contracts and assumed settlement) or in
the event that the Custodian or its nominee 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 own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the applicable Portfolio shall
be security therefor and should the Fund fail to repay the Custodian promptly,
the Custodian shall be entitled to utilize available cash and to dispose of such
Portfolio's assets to the extent necessary to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
SECTION 15. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT
This Agreement shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than ninety (90) days after the date of such delivery or mailing; provided,
however that:
(a) the Custodian shall not with respect to a Portfolio act under Section
2.8 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board has approved the
initial use of a particular Securities System by such Portfolio, as
required by Rule 17f-4 under the 1940 Act;
(b) the Custodian shall not with respect to a Portfolio act under Section
2.9 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board has approved the initial
use of the Direct Paper System by such Portfolio;
(c) the Fund shall not amend or terminate this Agreement in contravention
of any applicable federal or state regulations, or any provision of the
Fund's Declaration of Trust; and
(d) the Fund on behalf of one or more of the Portfolios may at any time by
action of its Board:
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(i) substitute another bank or trust company for the Custodian by giving
notice as described above to the Custodian, or
(ii) immediately, upon receipt of written notice by the Custodian,
terminate this Agreement (A) in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the
Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction, or (B),
without cost or penalty to either party, in the event of the Custodian's
failure to achieve "Year 2000 Readiness". For the purposes of this
section, the term "Year 2000 Readiness" means the capability to perform all
date dependent and date related functions, and to record, store process and
present date information and date dependent information for calendar dates
on or after January 1, 2000.
Upon termination of the Agreement, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
out-of-pocket costs, expenses and disbursements in connection with the transfer
of the Fund's assets to a successor to the Custodian hereunder and any services
provided pursuant hereto during the period between notice of termination and
such transfer. Notwithstanding anything to the contrary in this Section 15, the
Fund shall not reimburse the Custodian for the out-of-pocket costs, expenses and
disbursements in connection with transfer if termination is due to the
Custodian's failure to have achieved Year 2000 Readiness.
SECTION 16. SUCCESSOR CUSTODIAN
If a successor custodian for one or more Portfolios shall be appointed by
the Board, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities of each applicable Portfolio then held by it hereunder
and shall transfer to an account of the successor custodian all of the
securities of each such Portfolio held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a Certified Resolution, deliver at the office of
the Custodian and transfer such securities, funds and other properties in
accordance with such resolution.
In the event that no written order designating a successor custodian or
Certified Resolution shall have been delivered to the Custodian on or before the
date when such termination shall become effective, then the Custodian shall have
the right to deliver to a bank or trust company, which is a "bank" as defined in
the 1940 Act, doing business in Boston, Massachusetts, or New York, New York, of
its own selection, having an aggregate capital, surplus, and undivided profits,
as shown by its last published report, of not less than
24
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$25,000,000, all securities, funds and other properties held by the Custodian on
behalf of each applicable Portfolio and all instruments held by the Custodian
relative thereto and all other property held by it under this Agreement on
behalf of each applicable Portfolio, and to transfer to an account of such
successor custodian all of the securities of each such Portfolio held in any
Securities System. Thereafter, such bank or trust company shall be the
successor of the Custodian under this Agreement.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the Certified Resolution to appoint a successor
custodian, the Custodian shall be entitled to fair compensation for its services
during such period as the Custodian retains possession of such securities, funds
and other properties and the provisions of this Agreement relating to the duties
and obligations of the Custodian shall remain in full force and effect.
SECTION 17. INTERPRETIVE AND ADDITIONAL PROVISIONS
In connection with the operation of this Agreement, the Custodian and the
Fund on behalf of each of the Portfolios, may from time to time agree on such
provisions interpretive of or in addition to the provisions of this Agreement as
may in their joint opinion be consistent with the general tenor of this
Agreement. Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto, PROVIDED that no
such interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Fund's Declaration of
Trust. No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Agreement.
SECTION 18. ADDITIONAL FUNDS
In the event that the Fund establishes one or more series of Shares in
addition to CAPITAL APPRECIATION PORTFOLIO, GROWTH & INCOME PORTFOLIO, TENNESSEE
TAX-FREE PORTFOLIO, BOND PORTFOLIO, INTERMEDIATE BOND PORTFOLIO, U.S. TREASURY
MONEY MARKET PORTFOLIO, U.S. GOVERNMENT MONEY MARKET PORTFOLIO, MUNICIPAL MONEY
MARKET PORTFOLIO, AND CASH RESERVE PORTFOLIO with respect to which it desires to
have the Custodian render services as custodian under the terms hereof, it shall
so notify the Custodian in writing, and if the Custodian agrees in writing to
provide such services, such series of Shares shall become a Portfolio hereunder.
SECTION 19. BOND
The Custodian shall at all times maintain a bond in such form and amount as
is customary in the institutional custody industry, which shall be issued by a
reputable fidelity insurance
25
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company authorized to do business in the place where such bond is issued,
against larceny and embezzlement, covering each officer and employee of the
Custodian who may, singly or jointly with others, have access to securities or
funds of the Fund, either directly or through authority to receive and carry out
any certificate instruction, order request, note or other instrument required or
permitted by this Agreement.
SECTION 20. YEAR 2000
The Custodian will take all steps necessary to ensure that its products
(and those of its third-party suppliers) reflect the available state of the art
technology to offer products that are Year 2000 compliant, including, but not
limited to, century recognition of dates, calculations that correctly compute
same century and multi-century formulas and date values, and interface values
that reflect the date issues arising between now and the next one-hundred years.
If any changes are required, the Custodian will make the changes to its products
at no cost to the Fund and in a commercially reasonable time frame and will
require third-party suppliers to do likewise.
SECTION 21. MASSACHUSETTS LAW TO APPLY
This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
SECTION 22. PRIOR AGREEMENTS
This AGREEMENT supersedes and terminates, as of the date hereof, all prior
Agreements between the Fund on behalf of each of the Portfolios and the
Custodian relating to the custody of the Fund's assets.
SECTION 23. NOTICES.
Any notice, instruction or other instrument required to be given hereunder
may be delivered in person to the offices of the parties as set forth herein
during normal business hours or delivered prepaid registered mail or by telex,
cable or telecopy to the parties at the following addresses or such other
addresses as may be notified by any party from time to time.
To the Fund: FIRST FUNDS
c/o ALPS MUTUAL FUNDS SERVICES
370 17th Street, Suite 2700
Denver, Colorado 80202
Attention: Jeremy May
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Telephone: 303-623-2577
Telecopy: 303-623-7850
To the Custodian: STATE STREET BANK AND TRUST COMPANY
One Heritage Drive, JPB 2N
North Quincy, Massachusetts 02171
Attention: Charles R. Whittemore, Jr.
Telephone: 617-985-7809
Telecopy: 617-537-5152
Such notice, instruction or other instrument shall be deemed to have been
served in the case of a registered letter at the expiration of five business
days after posting, in the case of cable twenty-four hours after dispatch and,
in the case of telex, immediately on dispatch and if delivered outside normal
business hours it shall be deemed to have been received at the next time after
delivery when normal business hours commence and in the case of cable, telex or
telecopy on the business day after the receipt thereof. Evidence that the
notice was properly addressed, stamped and put into the post shall be conclusive
evidence of posting.
SECTION 24. REPRODUCTION OF DOCUMENTS
This Agreement and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process. The parties hereto
all/each agree that any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding, whether or not the
original is in existence and whether or not such reproduction was made by a
party in the regular course of business, and that any enlargement, facsimile or
further reproduction of such reproduction shall likewise be admissible in
evidence.
SECTION 25. CONFIDENTIALITY.
None of the parties hereto shall, unless compelled to do so by any court of
competent jurisdiction either before or after the termination of this Agreement,
disclose to any person not authorized by the relevant party to receive the same
any information relating to such party and to the affairs of such party of which
the party disclosing the same shall have become possessed during the period of
this Agreement and each party shall use its best endeavors to prevent any such
disclosure as aforesaid.
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SECTION 26. SHAREHOLDER COMMUNICATIONS ELECTION
SEC Rule 14b-2 requires banks which hold securities for the account of
customers to respond to requests by issuers of securities for the names,
addresses and holdings of beneficial owners of securities of that issuer held by
the bank unless the beneficial owner has expressly objected to disclosure of
this information. In order to comply with the rule, the Custodian needs the
Fund to indicate whether it authorizes the Custodian to provide the Fund's name,
address, and share position to requesting companies whose securities the Fund
owns. If the Fund tells the Custodian "no", the Custodian will not provide this
information to requesting companies. If the Fund tells the Custodian "yes" or
does not check either "yes" or "no" below, the Custodian is required by the rule
to treat the Fund as consenting to disclosure of this information for all
securities owned by the Fund or any funds or accounts established by the Fund.
For the Fund's protection, the Rule prohibits the requesting company from using
the Fund's name and address for any purpose other than corporate communications.
Please indicate below whether the Fund consents or objects by checking one of
the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name, address,
and share positions.
NO [ ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
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<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of May 7, 1999.
FIRST FUNDS FUND SIGNATURE ATTESTED TO BY:
By: By:
------------------------- --------------------
Name: Name:
------------------------- --------------------
Title: Title:
------------------------- --------------------
STATE STREET BANK AND TRUST COMPANY SIGNATURE ATTESTED TO BY:
By: By:
------------------------- --------------------
Name: Ronald E. Logue Name: Glenn Ciotti
------------------------- --------------------
Title:Executive Vice President Title: VP & Assoc. Counsel
------------------------ --------------------
<PAGE>
DATA ACCESS SERVICES AGREEMENT
AGREEMENT between First Funds (the "Customer") and State Street Bank and
Trust Company ("State Street").
PREAMBLE
WHEREAS, State Street has been appointed as custodian of certain assets of
the Customer pursuant to a certain Custodian Agreement (the "Custodian
Agreement") dated as of May 7, 1999;
WHEREAS, State Street has developed and utilizes proprietary accounting and
other systems, including State Street's proprietary Multicurrency HORIZON-SM-
Accounting System, in its role as custodian of the Customer, and maintains
certain Customer-related data ("Customer Data") in databases under the control
and ownership of State Street (the "Data Access Services"); and
WHEREAS, State Street makes available to the Customer certain Data Access
Services solely for the benefit of the Customer, and intends to provide
additional services, consistent with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and for other good and valuable consideration, the parties
agree as follows:
1. SYSTEM AND DATA ACCESS SERVICES
(a) SYSTEM. Subject to the terms and conditions of this Agreement, State
Street hereby agrees to provide the Customer with access to State Street's
Multicurrency HORIZON-SM- Accounting System and the other information systems
(collectively, the "System") as described in Attachment A, on a remote basis for
the purpose of obtaining reports and information, solely on computer hardware,
system software and telecommunication links (the "Designated Configuration") of
the Customer (or certain third parties) approved by State Street that serve as
investment advisors or investment managers of the Customer or other third
parties, such as the Customer's independent auditors, which serve as service
providers to the Customer (each, an "Investment Advisor"), solely with respect
to the Customer or on any designated substitute or back-up equipment
configuration with State Street's written consent, such consent not to be
unreasonably withheld.
(b) DATA ACCESS SERVICES. State Street agrees to make available to the
Customer the Data Access Services subject to the terms and conditions of this
Agreement and data access operating standards and procedures as may be issued by
State Street from time to time. The ability of the Customer to originate
electronic instructions to State Street on behalf of the Customer in order to
(i) effect the transfer or movement of cash or securities held under custody by
State Street or (ii) transmit accounting or other information (such transactions
are referred to herein as "Client Originated Electronic Financial
Instructions"), and (iii) access data for the purpose of reporting and analysis,
shall be deemed to be Data Access Services for purposes of this Agreement.
<PAGE>
(c) ADDITIONAL SERVICES. State Street may from time to time agree to make
available to the Customer additional Systems that are not described in the
attachments to this Agreement. In the absence of any other written agreement
concerning such additional systems, the term "System" shall include, and this
Agreement shall govern, the Customer's access to and use of any additional
System made available by State Street and/or accessed by the Customer.
2. NO USE OF THIRD PARTY SYSTEMS-LEVEL SOFTWARE
State Street and the Customer acknowledge that in connection with the Data
Access Services provided under this Agreement, the Customer will have access,
through the Data Access Services, to Customer Data and to functions of State
Street's proprietary systems; provided, however that in no event will the
Customer have direct access to any third party systems-level software that
retrieves data for, stores data from, or otherwise supports the System.
3. LIMITATION ON SCOPE OF USE
a. DESIGNATED EQUIPMENT; DESIGNATED LOCATION. The System and the Data Access
Services shall be used and accessed solely on and through the Designated
Configuration at the offices of the Customer, the Investment Advisor or any
Sub-Advisor located in Memphis, Tennessee or Knoxville, Tennessee ("Designated
Location").
b. DESIGNATED CONFIGURATION; TRAINED PERSONNEL. State Street shall be
responsible for supplying, installing and maintaining the Designated
Configuration at the Designated Location. State Street and the Customer agree
that each will engage or retain the services of trained personnel to enable both
parties to perform their respective obligations under this Agreement. State
Street agrees to use commercially reasonable efforts to maintain the System so
that it remains serviceable, provided, however, that State Street does not
guarantee or assure uninterrupted remote access use of the System.
c. SCOPE OF USE. The Customer will use the System and the Data Access
Services only for the processing of securities transactions, the keeping of
books of account for the Customer and accessing data for purposes of reporting
and analysis. The Customer shall not, and shall cause its employees and agents
not to (i) permit any third party to use the System or the Data Access Services,
(ii) sell, rent, license or otherwise use the System or the Data Access Services
in the operation of a service bureau or for any purpose other than as expressly
authorized under this Agreement, (iii) use the System or the Data Access
Services for any fund, trust or other investment vehicle without the prior
written consent of State Street, (iv) allow access to the System or the Data
Access Services through terminals or any other computer or telecommunications
facilities located outside the Designated Locations, (v) allow or cause any
information (other than portfolio holdings, valuations of portfolio holdings,
and other information reasonably necessary for the management or distribution of
the assets of the Customer) transmitted from State Street's databases, including
data from third party sources, available through use of the System or the Data
Access Services to be redistributed or retransmitted to another computer,
terminal or other device for other than use for or on behalf of the Customer or
(vi) modify the System in any way, including without limitation, developing any
software for or attaching any devices or computer programs to any equipment,
system, software or database which forms a part of or is resident on the
Designated Configuration.
<PAGE>
d. OTHER LOCATIONS. Except in the event of an emergency or of a planned
System shutdown, the Customer's access to services performed by the System or to
Data Access Services at the Designated Location may be transferred to a
different location only upon the prior written consent of State Street. In the
event of an emergency or System shutdown, the Customer may use any back-up site
included in the Designated Configuration or any other back-up site agreed to by
State Street, which agreement will not be unreasonably withheld. The Customer
may secure from State Street the right to access the System or the Data Access
Services through computer and telecommunications facilities or devices complying
with the Designated Configuration at additional locations only upon the prior
written consent of State Street and on terms to be mutually agreed upon by the
parties.
e. TITLE. Title and all ownership and proprietary rights to the System,
including any enhancements or modifications thereto, whether or not made by
State Street, are and shall remain with State Street.
f. NO MODIFICATION. Without the prior written consent of State Street, the
Customer shall not modify, enhance or otherwise create derivative works based
upon the System, nor shall the Customer reverse engineer, decompile or otherwise
attempt to secure the source code for all or any part of the System.
g. SECURITY PROCEDURES. The Customer shall comply with data access operating
standards and procedures and with user identification or other password control
requirements and other security procedures as may be issued from time to time by
State Street for use of the System on a remote basis and to access the Data
Access Services. The Customer shall have access only to the Customer Data and
authorized transactions agreed upon from time to time by State Street and, upon
notice from State Street, the Customer shall discontinue remote use of the
System and access to Data Access Services for any security reasons cited by
State Street; provided, that, in such event, State Street shall, for a period
not less than 180 days (or such other shorter period specified by the Customer)
after such discontinuance, assume responsibility to provide accounting services
under the terms of the Custodian Agreement.
h. INSPECTIONS. State Street shall have the right to inspect the use of the
System and the Data Access Services by the Customer and the Investment Advisor
to ensure compliance with this Agreement. The on-site inspections shall be upon
prior written notice to the Customer and the Investment Advisor and at
reasonably convenient times and frequencies so as not to result in an
unreasonable disruption of the Customer's or the Investment Advisor's business.
4. PROPRIETARY INFORMATION
a. PROPRIETARY INFORMATION. The Customer acknowledges and State Street
represents that the System and the databases, computer programs, screen formats,
report formats, interactive design techniques, documentation and other
information made available to the Customer by State Street as part of the Data
Access Services and through the use of the System constitute copyrighted, trade
secret, or other proprietary information of substantial value to State Street.
Any and all such information provided by State Street to the Customer shall be
deemed proprietary and confidential information of State Street (hereinafter
"Proprietary Information"). The Customer agrees that it will hold such
Proprietary Information in the strictest confidence and secure and protect it in
a manner consistent with its own procedures for the protection of its own
confidential information
<PAGE>
and to take appropriate action by instruction or agreement with its employees
who are permitted access to the Proprietary Information to satisfy its
obligations hereunder. The Customer further acknowledges that State Street
shall not be required to provide the Investment Advisor with access to the
System unless it has first received from the Investment Advisor an undertaking
with respect to State Street's Proprietary Information in the form of Attachment
B to this Agreement. The Customer shall use all commercially reasonable efforts
to assist State Street in identifying and preventing any unauthorized use,
copying or disclosure of the Proprietary Information or any portions thereof or
any of the logic, formats or designs contained therein.
b. COOPERATION. Without limitation of the foregoing, the Customer shall
advise State Street immediately in the event the Customer learns or has reason
to believe that any person to whom the Customer has given access to the
Proprietary Information, or any portion thereof, has violated or intends to
violate the terms of this Agreement, and the Customer will, at its expense,
co-operate with State Street in seeking injunctive or other equitable relief in
the name of the Customer or State Street against any such person.
c. INJUNCTIVE RELIEF. The Customer acknowledges that the disclosure of any
Proprietary Information, or of any information which at law or equity ought to
remain confidential, will immediately give rise to continuing irreparable injury
to State Street inadequately compensable in damages at law. In addition, State
Street shall be entitled to obtain immediate injunctive relief against the
breach or threatened breach of any of the foregoing undertakings, in addition to
any other legal remedies which may be available.
d. SURVIVAL. The provisions of this Section 4 shall survive the termination of
this Agreement.
5. LIMITATION ON LIABILITY
a. LIMITATION ON AMOUNT AND TIME FOR BRINGING ACTION. The Customer agrees
that any liability of State Street to the Customer or any third party arising
out of State Street's provision of Data Access Services or the System under this
Agreement shall be limited to the amount paid by the Customer for the preceding
24 months for such services. In no event shall State Street be liable to the
Customer or any other party for any special, indirect, punitive or consequential
damages even if advised of the possibility of such damages. No action,
regardless of form, arising out of this Agreement may be brought by the Customer
more than two years after the Customer has knowledge that the cause of action
has arisen.
b. LIMITED WARRANTIES. NO OTHER WARRANTIES, WHETHER EXPRESS OR IMPLIED,
INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE, ARE MADE BY STATE STREET.
c. THIRD-PARTY DATA. Organizations from which State Street may obtain certain
data included in the System or the Data Access Services are solely responsible
for the contents of such data, and State Street shall have no liability for
claims arising out of the contents of such third-party data, including, but not
limited to, the accuracy thereof.
<PAGE>
d. REGULATORY REQUIREMENTS. As between State Street and the Customer, the
Customer shall be solely responsible for the accuracy of any accounting
statements or reports produced using the Data Access Services and the System and
the conformity thereof with any requirements of law.
e. FORCE MAJEURE. Neither party shall be liable for any costs or damages due
to delay or nonperformance under this Agreement arising out of any cause or
event beyond such party's control, including without limitation, cessation of
services hereunder or any damages resulting therefrom to the other party, or the
Customer as a result of work stoppage, power or other mechanical failure,
computer virus, natural disaster, governmental action, or communication
disruption.
6. INDEMNIFICATION
The Customer agrees to indemnify and hold State Street harmless from any loss,
damage or expense including reasonable attorney's fees, (a "loss") suffered by
State Street arising from (i) the negligence or willful misconduct in the use by
the Customer of the Data Access Services or the System, including any loss
incurred by State Street resulting from a security breach at the Designated
Location or committed by the Customer's employees or agents or the Investment
Advisor and (ii) any loss resulting from incorrect Client Originated Electronic
Financial Instructions. State Street shall be entitled to rely on the validity
and authenticity of Client Originated Electronic Financial Instructions without
undertaking any further inquiry as long as such instruction is undertaken in
conformity with security procedures established by State Street from time to
time.
7. FEES
Fees and charges for the use of the System and the Data Access Services and
related payment terms shall be as set forth in the Custody Fee Schedule in
effect from time to time between the parties (the "Fee Schedule"). Any tariffs,
duties or taxes imposed or levied by any government or governmental agency by
reason of the transactions contemplated by this Agreement, including, without
limitation, federal, state and local taxes, use, value added and personal
property taxes (other than income, franchise or similar taxes which may be
imposed or assessed against State Street) shall be borne by the Customer. Any
claimed exemption from such tariffs, duties or taxes shall be supported by
proper documentary evidence delivered to State Street.
8. TRAINING, IMPLEMENTATION AND CONVERSION
a. TRAINING. State Street agrees to provide training, at a designated State
Street training facility or at the Designated Location, to the Customer's
personnel in connection with the use of the System on the Designated
Configuration. The Customer agrees that it will set aside, during regular
business hours or at other times agreed upon by both parties, sufficient time to
enable all operators of the System and the Data Access Services, designated by
the Customer, to receive the training offered by State Street pursuant to this
Agreement.
b. INSTALLATION AND CONVERSION. State Street shall be responsible for the
technical installation and conversion ("Installation and Conversion") of the
Designated Configuration. The Customer shall have the following
responsibilities in connection with Installation and Conversion of the System:
<PAGE>
(i) The Customer shall be solely responsible for the timely acquisition
and maintenance of the hardware and software that attach to the Designated
Configuration in order to use the Data Access Services at the Designated
Location.
(ii) State Street and the Customer each agree that they will assign
qualified personnel to actively participate during the Installation and
Conversion phase of the System implementation to enable both parties to
perform their respective obligations under this Agreement.
9. SUPPORT
During the term of this Agreement, State Street agrees to provide the
support services set out in Attachment C to this Agreement.
10. TERM OF AGREEMENT
a. TERM OF AGREEMENT. This Agreement shall become effective on the date
of its execution by State Street and shall remain in full force and effect until
terminated as herein provided.
b. TERMINATION OF AGREEMENT. Either party may terminate this Agreement
(i) for any reason by giving the other party at least one-hundred and eighty
days' prior written notice in the case of notice of termination by State Street
to the Customer or thirty days' notice in the case of notice from the Customer
to State Street of termination; or (ii) immediately for failure of the other
party to comply with any material term and condition of the Agreement by giving
the other party written notice of termination. In the event the Customer shall
cease doing business, shall become subject to proceedings under the bankruptcy
laws (other than a petition for reorganization or similar proceeding) or shall
be adjudicated bankrupt, this Agreement and the rights granted hereunder shall,
at the option of State Street, immediately terminate with notice to the
Customer. This Agreement shall in any event terminate as to any Customer within
90 days after the termination of the Custodian Agreement applicable to such
Customer.
c. TERMINATION OF THE RIGHT TO USE. Upon termination of this Agreement for
any reason, any right to use the System and access to the Data Access Services
shall terminate and the Customer shall immediately cease use of the System and
the Data Access Services. Immediately upon termination of this Agreement for
any reason, the Customer shall return to State Street all copies of
documentation and other Proprietary Information in its possession; provided,
however, that in the event that either party terminates this Agreement or the
Custodian Agreement for any reason other than the Customer's breach, State
Street shall provide the Data Access Services for a period of time and at a
price to be agreed upon by the parties.
11. MISCELLANEOUS
a. ASSIGNMENT; SUCCESSORS. This Agreement and the rights and obligations of
the Customer and State Street hereunder shall not be assigned by either party
without the prior written consent of the other party, except that State Street
may assign this Agreement to a successor of all or a
<PAGE>
substantial portion of its business, or to a party controlling, controlled by,
or under common control with State Street.
b. SURVIVAL. All provisions regarding indemnification, warranty, liability
and limits thereon, and confidentiality and/or protection of proprietary rights
and trade secrets shall survive the termination of this Agreement.
c. ENTIRE AGREEMENT. This Agreement and the attachments hereto constitute the
entire understanding of the parties hereto with respect to the Data Access
Services and the use of the System and supersedes any and all prior or
contemporaneous representations or agreements, whether oral or written, between
the parties as such may relate to the Data Access Services or the System, and
cannot be modified or altered except in a writing duly executed by the parties.
This Agreement is not intended to supersede or modify the duties and liabilities
of the parties hereto under the Custodian Agreement or any other agreement
between the parties hereto except to the extent that any such agreement
specifically refers to the Data Access Services or the System. No single waiver
of any right hereunder shall be deemed to be a continuing waiver.
d. SEVERABILITY. If any provision or provisions of this Agreement shall be
held to be invalid, unlawful, or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected or
impaired.
e. GOVERNING LAW. This Agreement shall be interpreted and construed in
accordance with the internal laws of The Commonwealth of Massachusetts without
regard to the conflict of laws provisions thereof.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
effective as of May 7, 1999.
STATE STREET BANK AND TRUST COMPANY
By:
--------------------------------
Title:
------------------------------
Date:
-------------------------------
FIRST FUNDS
By:
---------------------------------
Title:
------------------------------
Date:
-------------------------------
<PAGE>
ATTACHMENT A
Multicurrency HORIZON-SM- Accounting System
SYSTEM PRODUCT DESCRIPTION
I. The Multicurrency HORIZON-SM- Accounting System is designed to provide lot
level portfolio and general ledger accounting for SEC and ERISA type
requirements and includes the following services: 1) recording of general ledger
entries; 2) calculation of daily income and expense; 3) reconciliation of daily
activity with the trial balance, and 4) appropriate automated feeding mechanisms
to (i) domestic and international settlement systems, (ii) daily, weekly and
monthly evaluation services, (iii) portfolio performance and analytic services,
(iv) customer's internal computing systems and (v) various State Street provided
information services products.
II. INSIGHT-SM- is designed to provide customer access to the information
maintained on The Multicurrency HORIZON-SM- Accounting System, including: 1)
cash transactions and balances; 2) purchases and sales; 3) income receivables;
4) tax refund receivables; 5) daily priced positions; 6) open trades; 7)
settlement status; 8) foreign exchange transactions; 9) trade history, and 10)
daily, weekly and monthly evaluation services. (1)
- --------------------
(1) Definition to be expanded upon and forwarded to you.
<PAGE>
ATTACHMENT B
UNDERTAKING
The Undersigned understands that in the course of its employment as
Investment Advisor to First Funds (the "Customer") it will have access to State
Street Bank and Trust Company's ("State Street") Multicurrency HORIZON-SM-
Accounting System and other information systems (collectively, the "System").
The Undersigned acknowledges that the System and the databases, computer
programs, screen formats, report formats, interactive design techniques,
documentation and other information made available to the Undersigned by State
Street as part of the Data Access Services provided to the Customer and through
the use of the System constitute copyrighted, trade secret, or other proprietary
information of substantial value to State Street. Any and all such information
provided by State Street to the Undersigned shall be deemed proprietary and
confidential information of State Street (hereinafter "Proprietary
Information"). The Undersigned agrees that it will hold such Proprietary
Information in confidence and secure and protect it in a manner consistent with
its own procedures for the protection of its own confidential information and to
take appropriate action by instruction or agreement with its employees who are
permitted access to the Proprietary Information to satisfy its obligations
hereunder.
The Undersigned will not attempt to intercept data, gain access to data in
transmission, or attempt entry into any system or files for which it is not
authorized. It will not intentionally adversely affect the integrity of the
System through the introduction of unauthorized code or data, or through
unauthorized deletion.
Upon notice by State Street for any reason, any right to use the System and
access to the Data Access Services shall terminate and the Undersigned shall
immediately cease use of the System and the Data Access Services. Immediately
upon notice by State Street for any reason, the Undersigned shall return to
State Street all copies of documentation and other Proprietary Information in
its possession.
FIRST TENNESSEE BANK
By:
---------------------------------
Title:
------------------------------
Date:
-------------------------------
<PAGE>
ATTACHMENT B
UNDERTAKING
The Undersigned understands that in the course of its employment as
Sub-Advisor to First Funds (the "Customer") it will have access to State Street
Bank and Trust Company's ("State Street") Multicurrency HORIZON-SM- Accounting
System and other information systems (collectively, the "System").
The Undersigned acknowledges that the System and the databases, computer
programs, screen formats, report formats, interactive design techniques,
documentation and other information made available to the Undersigned by State
Street as part of the Data Access Services provided to the Customer and through
the use of the System constitute copyrighted, trade secret, or other proprietary
information of substantial value to State Street. Any and all such information
provided by State Street to the Undersigned shall be deemed proprietary and
confidential information of State Street (hereinafter "Proprietary
Information"). The Undersigned agrees that it will hold such Proprietary
Information in confidence and secure and protect it in a manner consistent with
its own procedures for the protection of its own confidential information and to
take appropriate action by instruction or agreement with its employees who are
permitted access to the Proprietary Information to satisfy its obligations
hereunder.
The Undersigned will not attempt to intercept data, gain access to data in
transmission, or attempt entry into any system or files for which it is not
authorized. It will not intentionally adversely affect the integrity of the
System through the introduction of unauthorized code or data, or through
unauthorized deletion.
Upon notice by State Street for any reason, any right to use the System and
access to the Data Access Services shall terminate and the Undersigned shall
immediately cease use of the System and the Data Access Services. Immediately
upon notice by State Street for any reason, the Undersigned shall return to
State Street all copies of documentation and other Proprietary Information in
its possession.
HIGHLAND CAPITAL MANAGEMENT
By:
---------------------------------
Title:
------------------------------
Date:
-------------------------------
<PAGE>
ATTACHMENT B
UNDERTAKING
The Undersigned understands that in the course of its employment as
Sub-Advisor to First Funds (the "Customer") it will have access to State Street
Bank and Trust Company's ("State Street") Multicurrency HORIZON-SM- Accounting
System and other information systems (collectively, the "System").
The Undersigned acknowledges that the System and the databases, computer
programs, screen formats, report formats, interactive design techniques,
documentation and other information made available to the Undersigned by State
Street as part of the Data Access Services provided to the Customer and through
the use of the System constitute copyrighted, trade secret, or other proprietary
information of substantial value to State Street. Any and all such information
provided by State Street to the Undersigned shall be deemed proprietary and
confidential information of State Street (hereinafter "Proprietary
Information"). The Undersigned agrees that it will hold such Proprietary
Information in confidence and secure and protect it in a manner consistent with
its own procedures for the protection of its own confidential information and to
take appropriate action by instruction or agreement with its employees who are
permitted access to the Proprietary Information to satisfy its obligations
hereunder.
The Undersigned will not attempt to intercept data, gain access to data in
transmission, or attempt entry into any system or files for which it is not
authorized. It will not intentionally adversely affect the integrity of the
System through the introduction of unauthorized code or data, or through
unauthorized deletion.
Upon notice by State Street for any reason, any right to use the System and
access to the Data Access Services shall terminate and the Undersigned shall
immediately cease use of the System and the Data Access Services. Immediately
upon notice by State Street for any reason, the Undersigned shall return to
State Street all copies of documentation and other Proprietary Information in
its possession.
MARTIN & CO.
By:
--------------------------------
Title:
------------------------------
Date:
-------------------------------
<PAGE>
ATTACHMENT C
SUPPORT
During the term of this Agreement, State Street agrees to provide the
following on-going support services:
a. TELEPHONE SUPPORT. The Customer Designated Persons may contact State
Street's Multicurrency HORIZON-SM- Help Desk and Customer Assistance Center
between the hours of 8 a.m. and 6 p.m. (Eastern time) on all business days for
the purpose of obtaining answers to questions about the use of the System, or to
report apparent problems with the System. From time to time, the Customer shall
provide to State Street a list of persons, not to exceed five in number, who
shall be permitted to contact State Street for assistance (such persons being
referred to as "the Customer Designated Persons").
b. TECHNICAL SUPPORT. State Street will provide technical support to assist
the Customer in using the System and the Data Access Services. The total amount
of technical support provided by State Street shall not exceed 10 resource days
per year. State Street shall provide such additional technical support as is
expressly set forth in the fee schedule in effect from time to time between the
parties (the "Fee Schedule"). Technical support, including during installation
and testing, is subject to the fees and other terms set forth in the Fee
Schedule.
c. MAINTENANCE SUPPORT. State Street shall use commercially reasonable
efforts to correct system functions that do not work according to the System
Product Description as set forth on Attachment A in priority order in the next
scheduled delivery release or otherwise as soon as is practicable.
d. SYSTEM ENHANCEMENTS. State Street will provide to the Customer any
enhancements to the System developed by State Street and made a part of the
System; provided that, sixty (60) days prior to installing any such enhancement,
State Street shall notify the Customer and shall offer the Customer reasonable
training on the enhancement. Charges for system enhancements shall be as
provided in the Fee Schedule. State Street retains the right to charge for
related systems or products that may be developed and separately made available
for use other than through the System.
e. CUSTOM MODIFICATIONS. In the event the Customer desires custom
modifications in connection with its use of the System, the Customer shall make
a written request to State Street providing specifications for the desired
modification. Any custom modifications may be undertaken by State Street in its
sole discretion in accordance with the Fee Schedule.
f. LIMITATION ON SUPPORT. State Street shall have no obligation to support
the Customer's use of the System: (i) for use on any computer equipment or
telecommunication facilities which does not conform to the Designated
Configuration or (ii) in the event the Customer has modified the System in
breach of this Agreement.
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Argentina Citibank, N.A. --
Australia Westpac Banking Corporation --
Austria Erste Bank der Oesterreichischen --
Sparkassen AG
Bahrain British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Bangladesh Standard Chartered Bank --
Belgium Generale de Banque --
Bermuda The Bank of Bermuda Limited --
Bolivia Banco Boliviano Americano S.A. --
Botswana Barclays Bank of Botswana Limited --
Brazil Citibank, N.A. --
Bulgaria ING Bank N.V. --
Canada State Street Trust Company Canada --
Chile Citibank, N.A. Deposito Central de Valores S.A.
People's Republic The Hongkong and Shanghai --
of China Banking Corporation Limited,
Shanghai and Shenzhen branches
Colombia Cititrust Colombia S.A. --
Sociedad Fiduciaria
1
<PAGE>
<CAPTION>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Costa Rica Banco BCT S.A. --
Croatia Privredna Banka Zagreb d.d --
Cyprus The Cyprus Popular Bank Ltd. --
Czech Republic Ceskoslovenska Obchodni --
Banka, A.S.
Denmark Den Danske Bank --
Ecuador Citibank, N.A. --
Egypt National Bank of Egypt --
Estonia Hansabank --
Finland Merita Bank Limited --
France Banque Paribas --
Germany Dresdner Bank AG --
Ghana Barclays Bank of Ghana Limited --
Greece National Bank of Greece S.A. The Bank of Greece,
System for Monitoring Transactions in
Securities in Book-Entry Form
Hong Kong Standard Chartered Bank --
Hungary Citibank Budapest Rt. --
2
<PAGE>
<CAPTION>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Iceland Icebank Ltd.
India Deutsche Bank AG --
The Hongkong and Shanghai
Banking Corporation Limited
Indonesia Standard Chartered Bank --
Ireland Bank of Ireland --
Israel Bank Hapoalim B.M. --
Italy Banque Paribas --
Ivory Coast Societe Generale de Banques --
en Cote d'Ivoire
Jamaica Scotiabank Jamaica Trust and Merchant --
Bank Ltd.
Japan The Fuji Bank, Limited Japan Securities Depository
Center
Sumitomo Bank, Ltd.
Jordan British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Kenya Barclays Bank of Kenya Limited --
Republic of Korea The Hongkong and Shanghai Banking
Corporation Limited
Latvia JSC Hansabank-Latvija --
3
<PAGE>
<CAPTION>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Lebanon British Bank of the Middle East
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Lithuania Vilniaus Bankas AB --
Malaysia Standard Chartered Bank --
Malaysia Berhad
Mauritius The Hongkong and Shanghai --
Banking Corporation Limited
Mexico Citibank Mexico, S.A. --
Morocco Banque Commerciale du Maroc --
Namibia (via) Standard Bank of South Africa -
The Netherlands MeesPierson N.V. --
New Zealand ANZ Banking Group --
(New Zealand) Limited
Norway Christiania Bank og --
Kreditkasse
Oman British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Pakistan Deutsche Bank AG --
Peru Citibank, N.A. --
Philippines Standard Chartered Bank --
4
<PAGE>
<CAPTION>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Poland Citibank (Poland) S.A. --
Bank Polska Kasa Opieki S.A.
Portugal Banco Comercial Portugues --
Romania ING Bank N.V. --
Russia Credit Suisse First Boston AO, Moscow --
(as delegate of Credit Suisse
First Boston, Zurich)
Singapore The Development Bank --
of Singapore Limited
Slovak Republic Ceskoslovenska Obchodni Banka, A.S. --
Slovenia Bank Austria d.d. Ljubljana --
South Africa Standard Bank of South Africa Limited --
Spain Banco Santander, S.A. --
Sri Lanka The Hongkong and Shanghai --
Banking Corporation Limited
Swaziland Standard Bank Swaziland Limited --
Sweden Skandinaviska Enskilda Banken --
Switzerland UBS AG --
Taiwan - R.O.C. Central Trust of China --
Thailand Standard Chartered Bank --
5
<PAGE>
<CAPTION>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Trinidad & Tobago Republic Bank Limited --
Tunisia Banque Internationale Arabe de Tunisie --
Turkey Citibank, N.A. --
Ottoman Bank
Ukraine ING Bank, Ukraine --
United Kingdom State Street Bank and Trust Company, --
London Branch
Uruguay Citibank, N.A. --
Venezuela Citibank, N.A. --
Zambia Barclays Bank of Zambia Limited --
Zimbabwe Barclays Bank of Zimbabwe Limited --
</TABLE>
Euroclear (The Euroclear System)/State Street London Limited
Cedel, S.A. (Cedel Bank, societe anonyme)/State Street London Limited
INTERSETTLE (for EASDAQ Securities)
6
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Argentina Caja de Valores S.A.
Australia Austraclear Limited
Reserve Bank Information and
Transfer System
Austria Oesterreichische Kontrollbank AG
(Wertpapiersammelbank Division)
Belgium Caisse Interprofessionnelle de Depot et
de Virement de Titres S.A.
Banque Nationale de Belgique
Brazil Companhia Brasileira de Liquidacao e
Custodia (CBLC)
Bolsa de Valores de Rio de Janeiro
All SSB CLIENTS PRESENTLY USE CBLC
Central de Custodia e de Liquidacao Financeira
de Titulos
Bulgaria Central Depository AD
Bulgarian National Bank
Canada The Canadian Depository
for Securities Limited
People's Republic Shanghai Securities Central Clearing and
of China Registration Corporation
Shenzhen Securities Central Clearing
Co., Ltd.
Costa Rica Central de Valores S.A. (CEVAL)
* Mandatory depositories include entities for which use is mandatory 1
as a matter of law or effectively mandatory as a matter of market practice.
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Croatia Ministry of Finance
National Bank of Croatia
Czech Republic Stredisko cennych papiru
Czech National Bank
Denmark Vaerdipapircentralen (the Danish
Securities Center)
Egypt Misr Company for Clearing, Settlement,
and Central Depository
Estonia Eesti Vaartpaberite Keskdepositoorium
Finland The Finnish Central Securities
Depository
France Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres (SICOVAM)
Germany Deutsche Borse Clearing AG
Greece The Central Securities Depository
(Apothetirion Titlon AE)
Hong Kong The Central Clearing and
Settlement System
Central Money Markets Unit
Hungary The Central Depository and Clearing
House (Budapest) Ltd. (KELER)
[MANDATORY FOR GOV'T BONDS ONLY;
SSB DOES NOT USE FOR OTHER SECURITIES]
India The National Securities Depository Limited
* Mandatory depositories include entities for which use is mandatory 2
as a matter of law or effectively mandatory as a matter of market practice.
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Indonesia Bank Indonesia
Ireland Central Bank of Ireland
Securities Settlement Office
Israel The Tel Aviv Stock Exchange Clearing
House Ltd.
Bank of Israel
Italy Monte Titoli S.p.A.
Banca d'Italia
Ivory Coast Depositaire Central - Banque de Reglement
Jamaica The Jamaican Central Securities Depository
Japan Bank of Japan Net System
Kenya Central Bank of Kenya
Republic of Korea Korea Securities Depository Corporation
Latvia The Latvian Central Depository
Lebanon The Custodian and Clearing Center of
Financial Instruments for Lebanon
and the Middle East (MIDCLEAR) S.A.L.
The Central Bank of Lebanon
* Mandatory depositories include entities for which use is mandatory 3
as a matter of law or effectively mandatory as a matter of market practice.
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Lithuania The Central Securities Depository of Lithuania
Malaysia The Malaysian Central Depository Sdn. Bhd.
Bank Negara Malaysia,
Scripless Securities Trading and Safekeeping
System
Mauritius The Central Depository & Settlement
Co. Ltd.
Mexico S.D. INDEVAL, S.A. de C.V.
(Instituto para el Deposito de
Valores)
Morocco Maroclear
The Netherlands Nederlands Centraal Instituut voor
Giraal Effectenverkeer B.V. (NECIGEF)
De Nederlandsche Bank N.V.
New Zealand New Zealand Central Securities
Depository Limited
Norway Verdipapirsentralen (the Norwegian
Registry of Securities)
Oman Muscat Securities Market
Pakistan Central Depository Company of Pakistan Limited
Peru Caja de Valores y Liquidaciones S.A.
(CAVALI)
* Mandatory depositories include entities for which use is mandatory 4
as a matter of law or effectively mandatory as a matter of market practice.
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Philippines The Philippines Central Depository, Inc.
The Registry of Scripless Securities
(ROSS) of the Bureau of the Treasury
Poland The National Depository of Securities
(Krajowy Depozyt Papierow Wartosciowych)
Central Treasury Bills Registrar
Portugal Central de Valores Mobiliarios (Central)
Romania National Securities Clearing, Settlement and
Depository Co.
Bucharest Stock Exchange Registry Division
Singapore The Central Depository (Pte)
Limited
Monetary Authority of Singapore
Slovak Republic Stredisko Cennych Papierov
National Bank of Slovakia
Slovenia Klirinsko Depotna Druzba d.d.
South Africa The Central Depository Limited
Spain Servicio de Compensacion y
Liquidacion de Valores, S.A.
Banco de Espana,
Central de Anotaciones en Cuenta
* Mandatory depositories include entities for which use is mandatory 5
as a matter of law or effectively mandatory as a matter of market practice.
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Sri Lanka Central Depository System
(Pvt) Limited
Sweden Vardepapperscentralen AB
(the Swedish Central Securities Depository)
Switzerland Schweizerische Effekten - Giro AG
Taiwan - R.O.C. The Taiwan Securities Central
Depository Co., Ltd.
Thailand Thailand Securities Depository
Company Limited
Tunisia Societe Tunisienne Interprofessionelle de
Compensation et de Depot de
Valeurs Mobilieres
Central Bank of Tunisia
Tunisian Treasury
Turkey Takas ve Saklama Bankasi A.S.
(TAKASBANK)
Central Bank of Turkey
Ukraine The National Bank of Ukraine
United Kingdom The Bank of England,
The Central Gilts Office and
The Central Moneymarkets Office
Uruguay Central Bank of Uruguay
* Mandatory depositories include entities for which use is mandatory 6
as a matter of law or effectively mandatory as a matter of market practice.
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Venezuela Central Bank of Venezuela
Zambia Lusaka Central Depository Limited
Bank of Zambia
* Mandatory depositories include entities for which use is mandatory 7
as a matter of law or effectively mandatory as a matter of market practice.
<PAGE>
SCHEDULE C
MARKET INFORMATION
<TABLE>
<CAPTION>
PUBLICATION/TYPE OF INFORMATION BRIEF DESCRIPTION
- ------------------------------- -----------------
(FREQUENCY)
<S> <C>
THE GUIDE TO CUSTODY IN WORLD MARKETS An overview of safekeeping and settlement practices and
(annually) procedures in each market in which State Street Bank and
Trust Company offers custodial services.
GLOBAL CUSTODY NETWORK REVIEW Information relating to the operating history and structure of
(annually) depositories and subcustodians located in the markets in
which State Street Bank and Trust Company offers custodial
services, including transnational depositories.
GLOBAL LEGAL SURVEY With respect to each market in which State Street Bank and
(annually) Trust Company offers custodial services, opinions relating to
whether local law restricts (i) access of a fund's independent
public accountants to books and records of a Foreign
Sub-Custodian or Foreign Securities System, (ii) the Fund's ability
to recover in the event of bankruptcy or insolvency of a
Foreign Sub-Custodian or Foreign Securities System, (iii) the
Fund's ability to recover in the event of a loss by a Foreign
Sub-Custodian or Foreign Securities System, and (iv) the
ability of a foreign investor to convert cash and cash
equivalents to U.S. dollars.
SUBCUSTODIAN AGREEMENTS Copies of the subcustodian contracts State Street Bank and
(annually) Trust Company has entered into with each subcustodian in the
markets in which State Street Bank and Trust Company offers
subcustody services to its US mutual fund clients.
Network Bulletins (weekly): Developments of interest to investors in the markets in which
State Street Bank and Trust Company offers custodial
services.
Foreign Custody Advisories (as
necessary): With respect to markets in which State Street Bank and Trust
Company offers custodial services which exhibit special
custody risks, developments which may impact State Street's
ability to deliver expected levels of service.
</TABLE>
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
Between
FIRST FUNDS
And
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
Page
----
1. Terms of Appointment and Duties. . . . . . . . . . . . . . . . . . . . 1
2. Third Party Administrators for Defined Contribution Plans. . . . . . . 4
3. Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4. Representations and Warranties of the Transfer Agent . . . . . . . . . 5
5. Representations and Warranties of the Fund . . . . . . . . . . . . . . 6
6. Wire Transfer Operating Guidelines . . . . . . . . . . . . . . . . . . 6
7. Data Access and Proprietary Information. . . . . . . . . . . . . . . . 8
8. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
9. Standard of Care . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
10. Year 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
11. Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
12. Covenants of the Fund and the Transfer Agent . . . . . . . . . . . . . 13
13. Termination of Agreement . . . . . . . . . . . . . . . . . . . . . . . 13
14. Assignment and Third Party Beneficiaries . . . . . . . . . . . . . . . 14
15. Subcontractors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
16. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
17. Additional Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
18. Limitations of Liability of the Trustees and Shareholders. . . . . . . 17
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the day of , 1999, by and between FIRST
FUNDS, a Massachusetts business trust, having its principal office and place of
business at 370 17th Street, Suite 3100, Denver, Colorado 80202 (the "Fund"),
and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company having
its principal office and place of business at 225 Franklin Street, Boston,
Massachusetts 02110 (the "Transfer Agent").
WHEREAS, the Fund is authorized to issue shares in separate series, with each
such series representing interests in a separate portfolio of securities and
other assets;
WHEREAS, the Fund offers shares in nine (9) series, such series to be named on
the attached Schedule A which may be amended by the parties from time to time
(each such series, together with all other series subsequently established by
the Fund and made subject to this Agreement in accordance with SECTION 17, being
herein referred to as a "Portfolio", and collectively as the "Portfolios") and
the shares of such Portfolios are offered in one or more classes; and
WHEREAS, the Fund on behalf of the Portfolios desires to appoint the Transfer
Agent as its transfer agent, dividend disbursing agent, custodian of certain
retirement plans and agent in connection with certain other activities as set
forth herein and the Transfer Agent desires to accept such appointment.
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
l. TERMS OF APPOINTMENT AND DUTIES
1.1 TRANSFER AGENCY SERVICES. Subject to the terms and conditions set forth in
this Agreement, the Fund, on behalf of the Portfolios, hereby employs and
appoints the Transfer Agent to act as, and the Transfer Agent agrees to act
as its transfer agent for the Fund's authorized and issued shares of its
beneficial interest, $ par value, ("Shares"), dividend disbursing agent,
custodian of certain retirement plans and agent in connection with any
accumulation, open-account or similar plan provided to the shareholders of
each of the respective Portfolios of the Fund ("Shareholders") and set out
in the currently effective prospectus and statement of additional
information ("prospectus") of the Fund on behalf of the applicable
Portfolio, including without limitation any periodic investment plan or
periodic withdrawal program. In accordance with procedures established from
time to time by agreement between the Fund on behalf of each of the
Portfolios, as applicable and the Transfer Agent, the Transfer Agent agrees
that it will perform the following services:
(a) Receive for acceptance orders for the purchase of Shares, and promptly
deliver payment and appropriate documentation thereof to the Custodian of
the Fund authorized pursuant to resolution of the Fund (the "Custodian");
(b) Pursuant to purchase orders, issue the appropriate number of Shares
and hold such Shares in the appropriate Shareholder account;
(c) Receive for acceptance redemption requests and redemption directions
and deliver the appropriate documentation thereof to the Custodian;
<PAGE>
(d) In respect to the transactions in items (a), (b) and (c) above, the
Transfer Agent shall execute transactions directly with broker-dealers
authorized by the Fund;
(e) At the appropriate time as and when it receives monies paid to it by
the Custodian with respect to any redemption, pay over or cause to be paid
over in the appropriate manner such monies as instructed by the redeeming
Shareholders;
(f) Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;
(g) Prepare and transmit payments for dividends and distributions declared
by the Fund on behalf of the applicable Portfolio;
(h) Issue replacement certificates for those certificates alleged to have
been lost, stolen or destroyed upon receipt by the Transfer Agent of
indemnification satisfactory to the Transfer Agent and protecting the
Transfer Agent and the Fund, and the Transfer Agent at its option, may
issue replacement certificates in place of mutilated stock certificates
upon presentation thereof and without such indemnity;
(i) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(j) Record the issuance of Shares of the Fund and maintain pursuant to
Regulations 17Ad-10(e) of the Securities Exchange Act of 1934 as amended
(the "Exchange Act") a record of the total number of Shares of the Fund
which are authorized, based upon data provided to it by the Fund, and
issued and outstanding. The Transfer Agent shall also provide the Fund on a
regular basis with the total number of Shares which are authorized and
issued and outstanding and shall have no obligation, when recording the
issuance of Shares, to monitor the issuance of such Shares or to take
cognizance of any laws relating to the issue or sale of such Shares, which
functions shall be the sole responsibility of the Fund.
1.2 ADDITIONAL SERVICES. In addition to, and neither in lieu nor in
contravention of, the services set forth in the above paragraph, the
Transfer Agent shall perform the following services:
(a) OTHER CUSTOMARY SERVICES. Perform the customary services of a
transfer agent, dividend disbursing agent, custodian of certain retirement
plans and, as relevant, agent in connection with accumulation, open-account
or similar plan (including without limitation any periodic investment plan
or periodic withdrawal program), including but not limited to maintaining
all Shareholder accounts, preparing Shareholder meeting lists, mailing
Shareholder proxies, Shareholder reports and prospectuses to current
Shareholders, withholding taxes on U.S. resident and non-resident alien
accounts, preparing and filing U.S. Treasury Department Forms 1099 and
other appropriate forms required with respect
2
<PAGE>
to dividends and distributions by federal authorities for all Shareholders,
preparing and mailing confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares and other confirmable
transactions in Shareholder accounts, preparing and mailing activity statements
for Shareholders, and providing Shareholder account information.
(b) CONTROL BOOK (ALSO KNOWN AS "SUPER SHEET"). Maintain a daily record
and produce a daily report for the Fund of all transactions and receipts
and disbursements of money and securities and deliver a copy of such report
for the Fund for each business day to the Fund no later than 9:00 AM
Eastern Time, or such earlier time as the Fund may reasonably require, on
the next business day.
(c) "BLUE SKY" REPORTING. The Fund shall (i) identify to the Transfer
Agent in writing those transactions and assets to be treated as exempt from
blue sky reporting for each State; and (ii) verify the establishment of
transactions for each State on the system prior to activation and
thereafter monitor the daily activity for each State. The responsibility
of the Transfer Agent for the Fund's blue sky State registration status is
solely limited to the initial establishment of transactions subject to blue
sky compliance by the Fund and providing a system which will enable the
Fund to monitor the total number of Shares sold in each State and follow
the Fund's instructions regarding the rejection of all unauthorized sales.
(d) NATIONAL SECURITIES CLEARING CORPORATION (THE "NSCC"). (i) Accept and
effectuate the registration and maintenance of accounts through Networking
and the purchase, redemption, transfer and exchange of shares in such
accounts through Fund/SERV (Networking and Fund/SERV being programs
operated by the NSCC on behalf of NSCC's participants, including the Fund),
in accordance with instructions transmitted to and received by the Transfer
Agent by transmission from NSCC on behalf of broker-dealers and banks which
have been established by, or in accordance with the instructions of
authorized persons, as hereinafter defined on the dealer file maintained by
the Transfer Agent; (ii) issue instructions to Fund's banks for the
settlement of transactions between the Fund and NSCC (acting on behalf of
its broker-dealer and bank participants); (iii) provide account and
transaction information from the affected Fund's records on DST Systems,
Inc. computer system TA2000 ("TA2000 System") in accordance with NSCC's
Networking and Fund/SERV rules for those broker-dealers; and (iv) maintain
Shareholder accounts on TA2000 System through Networking.
(e) NEW PROCEDURES. New procedures as to who shall provide certain of
these services in Section 1 may be established in writing from time to time
by agreement between the Fund and the Transfer Agent. The Transfer Agent
may at times perform only a portion of these services and the Fund or its
agent may perform these services on the Fund's behalf.
3
<PAGE>
2. THIRD PARTY ADMINISTRATORS FOR DEFINED CONTRIBUTION PLANS
2.1 The Fund may decide to make available to certain of its customers a
qualified plan program (the "Program") pursuant to which the customers
("Employers") may adopt certain plans of deferred compensation ("Plan or
Plans") for the benefit of the individual Plan participant (the "Plan
Participant"), such Plan(s) being qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended ("Code") and administered by
third party administrators which may be plan administrators as defined in
the Employee Retirement Income Security Act of 1974, as amended (the
"TPA(s)").
2.2 In accordance with the procedures established in the initial Schedule 2.1
entitled "Third Party Administrator Procedures", as may be amended by the
Transfer Agent and the Fund from time to time ("Schedule 2.1"), the
Transfer Agent shall:
(a) Treat Shareholder accounts established by the Plans in the name of the
Trustees, Plans or TPAs as the case may be as omnibus accounts;
(b) Maintain omnibus accounts on its records in the name of the TPA or its
designee as the Trustee for the benefit of the Plan; and
(c) Perform all services under SECTION 1 as transfer agent of the Funds
and not as a record-keeper for the Plans.
2.3 Transactions identified under SECTION 2 of this Agreement shall be deemed
exception services ("Exception Services") when such transactions:
(a) Require the Transfer Agent to use methods and procedures other than
those usually employed by the Transfer Agent to perform services under
SECTION 1 of this Agreement;
(b) Involve the provision of information to the Transfer Agent after the
commencement of the nightly processing cycle of the TA2000 System; or
(c) Require more manual intervention by the Transfer Agent, either in the
entry of data or in the modification or amendment of reports generated by
the TA2000 System than is usually required by non-retirement plan and
pre-nightly transactions.
3. FEES AND EXPENSES
3.1 FEE SCHEDULE. For the performance by the Transfer Agent pursuant to this
Agreement, the Fund agrees to pay the Transfer Agent an annual maintenance
fee for each Shareholder account as set forth in the attached fee schedule
("Schedule 3.1"). Such fees
4
<PAGE>
and out-of-pocket expenses and advances identified under SECTION 3.2 below
may be changed from time to time subject to mutual written agreement
between the Fund and the Transfer Agent.
3.2 OUT-OF-POCKET EXPENSES. In addition to the fee paid under SECTION 3.1
above, the Fund agrees to reimburse the Transfer Agent for out-of-pocket
expenses, including but not limited to confirmation production, postage,
forms, telephone, microfilm, microfiche, mailing and tabulating proxies,
records storage, or advances incurred by the Transfer Agent for the items
set out in Schedule 3.1 attached hereto. In addition, any other expenses
incurred by the Transfer Agent at the request or with the consent of the
Fund will be reimbursed by the Fund.
3.3 POSTAGE. Postage for mailing of dividends, proxies, Fund reports and other
mailings to all shareholder accounts shall be advanced to the Transfer
Agent by the Fund at least seven (7) days prior to the mailing date of such
materials.
3.4 INVOICES. The Fund agrees to pay all fees and reimbursable expenses within
thirty (30) days following the receipt of the respective billing notice,
except for any fees or expenses, which are subject to good faith dispute.
In the event of such a dispute, the Fund may only withhold that portion of
the fee or expense subject to the good faith dispute. The Fund shall
notify the Transfer Agent in writing within thirty (30) calendar days
following the receipt of each billing notice if the Fund is disputing any
amounts in good faith. If the Fund does not provide such notice of dispute
within the required time, the billing notice will be deemed accepted by the
Fund.
4. REPRESENTATIONS AND WARRANTIES OF THE TRANSFER AGENT
The Transfer Agent represents and warrants to the Fund that:
4.1 It is a trust company duly organized and existing and in good standing
under the laws of The Commonwealth of Massachusetts.
4.2 It is duly qualified to carry on its business in The Commonwealth of
Massachusetts.
4.3 It is empowered under applicable laws and by its Charter and By-Laws to
enter into and perform this Agreement.
4.4 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
4.5 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
4.6 It is duly registered as a transfer agent under the Exchange Act.
5
<PAGE>
4.7 Its service company Boston Financial Data Services, Inc. ("Boston
Financial") carries and will continue to carry general liability, errors
and omissions, fidelity bond and other policies, with limits of not less
than five million dollars ($5,000,000) for aggregate general liability,
twenty million dollars ($20,000,000) for errors and omissions and eighty
million dollars ($80,000,000) for fidelity bond and upon written request
shall provide certificates of liability insurance to the Fund.
5. REPRESENTATIONS AND WARRANTIES OF THE FUND
The Fund represents and warrants to the Transfer Agent that:
5.1 It is a business trust duly organized and existing and in good standing
under the laws of The Commonwealth of Massachusetts.
5.2 It is empowered under applicable laws and by its Declaration of Trust and
By-Laws to enter into and perform this Agreement.
5.3 All corporate proceedings required by said Declaration of Trust and By-Laws
have been taken to authorize it to enter into and perform this Agreement.
5.4 It is an open-end management investment company registered under the
Investment Company Act of 1940, as amended.
5.5 A registration statement under the Securities Act of 1933, as amended is
currently effective and will remain effective except as the Fund may advise
the Transfer Agent in writing, and appropriate state securities law filings
have been made and will continue to be made, with respect to all Shares of
the Fund being offered for sale.
6. WIRE TRANSFER OPERATING GUIDELINES/ARTICLES 4A OF THE UNIFORM COMMERCIAL
CODE
6.1 The Transfer Agent is authorized to promptly debit the appropriate Fund
account(s) upon the receipt of a payment order in compliance with the
selected security procedure (the "Security Procedure") chosen for funds
transfer and in the amount of money that the Transfer Agent has been
instructed to transfer. The Transfer Agent shall execute payment orders in
compliance with the Security Procedure and with the Fund instructions on
the execution date provided that such payment order is received by the
customary deadline (4:00 PM ET) for processing such a request, unless the
payment order specifies a later time. All payment orders and
communications received after the customary deadline will be deemed to have
been received the next business day.
6.2 The Fund acknowledges that the Security Procedure it has designated on the
Fund Selection Form was selected by the Fund from security procedures
offered by the Transfer Agent. The Fund shall restrict access to
confidential information relating to the
6
<PAGE>
Security Procedure to authorized persons as communicated to the Transfer
Agent in writing. The Fund must notify the Transfer Agent immediately if
it has reason to believe unauthorized persons may have obtained access to
such information or of any change in the Fund's authorized personnel. The
Transfer Agent shall verify the authenticity of all Fund instructions
according to the Security Procedure.
6.3 The Transfer Agent shall process all payment orders on the basis of the
account number contained in the payment order. In the event of a
discrepancy between any name indicated on the payment order and the account
number, the account number shall take precedence and govern.
6.4 The Transfer Agent reserves the right to decline to process or delay the
processing of a payment order which (a) is in excess of the collected
balance in the account to be charged at the time of the Transfer Agent's
receipt of such payment order; (b) if initiating such payment order would
cause the Transfer Agent, in the Transfer Agent's sole judgement, to exceed
any volume, aggregate dollar, network, time, credit or similar limits which
are applicable to the Transfer Agent; or (c) if the Transfer Agent, in good
faith, is unable to satisfy itself that the transaction has been properly
authorized.
6.5 The Transfer Agent shall use commercially reasonable efforts to act on all
authorized requests to cancel or amend payment orders received in
compliance with the Security Procedure provided that such requests are
received in a timely manner affording the Transfer Agent reasonable
opportunity to act. However, the Transfer Agent assumes no liability if
the request for amendment or cancellation cannot be satisfied.
6.6 The Transfer Agent shall assume no responsibility for failure to detect any
erroneous payment order provided that the Transfer Agent complies with the
payment order instructions as received and the Transfer Agent complies with
the Security Procedure. The Security Procedure is established for the
purpose of authenticating payment orders only and not for the detection of
errors in payment orders.
6.7 The Transfer Agent shall assume no responsibility for lost interest with
respect to the refundable amount of any unauthorized payment order, unless
the Transfer Agent is notified of the unauthorized payment order within
thirty (30) days of notification by the Transfer Agent of the acceptance of
such payment order. In no event (including failure to execute a payment
order) shall the Transfer Agent be liable for special, indirect or
consequential damages, even if advised of the possibility of such damages.
6.8 When the Fund initiates or receives Automated Clearing House credit and
debit entries pursuant to these guidelines and the rules of the National
Automated Clearing House Association and the New England Clearing House
Association, the Transfer Agent will act as an Originating Depository
Financial Institution and/or receiving depository Financial Institution, as
the case may be, with respect to such entries. Credits given by the
Transfer Agent with respect to an ACH credit entry are provisional until
the Transfer
7
<PAGE>
Agent receives final settlement for such entry from the Federal Reserve
Bank. If the Transfer Agent does not receive such final settlement, the
Fund agrees that the Transfer Agent shall receive a refund of the amount
credited to the Fund in connection with such entry, and the party making
payment to the Fund via such entry shall not be deemed to have paid the
amount of the entry.
6.9 Confirmation of Transfer Agent's execution of payment orders shall
ordinarily be provided within twenty four (24) hours notice of which may be
delivered through the Transfer Agent's proprietary information systems, or
by facsimile or call-back. The Fund must report any objections to the
execution of an order within thirty (30) days.
7. DATA ACCESS AND PROPRIETARY INFORMATION
7.1 The Fund acknowledges that the databases, computer programs, screen
formats, report formats, interactive design techniques, and documentation
manuals furnished to the Fund by the Transfer Agent as part of the Fund's
ability to access certain Fund-related data ("Customer Data") maintained by
the Transfer Agent on databases under the control and ownership of the
Transfer Agent or other third party ("Data Access Services") constitute
copyrighted, trade secret, or other proprietary information (collectively,
"Proprietary Information") of substantial value to the Transfer Agent or
other third party. In no event shall Proprietary Information be deemed
Customer Data. The Fund agrees to treat all Proprietary Information as
proprietary to the Transfer Agent and further agrees that it shall not
divulge any Proprietary Information to any person or organization except as
may be provided hereunder. Without limiting the foregoing, the Fund agrees
for itself and its employees and agents to:
(a) Use such programs and databases (i) solely on the Fund's computers, or
(ii) solely from equipment at the location agreed to between the Fund and
the Transfer Agent and (iii) solely in accordance with the Transfer Agent's
applicable user documentation;
(b) Refrain from copying or duplicating in any way (other than in the
normal course or performing processing on the Fund's computer(s)) the
Proprietary Information;
(c) Refrain from obtaining unauthorized access to any portion of the
Proprietary Information, and if such access is inadvertently obtained, to
inform the Transfer Agent in a timely manner of such fact and dispose of
such information in accordance with the Transfer Agent's instructions;
(d) Refrain from causing or allowing information transmitted from the
Transfer Agent's computer to the Fund's terminal to be retransmitted to any
other computer terminal or other device except as expressly permitted by
the Transfer Agent (such permission not to be unreasonably withheld);
8
<PAGE>
(e) Allow the Fund to have access only to those authorized transactions as
agreed to between the Fund and the Transfer Agent; and
(f) Honor all reasonable written requests made by the Transfer Agent to
protect at the Transfer Agent's expense the rights of the Transfer Agent in
Proprietary Information at common law, under federal copyright law and
under other federal or state law.
7.2 Proprietary Information shall not include all or any portion of any of the
foregoing items that: (i) are or become publicly available without breach
of this Agreement; (ii) are released for general disclosure by a written
release by the Transfer Agent; or (iii) are already in the possession of
the receiving party at the time of receipt without obligation of
confidentiality or breach of this Agreement.
7.3 The Fund acknowledges that its obligation to protect the Transfer Agent's
Proprietary Information is essential to the business interest of the
Transfer Agent and that the disclosure of such Proprietary Information in
breach of this Agreement would cause the Transfer Agent immediate,
substantial and irreparable harm, the value of which would be extremely
difficult to determine. Accordingly, the parties agree that, in addition
to any other remedies that may be available in law, equity, or otherwise
for the disclosure or use of the Proprietary Information in breach of this
Agreement, the Transfer Agent shall be entitled to seek and obtain a
temporary restraining order, injunctive relief, or other equitable relief
against the continuance of such breach.
7.4 If the Fund notifies the Transfer Agent that any of the Data Access
Services do not operate in material compliance with the most recently
issued user documentation for such services, the Transfer Agent shall
endeavor in a timely manner to correct such failure. Organizations from
which the Transfer Agent may obtain certain data included in the Data
Access Services are solely responsible for the contents of such data and
the Fund agrees to make no claim against the Transfer Agent arising out of
the contents of such third-party data, including, but not limited to, the
accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND
SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN AS
IS, AS AVAILABLE BASIS. THE TRANSFER AGENT EXPRESSLY DISCLAIMS ALL
WARRANTIES EXCEPT THOSE EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED
TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE.
7.5 If the transactions available to the Fund include the ability to originate
electronic instructions to the Transfer Agent in order to: (i) effect the
transfer or movement of cash or Shares; or (ii) transmit Shareholder
information or other information, then in such event the Transfer Agent
shall be entitled to rely on the validity and authenticity of such
instruction without undertaking any further inquiry as long as such
instruction is undertaken in conformity with security procedures
established by the Transfer Agent from time to time.
9
<PAGE>
7.6 Each party shall take reasonable efforts to advise its employees of their
obligations pursuant to this SECTION 7. The obligations of this Section
shall survive any earlier termination of this Agreement.
8. INDEMNIFICATION
8.1 The Transfer Agent shall not be responsible for, and the Fund shall
indemnify and hold the Transfer Agent harmless from and against, any and
all losses, damages, costs, charges, counsel fees, payments, expenses and
liability arising out of or attributable to:
(a) All actions of the Transfer Agent 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;
(b) The Fund's lack of good faith, negligence or willful misconduct;
(c) The reliance upon, and any subsequent use of or action taken or
omitted, by the Transfer Agent, or its agents or subcontractors on: (i) any
information, records, documents, data, stock certificates or services,
which are received by the Transfer Agent or its agents or subcontractors by
machine readable input, facsimile, CRT data entry, electronic instructions
or other similar means authorized by the Fund, and which have been
prepared, maintained or performed by the Fund or any other person or firm
on behalf of the Fund including but not limited to any previous transfer
agent or registrar; (ii) any instructions or requests of the Fund or any of
its officers; (iii) any instructions or opinions of legal counsel with
respect to any matter arising in connection with the services to be
performed by the Transfer Agent under this Agreement which are provided to
the Transfer Agent after consultation with such legal counsel; or (iv) any
paper or document, reasonably believed to be genuine, authentic, or signed
by the proper person or persons;
(d) The offer or sale of Shares in violation of federal or state
securities laws or regulations requiring that such Shares be registered or
in violation of any stop order or other determination or ruling by any
federal or any state agency with respect to the offer or sale of such
Shares except with respect to those Shares which the Fund has notified the
Transfer Agent are not registered pursuant to SECTION 1.2(c);
(e) The negotiation and processing of any checks including without
limitation for deposit into the Fund's demand deposit account maintained by
the Transfer Agent;
(f) Upon the Fund's request entering into any agreements required by the
National Securities Clearing Corporation (the "NSCC") for the transmission
of Fund or Shareholder data through the NSCC clearing systems; or
10
<PAGE>
(g) Execution by the Transfer Agent or Boston Financial of any
agreements with third party banking entities relating to bank
accounts, bank wires, automated clearing house items or other
bank services in respect of the Fund.
8.2 In order that the indemnification provisions contained in this SECTION 8
shall apply, upon the assertion of a claim for which the Fund may be
required to indemnify the Transfer Agent, the Transfer Agent shall promptly
notify the Fund of such assertion, and shall keep the Fund advised with
respect to all developments concerning such claim. The Fund shall have the
option to participate with the Transfer Agent in the defense of such claim
or to defend against said claim in its own name or in the name of the
Transfer Agent. The Transfer Agent shall in no case confess any claim or
make any compromise in any case in which the Fund may be required to
indemnify the Transfer Agent except with the Fund's prior written consent.
9. STANDARD OF CARE
9.1 The Transfer Agent shall at all times act in good faith and agrees to use
its best efforts to insure the accuracy of all services performed under
this Agreement, but assumes no responsibility and shall not be liable for
loss or damage due to errors unless said errors are caused by its
negligence, bad faith, or willful misconduct or that of its employees,
except as provided in SECTION 9.2 below.
9.2 In the case of Exception Services as defined in SECTION 2.3 herein, the
Transfer Agent shall be held to a standard of gross negligence and encoding
and payment processing errors shall not be deemed negligence.
10. YEAR 2000
10.1 The Transfer Agent will take reasonable steps to ensure that its products
(and those of its third-party suppliers) reflect the available technology
to offer products that are Year 2000 ready, including, but not limited to,
century recognition of dates, calculations that correctly compute same
century and multi century formulas and date values, and interface values
that reflect the date issues arising between now and the next one-hundred
years, and if any changes are required, the Transfer Agent will make the
changes to its products at a price to be agreed upon by the parties and in
a commercially reasonable time frame and will require third-party suppliers
to do likewise.
10.2 The Transfer Agent will conduct ongoing testing to ensure that its products
are Year 2000 Ready and thereafter the Transfer Agent takes reasonable
steps to achieve such Year 2000 Readiness.
11
<PAGE>
a) For purposes of this SECTION 10, "Year 2000 Readiness" means the
capability to perform all date dependent and date related functions
and to record, store, process and present date information and date
dependent information for calendar dates on or after January 1, 2000.
b) The provisions of this SECTION 10 do not constitute a certification,
guarantee, warranty or indemnity with respect to Year 2000 Readiness.
11. CONFIDENTIALITY
11.1 The Transfer Agent and the Fund agree that they will not, at any time
during the term of this Agreement or after its termination, reveal,
divulge, or make known to any person, firm, corporation or other business
organization other than their respective officers, directors, employees and
agents on a need-to-know basis or as otherwise set for herein, any
customers' lists, trade secrets, cost figures and projections, profit
figures and projections, or any other secret or confidential information
whatsoever, whether of the Transfer Agent or of the Fund, used or gained by
the Transfer Agent or the Fund during performance under this Agreement.
The Fund and the Transfer Agent further covenant and agree to retain all
such knowledge and information acquired during and after the term of this
Agreement respecting such lists, trade secrets, or any secret or
confidential information whatsoever in trust for the sole benefit of the
Transfer Agent or the Fund and their successors and assigns. In the event
of breach of the foregoing by either party, the remedies provided by
SECTION 7.3 shall be available to the party whose confidential information
is disclosed. The above prohibition of disclosure shall not apply to the
extent that the Transfer Agent must disclose such data to its
sub-contractor or Fund agent for purposes of providing services under this
Agreement. The Transfer Agent shall be responsible for its sub-contractors
under SECTION 11.1 hereunder as provided in SECTION 15 hereunder.
11.2 In the event that any requests or demands are made for the inspection of
the Shareholder records of the Fund, other than request for records of
Shareholders pursuant to standard subpoenas from state or federal
government authorities (i.e., divorce and criminal actions), the Transfer
Agent will endeavor to notify the Fund and attempt to secure instructions
from an authorized officer of the Fund as to such inspection. The Transfer
Agent expressly reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person or
if required by law or court order.
12
<PAGE>
12. COVENANTS OF THE FUND AND THE TRANSFER AGENT
12.1 The Fund shall promptly furnish to the Transfer Agent the following:
(a) A certified copy of the resolution of the Board of Trustees of the
Fund authorizing the appointment of the Transfer Agent and the execution
and delivery of this Agreement; and
(b) A copy of the Declaration of Trust and By-Laws of the Fund and all
amendments thereto.
12.2 The Transfer Agent hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if
any; and for the preparation or use, and for keeping account of, such
certificates, forms and devices.
12.3 The Transfer Agent shall keep records relating to the services to be
performed hereunder in the form and manner, as it may deem advisable. To
the extent required by Section 31 of the Investment Company Act of 1940, as
amended, and the Rules thereunder, the Transfer Agent agrees that all such
records prepared or maintained by the Transfer Agent relating to the
services to be performed by the Transfer Agent hereunder are the property
of the Fund and will be preserved, maintained and made available in
accordance with such Section and Rules, and will be surrendered promptly to
the Fund on and in accordance with its request.
13. TERMINATION OF AGREEMENT
13.1 This Agreement may be terminated (i) by either party upon ninety (90) days
written notice to the other and (ii) immediately by the Fund at its sole
option upon written notice to the Transfer Agent if such termination
results from the Transfer Agent's failure to achieve Year 2000 Readiness as
defined in SECTION 10.2(a) of this Agreement.
13.2 Unless due to (i) material breach or (ii) failure of the Transfer Agent to
achieve Year 2000 Readiness, should the Fund exercise its right to
terminate, all out-of-pocket expenses and any other reasonable expenses
approved by the Fund in writing associated with the movement of records and
material will be borne by the Fund. Payment of such expenses or costs
shall be in accordance with SECTION 3.4 of this Agreement.
13.3 In the event of termination under SECTION 13.2(ii) such termination shall
be without cost or penalty to either party. Notwithstanding the foregoing,
the Fund shall not reimburse the Transfer Agent for the out-of pocket
costs, expenses and disbursements in connection with transfer if
termination is due to the Transfer Agent's failure to have achieved Year
2000 Readiness.
13
<PAGE>
13.4 Upon termination of this Agreement, each party shall return to the other
party all copies of confidential or proprietary materials or information
received from such other party hereunder other than materials or
information required to be retained by such party under applicable laws or
regulations.
14. ASSIGNMENT AND THIRD PARTY BENEFICIARIES.
14.1 Except as provided in SECTIONS 8.1(g) AND 15.1 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party. Any attempt to do so
in violation of this Section shall be void. Unless specifically stated to
the contrary in any written consent to an assignment, no assignment will
release or discharge the assignor from any duty or responsibility under
this Agreement.
14.2 Except as explicitly stated elsewhere in this Agreement, nothing under this
Agreement shall be construed to give any rights or benefits in this
Agreement to anyone other than the Transfer Agent and the Fund, and the
duties and responsibilities undertaken pursuant to this Agreement shall be
for the sole and exclusive benefit of the Transfer Agent and the Fund.
This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
14.3 This Agreement does not constitute an agreement for a partnership or joint
venture between the Transfer Agent and the Fund. Other than as provided in
SECTIONS 8.1(g) AND 15.1, neither party shall make any commitments with
third parties that are binding on the other party without the other party's
prior written consent.
15. SUBCONTRACTORS
15.1 The Transfer Agent may, without further consent on the part of the Fund,
subcontract for the performance hereof with (i) Boston Financial Data
Services, Inc., a Massachusetts corporation ("BFDS") which is duly
registered as a transfer agent pursuant to Section 17A(c)(2) of the
Exchange Act, (ii) a BFDS subsidiary duly registered as a transfer agent or
(iii) a BFDS affiliate duly registered as a transfer agent; provided,
however, that the Transfer Agent shall be fully responsible to the Fund for
the acts and omissions of BFDS or its subsidiary or affiliate as it is for
its own acts and omissions.
15.2 Nothing herein shall impose any duty upon the Transfer Agent in connection
with or make the Transfer Agent liable for the actions or omissions to act
of unaffiliated third parties such as by way of example and not limitation,
Airborne Services, Federal Express, United Parcel Service, the U.S. Mails,
the NSCC and telecommunication companies, provided, if the Transfer Agent
selected such company, the Transfer Agent shall have exercised due care in
selecting the same.
14
<PAGE>
16. MISCELLANEOUS
16.1 AMENDMENT. This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a
resolution of the Board of Trustees of the Fund.
16.2 MASSACHUSETTS LAW TO APPLY. This Agreement shall be construed and the
provisions thereof interpreted under and in accordance with the laws of
The Commonwealth of Massachusetts.
16.3 FORCE MAJEURE. In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God,
strikes, equipment or transmission failure or damage reasonably beyond
its control, or other causes reasonably beyond its control, such party
shall not be liable for damages to the other resulting from such failure
to perform or otherwise from such causes. In any event each party will
use commercially reasonable efforts to mitigate damages.
16.4 CONSEQUENTIAL DAMAGES. Neither party to this Agreement shall be liable
to the other party for consequential damages under any provision of this
Agreement or for any consequential damages arising out of any act or
failure to act hereunder.
16.5 SURVIVAL. All provisions regarding indemnification, warranty, liability,
and limits thereon, and confidentiality and/or protections of proprietary
rights and trade secrets shall survive the termination of this Agreement.
16.6 SEVERABILITY. If any provision or provisions of this Agreement shall be
held invalid, unlawful, or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall not in any way be
affected or impaired.
16.7 PRIORITIES CLAUSE. In the event of any conflict, discrepancy or
ambiguity between the terms and conditions contained in this Agreement
and any Schedules or attachments hereto, the terms and conditions
contained in this Agreement shall take precedence.
16.8 WAIVER. No waiver by either party or any breach or default of any of the
covenants or conditions herein contained and performed by the other party
shall be construed as a waiver of any succeeding breach of the same or of
any other covenant or condition.
16.9 MERGER OF AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto and supersedes any prior agreement with
respect to the subject matter hereof whether oral or written.
16.10 COUNTERPARTS. This Agreement may be executed by the parties hereto on
any number of counterparts, and all of said counterparts taken together
shall be deemed to constitute one and the same instrument.
15
<PAGE>
16.11 REPRODUCTION OF DOCUMENTS. This Agreement and all schedules, exhibits,
attachments and amendments hereto may be reproduced by any photographic,
photostatic, microfilm, micro-card, miniature photographic or other
similar process. The parties hereto each agree that any such
reproduction shall be admissible in evidence as the original itself in
any judicial or administrative proceeding, whether or not the original is
in existence and whether or not such reproduction was made by a party in
the regular course of business, and that any enlargement, facsimile or
further reproduction shall likewise be admissible in evidence.
16.12 AUDIT; ANNUAL FINANCIAL STATEMENTS. Transfer Agent will cooperate in
providing to Fund or its auditors, any information reasonably requested
by Fund or Fund's auditors which is necessary or required for the
performance by Fund of any audit of the accounts or records of Services
performed by Transfer Agent pursuant to the terms and conditions of this
Agreement to the extent required by law. All out-of-pocket expenses
associated with compliance with such requests outside the customary
services rendered by the Transfer Agent under SECTION 1 of the Agreement
shall be borne by the Fund.
16.13 NOTICES. All notices and other communications as required or permitted
hereunder shall be in writing and sent by first class mail, postage
prepaid, addressed as follows or to such other address or addresses of
which the respective party shall have notified the other.
(a) If to State Street Bank and Trust Company, to:
State Street Bank and Trust Company
c/o Boston Financial Data Services, Inc.
Two Heritage Drive
Quincy, Massachusetts 02171
Attention: Legal Department
Facsimile: (617) 483-2287
(b) If to the Fund, to:
ALPS Mutual Funds
370 17th Street, Suite 2700
Denver, Colorado 80202
Attention: Jeremy May, Treasurer
Facsimile: (303) 623-7850
16
<PAGE>
16.13 INSPECTION OF RECORDS. Upon the Fund's written request the Transfer
Agent shall make all Shareholder records available for inspection by the
Fund or its agents. All out-of-pocket expenses associated with compliance
with such requests outside the customary services rendered by the
Transfer Agent under SECTION 1 of the Agreement shall be borne by the
Fund.
17. ADDITIONAL FUNDS
In the event that the Fund establishes one or more series of Shares in
addition to the attached Schedule A with respect to which it desires to
have the Transfer Agent render services as transfer agent under the terms
hereof, it shall so notify the Transfer Agent in writing, and if the
Transfer Agent agrees in writing to provide such services, such series of
Shares shall become a Portfolio hereunder.
18. LIMITATIONS OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS
A copy of the Declaration of Trust of the Trust is on file with the
Secretary of The Commonwealth of Massachusetts, and notice is hereby
given that this instrument is executed by an officer of the Trust and
that the obligations of this instrument are not binding upon any of the
Trustees of the Trust or Shareholders individually but are binding only
upon the assets and property of the Fund.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
FIRST FUNDS
BY:
-------------------------------
ATTEST:
- ------------------------------
STATE STREET BANK AND TRUST
COMPANY
BY:
------------------------------
Executive Vice President
ATTEST:
18
<PAGE>
SCHEDULE A
Bond Portfolio
Capital Appreciation Portfolio
Cash Reserve Portfolio
Intermediate Bond Portfolio
Growth & Income Portfolio
Municipal Money Market Portfolio
Tennessee Tax Free Portfolio
U.S. Government Money Market Portfolio
U.S. Treasury Money Market Portfolio
FIRST FUNDS STATE STREET BANK AND TRUST
COMPANY
BY: BY:
--------------------------------- ----------------------------------
19
<PAGE>
SCHEDULE 2.1
THIRD PARTY ADMINISTRATOR(S) PROCEDURES
Dated
----------
1. On each Business Day, the TPA(s) shall receive, on behalf of and as agent
of the Fund(s), Instructions (as hereinafter defined) from the Plan.
Instructions shall mean as to each Fund (i) orders by the Plan for the
purchases of Shares, and (ii) requests by the Plan for the redemption of
Shares; in each case based on the Plan's receipt of purchase orders and
redemption requests by Participants in proper form by the time required by
the term of the Plan, but not later than the time of day at which the net
asset value of a Fund is calculated, as described from time to time in that
Fund's prospectus. Each Business Day on which the TPA receives
Instructions shall be a "Trade Date".
2. The TPA(s) shall communicate the TPA(s)'s acceptance of such Instructions,
to the applicable Plan.
3. On the next succeeding Business Day following the Trade Date on which it
accepted Instructions for the purchase and redemption of Shares, (TD+1),
the TPA(s) shall notify the Transfer Agent of the net amount of such
purchases or redemptions, as the case may be, for each of the Plans. In
the case of net purchases by any Plan, the TPA(s) shall instruct the
Trustees of such Plan to transmit the aggregate purchase price for Shares
by wire transfer to the Transfer Agent on (TD+1). In the case of net
redemptions by any Plan, the TPA(s) shall instruct the Fund's custodian to
transmit the aggregate redemption proceeds for Shares by wire transfer to
the Trustees of such Plan on (TD+1). The times at which such notification
and transmission shall occur on (TD+1) shall be as mutually agreed upon by
each Fund, the TPA(s), and the Transfer Agent.
4. The TPA(s) shall maintain separate records for each Plan, which record
shall reflect Shares purchased and redeemed, including the date and price
for all transactions, and Share balances. The TPA(s) shall maintain on
behalf of each of the Plans a single master account with the Transfer Agent
and such account shall be in the name of that Plan, the TPA(s), or the
nominee of either thereof as the record owner of Shares owned by such Plan.
5. The TPA(s) shall maintain records of all proceeds of redemptions of Shares
and all other distributions not reinvested in Shares.
6. The TPA(s) shall prepare, and transmit to each of the Plans, periodic
account statements showing the total number of Shares owned by that Plan as
of the statement closing date, purchases and redemptions of Shares by the
Plan during the period covered by the statement, and the dividends and
other distributions paid to the Plan on Shares during the statement period
(whether paid in cash or reinvested in Shares).
<PAGE>
7. The TPA(s) shall, at the request and expense of each Fund, transmit to the
Plans prospectuses, proxy materials, reports, and other information
provided by each Fund for delivery to its shareholders.
8. The TPA(s) shall, at the request of each Fund, prepare and transmit to each
Fund or any agent designated by it such periodic reports covering Shares of
each Plan as each Fund shall reasonably conclude are necessary to enable
the Fund to comply with state Blue Sky requirements.
9. The TPA(s) shall transmit to the Plans confirmation of purchase orders and
redemption requests placed by the Plans; and
10. The TPA(s) shall, with respect to Shares, maintain account balance
information for the Plan(s) and daily and monthly purchase summaries
expressed in Shares and dollar amounts.
11. Plan sponsors may request, or the law may require, that prospectuses, proxy
materials, periodic reports and other materials relating to each Fund be
furnished to Participants in which event the Transfer Agent or each Fund
shall mail or cause to be mailed such materials to Participants. With
respect to any such mailing, the TPA(s) shall, at the request of the
Transfer Agent or each Fund, provide at the TPA(s)'s expense complete and
accurate set of mailing labels with the name and address of each
Participant having an interest through the Plans in Shares.
FIRST FUNDS STATE STREET BANK AND TRUST
COMPANY
BY: BY:
---------------------------------- ---------------------------------
<PAGE>
SCHEDULE 3.1
FEES
Dated
---------
ANNUAL ACCOUNT SERVICE FEES
Per Account Fee $ 25.00
Closed Account Fee $ 1.80
Base Fee (per Fund/Class) $ 18,575
Each class is considered a fund and will be billed accordingly.
Fees are billable on a monthly basis at the rate of 1/12 of the annual fee. A
charge is made for an account in the month that an account opens or closes.
OTHER FEES
NSCC Interface $ 1,500/per Cusip
CONVERSION FEES*
---------------
Per Account Fee $ 1.00
Minimum (per complex) $ 25,000
IRA CUSTODIAL FEES
------------------
Annual Maintenance $ 10.00/account
OUT-OF-POCKET EXPENSES Billed as incurred
Out-of-Pocket expenses include but are not limited to: confirmation statements,
investor statements, postage, banking services, forms, audio response,
telephone, records retention, customized programming / enhancements, federal
wire, transcripts, microfilm, microfiche, and expenses incurred at the specific
direction of the fund.
These fees will be subject to an annual Cost of Living Adjustment based on
regional consumer price index.**
*The conversion fee will be waived contingent upon a three-year term contract.
**This cost of living adjustment will be waived for the first three years of the
proposed three-year term.
FIRST FUNDS STATE STREET BANK AND TRUST
COMPANY
BY: BY:
--------------------------------- ----------------------------------
<PAGE>
DESIREE M. FRANKLIN
DIRECT DIAL: (901) 577-2310
INTERNET ADDRESS: [email protected]
May 21, 1999
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549
Re: FIRST FUNDS (THE TRUST): GROWTH AND INCOME PORTFOLIO; CAPITAL
APPRECIATION PORTFOLIO; AND TENNESSEE TAX-FREE PORTFOLIO
(EACH, A PORTFOLIO)
Post-Effective Amendment No. 17
Dear Sirs:
We serve as counsel to the above-referenced Trust. The Post Effective
Amendment No. 17 ("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 purposes of adding Class IV shares to
the Growth & Income, Capital Appreciation and Tennessee Tax-Free Portfolios and
complying with the Commissions new "Plain English" disclosure requirements.
We consent to the use of our name in the Registration Statement or
elsewhere it may appear.
Very truly yours,
Baker Donelson Bearman & Caldwell
<PAGE>
SHAREHOLDER SERVICES PLAN
FIRST FUNDS: CLASS II AND CLASS III
1. This Shareholder Services Plan (the Plan) is the Shareholder Services Plan of
the Classes II and 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, Bond Portfolio, Growth & Income Portfolio, Tennessee Tax-Free
Portfolio, Capital Appreciation Portfolio, Intermediate Bond 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 State Street Bank and
Trust Company and/or its affiliate Boston Financial Data Services. 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 II (Class II Shares) and a class of
shares designated Class III (Class III Shares). Class II and III Shares are
subject to this Plan and the eligible investors in the Class II and III Shares
shall be as described in the current prospectus for the Classes II and III, 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 II and III shares at an
annualized rate of up to (and including) .25% of each Class' 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 II or 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 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 transmission of fees to Shareholder Servicing
Agents under the Shareholder Services Contract.
<PAGE>
5. This Plan became effective March 20, 1993, 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 July 1, 1994, 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.
7. This Plan may be amended with respect to the Class II and 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 if the Independent Trustees.
9. Consistent with the limitation 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 II or 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>
DISTRIBUTION PLAN
FIRST FUNDS: CLASS III
THIS Distribution Plan (the Distribution Plan), made as of March 20, 1993, is
the plan of First Funds (the Trust), a business trust organized and existing
under the laws of the Commonwealth of Massachusetts, on behalf of each series of
the Trust, U.S. Government Money Market Portfolio, U.S. Treasury Money Market
Portfolio, Municipal Money Market Portfolio, Cash Reserve Portfolio, Bond
Portfolio, Growth & Income Portfolio, Tennessee Tax-Free Portfolio, Capital
Appreciation Portfolio, Intermediate Bond Portfolio, and any future series
established and designated by the Board of Trustees (each a Portfolio).
1. This Distribution Plan, when effective in accordance with its terms,
shall be the written plan contemplated by Securities and Exchange Commission
Rule 12b-1 under the Investment Company Act of 1940, as amended (the 1940 Act),
for shares of beneficial interest of Class III (Class III Shares) of each
Portfolio of the Trust.
2. The Trust has entered into a General Distribution Agreement on behalf of
each Portfolio with ALPS Mutual Funds Service, Inc. (ALPS) under which ALPS uses
all reasonable efforts, consistent with its other business, to secure purchasers
of each Portfolio's share including the Class III Shares. Such efforts may
include, but neither are required to include nor are limited to, the following:
1) formulation and implementation of marketing and promotional
activities, such as mail promotions and television, radio,
newspaper, magazine and other mass media advertising;
2) preparation, printing and distribution of sales literature;
3) preparation, printing and distribution of prospectuses of each
Portfolio and reports to recipients other than existing
shareholders of each Portfolio;
4) obtaining such information, analyses and reports with respect to
marketing and promotional activities as ALPS may from time to time,
deem advisable;
5) making payments to securities dealers and others engaged in the
sales of Class III Shares; and
6) providing training, marketing and support to such dealers and
others with respect to the sales of Class III Shares.
3. In consideration for the services provided and the expenses incurred by
ALPS pursuant to the General Distribution Agreement, Class III of each Portfolio
shall pay to ALPS a fee at the annual rate of up to (and including) .75% of such
Class' average daily net assets throughout the month, or such lesser amount as
may be established from time to time by the Trustees of the Trust by resolution,
as specified in this paragraph; provided that, for any period during which the
total of such fee and all other expenses of a Portfolio holding itself out as a
money market fund under Rule 2a-7 under the 1940 Act or of the Class III of such
a Portfolio, would exceed the gross income of that Portfolio (or of the Class
III thereof), such fee shall be reduced by such excess. Such fee shall be
<PAGE>
computed daily and paid monthly. The determination of daily net assets for each
Portfolio shall be made at the close of business each day throughout the month
and computed in the manner specified in each Portfolio's then current Prospectus
for the determination of the net asset value of Class III Shares of such
Portfolio, but shall exclude assets attributable to any other Class of each
Portfolio. ALPS may use all or any portion of the fee received pursuant to the
Distribution Plan to compensate securities dealers or other persons who have
engaged in the sale of Class III Shares pursuant to agreements with ALPS, or to
pay any of the expenses associated with other activities authorized under
paragraph 2 hereof.
4. This Distribution Plan became effective with respect to the Class III of
a Portfolio as of March 20, 1993, this Distribution Plan having been approved
(1) 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 Distribution Plan or in any agreement related to the Distribution Plan
(the Independent Trustees), cast in person at a meeting called for the purpose
of voting on this Distribution Plan; and (2) by a vote of a majority of the
outstanding voting securities (as such term is defined in Section 2(a)(42) of
the 1940 Act) of the Class III of the affected Portfolio.
5. During the existence of this Distribution Plan, the Trust will commit the
selection and nomination of those Trustees who are not interested persons of the
Trust to the discretion of such Independent Trustees.
6. This Distribution Plan shall, unless terminated as hereinafter provided,
remain in effect until July 1, 1994 and from 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
Distribution Plan.
7. This Distribution Plan may be amended with respect to the Class III
Shares of a Portfolio, at any time by the Board of Trustees, provided that (a)
any amendment to increase materially the maximum fee provided for in paragraph 3
hereof, must be approved by a vote of a majority of the outstanding voting
securities (as such term is defined in Section 2(a)(42) of the 1940 Act) of
Class III of the affected Portfolio, and (b) any material amendment of this
Distribution Plan must be approved in the manner provided in paragraph 4(1)
above.
8. This Distribution Plan may be terminated with respect to the Class III
Shares of a Portfolio, 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 (as such term is defined in Section 2(a)(42) of
the 1940 Act) of the Class III of the affected Portfolio.
<PAGE>
9. During the existence of this Distribution Plan, the Trust shall require
ALPS 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 in
connection with financing any activity primarily intended to result in the sale
of Class III Shares (making estimates of such costs where necessary or
desirable) and the purposes for which such expenditures were made.
10. This Distribution Plan does not require ALPS 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 Class III.
11. In the event that Article III, Section 26 of the NASD Rules of Fair
Practice precludes any Portfolio of the Trust (or any NASD member) from imposing
a sales charge (as defined in that Section) or any portion thereof, then ALPS
shall not make payments hereunder from the date that the Portfolio discontinues
or is required to discontinue imposition of some or all of its sales charge,
ALPS will receive payments hereunder.
12. Consistent with the limitation 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 Class III of the affected Portfolio and its assets, and shall not
constitute obligations of any shareholder of any other Class of the affected
Portfolio or other Portfolios of the Trust or of any Trustee.
13. If any provision of the Distribution Plan shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the
Distribution Plan shall not be affected thereby.
<PAGE>
DISTRIBUTION PLAN
FIRST FUNDS: CLASS IV
THIS Distribution Plan (the "Distribution Plan"), made as of ________,
1999, is the plan of First Funds (the "Trust"), a business trust organized and
existing under the laws of the Commonwealth of Massachusetts and registered as
an open-end investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), issuing separate series of shares designated as
follows: Capital Appreciation Portfolio, Growth & Income Portfolio, and
Tennessee Tax Free Portfolio, and any future series established and designated
by the Board of Trustees issuing Class IV shares (each a "Portfolio").
1. This Distribution Plan, when effective in accordance with its terms,
shall be the written plan contemplated by Securities and Exchange Commission
Rule 12b-1 under the 1940 Act, for shares of beneficial interest of Class IV
("Class IV Shares") of each Portfolio set forth above.
2. The Trust has entered into an Amended and Restated General Distribution
Agreement on behalf of each Portfolio with ALPS Mutual Funds Services, Inc. (the
"Distributor") under which the Distributor uses all reasonable efforts,
consistent with its other business interests, to secure purchasers of each
Portfolio's shares including the Class IV Shares. Such efforts may include, but
neither are required to include nor are limited to, the following:
(a) formulation and implementation of marketing and promotional activities,
such as mail promotions and television, radio, newspaper, magazine and
other mass media advertising;
(b) preparation, printing and distribution of sales literature;
(c) preparation, printing and distribution of prospectuses of each
Portfolio and reports to recipients other than existing shareholders of
each Portfolio;
(d) obtaining such information, analyses and reports with respect to
marketing and promotional activities as the Distributor may from time
to time deem advisable;
(e) making payments to securities dealers and others engaged in the sale of
Class IV Shares; and
(f) providing training, marketing and support to such dealers and
others with respect to the sale of Class IV Shares.
3. In consideration for the services provided and the expenses incurred by the
Distributor pursuant to the Amended and Restated General Distribution Agreement,
Class IV Shares of each Portfolio shall pay to the Distributor a fee at the
annual rate of up to (and including) .75% of such Class' average daily net
assets throughout the month, or such lesser amount as may be established from
time to time by the Trustees of the Trust by resolution, as specified in this
paragraph. Such fee shall be computed daily and paid monthly. The determination
of daily net
<PAGE>
assets for each Portfolio shall be made at the close of business each day
throughout the month and computed in the manner specified in each Portfolio's
then current Prospectus for the determination of the net asset value of Class
IV Shares of such Portfolio, but shall exclude assets attributable to any
other Class of each Portfolio. The Distributor may use all or any portion of
the fee received pursuant to the Distribution Plan to compensate securities
dealers or other persons who have engaged in the sale of Class IV Shares
pursuant to agreements with the Distributor, or to pay any of the expenses
associated with other activities authorized under paragraph 2 hereof.
4. This Distribution Plan will become effective with respect to the Class IV
of a Portfolio as of ________, 1999, this Distribution Plan having been approved
(a) 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 Distribution Plan or in any agreement related to the Distribution Plan
(the "Independent Trustees"), cast in person at a meeting called for the purpose
of voting on this Distribution Plan; and (b) by a vote of majority of the
outstanding voting securities (as such term is defined in Section 2(a)(42) of
the 1940 Act) of Class IV of the affected Portfolios.
5. During the existence of this Distribution Plan, the Trust will commit the
selection and nomination of those Trustees who are not interested persons of the
Trust to the discretion of such Independent Trustees.
6. This Distribution Plan shall, unless terminated as hereinafter provided,
remain in effect until June 30, 2000 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 Independent
Trustees, cast in person at a meeting called for the purpose of voting on this
Distribution Plan.
7. This Distribution Plan may be amended with respect to the Class IV Shares
of a Portfolio, at any time by the Board of Trustees, provided that (a) any
amendment to increase materially the maximum fee provided for in paragraph 3
hereof, must be approved by a vote of a majority of the outstanding voting
securities (as such term is defined in Section 2(a)(42) of the 1940 Act) of
Class IV of the affected Portfolio, and (b) any material amendment of this
Distribution Plan must be approved in the manner provided in paragraph 4(a)
above.
8. This Distribution Plan may be terminated with respect to the Class IV
Shares of a Portfolio, 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 (as such term is defined in Section 2(a)(42) of
the 1940 Act) of Class IV of the affected Portfolio.
9. During the existence of this Distribution Plan, the Trust shall require the
Distributor 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 in connection with financing any activity
2
<PAGE>
primarily intended to result in the sale of Class IV Shares (making estimates of
such costs where necessary or desirable) and the purposes for which such
expenditures were made.
10. This Distribution Plan does not require the 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
Class IV.
11. In the event that Rule 2830 of the NASD Conduct Rules precludes any
Portfolio of the Trust (or any NASD member) from imposing a sales charge (as
defined in that Section) or any portion thereof, then the Distributor shall not
make payments hereunder from the date that the Portfolio discontinues or is
required to discontinue imposition of some or all of its sales charges. If the
Portfolio resumes imposition of some or all of its sales charge, the Distributor
will receive payments thereunder.
12. Consistent with the limitation 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 IV thereof pursuant to this Plan and any agreements related
to this Plan shall be limited in all cases to the proportionate ownership of
Class IV of the affected Portfolio and its assets, and shall not constitute
obligations of any shareholder of any other Class of the affected Portfolio or
other Portfolios of the Trust or of any Trustee.
13. If any provision of the Distribution Plan shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Distribution
Plan shall not be affected thereby.
3
<PAGE>
SHAREHOLDERS SERVICE PLAN
FIRST FUNDS: CLASS IV
1. This Shareholder Services Plan (the "Plan") is the Shareholder Services
Plan of Class IV 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, as amended (the "1940 Act"), issuing separate
series o f shares designated as follows: Capital Appreciation Portfolio, Growth
& Income Portfolio, and Tennessee Tax Free Portfolio, and any future series
established and designated by the Board of Trustees issuing Class IV shares
(each a "Portfolio").
2. The Trust had entered into a separate Amended and Restated General
Distribution ("Distribution") Agreement with ALPS Mutual Funds Services, Inc.
(the "Administrator" or the "Distributor") under which the Distributor uses all
reasonable efforts, consistent with its other business interests, 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 State Street Bank and
Trust Company and/or its affiliat, Boston Financial Data Services, Inc. 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 IV ("Class IV Shares"). Class IV
Shares are subject to this Plan and the eligible investors in the Class IV
Shares will be as described in the current prospectus for the Class IV, 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 IV
Shares at an annualized rate of up to (and including) .25% of Class IV'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 IV Shares; answering
questions and handling correspondence from shareholders about their accounts;
handling the transmission of funds representing the purchase service or
redemption proceeds; issuing confirmations for transactions in Class IV 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 transmission of fees to Shareholder Servicing
Agents under the Shareholder Services Contract.
5. This Plan became effective _________, 1999, 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 a 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.
<PAGE>
6. This Plan shall, unless terminated as hereinafter provided, remain in
effect from the date specified above until June 30, 2000, 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.
7. This Plan may be amended with respect to the Class IV 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 limitation of shareholder and Trustee liability as
set forth in the Trust's Declaration of Trust, any obligation assumed by the
Trust, a Portfolio or Class IV 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 IV 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.
2
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<NAME> CLASS III
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<TABLE> <S> <C>
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<NAME> CLASS I
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 033
<NAME> CLASS III
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 45670374
<INVESTMENTS-AT-VALUE> 45670374
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<PAYABLE-FOR-SECURITIES> 0
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<TABLE> <S> <C>
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<TABLE> <S> <C>
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<TABLE> <S> <C>
<PAGE>
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<TABLE> <S> <C>
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<TABLE> <S> <C>
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<TABLE> <S> <C>
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<TABLE> <S> <C>
<PAGE>
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<NAME> CLASS II
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<NAME> CLASS III
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<PAGE>
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 Intermediate Bond Portfolio,
the Bond Portfolio, the Tennessee Tax-Free Portfolio, the Capital Appreciation
Portfolio, and the Growth & Income 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 this Rule 18f-3 Plan (or as amended) as described
herein, upon approval of the Board of Trustees of the Trust.
AUTHORIZED CLASSES
Each Portfolio may issue four classes of shares--Class I, Class II, Class
III, and Class IV (collectively, "the Classes" and individually, a "Class").
Initially, Class IV shares will be issued only by the Capital Appreciation,
Growth & Income, and Tennessee Tax Free Portfolios; however, additional
Portfolios of the Trust may make Class IV shares available in the future. Class
I shares are designed exclusively for investment of monies held in non-retail
trust, advisory, agency, custodial or similar institutional accounts by
financial institutions, business organizations, corporations, municipalities,
non-profit institutions, and other entities serving in a trust, advisory,
agency, custodial or similar capacity. The minimum initial investment for each
Agency Institution is $ 750,000 per Portfolio or Money Market Portfolio which
may be satisfied by aggregating 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 (a "Rule 12b-1 Plan").
Investors who do not qualify for Class I may choose between Class II and
Class III, and with respect to the Capital Appreciation, Growth & Income, and
Tennessee Tax Free Portfolios, Class IV, 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.
<PAGE>
Class IV shares may be purchased for the Capital Appreciation, Growth &
Income, and Tennessee Tax Free 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, and will be subject to an asset-based
shareholder servicing charge. In addition, Class IV shares will be subject to a
deferred sales charge. Class IV shares will convert to Class II shares after an
established expiration period.
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 arrangements, 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 of a given Portfolio is subject to
the same investment objectives, policies and limitations.
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 distribution
and/or shareholder services rendered to that Class ("Class Expenses"). Class
Expenses may be waived or reimbursed by the Portfolios' investment adviser,
underwriter or any other provider of services to the Portfolios.
EXCHANGES AND CONVERSION PRIVILEGES
Each Class of shares shall have exchange and conversion privileges
specific to that Class and as described in the current prospectus of the Trust
describing that Class.
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